-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NAvxbEqSlEsKNMhjfYoB4ZYrvyA/AJxzj9uNtVsG2YO4djI2AJHjNlOG2+hv5F7w s36GZz/y77OQi1VeBFOgQg== 0000950148-96-001823.txt : 19960820 0000950148-96-001823.hdr.sgml : 19960820 ACCESSION NUMBER: 0000950148-96-001823 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960819 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CROWN LABORATORIES INC /DE/ CENTRAL INDEX KEY: 0000847385 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FOOD PREPARATIONS & KINDRED PRODUCTS [2090] IRS NUMBER: 752300995 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-12848 FILM NUMBER: 96617596 BUSINESS ADDRESS: STREET 1: 6780 CABALLO ST CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7026969300 MAIL ADDRESS: STREET 1: 6780 CABALLO ST STREET 2: PO BOX 96205 CITY: LAS VEGAS STATE: NV ZIP: 89119 10QSB 1 QUARTERLY REPORT FOR PERIOD ENDED 6/30/96 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 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, 1996 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, 1996 Common Stock, $.001 par value - 16,644,981. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The Company has been in the pre-marketing phase of operation and had limited sales of dry mix products in the fourth quarter of 1995. For the three month period ended June 30, 1996, the Company incurred losses of ($1,034,877) vs. ($762,452) in the same period in 1995. The increased loss is due to additional salary expense and operating and start-up expenses associated with the Company's entry into the market. The accumulated consolidated deficit at June 30, 1996 was ($9,727,607) while shareholders' equity was $6,589,649. Losses have continued since such date due primarily to expenditures for salaries, plant start-up and other operating expenses. The Company received the F.D.A.'s approval of its aseptic processing and packaging equipment on June 25, 1996. There was a panel of six different bacteriological kill tests that had to be passed to file with the F.D.A. They measured the machinery's recording devices' ability to collect and record information from the pre-sterilization process, (both process and packaging related), and continue data collection during actual manufacturing, assuring that complete compliance with aseptic manufacturing guidelines is maintained. After the test samples were prepared, they were incubated for a 21 day period and, when the test results were favorable, the Process Authority summarized the results of the tests, combined it with a systems audit (review of machinery, manuals and operating safeguards) and presented their findings to the F.D.A. on the Company's behalf. The Process Authority has also submitted a description of the low-acid aseptic processing system, the aseptic filler manual and a piping diagram for the entire production and packaging system as required by the F.D.A. 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. Numerous modifications, primarily related to installing monitoring devices to seek to meet F.D.A. requirements, have been made to the machinery at the request of the Process Authority. 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. 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. Even though the machinery has been certified, there can be no assurances regarding if and when the Company will commence initial production of its liquid nutritional products or that the products will meet with acceptance in the market. 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 entered into consulting agreements for investor relations and public relations services which provide for the issuance of 30,000 options to purchase the Company's common stock at an 85% discount to the market price of the stock and 100,000 options to purchase the Company's shares at the market price on the dates of signing the respective agreements. Compensation expense relating to these common stock and option grants is approximately $37,000 for the three months ended June 30, 1996. Additionally, the Company has entered into a consulting agreement which provides for customer introductions to major potential purchasers of the Company's products in return for a fixed cash fee of $30,000. $10,000 was paid against this contract in the quarter ended June 30, 1996. 2 3 FINANCIAL CONDITION Working capital at June 30, 1996 was ($1,194,534) with approximately $700,000 in accounts payable attributable to capital expenditures and leasehold improvements. Cash and cash equivalent balances were $459,709 as of June 30, 1996. Based on the additional funding the Company has secured, (discussed in "Funding Section", below), the Company believes that it has adequate funds to support its operations into 1997. Based upon various factors discussed herein, the Company's independent public accountants have modified their report on the Company's financial statements in the Company's 1995 Form 10-KSB/A1 to indicate that there is no longer a substantial doubt about the ability of the Company to continue as a going concern. FUNDING The Company has received a $4.5 million term loan from a lender with $3 million advanced to the Company upon closing. See Note 7 to the financial statements, "Subsequent Events" for additional details. 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 31, 1997 and August 31, 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). 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 the 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 final closing of the placement. As of June 28, 1996, the Company raised $708,750 through the private placement (partial units have been sold). The Company extended the private placement's expiration date from June 28, 1996 to July 31, 1996 but has retained the right to terminate the placement at any time before the expiration date. Since June 30, 1996, the Company has raised an additional $1,203,750 in the private placement. The private placement was closed on July 30, 1996. 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. During the quarter ended March 31, 1996, the Company raised an additional $500,000 through a "Reg S" sale 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 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 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. 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. 3 4 CROWN LABORATORIES, INC. Consolidated Balance Sheets
ASSETS UNAUDITED AUDITED June 30, 1996 December 31, 1995 ------------- ----------------- CURRENT ASSETS Cash and cash equivalents $ 459,709 $ 677,431 Accounts Receivable 30,521 60,121 Inventory Raw & Packaging Materials 126,818 97,647 Finished Goods 11,347 11,347 Prepaid expenses & employee and officer advances 30,015 44,509 ----------- ----------- Total current assets 658,410 891,055 PROPERTY AND EQUIPMENT Leasehold improvements 1,294,092 1,291,497 Machinery & Equipment 7,977,289 7,595,945 ----------- ----------- 9,271,381 8,887,442 Accumulated Depreciation & Amortization (315,292) (208,679) ----------- ----------- Net Property and Equipment 8,956,089 8,678,763 MACHINERY RIGHTS & BLUEPRINTS 184,478 184,478 DEPOSITS & DEFERRED ASSETS 248,751 232,006 ----------- ----------- TOTAL ASSETS $10,047,728 $ 9,986,302 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt and capital lease liabilities $ 321,098 $ 267,713 Accounts payable and accrued expenses 1,569,853 1,451,633 ----------- ----------- Total current liabilities 1,890,951 1,719,346 ACCRUED SALES TAX PAYABLE 337,704 387,124 LONG-TERM DEBT & CAPITAL LEASE LIABILITIES 1,229,423 1,408,912 SHAREHOLDERS' EQUITY PREFERRED STOCK -- $0.001 par value; 1,000,000 2,121,233 5,000,000 shares authorized; 100 shares outstanding in 1996 and none in 1995 COMMON STOCK -- $0.001 par value; 50,000,000 shares authorized; 16,644,981 and 14,290,513 shares outstanding in 1996 and 1995, respectively 16,645 14,290 Additional paid-in-capital 15,309,845 12,163,600 Accumulated deficit (9,736,840) (7,828,203) ----------- ----------- Total shareholders' equity 6,589,650 6,470,921 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,047,728 $ 9,986,302 =========== ===========
The Accompanying Notes to the Consolidated Financial Statements are an Integral Part of these Financial Statements 4 5 CROWN LABORATORIES, INC. Consolidated Statements of Operations (UNAUDITED)
For the three months ended For the six months ended June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995 --------------- -------------- -------------- ------------- NET SALES $ - $ - $ - $ - Cost of Sales ----------- ---------- ----------- ----------- GROSS PROFIT - - - - General and Administrative Expenses 1,016,870 730,434 1,912,766 1,385,404 ----------- ---------- ----------- ----------- LOSS FROM OPERATIONS (1,016,870) (730,434) (1,912,766) (1,385,404) ----------- ---------- ----------- ----------- Other Income/(Expense) Other Income 25,200 - 50,400 - Interest expense (44,309) (42,486) (85,471) (68,896) Interest income 1,102 10,468 5,967 28,743 ----------- ---------- ----------- ----------- LOSS BEFORE INCOME TAXES (1,034,877) (762,452) (1,941,870) (1,425,557) Income Tax Provision - - - - ----------- ----------- ----------- ----------- NET LOSS ($1,034,877) ($762,452) ($1,941,870) ($1,425,557) =========== =========== =========== =========== NET LOSS PER SHARE ($0.07) ($0.06) ($0.14) ($0.12) =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 14,166,236 12,528,058 14,166,236 12,528,058 =========== =========== =========== ===========
The Accompanying Notes to the Consolidated Financial Statements are an Integral Part of these Financial Statements 5 6 CROWN LABORATORIES, INC. Consolidated Statements of Cash Flow (UNAUDITED)
For the six months ended June 30, 1996 June 30, 1995 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES NET LOSS ($1,941,870) ($1,425,557) ADD/(DEDUCT) ITEMS NOT IMPACTING CASH: Depreciation and amortization 106,613 3,792 Issuance of shares to employees 79,760 47,561 and consultants CHANGES IN ASSETS AND LIABILITIES: (Increase)/Decrease in receivables 29,600 - (Increase)/Decrease in inventories (29,171) (79,390) (Increase)/Decrease in prepaid expenses 14,494 29,762 and employee advances Increase/(Decrease) in accounts payable 118,220 878,613 and accrued expenses --------- ------- TOTAL CASH GENERATED FROM/(USED FOR) OPERATIONS (1,622,354) (545,219) --------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital Expenditures and leasehold improvements (383,939) (3,901,907) (Increase)/Decrease in deposits and deferred assets (16,744) 804,824 Increase/(Decrease) in accrued sales taxes payable (49,419) - TOTAL CASH (USED IN)/GENERATED FROM INVESTING ACTIVITIES (450,102) (3,097,083) ------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loans - 750,000 Repayment of loans payable (126,104) (108,821) Proceeds from issuance of common and 2,052,571 2,018,750 preferred stock and the exercise of warrants Fundraising costs (71,733) (253,031) --------- --------- TOTAL CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 1,854,734 2,406,898 --------- --------- Net increase/(decrease) in cash and cash equivalents (217,722) (1,235,404) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 677,431 1,826,935 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 459,709 $ 591,531 =========== ===========
The Accompanying Notes to the Consolidated Financial Statements are an Integral Part of these Financial Statements 6 7 CROWN LABORATORIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED) 1. BACKGROUND AND ORGANIZATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the Crown Laboratories, Inc. Annual Report on Form 10-KSB. 2. MANUFACTURING FACILITY The Company presently leases 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 business 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. See Note 5, "Commitments and Contingencies", for additional information on the purchase of the building. The Company received the F.D.A.'s approval of its aseptic processing and packaging equipment on June 25, 1996. There was a panel of six different bacteriological kill tests that had to be passed to file with the F.D.A. They measured the machinery's recording devices' ability to collect and record information from the pre-sterilization process, (both process and packaging related), and continue data collection during actual manufacturing, assuring that complete compliance with aseptic manufacturing guidelines is maintained. After the test samples were prepared, they were incubated for a 21 day period and, when the test results were favorable, the Process Authority summarized the results of the tests, combined it with a systems audit (review of machinery, manuals and operating safeguards) and presented their findings to the F.D.A. on the Company's behalf. The Process Authority has also submitted a description of the low-acid aseptic processing system, the aseptic filler manual and a piping diagram for the entire production and packaging system as required by the F.D.A. 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. Numerous modifications, primarily related to installing monitoring devices to seek to meet F.D.A. requirements, have been made to the machinery at the request of the Process Authority. The manufacturer of the aseptic filling machine has filed for bankruptcy in the German courts. The Company has filed 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. 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. Even though the machinery has now been certified, there can be no assurances regarding if and when the Company will commence initial production of its liquid nutritional products or that the products will meet with acceptance in the market. 8 3. FINANCING In July, the Company sold $1 million of its Series E Preferred Stock, see "Note 7 to the financial statements, Subsequent Events" for additional information. 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 the 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 final closing of the placement. As of June 28, 1996, the Company raised $708,750 through the private placement (partial units have been sold). The Company has extended the private placement's expiration date from June 28, 1996 to July 31, 1996 but has retained the right to terminate the placement at any time before the expiration date. Since June 30, 1996, the Company has raised an additional $1,203,750 in the private placement. The private placement was closed on July 30, 1996. 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. During the quarter ended March 31, 1996, the Company raised an additional $500,000 through a "Reg S" sale of its Series C Preferred Stock bringing the total of Series C Preferred Stock issued to $4 million. The entire amount of Series C Preferred Stock issued has been converted into 3,294,735 shares of the Company's common stock. 4. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation Refer to Form 10-KSB for discussions on Significant Accounting Policies. 5. COMMITMENTS AND CONTINGENCIES The Company has entered into a five year lease of its Las Vegas manufacturing facility, (with an option to renew the lease for an additional five year period), which requires monthly payments of $25,802, subject to annual inflation escalations which commenced in September 1995. During 1995, the Company paid $278,768 in lease payments for the building. Minimum payments due under the building lease are as follows: 1996 $309,624 1997 $309,624 1998 $309,624 1999 $154,812 2000 -0-
The Company's option to purchase its current manufacturing facility for $2,700,000 has expired. The Company is presently negotiating another option with its landlord. The Company's option to lease a building in the Fjardo region of Puerto Rico has expired. The Company is presently exploring other alternatives for locating its dry mix operation in Puerto Rico. 9 6. LITIGATION The Company will be subject to normal business litigation and claims concerning products and services rendered to the Company. Associated with the Company's construction of its manufacturing facility, the Company has disputes with two major contractors over the services performed. The Company's claims are for defective workmanship, excessive charges for services rendered, claims that charges should have been included under warranties and returns which have not been accepted by the vendor. Although the Company believes that its claims and counterclaims have merit, there can be no assurances that the Company will prevail on the merits of any or all of its claims. In addition to normal business litigation, the Company has the following material litigation: CROWN V. SWINNEY ET AL., the Company has sought to enforce the legends on its stock under the Securities Act of 1933. The Court issued an injunction, and after the injunction became moot, the court decided that the injunction was wrongful. The Company has posted a superscedeas bond in the amount of $89,695 secured by a certificate of deposit to cover its potential liability in this case. As the enforceability of the Company's legends on its securities is at stake, the Company posted a bond and appealed the Nevada District Court's decision. This appeal has been accepted by the Nevada Supreme Court. Although, the Company believes that its liability, if any, will be limited to attorney's fees, it has expensed the amount of the preliminary judgment, approximately $64,000. CROWN V. ROLFENADE ET AL., was filed by the Company, in March, 1995, and subsequently amended to incorporate all of the respective "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 except those in Germany, which are still in the process of being served under the Hague Convention. To date, no defendant has answered the complaint. After further investigation, it was determined that in the opinion of the Company's counsel that Standard Charter Bank's claims (which have discussed in previously-issued periodic reports) are groundless as they relate to a machine other than the one which was purchased by the Company. 10 7. SUBSEQUENT EVENTS 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). After June 30, 1996, the Company raised an additional $1.2 million through a private placement of equity securities. See Note 3 to the financial statements, "Financing" for additional details on the private placement. The Company entered into a term loan agreement with FINOVA Capital Corporation which provides for a $3 million, fixed rate, (pegged at a spread of 561 basis points above the 5 year Treasury Note rate at the time of closing), 5 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 provides 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 coverage ratio of 2.0 to 1. The cash flow ratio will not come into effect until December 31, 1997. Additionally, as part of the terms of the loan agreement, the Company has agreed to issue 300,000, 5 year, warrants to FINOVA to purchase the Company's common stock at the closing market price of the stock on the date prior to the closing. Minimum principal payments due on the loan over the next 5 years are as follows. 1996 0 1997 441,809 1998 591,225 1999 665,746 2000 749,659 Thereafter 551,561 ---------- Total $3,000,000 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings See Note 6 in the Notes to Financial Statements Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 1.0 Certificate of Incorporation (as amended) (b) Reports on Form 8-K None 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. Date: August 16, 1996 By: /s/ CRAIG E. NASH ------------------------------------- Craig E. Nash Chief Executive Officer Chairman, Board of Directors By: /s/ SCOTT E. HILLEY ------------------------------------- Scott E. Hilley Vice President, Finance EX-1 2 CERTIFICATE OF DESIGNATION 1 EXHIBIT 1 CROWN LABORATORIES, INC. CERTIFICATE OF DESIGNATION OF SERIES E PREFERRED STOCK (Pursuant to Section 151 of the Delaware General Corporation Law) ---------------------------- We, Scott Nash and Scott Hilley, President and Vice President Finance respectively, of Crown Laboratories, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That pursuant to the authority vested in the Board of Directors by the Certificate of Incorporation of the said corporation, the Board of Directors adopted the following resolution creating a series of 300 shares of its Preferred Stock to be a designated Series E Preferred Stock; "WHEREAS, the Certificate of Incorporation of the Corporation authorizes a class of stock designated Preferred Stock, comprising 5,000,000 shares (of which 999,000 shares of Series A Preferred Stock are authorized and no shares of Series A Preferred Stock are currently outstanding; 999,000 shares of Series B Preferred Stock are authorized and no shares are outstanding; 600 shares of Series C Preferred Stock are authorized of which no shares are outstanding); and provides that such Preferred Stock may be divided into such number of series as the Board of Directors may determine, and authorizes the Board of Directors to (i) determine and alter the powers, preferences, rights, qualifications, limitations and restrictions granted to or imposed upon any series of Preferred Stock and (ii) fix the number of shares of any series of Preferred Stock and the designation of such series of Preferred Stock. RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Certificate of Incorporation, this Board of Directors hereby creates a series of Series E Preferred Stock, par value $0.001 per share, of the Corporation, and hereby states the designation and number of shares, and fixes the relative rights, preferences, and restrictions thereof (in addition to any provisions set forth in the Certificate of Incorporation of the Corporation which are applicable to the Preferred Stock of all classes and series) as follows: -1- 2 SERIES E PREFERRED STOCK 1: Designation and Amount. The shares of such series shall be designated as "Series E Preferred Stock" (the "Series E Preferred Stock") and the number of shares constituting the Series E Preferred Stock shall be 300. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series E Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series E Preferred Stock. 2: Rank. The Series E Preferred Stock shall rank: (i) prior to all of the Corporation's Common Stock, par value $0.001 per share ("Common Stock") and the Corporation's Series B Preferred Stock, par value $0.001 per share (collectively the "Junior Securities"); and (ii) (subject to the provisions of Section 8 hereof) on parity with any class or series of capital stock of the Corporation hereafter created specifically ranking by its terms on parity with the Series E Preferred Stock (collectively "Parity Securities"); and (iii) (subject to the provisions of Section 8 hereof) junior to Series A Preferred Stock, $0.001 par value, Series C Preferred Stock, $0.001 par value or any class or series of capital stock of the Corporation hereafter created specifically ranking higher than the Series E Preferred Stock ("Senior Securities"), in each case as to distributions of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary (all such distributions being referred to collectively as "Distributions"). 3: Dividends. The Series E Preferred Stock is entitled to receive cumulative dividends at the annual rate of Six Hundred Dollars ($600) per share and no more, payable in one yearly installment in the form of shares of the Company's Common Stock based on the Market Price as of the dividend date on the 1st day of August of each year (but only for the first two years after issuance) commencing on August 1, 1997, when and as declared by the Board of Directors provided, however, unless otherwise prohibited by the Delaware Corporations Code, the Board of Directors shall timely declare and have the corporation pay such dividends. All such dividends shall accrue from the date of issuance whether or not earned so that no dividends or other distributions shall be made with respect to the Common Stock or the Series B Preferred Stock, and no Common Stock or Series B Preferred Stock shall be purchased or redeemed until cumulative dividends on the Series E Preferred Stock, for all past dividend -2- 3 periods and for the then current year dividend period shall have been declared and paid or set apart. The Market Price shall be the average closing sale prices for the Common Stock of the Company for the five (5) trading days immediately preceding the dividend date; as reported by the American Stock Exchange (the "AMEX"), or if not quoted on the AMEX, on the principal stock exchange or NASDAQ, where the Company's Common Stock trades. After cumulative dividends on the Series E Preferred Stock and for the then current year dividend period shall have been declared and paid or set apart, if the Board of Directors shall elect to declare additional dividends out of funds legally available therefore, such additional dividends may be declared on the Common Stock. 4: Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of shares of Series E Preferred Stock shall be entitled to receive, immediately after any distributions to Senior Securities required by the Corporation's Certificate of Incorporation or any certificate of designation of preferences, and prior and in preference to any distribution to Junior Securities but in parity with any distribution to Parity Securities, an amount per share equal to the sum of (i) $10,000 for each outstanding share of Series E Preferred Stock (the "Original Series E Issue Price") and (ii) an amount equal to 6% of the Original Series E Issue Price for each 12 months that has passed since the date of issuance of any Series E Preferred Stock (such amount being referred to herein as the "Premium"). If upon the occurrence of such event and after payment to the Senior Securities, the assets and funds thus distributed among the holders of the Series E Preferred Stock and Parity Securities shall be insufficient to permit the payment to such holders of the full preferential amounts due to the holders of the Series E Preferred Stock and the Parity Securities, respectively, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Series E Preferred Stock and the Parity Securities, pro rata, based on the respective liquidation amounts to which each such series of stock is entitled by this Certificate of Incorporation and any certificate of designation of preferences. (b) Upon the completion of the distribution required by subsection 4(a), if assets remain in this Corporation, they shall be distributed to holders of Junior Securities in accordance with the corporation's Certificate of Incorporation or any certificate of designation or preferences. -3- 4 (c) A consolidation or merger of this Corporation with or into any other corporation or corporations, or a sale, conveyance or disposition of all or substantially all of the assets of this corporation or the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of, shall not be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 4, but shall instead be treated pursuant to Section 6 hereof. 5. Conversion. The holders of the Series E Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series E Preferred Stock shall be convertible, subject to the Corporation's rights of redemption set forth in Section 6, at the option of the holder thereof, at any time after 60 days following the date of issuance of the last of such shares at the office of the Corporation or any transfer agent for the Series E Preferred Stock, into that number of fully-paid and non-assessable shares of Common Stock calculated in accordance with the following formula: ($10,000) -------------------------- Conversion Price per share Conversion Price = X% of the average closing sale prices (or if none, the average of the bid and asked prices) for the three (3) trading days immediately preceding the Date of Conversion; as reported by the American Stock Exchange (the "AMEX"), or if not quoted on the AMEX, on the principal stock exchange or NASDAQ, of the Corporations' Common Stock, (the "Closing Sale Price"); provided, however, if the Closing Sale Price is less than $0.75 per share of Common Stock, the Conversion Price per share shall equal Closing Sale Price. X shall be the following percentages based on the number of days which have elapsed from the date of issuance of said share of Series E Preferred Stock -4- 5
Number of Days Elapsed Percentage ---------------------- ---------- 60 - 89 85% 90 - 119 81% 120 - 149 75% 150 - 179 73% 180 and beyond 69%
The number of shares of Common Stock into which each share of Series E Preferred Stock may be converted is hereinafter referred to as the "Conversion Rate" for such series. Upon any Conversion of Series E Preferred Stock accrued but unpaid dividends shall be disregarded and waived. (b) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Series E Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall round up to the nearest whole share. In the case of a dispute as to the calculation of the Conversion Rate, the Corporation's calculation shall be deemed conclusive absent manifest error. In order to convert Series E Preferred Stock into full shares of Common Stock, the holder shall surrender the certificate or certificates therefor, duly endorsed, by overnight courier to the office of the Corporation or of any transfer agent for the Series E Preferred Stock, and shall give written notice to the Corporation at such office that he elects to convert the same, the number of shares of Series E Preferred Stock so converted and a calculation of the Conversion Rate (with an advance copy of the certificate(s) and the notice by facsimile); provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless either the certificates evidencing such shares of Series E Preferred Stock are delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation shall use reasonable efforts to issue and delivery within five (5) business days after delivery to the Corporation of such certificates, to such holder of Series E Preferred Stock at the address of the holder on the stock books of the Corporation, a certificate or certificates for the number -5- 6 of shares of Common Stock to which he shall be entitled as aforesaid. The date on which notice of conversion is given (the "Date of Conversion") shall be deemed to be the date set forth in such notice of conversion provided that the original shares of Series E Preferred Stock to be converted are received by the Corporation or transfer agent, if any, for the Series E Preferred Stock within five business days thereafter and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the original shares of Series E Preferred Stock to be converted are not received by the Corporation or such transfer agent, if any, within five business days after the Date of Conversion, the notice of conversion shall become null and void. (c) No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series E Preferred Stock against impairment. (d) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Series E Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of the Series E Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series E Preferred Stock, the Corporation will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (e) Automatic Conversion. On the second annual anniversary of the issuance of each share of Series E Preferred Stock, each share of Series E Preferred Stock shall automatically convert into fully-paid and non-assessable shares of Common Stock at a Conversion Rate for each share of Common Stock calculated in accordance with the formula in Paragraph 5(a) above, but expressed as a document. -6- 7 6. Redemption (a) Right to Redeem. The Corporation shall have the right, in its sole discretion to redeem in whole or in part, any shares of Series E Preferred Stock. If the Corporation elects to redeem some but not all the shares outstanding, the shares shall be redeemed on a pro rata basis. (b) Mechanics of Redemption. The Corporation shall effect each such redemption by giving notice of its election to redeem, by facsimile with a copy by 2-day courier, to the holder of shares of Series E Preferred Stock at the address and facsimile number of such holder appearing in the Corporation's register for the Series E Preferred Stock. Such redemption notice shall indicate whether the Corporation will redeem all or part of the shares of Series E Preferred Stock and the applicable redemption price. The Corporation shall not be entitled to send any notice of redemption and begin the redemption procedures unless it has the full amount of the redemption price, in cash or liquid assets, available in demand or other immediately available account in a bank or similar financial institution on the date the redemption notice is sent to shareholders. The redemption price per share of Series E Preferred Stock shall be calculated in accordance with the following formula: $10,000 -------------------------- X For the purposes of the above formula "X" shall equal the applicable percentage as set forth in Section 5(a) above. The redemption price shall be paid to the holder of shares of Series E Preferred Stock redeemed within 10 business days of the delivery of the notice of such redemption to such holder; provided, however, that the Corporation shall not be obligated to deliver any portion of such redemption price unless either the certificates evidencing the shares of Series E Preferred Stock redeemed are delivered to the Corporation or its transfer agent as provided in Section 5, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. Upon any redemption any accrued but unpaid dividends shall be disregarded and waived. -7- 8 7. Corporate Change. The Closing Sale Price used to determine the Conversion Price shall be appropriately adjusted to reflect as deemed equitable and appropriate by the Corporation, any stock dividend, stock split or share combination of the Common Stock. In the event of a merger, reorganization, recapitalization or similar event of or with respect to the Company (a "Corporate Change") (other than a Corporate Change in which all or substantially all of the consideration received by the holders of the Company's equity securities upon such Corporate Change consists of cash or assets other than securities issued by the acquiring entity or any affiliate thereof), the Series E Preferred Stock shall be assumed by the acquiring entity and thereafter this Series E Preferred Stock shall be convertible into such class and type of securities as the holder would have received had the holder converted this Series E Preferred Stock immediately prior to such Corporate Change. 8. Voting Rights. The holders of Series E Preferred Stock will not have any voting rights except as set forth below or as otherwise from time to time required by law. The affirmative vote of consent of the holders of at least a majority of the outstanding shares of the Series E Preferred stock, voting separately as a class, will be required for any amendment, alteration or repeal of the Corporation's Certificate of Incorporation if, and only if, the amendment, alteration or repeal adversely affects the powers, preferences or special rights of the Series E Preferred Stock. To the extent that under Delaware law the vote of the holders of the Series E Preferred Stock, voting separately as a class, may be required to authorize a given action of the Corporation, the affirmative vote or consent of the holders of at least a majority of the outstanding shares of the Series E Preferred Stock shall constitute the approval of such action by the class. To the extent that under Delaware law the holders of the Series E Preferred Stock are entitled to vote on a matter with holders of Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, voting together as one class, each share of Series E Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of stockholders as the date as of which the Conversion Price is calculated. Holders of the Series E Preferred Stock shall be entitled to notice of all shareholder meetings or written consent with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's by-laws and applicable statutes. -8- 9 9. Protective Provisions. So long as shares of Series E Preferred Stock are outstanding, this Corporation shall not take any action that would impair the right of the holders of the Series E Preferred Stock to exercise the conversion rights set forth herein and shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the outstanding shares of Series E Preferred Stock: (a) create any new class or series of stock having a preference over, or being on a parity with, the Series E Preferred Stock with respect to Distributions (as defined in Section 2 above); or (b) do any act or thing which would result in taxation of the holders of shares of the Series E Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). 10. Status of Redeemed or Converted Stock. In the event any shares of Series E Preferred Stock shall be converted or redeemed pursuant to Section 5 or Section 6 hereof, the shares so converted or redeemed shall be cancelled and shall not be reissuable by the Corporation. IN WITNESS WHEREOF, Crown Laboratories, Inc. has caused its corporate seal to be hereunto affixed and this certificate to be signed by Scott Nash, its President, and attested by Scott Hilley, its Vice President, Finance, this 26th day of July 1996. By: /s/ Scott Nash _____________________ Scott Nash, President Attest: By: /s/ Scott Hilley _____________________________________ Scott Hilley, Vice President Finance -9- EX-27 3 FINACIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENT OF OPERATIONS AND CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB DATED JUNE 30, 1996. 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 459,709 0 30,521 0 126,818 658,410 9,271,381 (315,292) 10,047,728 1,890,951 0 0 1,000,000 16,645 5,589,650 10,047,728 0 0 0 0 1,912,766 0 (85,471) (1,941,870) 0 (1,941,870) 0 0 0 (1,941,870) (.14) 0
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