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 March 31, 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 March 31, 1998
Common Stock, $.001 par value: 25,106,060
<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 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. 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 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 Company had sales of $24,635 of liquid nutritional products for the quarter
ended on March 31, 1998. THE COMPANY HAS NOW COMMENCED COMMERCIAL PRODUCTION OF
ITS LIQUID NUTRITIONAL PRODUCTS. CONSEQUENTLY, DEPRECIATION AND AMORTIZATION
CHARGES, RELATED TO THE LIQUID NUTRITIONAL MACHINERY, BLUEPRINTS AND RIGHTS TO
ITS FILLING MACHINE AND CERTAIN OTHER PARTS AND EQUIPMENT, FOR THE QUARTER
ENDING MARCH 31, 1998, INCREASED TO $187,572 VS. $60,071, RELATED ONLY TO DRY
MIX PRODUCTION, FOR THE FIRST QUARTER ENDING MARCH 31, 1997. For the three month
period ended March 31, 1998, the Company incurred losses of ($1,185,375) vs.
($921,504) in the same period in 1997. The Company has incurred losses
associated with additional salary expense as a result of additions to staff,
other operating expenses such as principal payments on the Finova loan of
$127,000 during first quarter 1998 vs. $0.00 for first quarter 1997 and certain
expenses charged to
2
<PAGE>
start-up costs in the engineering, design, and modifications to its facility,
processes and formulations associated with the Company's entry into the market.
The Company has incurred ($231,709) in research and development and start-up
expenses for first quarter of 1998. For first quarter 1997 research and
development and start-up expenses were $313,527. The accumulated consolidated
deficit at March 31, 1998, was ($18,816,379) while shareholder's equity was
$5,306,638.
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.
Between January 5, 1998, and May 29, 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.
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 March 21, 1998, and May 1, 1998, the Company borrowed $8,245 and $3,500,
respectively, from Christopher Demetree, a former 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.
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.
3
<PAGE>
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.
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 May 29, 1998 an individual investor loaned the Company $10,000. The loan is
unsecured, bears interest of 9% annually and is due and payable by June 20,
1998. The Company will issue 20,000 Warrants priced at $0.275 each. The warrants
are exercisable for two years. The Company will register the underlying shares
in the next registration statement.
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 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 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.
Financial Condition
Working capital at March 31, 1998 was ($2,672,757) 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 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
4
<PAGE>
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 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 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.
5
<PAGE>
Crown Laboratories, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS UNAUDITED AUDITED
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $25,579 $7,650
Accounts Receivable 160,665 179,257
Inventory
Raw & Packaging Materials 343,269 362,431
Work in Process 7,882 7,882
Finished Goods 46,406 26,241
Prepaid expenses 260,853 310,396
Related Party Notes 128,876 123,875
----------- -----------
Total current assets 973,530 1,017,732
PROPERTY AND EQUIPMENT
Leasehold improvements 1,281,721 1,281,721
Machinery & Equipment 8,913,382 8,888,928
----------- -----------
10,195,103 10,170,649
Accumulated Depreciation & Amortization (828,010) (640,438)
----------- -----------
Net Property and Equipment 9,367,093 9,530,211
MACHINERY RIGHTS & BLUEPRINTS 272,382 272,381
Patents Pending 88,464 81,691
DEPOSITS & DEFERRED ASSETS 303,401 331,722
----------- -----------
Total assets $11,004,870 $11,233,737
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and capital lease liabilities $603,039 $630,219
Related Party Notes $742,000 $150,000
Accounts payable and accrued expenses 2,350,672 2,020,150
----------- ----------
Total current liabilities 3,695,711 2,800,369
ACCRUED SALES TAX PAYABLE 141,098 158,186
LONG-TERM DEBT & CAPITAL LEASE LIABILITIES 1,861,423 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 shares 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 25,106 25,106
Additional paid-in-capital 22,819,689 22,583,899
Accumulated deficit (18,816,379) (17,631,004)
Treasury Stock (446,778) (446,778)
------------ -----------
Total shareholders' equity 5,306,638 6,256,223
Total liabilities and shareholders' equity $11,004,870 $11,233,737
=========== ===========
</TABLE>
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)
For the three months ended
March 31, 1998 March 31, 1997
-------------- --------------
Net Sales $24,635 $33,732
Cost of Sales (8,203) (11,132)
------------ ------------
Gross Profit 16,432 22,600
Research & Development Start Up Costs 231,709 313,527
General and Administrative Expenses 875,504 527,216
------------ ------------
Loss From Operations (1,090,781) (818,143)
Other Income/(Expense)
Other Expense (19,654) (17,492)
Interest expense (74,946) (89,475)
Interest income 7 3,606
------------ ------------
Loss before income taxes (1,185,374) (921,504)
Income Tax Provision -- --
------------ ------------
Net Loss ($1,185,374) ($921,504)
============ ============
NET LOSS PER SHARE ($0.05) ($0.05)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 25,106,060 19,187,157
============ ============
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 Quarter ended March 31, 1998
UNAUDITED
<TABLE>
<CAPTION>
Shares of Common Additional Accumulated
Common Stock Paid-in Capital Deficit
<S> <C> <C> <C> <C>
Balance as of Dec. 31, 1997 25,106,060 $25,106 $22,583,899 ($17,631,004)
Compensation expense for options -- -- 47,745 --
granted to employees and consultants
Series E Preferred Stock Issued -- -- -- --
Shares issued on the conversion -- -- -- --
of Series E Preferred Stock
Fund raising expenses -- -- (21,956) --
Warrants Purchased -- -- 210,000 --
Imputed interest for Series C Preferred -- -- -- --
Net loss for the period ended -- -- -- (1,185,375)
March 31, 1998
------------ ------------ ------------ ------------
Balance as of March 31, 1998 25,106,060 $25,106 $22,819,688 ($18,816,379)
============ ============ ============ ============
<CAPTION>
Treasury Preferred Total
Stock Stock
<S> <C> <C> <C>
Balance as of Dec. 31, 1997 ($446,778) $1,725,000 $6,256,223
Compensation expense for options -- 47,745
granted to employees and consultants
Series E Preferred Stock Issued -- --
Shares issued on the conversion -- --
of Series E Preferred Stock
Fund raising expenses -- (21,956)
Warrants Purchased -- 210,000
Imputed interest for Series C Preferred -- --
Net loss for the period ended -- (1,185,375)
March 31, 1998
------------ ------------ ------------
Balance as of March 31, 1998 ($446,778) $1,725,000 $5,306,638
============ ============ ============
</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 three months ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($1,185,374) ($921,504)
Add/(deduct) items not impacting cash:
Depreciation and amortization 187,572 54,194
Issuance of shares to employees and consultants 47,745 31,353
---------- ----------
Changes in Assets and Liabilities:
(Increase)/Decrease in receivables 18,592 (38,536)
(Increase)/Decrease in inventories (1,003) 19,145
(Increase)/Decrease in prepaid expenses 49,543 (29,661)
Increase/(Decrease) in accounts payable
and accrued expenses 208,682 (123,034)
---------- ----------
Total Cash Generated from/(used for) operations (674,243) (1,008,043)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures and leasehold improvements (24,454) (146,007)
Increase in rights and blueprints 0
Increase Patents Pending (6,773)
Borrowings from related parties 5,001
(Increase)/Decrease in deposits and deferred assets 28,321 3,322
Increase/(Decrease) in accrued sales taxes payable (17,088) (24,714)
Total cash (used in)/generated from investing activities (14,993) (167,399)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party loans 592,000 --
Repayment of loans payable (116,791) (68,939)
Proceeds from issuance of common and 210,000 3,000,000
preferred stock and the excercise of warrants
Cost of Debt Financing 21,956 (45,200)
Repurchase of common shares -- --
Total cash provided by/(used in) financing activities 707,165 2,885,861
---------- ----------
Net increase/(decrease) in cash and cash equivalents 17,929 1,710,420
Cash and cash equivalents, beginning of period 7,650 579,488
---------- ----------
Cash and cash equivalents, end of period $25,579 $2,289,908
========== ==========
</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
MARCH 31, 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 may require
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 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.
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 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.
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
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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.
4. 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.
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5. Commitments and Contingencies
The Company was delinquent in paying its payroll taxes amounting to $110,642 for
fourth quarter 1997, an additional $82,255 is owed for the first quarter 1998
for a combined total of $192,897. From March 31,1998 through May 31, 1998 the
Company owes an additional $67,232 for a combined total due for 1997 through May
31, 1998 of $260,129. The Company has not been assessed any penalties related to
the failure to pay its payroll tax obligations to date.
As of May 31, 1998, the Company is delinquent two payments to Finova, its fixed
asset lender, for a total of $144,130 net including late charges, if any.
As of May 31, 1998, the Company is in arrears a total of $132,380 on its
manufacturing facility rental payments.
6. Subsequent Events
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.
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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: May 29, 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
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