FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1933
Commission File No. 1-12848
CROWN LABORATORIES, INC.
(Name of small business issuer in its charter)
Delaware 75-2300995
(State of Incorporation) (I.R.S. Employer I.D. No.)
6780 Caballo Street
Las Vegas, Nevada 89119
(Address of Principal Executive Office)
(702) 696-9300
(Registrant's Telephone Number, Including Area Code)
Indicate by a check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
The number of outstanding shares of the registrant's only class of common stock
as of June 30, 1998
Common Stock, $.001 par value: 25,259,393
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
The Private Securities Litigation Reform Act of 1995 provides a "Safe Harbor"
for forward looking statements. Except for the historical information contained
in this Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998, 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. 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 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.
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 Quarterly Report, the words "intend", "estimated", "believe",
"expect", and similar expressions which are not historical are intended to
identify forward-looking statements. The Company assumes no obligation to update
any forward-looking statements contained herein or that may be made from time to
time by, or on behalf of, the Company. References made in the Quarterly Report
on Form 10-QSB to "Crown", the "Company", or the "Registrant" refer to Crown
Laboratories, Inc.
The Company reported no sales of liquid nutritional or dry mix products for the
quarter ended June 30, 1998. For the six month period ended June 30, 1998, the
Company incurred losses of ($953,394) vs. ($1,047,798) in the same period for
1997. The Company has incurred losses associated with salary expense, fund
raising, and other operating expenses of ($844,093) during second quarter 1998
vs. ($956,526) for the second quarter of 1997. During the second quarter the
Company significantly reduced overhead and continues to reduce nonessential
expenses. The Company did not incur any research and development or start-up
expenses for the second quarter of 1998 vs. ($179,016) for the second quarter of
1997. The accumulated consolidated deficit at June 30, 1998, was ($19,769,774)
while shareholder's equity was $4,390,613.
2
<PAGE>
Crown Laboratories, Inc. (the Company), has suffered financially in recent
months and is currently exploring, with its principal financial advisers,
alternatives for maintaining adequate liquidity and longer term funding. There
can be no assurances that adequate liquidity or long term funding will be
restored or secured or that there will not be further declines in the Company's
business and financial condition. Management spends a substantial amount of its
time securing short and long term funding for the Company.
Between January 5, and June 30, 1998, and subsequently through August 15, 1998,
the Company entered into a series of equity and short-term debt financing
transactions designed to improve the Company's liquidity and financial
flexibility.
During the first and second quarter the company arranged a series of short term
(30-60 days), secured and unsecured loans for a total of $870,503. The interest
rates on the loans ranged from 9-10 % per year. Warrant coverage ranged from one
to four times the original loan amount. Warrants were priced from $.135 to 110%
of market price and may be exercised up to three (3) years. The company has
agreed to register the underlying shares in its next registration statement or
within six months. For each three week period that the loans remain unpaid past
their due dates the company is required to issue additional warrants equivalent
to 50% of the original loan amount, on some of the short term loans.
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 Company, for its most recent fiscal year, 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 8, 1998, Herbert Altman resigned as a member of the Board of Directors.
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
Crown is in compliance with their terms and conditions, and will remain as a
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, and May 27, 1998
for shares of common stock concerning past services.
On June 2, 1998, after reviewing the company's submissions, the Equity Listing
Committee of the Pacific Exchange determined that continued dealings in the
Company's Common Stock was not warranted due to the Company's inability to meet
its ongoing obligations. The Company is appealing this decision and is seeking
reinstatement of its trading privileges.
On June 8, 1998 Melvin Lechner became a member of the Board of Directors.
3
<PAGE>
On June 19,1998, the Company issued to a Consultant, 375,000 warrants which may
be exercised at an 85% discount to the last trade made on March 6, 1998 of $.25.
The term of the warrants is for 5 years from the date of issue. The warrants
were issued under a consulting agreement which includes provisions for
introductions to buyers of the company's products as well as introductions to
potential investors, lenders, and brokerage firms in furthering the company's
access to additional financial sources.
On June 24, 1998, the Company initiated quotations in the OTC-Bulletin Board
Service under the symbol "CLWB". Furman Selz assisted the company and became the
certifying member firm in its application to become a Market Maker in the
Company's stock..
Related Party Transactions
On February 9, 1998, the Company borrowed $30,000 from Lee Hooker, a director of
the Company. 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 $.3125. The warrants expire in three years.
On March 18, 1998, the Company borrowed $20,000 and $14,000 from two directors,
Lee Hooker 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 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 a lender. 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 of 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 July 31, 1998 Melvin Lechner, a director, made a $50,000 unsecured loan to
the Company. The loan is due by September 11, 1998. The interest rate is 9%
annually. Warrant coverage is 200,000 warrants priced at $.135 and are
exercisable in three years. The Company will register these underlying shares in
its next registration statement. For every three week period that the loan is
not repaid, an additional 12,500 warrants will be issued under the original
terms outlined above.
Financial Condition
Working capital at June 30, 1998 was ($3,610,013) and was based on the financing
the Company has secured. To the extent that the Company uses equity securities
to raise additional funds to satisfy its working capital needs, there will be
additional dilution to the Company's existing shareholders. There can be no
assurances that the Company will be able to secure additional financing, or, if
additional financing is obtained, that it will be on terms and conditions that
are acceptable to the Company.
Funding
On April 7, 1998, the Company reached an agreement with a Trust, the lessor of
certain production equipment, such that the Company will provide a waiver of
default to the 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 Trust 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
personally guaranteed $25,000 of the $77,000 loan. Mr. Nash received no
compensation for the risks of such commitment.
4
<PAGE>
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 recouped by the Trust, within a six month period, as if
the amount was repaid at a minimum of $0.86 per share.
On May 13, 1998, the holders of the Company's Prepaid, Mandatory Exercisable
Stock Purchase Warrants notified the Company that each holder converted $50,000
of these Prepaid Warrants into 333,333 shares of Crown Laboratories, Inc. Common
Stock at a Conversion Price of $0.15. Following this conversion the holders will
have $55,000 and $70,000 respectively in principal remaining from their
respective original $250,000 Warrants.
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.
On June 26, 1998, the Company and the Holders of the Company's Series E
Preferred Stock reached an Agreement whereby: The Holders of the Series E agreed
to redeem the Series E shares with a new security issued by the Company, the
terms of which shall be no less favorable than the terms of any new security
expected to be sold by the Company through a private placement managed by the
Investment Banking Firm. The stated value of the New Security which the Company
shall pay to the Holders of the Old Preferred shall be the product of
multiplying the original issue price of the Old Preferred, plus the value of the
dividends accrued from the date of issue to the date of redemption, times 1.55
(one point fifty five). The Company agrees that the Holders shall have the right
to exchange its New Security for a security identical in terms as the Old
Preferred after September 30, 1998 in the event that the Company has not raised
a minimum of $3 million of equity prior to September 30, 1998. In the event that
the Holders are redeemed for common shares, the Company will grant the Holders
the right to elect a representative to the Board of Directors of the Company
effective immediately upon issuance of the New Security. The Company agrees to
extend the expiration date of all warrants held by Holders to September 30,
2004. The Company shall pay to the Holders a fee of $75,000 upon the closing of
the minimum of $3 million of new securities referred to in Section 1 above.
On July 6, 1998 the Company filed a Form D, Notice Of Sale Of Securities, with
the Securities and Exchange Commission in order to allow its Investment Banking
Firm to commence the Private Placement of up to $8,000,000 on behalf the
Company.
5
<PAGE>
Crown Laboratories, Inc.
Consolidated Balance Sheets
ASSETS UNAUDITED AUDITED
June 30, December 31,
1998 1997
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 0,081 $ 7,650
Accounts Receivable 160,665 179,257
Inventory
Raw & Packaging Materials 342,852 362,431
Work in Process 7,882 7,882
Finished Goods 37,490 26,241
Prepaid Expenses 214,682 310,396
Related Party & Notes Receivable 128,419 123,875
------------ ------------
Total current assets 892,071 1,017,732
PROPERTY AND EQUIPMENT
Leasehold improvements 1,281,721 1,281,721
Machinery & Equipment 8,915,103 8,888,928
------------ ------------
10,196,824 10,170,649
Accumulated Depreciation & Amortization (1,015,582) (640,438)
------------ ------------
Net Property and Equipment 9,181,242 9,530,211
------------ ------------
MACHINERY RIGHTS & BLUEPRINTS 272,381 272,381
Patents Pending 95,074 81,691
DEPOSITS & DEFERRED ASSETS 275,079 331,722
------------ ------------
Total assets $ 10,715,847 $ 11,233,737
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt
and capital lease liabilities $ 765,320 $ 630,219
Related Party & Notes Payable $ 1,051,291 $ 150,000
Accounts payable and accrued expenses 2,685,472 2,020,150
------------ ------------
Total current liabilities 4,502,083 2,800,369
ACCRUED SALES TAX PAYABLE 124,009 158,186
LONG-TERM DEBT & CAPITAL LEASE LIABILITIES 1,699,142 2,018,959
SHAREHOLDERS' EQUITY
Preferred stock -- $10,000 par value; 1,725,000 1,725,000
5,000,000 shares authorized;
172.5 shares outstanding in
1997 and 250 in 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,
respectively 25,259 25,106
Additional paid-in-capital 22,856,905 22,583,899
Accumulated deficit (19,769,773) (17,631,004)
Treasury Stock (446,778) (446,778)
------------ ------------
Total shareholders' equity 4,390,613 6,256,223
Total liabilities and shareholders' equity $ 10,715,847 $ 11,233,737
============ ============
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
6
<PAGE>
Crown Laboratories, Inc.
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales -- $48,044 $24,635 $81,776
Cost of Sales -- ($21,620) (8,203) (32,752)
------------ ------------
Gross Profit -- 26,424 16,433 49,024
Research & Development Start Up Costs -- 179,016 231,709 492,543
General and Administrative Expenses 844,093 803,934 1,719,597 1,331,149
------------ ------------ ------------ ------------
Loss From Operations (844,093) (956,526) (1,934,873) (1,774,668)
Other Income/(Expense)
Other Income -- -- -- --
Other Expense (17,035) (24,312) (36,690) (41,804)
Interest expense (92,266) (86,939) (167,213) (176,415)
Interest income -- 19,979 7 23,585
------------ ------------ ------------ ------------
Loss before income taxes (953,394) (1,047,798) (2,138,770) (1,969,302)
Net Loss ($953,394) ($1,047,798) ($2,138,770) ($1,969,302)
============ ============ ============ ============
NET LOSS PER SHARE ($0.04) ($0.05) ($0.08) ($0.10)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 25,189,696 19,620,419 25,189,696 19,620,419
============ ============ ============ ============
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
7
<PAGE>
Crown Laboratories, Inc.
Statement of Shareholders Equity
for the six months ended June 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Shares of Common Paid-in Accumulated Treasury Preferred Total
Common Stock Capital Deficit Stock Stock
---------- --------- ----------- ------------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of Dec. 31, 1997 25,106,060 $ 25,106 $22,583,899 ($17,631,004) ($446,778) $1,725,000 $6,256,223
Compensation expense for options 95,490 95,490
granted to employees and consultants
Series E Preferred Stock Issued
Shares issued on the conversion
of Series E Preferred Stock
Warrants Purchased 210,000 210,000
Fund raising expenses (32,484) (32,484)
Warrants converted 153,333 153 153
Imputed interest for Series E Preferred
Net loss for the period ended (2,138,770) (2,138,770)
June 30, 1998
---------- --------- ----------- ------------ --------- ---------- ----------
Balance as of June 30, 1998 25,259,393 $ 25,259 $22,856,905 ($19,769,774) ($446,778) $1,725,000 $4,390,613
=========== ========= =========== ============ ========= ========== ==========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
8
<PAGE>
Crown Laboratories, Inc.
Consolidated Statements of Cash Flow
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($2,138,770) ($1,969,302)
Add/(deduct) items not impacting cash:
Depreciation and amortization 375,144 108,382
Issuance of shares to employees 95,490 62,957
and consultants
Changes in Assets and Liabilities:
(Increase)/Decrease in receivables 18,592 (64,960)
(Increase)/Decrease in inventories 8,330 (11,836)
(Increase)/Decrease in prepaid expenses 95,714 (116,691)
and employee advances
Increase/(Decrease) in accounts payable 559,726 (112,038)
and accrued expenses ----------- -----------
Total Cash Generated from/(used for) operations (985,774) (2,103,488)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures and leasehold improvements (26,175) (562,200)
Increase in rights and blueprints
Increase in Patents Pending 13,383
Borrowings from related parties 4,544
(Increase)/Decrease in deposits and deferred assets (56,643) (99,032)
Increase/(Decrease) in accrued sales taxes payable (34,177) (41,803)
Total cash (used in)/generated from investing activities (99,068) (703,035)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans 901,291 --
Repayment of loans payable (209,405)
Proceeds from issuance of common and 210,000 3,000,000
preferred stock and the excercise of warrants
Fundraising costs (34,018) (173,412)
----------- -----------
Total cash provided by/(used in) financing activities 1,077,273 2,617,183
----------- -----------
Net increase/(decrease) in cash and cash equivalents (7,569) (189,338)
Cash and cash equivalents, beginning of period 7,650 579,488
----------- -----------
Cash and cash equivalents, end of period $ 81 $ 390,150
=========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
9
<PAGE>
CROWN LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30 , 1998
(UNAUDITED)
1. Background of 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 requires further
financial resources. 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 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.
10
<PAGE>
2. Manufacturing Facility
The Company presently occupies a 62,000 square foot manufacturing facility in
Las Vegas, Nevada for the purpose of manufacturing its line of nutritional
products. The Company selected its Las Vegas location based on a number of
factors. The State of Nevada does not assess either corporate or personal income
taxes and is a "right to work" state. It has favorable freight rates resulting
from the large volume of shipments into the casino trade with Las Vegas' limited
manufacturing providing little outbound trucking demand and the climate is also
very favorable for shipping on a year round basis.
3. Financing
On April 7, 1998, the Company reached an agreement with a Trust, the lessor of
certain production equipment, such that the Company will provide a waiver of
default to the 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 Trust 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
personally guaranteed $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.
4. Related Party Transactions
On February 9, 1998, the Company borrowed $30,000 from Lee Hooker, a director of
the Company. 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 March 18, 1998, the Company borrowed $20,000 and $14,000 from two directors,
Lee Hooker 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 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 a lender. 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 July 31,1998 Melvin Lechner, a director, made a $50,000 unsecured loan to the
Company. The loan is due on September 11,1998. The interest rate is 9% annually.
Warrant coverage is 200,000 warrants priced at $.135 and are exercisable in
three years. The Company will register these underlying shares in its next
registration statement. For every three week period that the loan is not repaid,
an additional 12,500 warrants will be issued under the original terms outlined
above.
11
<PAGE>
5. Litigation
The Company is subject to normal business litigation and claims concerning
products and services rendered to the Company.
In addition to normal business litigation, the Company has the following
material litigation:
Crown V. Rolfenade et al., was filed by the Company, in March 1995, and
subsequently amended to incorporate all of the defendants "alter egos" in
September 1995. The action is for breach of contract, misrepresentation, fraud,
and alter ego. Rolfenade warranted that the packaging machine would be in
compliance with F.D.A. requirements. The packaging machine was not in compliance
with the applicable regulations, and the Company has made substantial
modifications to the filler to bring it into compliance. The Company has served
all defendants under the Hague Convention. Other defendants named in the suit
filed a Motion to Quash Service, which was lost. 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.
6. Commitments and Contingencies
At June 30, 1998, the Company was delinquent in paying its payroll taxes, State
taxes and local taxes amounting to $527,185. Through August 15, 1998, the
Company has not paid this liability or any additional tax liabilities for 1998.
The Company has not been assessed any penalties related to the failure to pay
its payroll tax obligations to date.
As of August 15, 1998, the Company is delinquent a total of $108,097 in its
payments to its fixed asset lender, not including late charges, if any.
As of June 30, 1998, the Company is in arrears a total of $158,856 on its
manufacturing facility rental payments. As of August 15, 1998, the Company was
in arrears $93,808 in its rental payments, not including any late charges, if
any..
On June 26, 1998, the Company and the Holders of the Company's Series E
Preferred Stock reached an Agreement whereby: The Holders of the Series E agreed
to redeem the Series E shares with a new security issued by the Company, the
terms of which shall be no less favorable than the terms of any new security
expected to be sold by the Company through a private placement managed by
Robinson Humphrey and Company. The stated value of the New Security which the
Company shall pay to the Holders of the Old Preferred shall be the product of
multiplying the original issue price or the Old Preferred, plus the value of the
dividends accrued from the date of issue to the date of the redemption, times
1.55 (one point fifty five). The Company agrees that the Holders shall have the
right to exchange its New Security for a security identical in terms as the Old
Preferred after September 30, 1998 in the event that the Company has not raised
a minimum of $3 million of equity prior to September 30, 1998. In the event that
the Holders are redeemed for common shares, the Company will grant the Holders
the right to elect a representative to the Board of Directors of the Company
effective immediately upon issuance of the New Security. The Company agrees to
extend the expiration date of all warrants held by Holders to September 30,
2004. The Company shall pay to the Holders a fee of $75,000 upon the closing of
the minimum of $3 million of new securities referred to in Section 1 above.
From April 1, 1998, through May 29, 1998, a total of 28,125 options expired. A
total year to date of 331,787 options and warrants have expired.
12
<PAGE>
7. Subsequent Events
Subsequent to the end of the second quarter, the Company continued to arrange a
series of short term secured and unsecured loans for a total of $270,000. The
interest rates on the loans range from 9-10 % annually, mature in 60 days and
have Warrant coverage of up to four times the loan amount. The Warrants are
priced from $.135 to 110% of the market and may be exercised within three years.
The Company has agreed to register the underlying shares in the next
registration statement or within six months. For each three week period that the
loans remain unpaid past their due dates, the Company is required to issue
additional Warrants equivalent to 50% of the original amount under the original
terms, on some of the short term loans.
As of August 15, 1998, the Company was delinquent in repayment of various short
term loans in the total amount of $810,500. The Company is in contact with its
various lenders seeking to extend the maturity date of the loans. The Company
believes it will be successful in obtaining an extension on the loans
outstanding.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROWN LABORATORIES, INC.
Dated: August 15, 1998 By: /s/ Craig E. Nash
------------------------------
Craig E. Nash
Chief Executive Officer
Chairman, Board of Directors
By: /s/ Calvin T. Mathews
------------------------------
Calvin T. Mathews
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENT OF INCOME AND THE
CONSOLIDATED STATEMENTS OF CASH FLOW, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 81
<SECURITIES> 0
<RECEIVABLES> 160,665
<ALLOWANCES> 0
<INVENTORY> 388,224
<CURRENT-ASSETS> 892,071
<PP&E> 10,196,824
<DEPRECIATION> (1,015,582)
<TOTAL-ASSETS> 10,715,847
<CURRENT-LIABILITIES> 4,502,083
<BONDS> 0
0
1,725,000
<COMMON> 25,259
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,715,847
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> (844,093)
<OTHER-EXPENSES> (17,035)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (96,266)
<INCOME-PRETAX> (953,394)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (953,394)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
