U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the Fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934 (NO FEE REQUIRED)
Commission File No. 1-12848
CROWN LABORATORIES, INC.
(Name of small business issuer in its charter)
Delaware 75-2300995
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
6780 Caballo Street 89119
Las Vegas, NV (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number, including area code: (702) 696-9300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Common
Name of each exchange on which registered: The Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
Check whether the issuer (1) filed all the reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any amendment to
this form 10-KSB. [ X ]
State issuer's revenue for the most recent fiscal year: $189,070
The aggregate value of the Common Stock held by non-affiliates on December 31,
1997 was $12,580,030. As of December 31, 1997 there were 25,106,060 shares of
Crown Laboratories, Inc., Common Stock, $.001 par value outstanding.
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PART I
Item 1. Description of Business
General
The Company is engaged in the development of, and intends to manufacture and
market, a proprietary line of pharmaceutically-balanced nutritional products
designed for the special needs of residents in nursing homes and patients in
hospitals. Generally, these individuals are over age 70, and prefer foods that
are easy to ingest, flavorful, easily digestible and nutritionally complete. The
Company's products will be provided in aseptically-sealed, ready-to-drink
packages. Product formulations are designed to provide a maximum of nutrient and
caloric support in easily consumable forms. The Company currently intends to
offer four liquid nutritional products and 26 dry-mixed products for use by
individuals with dietary restrictions, including low sodium and diabetic diets.
The Company's liquid nutritional product line will consist of both standard
products for nursing homes (nutritional supplements and milkshake-type products
in a variety of flavors) as well as specialized products targeted towards
patients with kidney dysfunction and tube feeding needs.
On June 25, 1996, the Company received approval for its aseptic manufacturing
and filling equipment from the U.S. Food & Drug Administration (F.D.A.).
Commissioning of the equipment is required by the F.D.A. The commissioning
process began on April 13, 1995, with the Company working with the National Food
Laboratories (the Process Authority) to review its manufacturing equipment,
manufacturing procedures and operating manuals and to monitor the
bacteriological kill tests for compliance with applicable federal regulations.
The National Food Laboratories is an international food and research and
development organization with laboratory facilities in Dublin, California;
Washington, D.C.; and Seattle, Washington and is a wholly-owned subsidiary of
the National Food Processors Association.
Since that time, the Company has been involved in modifying its product
formulation and aseptic packaging equipment to support commercial level
production in anticipation of its entry into the market.
The Company has entered into two consulting agreements which provide for
customer introductions to major potential purchasers of the Company's products.
The first contract calls for a fixed cash fee of $40,000. This amount will be
amortized ratably as the customer introductions are made, presently estimated to
cover a 24 month period. The other contract calls for the consultant to make
introductions and follow-up calls to 7 major potential accounts over the next 4
years. The consultant was granted 180,000 shares of the Company's Common Stock
as compensation for the agreement. The value of these shares ($225,000), based
on the market price of the shares at the time of grant ($1.25 per share), is
being expensed ratably over the life of the contract.
Recent Significant Developments
Crown Laboratories, Inc. (the Company), has suffered substantial decline in
financial performance in recent months and is currently exploring alternatives
for maintaining adequate liquidity and longer term funding with its principal
financial advisers. There can be no assurances that adequate liquidity or long
term funding will be restored or secured or that there will not be further
significant decline in the Company's business and financial condition. See Item
6 Management's Discussion and Analysis.
Between September 1, 1997, and April 30, 1998, the Company entered in to a
series of equity and short-term debt financing transactions designed to improve
the Company's liquidity and financial flexibility.
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On January 5, 1998, the Company raised $150,000 in a Regulation S sale of
prepaid, mandatory exercisable warrants to purchase Common Stock in two offshore
investors who held similar warrants. The new warrants may be exercised in whole
or in part in amounts over $10,000 of the principal amount of the warrants, at
any time, until expiration on September 28, 1999. The exercise price for each
share of Common Stock shall be equal to the lower of (x) 80% of the average
closing price of the Common Stock for the one business day immediately preceding
the issue date of the warrant or (y) 80% of the average closing price of the
Common Stock for the one business day immediately preceding the date of receipt
by the Company of the notice of exercise, as reported on the principal stock
exchange on which the Company's Common Stock is traded.
On January 28, 1998, the Company borrowed $43,000 from Herbert Altman, a
director of the Company. The loan rate is 9%, is due and payable on May 27,
1998, and has been extended until June 15, 1998. Warrant coverage is 43,000
warrants at 110% of the market price of $.3750. The warrants expire on June 15,
2001. Additionally, the expiration date on 200,000 prior warrants was extended
from September 4, 1999 to September 4, 2004.
On February 9, 1998, the Company borrowed $30,000 from Lee Hooker, a director.
The loan rate is 9% per annum. The original note due date has been extended to
June 15, 1998. Warrant coverage is 30,000 warrants at 110% of the market price
of $.25. The warrants expire in three years.
On February 13, 1998, and February 17, 1998, the Company received $30,000 from
UFH Endowment Ltd. and $30,000 from Austost Antalt Schaan, respectively from the
sale of Regulation S Prepaid Mandatory Exercisable Warrants which were
convertible at a discount to the market at the time of conversion.
On February 25, 1998, the Company borrowed $120,000 from Herbert Altman, a
director of the Company. The loan rate is 9%, is due and payable on March 24,
1998 and is unsecured. The note has been extended until June 15, 1998. Warrant
coverage is 120,000 warrants at 110% of the market price of $.25 on February 25,
1998. The warrants are valid for three years.
On March 18, 1998, the Company borrowed $20,000, $15,000 and $14,000 from three
directors, Lee Hooker, Herbert Altman and Arthur Berkowitz, respectively. The
loan rate is 9% per annum, is due and payable on April 14, 1998 and has been
extended until June 15, 1998 and has 100% warrant coverage of 20,000, 15,000 and
14,000 warrants, respectively, for the loans at 110% of the market price of
$.3125 on March 18, 1998. The warrants are valid for three years.
On March 20, and March 27, 1998, the Company borrowed $100,000 and $250,000,
respectively from Pelican Partners V, a Pennsylvania Partnership. Art Berkowitz,
a director, advanced $50,000 of the above loan and is therefore allocated 50,000
of the 350,000 warrants. The loan is due and payable no later than July 20 and
July 27, 1998, respectively. The rate is 10% per annum and is secured by a
second lien position on certain Company equipment. The loan has warrant
coverage, 350,000 warrants at 110% of the last price quoted of $.25 on March 20
and March 27, 1998, respectively. The warrants expire in three years.
On April 3, 1998, the Company borrowed $25,000 from Pelican Partners V, A
Pennsylvania Partnership. The loan rate is 10% per annum and is due and payable
on the earlier of 120 days or upon the funding of bridge loan financing. Warrant
coverage is 25,000 warrants at 110% of the market price of $.375 on April 4,
1998. The warrants are valid for three years.
On April 21, 1998, the Company borrowed $32,000 from Herbert Altman, a director
of the Company. The loan rate is 9% and is due and payable on May 24, 1998 and
is unsecured. The note has been extended until June 15, 1998. The Company issued
32,000 warrants at 110% of the market price of $.25. The warrants are valid for
three years with certain registration rights.
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On May 4, 1998, the Company borrowed $14,000 from Joseph C. Avitabile, a
shareholder. The loan rate is 9% per annum and is due on or before July 30,
1998. The Company will issue 14,000 warrants for the loan at 110% of the market
price on May 4, 1998, of $.20. The warrants expire three years from May 4, 1998.
On April 1, 1998, the audit committee of the Board of Directors of Crown
Laboratories, Inc., upon the recommendation of the management of the Company,
voted (I) to dismiss the Company's independent public accountants, Arthur
Andersen LLP, and (II) engage BDO Seidman LLP as the Company's independent
public accountants for the year ended December 31, 1997.
The reports issued by Arthur Andersen LLP on the Company's financial statements
for the each of years ended December 31, 1996 and 1995 did not contain an
adverse opinion or a disclosure of opinion and were not qualified or modified as
to uncertainty, audit scope, or accounting principles, except that the report
for the year ended December 31, 1995 included an explanatory paragraph regarding
the ability of the Company to continue as a going concern.
For each of the Company's two most recent fiscal years and subsequent thereto,
the Company had not consulted with BDO Seidman LLP on any matter concerning
either (I) the application of accounting principles to a completed or proposed
transaction, or (II) the type of audit opinion that might be rendered on the
Company's financial statement. Form 8K was filed by the Company on April 1, 1998
announcing the appointment of the new auditors.
Additionally on April 1, 1998, the Company filed Form 12b-25 requesting an
extension of the Company's 10K filing date from March 31, 1998, to April 15,
1998. The extension was required due to the change in the Company's independent
public accountant. Consequently, the Company has not been able to compile the
requisite financial data necessary to enable the Company to have sufficient time
to complete the Company's financial statements and exhibits by March 31, 1998,
which is the required filing date for the Company's annual report on Form 10-KSB
without unreasonable effort and expense.
On April 7, 1998, the Company reached an agreement with EWE Trust Number 1, the
lessor of certain production equipment, such that the Company will provide a
waiver of default to the EWE Trust for having gone outside the agreement and
pledged the assets in return for a six month loan of $77,000 at 9% interest.
Warrant coverage will be 77,000 warrants at 110% of Crown's Common Stock closing
price on April 3, 1998. The warrants expire in three years. The proceeds of the
$77,000 was disbursed as follows: Past due payments, to EWE Trust No. 1 as of
December 31, 1997, and as of April 7, 1998 were $6,502 and $19,506,
respectively. Four payments, through August 1998, were prepaid for a total of
$26,008 and $25,000 was advanced to the Company. Craig Nash, the Chief Executive
Officer of Crown, will personally guarantee $25,000 of the $77,000 loan. Mr.
Nash received no compensation for the risks of such commitment.
Additionally, the amount of warrants under the Option Agreement may under
certain circumstances, if not converted, increase up to 1,932,632 warrants.
Secondly, the exercise price of the warrants was reduced to $0.56 per warrant
subject to the Company having a first right of refusal to repurchase the
warrants within a 15 day notice period. The mandatory conversion price would
move from $3.50 to $0.85, and would be subject to mandatory exercise if the
price remained at $0.85 for seven consecutive days. The Company also has the
right to repay the principal amount of the lease of $918,000 and reclaim up to
1,080,000 warrants or allow the market to absorb the then registered shares such
that the Trust recoups its original investment of $918,000 and retains any
additional shares as the result of issuing more lower price stock so that the
original investment is recoupled by the Trust, within a six month period, as if
the amount was repaid at a minimum of $0.86 per share.
On May 5, 1998, the Company signed a three year contract to be part of McKesson
General Medical's corporate product strategy and become a program vendor. The
program commenced on April 1, 1998, and expires on March 31, 2001. Crown's
corporate aligned status designates to General Medical's sales organization that
the vendor is in compliance with their terms and conditions, and will remain as
a
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continued source of product on their database. McKesson General Medical is one
of the nations largest nursing home distributors serving approximately 5,200
nursing homes from over 40 distribution warehouses located throughout the United
States.
The Company concluded agreements with vendors on May 11, 1998, for shares of
common stock concerning past services.
The Private Securities Litigation Reform Act of 1995 provides a "Safe Harbor"
for forward looking statements. Except for the historical information contained
in this Annual Report on Form 10-KSB for the year ended December 31, 1997, the
matters discussed herein include forward-looking information.
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 Annual Report, are based on the Company's
current expectations and are subject to a number of risks and uncertainties that
could cause actual results in the future 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 of the Company's revenues from development, manufacture
and sale of the Company's products, (ii) the anticipated expansion of the
Company's international activities, (iii) the impact of competitive products and
pricing, (iv) approval of the Company's products and manufacturing equipment by
government agencies such as the United States Food and Drug Administration, (v)
the availability and terms of financing from other financing sources to fund the
Company's operating losses, the willingness of existing creditors to continue to
forbear from enforcing available rights and remedies and to grant additional
waivers of potential defaults. Given these uncertainties, stockholders and
debtholders are cautioned not to place undue reliance on any forward-looking
statement contained herein, and (vi) other risks detailed below and 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. The Company disclaims any
obligation to update such factors or forward-looking statements or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein or to reflect future events or developments.
When used in this Annual 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. References made in the Annual Report on
Form 10-KSB to "Crown", the "Company", or the "Registrant" refer to Crown
Laboratories, Inc.
The Market
The need and demand for nursing home services are increasing as a direct result
of the overall aging of the United States population. The result of this longer
life span has been an increase in the number of people with debilitating
conditions that make the tasks of day-to-day living difficult to achieve, and an
overall change in the demographics of the U.S. population. In relative terms,
the fastest growing segment of the population is individuals over the age of 85.
This group has tripled since 1960 and is expected to double again over the next
20 years.
The nursing home industry has been a primary beneficiary of this demographic
shift. These trends should continue to increase annually over the next several
years. Presently, there are approximately 20,000 nursing homes in the United
States with an average of 100 beds per nursing home. Today, the nursing home
industry is a multi-billion dollar business, with one of the highest growth
rates in expenditures among all health services. A nursing home stay is a common
event for the elderly population in America. Although only 5% of the elderly
reside in nursing homes at any point in time, the lifetime risk of entering a
nursing home is approximately 30%. One out of every five individuals living past
the age of 65 and one of
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three aged 85 or older will spend some time in a nursing home. The median age of
nursing home residents is now 81 years.
As a result of the aging of society and changes in hospital practices, the
character of nursing homes has changed dramatically in the past 10 years.
Nursing homes are now complex institutions caring for people who, because of
severe incapacities, need both sub-acute and chronic care.
The costs of nursing home care are increasing faster than inflation. At present,
approximately 65% of the cost of care is paid for by state Medicare programs
with the remaining 35% paid for by private insurance or individuals.
Increasingly, insurance providers are attempting to control costs by limiting
hospital coverage, which has resulted in a 40% reduction in the length of stay
at the hospital. This encourages early transfer from acute care facilities into
long term care facilities. The result is that nursing home populations are
becoming more disabled with increasing acuity requiring a higher level of care.
As care increases, the use of pharmaceutical food supplements also increases.
The Company estimates that over fifty percent of the nursing home population
receives a liquid supplement at least two times per day.
Products
The Company has developed and intends to market the following products:
Liquid Products. Upon completion of its manufacturing facility, the Company will
offer a line of liquid specialty dietary-control products in an aseptic liquid
packaged form in a variety of flavors.
WinLac(TM) - A Complete Supplement. WinLac is a lactose-free
nutritional supplement which fulfills the general supplementation
requirements of long term nursing and acute care facilities. WinLac is
high in protein and lactose-free, since most elderly individuals cannot
break down the sugars found in milk products (lactose). A four-ounce
serving of WinLac provides 200 calories and approximately 20% of the
United States Recommended Daily Allowance of vitamins and minerals.
MultiCal(TM) - A Milk Shake Substitute. MultiCal is designed to replace
the milk shake which is a staple food product in long term and acute
care health facilities. Typically, healthcare facility kitchens make
milk shakes for patients since they contain most of the nutrients
recommended by the government, have an agreeable taste and are easy to
ingest. These milk shakes are usually made from staple ingredients in
the facility kitchen. MultiCal replaces the scratch preparation shake
thus providing the healthcare facility with a ready-to-drink,
scientifically-tested formulation without the necessary preparation and
clean up. The Company's anticipated production efficiencies and
proprietary formulation permit MultiCal to be sold to healthcare
facilities at a cost which is often less than that of a scratch
preparation milk shake.
Renalite(TM) - Kidney-Deficient Product. Renalite is specifically
designed as a food supplement for use by patients with decreased kidney
function. Decreased kidney function limits the amount of fluids, salt
and proteins that can be consumed and eliminated by the body. Renalite
is a liquid formulation designed as a food supplement containing both
high caloric intake and the necessary vitamins and minerals. Other
product benefits include limited volume of fluid devoid of unwanted
proteins, sodium, potassium and chloride. Renalite is also designed for
consumption by diabetics, which comprise 50% of all renal patients.
Entralite(TM) - Tube-Feeding Product under review.
Dry-Mix Products - The Company has developed 26 dry-mix products to be used for
protein enhancement, caloric enhancement, low sodium and sugar free diets of the
geriatric population. These dry-mix products have been test marketed and
clinically tested . The Company's dry-mix nutritional products, packaged in
form, fill and seal bags, include a protein and carbohydrate supplement, a
complete instant
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breakfast supplement, a full assortment of low sodium, sugar free items as well
as no-bake egg custard, whipped topping and texture enhancement products.
Future Product Development. Management anticipates adding new flavors and
textures to its nutritionals product line. In addition, the Company anticipates
developing additional formulations utilizing its proprietary emulsion
technologies to address specific medical situations. There can be no assurances
that the Company will be successful in developing new products or, if it is
successful in developing new products, that the products will meet with
acceptance in the marketplace.
Patient Benefits
The Company's products provide specific patient benefits:
Scientifically-Formulated. The Company's formulations have been tested
under controlled conditions for their particular applications. Product
quality is closely monitored in the Company's laboratory to assure
consistently reliable product performance which generates predictable
favorable results when prescribed.
Aseptically-Processed. All of the Company's liquid nutritional
products will be aseptically processed and packaged, providing
extended shelf life without the need for refrigeration.
Concentrated Nutrition. The Company's special formulations and more
efficient nutrient composition make it possible to serve patients
smaller, more compact portions that do not leave them feeling full or
bloated. As a result, these supplements compliment a solid food diet
rather than interfere with it.
Ready-to-Drink. The Company's liquid products will be packaged in
ready-to-consume "Peel and Drink(TM)" four-ounce plastic cups which
need no refrigeration. They can then be stored next to patient care
stations to be used whenever a patient is hungry or thirsty.
Healthcare Facility Benefits
The Company's products were designed to be efficient for the healthcare
facilities to administer. Specific benefits include:
Clinically-Proven. The Company has conducted several empirical studies
working in conjunction with nursing homes. The study results
demonstrated that patients using the Company's products receive more
nutrition and gained more weight than with competitive products.
Increases in serving intake over competitive products ranged from 50%
to 95%. The Company attributes this increase to two factors. First,
the volume of the serving is more closely aligned to the patient's
ability to consume a supplement. Second, the Company's products simply
taste better. On average, during the studies, the patients using the
Company's products gained 4.3 pounds per month versus a 1 pound per
month weight gain for those consuming competitive products. These
results are significant since weight gain is considered a key factor
in determining the success of patient nutrition programs.
Increased Nutritional Density. The Company designed its products to
provide increased nutritional density since the patients studied in
their clinical tests could not consume a sufficient volume of food to
both support ongoing metabolism and maintain health. The Company's
four-ounce liquid products contain essentially the same nutritional
density in proteins, minerals and vitamins as eight ounces of the
competitive brands.
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Reduced Waste. The Company's liquid products will be packaged in
convenient ready-to-drink four-ounce servings. The Company's studies
show that, in most cases, patients consistently consume up to four
ounces of a liquid food supplement per serving. Competitive products
are generally packaged in eight ounce portions with at least half of
the product going to waste on average.
Cost Effective. In addition to the product waste issues, discussed
earlier, the Company's products will normally be consumed directly
from the four ounce disposable cup, eliminating the need for washing,
rinsing, drying and storing additional serving containers.
Additionally, the Company's light-weight plastic containers and
reduced serving size will result in lower freight costs which can be
passed along to the customer.
No Refrigeration Required. Government regulations, requiring that
scratch preparation milk-based products be carefully refrigerated, are
closely monitored and strictly enforced by the various regulatory
agencies. Failure to follow proper temperature requirements can result
in the imposition of penalties to the facility. The Company's products
will be stored in aseptically-sealed containers that require no
refrigeration during transport, storage or prior to serving.
Marketing Strategy
Unlike the Company's major competitors (Ross Laboratories, Inc. and Mead Johnson
Nutritionals, who together control an estimated 93% of the market), the Company
will focus its primary efforts on the nursing home segment of the medical
nutritionals market. Management believes that by concentrating its efforts on
addressing the needs of the nursing home market, developing appropriate product
formulations, packaging formats and marketing strategies, it will be successful
in penetrating and gaining a significant share of this market which has been
under-serviced by competition.
The Company also intends to expand its business through new product
introductions utilizing its proprietary production and aseptic filling
technologies as well as through expansion into international markets. There can
be no assurances that the Company will be successful in either of these areas.
The nursing home market is presently undergoing consolidation with large nursing
home chains acquiring one another in an attempt to obtain economies of scale.
The Company's management has a significant number of long-standing business
relationships with the senior management of these major accounts. The Company
believes that this presents significant opportunities for it since obtaining
only one or two major accounts or portions of their total business will provide
enough sales volume to achieve break-even levels. There can be no assurances
that the Company will be successful in obtaining sufficient volumes from these
major accounts, or if they are achieved, that the profit margins resulting from
these sales will be sufficient to provide break-even operations. The Company's
future sales may be dependent on a few major accounts.
The Company has signed a major marketing and distribution agreement with
McKesson Corporation's Health Care Unit. This agreement will allow the Company
not only to penetrate the nursing home market, but also the hospital and home
health care markets. The agreement calls for McKesson to distribute Crowns'
products to all three market segments over a three-year period with renewal
options.
Competition
The pharmaceutical nutritional product industry's annual revenue is estimated by
the Company to be approximately $4 billion in the United States alone. Three
companies currently dominate the market: Ross Laboratories, Inc. (a division of
Abbott Laboratories, Inc. (NYSE)), Mead Johnson Nutritionals, (a division of
Bristol-Meyers-Squibb, Inc. (NYSE)), and Novartis, Inc., a Pharmaceutical
Company. Clintec, (a division of Nestle Foods), competes with tube feeding
products.
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All of these companies are much larger and better financed than the Company,
have established products and an established customer base, and can, therefore,
devote more resources to research and development, production and marketing
activities. Further, these companies may respond vigorously to the Company's
entry into the market by targeting products to nursing homes or repositioning
their product lines in more concentrated serving sizes. Therefore, the Company
may not be a significant factor in these markets for the near or foreseeable
future. Further, due to the size of the major nursing home and hospital chains,
the Company may find its sales concentrated initially in a few large accounts.
Manufacturing
Manufacturing of dry mix products entails the purchasing of raw materials such
as sugar and non-fat dry milk, measuring the ingredients based on formulations,
mixing and finally, packaging. The Company will check its products for quality
and moisture content at its own in-plant laboratory facility. The dry mix
packaging process involves using rolls of pre-printed foil which are run through
a special form, fill and seal machine that makes the envelope, fills it with
product and seals it for shipment.
The liquid packaging process is more complex which has required the construction
of a liquid processing facility. The Company has acquired and installed the
major components required for the production of its products in its plant in Las
Vegas, Nevada (see Item 2 - "Description of Property").
Product Protection
The Company regards the formulations of its products to be proprietary and has
filed for a patent covering the formulation and production process for its
primary liquid nutritional product, WinLac(TM). The Company has also trademarked
its Company name, its liquid nutritional product names as well as "Peel and
Drink(TM)" and "The Nutritional Difference(TM)". There can be no assurances that
any patent will be issued. Currently, the Company exerts substantial efforts to
protect trade secrets and to keep formulas and related process know-how
confidential. Currently, the Company requires each of its employees to sign
confidentiality agreements as a condition of employment to protect its
formulations and production know-how. However, there can be no assurances that
the Company will be successful in these efforts.
Regulatory Compliance and Approval Required for Operation
The Company's operations are regulated principally by the U.S. Food and Drug
Administration, (F.D.A.), although state and local regulations also apply.
Failure to comply with regulatory requirements could result in fines and other
penalties, including cessation of production. Additionally, there can be no
assurance that regulatory requirements will not change or that the Company will
be able to comply with changes at an acceptable cost, if they were to occur.
Regulatory approval is required for the manufacturing process, which principally
entails certification of the processor and the aseptic filler/packaging machine.
The manufacturers have warranted that their equipment meets F.D.A. requirements
for aseptic machinery. The manufacturer of the processor has had numerous
processors approved in the United States. The filler manufacturer has never
received approval in the United States because this type of filler is the first
of its kind made by it for a U.S. manufacturer. However, after extensive
modification by the Company, the filler as well as the facility received
complete F.D.A. certification on June 25, 1996.
Failure to meet regulatory approval will preclude the Company's ability to
manufacture and ship its products.
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Sources of Supply
There are alternative sources of supply for the raw materials required for the
manufacture of the Company's products. The Company considers the sources and
names of its principal suppliers to be confidential.
Employees
Currently, the Company has 26 full-time employees. There are presently no labor
contracts in effect with the Company.
Organization
Crown Laboratories, Inc. ("the Company") was incorporated on February 23, 1989,
in Delaware, as Industrialistics, Inc. In November 1991, Industrialistics, Inc.
changed its name to Crown Laboratories, Inc.
Item 2. Description of Property
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 had obtained a
twelve month option to purchase its current manufacturing facility for
$3,185,000. As of December 31, 1997, the option expired. Currently there are no
plans to renew the option.
Item 3. Legal Proceedings
The Company is subject to normal business litigation and claims concerning
products and services rendered to the Company. The Company believes that the
outcome of such lawsuits, claims and other legal matters will not have a
material impact on the Company's consolidated financial position.
In addition to normal business litigation, the Company is involved in the
following 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. Their appeal to the Nevada
Supreme Court was denied. They have since filed an answer. The Company cannot
predict the outcome of its claims. In January 1998, an order was filed in the
District Court Clark County Nevada granting a motion for Partial Summary
Judgment in favor of Crown Laboratories against International Packaging and
Processing Systems, Inc., and Karl Fabricius. The motion included specific
findings of misrepresentation, fraud and alter ego. The award in favor of Crown
was for $21,664,323 plus costs and attorneys fees. Since that time, the Company
has been evaluating the award and trying to determine how much, if anything, the
Company is likely to recover. Presently, the Company cannot predict the ultimate
collectibility of its claims.
10
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on September 16, 1997 at the Monte
Carlo Resort & Casino in Las Vegas, Nevada. At the meeting, an election of
members of the Board of Directors of the Company was held and the following
individuals (comprising the entire membership of the Board) were elected to one
year terms. Mr. Herbert G. Altman is a new member of the Board. Mr. Vincent J.
Casella did not stand for reelection.
Member of the Board Votes For Votes Against Abstention
- ------------------- --------- ------------- ----------
Craig E. Nash 14,611,495 35,500 57,067
Scott O. Nash 14,611,495 35,500 57,067
Herbert G. Altman 14,557,495 89,500 57,067
Arthur M. Berkowitz 14,559,495 87,500 57,067
Linda Carrick, Ph.D. 14,559,495 87,500 57,067
Christopher Demetree 14,559,495 87,500 57,067
Lee Allen Hooker 14,556,495 90,500 57,067
Shareholders also approved amendments to the Certificate of Incorporation to
remove the designations of the Company's Series A and Series B Preferred Stock,
Proposal Three.
To approve Proposal Three:
Shares For 14,610,533 Shares Against 65,200 Shares Abstaining 28,328
---------- ------ ------
Two other proxy items were adjourned for 20 days pending receipt of additional
votes by proxy. These were a proposal to approve amendments to the Certificate
of Incorporation which creates a classified board of directors and a second item
to approve the Crown Laboratories 1997 Incentive Plan.
On October 7, 1997 the Company concluded its adjourned Annual Meeting of
Shareholders, previously held September 16, 1997. As previously disclosed, the
two proxy items addressed at the meeting were a proposal to approve amendments
to the Certificate of Incorporation which creates a classified board of
directors (Proposal One) and a proposal to approve the Company's 1997 Incentive
Plan (Proposal Four).
Proposal Four, the Company's 1997 Incentive Plan was adopted by the
shareholders, receiving majority approval by voting shares.
To approve Proposal Four - the Crown Laboratories, Inc. 1997 Incentive Plan:
Shares For 7,903,972 Shares Against 1,333,411 Shares Abstaining 16,457
--------- --------- ------
Although Proposal One, the classified board amendments, received approximately
7.6 million votes in favor, it did not receive the majority approval by the
shareholders of the Company's outstanding common stock and did not carry.
To approve Proposal One - the Classified Board Amendments:
Shares For 7,692,810 Shares Against 1,516,803 Shares Abstaining 44,227
--------- --------- ------
11
<PAGE>
PART II
Item 5. Market for Common Equity and Related Shareholder Matters
The Company's stock was listed on the American Stock Exchange, Emerging Company
Marketplace (AMEX ECM) on March 29, 1994. It traded under the symbol CLL.EC.
Prior to that time, the Company's stock was listed on the Electronic Bulletin
Board (EBB) of the NASD. The table below lists the low and high bid prices for
the stock for each quarter over the last two years.
<TABLE>
<CAPTION>
Calendar 1997 Calendar 1996 Calendar 1997
------------- ------------- -------------
Low High Low High Low High
--- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
1st Quarter (AMEX ECM) $0.81 $0.88 $1.63 $1.75 -- --
2nd Quarter (AMEX ECM) $0.56 $1.06 $1.63 $1.69 -- --
3rd Quarter (AMEX ECM) $0.75 $1.00 $1.19 $1.25 -- --
4th Quarter (AMEX ECM) $0.43 $0.93 $0.63 $0.81 -- --
4th Quarter (Pacific) -- -- -- -- $0.50 $0.50
</TABLE>
The source of the information, (summarized above), comes from the American Stock
Exchange for Amex quotes for 1996 and 1st, 2nd and 3rd Quarters for 1997, and
The Pacific Exchange quotes for 4th Quarter 1997.
The American Stock Exchange has announced that it will no longer accept new
issuers for the Emerging Company Marketplace, but will continue trading existing
shares, including the Company's. Therefore, over time, the Emerging Company
Marketplace will cease to exist. The market for the Company's Common Stock must
be considered limited and there can be no assurance that a meaningful trading
market will continue. Stock sold by the Company in private placements have
generally been below the then trading price on the American Stock Exchange.
On October 16, 1997, the Company's Board of Directors unanimously determined to
withdraw the Company's common stock from listing on the Emerging Company
Marketplace of the American Stock Exchange and notified the Exchange of its
intentions. The Exchange notified the Company, by letter dated November 11,
1997, that it would not interpose any objection to the Company's application. On
November 17, 1997, the Company submitted its application to the US Securities
and Exchange Commission to withdraw its common stock from listing on the
Emerging Company Marketplace. The Company's stock has continued to trade on The
Pacific Exchange where the Company has been fully listed since November 11,
1996.
On April 12, 1998, The Pacific Exchange (Exchange), notified the Company that it
was in violation of the Exchange's financial filing policies since the Company
had not filed its Form 10-K for the period ended December 31, 1997, by the March
31, 1998 deadline. Further, the Exchange advised the Company that failure to
file the required filings by May 15, 1998, would result in the Company's stock
being suspended from trading on May 18, 1998.
The Company has notified the Exchange of its 8K filing referencing its change of
independent public accountants and request for extension of its filing date to
May 15, 1998. The Company is continuing to work with the Exchange to insure full
uninterrupted trading privileges.
During 1996 and 1997 the Company raised $1.9 Million and $736 Thousand,
respectively, in common equity financing through Private Placements.
12
<PAGE>
There are approximately 2,000 beneficial Common Stock holders. The Company did
not pay any dividends in the last two years and does not intend to pay dividends
in the foreseeable future. All available working capital will be used to meet
the Company's expected growth.
The Company has entered into agreements with certain employees which provide for
the grant of Common Stock and stock options (at an 85% discount to market price
as of their date of employment) which vest over a five year period.
Additionally, the Company has entered into consulting agreements for investor
relations and other services which provides for the issuance of 50,000 options
to purchase the Company's Common Stock at an 85% discount to the market price of
the stock on the date of signing the agreement, and also the issuance of 180,000
shares of common stock. Compensation expense relating to these Common Stock and
option grants is approximately $125,413 for the year ended December 31, 1997 and
$550,000 for the year ended December 31, 1996.
On April 9, 1997, the Company announced that its Board of Directors authorized
the expenditure of up to $500,000 for purchase of its common stock. The Company
will make purchases from time to time as market conditions permit and in such
amounts as it 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
the Company to buy any specific amount of its shares. As of December 31, 1997,
the Company had repurchased 591,400 shares of Company stock for a total of
$446,778.
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", (August 1, 1997 and August 1, 1998). 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 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.
Item 6: Management's Discussion and Analysis and Plan of Operation
Results of Operations
The Company's independent certified public accountants have included an
explanatory paragraph in their audit report accompanying the 1997 financial
statements. The paragraph states that the Company's recurring losses and
negative working capital raise substantial doubt about the Company's ability to
continue as a going concern and caution that the financial statements do not
include adjustments that might result from the outcome of this uncertainty.
The Company has been extensively engaged in research and development activities
in order to commercialize its proprietary line of liquid nutritional products.
As a consequence, the Company has incurred and charged to expense substantial
start-up costs in the engineering, design, construction, and modification of its
facility, production equipment, processes, and formulations.
The Company had total sales for the year ended December 31, 1997 of $189,070.
Dry-mix products represent $165,011 and $24,058 represents liquid products. For
the year ended 1996 there were no sales. For the years ended December 31, 1997,
and December 31, 1996, the Company incurred losses of ($5,179,132) and
($4,631,905) respectively. Higher losses in 1997 are attributable to increased
salaries associated with additional employees and higher operating expenses. In
addition, the Company incurred
13
<PAGE>
start-up expenses totaling ($1,633,720). The accumulated deficit at December 31,
1997, was ($17,631,004). Losses have continued since such date due primarily to
expenditures of salaries, other operating expenses, and plant start-up expenses.
The Securities & Exchange Commission (SEC) and Financial Accounting Standards
Board (FASB) have issued stringent guidelines to account for research and
development and certain other start-up costs. The SEC has adopted a view that
they will not accept deferred start-up costs (capitalization of start-up costs
on the balance sheet) if the registrant is not in an industry where deferral is
a readily accepted policy. Deferral is not a widely accepted policy in the
Company's industry. Consequently, Crown expensed ($1,633,720) of start-up
expense for the year ended 1997. Start-up expenses of ($1,870,957) were
similarly expensed in 1996.
On June 25, 1996, the Company received approval of its aseptic manufacturing and
filling equipment from the F.D.A. Commissioning of the equipment is required by
the F.D.A. The commissioning process begins with the Company, working with an
independent laboratory, (the Process Authority), to review its manufacturing
equipment, manufacturing procedures, manuals and monitor bacteriological kill
tests.
Although the equipment manufacturer warranted that the purchased equipment had
been manufactured to the F.D.A. regulatory specifications for aseptic packaging
and processing equipment, the filler was the first of its kind manufactured for
a U.S. Company requiring F.D.A. aseptic processing approval. The delays in
certifying the Company's production equipment can be attributed to the aseptic
filling machine. The machine was unable to pass certification testing when it
was originally shipped from Germany in February, 1995. Numerous modifications
have been made to the machinery at the request of the Process Authority
primarily related to installing monitoring devices which were required to meet
F.D.A. requirements. The manufacturer of the aseptic filling machine has filed
for bankruptcy in the German courts. The Company has filed a claim against the
manufacturer of the aseptic filler for damages caused by the delays in
certifying the filler and seeks to have these damages applied against the
purchase price of the machine. Further, the Company has filed suit in Las Vegas,
Nevada against certain persons and entities involved with the manufacturer, (see
Item 3, "Legal Proceedings"). To further protect its rights to the machinery and
its related technology, the Company has purchased the blueprints and the rights
to its aseptic filling machine from the German bankruptcy court.
Now that the machinery is certified, and assuming there is sufficient working
capital in place, the Company should be able to increase production of its
liquid nutritional products, to fulfill its agreements with its distributors.
YEAR 2000
The Company is currently addressing the impact of the Year 2000 issue.
Expenditures relating to this are expensed as incurred. The Company does not
expect a significant impact on the Company's ongoing results of operations.
Plan of Operations
In June 1996, the Company received approval for its aseptic manufacturing and
filling equipment from the F.D.A. to produce its product line for adult
nutritional and specialty products. Extensive modifications were required on the
filling equipment for the remainder of the year. Consequently, no liquid
nutritional sales were produced for the year ended 1996 and $24,058 of liquid
nutritional products were produced for the year ended 1997.
In the absence of long-term financial support, there can be no assurance that
additional financing can be obtained from conventional sources. Management is
exploring alternatives that include seeking strategic investors, lenders and/or
technology partners or pursuing other transactions that could result in
substantial dilution to management and existing shareholders. There can be no
assurance that management efforts in
14
<PAGE>
this regard will be successful. Management believes that despite the financial
hurdles and funding uncertainties going forward, it has a business plan that, if
successfully funded and executed can significantly improve operating results.
The support of the Company's vendors, customers, lenders, stockholders and
employees will continue to be key to the Company's future success. If
negotiations with its vendors, landlord, and lenders are not successful and
alternative financing sources are not available, the Company may face the loss
of key personnel, cessation of shipping goods, its equipment and its plant.
Funding
During 1995, the Company raised approximately $2.4 million in additional common
equity financing through a private placement and this amount is reflected in the
accompanying financial statements. Each unit was purchased for $50,000. A unit
consisted of 25,000 shares of Common Stock and warrants to purchase 12,500
shares of Common Stock for $3 per share. The warrants expired two years from the
date of issuance. Fractional units have been sold. In addition, the Company
issued to the Placement Agent and brokers 2,500 options to acquire shares of the
Company's Common Stock at a price of $2.40 per share for each unit sold. These
options expire five years from the date of issuance.
During 1995, the Company also raised $3.5 million through the issuance of Series
C Preferred Stock. The Series C Preferred Stock pays no dividends, but imputes a
6% effective annual interest rate upon conversion into Common Stock which will
be accounted for over the time during which the preferred stock is outstanding.
The conversion rate is determined by the acquisition value of the preferred
stock (plus imputed interest referred to above) and an 18% discount to the five
day average market price of the common shares at the time of exercise. During
1995, the Company's Board of Directors authorized utilizing an alternate price
to the five day average market price provided for in the conversion of Series C
Preferred Stock for several block trades. During the quarter ended March 31,
1996, the Company raised an additional $500,000 through a placement pursuant to
Regulation S under the Securities Act of 1933, as amended, of its Series C
Preferred Stock, bringing the total of Series C Preferred Stock issued to $4
million. As of July 2, 1996, all of the Series C Preferred Stock issued had been
converted into 3,294,735 shares. The shareholders had waived their interest in
the conversion for all past, present, and future transactions. 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.
On February 15, 1996, the Company offered the holders of its warrants (issued in
conjunction with private placements in 1994 and 1995) the opportunity to lower
the exercise price of the warrants from $3.00 to $1.375 per share provided that
they exercise at least 60% of their holdings. The expiration date of the
remaining warrants, if any, would be extended for one year at the original
exercise price. This offer was extended on March 12, 1996 until March 28, 1996.
A total of 613,688 warrants representing $843,821 were exercised.
On May 10, 1996, the Company offered a private placement of equity securities
with a minimum of $540,000 to a maximum of $2,520,000 (the private placement
provides for an over-subscription of the placement up to $3,000,000 at the
Company's discretion) in units of $45,000. Each unit consists of 30,000 shares
of the Company's Common Stock and 30,000 warrants to purchase the Company's
Common Stock at a price of $1.60 for a period of six months after the closing of
the private placement. The Company raised $1,912,500 through the private
placement which was closed on July 30, 1996.
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). 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
15
<PAGE>
Stock is convertible continues to 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 August 11, 1996, the Company entered into a term loan agreement with FINOVA
Capital Corporation which provides for a $3 million, fixed rate (11.93% annual
percentage rate); (this rate is pegged at a spread of 561 basis points above the
five year Treasury Note rate at the time of closing), five year term loan
(interest only for the first six months, amortized over the remaining 54 months)
secured by a first lien against the fixed assets and leasehold improvements of
the Company. The commitment provides for the advance of an additional $1.5
million upon securing sales contracts totaling $7 million on an annualized
basis. The loan agreement requires that the Company adhere to certain covenants.
Specifically, they require that the Company maintain a minimum tangible net
worth of $5 million, a senior debt to tangible net worth ratio of 1 to 1 and a
cash flow rate of 2 to 1. The first two covenants are effective on the closing
date of the loan while the cash flow ratio took effect on December 31, 1997.
Also as part of the terms of the loan agreement, the Company has agreed to issue
300,000 five year warrants to FINOVA to purchase a share of the Company's Common
Stock at the closing market price of the stock on the date prior to closing the
loan ($1 7/16). As reflected in the financial statement footnotes, these
covenants were subsequently waived and the loan agreement modified.
On September 19, 1996, the Company's Board of Directors approved a re-pricing of
the May 10, 1996, Private Placement. Under the re-pricing, each unit was
adjusted to consist of 36,000 shares of Common Stock per unit as compared to the
30,000 shares per unit contained under the original terms of the Private
Placement. This resulted in the issuance of an additional 255,000 shares of
Common Stock being issued in conjunction with the Private Placement.
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.
On May 5, 1997, the Company's Board of Directors adopted a Shareholder Rights
Plan designed to protect the 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 "grandfathered 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."
16
<PAGE>
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 E 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 issued to 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.
On August 7, 1997, the Company commenced a private offering of up to 5,000,000
shares of its common stock at a price of $.70 per share. The offering was made
pursuant to the exemption for a private placement under Section 4(2) of the
Securities Act of 1933, as amended. During August - October 31, 1997, the
Company sold a total of 1,338,273 shares of Common Stock, for an aggregate
purchase price of $736,050. The Common Stock was sold to 14 accredited
investors. The Company's private offering concluded on October 31, 1997.
On August 21, 1997, the Board of Directors of the Company approved the grant of
48,000 shares of the Company's common stock to Joseph K. Furst, as compensation
for certain services rendered to the Company.
On September 1, 1997, the Company borrowed $100,000 from Christopher Demetree, a
director of the Company, in order to meet short term working capital needs. The
loan rate is 9% annually and is due and payable on July 30, 1998 and is
unsecured. The Company issued 100,000 warrants at 110% of the market price of
$.8125. The warrants are valid for three years with certain registration rights.
On September 29, 1997, the holder of the Company's Series E Preferred Stock
converted 90 shares of this series into 1,600,000 shares of Common Stock. In
turn, the holder sold these shares of Common Stock privately and then acquired,
in a Regulation S offering, 1,285,715 shares of Common Stock and a one-year
warrant from the Company and a one-year warrant to purchase 648,141 shares of
Common Stock to an offshore investor who holds the Series E Preferred Stock. The
shares of Common Stock were sold by the Company at $.70 per share for an
aggregate of $900,000. There are currently outstanding 172.5 shares of Series E
Preferred Stock.
17
<PAGE>
On September 29, 1997, the Company raised $500,000 in a Regulation S sale of
prepaid, mandatory exercisable warrants to purchase Common Stock to a new
investor. The warrants may be exercised in whole or in part in amounts over
$10,000 of the principal amount of the warrants, at any time, until expiration
on September 28, 1999. The exercise price for each share of Common Stock shall
be equal to the lower of (x) 80% of the average closing price of the Common
Stock for the one business day immediately preceding the issue date of the
warrant or (y) 80% of the average closing price of the Common Stock for the one
business day immediately preceding the date of receipt by the Company of the
notice of exercise, as reported on the principal stock exchange on which the
Company's Common Stock is traded. At the present time no shares of Common Stock
have been issued under this arrangement.
On November 17, 1997, the Company sold for $200,000, 363,637 shares of Common
Stock and a two-year warrant to purchase 181,181 shares of Common Stock to an
offshore investor. The warrants are exercisable for one year at $0.05 per share
provided the Common Stock is trading at less than $0.6875.
On December 3, 1997, the Company for $200,000 issued 500,000 shares of Common
Stock and a two-year warrant to purchase 250,000 shares of Common Stock to two
offshore investors, both of which previously purchased equity securities of the
Company. The warrants are exercisable for one year at $0.05 per share provided
the Common Stock is trading at less than $0.50.
On December 5, 1997, the Company borrowed $50,000 from Vincent Casella, a former
director of the Company. The loan rate is 8% annually, is due and payable June
5, 1998, and is unsecured. The Company issued 75,000 warrants for Crown Common
Stock exercisable at $.25 per warrant. The warrants are valid for three years
with certain registration rights.
On March 21, 1998, and May 1, 1998, the Company borrowed $8,245 and $3,500,
respectively, from Christopher Demetree, a director. The loans are unsecured and
carry no interest rate. The loans are due and payable on renewable 30 day terms
or upon funding of bridge financing, whichever is the earlier.
The issuance of securities in these transactions were not subject to the
registration under the Securities Act of 1933, as amended (the "Act"), by virtue
of (I) Section 4(2) or Regulations D promulgated thereunder or (II) of
Regulation S for the sales sold "offshore" to "non-U.S. Persons." No
underwriters or placement agents were involved in any sales unless otherwise
noted. The distribution of the Shareholders Rights did not involve an offer or
sale.
Financial Condition
Working capital at December 31, 1997 was ($1,888,233) and was based on the
funding the Company has secured, discussed above. 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.
Item 7. Financial Statements
See the audited financial statements for the years ended December 31, 1997 and
1996.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes or disagreements with the Accountants for the years ending
December 31, 1997, and 1996, except that on April 1, 1998, the Company's Board
of Directors changed the Company's independent public accountant firm from
Arthur Andersen to BDO Seidman. Refer to Recent Significant Developments.
18
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
As of December 31, 1997, the current directors and executive officers of the
Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Craig E. Nash 43 Chairman of the Board of
Directors and Chief Executive Officer
Scott O. Nash 43 President and
Vice Chairman of the Board of Directors
Christopher Demetree* 34 National Account Executive and Director
Herbert G. Altman 65 Director, Member of the Audit Committee
Lee Allen Hooker 52 Director, Chairman of the Compensation
Committee
Arthur M. Berkowitz 57 Director, Chairman of the Audit Committee
Member of the Compensation Committee
Linda Carrick, Ph.D. 44 Director, Member of the Audit Committee
</TABLE>
Craig E. Nash has been Chairman of the Board of Directors and Chief Executive
Officer of the Company since September 1991 and has held such positions or
similar positions in its predecessors since February 1980. He also is the senior
marketing executive of the Company. Mr. Nash has sixteen years experience in
pharmaceutical and food-products marketing. Mr. Nash attended the University of
Southern California.
Scott O. Nash has been President and Vice Chairman of the Board of Directors of
the Company since September 1991 and has held these or similar positions in its
predecessors since February 1980. Mr. Nash has sixteen years experience in
pharmaceutical and food-products manufacturing and operations. Mr. Nash attended
the University of Southern California. Messrs. Craig and Scott Nash are twin
brothers.
Christopher Demetree has been a director of the Company since December 2, 1992
and prior to that a major investor in the Company. Mr. Demetree is currently
Vice President of Demetree Brothers, Inc., a Florida-based fully-integrated
property management and investment company, and was responsible for many aspects
of the management of Demetree Brothers, Inc. His duties primarily included
planning and developing real estate developments, including permits, sales pro
formas and construction budgets. Mr. Demetree holds a B.S. degree in Industrial
Management from Georgia Institute of Technology. *Mr. Demetree, effective
February 6, 1998, resigned as National Accounts Executive but remains as a
Director.
Herbert G. Altman became a director of the Company in September 1997. Mr. Altman
is a consultant and a retired private investor. He has been active in the
pharmaceutical distribution business, serving as Senior Vice President, Chief
Financial Officer, and Director of Spectro Industries, Inc., an American Stock
Exchange company for 17 years. For five years, he served as Vice President,
Finance of McKesson Drug Company, Jenkintown, a division of the McKesson
Corporation. Prior thereto, he was active as a partner in a Philadelphia-based
Certified Public Accounting Firm. Mr. Altman holds a B.S. Degree from the
Wharton School of Finance.
19
<PAGE>
Lee Allen Hooker became a director of the Company in February 1994. Mr. Hooker
is the owner and Chief Executive Officer of American Benefits Counselors/Hooker
Associates, a brokerage firm for employee benefits to the healthcare industry.
He has been involved with the medical industry for more than twenty-five years.
Mr. Hooker holds a B.S. in Business Administration from Columbia Union College
and an M.S. in Business Administration from Pepperdine University.
Arthur M. Berkowitz became director of the Company in June 1994. Mr. Berkowitz
has been an agent for the Equitable Life Insurance Society of the United States
for the past 19 years. He is currently a Benefits Consultant to many large
corporations. Mr. Berkowitz was an engineer with The General Electric Company
for 12 years. Mr. Berkowitz is a life member of the Million Dollar Round Table,
a Director of the Philadelphia Friends of ALS, and Financial Secretary of the
Germantown Jewish Centre of Philadelphia. Mr. Berkowitz has a B.S. degree in
Mathematics from St. Lawrence University and a B.Ae. and a M.Ae. in Aeronautical
Engineering from Rensselaer Polytechnic Institute.
Linda Carrick, Ph.D. became a director of the Company in June 1994. Dr. Carrick
has been in the nursing field since 1975. She has been Clinical Director,
Surgical Nursing for the Hospital of the University of Pennsylvania, where she
also served as interim Vice President of Nursing. Subsequently, she served as an
Assistant Professor of the University of Pennsylvania. She is a member of
several professional organizations, including the American Association of
Critical Care Nursing, The Nursing Association, Association of Nurse Executives,
and the American Society of Parenteral and Enteral Nutrition. She also completed
a Wharton Nurse Executive Fellowship. Dr. Carrick holds a B.S. degree in Nursing
from Villanova University, and a M.S. degree in Surgical, Cardiovascular
Nursing, and a Ph.D. in Healthcare from The University of Pennsylvania. From
September 1997 to the present, Dr. Carrick has been Executive Vice President of
Operations and Patient Care Services for Mercy Health Partners, Scranton, PA.
All Directors hold office until the next annual meeting of the shareholders and
the election and qualification of their successors. Officers are elected
annually and serve at the pleasure of the Board of Directors, subject to any
employment agreements.
Section 16 of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and any persons who own more than ten percent
of the registered class of the Company's equity securities to file various
reports with the Securities Exchange Commission and the American Stock Exchange
concerning the holdings of and transactions in the Common Stock and other equity
securities of the Company. Copies of these filings must be furnished to the
Company. Based solely upon a review of the copies of such reports furnished to
the Company or written representations that no other reports were required, the
Company believes that during Fiscal 1997, all filing requirements applicable to
its directors, executive officers and 10% shareholders were complied with except
that certain directors may not have filed their Form 5, the Annual Statement of
Changes in Beneficial Ownership, on a timely basis.
20
<PAGE>
Item 10. Executive Compensation
The following executive officers of the Company earned remuneration in excess of
$100,000 during 1997. The following table shows all remuneration earned by the
Chief Executive Officer during the fiscal years ended December 31, 1997, 1996,
and 1995 for services in all capacities rendered to the Company and its
subsidiaries.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards
------------------------
Restricted Securities
Name and Other Annual Stock Underlying
Principal Position Salary Compensation (2) Award Options
- ------------------ ------- ---------------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Craig Nash 1997 $70,000 $ 0 0 $ 0 0 0
Chief Exec. Officer 1996 $70,000 0 0 0 0 0
1995 $78,771 0 0 0 0 0
</TABLE>
In 1993, the Company entered into a five year employment agreement, which has
expired, with Craig Nash. He is currently receiving a base salary of $70,000 per
annum, however, $110,000 has been approved by the Board of Directors. This
amount may be increased at the discretion of the Board of Directors. Mr. Nash's
contract automatically rolls over into annual one year agreements until
terminated by the Board or Mr. Nash upon 60-day notice by either party. The
contract is in the initial year of the annual rollover. The Company can
terminate such employment for cause on 90 days notice. If the individual is
terminated by the Company during the term of the employment agreement, he will
receive certain termination compensation of up to two years of base salary and
the immediate vesting of the stock per his employment agreement.
Mr. Craig Nash's compensation includes 1,665,545 shares granted with a nominal
fair market value on the date of his 1993 employment agreement. All Common Stock
issued to Mr. Nash was ascribed a nominal value by the Company and its
investment adviser, given the inherent uncertainty as to the ability of the
Company to raise capital and continue in existence as of the dates such shares
were issued. Of the 1,665,548 shares, all shares are vested.
All the shares are eligible to receive dividends.
The Company provided automobile allowances to certain of its employees,
including certain persons who are executive officers of the Company, including
the Nashes, based upon the job requirements of each employee. No amounts with
respect to the personal use of automobiles, if any, have been included in the
above table. The Company has concluded that the aggregate amounts of such
personal benefits which cannot be specifically or precisely ascertained, did not
in any event exceed, as to any executive officer, either the lessor of $50,000
or 10% of his cash compensation for the last fiscal year, and that the
information set forth in the foregoing table is not rendered materially
misleading by virtue of the omission of the value of such personal benefits.
Each of the executive officers and certain key employees have entered into a
Confidentiality Agreement in which the individual agrees not to disclose, reveal
or permit access to all or any portion of the "Company's Confidential
Information" as specified in the agreement.
The following table gives certain information regarding options held on December
31, 1997.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-The
Unexercised Options at FY-End Money Options at FY-End
Name of Individual Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Craig Nash, CEO 768,028 - - -
</TABLE>
21
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information as of December 31, 1997 with
respect to the beneficial ownership of the Company's Common Stock by all persons
known by the Company to be the beneficial owners of more than 5% of any such
outstanding classes:
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
- ------------------- ----------------------- --------
Mr. Craig E. Nash 2,266,014* Direct 8.2%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
Mr. Scott O. Nash 2,676,267 Direct 9.7%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
Imperial Trust Co. 1,916,571 Direct 6.9%
The Gifford Fund, LTD See Footnote (1) N/A
Charlotte House
Charlotte Street
P.O. Box N9204
Nassau, Bahamas
(1) The Gifford Fund presently holds $1,725,000 of Series E Preferred Stock of
Crown Laboratories, Inc. The Series E Preferred Stock provides for
conversion into Crown Laboratories, Inc. Common Stock based upon market
prices. If converted, the Gifford Fund, Ltd. may become a holder of more
than 5% of the common shares outstanding of Crown Laboratories, Inc.
depending upon the market price of the shares at time of conversion.
* Includes 400,000 shares owned by Yelena Nash, the wife of Craig Nash. Mr.
Nash disclaims any beneficial interest.
22
<PAGE>
Security Ownership of Management
The following table sets forth certain information as of December 31, 1997 with
respect to the beneficial ownership of the Company's Common Stock by each
executive officer and director, and by all executive officers and directors as a
group:
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class (1)
- ------------------- ----------------------- ------------
Mr. Craig E. Nash 2,266,014* Direct 8.2%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
Mr. Scott O. Nash 2,676,267 Direct 9.7%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
Chris Demetree 928,765 Direct 3.4%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
Herbert G. Altman 420,684 Direct 1.5%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
Lee Allen Hooker 191,478 Direct 0.7%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
Arthur M. Berkowitz 324,529 Direct 1.2%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
Dr. Linda Carrick, Ph.D. 143,000 Direct 0.5%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119
All Executive Officers and
Directors as a Group 7,069,671 25.6%
(1) Percentages are calculated based on outstanding shares and options and
warrants exercisable within 60 days.
* Includes 400,000 shares owned by Yelena Nash, the wife of Craig Nash. Mr.
Nash disclaims any beneficial interest.
23
<PAGE>
Directors' Remuneration
In 1994, outside members of the Board of Directors, Lee Allen Hooker, Arthur M.
Berkowitz, Dr. Linda Carrick, Ph.D., and Myles Cane, a former director, each
received options to purchase 50,000 shares of Common Stock at exercise prices
ranging from $1.275 to $2.50 per share. Of the options received, options to
purchase 25,000 shares of common stock vested immediately and options to
purchase 25,000 shares of Common Stock will vest on different schedules ranging
between the thirteenth to the twenty-third month of their term. Additionally in
1995, Lee Allen Hooker, Arthur M. Berkowitz, Dr. Linda Carrick, and Myles Cane
received options to purchase 10,000 shares of Common Stock at an exercise price
of $2.44 per share, and Vincent Cassella received options to purchase 50,000
shares of Common Stock at an exercise price of $1.275 per share.
Vincent Casella, a former director, and his associates were granted a total of
230,000 options to purchase the Company's Common Stock for their roles in
assisting the Company in strategic planning issues. Mr. Casella was granted
100,000 options at an exercise price of $1.44 per share which expire five years
from the date of grant November 13, 1995.
Outside members of the Board of Directors, Lee Allen Hooker, Arthur M.
Berkowitz, Dr. Linda Carrick and Herbert G. Altman each have received
non-qualified stock options to purchase shares of Common Stock at exercise
prices ranging from $0.938 to $2.50 per share, in awards commencing 1994. As of
December 31, 1997, stock options for these Outside Board Members were as
follows:
Options Board Membership Commenced
------- --------------------------
Lee Allen Hooker 110,000 1994
Arthur M. Berkowitz 150,000 1994
Dr. Linda Carrick 110,000 1994
Herbert G. Altman 25,000 1997
- ----------
Includes 50,000 options granted in 1997 according to the Plan.
All Outside members' stock options vest and are exercisable according to various
schedules, which continue to the year 2007.
Arthur M. Berkowitz also received 40,000 stock options in 1996 at an exercise
price of $.90/share associated with his efforts in the establishment of a
marketing consultant agreement for the Company. Herbert G. Altman also received
200,000 stock options in 1996, prior to becoming a Director, at an exercise
price of $.90/share associated with his introduction to and the signing of
agreements with distribution sources for Crown's products.
Additionally, in 1995, and continuing to July 1998, Arthur M. Berkowitz receives
$1,500 per month for serving as Chairman of the Audit Committee of the Company's
Board of Directors. The Company anticipates continuing this agreement at the
same level of compensation in the future.
Additionally, in October 1997, shareholders of the Company approved the issuance
of 50,000 non-qualified stock options to Outside Board Members, to be issued
annually, continuing to the Year 2001.
Item 12. Certain Relationships and Related Transactions
Effective during the third quarter, the Company entered into an agreement
regarding a reorganization of its corporate structure, under which the Company
transferred ownership of 100% of the common stock of Crown Russia OOO, its
wholly-owned subsidiary ("Crown Russia"), to Yelena Nash in exchange for payment
of $15,000, adjusted to $37,825, by Yelena Nash. At the same time, the Company
and Crown Russia entered into a ten-year distribution and sales agreement (the
"Distribution Agreement"), under
24
<PAGE>
which Crown Russia will become the exclusive distribution, marketing and sales
company for the Company's nutritional products in Russia and other Central and
Eastern European countries and Crown USA agrees to pay Crown Russia all
reasonable expenses approved by the Board to develop this customer for a period
of three to five years. Yelena Nash is a Russian citizen and the wife of Craig
E. Nash, the Company's Chairman of the Board of Directors and Chief Executive
Officer. Mrs. Nash is also a significant shareholder of the Company. Under the
terms of the Distribution Agreement, Yelena Nash will receive a 10% commission
on sales of the Company's products to Crown Russia, exclusive of promotional or
marketing costs, after the Company has received payment for such sales. The
Distribution Agreement contains certain provisions restricting the right of
Yelena Nash to transfer her interest in Crown Russia to a third party. The
Distribution Agreement is subject to automatic renewal for ten-year periods
under certain circumstances.
Under the terms of the agreement to transfer ownership of Crown Russia, Yelena
Nash was required to pay an initial $1,000 payment of the $15,000 sale price
which has subsequently been adjusted to $37,825. The initial payment was made on
March 16, 1998. The balance, plus interest at 2% above prime accrued monthly,
may be paid over the ensuing 24 months from commissions earned from product
sales.
The Company has the option to evaluate this business venture and determine
whether it continues to be of benefit to its shareholders.
Fiscal year 1997 sales, amounts due to and from, expenses, and results of the
sale of the Russian subsidiary are as follows, after eliminating intercompany
transactions: The Company sold $33,732 worth of its products to a non-affiliated
customer in Russia, and $131,279 of its products to New Crown Russia as part of,
and subsequent to the sale of the subsidiary on June 1, 1997. Total combined
sales to Russia were $165,011 for 1997. Included in accounts receivable at
December 31, 1997 was $105,461 due from New Crown Russia. The sale of the
subsidiary and its assets as of June 1, 1997 resulted in a loss of $9,041, with
the amount due from Yelena Nash of $37,825, reflected in related party notes
receivables. The expenses incurred and accrued in 1997 for development of the
Russian market were $181,078.
The Board of Directors formed a special committee of outside directors (the
"Crown Russia" committee) to oversee the Company's relationship with Crown
Russia, including reviewing all transactions and recommending to the Board for
approval of all transactions between the Company and Crown Russia. The members
of the special committee are Arthur M. Berkowitz, Lee A. Hooker and Dr. Linda
Carrick.
During the past two years, Craig Nash established a physical presence in New
York City in order to manage the emerging company marketplace affairs of the
Company, certain marketing activities, and engage in extensive fundraising
activities on behalf of the Company. The cost of living in New York City is
substantially greater than that of Las Vegas, Nevada. Consequently, the Company
loaned Mr. Nash $77,183 in order to cover certain expenses personally incurred
by Mr. Nash during 1997 while carrying out his duties on behalf of the Company.
The loan rate is 9% annually and the loan is unsecured and due and payable on or
before December 31, 1998. The Company also loaned Scott Nash $8,867. The loan
rate is 9% annually and the loan amount is unsecured and due and payable on or
before December 31, 1998.
On September 1, 1997, the Company borrowed $100,000 from Christopher Demetree, a
director of the Company, in order to meet short term working capital needs. The
loan rate is 9% annually and is due and payable on July 30, 1998, and is
unsecured. The Company issued 100,000 warrants at 110% of the market. The
warrants are valid for three years with certain registration rights.
On December 5, 1997, the Company borrowed $50,000 from Vincent Casella, a former
director of the Company in order to meet short term working capital needs. The
loan rate is 8% annually, is due and payable June 5, 1998, and is unsecured. The
Company issued 50,000 warrants for Crown Common Stock exercisable at $2.50 per
warrant. The warrants are valid for three years with certain registration
rights.
25
<PAGE>
On January 28, 1998, the Company borrowed $43,000 from Herbert Altman, a
director of the Company. The loan rate is 9% , is due and payable on May 27,
1998. Warrant coverage is 43,000 warrants at 110% of the market price of $.375.
The warrants expire on June 15, 2001. Additionally, the expiration date on
200,000 warrants issued prior to becoming a Director was extended from September
4, 1999 to September 4, 2004.
On February 9, 1998, the Company borrowed $30,000 from Lee Hooker, a director.
The loan rate is 9% per annum. The original note due date has been extended to
June 15, 1998. Warrant coverage is 30,000 warrants at 110% of the market price
of $.25 at the date of grant. The warrants expire in three years.
On February 13, 1998, and February 17, 1998, the Company received $30,000 from
UFH Endowment Ltd. and $30,000 from Austost Antalt Schaan, respectively from the
sale of Regulation S Prepaid Mandatory Exercisable Warrants which were
convertible at a discount to the market at the time of conversion.
On February 25, 1998, the Company borrowed $120,000 from Herbert Altman, a
director of the Company. The loan rate is 9%, is due and payable on March 24,
1998 and is unsecured. The note has been extended until June 15, 1998. Warrant
coverage is 120,000 warrants at 110% of the market price of $.25 on May 25,
1998. The warrants are valid for three years.
On March 18, 1998, the Company borrowed $20,000, $15,000 and $14,000 from three
directors, Lee Hooker, Herbert Altman and Arthur Berkowitz, respectively. The
loan rate is 9% per annum, is due and payable on April 14, 1998, and has been
extended until June 15, 1998, and has 100% warrant coverage for the loans at
110% of the market price of $.25 on March 18, 1998. The warrants are valid for
three years.
On March 20, and March 27, 1998, the Company borrowed $100,000 and $250,000,
respectively from Pelican Partners V, a Pennsylvania Partnership. Art Berkowitz,
a director, advanced $50,000 of the above loan and is therefore allocated 50,000
of the 350,000 warrants. The loan is due and payable no later than July 20 and
July 27, 1998, respectively. The rate is 10% per annum and is secured by a
second lien position on certain Company equipment. The loan has warrant
coverage, 350,000 warrants at 110% of the last price quoted ($.25) on March 20
and March 27, 1998, respectively. The warrants expire in three years.
On April 3, 1998, the Company borrowed $25,000 from Pelican Partners V, a
Pennsylvania Partnership. The loan rate is 10% per annum and is due and payable
on the earlier of 120 days or upon the funding of bridge loan financing. Warrant
coverage is 25,000 warrants at 110% of the market price of $.375 on April 4,
1998. The warrants are valid for three years.
On April 21, 1998, the Company borrowed $32,000 from Herbert Altman, a director
of the Company. The loan rate is 9% and is due and payable on May 24, 1998, and
is unsecured. The Company issued 32,000 warrants at 110% of the market price of
$.25. The warrants are valid for three years with certain registration rights.
The note has been extended until June 15, 1998.
On May 4, 1998, the Company borrowed $14,000 from Joseph C. Avitabile, a
shareholder. The loan rate is 9% per annum and is due on or before July 30,
1998. The Company will issue 14,000 warrants for the loan at 110% of the market
price on May 4, 1998, of $.20. The warrants expire three years from May 4, 1998.
26
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8 K
(a) Exhibits
3(a) Certificate of Incorporation, as amended (1)
3(b) Bylaws, as amended (1)
4(a) Form of Warrant Agreement, including Form of Warrant, for
private placement investors (4)
4(b)(1) Certificate of Amendment to Certificate of Designation of
Series E Preferred Stock (6)
4(b)(2) Certificate of Designation of Series E Preferred Stock (6)
4(b)(3) Certificate of Amendment to Certificate of Designation of
Series F Preferred Stock (1)
4(b)(4) Certificate of Designations of Series F Preferred Stock (8)
4(c) Specimen of Common Stock Certificate of Registrant (1)
4(d) Regulation S Subscription Agreement, dated July 31, 1996 (2)
4(e) Regulation S Subscription Agreement, dated March 7, 1997 (7)
4(f) Rights Agreement between the Registrant and Securities
Transfer Corporation, dated May 5, 1997 (8)
10(a) 1992 Stock Option Plan (5)*
10(b) Employment Agreement with Craig Nash (3)*
10(c) Employment Agreement with Scott Nash (3)*
10(d) Employment Agreement with Christopher Demetree (3)*
10(h) Lease for Las Vegas, Nevada (2)
10(j) Agreement with NME (2)
10(k) Agreement with McKesson (6)
10(l) Agreement with US FoodService (1)
21 Subsidiaries, (100% owned): Crown Puerto Rico (1)
23 Consent of BDO Seidman LLP (+)
4(g) Sale of Equity Securities Pursuant to Regulation S (9)
99 Application for Withdrawal from Listing of Securities (10)
10(m) Investment Banking Firm Engagement (11) 16 Change of
Independent Public Accounting Firm (12)
10(n) 1997 Stock Option Plan (13)
10(o) Agreement with McKesson General Medical (1)
(b) Form 8(K)'s: Filed on: March 24, 1997; November 6, 1997; November 14,
1997; December 1, 1997; December 31, 1997; April 2, 1998; and April 7,
1998.
* Management Compensation Contract or Plan
+ Filed herewith.
(1) To be filed by Amendment.
(2) Previously filed in connection with the Registrant's Registration Statement
on Form SB-2, File No.33-72912.
(3) Previously filed as an exhibit to the Form 10-KSB for the fiscal year ended
December 31, 1992.
(4) Previously filed as an exhibit to the Form 10-KSB for the fiscal year ended
December 31, 1994.
(5) Previously filed as an exhibit to the Form 8-K of the Registrant filed
September 24, 1991.
(6) Previously filed as an exhibit to the Form 10QSB for the quarter ended
September 30, 1995.
(7) Previously filed as an exhibit to the Form 8(K) of the Registrant filed
March 25, 1997.
(8) Previously filed as an exhibit to the Form 8-A12B/A of the Registrant filed
July 7, 1997.
(9) Previously filed as an exhibit to the Form 10QSB for the quarter ended
September 30, 1997.
(10) Previously filed as an exhibit to the Form 8K of the Registrant filed
November 6, 1997.
(11) Previously filed as an exhibit to the Form 8K of the Registrant filed
December 1, 1997.
(12) Previously filed as an exhibit to the Form 8K of the Registrant filed March
31, 1998.
(13) Previously filed as an exhibit to the Proxy Statement of the Registrant
filed August 22, 1997.
27
<PAGE>
Signatures
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereto duly authorized.
CROWN LABORATORIES, INC.
Date: May 15, 1998 By: s/ Craig E. Nash
-----------------
Craig E. Nash
Chief Executive Officer
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
s/ Craig E. Nash Chief Executive Officer
- -------------------------------- Chairman of the Board of Directors
Craig E. Nash (Principal Executive Officer)
s/ Scott O. Nash
- -------------------------------- Vice Chairman of the Board of Directors
Scott O. Nash President
Director
- --------------------------------
Christopher Demetree
s/ Herber G. Altman Director
- --------------------------------
Herbert G. Altman
s/ Lee Allen Hooker Director
- --------------------------------
Lee Allen Hooker
s/ Arthur M. Berkowitz Director
- --------------------------------
Arthur M. Berkowitz
s/ Linda Carrick Director
- --------------------------------
Linda Carrick, Ph.D.
28
<PAGE>
Crown Laboratories, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,650 $ 579,488
Accounts Receivable 179,257 11,882
Inventories
Raw & Packaging Materials 362,431 243,686
Work in Process 7,882 5,800
Finished Goods 26,241 33,418
Prepaid expenses 310,396 155,806
Related Party Notes 123,875 --
------------ ------------
Total current assets 1,017,732 1,030,080
PROPERTY AND EQUIPMENT
Leasehold improvements 1,281,721 1,300,043
Machinery & Equipment 8,888,928 8,410,629
------------ ------------
10,170,649 9,710,672
Accumulated Depreciation & Amortization (640,438) (423,674)
------------ ------------
Net Property and Equipment 9,530,211 9,286,998
MACHINERY RIGHTS & BLUEPRINTS 272,381 242,917
PATENTS PENDING 81,691 --
DEPOSITS & DEFERRED ASSETS 331,722 490,700
------------ ------------
Total assets $ 11,233,737 $ 11,050,695
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,020,150 $ 480,810
Related Party Loans 150,000 --
Current Maturities of long-term debt 630,219 1,285,019
------------ ------------
Total current liabilities 2,800,369 1,765,829
ACCRUED SALES TAX PAYABLE 158,186 288,289
LONG-TERM DEBT 2,018,959 2,558,191
SHAREHOLDERS' EQUITY
Preferred stock -- $0.001 par value; 1,725,000 1,024,997
5,000,000 shares authorized;
172.5 and 100 shares outstanding in 1997 and 1996
Common Stock -- $0.001 par value;
50,000,000 shares authorized;
25,106,060 and 18,795,488 shares outstanding
in 1997 and 1996 25,106 18,795
Additional paid-in-capital 22,583,899 17,846,466
Accumulated deficit (17,631,004) (12,451,872)
Treasury Stock (446,778) --
------------ ------------
Total shareholders' equity 6,256,223 6,438,386
------------ ------------
Total liabilities and shareholders' equity $ 11,233,737 $ 11,050,695
============ ============
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
F1
<PAGE>
Crown Laboratories, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Sales-Net of Allowable Discounts $ 189,070 $ --
Cost of Sales (51,544) --
------------ ------------
Gross Profit 137,526 --
Research & Development Start Up Costs 1,633,720 1,870,957
General and Administrative Expenses 3,287,741 2,483,490
------------ ------------
Loss From Operations (4,783,935) (4,354,447)
Other Income/(Expense)
Other Income 0 75,600
Other Expense (65,980) (146,902)
Interest expense (345,111) (238,851)
Interest income 24,935 32,695
------------ ------------
(5,170,091) (4,631,905)
Loss From Sale of Subsidiary (9,041) --
------------ ------------
Net Loss ($ 5,179,132) ($ 4,631,905)
============ ============
NET LOSS PER SHARE ($ 0.27) ($ 0.27)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 18,961,292 17,079,951
============ ============
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
F2
<PAGE>
Crown Laboratories, Inc.
Consolidated Statement of Shareholders' Equity
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Shares of Common Additional Accumulated Treasury Preferred
Common Stock Paid-in-Capital Deficit Stock Stock Total
---------- ------- ----------- ------------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 18,795,488 $18,795 $17,846,466 ($12,451,872) -- $ 1,024,997 $ 6,438,386
Compensation expense for options
granted to employees
and consultants -- -- 125,413 -- -- -- 125,413
Series E Preferred Stock Issued -- -- -- -- -- 3,000,000 3,000,000
Shares issued on the conversion
of Series E Preferred Stock 2,818,424 2,819 2,048,982 -- -- (2,299,997) (248,196)
Shares sold in private placement 1,338,273 1,338 736,050 -- -- -- 737,388
Fund raising Issuances 1,837,875 1,838 1,576,602 -- -- -- 1,578,440
Fund Raising Expenses -- -- (338,616) -- -- -- (338,616)
Warrants -- -- 452,500 -- -- -- 452,500
Shares Issued for Services 316,000 316 136,502 -- -- -- 136,817
Treasury Stock Buy Back -- -- -- -- (446,778) -- (446,778)
Net loss for the year ended
December 31, 1997 -- -- -- (5,179,132) -- -- (5,179,132)
---------- ------- ----------- ------------ --------- ----------- -----------
Balance as of December 31,1997 25,106,060 $25,106 $22,583,899 ($17,631,004) ($446,778) $ 1,725,000 $ 6,256,223
========== ======= =========== ============ ========= =========== ===========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements.
F3
<PAGE>
Crown Laboratories, Inc.
Consolidated Statement of Shareholders' Equity
For the year ended December 31, 1996
<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 December 31, 1995 14,290,513 $14,290 $ 12,163,601 ($ 7,828,203) $ 2,121,233 $ 6,470,921
Compensation expense for options
granted to employees and consultants 320,000 320 550,651 -- -- 550,971
Series C/Series E Preferred Stock Issued -- -- -- -- $ 1,500,000 1,500,000
Shares issued on the conversion
of Series C Preferred Stock 2,041,288 2,041 2,585,959 -- (2,588,000) --
Shares sold in private placement 1,529,999 1,530 1,910,970 -- -- 1,912,500
Fund raising expenses -- -- (207,922) -- -- (207,922)
Warrants converted 613,688 614 843,207 -- -- 843,821
Imputed interest for Series
C/Series E Preferred -- -- -- 8,236 (8,236) --
Net loss for the period ended
December 31, 1996 -- -- -- (4,631,905) -- (4,631,905)
---------- ------- ------------ ------------ ----------- -----------
Balance as of December 31, 1996 18,795,488 $18,795 $ 17,846,466 ($12,451,872) $ 1,024,997 $ 6,438,386
========== ======= ============ ============ =========== ===========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
F4
<PAGE>
Consolidated Statements of Cash Flow
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
For the Year Ended
December 31,1997 December 31,1996
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($5,170,091) ($4,631,905)
Adjustments to reconcile net loss to net cash used by operations:
Depreciation and amortization 216,764 214,995
Loss on Repayment of Debt 0 53,000
Issuance of shares to employees 125,413 550,971
and consultants
Loss on Sale of Subsidiary 9,041 --
----------- -----------
Changes in Assets and Liabilities:
Increase in receivables (167,375) 48,239
Increase in inventories (38,650) (173,910)
Increase in prepaid expenses (154,590) (111,297)
Increase in accounts payable 735,131 (166,614)
----------- -----------
and accrued expenses
Net Cash Used for operations (4,444,357) (4,216,521)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures and leasehold improvements (459,977) (823,230)
Increase in rights and blueprints (29,465) (58,439)
Increase Patents Pending (81,691) --
Borrowings from related parties (123,875) --
Decrease in deposits and deferred assets (158,978) (8,587)
Increase in accrued sales taxes payable (130,103) (98,834)
Net Cash Used for investing activities (984,089) (989,090)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans -- 3,000,000
Proceeds from related party loans 150,000 --
Repayment of loans payable (149,409) (1,690,624)
Proceeds from issuance of common and 5,030,940 4,256,321
preferred stock and the excercise of warrants
Cost of Debt Financing 163,693 (250,107)
Equity Fundraising costs (338,616) (207,922)
----------- -----------
Net cash provided by financing activities 4,856,608 5,107,668
----------- -----------
Net decrease in cash and cash equivalents (571,838) (97,943)
Cash and cash equivalents, beginning of year 579,488 677,431
----------- -----------
Cash and cash equivalents, end of year $ 7,650 $ 579,488
=========== ===========
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements.
F5
<PAGE>
F11
CROWN LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. Background and Organization
Crown Laboratories, Inc. (the "Company" or "Crown") was incorporated on February
23, 1989, in Delaware, as Industrialistics, Inc. In November 1991,
Industrialistics, Inc. changed its name to Crown Laboratories, Inc.
Since its inception, the Company has been principally engaged in the research
and development of proprietary medical nutritional dry-mix and liquid supplement
products to be sold primarily to nursing homes, hospitals, and home health care
agencies.
On June 25, 1996, the Company received final U.S. Food & Drug Administration
(F.D.A.) approval to commence manufacturing its proprietary line of aseptic
liquid nutritional products. Commissioning of the equipment is required by the
F.D.A. The commissioning process began on April 13, 1995 and delays were
experienced primarily as a result of the aseptic filler's inability to meet
F.D.A. certification criteria when it was shipped to the Company. A panel of
tests must be passed in order to file with the F.D.A. On June 25, 1996, the
Company received approval for its aseptic manufacturing and filling equipment.
Since that date, the Company has been involved in modifying its product
formulation and aseptic packaging equipment to support commercial level
production in anticipation of its entry into the market.
The Company has suffered recurring losses from operations and working capital
deficiencies that raise substantial doubt about its ability to continue as a
going concern. Management's explanation and plans to address this issue are as
follows:
As a result of delays in installing the equipment, problems encountered with
bacteriological tests which delayed filing with the F.D.A. and the modification
of the process to support commercial level production, the Company has been
required to raise further funds to sustain operations until the plant becomes
operational and it may require further funds to support working capital needs as
it begins to enter the market or to provide for normal operating expenses. The
Company is exploring possible alternatives for raising additional debt and
equity funds. There can be no assurances that the Company will be able to secure
the necessary financing, or if a source of funding is identified, that the
funding will be on terms and conditions which are favorable to the Company.
The Company and its operations are subject to the various risks inherent in the
start-up and development of a new business enterprise. The operating history of
the Company is limited. There can be no assurance the Company will be able to
produce its products and operate profitably. Competitors of the Company have
substantially greater resources than the Company. The Company may require
further financial resources. The Company will not have any sales of liquid
nutritional products until the Las Vegas manufacturing facility can sustain
commercial production levels. 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.
The Company regards the formulations of its products to be proprietary and has
filed for a patent covering the formulation and production process for its
primary liquid nutritional product, "WinLac(TM)". The Company has also
trademarked its Company name, its liquid nutritional product names as well as
"Peel and Drink(TM)" and "The Nutritional Difference(TM)". There can be no
assurances that any patent will be issued. Currently, the Company exerts
substantial efforts to protect trade secrets and to keep formulas and related
process know-how confidential. Currently, the Company requires each of its
employees to sign
F6
<PAGE>
confidentiality agreements as a condition of employment to protect its
formulations and production know-how. However, there can be no assurances that
the Company will be successful in these efforts.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Crown
Laboratories, Inc. and its wholly-owned subsidiary, Crown Russia OOO. The
Company transferred ownership of 100% of the Common Stock of Crown Russia OOO
effective during the third quarter of 1997. Note 16. All intercompany balances
have been eliminated in consolidation.
Uses of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of certain estimates by management in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. Actual
results could differ from those estimates.
Revenue Recognition
The Company records sales upon shipment of product to its customers which is
concurrent with the transfer of title. Sales of $189,070 were recorded in 1997.
The Company has sold, through its subsidiary, product to Eastern European
customers.
Concentration of Credit Risks
Substantially all of the Company's dry mix products sales have been to foreign
customers.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original
maturity dates of three months or less at the date of purchase.
Inventories
Inventories are stated at the lower of cost or market using the first-in
first-out method.
Property and Equipment/Machinery Rights and Blueprints
Property and equipment are stated at historical cost. Depreciation and
amortization are recorded using the straight line method over the estimated
useful lives of assets which range from 5 to 15 years. Recently acquired
equipment and improvements for the liquid products production facility will not
be depreciated until production begins. The Company only capitalizes those costs
directly related to the equipment and external costs for installation and has
not capitalized any management, executive or overhead costs except for certain
legal expenses related to machinery rights, blueprints and patents pending. Such
costs are charged to expense as they are incurred.
During 1995, the Company obtained the rights and blueprints to its aseptic
filler machine from the German bankruptcy court. Costs incurred to obtain
intangible liquid products machinery rights and blueprints are capitalized and
will be amortized over the same life as the underlying liquid products
equipment.
F7
<PAGE>
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS
No. 109 requires the use of the asset and liability method, whereby deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. Under SFAS No. 109, the effect on deferred
income taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
Stock-Based Compensation
The Company accounts for employee stock options in accordance with Accounting
Principles Board No. 25 ("APB No. 25") "Accounting for Stock Issued to
Employees". Under APB No. 25, the Company values its compensation cost for
stock-based employee compensation plans using the intrinsic value method of
accounting.
In 1996, the Company adopted for footnote disclosure purposes Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") which requires that companies measure the cost of
stock-based employee compensation at the grant date based on the value of the
award and recognize this cost over the service period. The value of the stock
based award is determined using a pricing model whereby compensation cost is the
excess of the fair value of the stock as determined by the model at grant date
or other measurement date over the amount an employee must pay to acquire the
stock.
Financial Instruments
The carrying amount for cash and cash equivalents reported in the balance sheet
approximates fair value. The fair value of long-term debt based on the current
rates at which the Company could borrow funds with similar maturities,
approximates its carrying value as of December 31, 1997.
Reclassification
Certain reclassifications have been made to the December 31, 1996, financial
statements to conform with the current year presentation.
Long-Lived Assets
The Company accounts for its long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" which establishes
guidelines regarding when impairment losses on long-lived assets, which include
property and equipment and certain identifiable intangible assets, should be
recognized and how impairment losses should be measured. The Company
periodically reviews such assets for possible impairment and expected losses, if
any, are recorded currently. During the year ended December 31, 1997, the
Company provided no reserves of assets for disposal.
New Accounting Pronouncements
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income," issued by the FASB is effective for financial statements with fiscal
years beginning after December 15, 1997. SFAS establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company does not expect adoption of
SFAS 130 to have any effect on its financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997. SFAS
131 requires
F8
<PAGE>
that public companies report certain information about operating segments,
products, services and geographical areas in which they operate and their major
customers. The Company does not expect adoption of SFAS 131 to have any effect
on its financial position or results of operations; however, disclosures with
respect to the aforementioned items may be increased.
Net Loss Per Common Share
Statements of Financial Accounting Standards No. 128, "Earnings per Share"
issued by the FASB is effective for financial statements with fiscal years and
interim periods ending after December 15, 1997. SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the periods presented. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings, such as stock options,
warrants or convertible debentures. Stock options and warrants outstanding
during the periods presented were not included in diluted earnings per share
since their effect would be anti-dilutive.
3. Debt
The Company obtained debt financing from Finova Capital Corporation ("FINOVA")
that provides for a term loan of $3 million which increases to $4.5 million when
the Company secures commitments for $7 million of sales. The loan calls for
interest-only payments over the course of the first six months with the loan
fully amortizing over the remaining 54 months. The interest rate of 11.93% which
was fixed at the time of closing, was 561 basis points higher than the 5 year
treasury note rate at the time of closing. The loan agreement contains certain
covenants and ratios that must be maintained. Specifically, the Company is
required to maintain a minimum tangible net worth of $5 million, a senior debt
to tangible net worth ratio of 1 to 1, and a cash flow ratio of 2 to 1. The
first two covenants are effective with the closing of the loan while the cash
flow ratio is effective as of December 31, 1997. The proceeds of the loan were
used to pay off existing debt, trade payables and provide working capital funds.
Additionally, as part of the loan agreement, the Company issued 300,000 five
year warrants to purchase shares of the Company's Common Stock at the closing
market price of the shares on the date of closing. For accounting purposes,
these warrants were deemed to have been issued at fair market value.
In connection with the loan from FINOVA, the Company incurred legal expenses,
for both its attorneys and for FINOVA's attorneys (as provided for in the loan
agreement) totaling approximately $49,000. These amounts have been capitalized
and are being expensed over the life of the loan.
The Company paid $80,000 as a cash fee to a finder and the finder's nominee.
Additionally, 100,000 warrants were issued to purchase the Company's Common
Stock at the closing market price of the stock on the date of closing the loan
($1.4375 per share). The cost of the finder's fee is being amortized over the
life of the loan (5 years). For accounting purposes, these warrants were deemed
to have been issued at fair market value.
From the proceeds of the loan, the Company paid off its loans with First
Security Bank of Nevada (secured term loan and Small Business Administration
loan), its lease with G.E. Capital Corporation financing its aseptic processor,
its telephone system lease, and its fork lift and pallet lift leases. The
Company paid a pre-payment penalty on its lease with G.E. Capital Corporation of
$53,983, which was expensed during 1996 and included in "Other Income/(Expense)"
in the consolidated statements of operations.
The Company's debt repayments were delinquent by $45,719 as of December 31,
1997. The Company subsequently paid the late payments and is current on the
loan. The Company was in violation of certain of its loan covenants. Finova,
however, has subsequently waived the covenants and modified its loan agreement.
In consideration for the waiver and modifications the Company issued to Finova
warrants to purchase an additional 400,000 shares of Company stock at $.375 per
share. The warrants expire August 16, 2001.
F9
<PAGE>
Annual principal payments for future years ending December 31 are as follows:
Year Principal Due
---- -------------
1998 $ 630,219
1999 659,192
2000 742,279
2001 617,489
-----------
$ 2,649,178
Less: current portion 630,219
-----------
$ 2,018,959
===========
4. Income Taxes
The Company has operated at a loss since inception and has a net operating loss
carry-forward of approximately ($13,500,000) as of December 31, 1997. The
Company is researching the availability of such net operating losses to the
Company. The availability of all loss carry-forwards to offset U.S. taxable
income may be limited as a result of changes in shareholders and certain
elections made by the Company. For accounting purposes, the Company has provided
a full valuation allowance for these loss carry-forwards and has not established
a deferred tax asset.
5. Management Employment and Consulting Contracts
The Company has an obligation to make minimum cash payments for management
employment contracts of $525,000 for 1998, $525,000 for 1999, $525,000 for 2000,
$465,000 for 2001, and $372,000 for 2002.
During 1995, 411,000 options were issued to consultants for services rendered.
These options expire 5 years from, November 13, 1995, the date of grant. All
options were granted at exercise prices that were equal to or greater than 85%
of the market price of the Company's shares at the time of grant.
Additionally in 1995, the Company issued stock to two employees (total of 40,000
shares) vesting 40%, two years after the date of their employment, and 60% five
years after date of their employment. Also in 1995, the Company issued an
additional 141,000 options to employees at an exercise price which was based
upon an 85% discount to the market price at the time of grant. Vesting of these
options will occur 40%, two years after the date of their employment and 60%,
five years after date of their employment. Salary expense for these options is
being accrued over the life of the vesting schedules. During 1996, the Company
recognized compensation expense of $182,221 and recorded a corresponding
increase to additional paid-in-capital.
In 1996, the Company issued stock to two employees (total of 40,000 shares)
which vest 40% two years after the date of their employment and 60%, five years
after the date of their employment. During 1996, 180,000 shares of Common Stock
was also issued to Dr. Kouri (refer to Note 12). Also in 1996, the Company
issued an additional 210,000 options to employees at an exercise price which was
based upon 85% discount to the market price at the time of grant. Vesting of
these options will occur 40%, two years after the date of their employment and
60%, five years after their date of employment. Salary expense for these options
is being accrued over the life of the vesting schedules. During 1996, 50,000
options were issued to consultants for services rendered. These options expire 3
years from the dates of grant, June 6, 1996 and October 28, 1996.
6. 1992 Stock Option Plan
In December 1992, the Company adopted the 1992 Stock Option Plan (the "Plan").
The Plan provides for the granting of non-statutory stock options or incentive
stock options to certain key employees to purchase up to an aggregate of
2,100,000 shares of Common Stock. The option price per share for non-statutory
options must be at least 85% of the fair market value on the date of grant. The
Plan terminates in 2003.
F10
<PAGE>
Options are not transferable under the Plan and terminate within specified
periods of time after termination of an optionee's employment.
On November 18, 1993, options to purchase 2,100,000 shares of the Company's
Common Stock were granted to the Company's employees. The schedule below
outlines the amount of options outstanding as of December 31, 1997. These
options have an exercise price of $1.275 and are fully vested. All 1,834,967
options expire in 2003.
Name Number of Options Granted
---- -------------------------
Craig Nash 768,028
Scott Nash 768,029
Other Employees 298,910
---------
Total Employee Stock Option Plan Options
Remaining from 1992 Plan 1,834,967
=========
7. 1997 Stock Option Plan
On August 21, 1997 the Board unanimously adopted the Company's 1997 Incentive
Plan subject to shareholder approval. On October 7, 1997, the shareholders
approved the Company's 1997 Plan. Under the plan, 5,000,000 shares will be
available for the grant of options and awards to eligible individuals. The 1997
Plan also provides for the non-discretionary grant of 50,000 options each year
to each non-employee Director who becomes a member of the Board after September
16, 1997. The Company's current 1992 Plan authorizing the issuance of 2,100,000
shares of common stock in respect of option grants has been terminated except to
the extent of 1,834,967 grants of options were made thereunder. The remainder of
the authorized shares of common stock under the 1992 plan, outlined above,
265,033 has been terminated.
8. Other Stock Options and Warrants
During 1996, the Company granted the following options to purchase 854,110
shares of its Common Stock (in addition to those in the 1992 stock option plan).
Outstanding options and vested options as of December 31, 1996, are summarized
below at the following exercise prices:
<TABLE>
<CAPTION>
# shares subject to dates of
forfeiture vesting
---------- -------
<S> <C> <C> <C>
30,000 shares at $0.225 per share through June 1999 -0- Vested
50,000 shares at $0.225 per share through August 2006 50,000 8/96-8/99
140,000 shares at $0.250 per share through June 2006 120,000 3/96-6/01
150,000 shares at $1.44 per share through August 1999 150,000 8/96-6/98
50,000 shares at $1.4375 per share through August 2001 -0- Vested
300,000 shares at $1.4375 per share through December 2001 -0- Vested
24,110 shares at $1.625 per share through June 1998 -0- Vested
40,000 shares at $1.75 per share through September 1999 -0- see below
50,000 shares at $2.00 per share through July 2001 -0- Vested
20,000 shares at $2.40 per share through October 1999 -0- Vested
</TABLE>
The options to purchase 40,000 shares of Common Stock at $1.75 per share has
been granted to Arthur Berkowitz for his efforts in the establishment of a
marketing consulting agreement for the Company. These options (20,000 of which
will vest immediately with the remaining vesting based upon the signing of a
marketing agreement) expire on September 24, 1999.
F11
<PAGE>
During 1997, the Company granted the following options to purchase 1,889,000
shares of its Common Stock (in addition to those in the 1992 Stock Option Plan
and outstanding options as of December 31, 1997, summarized below) at the
following exercise prices:
<TABLE>
<CAPTION>
# shares subject to dates of
forfeiture vesting
---------- -------
<S> <C> <C> <C>
100,000 shares at $0.25 per share through February 2007 90,000 2/97-2/02
100,000 shares at $0.25 per share through April 2004 77,500 4/97-4/99
130,000 shares at $0.25 per share through November 2007 130,000 2/99-11/02
200,000 shares at $0.15 per share through January 2004 100,000 9/97-1/99
125,000 shares at $1.01 per share through April 2007 125,000 4/99-4/02
200,000 shares at $0.938 per share through October 2007 100,000 10/97-10/99
734,000 shares at $1.25 per share through June 2002 -0- Vested
300,000 shares at $0.688 per share through November 2002 -0- Vested
</TABLE>
In connection with the private placements of 1,547,975 shares of the Company's
Common Stock in November 1994 and an additional 1,196,125 shares of the
Company's Common Stock in 1995, the Company issued warrants to acquire 877,500
shares and 598,063 shares, respectively, of the Company's Common Stock at an
exercise price of $3.00 per share. The Company has the right to call such
warrants at a call price of $.10 per warrant if, at any time, the current market
price of the Company's Common Stock has been at least $4.00 per share for 30
consecutive days, ending within 15 days of the notice of such call. All
unexercised and uncalled warrants have expired from December 31, 1996 to April
1997 depending on the date of investment. On February 15, 1996, the Company
offered the holders of its warrants (issued in conjunction with private
placements in 1994 and 1995), the opportunity to lower the exercise price of the
warrants from $3.00 to $1.375 per share provided that they exercise at least 60%
of their holdings. The expiration date of the remaining warrants, if any, would
be extended for one year at the same exercise prices. This offer was extended on
March 12, 1996 until March 28, 1996. A total of 613,688 warrants representing
$843,821 were exercised.
The Company also issued to its placement agent and brokers, options to acquire
165,750 shares of the Company's Common Stock at an exercise price of $2.40 per
share in the November 1994 private placement and 110,613 shares of the Company's
Common Stock at an exercise price of $2.40 per share in the 1995 private
placement. These options will expire in November 1999 and March/April 2000,
respectively.
9. Stock Option and Incentive Plan
The Company has stock option plans and other arrangements currently in effect
under which future grants of stock options may be issued to executives, key
employees, and directors. Refer to Notes 5 and 6. The Company has adopted the
disclosure of provisions of SFAS No. 123 and is continuing to recognize
compensation expense using the intrinsic value method under APB No. 25 as
discussed in Note 2. Had compensation expense for the Company's stock options
been determined based on the fair market value at the grant date for awards in
1997 and 1996, consistent with the provisions of SFAS No. 123, the Company's net
loss and primary loss per common share would have been as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C> <C>
Net Loss: as reported ($5,179,132) ($4,631,905)
Net Loss: pro forma ($5,919,000) ($4,636,621)
Primary loss per Common Share: as reported ($0.24) ($0.27)
Primary loss per Common Share: pro forma ($0.31) ($0.27)
</TABLE>
F12
<PAGE>
This pro forma impact only takes into account options granted since January 1,
1995. The SFAS No. 123 fair value of each option granted was estimated on the
date of the grant using a number of factors that resulted in a net value of
approximately 60% of the stock price on the grant date.
Number of Weighted Average
shares Exercise Price
------ --------------
Outstanding at December 31, 1994 2,209,967 1.31
Granted 421,834 1.69
Exercised - -
Forfeited - -
---------
Outstanding at December 31, 1995 2,631,801 1.40
Granted 360,000 1.50
Exercised - -
Forfeited (262,500) 1.50
---------
Outstanding at December 31,1996 2,729,301 1.43
Granted 675,000 0.85
Exercised - -
Forfeited (260,000) 0.90
---------
Outstanding at December 31, 1997 3,144,301 1.25
=========
10. Preferred Stock and Potential Anti-Takeover Rights
The Company is authorized to issue 5,000,000 shares of $0.001 par value
preferred stock with the rights, preferences, privileges and restrictions
thereof to be determined by the Board of Directors of the Company. Preferred
stock can be issued without the vote of holders of Common Stock. Rights could be
granted to the holders of preferred stock that could reduce the attractiveness
of the Company as a potential takeover target, make the removal of management
more difficult, or adversely impact the rights of holders of Common Stock.
During 1995, the Company raised $3.5 million through the issuance of Series C
Preferred Stock. During the quarter ended March 31, 1996, the Company raised an
additional $500,000 through a placement pursuant to Regulation S under the
Securities Act of 1933, as amended, of its Series C Preferred Stock, bringing
the total of Series C Preferred Stock issued to $4 million. The Series C
Preferred Stock pays no dividends, but imputes a 6% effective annual rate of
return upon conversion into Common Stock. This return to holders is being
accounted for as a direct reduction to accumulated deficit over the time during
which the preferred stock is outstanding. The conversion rate is determined by
the acquisition value of the preferred stock (plus imputed interest referred to
above) and an 18% discount to the 5 day average market price of the common
shares at the time of exercise. As of July 2, 1996 all of the Series C Preferred
Stock issued had been converted into 3,294,735 shares of Common Stock. The
shareholders had waived their interest in the conversion for all past, present,
and future transactions.
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 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 grows. The number is not subject to a
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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.
The Company's Certificate of Incorporation contains certain provisions designed
to require a beneficial owner of over 25% of the Common Stock to comply with
certain provisions regarding transactions with the Company and membership on the
Board of Directors, or pay certain prices (usually the highest price per share
paid) for the Company's stock in certain business combinations involving the
beneficial owner. These provisions are in addition to those provided by Delaware
law.
11. Equity
During 1995, the Company raised approximately $2.4 million in additional common
equity financing through a private placement which is reflected in the
accompanying financial statements. Each unit was purchased for $50,000. A unit
consisted of 25,000 shares of Common Stock and warrants to purchase 12,500
shares of Common Stock for $3 per share. The warrants expired two years from the
date of investment. Fractional units have also been sold. In addition, the
Company issued to the Placement Agent and brokers 2,500 options to acquire
shares of the Company's Common Stock at a price of $2.40 per share for each unit
sold. These options expire five years from the date of issuance.
On May 10, 1996, the Company offered a private placement of equity securities
with a minimum of $540,000 to a maximum of $2,520,000 (the private placement
provides for an over-subscription of the placement up to $3,000,000 at the
Company's discretion) in units of $45,000. Each unit consisted of 30,000 shares
of the Company's Common Stock and 30,000 warrants to purchase the Company's
Common Stock at a price of $1.60 for a period of six months after the closing of
the private placement. The Company raised $1,912,500 through the private
placement which was closed on July 30, 1996.
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 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 August 7, 1997, the Company commenced a private offering of up to 5,000,000
shares of its common stock at a price of $.70 per share. The offering was made
pursuant to the exemption for a private placement under Section 4(2) of the
Securities Act of 1933, as amended. During August - October 31, 1997, the
Company sold a total of 1,338,273 shares of Common Stock, for an aggregate
purchase price of $736,050. The Common Stock was sold to 14 accredited
investors. The Company's private offering concluded on October 31, 1997.
On September 29, 1997, the holder of the Company's Series E Preferred Stock
converted 90 shares of this series into 1,600,000 shares of Common Stock. In
turn, the holder sold these shares of Common Stock privately and then acquired,
in a Regulation S offering, 1,285,715 shares of Common Stock from the
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Company. The shares of Common Stock were sold by the Company at $.70 per share
for an aggregate of $900,000. There are currently outstanding 172.5 shares of
Series E Preferred Stock.
On September 29, 1997, the Company raised $500,000 in a Regulation S sale of
prepaid, mandatory exercisable warrants to purchase Common Stock to a new
investor. The warrants may be exercised in whole or in part in amounts over
$10,000 of the principal amount of the warrants, at any time, until expiration
on September 28, 1999. The exercise price for each share of Common Stock shall
be equal to the lower of (x) 80% of the average closing price of the Common
Stock for the one business day immediately preceding the issue date of the
warrant or (y) 80% of the average closing price of the Common Stock for the one
business day immediately preceding the date of receipt by the Company of the
notice of exercise, as reported on the principal stock exchange on which the
Company's Common Stock is traded. At the present time no shares of Common Stock
have been issued under this arrangement.
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 discontinued at any time and does
not constitute a commitment by the Company to buy a specific amount of its
shares.
During the third quarter ended September 30, 1997 a total of 1,933,849 shares,
options or warrants were repurchased or expired.
During 1996 and 1997, the Company incurred $207,922 and $269,212, respectively,
of costs relating to issuances of stock. These costs have been accounted for as
a reduction of Additional Paid-in Capital.
Please refer to Note 8 for a summary of options and warrants outstanding.
12. Dividend Policy
Since its inception, the Company has not generated any earnings and has not paid
any dividends on its Common Stock. Payment of future dividends, if any, will be
determined by the Company's Board of Directors based upon a number of
considerations, including the Company's financial condition, capital
requirements, cash flow, profitability, business outlook, contractual
restrictions and other factors. In the foreseeable future, the Company intends
to retain all of its earnings to finance the development and expansion of its
business.
13. 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 and 1996, the Company
paid $318,912 and $311,946 in lease payments for the building. The Company had
obtained a twelve month option to purchase its current manufacturing facility
for $3,185,000 which expired on December 31, 1997. Currently there are no plans
to renew the option.
The Company also has a year to year office space lease in New York City which
requires monthly payments of $3,090, subject to annual inflation escalation.
During 1997, the Company paid $33,410 in lease payments for this space.
*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 at
$6,502 per month from the first 24 months, escalating to $15,000 per month
thereafter. The remaining portion under the lease, $367,200, is payable at the
end of the 60-month term. The Company
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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. During 1997, the Company paid $19,607 in lease
payments for the equipment.
At December 31, 1997, the Company was delinquent in paying its payroll taxes
amounting to approximately $206,480. Through April 9, 1998, the Company has not
paid this liability or any additional payroll tax liabilities for 1998. The
Company has not been assessed any penalties related to the failure to pay its
payroll obligations to date.
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.
Future minimum payments due under non-canceled lease arrangements are as
follows:
Year Ending Facility and Office
December 31, Leases Equipment Total
------------ ------ --------- -----
1998 $357,174 $ 37,080 $ 394,254
1999 367,886 38,192 406,078
2000 381,468 39,337 420,805
---------- -------- ----------
$1,106,528 $114,609 $1,221,137
========== ======== ==========
14. Supplemental Consolidated Statements of Cash Flow Information
The following information supplements the consolidated statements of cash flow
for the years ended December 31, 1997 and 1996.
1997 1996
---- ----
Interest Paid $345,111 $238,851
Assets acquired through capital lease financing -0- $29,755
During 1997 and 1996, the Company issued 316 and 320 common stock shares for
services.
15. Legal Proceedings
The Company is subject to normal business litigation and claims concerning
products and services rendered to the Company. The Company believes that the
outcome of such lawsuits, claims and other legal matters will not have a
material impact on the Company's consolidated financial position.
In addition to normal business litigation, the Company is involved in the
following 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
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<PAGE>
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. Their appeal to the Nevada Supreme Court was denied. They have
since filed an answer. The Company cannot predict the outcome of its claims. In
January 1998, an order was filed in the District Court Clark County Nevada
granting a motion for Partial Summary Judgment in favor of Crown Laboratories
against International Packaging and Processing Systems, Inc., and Karl
Fabricius. The motion included specific findings of misrepresentation, fraud and
alter ego. The award in favor of Crown was for $21,664,323 plus costs and
attorneys fees. Since that time, the Company has been evaluating the award and
trying to determine how much, if anything, the Company is likely to recover.
Presently, the Company cannot predict the ultimate collectibility of its claims.
16. Related Party Transactions
Effective during the third quarter, the Company entered into an agreement
regarding a reorganization of its corporate structure, under which the Company
transferred ownership of 100% of the common stock of Crown Russia OOO, its
wholly-owned subsidiary ("Crown Russia"), to Yelena Nash in exchange for payment
of $15,000, adjusted to $37,825, by Yelena Nash. At the same time, the Company
and Crown Russia entered into a ten-year distribution and sales agreement (the
"Distribution Agreement"), under which Crown Russia will become the exclusive
distribution, marketing and sales company for the Company's nutritional products
in Russia and other Central and Eastern European countries and Crown USA agrees
to pay Crown Russia all reasonable expenses approved by the Board to develop
this customer for a period of three to five years. Yelena Nash is a Russian
citizen and the wife of Craig E. Nash, the Company's Chairman of the Board of
Directors and Chief Executive Officer. Mrs. Nash is also a significant
shareholder of the Company. Under the terms of the Distribution Agreement,
Yelena Nash will receive a 10% commission on sales of the Company's products to
Crown Russia, exclusive of promotional or marketing costs, after the Company has
received payment for such sales. The Distribution Agreement contains certain
provisions restricting the right of Yelena Nash to transfer her interest in
Crown Russia to a third party. The Distribution Agreement is subject to
automatic renewal for ten-year periods under certain circumstances.
Under the terms of the agreement to transfer ownership of Crown Russia, Yelena
Nash was required to pay an initial $1,000 payment of the $15,000 sale price
which has subsequently been adjusted to $37,825. The initial payment was made on
March 16, 1998. The balance, plus interest at 2% above prime accrued monthly,
may be paid over the ensuing 24 months from commissions earned from product
sales.
The Company has the option to evaluate this business venture and determine
whether it continues to be of benefit to its shareholders.
Fiscal year 1997 sales, amounts due to and from, expenses, and results of the
sale of the Russian subsidiary are as follows, after eliminating intercompany
transactions: The Company sold $33,732 worth of its products to a non-affiliated
customer in Russia, and $131,279 of its products to New Crown Russia as part of,
and subsequent to the sale of the subsidiary on June 1, 1997. Total combined
sales to Russia were $165,011 for 1997. Included in accounts receivable at
December 31, 1997 was $105,461 due from New Crown Russia. The sale of the
subsidiary and its assets as of June 1, 1997 resulted in a loss of $9,041, with
the amount due from Yelena Nash of $37,825, reflected in related party notes
receivable. The expenses incurred and accrued in 1997 for development of the
Russian market were $181,078.
The Board of Directors formed a special committee of outside directors (the
"Crown Russia" committee) to oversee the Company's relationship with Crown
Russia, including reviewing all transactions and recommending to the Board for
approval of all transactions between the Company and Crown Russia. The members
of the special committee are Arthur M. Berkowitz, Lee A. Hooker and Dr. Linda
Carrick.
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<PAGE>
During the past two years, Craig Nash established a physical presence in New
York City in order to manage the emerging company marketplace affairs of the
Company, certain marketing activities, and engage in extensive fundraising
activities on behalf of the Company. The cost of living in New York City is
substantially greater than that of Las Vegas, Nevada. Consequently, the Company
loaned Mr. Nash $77,183 in order to cover certain expenses personally incurred
by Mr. Nash during 1997 while carrying out his duties on behalf of the Company.
The loan rate is 9% annually and the loan is unsecured and due and payable on or
before December 31, 1998. The Company also loaned Scott Nash $8,867. The loan
rate is 9% annually and the loan amount is unsecured and due and payable on or
before December 31, 1998.
On September 1, 1997, the Company borrowed $100,000 from Christopher Demetree, a
director of the Company, in order to meet short term working capital needs. The
loan rate is 9% annually and is due and payable on July 30, 1998, and is
unsecured. The Company issued 100,000 warrants at 110% of the market. The
warrants are valid for three years with certain registration rights.
On December 5, 1997, the Company borrowed $50,000 from Vincent Casella, a former
director of the Company in order to meet short term working capital needs. The
loan rate is 8% annually, is due and payable June 5, 1998, and is unsecured. The
Company issued 50,000 warrants for Crown Common Stock exercisable at $2.50 per
warrant. The warrants are valid for three years with certain registration
rights.
17. Subsequent Events
Subsequent to December 31, 1997, the following events occurred:
The Company was in arrears $45,719 as of December 31, 1997. The Company has
subsequently paid the late payments and is current on the loan. The Company was
in violation of certain of its loan covenants. Finova, however, has subsequently
waived the covenants and modified its loan agreement. In consideration for the
waiver and modifications the Company issued to Finova warrants to purchase an
additional 400,000 shares of Company stock at $.375 per share. The warrants
expire August 16, 2001.
On January 5, 1998, the Company raised $150,000 in a Regulation S sale of
prepaid, mandatory exercisable warrants to purchase Common Stock in two offshore
investors who held similar warrants. The new warrants may be exercised in whole
amounts over $10,000 of the principal amount of the warrants, at any time, until
expiration on September 28, 1999. The exercise price for each share of Common
Stock shall be equal to the lower of (x) 80% of the average closing price of the
Common Stock for the one business day immediately preceding the issue date of
the warrant or (y) 80% of the average closing price of the Common Stock for the
one business day immediately preceding the date of receipt by the Company of the
notice of exercise, as reported on the principal stock exchange on which the
Company's Common Stock is traded.
On January 28, 1998, the Company borrowed $43,000 from Herbert Altman, a
director of the Company. The loan rate is 9% , is due and payable on May 27,
1998. Warrant coverage is 43,000 warrants at 110% of market. The warrants expire
on June 15, 2001. Additionally, the expiration date on 200,000 warrants issued
prior to becoming a Director was extended from September 4, 1999 to September 4,
2004.
On February 9, 1998, the Company borrowed $30,000 from Lee Hooker, a director.
The loan rate is 9% per annum. The original note due date has been extended to
June 15, 1998. Warrant coverage is 30,000 warrants at 110% of the market price
of $.25 at the date of grant. The warrants expire in three years.
On February 13, 1998, and February 17, 1998, the Company received $30,000 from
UFH Endowment Ltd. and $30,000 from Austost Antalt Schaan, respectively from the
sale of Regulation S Prepaid Mandatory Exercisable Warrants which were
convertible at a discount to the market at the time of conversion.
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<PAGE>
On February 25, 1998, the Company borrowed $120,000 from Herbert Altman, a
director of the Company. The loan rate is 9%, is due and payable on March 24,
1998 and is unsecured. The note has been extended until June 15, 1998. Warrant
coverage is 120,000 warrants at 110% of market on May 25, 1998. The warrants are
valid for three years.
On March 18, 1998, the Company borrowed $20,000, $15,000 and $14,000 from three
directors, Lee Hooker, Herbert Altman and Arthur Berkowitz, respectively. The
loan rate is 9% per annum, is due and payable on April 14, 1998, and has been
extended until June 15, 1998, and has 100% warrant coverage for the loans at
110% of market on March 18, 1998. The warrants are valid for three years.
On March 20, and March 27, 1998, the Company borrowed $100,000 and $250,000,
respectively from Pelican Partners V, a Pennsylvania Partnership. Art Berkowitz,
a director, advanced $50,000 of the above loan and is therefore allocated 50,000
of the 350,000 warrants. The loan is due and payable no later than July 20 and
July 27, 1998, respectively. The rate is 10% per annum and is secured by a
second lien position on certain Company equipment. The loan has warrant
coverage, 350,000 warrants at 110% of the last price quoted on March 20 and
March 27, 1998, respectively. The warrants expire in three years.
On April 3, 1998, the Company borrowed $25,000 from Joseph Furst, a shareholder.
The loan rate is 10% per annum and is due and payable on the earlier of 120 days
or upon the funding of bridge loan financing. Warrant coverage is 25,000
warrants at 110% of the market price of $.375 on April 4, 1998. The warrants are
valid for three years.
On April 7, 1998, the Company reached an agreement with EWE Trust Number 1, the
lessor of certain production equipment, such that the Company will provide a
waiver of default to the EWE Trust for having gone outside the agreement and
pledged the assets in return for a six month loan of $77,000 at 9% interest.
Warrant coverage will be 77,000 warrants at 110% of Crown's Common Stock closing
price on April 3, 1998. The warrants expire in three years. The proceeds of the
$77,000 was disbursed as follows: Past due payments, to EWE Trust No. 1 as of
December 31, 1997, and as of April 7, 1998 were $6,502 and $19,506,
respectively. Four payments, through August 1998, were prepaid for a total of
$26,008 and $25,000 was advanced to the Company. Craig Nash, the Chief Executive
Officer of Crown, will personally guarantee $25,000 of the $77,000 loan. Mr.
Nash received no compensation for the risks of such commitment.
Additionally, the amount of warrants under the Option Agreement may under
certain circumstances, if not converted, increase up to 1,932,632 warrants.
Secondly, the exercise price of the warrants was reduced to $0.56 per warrant
subject to the Company having a first right of refusal to repurchase the
warrants within a 15 day notice period. The mandatory conversion price would
move from $3.50 to $0.85, and would be subject to mandatory exercise if the
price remained at $0.85 for seven consecutive days. The Company also has the
right to repay the principal amount of the lease of $918,000 and reclaim up to
1,080,000 warrants or allow the market to absorb the then registered shares such
that the Trust recoups its original investment of $918,000 and retains any
additional shares as the result of issuing more lower price stock so that the
original investment is recoupled by the Trust, within a six month period, as if
the amount was repaid at a minimum of $0.86 per share.
On April 21, 1998, the Company borrowed $32,000 from Herbert Altman, a director
of the Company. The loan rate is 9% and is due and payable on May 24, 1998, and
is unsecured. The Company issued 32,000 warrants at 110% of the market. The
warrants are valid for three years with certain registration rights. The note
has been extended until June 15, 1998.
On May 4, 1998, the Company borrowed $14,000 from Joseph C. Avitabile, a
shareholder. The loan rate is 9% per annum and is due on or before July 30,
1998. The Company will issue 14,000 warrants for the loan at 110% of the market
price on May 4, 1998, of $.20. The warrants expire three years from May 4, 1998.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Crown Laboratories, Inc.
We have audited the accompanying consolidated balance sheet of Crown
Laboratories, Inc. (a Delaware corporation) and subsidiary as of December 31,
1997, and the related consolidated statement of operations, shareholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Crown Laboratories, Inc. and
subsidiaries as of December 31, 1997 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations and
working capital deficiencies that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regards to this matter are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
s/ BDO Seidman, LLP
----------------------------
BDO SEIDMAN, LLP
April 9, 1998 (except for Note 17
for which the date is May 4, 1998)
F20
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated April 9, 1998, included in this form 10-KSB into the Company's
previously filed Form S-3 Registration Statements (File Nos.
33-59055 and 33-65421).
s/ BDO Seidman, LLP
------------------------------
BDO SEIDMAN, LLP
April 9, 1998
