<PAGE>
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended, June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1933
Commission File No. 1-12848
CROWN LABORATORIES, INC.
(Name of small business issuer in its charter)
Delaware 75-2300995
(State of Incorporation) (I.R.S. Employer I.D. No.)
6780 Caballo Street
Las Vegas, Nevada 89119
(Address of Principal Executive Office)
(702) 696-9300
(Registrant's Telephone Number, Including Area Code)
Indicate by a check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of outstanding shares of the registrant's only class of common stock
as of June 30, 1997
Common Stock, $.001 par value: 20,063,912
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "Safe Harbor"
for forward looking statements. Except for the historical information contained
in this Quarterly Report of Form 10-QSB for the quarter ended, June 30, 1997,
the matters discussed herein include forward-looking statements.
Such forward-looking statements, in addition to information contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this Quarterly Report, are based on the Company's
current expectations and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from those projected or implied
in any forward-looking statements made by, or on behalf of, the Company. These
risks and uncertainties, include, but are not limited to (i) the anticipated
growth in demand for the Company's products, (ii) the anticipated growth of the
Company's revenues from development, manufacture and sale of the Company's
products, (iii) the anticipated expansion of the Company's international
activities, (iv) the impact of competitive products and pricing and, (v) other
risks which are included from time to time in the Company's other SEC reports
and press releases, copies of which are available from the Company upon request.
When used in this Quarterly Report, the words "intend", "estimated", "believe",
expect", and similar expressions which are not historical are intended to
identify forward-looking statements. The Company assumes no obligation to
update any forward-looking statements contained herein or that may be made from
time to time by, or on behalf of, the Company.
The Company has continued in the pre-marketing phase of operation and has
shipped $48,044 to Russia in export sales of dry mix products for the three
month periods ended June 1997. For the three month period ended June 30, 1997
the company incurred losses of ($1,047,798) vs. ($1,034,877) in the same period
in 1996. The company has incurred losses associated with salary expense with
additions to staff, other operating expenses and start-up costs in the
engineering, design, and modifications to its facility, processes and
formulations associated with the company's entry into the market. The Company
has incurred ($300,427) in research and development and start-up expenses in the
quarter ended June 30, 1997. The Company has capitalized $121,411 of startup
expenses incurred under certain contractual arrangements and will amortize these
expenses over the next four quarters. The accumulated consolidated deficit at
June 30, 1997, was ($14,421,174) while shareholder's equity was $7,358,632.
On February 28, 1997, the Company announced a three-year agreement with renewal
options with McKesson Corporation's US Health Care unit. The agreement calls
for McKesson to distribute Crown's liquid nutritional and dietary products to
the home health care, hospital, and nursing home markets. Management believes
that, while this best effort agreement will produce revenues growing to $1.5
million per month during the ensuing months, there can be no assurances that
this estimate will be reached. The agreement has a thirty day cancellation
provision for both parties.
On March 4, 1997, the Company announced that the Company and Tufts University
have embarked on an initiative in Human Nutrition, an alliance to pursue a
variety of joint activities in the areas of nutritional product research,
education, and public information dissemination. Specific activities of the
initiative will include the formation of a Crown\Tufts steering committee to be
guided by a Tufts Associate Dean, and the establishment of graduate fellowships
to be funded by Crown for their advanced graduate students studying human
nutrition science.
Crown will contribute $80,000 during the first year, and if continued, $100,000
each following year for four years. The agreement is a year-year obligation
with cancellation clauses for both parties.
<PAGE>
On May 31, 1997, the Board of Directors vested 200,000 stock options held by Mr.
Herbert Altman and lowered the exercise price to $0.90 per share upon exercise,
in exchange for his assistance to the Company in signing the distribution
agreement with McKesson Corporation.
On June 5, 1997 the Board of Directors agreed to vest 40,000 stock options and
reduce the exercise price to $0.90 for Mr. Arthur Berkowitz who was also
instrumental in assisting the Company with the McKesson distribution agreement.
FINANCIAL CONDITION
The net working capital deficit at June 30, 1997 was $(721,139) with
approximately $285,222 in accounts payable attributable to capital expenditures
and leasehold improvements. Cash and equivalents balances were $390,150 as of
June 30, 1997.
Since December 31, 1996 the Company raised an additional $3 million from the
sale of Series E Preferred stock on March 7, 1997, as outlined below in the
Funding section. Based upon the above cash proceeds provided by the sale of
preferred stock offset by the required and intended use of proceeds, losses
incurred since December 31, 1996, anticipated results of operations expected to
be incurred during the remainder of 1997, and the continuing fund raising
efforts of the company, the management of the Company believes that sufficient
cash resources are available to enable the Company to continue in existence
through at least December 31, 1997.
The Company is presently exploring its alternatives for raising additional
funds. To the extent that the Company uses equity securities to raise additional
funds to satisfy its working capital needs, there will be additional dilution to
the Company's existing shareholders. There can be no assurances that the
Company will be able to secure additional financing, or, if additional financing
is obtained, that it will be on terms and conditions that are acceptable to the
Company.
FUNDING
On July 31, 1996, the Company raised $1 million through the sale of its Series E
Preferred Stock to a "Regulation S" investor. The Series E Preferred Stock
imputes an average effective interest rate of 6% which is payable in shares of
the Company's Common Stock on the "Dividend Dates" August 1, 1997 and August 1,
1998 (These Dividend Dates have been waived). The Series E Preferred Stock is
convertible into common shares based on discounts to the market price at the
time of conversion which range from 15% to 31% depending on the time they are
held from the issuance date, (the longer the stock is held, the deeper the
discount). Under this conversion formula, as the Common Stock price drops, the
number of Common Shares into which Series E Preferred Stock is convertible grow.
The number is not subject to a ceiling. As of December 31, 1996, there was
$1,000,000 in Series E Preferred Stock outstanding. On March 3, 1997, the
Regulation S investor notified the Company of its intention to convert its
Series E Preferred Stock into shares of the Company's Common Stock. Under the
conversion formula for the Series E Preferred Stock, the Regulation S investor
was issued 1,018,424 shares of the Company's Common Stock on March 7, 1997.
On March 7, 1997, the Company raised an additional $3 million through the sale
pursuant to Regulation S under the Securities Act of 1933, as amended, of its
Series E Preferred Stock. The Series E Preferred Stock imputes an average
effective interest rate of 6% which is payable in shares of the Company's Common
Stock on the "Dividend Dates"(These Dividend Dates have been waived). The
Series E Preferred Stock is convertible into common shares at a rate equal to
10,000 divided by the market value of the Common Stock adjusted by a discount
factor which ranges from 15% to 31% depending on the time the shares are held
from the issuance date (the longer the stock is held, the deeper the discount,
unless the Common Stock price falls below $0.75, in which case the discount no
longer applies). Under this conversion formula, as the Common Stock price
drops, the number of Common Shares into which Series E Preferred Stock is
convertible continues to grow. The number is not subject to a ceiling. A total
of 200,000 five year options to purchase the Company's Common Stock at $2.50 per
share were issued to two finders for their role in raising these funds.
<PAGE>
On April 9, 1997, Crown Laboratories, Inc. announced that its Board of Directors
authorized the expenditure of up to $500,000 for purchases of its common stock.
The Company will make purchases from time to time as market conditions permit
and in such amounts as its deems advisable. Any common stock reacquired would
be retained by the Company as treasury stock. The authorization to make these
purchases, which may be discontinued at any time, does not constitute a
commitment on the part of Crown Laboratories, Inc. to buy any specific amount of
its shares.
On May 5, 1997, Crown Laboratories' Board of Directors adopted a Shareholder
Rights Plan designed to protect shareholders from various abusive takeover
tactics, including attempts to acquire control of the Company at an inadequate
price.
The plan is designed to assure that any acquisition of the Company and/or any
acquisition of control of the Company would take place under circumstances in
which the Board of Directors can secure the best available transaction for all
of the Company's stockholders. Under the plan, each stockholder will receive a
dividend of one right for each share of the Company's outstanding common stock.
The rights are designed to protect the Company and its shareholders against
market accumulation programs and other abusive takeover tactics. They are not
aimed at preventing a takeover but rather are intended to encourage a potential
buyer to negotiate appropriately with the board prior to attempting a takeover.
Initially, the rights are attached to the Company's common stock and are not
exercisable. They become detached from the common stock and become immediately
exercisable after any person or group that is not a "granfathered stockholder"
becomes the beneficial owner of 15% or more of the Company's common stock or 10
days after any person or group announces a tender or exchange offer that would
result in that same beneficial ownership level, subject only to certain
"permitted offers."
If a buyer who is not a "grandfathered stockholder" becomes a 15% owner in the
Company, all rights holders, except the buyer, will be entitled to purchase
preferred stock in the Company at a price discounted from the then market price.
In addition, if the Company is acquired in a merger after such an acquisition,
all rights holders except the buyer will also be entitled to purchase stock in
the buyer at a discount in accordance with the plan. The distribution of rights
was made to common stockholders of record on May 16, 1997. Shares of common
stock that are newly-issued after that date will also carry rights until the
rights become detached from the common stock. The rights will expire on May 15,
2007. The Company may redeem the rights for $0.01 each at any time before a
buyer acquires a 15% position in the Company and under certain other
circumstances. The rights distribution is not taxable to stockholders. A
complete description of the Shareholder Rights Agreement and Series F Preferred
Stock may be found in the Company's Form 8A filed with the SEC on May 13, 1997.
On July 24, 1997, the Company swapped with one of its creditors 18,000 shares of
restricted common stock for canceling $15,800 in short term debt. The Company
agreed to register the shares in the Company's next registration statement.
On July 25, 1997, the Company entered into an operating lease for equipment to
be used for the manufacturing of other nutritional products at its production
facility in Las Vegas, Nevada. Under the terms of the operating lease, $550,800,
together with interest thereon, is payable monthly over a 60-month term. The
remaining portion under the lease ($367,200) is payable at the end of the
60-month term. The Company has an option to prepay the financed amount in full
or in part without penalty, and has an option to purchase the equipment at the
end of the 60-month term, at a price equal to the then fair market value of the
equipment.
In connection with the financing of the equipment, the Company granted 734,000
options to the lessor of the equipment exercisable at an exercise price of $1.25
per share, subject to adjustments. These options may be exercised in whole but
not in part at any time by the lessor, and are subject to mandatory exercise
under certain circumstances.
<PAGE>
CROWN LABORATORIES, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS UNAUDITED AUDITED
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $390,150 $579,488
Accounts Receivable 76,842 11,882
Inventory
Raw & Packaging Materials 270,390 243,686
Work in Process 14,558 5,800
Finished Goods 9,792 33,418
Prepaid expenses & employee and
officer advances 272,497 155,806
------------ -------------
Total current assets 1,034,228 1,030,080
PROPERTY AND EQUIPMENT
Leasehold improvements 1,328,911 1,300,043
Machinery & Equipment 8,914,497 8,410,629
------------ -------------
10,243,408 9,710,672
Accumulated Depreciation & Amortization (532,056) (423,674)
------------ -------------
Net Property and Equipment 9,711,352 9,286,998
MACHINERY RIGHTS & BLUEPRINTS 272,382 242,917
DEPOSITS & DEFERRED ASSETS 589,732 490,700
------------ -------------
TOTAL ASSETS $11,607,695 $11,050,695
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and capital lease liabilit $309,890 $480,810
Accounts payable and accrued expenses 1,172,981 1,285,019
------------ -------------
Total current liabilities 1,482,871 1,765,829
ACCRUED SALES TAX PAYABLE 246,486 288,289
LONG-TERM DEBT & CAPITAL LEASE LIABILITIES 2,519,706 2,558,191
SHAREHOLDERS' EQUITY
PREFERRED STOCK -- $0.001 par value; 3,000,000 1,024,997
5,000,000 shares authorized;
300 shares outstanding in 1997 and 250 in 1996
COMMON STOCK -- $0.001 par value;
50,000,000 shares authorized;
20,063,912 and 18,795,488 shares outstanding
in 1997 and 1996, respectively 20,063 18,795
Additional paid-in-capital 18,759,743 17,846,466
Accumulated deficit (14,421,174) (12,451,872)
------------ -------------
Total shareholders' equity 7,358,632 6,438,386
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,607,695 $11,050,695
============= =============
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
5
<PAGE>
CROWN LABORATORIES, INC.
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 48,044 $ - $ 81,776 $ -
Cost of Sales (21,620) $ - (32,752) -
----------- ----------- ----------- -----------
GROSS PROFIT 26,424 - 49,024 -
Research & Development Start Up Costs 179,016 178,877 492,543 454,161
General and Administrative Expenses 803,934 837,993 1,331,149 1,458,605
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (956,526) (1,016,870) (1,774,668) (1,912,766)
Other Income/(Expense)
Other Income - 25,200 - 50,400
Other Expense (24,312) (41,804)
Interest expense (86,939) (44,309) (176,415) (85,471)
Interest income 19,979 1,102 23,585 5,967
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,047,798) (1,034,877) (1,969,302) (1,941,870)
Income Tax Provision - - - -
----------- ----------- ----------- -----------
NET LOSS ($1,047,798) ($1,034,877) ($1,969,302) ($1,941,870)
=========== =========== =========== ===========
NET LOSS PER SHARE ($0.05) ($0.07) ($0.10) ($0.14)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 19,620,419 14,166,236 19,620,419 14,166,236
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
6
<PAGE>
CROWN LABORATORIES, INC.
Statement of Shareholders Equity
For the six months ended June 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Shares of Common Additional Accumulated Preferred
Common Stock Stock Paid-in Capital Deficit Stock Total
------------ -------- --------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF DEC. 31, 1996 18,795,488 $18,795 $17,846,466 ($12,451,872) $ 1,025,000 $6,438,389
Compensation expense for options
granted to employees and consultants 250,000 250 62,707 - - 62,957
Series E Preferred Stock Issued - $ 3,000,000 3,000,000
Shares issued on the conversion
of Series E Preferred Stock 1,018,424 1,018 1,023,982 - (1,025,000) -
Shares sold in private placement 0
Fund raising expenses (173,412) (173,412)
Warrants converted 0
Imputed interest for Series E Preferred - - -
Net loss for the period ended
June 30, 1997 - - - (1,969,302) - (1,969,302)
---------- -------- ------------ ------------- ----------- -----------
BALANCE AS OF JUNE 30, 1997 20,063,912 $20,063 $18,759,743 ($14,421,174) $ 3,000,000 $ 7,358,633
========== ======== ============ ============= =========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
7
<PAGE>
CROWN LABORATORIES, INC.
Consolidated Statements of Cash Flow
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
June 30, 1997 June 30, 1996
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS ($1,969,302) ($1,941,870)
ADD/(DEDUCT) ITEMS NOT IMPACTING CASH:
Depreciation and amortization 108,382 106,613
Issuance of shares to employees
and consultants 62,957 79,760
CHANGES IN ASSETS AND LIABILITIES:
(Increase)/Decrease in receivables (64,960) 29,600
(Increase)/Decrease in inventories (11,836) (29,171)
(Increase)/Decrease in prepaid expenses
and employee advances (116,690) 14,494
Increase/(Decrease) in accounts payable
and accrued expenses (112,038) 118,220
------------ ------------
TOTAL CASH GENERATED FROM/(USED FOR) OPERATIONS (2,103,487) (1,622,354)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures and leasehold improvements (562,200) (383,939)
(Increase)/Decrease in deposits and deferred assets (99,032) (16,744)
Increase/(Decrease) in accrued sales taxes payable (41,803) (49,419)
TOTAL CASH (USED IN)/GENERATED FROM INVESTING ACTIVITIES (703,035) (450,102)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans - -
Repayment of loans payable (209,405) (126,104)
Proceeds from issuance of common and
preferred stock and the excercise of warrants 3,000,000 2,052,571
Fundraising costs (173,412) (71,733)
------------ ------------
TOTAL CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 2,617,183 1,854,734
------------ ------------
Net increase/(decrease) in cash and cash equivalents (189,338) (217,722)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 579,488 677,431
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $390,150 $459,709
============ ============
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
8
<PAGE>
CROWN LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. BACKGROUND OF ORGANIZATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month periods and six month
periods ended June 30, 1997, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Crown Laboratories, Inc. Annual Report on Form 10-KSB.
2. MANUFACTURING FACILITY
The Company presently occupies a 62,000 square foot manufacturing facility in
Las Vegas, Nevada for the purpose of manufacturing its line of nutritional
products. The Company selected its Las Vegas location based on a number of
factors. The State of Nevada does not assess either corporate or personal
income taxes and is a "right to work" state. It has favorable freight rates
resulting from the large volume of shipments into the casino trade with Las
Vegas' limited manufacturing providing little outbound trucking demand and the
climate is also very favorable for shipping on a year round basis. The Company
has obtained a twelve month option to purchase its current manufacturing
facility for $3,185,000. The Company sub-leased 20,000 square feet of space in
its Las Vegas facility under a one year lease signed in October of 1995 with
two, one month renewal options. The Company collected $75,600 in lease
revenue during the full year which amounts are reflected in the financial
statements of the Company.
3. FINANCING
On July 31, 1996, the Company raised $1 million through the sale of its Series E
Preferred Stock to a "Regulation S" investor. The Series E Preferred Stock
imputes an average effective interest rate of 6% which is payable in shares of
the Company's Common Stock on the "Dividend Dates" (These Dividend Dates have
been waived). The Series E Preferred Stock is convertible into common shares
based on discounts to the market price at the time of conversion which range
from 15% to 31% depending on the time they are held from the issuance date, (the
longer the stock is held, the deeper the discount). Under this conversion
formula, as the Common Stock price drops, the number of Common Shares into which
Series E Preferred Stock is convertible grows. The number is not subject to a
ceiling. As of December 31, 1996, there was $1,000,000 in Series E Preferred
Stock outstanding. On March 3, 1997, the Regulation S investor notified the
Company of its intention to convert its Series E Preferred Stock into shares of
the Company's Common Stock. Under the conversion formula for the Series E
Preferred Stock, the Regulation S investor was issued 1,018,424 shares of the
Company's Common Stock on March 7, 1997.
On March 7, 1997, the Company raised $3 million through the sale pursuant to
Regulation S under the Securities Act of 1933, as amended, of its Series E
Preferred Stock. The Series E Preferred Stock imputes an average effective
interest rate of 6% which is payable in shares of the Company's Common Stock on
the "Dividend Dates", (These Dividend Dates have been waived). The Series E
Preferred Stock is convertible into common shares at a rate equal to 10,000
divided by the market value of the Common Stock adjusted by a discount factor
which ranges from 15% to 31% depending on the time the shares are held from the
issuance date (the longer the stock is held, the deeper the discount, unless the
Common Stock price falls below $0.75, in which case the discount no longer
applies). Under this conversion formula, as the Common Stock price drops, the
number of Common Shares into which Series E
9
<PAGE>
Preferred Stock is convertible continues to grow. The number is not subject to
a ceiling. A total of 200,000 five year options to purchase the Company's
Common Stock at $2.50 per share were issued to two finders for their role in
raising these funds.
On April 9, 1997, the Company announced the authorization of expenditures up to
$500,000 for purchases of its common stock to be retained as treasury stock. The
authorization to make these purchases may be discounted at any time and does not
constitute a commitment by the Company to buy a specific amount of its shares.
During the second quarter ended June 30, 1997 a total of 297,783 shares, options
or warrants were repurchased or expired.
Based upon the above cash proceeds provided by the sale of preferred stock
offset by the required and intended use of proceeds, losses incurred since
December 31, 1996, anticipated results of operations expected to be incurred
during the remainder of 1997, and the continuing fund raising efforts of the
Company, the management of the Company believes that sufficient cash resources
are available to enable the Company to continue in existence through at least
December 31, 1997.
4. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Crown
Laboratories, Inc. and its wholly-owned subsidiaries, which include Crown Russia
OOO.
5. COMMITMENTS AND CONTINGENCIES
The Company has entered into a five year lease for its Las Vegas manufacturing
facility, (with an option to renew the lease for an additional five year
period), which requires monthly payments of $26,576 subject to annual inflation
escalations which commenced in September 1996. During 1997, the Company paid
$159,456 in lease payments for the building. Minimum payments due under the
building lease are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
- --------------
<S> <C>
1997 $318,912
1998 $318,912
1999 $159,456
2000 -0-
</TABLE>
The Company has obtained a twelve month option to purchase its current
manufacturing facility for $3,185,000. The Company sub-leased 20,000 square
feet of space in its Las Vegas facility under a one year lease signed in October
of 1995 with two, one month renewal options. The Company collected $75,600 in
lease revenue during the full year which amounts are reflected in the financial
statements of the Company.
The Company is also negotiating with other various parties to enter into
consulting arrangements. The Company will compensate consultants either in
cash, shares of Common Stock, or a combination thereof.
To the extent the fair market value of options issued for services rendered
exceeds exercise prices, the Company is required to recognize compensation
expense.
10
<PAGE>
6. LITIGATION
- --------------
The Company is subject to normal business litigation and claims concerning
products and services rendered to the Company.
In addition to normal business litigation, the Company has the following
material litigation:
CROWN V. ROLFENADE ET AL., was filed by the Company, in March 1995,
-------------------------
and subsequently amended to incorporate all of the defendants "alter
egos" in September 1995. The action is for breach of contract,
misrepresentation, fraud, and alter ego. Rolfenade warranted that the
packaging machine would be in compliance with F.D.A. requirements. The
packaging machine was not in compliance with the applicable
regulations and the Company has made substantial modifications to the
filler to bring it into compliance. The Company has served all
defendants under the Hague Convention. Other defendants named in the
suit filed a Motion to Quash Service which was lost. They appealed to
the Nevada Supreme Court. Their appeal was denied. They have since
filed an answer. The Company cannot predict the outcome of its claims.
CROWN V. STATCO ET AL., was a lawsuit filed by Statco Engineering &
----------------------
Fabrication Inc. in July 1997 in California Superior Court seeking
payment for certain pipe fittings, pumps and miscellaneous materials
and labor in the amount of $68,452.50, as well as recovery of costs.
disbursements and attorneys fees. The Company has engaged legal
counsel and asserts improper billings from defective workmanship and
seeks to have the suit dismissed. The Company believes it will prevail
on its merits, however, the Company cannot predict the outcome of its
claims.
7. SUBSEQUENT EVENTS
A total of 2,315,633 shares, options or warrants were either canceled, expired
or repurchased from January 1, 1997 through July 31, 1997 including the 297,783
shares, options or warrants referenced above in Footnote 3.
On July 24, 1997, the Company swapped, with one of its creditors, 18,000 shares
of restricted common stock for canceling $15,800 in short term debt. The Company
agreed to register the shares in the Company's next registration statement.
On July 25, 1997, the Company entered into an operating lease for equipment to
be used for the manufacturing of its nutritional products at its production
facility in Las Vegas, Nevada. Under the terms of the operating lease, $550,
800, together with interest thereon, is payable monthly over a 60-month term.
The remaining portion under the lease ($367,200) is payable at the end of the
60-month term. The Company has an option to prepay the financed amount in full
or in part without penalty, and has an option to purchase the equipment at the
end of the 60-month term, at a price equal to the then fair market value of the
equipment.
In connection with the financing of the equipment, the Company granted 734,000
options to the lessor of the equipment exercisable at an exercise price of $1.25
per share, subject to adjustments. These options may be exercised in whole but
not in part at any time by the lessor, and are subject to mandatory exercise
under certain circumstances.
11
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports
(a) Exhibits
4 (b) Certificate of Designation of Series F Junior
Participating Preferred Stock (2)
10 (a) Equipment Lease(1)
10 (b) Stock Option Agreement (1)
(1) Filed herewith.
(2) Previously filed as an exhibit to the Form 10-QSB for the
quarter ended March 31, 1997
SIGNATURES
Pursuant to the requirements of Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROWN LABORATORIES, INC.
Dated: August 13, 1997 By: /s/ Craig E. Nash
----------------------------------
Craig E. Nash
Chief Executive Officer
Chairman, Board of Directors
By: /s/ Calvin T. Mathews
----------------------------------
Calvin T. Mathews
Chief Financial Officer
12
<PAGE>
EXHIBIT 10(B)
-------------
CROWN LABORATORIES, INC.
STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of July 25, 1997 between CROWN LABORATORIES,
INC., a Delaware company (hereinafter called the "Company"), and EWE TRUST
NUMBER 1, a Florida trust (hereinafter called the "Optionee"). Unless otherwise
defined herein, capitalized terms used herein have the meanings set forth in the
Equipment Lease between the Company and the Optionee, dated as of July 25, 1997
(the "Equipment Lease").
WHEREAS, the Company has determined that it is in its best interests to
acquire the use of the Equipment in accordance with the terms of the Equipment
Lease;
WHEREAS, in order to induce the Optionee, as Lessor, to enter into the
Equipment Lease, the Company and the Optionee desire to enter into an agreement
whereby the Company will grant the Optionee alternative options to purchase
shares of the Company's common stock, par value $0.001 per share (the "Common
Stock") in certain circumstances and under certain conditions,
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and the Optionee agree
as follows:
THE OPTIONS, AND THE COMMON STOCK ISSUABLE UPON THEIR EXERCISE, HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED, DISPOSED OF OR OFFERED FOR
SALE, IN WHOLE OR IN PART, IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND COMPLIANCE OTHERWISE WITH OTHER SUCH
LAWS COVERING THE OPTIONS AND/OR THE COMMON STOCK ISSUABLE UPON ITS
EXERCISE, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO CROWN
LABORATORIES, INC. THAT AN EXEMPTION IS AVAILABLE UNDER THE SECURITIES ACT
OR OTHER SUCH LAWS.
<PAGE>
1. ORIGINAL OPTION
---------------
(A) OPTION GRANT. Pursuant to and subject to the terms and conditions of
------------
this Agreement, the Company grants the Optionee the option to purchase an
aggregate of seven hundred thirty-four thousand four hundred (734,400) shares
("Original Option Shares") of the presently authorized and unissued Common Stock
(subject to adjustment as provided herein in Section 1(e) and 1(f) of this
agreement, the "Original Option"). The grant of the Original Option is in
consideration of the transactions described in the Equipment Lease.
(B) TERM. The Original Option shall be exercisable by the optionee at any
----
time prior to the end of the 60th month of the Term of the Equipment Lease,
subject to the provisions of Sections 1(e), 1(f) and 1(g) hereof (the "Original
Option Term")
(C) EXERCISE PRICE. The exercise price for the Original Option shall
--------------
initially be $1.25 per share (the "Original Exercise Price"). Subject to
adjustment as provided in Sections 1(e) and Section 1(f) hereof, the Original
Exercise Price shall be payable by (i) the Optionee's delivery to the Company of
(A) the canceled Equipment Lease, and (B) within forty-five (45) days thereof,
free and clear title to the Equipment reasonably satisfactory to the Company or
(ii) in the Company's sole discretion upon the Optionee's written request, the
delivery of the aggregate Original Exercise Price in the form of cash or in
immediately available funds.
(D) METHOD OF EXERCISE. Within ninety (90) days after the date of
------------------
delivery by the Optionee of a written notice to the Company, substantially in
the form of Exhibit A attached hereto, stating its intention to exercise the
Original Option (a "Notice of Intent"), the Optionee may, subject to the
provisions of Section 7 hereof, at its election exercise all of, but not less
than all of, the then outstanding Original Option by the delivery to the Company
of a written notice, substantially in the form of Exhibit B attached hereto (an
"Exercise Notice"), together with payment in full of the Original Exercise Price
as described in Section 1(c) hereof.
(E) ADJUSTMENTS; PARTIAL EXPIRATION OF THE ORIGINAL OPTIONS. If, on any
-------------------------------------------------------
date on or prior to the last day of the 18th month of the Equipment Lease Term
(the "Prepayment Expiration Date"), the Financed Amount under the Equipment
Lease is reduced to $600,000 or less by one or more prepayments of principal
outstanding under the Equipment Lease (the "Prepayment") or otherwise, then one
hundred eighty-four thousand (184,400) of the Original Option Shares shall
expire without further action on the date of Prepayment by the Company. All of,
but not less than all of, the remaining five hundred fifty thousand (550,000)
Original Option Shares will thereafter, from the Prepayment Expiration Date
until the end of the Original Option Term, be exercisable at the election of the
Optionee, at an exercise price of $1.09 per share under the terms and conditions
of this Agreement. If the Company does not reduce the Financed Amount under the
Equipment Lease to $600,000 or less on or prior to the
-2-
<PAGE>
Prepayment Expiration Date, the number and exercise price of the Original Option
shall be unchanged from the terms of Section 1(c) until the end of the Original
Option Term.
(F) MANDATORY EXERCISE. If, at any time prior to the end of the
------------------
Original Option Term, the average closing price of the Common Stock (as
calculated in the following sentence) is $3.50 or more per share during the
Trade Period, the Optionee shall exercise all of the then outstanding Original
Option at the then applicable Exercise Price on the first business date
following the end of the Trade Period (as defined below) (i.e., either (i)
734,400 Option Shares exercisable at an Exercise Price of $1.25 per share if the
Company has not timely made the Prepayment or (ii) 550,000 Options Shares
exercisable at an Exercise Price of $1.09 per share if the Company has timely
made the Prepayment), and the Company shall sell, and the Optionee shall
purchase, all of the shares of Common Stock underlying such Original Option on
the first business date following the end of the Trade Period (as defined below)
(the "Mandatory Exercise"). For purposes of this provision, the average closing
price of the Common Stock shall be the average of its last sale price as
reported in the principal consolidated transaction reporting system of the
American Stock Exchange, Inc. (or the then principal trading market for the
Common Stock) over a fourteen (14) consecutive trading day period (the "Trade
Period"). The Exercise Price shall be payable in the same manner and form as
Section 1(c) prescribes.
(G) TERMINATION. The Original Option shall terminate and expire at
-----------
5:00 pm (New York time) on the earlier of (i) the last day of the 60th month of
the Term of the Equipment Lease, provided, however, that the Company has made
-------- ------- ----
all monthly Rent payments as provided in Section 2 of the Equipment Lease, or
(ii) the date on which the Company exercises the option to purchase the
Equipment pursuant to Section 23 of the Equipment Lease (in either case, the
"Expiration Date").
2. NEW OPTION.
----------
(A) EXCHANGE. If, the Original Option has terminated and expired
--------
without exercise as provided in Section 1(g) hereof, the Company shall, at the
Expiration Date, cancel all of the then outstanding Original Option and grant
the Optionee an option to purchase five hundred fifty thousand (550,000) shares
of Common Stock (the "New Option").
(B) TERM. The New Option shall be exercisable by the Optionee on or
----
prior to the date which is thirty-six (36) months from the Expiration Date (the
"New Option Term").
(C) EXERCISE PRICE. The New Option shall be exercisable by the
--------------
Optionee during the New Option Term at an exercise price (the "New Option
Exercise Price") equal to the last sale price of the Common Stock as reported
in the principal consolidated transaction reporting system of the American Stock
Exchange, Inc. (or other applicable national securities exchange or the NASDAQ)
on the trading day immediately preceding the Expiration Date.
-3-
<PAGE>
The New Option Exercise Price shall be payable by the Optionee in cash or in
immediately available funds.
(D) METHOD OF EXERCISE. Within ninety (90) days after the date of
------------------
delivery by the Optionee of a Notice of Intent stating its intention to exercise
the New Option, the Optionee may, subject to the provisions of Section 7 hereof,
at its election exercise the New Option, in whole or in part, by the delivery to
the Company of an Exercise Notice, together with payment in full of the New
Option Exercise Price as described in Section 2(c) hereof.
(E) TERMINATION. The New Option shall terminate and expire on the
-----------
last day of the New Option Term at 5:00 pm (New York time).
3. OPTION REFERENCE. The Original Option and the New Option are
----------------
hereinafter collectively referred to as the "Options." The shares of Common
Stock underlying the Options are hereinafter referred to as the "Option Shares."
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
---------------------------------------------
represents and warrants to the Optionee as follows:
(A) ORGANIZATION AND STANDING. The Company is a corporation duly
-------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware and has all corporate power and authority required to enter into this
Agreement and to carry out its obligations hereunder. The Company is in good
standing in the State of Nevada, in which the Company's principal place of
business is located.
(B) AUTHORITY. The execution and delivery of this Agreement by the
---------
Company and the consummation by the Company of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of the Company and no other corporate proceedings on the part of the Company and
no action of the Company's shareholders are necessary to authorize this
Agreement or any of the transactions contemplated hereby; this Agreement has
been duly and validly executed and delivered by the Company and, assuming the
due authorization, execution and delivery hereof by the Optionee, is enforceable
against the Company in accordance with its terms, except as the same may be
limited by applicable bankruptcy, insolvency, reorganization or other similar
laws affecting the enforcement of creditors' rights generally, and except that
the availability of equitable remedies, including specific performance, may be
subject to the discretion of any court before which any proceeding therefor may
be brought.
(C) RESERVATION OF SHARES. The Company has taken all necessary
---------------------
corporate action to authorize and reserve for issuance and to permit it to
issue, upon exercise of the Options, and at all times from the date hereof
through the expiration of the Options will have reserved, a number of authorized
and unissued shares of the Company's Common Stock not less than 734,400, such
amount being subject to adjustment as provided in Sections 1(e) and 1(f)
-4-
<PAGE>
hereof, all of which, upon their issuance and delivery in accordance with the
terms of this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable.
(D) NO LIENS. The Option Shares issued to the Optionee upon the
--------
exercise of the Options will be, upon delivery thereof to the Optionee, free and
clear of all claims, preemptive rights, liens, charges, encumbrances and
security interests of any nature whatsoever.
(E) NO CONFLICTS. The execution and delivery of this Agreement by the
------------
Company does not, and, subject to compliance with applicable law, the
consummation by the Company of the transactions contemplated hereby will not,
violate, conflict with, or result in a breach of any provision of, or constitute
a default (with or without notice or lapse of time, or both) under, or result in
the termination of, or accelerate the performance required by, or result in a
right of termination, cancellation, or acceleration of any obligation or the
loss of a material benefit under, or the creation of a lien, pledge, security
interest or other encumbrance on assets (any such violation, conflict, breach,
default, termination, acceleration, right of termination, cancellation or
acceleration, loss, or creation, a "Violation") by the Company or any of its
subsidiaries of (i) any provision of the Certificate of Incorporation or the
Bylaws of the Company or any of its subsidiaries, each as amended to date, (ii)
any material provision of any material loan or credit agreement, note, mortgage,
indenture, lease, benefit plan or other agreement, obligation, instrument,
permit, concession, franchise or license (a "Material Contract") of the Company
or any of its subsidiaries or to which any of them is a party or by which any of
them or their respective properties or assets are bound, or (iii) any judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to the
Company or any of its subsidiaries or any of their respective properties or
assets.
5. REPRESENTATIONS AND WARRANTIES OF OPTIONEE. The Optionee hereby
------------------------------------------
represents and warrants to the Company as follows:
(A) INVESTMENT INTENT. Optionee is purchasing or acquiring the Options
-----------------
and the Option Shares thereunder for the Optionee's own account for investment
and not with a view to, or for sale in connection with, any distribution thereof
in violation of the Securities Act. Optionee hereby consents to the imposition
of a legend substantially similar to the following on each certificate for
shares of Common Stock and Optionee agrees to abide by the restrictions
contained therein:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT") OR APPLICABLE STATE SECURITIES LAWS AND
MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED, DISPOSED
OF OR OFFERED FOR SALE, IN WHOLE OR IN PART, IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND COMPLIANCE OTHERWISE
WITH OTHER SUCH LAWS COVERING THE OPTIONS
-5-
<PAGE>
AND/OR THE COMMON STOCK ISSUABLE UPON ITS EXERCISE, OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO CROWN LABORATORIES, INC. THAT AN
EXEMPTION IS AVAILABLE UNDER THE SECURITIES ACT OR OTHER SUCH LAWS.
In addition, such certificates shall bear any other legends as may be required
by law.
(B) AUTHORIZATION. Optionee has the power and authority to enter into
-------------
this Agreement and to perform all of optionee's Obligations hereunder.
(C) RESTRICTED SECURITIES. Optionee understands that the Options and
---------------------
Option Shares thereunder have not been registered under the Securities Act by
reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona fide nature of
Optionee's investment intent as expressed herein. Optionee acknowledges that
the Option Shares, when received, must be held indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available ("Restricted Shares"). Optionee has been advised of
or is aware of the provisions of Rule 144 promulgated under the Securities Act,
which rule permits limited resale of securities purchased in a private placement
subject to the satisfaction of certain conditions contained therein.
(D) BROKERAGE. There are no valid claims for brokerage commissions,
---------
finder's fees or similar compensation in connection with the transactions
contemplated by this agreement based upon any arrangement or agreement made by
or on behalf of Optionee, and Optionee agrees to indemnify and hold harmless the
Company against any liability or expense to it arising out of such a claim to
the extent that such claim arises out of actions or alleged actions of such
Optionee.
(E) EXPERIENCE; EVALUATION OF INVESTMENT; RISK OF LOSS. Optionee has
--------------------------------------------------
carefully reviewed the representations concerning the Company contained in this
Agreement, and has made detailed inquiry concerning the Company, its business
and its personnel. The officers of the Company have made available to Optionee
any and all written information which Optionee has requested and have answered
to Optionee's satisfaction all inquiries made by such Optionee. Optionee
acknowledges that it has had the opportunity to ask questions of and receive
answers from the Company. Optionee understands that an investment in the
Company involves a substantial degree of risk and Optionee represents and
warrants that Optionee has adequate net worth and means of providing for
Optionee's current needs and personal contingencies to sustain a complete loss
of Optionee's investment in the Company. Optionee further represents and
warrants that Optionee's overall commitment to investments which are not readily
marketable is not disproportionate to Optionee's net worth and Optionee's
investment in the Option Shares will not cause such overall commitment to become
excessive.
-6-
<PAGE>
(F) OPTIONEE STATUS. Optionee is an accredited investor within the
---------------
definition set forth in Rule 501(a) under the Securities Act. Simultaneously
with the execution of this Agreement, Optionee has executed a Suitability
Questionnaire (attached hereto as Exhibit C) which evidences that status and
contains certain representations and warrants by the Optionee.
6. COMPLIANCE WITH SECURITIES LAWS.
-------------------------------
(A) SECURITIES LAW CONDITIONS. The Company's obligation to issue
-------------------------
Option Shares upon exercise of the Options is expressly conditioned upon (i) the
completion by the Company of any registration or other qualification of such
shares under any state and/or Federal law or rulings or regulations of any
government regulatory body and (ii) the completion by the Company of any
original or supplemental listing applications of such shares.
(B) GENERAL. No Option Shares shall be issued upon exercise of the
-------
Options unless and until the Company is satisfied, in its reasonable discretion,
that there has been compliance with all legal requirements applicable to the
issuance of such Option Shares.
7. REGISTRATION RIGHTS.
-------------------
(A) GENERAL. Subject to the provisions of Sections 5 and 6 hereof,
-------
the Company will use commercially reasonable efforts to register the Option
Shares under a "resale" prospectus pursuant to the Securities Act with the
Securities and Exchange Commission within ninety (90) days after the delivery to
the Company by the Optionee of a Notice of Intent stating its intention to
exercise the Options. Such Notice of Intent shall be in the form of Exhibit A
hereto. Any rights to require registration hereunder shall terminate with
respect to any shares of Common Stock that may be sold pursuant to Rule 144
under the Securities Act without any further holding period thereunder.
Notwithstanding the foregoing, the Company shall have the right to postpone the
time of delivery of Option Shares for such period as may be required for it with
reasonable diligence to comply with any applicable listing requirements of any
national securities exchange or any federal, state, or local law, to complete a
previously filed indemnity, or to avoid the premature disclosure of a possible
material transaction.
(B) REGISTRATION COSTS. If, within two (2) years of the Optionee's
------------------
delivery of a Notice of Intent, the Optionee shall not have delivered to the
Company an Exercise Notice, together with payment in full of the applicable
Exercise Price, and if the Company has complied with the provisions of Section
7(a) hereof (including the 90-day requirement), the Optionee shall pay to the
Company, in the form of cash or in immediately available funds, fifty percent
(50%) of the registration costs incurred by the Company pursuant to Section 7(a)
hereof, including any federal or state fees, attorneys' costs, or printing
expense.
-7-
<PAGE>
8. RESTRICTION UPON RIGHT OF RESALE.
--------------------------------
(A) NOTICE. The Optionee shall give the Company written notice of its
------
intention to sell or dispose of any of the Option Shares not less than seven (7)
days prior to any such sale or disposition.
(B) RESTRICTIONS. The Optionee may resell the Option Shares in an
------------
amount per month not to exceed 10% of the number of Option Shares originally
purchased by the Optionee; provided however, that in any one, and only one,
-------- -------
month, the Optionee may sell an amount not to exceed thirty-five (35%) of the
number of Option Shares originally purchased by the Optionee.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
------------------------------------------
(A) CERTAIN CHANGES. In the event of any change in the Common Stock
---------------
by reason of any stock dividend, stock split, merger, recapitalization,
combination, exchange of shares or any similar transaction, the type and number
of shares or securities subject to the Options, and the Exercise Price per share
provided herein, shall be adjusted appropriately and proper provision shall be
made in the agreements governing such transaction so that the Optionee shall
receive, upon exercise of the Options, the number and class of securities or
property that the Optionee would have received in respect of the shares of
Common Stock issuable to the Optionee if the Options had been exercised
immediately prior to such event or the record date therefor, as applicable. In
addition, without limiting any restriction on the Company contained in this
Agreement, in the event of any change in the Common Stock by reason of any stock
dividend, stock split, merger, recapitalization, combination, exchange of shares
or similar transaction, equitable adjustment shall be made to the other
provisions hereof to carry out the original intent of this Agreement.
(B) CERTAIN TRANSACTIONS. If the Company shall enter into an agreement
--------------------
(i) to consolidate with or merge with and into a person and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) to
permit any person to merge with and into the Company and the Company shall be
the continuing or surviving corporation, but, in connection with such merger,
the then-outstanding shares of Common Stock shall be changed into or exchanged
for stock or other securities of the Company or any other person or cash or any
other property, or (iii) to sell or otherwise transfer all or substantially all
of its assets to any person, then, the agreement governing such transaction
shall make proper provision so that upon the consummation of such transaction
and upon the subsequent exercise of the Options, the Optionee shall be entitled
to receive, for each share of Common Stock underlying the Options, an amount of
consideration in the form of and equal to the per share amount of consideration
that would be received by the holder of one share of Common Stock (and, in the
event of an election or similar arrangement with respect to the type of
consideration to be received by the holders of Common Stock, subject to the
foregoing, proper provision shall be made so that the Optionee would have
-8-
<PAGE>
the same election or similar rights as would the holder of the number of shares
of Common Stock for which either of the Options are then exercisable).
10. NO STOCKHOLDER RIGHTS. The Optionee shall have no rights or
---------------------
privileges as a stockholder with respect to any shares of Common Stock subject
hereto until the Optionee has purchased, and become the holder of record of,
such shares, and no adjustment shall be made for dividends or distribution of
rights in respect to such shares if the record date therefor is prior to the
date which the Optionee becomes the holder of record.
11. BINDING EFFECT; NO ASSIGNMENT; NO THIRD PARTY BENEFICIARIES.
-------------------------------------------------------------
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Except as
expressly provided for in this Agreement, neither this Agreement nor the rights
or obligations of either party hereto are assignable, except by operation of
law, or with the written consent of the other party, and any such attempted
assignment in violation of this Agreement shall be void and of no force or
effect. Nothing contained in this Agreement, express or implied, is intended to
confer upon any person other than the parties hereto and their respective
permitted assigns any rights or remedies of any nature whatsoever.
12. SPECIFIC PERFORMANCE. The parties hereto recognize and agree that if
--------------------
for any reason any of the provisions of this Agreement are not performed in
accordance with their specific terms or are otherwise breached, immediate and
irreparable harm or injury would be caused for which money damages would not be
an adequate remedy. Accordingly, each party agrees that, in addition to other
remedies, whether at law or in equity, the other party shall be entitled to an
injunction to prevent or restrain any violation or threatened violation of the
provisions of this Agreement, and to enforce specifically the terms and
provisions hereof, in any court of the State of New York or of the United States
of America within the Southern District in the State of New York. In the event
that any action should be brought in equity to enforce the provisions of this
Agreement, neither party will allege, and each party hereby waives the defense,
that there is an adequate remedy at law.
13. MISCELLANEOUS
-------------
(A) ENTIRE AGREEMENT. This Agreement, together with the Equipment
----------------
Lease, and their respective exhibits, constitutes the entire agreement between
the parties with respect to the subject matter hereof and supersedes all prior
or contemporaneous agreements, whether oral or written, of the parties
pertaining to that subject matter. No agent or employee of the Company or the
Optionee is authorized to waive, alter or add any terms or conditions printed
herein.
(B) AMENDMENTS. This Agreement may only be modified or amended by a
----------
writing signed by both parties.
-9-
<PAGE>
(C) NOTICES. All notices and other communications hereunder shall be
-------
in writing and shall be deemed given if (a) delivered personally, (b) if sent by
overnight courier service (receipt confirmed in writing), (c) if delivered by
facsimile transmission (with receipt confirmed), or (d) five (5) days after
being mailed by registered or certified mail (return receipt requested) to the
parties in each case to the following addresses (or at such other address for a
party as shall be specified by like notice):
if to the Company:
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, Nevada 89119
Facsimile No. (702) 696-9300
Attention: Craig E. Nash, Chief Executive Officer
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
1001 Pennsylvania Avenue, Suite 800
Washington, D.C. 20004-2505
Facsimile No. (202) 639-7003/7004
Attention: Richard A. Steinwurtzel
if to the Optionee:
EWE Trust Number 1
300 Greco Avenue
Coral Gables, FL 33146
Facsimile No. (305) 444-5934
Attention: Edward W. Easton, Trustee
with a copy to:
Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quentel, P.A.
1221 Brickel Avenue
Miami, FL 33131
Facsimile No. (305) 579-0717
Attention: Richard J. Giusto
(D) SUCCESSORS AND ASSIGNS. The rights and obligations of the Company
----------------------
under this Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the Company.
-10-
<PAGE>
(E) APPLICABLE LAW. This Agreement shall be governed by and construed,
--------------
and any controversy arising out of or otherwise relating to this Agreement shall
be determined, in accordance with the laws of the State of New York applicable
to agreements made and to be performed entirely within such State and without
regard to its choice of law principles. Each party hereto consents and submits
to the exclusive jurisdiction of any court of the State of New York or of the
United States of America within the Southern District in the State of New York
for the adjudication of any action, suit, proceeding, claim or dispute arising
out of or otherwise relating to this Agreement.
(F) PARAGRAPH HEADINGS. The paragraph headings used in this Agreement
------------------
are for convenience or reference, and are not to be construed as part of this
Agreement.
(G) FURTHER ASSURANCES. Each party agrees to execute and deliver all
------------------
such further documents and instruments and take all such further action as may
be necessary in order to consummate the transactions contemplated hereby.
(H) COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as an
instrument under seal effective as of the date written on the first page of this
Agreement.
CROWN LABORATORIES, INC.
By: /s/ Craig E. Nash
--------------------------
Name: Craig E. Nash
Title: Chief Executive Officer
EWE TRUST NUMBER 1
BY: /s/ Edward W. Easton
---------------------------
Name: Edward W. Easton, Trustee
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<PAGE>
EXHIBIT A
---------
NOTICE OF INTENT
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, Nevada 89119
Attention: President
- ----------
Gentlemen:
Pursuant to our Stock Option Agreement dated as of July 25, 1997, I hereby
intend to exercise the Option as follows:
- --------------------------------------------------------------------------------
Number of Shares Per Share Total
Which I Elect to Purchase x Price = Price
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Executed as of this date of , 199 .
--- ----------- -
Very truly yours,
------------------------
Name:
Title:
Address:
<PAGE>
EXHIBIT B
---------
EXERCISE NOTICE
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, Nevada 89119
Attention: President
- ----------
Gentlemen:
Pursuant to our Stock Option Agreement dated as of July 25, 1997, I hereby
elect to exercise the Option as follows:
- --------------------------------------------------------------------------------
Number of Shares Per Share Total
Which I Elect to Purchase x Price = Price
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Enclosed with this Notice of Exercise is full payment of the total price of
the shares described above as provided the Stock Option Agreement or in the form
of a check in the amount of $ payable to the order of the Company.
--------
Kindly issue a certificate or certificates to me representing the shares of
Common Stock which I am acquiring by this exercise, and deliver it to the
address provided below.
Executed as of this date of , 199 .
--- ----------- -
Very truly yours,
---------------------------
Name:
Title:
Address:
<PAGE>
EXHIBIT C
---------
CROWN LABORATORIES, INC.
SUITABILITY QUESTIONNAIRE
-------------------------
Background
- ----------
The offer and sale of up to 734,400 shares of common stock, par value
$0.001 per share ("Common Stock"), of Crown Laboratories, Inc., a Delaware
corporation (the "Company"), pursuant to the terms and conditions of the Stock
Option Agreement between the Company and EWE Trust Number 1, a Florida trust
(the "Investor"), is being made by the Company pursuant to the private placement
exemption from registration in Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act") and Rule 506 promulgated thereunder by the
Securities and Exchange Commission ("SEC"), and pursuant to exemptions under
applicable state securities laws. The following information is requested in
order to determine whether the Investor qualifies as an "accredited investor"
for purposes of utilizing the above-referenced exemptions.
Representations
- ---------------
The undersigned acknowledges that this questionnaire is designed to enable
the Company to comply with the above-referenced exemptions and that the Company
and its advisers thus will rely upon the information contained herein. In this
connection, the undersigned represents and warrants to the Company that the
information contained herein is true and accurate and may be relied up on by the
Company and its advisers. The undersigned agrees to notify the Company
immediately of any material change in any such information prior to the purchase
of any of the shares of Common Stock which may be obtained by the Investor upon
exercise of the Option (the "Option Shares").
The undersigned understands and further agrees that, although the Company
will use its best efforts to keep the information provided in the answer to this
questionnaire strictly confidential, the Company, on its behalf, may present
this questionnaire and the information provided in it to such parties as the
Company deems advisable if it is called up on to establish the availability
under any federal or state securities laws of an exemption from registration or
if the contents thereof are relevant to any issue in any threatened or pending
action or other proceeding to which the Company or any of its respective
advisers is or may become a party.
The undersigned acknowledges and also agrees that this questionnaire does
not constitute an offer by the Company to sell Common Stock, but is a request
for information.
<PAGE>
Instructions
- ------------
PLEASE PRINT OR TYPE ALL ANSWERS AND RETURN THE EXECUTED SUITABILITY
QUESTIONNAIRE TO:
Richard A. Steinwurtzel
Fried, Frank, Harris, Shriver & Jacobson
1001 Pennsylvania Avenue, N.W., Suite 800
Washington, D.C. 20004-2505
PHONE: (202) 639-7120
TELECOPIER: (202) 639-7003/7004
(1) If the Investor is or represents an entity, Questions 4 through 8 must
be answered.
(2) If the answer to Question 6 is yes, then responses to Questions 11
through 23 must be provided with respect to each beneficial owner of the
----
entity.
(3) If the answer to Question 6 is no, then the information requested in
Questions 11 through 23 should be provided, where applicable, with respect to
the entity.
(4) An entity investor shall furnish a copy of its organizational
documents, or appropriate certificates in lieu thereof, reflecting its authority
to enter into the above-referenced investment.
-2-
<PAGE>
Information Required of the Investor
- ------------------------------------
CAPACITY
--------
1. Name of the Investor:
---------------------------------------------------------------------------
2. Are you acting for your own account?
Yes No
------ ------
3. If you are not acting for your own account, please specify the capacity
in which you are acting (i.e., agent, trustee, partner, corporate officer or
----
joint tenant).
4.a. If you represent an entity, when was the entity formed? (Please
provide the filing date of the entity's articles of incorporation or the
agreement of partnership, where applicable.)
4.b. If you represent an entity, what is the name of the entity?
4.c. Specify whether the entity is a corporation, general partnership,
limited partnership, association, joint stock company, trust or other
incorporated association.
5. In what state, territory, possession or foreign country was the entity
formed?
6. If the Investor is an entity such as a corporation, partnership,
association, joint stock company, trust or other incorporated association, was
such Investor organized for the purpose of acquiring the Option and the Common
Stock?
Yes No
-------- --------
-3-
<PAGE>
7. If the answer to Question 6 is yes, or if the Investor is an entity
which is an Accredited Investor (as defined in Rule 501(a) under the Securities
Act) because all the equityholders of the Investor are Accredited Investors,
please list in the space provided below (or on attached sheets) the names,
addresses and telephone numbers of each beneficial owner of the Investor and his
----
percentage equity interest in such Investor and supply the information requested
---
in Questions 11 to 23 below with respect to each beneficial owner of the entity.
----
You may have each such beneficial owner complete and sign a photocopy of this
form.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. Taxpayer Identification or Social Security No.:
---------------------------------------------------------------------------
9a. Address to which all correspondence should be sent:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9b. Home telephone number:
------------------------------------------------
9c. Office telephone number:
-----------------------------------------------
9d. Fax telephone number:
--------------------------------------------------
-4-
<PAGE>
FINANCIAL DATA AND INVESTMENT HISTORY
-------------------------------------
10. Is the Investor's present net worth in excess of $5,000,000? Natural
persons may use their joint net worth with their spouse and should use
$1,000,000 as the reference amount. Joint net worth is the sum of individual
net worth of both spouses.
Yes No
------- -------
11. Does the Investor have adequate liquid assets (defined as cash and
cash equivalents and marketable securities) to meet its current needs and
contingencies without considering the assets proposed to be invested in the
Option and the Option Shares?
Yes No
------- -------
12. Have you filed or been involved (within the past two years) in, or
threatened with, or are considering, personal bankruptcy proceedings?
Yes No
------- -------
13. Are there any lawsuits outstanding or threatened against the Investor,
or are there any claims against or contingent liabilities of the Investor which
could materially affect its net worth as reported in this questionnaire so as to
bring it below $5,000,000 (in the case of a natural person, $1,000,000)? If
yes, please provide details in response to question, below.
Yes No
------- -------
14. Please indicate below any additional matter of a financial nature that
is relevant to an analysis of the Investor's financial position:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-5-
<PAGE>
15. Do any significant contingent liabilities exist for which you may be
obligated?
Yes No
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If yes, please indicate type and amount.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16. Have you previously invested in securities offered through private
placements (other than Crown Laboratories, Inc.)?
Yes No
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If so, indicate the approximate amount invested: $
-------------
INVESTMENT IN THE OPTION AND OPTION SHARES
------------------------------------------
17. Are you currently a beneficial and record holder of the Common Stock?
Yes No
------- -------
18. Do you understand the nature of this particular investment in the
Option and Option Shares and the risks associated with such an investment?
Yes No
------- -------
19. Do you understand that there is no guarantee of any financial return
on this investment?
Yes No
------- -------
20. Do you understand that this investment is not liquid, and, therefore,
must be held indefinitely and may not be relied upon for your current needs and
contingencies?
Yes No
------- -------
-6-
<PAGE>
21. Are the Option and Option Shares being purchased for investment and
not with the intent to resell them?
Yes No
------- -------
22. Do you understand that the Option Shares have not been registered and,
therefore, cannot be sold unless they are registered under the Securities Act or
unless an exemption from registration is available?
Yes No
------- -------
23. Do you understand that the Option Shares will bear a legend stating
that they have not been registered and are restricted as to transfer?
Yes No
------- -------
-7-
<PAGE>
IN WITNESS WHEREOF, I have executed this Suitability Questionnaire as of
the 25th day of July, 1997, and declare that it is true and correct.
FOR INDIVIDUALS ONLY:
(Check One) Signature of Investor
- ----- Individual ------------------------------------
- ----- Joint tenants with ------------------------------------
right of survivorship Name:
- ----- Tenants
in Common FOR OTHER INVESTORS:
- ----- As custodian, Signature of Investor
trustee or agent
------------------------------------
- ----- Corporation ------------------------------------
Name:
- ----- Partnership Title:
CROWN LABORATORIES, INC.
By:
-------------------------------
-------------------------------
Name:
Title:
-8-
<PAGE>
EXHIBIT 10(A)
-------------
EQUIPMENT LEASE
---------------
This lease is made as of July 25, 1997, between EWE TRUST NUMBER 1, a Florida
trust, whose principal place of business is at 300 Greco Avenue, Coral Gables,
Florida 33146, hereinafter called the "Lessor," and CROWN LABORATORIES, INC., a
Delaware corporation, whose principal place of business is at 6780 Caballo
Street, Las Vegas, Nevada 89119, hereinafter called "Lessee."
Lessee does hereby lease from the Lessor the equipment described in Exhibit A
attached hereto, together with all attachments, replacements, parts, additions,
repairs and accessories incorporated in or now or hereafter affixed to said
equipment (the "Equipment" or "equipment"), subject to the terms, provisions,
conditions and agreement of this Lease as hereinafter set forth.
Lessee has selected the Equipment and Lessor HAS NOT AND DOES NOT HEREIN MAKE
ANY WARRANTIES, EXPRESS OR IMPLIED, AS TO THE MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE OR QUALITY OF THE LEASED EQUIPMENT AND LESSEE IS LEASING THE
EQUIPMENT IN ITS "AS-IS, WHERE-IS" CONDITION.
EQUIPMENT LEASED
TERMS AND CONDITIONS OF EQUIPMENT LEASE
1. Delivery, Location & Inspection. The Lessee acknowledges and agrees that
-------------------------------
it has been delivered and accepted the Equipment at its principal place of
business, 6780 Caballo Street, Las Vegas, Nevada 89119. The Equipment shall not
be removed from 6780 Caballo Street, Las Vegas, Nevada 89119 without Lessor's
prior written consent, which consent shall not be unreasonably withheld. Lessor
shall have the right to inspect the Equipment upon 48 hours prior written notice
at any reasonable time once every year during the term of this Lease. All
reasonable maintenance recommendations made by Lessor shall be commenced by
Lessee within ten (10) days of receipt by Lessee of a written request from
Lessor with respect thereto, and pursued diligently thereafter.
2. Term; Commencement Date; Rent. (a) The term of this Lease ("TERM") shall
-----------------------------
be sixty (60) months, beginning upon the Lessee's acknowledgment of receipt of
the Equipment (the "COMMENCEMENT DATE"), unless earlier terminated in accordance
with the terms hereof. Lessee will pay to Lessor as rent ("RENT") for the
Equipment, the following monthly amounts and at the following times: (a)
commencing on the Commencement Date and continuing on each of the succeeding
twenty-three (23) monthly anniversaries thereof, through the twenty-fourth
(24th) month of the Term, an amount equal to the Variable Monthly Rent (as
defined below) for such month; (b) commencing on the twenty fourth (24th)
anniversary of the Commencement Date and continuing on each of the succeeding
thirty-five (35) monthly anniversaries of the Commencement Date, through the
sixtieth (60th) month of the Term, an amount equal to the sum of (i) the Fixed
Monthly Rent (as defined below), and (ii) the Variable Monthly Rent for such
<PAGE>
month; and (c) on the last day of the Term, an amount equal to the then
outstanding Financed Amount (as defined below). For purposes of this paragraph
1: (A) the "FINANCED AMOUNT" shall mean, as of any date of determination,
$918,000, minus (i) all payments of Fixed Monthly Rent, and (ii) all prepayments
of Rent (other than payments of Variable Monthly Rent) made prior to such date
of determination pursuant to Section 2(d), in each case paid on or prior to such
date of determination; (B) "FIXED MONTHLY RENT" shall mean, $15,300; (C) "PRIME
RATE" shall mean, as of any date of determination, the per annum rate of
interest published in the Wall Street Journal on such date as the Prime Rate of
interest charged by U.S. banks; and (D) "VARIABLE MONTHLY RENT" shall mean, as
of any date of determination, the product of (i) the Financed Amount determined
as of such date, and (ii) one-twelfth of the Prime Rate determined as of such
date.
(b) In addition to the Rent specified above, Lessee shall be responsible
for all tangible personal property taxes associated with the Equipment and all
sales tax, if any, on such Lease payments.
(c) This Lease shall automatically terminate and be of no further force and
effect (i) at Lessee's sole option, upon the prepayment in full of all Rent due
and payable hereunder pursuant to Section 2(d), or (ii) upon the exercise by
Lessor of the options with respect to Lessee's common stock issued to Lessor
pursuant to the Stock Option Agreement dated as of the date hereof (the "Stock
Option Agreement") between Lessee and Lessor, and the payment in full by Lessee
of all Rent and other amounts due and payable hereunder on or prior to the date
of such exercise. This Lease shall be subject to termination at Lessee's sole
option, upon a default by Lessor under the Stock Option Agreement.
(d) In addition to the Rent due and payable hereunder on any monthly
payment date, Lessee may prepay, in whole or in part, Rent (other than payments
of Variable Monthly Rent) not yet due and payable. Any such prepayment amount
will be applied on the date of such prepayment to reduce the Financed Amount for
purposes of calculating Rent due on the next succeeding monthly payment date and
thereafter.
(e) Rent hereunder shall be terminated and no longer be due and payable (i)
as of the date of any early termination of this Lease pursuant to Section 2(c)
or Section 11, or (ii) as of the date of purchase of the Equipment by Lessee
pursuant to the purchase option set forth in Section 23.
3. Late Fees. Lessee acknowledges that subsequent to a five (5) day grace
---------
period, Lessee will be subject to a monthly late payment fee equal to 1.5% of
the amount of any past due payment; that if no payment is received within thirty
(30) days after the date for which payment is due, the entire remaining Financed
Amount will be due and payable immediately, and that if such entire remaining
Financed Amount is not paid, Lessor shall have the immediate right to enter
Lessee's premises and reclaim any and all equipment subject to this Lease.
3. Place of Payment. All Lease payments shall be made by a check drawn on a
----------------
commercial bank organized under the laws of the United States of America or any
state thereof, at the office of Lessor, or at such other place as Lessor may in
writing designate. Any required
-2-
<PAGE>
notice shall be given by certified or registered mail, return receipt requested,
to each party at the address of its principle place of business.
4. Lessor's Property, Recording. (a) The Equipment is, and shall at all
----------------------------
times remain, the property of Lessor; and Lessee shall have no right, title or
interest therein or thereto except as expressly set forth in this Lease. The
Equipment is and shall at all times be and remain personal property
notwithstanding that the Equipment or any part thereof may now be, or hereafter
become, in any manner affixed or attached to real property or any improvements
thereon. Lessee will not change, mark, deface or remove any insignia,
identification number, numbering or lettering which is on the Equipment at the
time of delivery thereof or which is thereafter placed thereon identifying the
Equipment. If Lessor supplies Lessee with labels or tags stating that the
Equipment is owned by Lessor, Lessee shall affix such labels to and keep them in
a prominent place on the Equipment.
(b) Lessee shall at its expense protect and defend Lessor's title, at
all times keeping the Equipment free from any security interests and/or other
encumbrances whatsoever, other than those caused by and relating solely to acts
or omissions of Lessor, including, but not limited to liens, attachments, levies
and executions, and shall give Lessor immediate written notice thereof and shall
indemnify and hold harmless Lessor from any loss caused thereby.
5. Maintenance. (a) Lessee shall maintain the Equipment in good operating
-----------
condition, repair and appearance, and protect same from deterioration; shall
only use the Equipment in the regular course of its business, within its normal
capacity, without abuse, and in a manner contemplated by the manufacturer
thereof; shall cause the Equipment to be operated only by competent, properly
trained operators; shall pay all expenses of operation of the Equipment and
maintenance thereon; and shall not make modifications, alterations or additions
to the Equipment, other than normal operating accessories or controls, without
the consent of Lessor, which consent shall not be unreasonably withheld.
(b) Furthermore, Lessee agrees to comply with all laws and regulations
regarding the use and maintenance of the Equipment and to pay directly to the
appropriate government or governmental agency all licenses, fees, assessments
and sales, use, property, excise and other taxes hereinafter imposed by any
government or governmental agency upon the Equipment or with respect to the use
of the Equipment.
6. Assignment. Without Lessor's prior written consent, which consent shall
----------
be in the sole discretion of Lessor, Lessee shall not (a) assign, transfer,
pledge, hypothecate or otherwise dispose of this Lease, the Equipment, or any
interest therein, or (b) sublet or lend the Equipment or any part of it or
permit it to be used by anyone other than Lessee or Lessee's employees. Lessor
may not assign this Lease or grant a security interest in this Lease and/or the
Equipment, in whole or in part.
7. Risk of Loss. Lessee hereby assumes the entire risk of loss to the
------------
Equipment from any kind and every cause whatsoever. In the event of a loss,
Lessee shall, at its own expense and option, either (a) repair the Equipment,
returning it to the condition it was in immediately prior to such loss; (b)
replace same with like Equipment acceptable to Lessor and in
-3-
<PAGE>
good condition and equivalent value, which replacement shall become property of
Lessor, or (c) pay to Lessor the then outstanding Financed Amount. In case
Lessor shall fail to exercise and fulfill its obligations under one of the
foregoing options, Lessor may repair same at Lessee's expense, and any sums
expended by Lessor in connection therewith shall be charged as additional rent,
payable forthwith.
8. Equipment Leased "As Is." It is agreed that Lessor shall not be
-----------------------
responsible as to the condition of the Equipment and the Lessee agrees to look
only to the manufacturer and/or actual supplier for any possible defects, be
they latent or patent, and will further only look to the aforementioned
manufacturer and/or supplier, and not to the Lessor, for any other claims. It is
specifically acknowledged and agreed that: (i) Lessee is leasing the Equipment
in its "AS IS, WHERE IS" condition, and (ii) the "As-Is" nature of this Lease is
a material inducement for Lessor to enter into this Lease.
9. Rental Net to Lessor. Except as otherwise expressly provided herein,
--------------------
Lessee intends the rental payments in this lease to be absolutely net to Lessor,
and Lessee shall comply with all laws, and shall pay all taxes, licenses and
registration fees and similar charges imposed on the ownership, possession or
use of the Equipment during the term of this Lease and shall fully maintain and
repair the Equipment at own expenses. Lessee shall pay Lessor all costs and
expenses, including reasonable attorney's fees, before and in connection with
litigation and appellate or bankruptcy proceedings, storage, caretaking, and
repossession expenses in connection with the enforcement of Lessor's rights
under this Lease. In case any charges, costs, taxes or expenses required to be
paid by Lessee under this Lease shall remain unpaid, Lessor shall have the right
to pay same and charge such payments to Lessee as additional rent, to be paid
forthwith by Lessee.
10. Indemnity. (a) Lessee shall defend, indemnify and hold harmless Lessor,
---------
its agents, officers, servants and employees from and against any and all
liabilities, losses, damages, injuries, claims, demands, fines, penalties, costs
and expenses of every kind and nature, whether or not covered by insurance,
including, but not limited to, reasonable legal fees and disbursements, before
and during trial and all appellate proceedings, arising out of or in any way
connected with the ownership, selection, possession, leasing, renting,
operation, control, use, maintenance, delivery and/or return of the Equipment.
(b) Lessee agrees to pay and indemnify and hold Lessor harmless from and
against any sale, use, VAT, stamp, gross receipts, business, property, ad
valorem, import, export or other taxes, tolls, levies, imposts, duties, charges
or withholdings from or of any nature (together with any penalties, fines or
interests thereon) imposed against Lessor or Lessee on any Equipment upon or
with respect to the ownership of any Equipment or the delivery, leasing,
possession, exchange, use, operation, transportation, or return of any Equipment
hereunder or upon the rentals, receipts, earnings or payments arising therefrom
or under or with respect to this agreement.
-4-
<PAGE>
(c) Lessee and Lessor agree for income tax purposes that this Lease is
intended to be a true lease. In order to allow Lessor to properly file its
income tax return(s), Lessee shall provide to Lessor from time to time
information as Lessor may reasonably request.
11. Insurance. (a) Lessee shall keep the Equipment fully insured against
---------
all risks of loss or damage from every cause and of every character whatsoever
for the full replacement value thereof, and shall carry public liability
insurance, both personal injury and property damage, covering the Equipment and
the operation thereof. All said insurance shall be in forms and amounts and
written by insurance companies satisfactory to Lessor. Lessee, at its own
expense, shall pay the premiums thereof and deliver to Lessor the polices of
insurance. Each insurer shall agree, by endorsement upon the policy or policies
issued by it or by independent instrument furnished to Lessor, that Lessor shall
be an additional named insured and it will give Lessor 30 days prior written
notice of the effective date of any alteration or cancellation of such policy.
(b) The proceeds of such insurance payable as a result of loss or of damage
to the Equipment shall be applied at the option of Lessee, (a) toward the
replacement, restoration or repair of equipment which may be lost, stolen,
destroyed or damaged, or (b) toward payment of the obligations of Lessee
hereunder. No loss, theft, damage or destruction of the Equipment shall relieve
Lessee of the obligation to pay Rent. In case of the failure of Lessee to
procure or maintain such insurance or to comply with any other provision of this
Lease, Lessor shall have the right, but shall not be obligated, to effect such
insurance or compliance on behalf of and at the expense of Lessee. In that
event, all moneys spent by and expenses of Lessor in effecting such insurance or
compliance shall be deemed to be additional rent, and shall be paid by Lessee to
Lessor forthwith. If Lessee determines that the Equipment is lost, stolen,
destroyed or damaged beyond repair, Lessee may, in lieu of the foregoing, pay in
cash all Rent and other amounts then owed by Lessee to Lessor under this Lease,
upon which payment this Lease shall be terminated and Lessee shall have no
further rights or obligations hereunder.
12. Events of Default. If (a) Lessee shall default in the payment of any
-----------------
Rent or in making any other payment hereunder when due and such default shall
continue for a period of five (5) days after such payment is due, or (b) Lessee
shall breach any warranty hereunder, or (c) Lessee shall default in the
performance of any other covenant herein and such default shall continue for a
period of thirty (30) days after Lessee receives notice from Lessor of such
default, or (d) Lessee becomes insolvent or makes an assignment for the benefit
of creditors, or (e) Lessee applies for or consents to the appointment of a
receiver, trustee, conservator or liquidator of Lessee or of all or a
substantial part of the assets of Lessee, or if such receiver, trustee,
conservator or liquidator is appointed without the application or consent of
Lessee, or (f) a petition is filed by or against Lessee under any bankruptcy law
providing for the relief of creditors and such petition, if involuntary, is not
dismissed within sixty (60) days, or (g) if Lessee shall permit any lien or
encumbrance, other than a lien or encumbrance of Lessor, to remain on the
Equipment for a period of sixty (60) days, or (h) if Lessee attempts to remove
(unless Lessor has consented to such removal in writing), sell, transfer, sublet
or part with possession of the Equipment, or any of it, or (i) if Lessee permits
the equipment to be improperly operated and/or maintained or used, then, to the
extent permitted by applicable law, Lessor shall have the right to
-5-
<PAGE>
exercise any one or more of the remedies as provided in Paragraph 13 below, or
(j) default by Lessee under the Stock Option Agreement.
13. Lessor's Remedies. (a) Lessor may declare the then outstanding Financed
-----------------
Amount to be immediately due and payable, and (i) retain all prior payments of
Rent and the Equipment, or (ii) retain all prior payments of Rent and sell the
Equipment at public or private sale with notice to Lessee, with or without
having the Equipment at the sale, and the proceeds of such sale less expenses of
retaking, storage, repairing and reasonable attorney's fees shall be applied to
the then Financed Amount, Lessee remaining liable for the balance of the then
outstanding Financed Amount. Lessee shall be liable for any and all expenses
Lessor may incur in connection with the enforcement of any of its remedies
herein, including, but not limited to, collection costs, court costs, and
reasonable attorney's fees and costs before, during, during and after trial and
at all appellate or bankruptcy proceedings.
(b) All remedies of Lessor hereunder are cumulative and may to the extent
permitted by law be exercised concurrently or separately, and the exercise of
any one remedy shall not be deemed to be an exclusive election of such remedy
only or to preclude the exercise of any other remedy. No failure on the part of
Lessor to exercise, and no delay in exercising any right or remedy hereunder,
shall operate as a waiver thereof, nor shall any single or partial exercise by
Lessor of any right or remedy hereunder preclude any other or further exercise
of any right or remedy under this Lease or as permitted by applicable law.
14. Return of Equipment. Unless the Equipment is purchased pursuant to the
-------------------
option set forth in Section 23 hereof, upon the termination or expiration of the
term hereof, or otherwise when required by the terms of this Lease, Lessee
shall, at its expense, deliver to Lessor the Equipment at an address specified
by Lessor, and in the same condition, repair and working order as received, less
normal depreciation and wear.
15. Failure to Enforce Rights Not Waiver. The omission by Lessor at any
------------------------------------
time to enforce any default or right reserved to it, or to require performance
of any of the terms, covenants or provisions hereof by Lessee at any time
designated, shall not be a waiver of any such default or right to which Lessor
is entitled, nor shall it in any way affect the right of Lessor to enforce such
provisions thereafter. Lessor may exercise all remedies simultaneously, pursuant
to the terms hereof, and any such action shall not operate to release Lessee
until the full amount of the rentals due and to become due and all other sums to
be paid hereunder have been paid in cash.
16. Notices. Any written notices or demand under this Agreement may be
-------
given by one party hereto to the other by hand delivery or registered or
certified mail, return receipt requested, mailing it to the party at its address
as set forth above, or at such address as the party may provide in writing from
time to time. Notice or demand so mailed shall be effective when deposited in
the United States mail, duly addressed and with postage prepaid.
17. Obligations, Absolute; Not set-off. (a) Lessee agrees that its
----------------------------------
obligations under this Lease are absolute, and shall continue in full force and
effect regardless of any disability of Lessee to use the Equipment because of
war, act of God, governmental regulations, strike, civil
-6-
<PAGE>
commotion, riot, loss or damage, obsolescence, breach of contract or warranty,
failure of or delay in delivery, misdelivery or any other cause, and, except as
otherwise provided herein, that its obligations shall not abate due to any claim
or set-off against Lessor. If any term or provision of this Lease or the
application thereof to any person or circumstances shall to any extent be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances, other than those as to which
it is invalid or unenforceable shall not be affected thereby, and each term and
provision of this Lease shall be valid and shall be enforced to the fullest
extent permitted by law.
(b) Any alleged defenses, counterclaims or set-offs, except as otherwise
provided herein, may be addressed by Lessee by means of independent action,
which action may be consolidated, however, with any pending action by Lessor, or
any assignee of Lessor or assignee of Lessor's assignee against Lessee. Lessee
acknowledges that the application, statements and financial reports submitted by
it to Lessor are material inducements to the granting of this Lease, that all of
such documents are true and correct in all material respects and any
misrepresentations shall constitute a default hereunder. Lessee agrees to
procure for Lessor such estoppel certificates, landlord's and mortgagee's
waivers or similar documents as Lessor or its assignees may reasonably request.
Lessee warrants that this Lease has been duly authorized and that no provision
of this Lease is inconsistent with Lessee's charter, bylaws or any loan or
credit agreement or other instrument or arrangement to which Lessee is a party
or by which Lessee or its property may be bound or affected.
18. Enforcement Costs. If any legal action or other proceeding is brought
-----------------
for the enforcement of this Lease, or because of an alleged dispute, breach, or
default in connection with any provision of this Lease, the successful or
prevailing party or parties shall be entitled to recover reasonable attorneys'
fees, court costs, and all expenses even if not taxable court costs (including
without limitation, all such fees, costs, and expenses incident to arbitration,
appellate, bankruptcy, and post-judgment proceedings), incurred in the action or
proceeding or any appeal, in addition to any other relief to which the party or
parties may be entitled. Attorneys' fees include legal assistant time, expert
witness fees, investigative fees, administrative costs, and all other charges
billed by the Attorney to the prevailing party.
19. Financing Statements. Lessee authorizes Lessor to file a financing
--------------------
statement covering this transaction in any and all jurisdictions which have
adopted the Uniform Commercial Code and at Lessor's request, Lessee will join
Lessor in executing financing statements pursuant to the Uniform Commercial
Code. Lessee authorizes Lessor to file financing statements signed only by
Lessor in all jurisdictions where permitted by law. Even though it is
specifically understood and agreed that Lessor is the owner of the Equipment and
no financing statement is required, Lessor may at its discretion file a
financing statement for information purposes only.
20. Time of Essence. Nothing to the contrary withstanding, it is
---------------
specifically agreed that time is of the essence concerning any of the covenants
and obligations of Lessee and Lessor hereunder.
-7-
<PAGE>
21. Entire Agreement. This instrument constitutes the entire agreement
----------------
between Lessor and Lessee. No agent or employee of the Lessor is authorized to
waive, alter or add any terms or conditions printed herein. Nothing herein
contained may be altered or varied except in writing and made part hereof by an
authorized officer of Lessor.
22. Governing Law. This Lease shall be governed and interpreted in
-------------
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such State and without regard to its choice
of law principles. Each party hereto consents and submits to the exclusive
jurisdiction of any court of the State of New York or of the United States of
America within the Southern District in the State of New York for the
adjudication of any action, suit, proceeding, claim or dispute arising out of or
otherwise relating to this Lease.
23. Purchase Option. Provided that Lessee is not in default under this
---------------
Lease under Sections 2(a), 2(b), 3, 9 and 10 hereunder, Lessor hereby grants
Lessee the option to purchase all of the Equipment for cash upon the end of the
60th month of the Term, upon payment in full of all Rent and other amounts then
due and payable hereunder, at a price equal to the then fair market value of the
Equipment, as determined by an appraiser mutually acceptable to Lessor and
Lessee, or, if Lessor and Lessee are unable to agree upon an appraisal, at a
price equal to the average of the fair market values determined by an appraiser
selected by Lessor and an appraiser selected by Lessee. Upon such purchase, this
Lease will terminate and neither party will have any further obligation
hereunder. Such Equipment shall become the property of Lessee and Lessor will
transfer to Lessee, without recourse, representation or warranty (other than
warranty of title), all of Lessor's rights, title and interest, if any, in and
to the Equipment, free and clear of all liens and a encumbrances not expressly
consented to in writing by Lessee.
24. No Recourse. Notwithstanding anything to the contrary in this Lease,
-----------
Lessor's maximum liability hereunder for the satisfaction of any remedy Lessee
may have hereunder or in connection herewith against Lessor shall not exceed the
then market value of the Equipment (excluding any liens or encumbrances with
respect thereto). Such exculpation of liability shall be absolute without any
exception whatsoever.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed as indicated below.
LESSOR: LESSEE:
EWE TRUST NUMBER 1 CROWN LABORATORIES, INC.
By: /s/ Edward W. Easton By: /s/ Craig E. Nash
--------------------- ----------------------------------------
Name: Edward W. Easton Name: Craig E. Nash
Title: Trustee Title: Chairman and Chief Executive Officer
-9-
<PAGE>
EXHIBIT A
DESCRIPTION OF THE EQUIPMENT
The Equipment which is the subject of this Agreement is a Hydromatic
Continuous Sterilizer by Stork of the Netherlands. The Equipment includes:
. The infeed and discharge cross conveyors;
. Three (3) angled belt orienter conveyors;
. All components originally supplied by Stork;
. One (1) heat exchanger and cartridge filter assembly with face
piping and valves;
. one (1) remote buffer tank;
. the face piping of the retort; and
. The electrical control panel.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CROWN
LABORATORIES, INC.'S CONSOLIDATED STATEMENTS OF EARNINGS AND CONSOLIDATED
BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 390,150
<SECURITIES> 0
<RECEIVABLES> 76,842
<ALLOWANCES> 0
<INVENTORY> 270,390
<CURRENT-ASSETS> 1,034,228
<PP&E> 10,243,408
<DEPRECIATION> (532,056)
<TOTAL-ASSETS> 11,607,695
<CURRENT-LIABILITIES> 1,482,871
<BONDS> 0
0
3,000,000
<COMMON> 20,063
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,607,695
<SALES> 48,044
<TOTAL-REVENUES> 0
<CGS> (21,620)
<TOTAL-COSTS> 956,526
<OTHER-EXPENSES> 24,312
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,939
<INCOME-PRETAX> (1,047,798)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,047,798)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
</TABLE>
