<PAGE>   1





                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 FORM 10-KSB/A

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
     ACT OF 1934 (FEE REQUIRED)

                  For the Fiscal year ended December 31, 1996

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
     OF 1934 (NO FEE REQUIRED)

                          Commission File No. 1-12848

                            CROWN LABORATORIES, INC.
                 (Name of small business issuer in its charter)

                Delaware                                       75-2300995
      (State or other jurisdiction                          (I.R.S. Employer
   of incorporation or organization)                     Identification Number)

          6780 Caballo Street                                      89119
             Las Vegas, NV                                      (Zip Code)
(Address of Principal Executive Offices)


       Issuer's Telephone Number, including area code:    (702) 696-9300

          Securities registered pursuant to Section 12(b) of the Act:

Title of each class:  COMMON    
Name of each exchange on which registered:  AMERICAN STOCK EXCHANGE
                                            PACIFIC STOCK EXCHANGE

          Securities registered pursuant to Section 12(g) of the Act:

                                 Not Applicable

Check whether the issuer (1) filed all the reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.  Yes  X
No ___

Check if there is no disclosure of delinquent files in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form
10-KSB or any amendment to this form 10-KSB.   Yes______  No    X

State issuer's revenue for the most recent fiscal year:  $0.00

The aggregate value of the Common Stock held by non-affiliates on December 31,
1996 was $17,620,770.  As of  December 31, 1996 there were 18,795,488 shares of
Crown Laboratories, Inc., Common Stock, $.001 par value outstanding.
<PAGE>   2
                                     PART I


Item 1.  DESCRIPTION OF BUSINESS

GENERAL

The Company is engaged in the development of, and intends to manufacture and
market, a proprietary line of pharmaceutically-balanced nutritional products
designed for the special needs of residents in nursing homes and patients in
hospitals.  Generally, these individuals are over age 70, and prefer foods that
are easy to ingest, flavorful, easily digestible and nutritionally complete.
The Company's products will be provided in aseptically-sealed, ready-to-drink
packages.  Product formulations are designed to provide a maximum of  nutrient
and caloric support in easily consumable forms.  The Company currently intends
to offer four liquid nutritional products and 26 dry-mixed products for use by
individuals with dietary restrictions, including low sodium and diabetic diets.

The Company's liquid nutritional product line will consist of both standard
products for nursing homes (nutritional supplements and milkshake-type
products in a variety of flavors) as well as specialized products targeted
towards patients with kidney dysfunction and tube feeding needs.

On June 25, 1996, the Company received approval for its aseptic manufacturing
and filling equipment from the U.S. Food & Drug Administration (F.D.A.).
Commissioning of the equipment is required by the F.D.A.  The commissioning
process began on April 13, 1995, with the Company working with the National
Food Laboratories (the Process Authority) to review its manufacturing
equipment, manufacturing procedures and operating manuals and to monitor the
bacteriological kill tests for compliance with applicable federal regulations.
The National Food Laboratories is an international food and research and
development organization with laboratory facilities in Dublin, California;
Washington, D.C.; and Seattle, Washington and is a wholly-owned subsidiary of
the National Food Processors Association.

There is a panel of six different bacteriological kill tests that must be
passed to file with the F.D.A.  They measure the machinery's recording devices'
ability to collect and record information from the pre-sterilization process
(both process and packaging related), continue data collection during actual
manufacturing, and assure that complete compliance with aseptic manufacturing
guidelines is maintained.  After the test samples are prepared, they are
incubated for a 21 day period and, if the test results are favorable, the
Process Authority summarizes the results of the tests and combines it with
their systems audit (review of machinery, manuals and operating safeguards) and
presents their findings to the F.D.A. on the Company's behalf.  The F.D.A. then
has 30 working days to respond to the Company with additional questions or
requests for information.  In the absence of such a request, the Company is
authorized to produce and market its products.  The Process Authority has
confirmed that the Company has passed the six sterility tests.  On April 12,
1996, The Process Authority and the Company provided the F.D.A. with a
preliminary submission of documentation pertinent to the filing of Company's
system including a description of the low-acid aseptic processing system, the
aseptic filler manual and a piping diagram for the entire production and
packaging system.

Since that time, the Company has been involved in modifying its product
formulation and aseptic packaging equipment to support commercial level
production in anticipation of its entry into the market.

The Company has entered into two consulting agreements which provide for
customer introductions to major potential purchasers of the Company's products.
The first contract calls for a fixed cash fee of $40,000.  This amount will be
amortized ratably as the customer introductions are made, presently estimated
to cover a 24 month period.   The other contract calls for the consultant to
make introductions and follow-up calls to 7 major potential accounts over the
next 4 years.  The consultant was granted 180,000 shares of the Company's
Common Stock as compensation for the agreement.  The value of these shares
($225,000),  based on the market price of the shares at the time of grant
($1.25 per share), is being expensed ratably over the life of the contract.





                                       2
<PAGE>   3
RECENT SIGNIFICANT DEVELOPMENTS

On February, 28, 1997, the Company announced a three-year agreement with renewal
options with McKesson Corporation's U.S. Health Care unit.  The agreement calls
for McKesson to distribute Crown's liquid nutritional and dietary products to
the home health care, hospital, and nursing home markets. The management
believes that, while the best effort agreement will produce revenues growing to
$1.5 million per month during the ensuing months there can be no assurance that
this estimate will be reached.  The agreement has a thirty day cancellation
provision.

On March 4, 1997, the Company announced that Crown and Tufts University had
created an alliance in human nutrition to pursue a variety of joint activities
in the area of nutritional product research, education, and public information
dissemination.  Specific activities of the initiative will include the
formation of a Crown\Tufts steering committee to be guided by a Tufts Associate
Dean, and the establishment of graduate fellowships to be funded by Crown for
their advanced graduate students studying human nutrition science.  Crown will
contribute $80,000 during the first year, and if continued, $100,000 each
following year for four years.  The agreement is a year to year obligation with
cancellation clauses for both parties.

On March 7, 1997, the Company raised $3 million through the sale pursuant to
Regulation S under the Securities Act of 1933, as amended, of its Series E
Preferred Stock.   The Series E Preferred Stock imputes an average effective
interest rate of 6% which is payable in shares of the Company's Common Stock on
the "Dividend Dates", (August 1, 1997 and August 1, 1998).  The Series E
Preferred Stock is convertible into common shares at a rate equal to 10,000
divided by the market value of the Common Stock adjusted by a discount factor
which ranges from 15% to 31% depending on the time the shares are held from the
issuance date (the longer the stock is held, the deeper the discount, unless
the Common Stock price falls below $0.75,  in which case the discount no longer
applies).  Under this conversion formula, as the Common Stock price drops, the
number of Common Shares into which Series E Preferred Stock is convertible
continues to grow.  The number is  not subject to a ceiling.  A total of
200,000 five year options to purchase the Company's  Common Stock at $2.50 per
share were issued to two finders for their role in raising these funds.

On April 9, 1997, the Company announced the authorization of expenditures up to
$500,000 for purchases of its common stock to be retained as treasury stock.
The authorization to make these purchases may be discontinued at any time and
does not constitute a commitment by the Company to buy a specific amount of its
shares.

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,
1996, 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, and (v) 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.

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.





                                       3
<PAGE>   4
THE MARKET

The need and demand for nursing home services are increasing as a direct result
of the overall aging of the United States population.  The result of this
longer life span has been an increase in the number of people with debilitating
conditions that make the tasks of day-to-day living difficult to achieve, and
an overall change in the demographics of the U.S. population.  In relative
terms, the fastest growing segment of the population is individuals over the
age of 85.  This group has tripled since 1960 and is expected to double again
over the next 20 years.

The nursing home industry has been a primary beneficiary of this demographic
shift to the point where it represented  $69.6 billion, or 7.9% of the total
personal healthcare dollars spent in the United States in 1993.  These trends
should continue to increase annually over the next several years. Presently,
there are approximately 20,000 nursing homes in the United States with an
average of 100 beds per nursing home.  Today, the nursing home industry is a
multi-billion dollar business, with one of the highest growth rates in
expenditures among all health services.  A nursing home stay is a common event
for the elderly population in America.  Although only 5% of the elderly reside
in nursing homes at any point in time, the lifetime risk of entering a nursing
home is approximately 30%.  One out of every five individuals living past the
age of 65 and one of three aged 85 or older will spend some time in a nursing
home.  The median age of nursing home residents is now 81 years.

As a result of the aging of society and changes in hospital practices, the
character of nursing homes has changed dramatically in the past 10 years.
Nursing homes are now complex institutions caring for people who, because of
severe incapacities, need both sub-acute and chronic care.

The costs of nursing home care are increasing faster than inflation.  At
present, 65% of the cost of care is paid for by state Medicare programs with the
remaining 35% paid for by private insurance or individuals.  Increasingly,
insurance providers are attempting to control costs by limiting hospital
coverage, which has resulted in a 40% reduction in the length of stay at the
hospital.  This encourages early transfer from acute care facilities into long
term care facilities.  The result is that nursing home populations are becoming
more disabled with increasing acuity requiring a higher level of care.  As care
increases, the use of pharmaceutical food supplements also increases.  The
Company estimates that over fifty percent of the nursing home population
receives a liquid supplement at least two times per day.

PRODUCTS

The Company has developed and intends to market the following products:

LIQUID PRODUCTS.  Upon completion of its manufacturing facility, the Company
will offer a line of liquid specialty dietary-control products in an aseptic
liquid packaged form in a variety of flavors.

         WINLAC(TM) -  A Complete Supplement.  WinLac is a lactose-free
         nutritional supplement which fulfills the general supplementation
         requirements of long term nursing and acute care facilities.   WinLac
         is high in protein and lactose-free, since most elderly individuals
         cannot break down the sugars found in milk products (lactose).  A
         four-ounce serving of WinLac provides 200 calories and approximately
         20% of the United States Recommended Daily Allowance of vitamins and
         minerals.

         MULTICAL(TM)  -  A Milk Shake Substitute.  MultiCal is designed to
         replace the milk shake which is a staple food product in long term and
         acute care health facilities.  Typically, healthcare facility kitchens
         make milk shakes for patients since they contain most of the nutrients
         recommended by the government, have an agreeable taste and are easy to
         ingest.  These milk shakes are usually made from staple ingredients in
         the facility kitchen.  MultiCal replaces the scratch preparation shake
         thus providing the healthcare facility with a ready-to-drink,
         scientifically-tested formulation without the necessary preparation
         and clean up.  The Company's anticipated production efficiencies and
         proprietary formulation permit MultiCal to be sold to healthcare
         facilities at a cost which is often less than that of a scratch
         preparation milk shake.





                                       4
<PAGE>   5
         RENALITE(TM)  -  Kidney-Deficient Product.  Renalite is specifically
         designed as a food supplement for use by patients with decreased
         kidney function.  Decreased kidney function limits the amount of
         fluids, salt and proteins that can be consumed and eliminated by the
         body.  Renalite is a liquid formulation designed as a food supplement
         containing both high caloric intake and the necessary vitamins and
         minerals.  Other product benefits include limited volume of fluid
         devoid of unwanted proteins, sodium, potassium and chloride.  Renalite
         is also designed for consumption by diabetics, which comprise 50% of
         all renal patients.

         ENTRALITE(TM)  -  Tube-Feeding Product under review.

DRY-MIX PRODUCTS -  The Company has developed 26 dry-mix products to be used
for protein enhancement, caloric enhancement, low sodium and sugar free diets
of the geriatric population.    These dry-mix products have been test marketed
and clinically tested.  The Company's dry-mix nutritional products, packaged
in form, fill and seal bags,  include a protein and carbohydrate supplement, a
complete instant breakfast supplement, a full assortment of low sodium, sugar
free items as well as no-bake egg custard, whipped topping and texture
enhancement products.

FUTURE PRODUCT DEVELOPMENT.  Management anticipates adding new flavors and
textures to its nutritionals product line.  In addition, the Company
anticipates developing additional formulations utilizing its proprietary
emulsion technologies to address specific medical situations.  There can be no
assurances that the Company will be successful in developing new products or,
if it is successful in developing new products, that the products will meet
with acceptance in the marketplace.


PATIENT BENEFITS

     The Company's products provide specific patient benefits:

         SCIENTIFICALLY-FORMULATED. The Company's formulations have been tested
         under controlled conditions for their particular applications.
         Product quality is closely monitored in the Company's laboratory to
         assure consistently reliable product performance which generates
         predictable favorable results when prescribed.

         ASEPTICALLY-PROCESSED.  All of the Company's liquid nutritional
         products will be aseptically processed and packaged, providing
         extended shelf life without the need for refrigeration.

         CONCENTRATED NUTRITION.  The Company's special formulations and more
         efficient nutrient composition make it possible to serve patients
         smaller, more compact portions that don't leave them feeling full or
         bloated.  As a result, these supplements compliment a solid food diet
         rather than interfere with it.

         READY-TO-DRINK.  The Company's liquid products will be packaged in
         ready-to-consume "PEEL AND DRINK(TM)" four-ounce plastic cups which
         need no refrigeration.  They can then be stored next  to patient care
         stations to be used whenever a patient is hungry or thirsty.

HEALTHCARE FACILITY BENEFITS

     The Company's products were designed to be efficient for the healthcare
     facilities to administer.  Specific benefits include:

         CLINICALLY-PROVEN.  The Company has conducted several empirical
         studies working in conjunction with nursing homes.  The study results
         demonstrated that patients using  the Company's products receive more
         nutrition and gained more weight than with competitive products.
         Increases in serving intake over competitive products ranged from 50%
         to 95%.  The Company attributes this increase to two factors.  First,
         the volume of the serving is more closely aligned to the patient's
         ability to consume a supplement.  Second, the Company's products
         simply taste better.  On average, during the studies, the patients
         using the Company's products gained 4.3 pounds per month versus a 1
         pound per month weight gain for those consuming competitive products.
         These results are significant since weight gain is considered a key
         factor in determining the success of patient nutrition programs.





                                       5
<PAGE>   6
         INCREASED NUTRITIONAL DENSITY.  The Company designed its products to
         provide increased nutritional density since the patients studied in
         their clinical tests could not consume a sufficient volume of food to
         both support ongoing metabolism and maintain health.  The Company's
         four-ounce liquid products contain essentially the same nutritional
         density in proteins, minerals and vitamins as eight ounces of the
         competitive brands.

         REDUCED WASTE.  The Company's liquid products will be packaged in
         convenient ready-to-drink four-ounce servings.  The Company's studies
         show that, in most cases, patients consistently consume up to four
         ounces of a liquid food supplement per serving.  Competitive products
         are generally packaged in eight ounce portions with at least half of
         the product going to waste on average.

         COST EFFECTIVE.  In addition to the product waste issues, discussed
         earlier, the Company's products will normally be consumed directly
         from the four ounce disposable cup, eliminating the need for washing,
         rinsing, drying and storing additional serving containers.
         Additionally, the Company's light-weight plastic containers and
         reduced serving size will result in lower freight costs which can be
         passed along to the customer.

         NO REFRIGERATION REQUIRED.  Government regulations, requiring that
         scratch preparation milk-based products be carefully refrigerated, are
         closely monitored and strictly enforced by the various regulatory
         agencies.  Failure to follow proper temperature requirements can
         result in the imposition of penalties to the facility.  The Company's
         products will be stored in aseptically-sealed containers that require
         no refrigeration during transport, storage or prior to serving.


MARKETING STRATEGY

Unlike the Company's major competitors (Ross Laboratories, Inc. and Mead
Johnson Nutritionals, who together control an estimated 93% of the market), the
Company will focus its primary efforts on the nursing home segment of the
medical nutritionals market.  Management believes that by concentrating its
efforts on addressing the needs of the nursing home market, developing
appropriate product formulations, packaging formats and marketing strategies,
it will be successful in penetrating and gaining a significant share of this
market which has been under-serviced by competition.

The Company also intends to expand its business through new product
introductions utilizing its proprietary production and aseptic filling
technologies as well as through expansion into international markets.  There
can be no assurances that the Company will be successful in either of these
areas.

The nursing home market is presently undergoing consolidation with large
nursing home chains acquiring one another in an attempt to obtain economies of
scale.  The Company's management has a significant number of long-standing
business relationships with the senior management of these major accounts.  The
Company believes that this presents significant opportunities for it since
obtaining only one or two major accounts or portions of their total business
will provide enough sales volume to achieve break-even levels.  There can be no
assurances that the Company will be successful in obtaining sufficient volumes
from these major accounts, or if they are achieved, that the profit margins
resulting from these sales will be sufficient to provide break-even operations.
The Company's future sales may be dependent on a few major accounts.

The Company recently signed a major marketing and distribution agreement with
McKesson Corporation's Health Care Unit.  This agreement will allow the Company
not only to penetrate the nursing home market, but also the hospital and home
health care markets.  The agreement calls for McKesson to distribute Crowns'
products to all three market segments over a three-year period with renewal
options.

COMPETITION

The pharmaceutical nutritional product industry's annual revenue is estimated
by the Company to approximate $4 billion in the United States alone.  Three
companies currently dominate the market:  Ross Laboratories, Inc. (a division
of Abbott Laboratories, Inc. (NYSE)), Mead Johnson Nutritionals, (a division of
Bristol-Meyers-Squibb, Inc. (NYSE)), and Sandoz Nutrition, (a division of
Sandoz Pharmaceuticals, Inc.).  Clintec, (a division of Nestle Foods), competes
with tube feeding products.





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<PAGE>   7
All of these companies are much larger and better financed than the Company,
have established products and an established customer base, and can, therefore,
devote more resources to research and development, production and marketing
activities.  Further, these companies may respond vigorously to the Company's
entry into the market by targeting products to nursing homes or repositioning
their product lines in more concentrated serving sizes.  Therefore, the Company
may not be a significant factor in these markets for the near or foreseeable
future.  Further, due to the size of the major nursing home and hospital
chains, the Company may find its sales concentrated initially in a few large
accounts.

MANUFACTURING

Manufacturing of dry mix products entails the purchasing of raw materials such
as sugar and non-fat dry milk, measuring the ingredients based on formulations,
mixing and finally, packaging.  The Company will check its products for quality
and moisture content at its own in-plant laboratory facility.  The dry mix
packaging process involves using rolls of pre-printed foil which are run
through a special form, fill and seal machine that makes the envelope, fills it
with product and seals it for shipment.

The liquid packaging process is more complex which has required the
construction of a liquid processing facility.  The Company has acquired and
installed the major components required for the production of its products in
its plant in Las Vegas, Nevada  (see Item 2 - "Description of Property").

PRODUCT PROTECTION

The Company regards the formulations of its products to be proprietary and has
filed for a patent covering the formulation and production process for its
primary liquid nutritional product, WINLAC(TM).  The Company has also
trademarked its Company name, its liquid nutritional product names as well as
"PEEL AND DRINK(TM)" and "THE NUTRITIONAL DIFFERENCE(TM)".  There can be no
assurances that any patent will be issued.  Currently, the Company exerts
substantial efforts to protect trade secrets and to keep formulas and related
process know-how confidential.  Currently, the Company requires each of its
employees to sign confidentiality agreements as a condition of employment to
protect its formulations and production know-how.  However, there can be no
assurances that the Company will be successful in these efforts.

REGULATORY COMPLIANCE AND APPROVAL REQUIRED FOR OPERATION

The Company's operations are regulated principally by the U.S. Food and Drug
Administration, (F.D.A.), although state and local regulations also apply.
Failure to comply with regulatory requirements could result in fines and other
penalties, including cessation of production.  Additionally, there can be no
assurance that regulatory requirements will not change or that the Company will
be able to comply with changes at an acceptable cost, if they were to occur.

Regulatory approval is required for the manufacturing process, which
principally entails certification of the processor and the aseptic
filler/packaging machine.  The manufacturers have warranted that their
equipment meets F.D.A. requirements for aseptic machinery.  The manufacturer of
the processor has had numerous processors approved in the United States.  The
filler manufacturer has never received approval in the United States because
this type of filler is the first of its kind made by it for a U.S.
manufacturer.  However, after extensive modification by the Company, the filler
as well as the facility received complete F.D.A. certification on June 25,
1996.

Failure to meet regulatory approval will preclude the Company's ability to
manufacture and ship its products.

SOURCES OF SUPPLY

There are alternative sources of supply for the raw materials required for the
manufacture of the Company's products.  The Company considers the sources and
names of its principal suppliers to be confidential.

EMPLOYEES

Currently, the Company has 24 full-time employees.  There are presently no
labor contracts in effect with the Company.





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<PAGE>   8

ORGANIZATION

Crown Laboratories, Inc. ("the Company") was incorporated on February 23, 1989,
in Delaware, as Industrialistics, Inc.  In November 1991, Industrialistics,
Inc. changed its name to Crown Laboratories, Inc.

Item 2.  DESCRIPTION OF PROPERTY

The Company presently occupies a 62,000 square foot manufacturing facility in
Las Vegas, Nevada for the purpose of manufacturing its line of nutritional
products.  The Company selected its Las Vegas location based on a number of
factors.  The State of Nevada does not assess either corporate or personal
income taxes and is a "right to work" state.  It has favorable freight rates
resulting from the large volume of shipments into the casino trade with Las
Vegas' limited manufacturing providing little outbound trucking demand and the
climate is also very favorable for shipping on a year round basis.  The Company
has obtained a twelve month option to purchase its current manufacturing
facility for $3,185,000.  The Company sub-leased 20,000 square feet of space in
its Las Vegas facility under a one year lease signed in October of 1995 with
two, one month renewal options.   The Company collected $25,200 in lease
revenue during 1995 and $75,600 during 1996 which amounts are reflected in the
financial statements of the Company.

The Company contemplated establishing a dry-mix operation in Puerto Rico
because of favorable manufacturing cost and potential tax benefits under
Internal Revenue Code 936.  Due to recent and anticipated changes in the tax
laws governing Section 936 corporations, the Company will no longer be able to
fully achieve the anticipated benefits and has subsequently discontinued any
activity related to this operation.

Item 3.  LEGAL PROCEEDINGS

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. SWINNEY ET AL., the Company sought to enforce the legends on
         its stock requiring compliance with 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 posted a
         supercedeas bond in the amount of  $89,695 secured by a certificate of
         deposit, included in Deposits & Deferred Assets on the Balance Sheet,
         to cover its potential liability in this case.  As the enforceability
         of the Company's legends on its securities was at stake, the Company
         posted a bond and appealed the Nevada District Court's decision.  This
         appeal was accepted by the Nevada Supreme Court. Although, the Company
         believes that its liability, if any, will be limited to attorney's
         fees, it expensed the amount of the preliminary judgment,
         approximately $64,000 in 1995.   Subsequent to December 31, 1996 this
         dispute was resolved.  The final settlement amount was $69,000.

         CROWN V. ROLFENADE ET AL., was  filed by the Company, in March, 1995,
         and subsequently amended to incorporate all of the defendants "alter
         egos" in September, 1995.  The action is for breach of contract,
         misrepresentation,  fraud and alter ego.  Rolfenade warranted that the
         packaging machine would be in compliance with F.D.A. requirements.
         The packaging machine was not in compliance with the applicable
         regulations and the Company has made substantial modifications to the
         filler to bring it into compliance.  The Company has served all
         defendants  under the Hague Convention.  Other defendants named in the
         suit filed a Motion to Quash Service which was lost.  They appealed to
         the Nevada Supreme Court.  Their appeal was denied.  They have since
         filed an answer.  The Company cannot predict the outcome of its
         claims.

         CROWN V. LLOYDS   On August 8, 1996, a settlement was reached whereby
         Lloyds would reduce its claim from $123,000 to $35,000 which Crown
         subsequently paid on August 8, 1996 with complete releases on both
         sides.





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<PAGE>   9
On September 9, 1996, the Company entered into a settlement agreement with Dr.
Kouri to settle all claims, demands and/or causes of action which may exist
between them, whether known, unknown, or suspected relating to a claim by Dr.
Kouri to a 25% ownership interest in the Company.  Under the Settlement
Agreement, the Company has agreed, among other things, to provide to Dr. Kouri
180,000 shares of Common Stock.  The Company has further agreed to include
these shares in the next registration statement which the Company would use its
best efforts to file within 30 days from the date of the Settlement Agreement.
In return, Dr. Kouri has agreed to enter into a non-assignable four year
marketing agreement with the Company pursuant to which Dr. Kouri will assist
the Company in marketing its products.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not Applicable.





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<PAGE>   10
PART II

Item 5.  MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's stock was listed on the American Stock Exchange, Emerging Company
Marketplace (AMEX ECM) on March 29, 1994.  It trades under the symbol CLL.ec.
Prior to that time, the Company's stock was listed on the Electronic Bulletin
Board (EBB) of the NASD.  The table below lists the low and high bid prices for
the stock for each quarter over the last two years.

<TABLE>
<CAPTION>
                                       CALENDAR 1996                             CALENDAR 1995
                                   --------------------                      -------------------
                                   Low             High                      Low            High
                                   ---             ----                      ---            ----
<S>          <C>                  <C>              <C>                       <C>            <C>
1ST QUARTER  (AMEX ECM)           1.63             1.75                      $2.25          $3.13
2ND QUARTER  (AMEX ECM)           1.63             1.69                      $2.38          $2.81
3RD QUARTER  (AMEX ECM)           1.19             1.25                      $1.88          $2.94
4TH QUARTER  (AMEX ECM)            .63              .81                      $1.25          $1.94
</TABLE>

The source of the information, (summarized above), comes from the American
Stock Exchange for Amex quotes.

The American Stock Exchange announced that it will no longer accept new issuers
for the Emerging Company Marketplace, but will continue trading existing
shares, including the Company's.  Therefore, over time, the Emerging Company
Marketplace will cease to exist.  The market for the Company's Common Stock
must be considered limited and there can be no assurance that a meaningful
trading market will continue. Stock sold by the Company in private placements
have generally been below the then trading price on the American Stock
Exchange.

During 1995 and 1996 the Company raised approximately $2.4 Million and $1.9
Million respectively, in common equity financing through Private Placements.

There are approximately 1,550 beneficial Common Stock holders.  The Company did
not pay any dividends in the last two years and does not intend to pay
dividends in the foreseeable future.  All available working capital will be
used to meet the Company's expected growth.

The Company has entered into agreements with certain employees which provide
for the grant of Common Stock and stock options (at an 85% discount to market
price as of their date of employment) which vest over a five year period.
Additionally, the Company has entered into consulting agreements for investor
relations and other services which provides for the issuance of 50,000 options
to purchase the Company's Common Stock at an 85% discount to the market price
of the stock on the date of signing the agreement, and also the issuance of
180,000 shares of common stock..  Compensation expense relating to these Common
Stock and option grants is approximately $182,000 for the year ended December
31, 1996.

Effective on August 15, 1996, the Board of Directors granted 50,000 options to
purchase the Company's Common Stock at 85% of the market price of the stock on
the date of grant to each of three outside directors (Arthur Berkowitz, Linda
Carrick, Ph.D., and Lee Hooker) for their service on the Board of Directors
over the next two years.  Of the options received, 25,000 options vest upon the
date of grant with the remaining 25,000 vesting on June 1,  1998.  All options
expire on August 13, 1999.





                                       10
<PAGE>   11
Additionally, the Board of Directors granted 40,000 options to purchase the
Company's Common Stock at $1.75 per share to Arthur Berkowitz for his efforts
in the establishment of a marketing consulting agreement for the Company.
These options (20,000 of which will vest immediately with the remaining 20,000
vesting based upon the signing of a marketing agreement) expire on September
24, 1999.

On March 7, 1997, the Company raised $3 million through the sale pursuant to
Regulation S under the Securities Act of 1933, as amended, of its Series E
Preferred Stock.  The Series E Preferred Stock imputes an average effective
interest rate of 6% which is payable in shares of the Company's Common Stock on
the "Dividend Dates", (August 1, 1997 and August 1, 1998).  The Series E
Preferred Stock is convertible into common shares at a rate equal to 10,000
divided by the market value of the Common Stock adjusted by a discount factor
which ranges from 15% to 31% depending on the time the shares are held from the
issuance date (the longer the stock is held, the deeper the discount, unless
the Common Stock price falls below $0.75, in which the discount no longer
applies).  Under this conversion formula, as the Common Stock price drops the
number of Common Shares into which Series E Preferred Stock is convertible
continues to grow.  The number is not subject to a ceiling.  A total of 200,000
five year options to purchase the Company's Common Stock at $2.50 per share
were issued to two finders for their role in raising these funds.

Item 6:  MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

RESULTS OF OPERATIONS

The Company has been extensively engaged in research and development activities
in order to commercialize its proprietary line of liquid nutritional products.
As a consequence, the Company has incurred and charged to expense substantial
start-up costs in the engineering, design, construction, and modification of
its facility, production equipment, processes, and formulations.

The Company had no sales for the years ended December 1996 and 1995 except for
approximately $80,100 of dry-mix products sold in the fourth quarter of 1995.
For the years ended December 31, 1996, and December 31, 1995, the Company
incurred losses of ($4,631,905) and ($3,839,092) respectively.  Higher losses
in 1996 are attributable to increased salaries associated with additional
employees and higher operating expenses.  In addition, the Company incurred
start-up expenses totaling $1,870,957 or 43% of the loss incurred in 1996.  The
accumulated deficit at December 31, 1996, was ($12,451,872).  Losses have
continued since such date due primarily to expenditures of salaries, other
operating expenses, and plant start-up expenses.

The Securities and Exchange Commission (SEC) and Financial Accounting Standards
Board (FASB) have issued stringent guidelines to account for research and
development and certain other start-up costs.  The SEC has adopted a view that
they will not accept deferred start-up costs (capitalization of start-up costs
on the Balance Sheet) if the registrant is not in an industry where deferral is
a readily accepted policy.  Crown has been advised by its auditors that it is
in an industry where deferral is not a widely accepted policy.  Consequently,
Crown expensed $1,870,957 of start-up expense for the year ended 1996.
Start-up expenses of $1,202,031 were similarly expensed in 1995.

On June 25, 1996, the Company received approval of its aseptic manufacturing
and filling equipment from the F.D.A.  Commissioning of the equipment is
required by the F.D.A.  The commissioning process begins with the Company,
working with an independent laboratory, (the Process Authority), to review its
manufacturing equipment, manufacturing procedures, manuals and monitor
bacteriological kill tests.

There is a panel of six different bacteriological kill tests that must be
passed to file with the F.D.A.  They measure 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 throughout
actual manufacturing, assuring that complete compliance with aseptic
manufacturing guidelines is maintained.  After the test samples are prepared,
they are incubated for a 21 day period and, if the test results are favorable,
the Process Authority summarizes the results of the tests and combines it with
their systems





                                       11
<PAGE>   12
audit (review of machinery, manuals and operating safeguards) and presents
their findings to the F.D.A. on the Company's behalf.

Although the equipment manufacturers have warranted that the purchased
equipment has been manufactured to the F.D.A. regulatory specifications for
aseptic packaging and processing equipment, the filler is the first of its kind
manufactured for a U.S. Company requiring F.D.A. aseptic processing approval.
The delays in certifying the Company's production equipment can be attributed
to the aseptic filling machine.  The machine was unable to pass certification
testing when it was originally shipped from Germany in February, 1995.
Numerous modifications have been made to the machinery at the request of the
Process Authority primarily related to installing monitoring devices which were
required to meet F.D.A. requirements.  The manufacturer of the aseptic filling
machine has filed for bankruptcy in the German courts.  The Company has filed a
claim against the manufacturer of the aseptic filler for damages caused by the
delays in certifying the filler and seeks to have these damages applied against
the purchase price of the machine.  Further, the Company has filed suit in Las
Vegas, Nevada against certain persons and entities involved with the
manufacturer, (see Item 3, "Legal Proceedings").  To further protect its rights
to the machinery and its related technology, the Company has purchased the
blueprints and the rights to its aseptic filling machine from the German
bankruptcy court.  Now that the machinery is certified, there can be no
assurances 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.

PLAN OF OPERATIONS

In June 1996, the Company received approval for its aseptic manufacturing and
filling equipment from the F.D.A. to produce its product line for adult
nutritional and specialty products.  Extensive modifications were required on
the filling equipment for the remainder of the year.  Consequently, no sales
were produced for the year ended 1996.

FUNDING

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 1995, the Company raised approximately $2.4 million in additional common
equity financing through a private placement and this amount is reflected in
the accompanying financial statements.  Each unit was purchased for $50,000.  A
unit consisted of 25,000 shares of Common Stock and warrants to purchase 12,500
shares of Common Stock for $3 per share. The warrants expire two years from the
date of issuance.  Fractional units have been sold.  In addition, the Company
issued to the Placement Agent and brokers 2,500 options to acquire shares of
the Company's Common Stock at a price of $2.40 per share for each unit sold.
These options expire five years from the date of issuance.

During 1995, the Company also raised $3.5 million through the issuance of
Series C Preferred Stock.  The Series C Preferred Stock pays no dividends, but
imputes a 6% effective annual interest rate upon conversion into Common Stock
which will be accounted for over the time during which the preferred stock is
outstanding.  The conversion rate is determined by the acquisition value of the
preferred stock (plus imputed interest referred to above) and an 18% discount
to the 5 day average market price of the common shares at the time of exercise.
During 1995, the Company's Board of Directors authorized utilizing an alternate
price to the 5 day average market price provided for in the conversion of
Series C Preferred Stock for several block trades. During the quarter ended
March 31, 1996, the Company raised an additional $500,000 through a placement
pursuant to Regulation S under the Securities Act of 1933, as amended, of its
Series C Preferred Stock, bringing the total of Series C Preferred Stock issued
to $4 million.  As of  July 2, 1996, all of the Series C Preferred Stock issued
had been converted into 3,294,735 shares.  The shareholders had waived their
interest in the conversion for all past, present, and future transactions.  To
the extent that the Company uses equity securities to raise additional funds to
satisfy its working capital needs, there will be additional dilution to the
Company's existing shareholders.





                                       12
<PAGE>   13
On July 31, 1996, the Company raised $1 million through the sale of its Series
E Preferred Stock to a "Regulation S" investor.  The Series E Preferred Stock
imputes an average effective interest rate of 6% which is payable in shares of
the Company's Common Stock on the "Dividend Dates" (August 1, 1997 and August
1, 1998).  The Series E Preferred Stock is convertible into common shares based
on discounts to the market price at the time of conversion which range from 15%
to 31% depending on the time they are held from the issuance date, (the longer
the stock is held, the deeper the discount).  Under this conversion formula, as
the Common Stock price drops, the number of Common Shares into which Series E
Preferred Stock is convertible continues to grow.  The number is  not subject
to a ceiling.   As of December, 31, 1996, there was $1,000,000 in Series E
Preferred Stock outstanding.

On August 11, 1996, the Company entered into a term loan agreement with FINOVA
Capital Corporation which provides for a $3 million, fixed rate (11.93% annual
percentage rate); (this rate is pegged at a spread of 561 basis points above
the 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 requires that the Company adhere to
certain covenants.  Specifically, they require that the Company maintain a
minimum tangible net worth of $5 million, a senior debt to tangible net worth
ratio of 1 to 1 and a cash flow rate of 2 to 1.  The first two covenants are
effective on the closing date of the loan while the cash flow ratio takes
effect on December 31, 1997.  Also as part of the terms of the loan agreement,
the Company has agreed to issue 300,000 five year warrants to FINOVA to
purchase a share of the Company's Common Stock at the closing market price of
the stock on the date prior to closing the loan ($1 7/16).

On May 10, 1996, the Company offered a private placement of equity securities
with a minimum of $540,000 to a maximum of $2,520,000 (the private placement
provides for an over-subscription of the placement up to $3,000,000 at the
Company's discretion) in units of $45,000.  Each unit consists of 30,000 shares
of the Company's Common Stock and 30,000 warrants to purchase the Company's
Common Stock at a price of $1.60 for a period of six months after the closing of
the private placement.  The Company raised $1,912,500 through the private
placement which was closed on July 30, 1996.

On September 19, 1996, the Company's Board of Directors approved a re-pricing
of the May 10, 1996, Private Placement.  Under the re-pricing, each unit was
adjusted to consist of 36,000 shares of Common Stock per unit as compared to
the 30,000 shares per unit contained under the original terms of the Private
Placement.  This resulted in the issuance of an additional 255,000 shares of
Common Stock being issued in conjunction with the Private Placement.

FINANCIAL CONDITION

Working capital at December 31, 1996 was based on the funding the Company has
secured (discussed above). Based upon the above cash proceeds provided by the
sale of preferred stock offset by the required and intended use of proceeds,
losses incurred since December 31, 1996, and anticipated results of operations
expected to be incurred during the remainder of 1997, management of the Company
believes that sufficient cash resources are available to enable the Company to
continue in existence through at least December 31, 1997.  After that time the
Company may require additional funds to support its operations, entry, and
further expansion into other markets.

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.





                                       13
<PAGE>   14
Item 7.  FINANCIAL STATEMENTS

See the audited financial statements for the years ended December 31, 1996 and
1995.

Item 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

There were no changes or disagreements with the Accountants for the periods
ending December 31, 1996 and 1995.





                                       14
<PAGE>   15
                                    PART III


Item 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

The current directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME                              AGE              POSITION
<S>                               <C>              <C>
Craig E. Nash                     42               Chairman of the Board of
                                                   Directors and Chief Executive Officer

Scott O. Nash                     42               President and
                                                   Vice Chairman of the Board of Directors

Christopher Demetree              33               National Account Executive and Director

Vincent Casella                   58               Director

Lee Allen Hooker                  51               Director, Chairman of the Compensation
                                                   Committee

Arthur M. Berkowitz               56               Director, Chairman of the Audit Committee
                                                   Member of the Compensation Committee

Linda Carrick, Ph.D.              43               Director, Member of the Audit Committee
</TABLE>


CRAIG E. NASH has been Chairman of the Board of Directors and Chief Executive
Officer of the Company since September 1991 and has held such positions or
similar positions in its predecessors since February 1980.  He also is the
senior marketing executive of the Company.  Mr. Nash has sixteen years
experience in pharmaceutical and food-products marketing.  Mr. Nash attended
the University of Southern California.

SCOTT O. NASH has been President and Vice Chairman of the Board of Directors of
the Company since September 1991 and has held these or similar positions in its
predecessors since February 1980.  Mr. Nash has sixteen years experience in
pharmaceutical and food-products manufacturing and operations.  Mr. Nash
attended the University of  Southern California.  Messrs. Craig and Scott Nash
are twin brothers.

CHRISTOPHER DEMETREE has been a director of the Company since December 2, 1992
and prior to that a major investor in the Company.  Mr. Demetree is currently
the National Accounts Executive for Crown and prior to that was Vice President
of Demetree Brothers, Inc., a Florida-based fully-integrated property
management and investment company, and was responsible for many aspects of the
management of Demetree Brothers, Inc.  His duties primarily included planning
and developing real estate developments, including permits, sales pro formas
and construction budgets.  Mr.  Demetree holds a B.S. degree in Industrial
Management from Georgia Institute of Technology.

VINCENT J. CASELLA became a director of the Company in July 1995.  Mr. Casella
is an equity specialist, floor broker, and a past Chairman of the Philadelphia
Stock Exchange.  He has accumulated over 35 years of experience in numerous
senior positions in the securities industry, including associations with
Republic Securities Corporation, Steadman Funds, and several NYSE firms.  He
was Trustee of PHLX Foundation, Director of Stock Clearing Corporation, and
Director of Philadelphia Depository Trust Company.  He has held chairman and
vice-chairman positions in a variety of steering committees at the Exchange.





                                       15
<PAGE>   16
LEE ALLEN HOOKER became a director of the Company in February 1994.  Mr. Hooker
is the owner and Chief Executive Officer of American Benefits Counselors/Hooker
Associates, a brokerage firm for employee benefits to the healthcare industry.
He has been involved with the medical industry for more than twenty-five years.
Mr. Hooker holds a B.S. in Business Administration from Columbia Union College
and an M.S. in Business Administration from Pepperdine University.

ARTHUR M. BERKOWITZ became director of the Company in June 1994.  Mr. Berkowitz
has been an agent for the Equitable Life Insurance Society of the United States
for the past 19 years.  He is currently a Benefits Consultant to many large
corporations.  Mr. Berkowitz was an engineer with The General Electric Company
for 12 years.  Mr. Berkowitz is a life member of the Million Dollar Round
Table, a Director of the Philadelphia Friends of ALS, and Financial Secretary
of the Germantown Jewish Centre of Philadelphia.  Mr. Berkowitz has a B.S.
degree in Mathematics from St. Lawrence University and a B.Ae. and a M.Ae. in
Aeronautical Engineering from Rensselaer Polytechnic Institute.

LINDA CARRICK, PH.D. became a director of the Company in June 1994.  Dr.
Carrick has been in the nursing field since 1975.  She has been Clinical
Director, Surgical Nursing for the Hospital of the University of Pennsylvania,
where she also served as interim Vice President of Nursing.  She is a member of
several professional organizations, including the American Association of
Critical Care Nursing, The Nursing Association, Association of Nurse
Executives, and the American Society of Parenteral and Enteral Nutrition.  She
also completed a Wharton Nurse Executive Fellowship.  Dr. Carrick holds a B.S.
degree in nursing from Villanova University, and a M.S. degree in Surgical,
Cardiovascular Nursing and a Ph.D. in Healthcare Administration from The
University of Pennsylvania.

All Directors hold office until the next annual meeting of the shareholders and
the election and qualification of their successors.  Officers are elected
annually and serve at the pleasure of the Board of Directors, subject to any
employment agreements.

Section 16 of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and any persons who own more than ten percent
of the registered class of the Company's equity securities to file various
reports with the Securities Exchange Commission and the American Stock Exchange
concerning the holdings of and transactions in the Common Stock and other
equity securities of the Company.  Copies of these filings must be furnished to
the Company.   The Company believes that Mr. Craig Nash filed his May and
December 1996 Form 4's after the required filing date.

Item 10.  EXECUTIVE COMPENSATION

No executive officer of the Company earned remuneration in excess of $100,000
during 1996.  The following table shows all remuneration earned by the Chief
Executive Officer during the fiscal years ended December 31, 1996, 1995, and
1994 for services in all capacities rendered to the Company and its
subsidiaries.
<TABLE>
<CAPTION>
                                           ANNUAL COMPENSATION            LONG-TERM COMPENSATION 
                                           -------------------          -------------------------- 
                                                                                   AWARDS
                                                                                   ------
                                                                         RESTRICTED     SECURITIES
NAME AND                                                OTHER ANNUAL       STOCK        UNDERLYING
PRINCIPAL POSITION                     SALARY          COMPENSATION (2)    AWARD          OPTIONS
------------------                    -------          ----------------    -----          -------
<S>                       <C>         <C>              <C>          <C>     <C>     <C>     <C>
Craig Nash                1996        $70,000          $  0         0       $ 0      0       0
Chief Exec. Officer       1995        $78,771             0         0         0      0       0
                          1994        $51,329             0         0         0      0       0
</TABLE>





                                       16
<PAGE>   17
Mr. Craig Nash's compensation includes 1,665,545 shares granted with a nominal
fair market value on the date of his employment agreement.  All Common Stock
issued to Craig Nash were ascribed a nominal value by the Company and its
investment adviser, given the inherent uncertainty as to the ability of the
Company to raise capital and continue in existence as of the dates such shares
were issued.  Of the 1,665,545 shares, all shares are vested except for 10,000
shares  which will vest on  January 3, 1997.  All the shares are eligible to
receive dividends.

The Company provided automobile allowances to certain of its employees,
including certain persons who  are executive officers of the Company, including
Mr. Nash, based upon the job requirements of each employee.  No amounts with
respect to the personal use of automobiles, if any, have been included in the
above table.  The Company has concluded that the aggregate amounts of such
personal benefits which cannot be specifically or precisely ascertained, did
not in any event exceed, as to any executive officer, either the lessor of
$50,000 or 10% of his cash compensation for the last fiscal year, and that the
information set forth in the foregoing table is not rendered materially
misleading by virtue of the omission of the value of such personal benefits.

In 1993, the Company entered into a five year employment agreement with Craig
Nash.  He is currently receiving a base salary of $70,000 per annum, although
$100,000 per annum was approved by the Board of Directors.   This amount  may
be increased at the discretion of the Board of Directors.  The Company can
terminate such employment for cause on 90 days notice.  If the individual is
terminated by the Company during the term of the employment agreement, he will
receive certain termination compensation of up to two years of base salary and
the immediate vesting of the stock per his employment agreement.

Each of the executive officers and certain key employees have entered into a
Confidentiality Agreement in which the individual agrees not to disclose,
reveal or permit access to all or any portion of the "Company's Confidential
Information" as specified in the agreement.

The following table gives certain information regarding options held on
December 31, 1996.

<TABLE>
<CAPTION>
                          NUMBER OF SECURITIES UNDERLYING           VALUE OF UNEXERCISED IN-THE
                           UNEXERCISED OPTIONS AT FY-END              MONEY OPTIONS AT FY-END
NAME OF INDIVIDUAL          EXERCISABLE    UNEXERCISABLE            EXERCISABLE      UNEXERCISABLE
<S>                           <C>               <C>                     <C>               <C>
Craig Nash, CEO               768,028            -                      -                 -
</TABLE>





                                       17
<PAGE>   18
Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth certain information as of December 31, 1996 with
respect to the beneficial ownership of the Company's Common Stock by all
persons known by the Company to be the beneficial owners of more than 5% of any
such outstanding classes:

<TABLE>
<CAPTION>
NAME AND ADDRESS                                     AMOUNT AND NATURE                PERCENT
OF BENEFICIAL OWNER                               OF BENEFICIAL OWNERSHIP             OF CLASS
-------------------                             --------------------------            --------
<S>                                             <C>                                    <C>
MR. CRAIG E. NASH                               2,260,014           Direct             12.02%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

MR. SCOTT O. NASH                               2,656,276           Direct             14.13%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

INVESCO NORTH AMERICAN HOLDINGS                 1,430,750           Direct              7.61%
7800 E. Union Avenue
Denver, CO 80237

CHRIS DEMETREE                                    965,575           Direct              5.13%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

THE GIFFORD FUND, LTD                                See Footnote (1)                    N/A
Charlotte House
Charlotte Street
P.O. Box N9204
Nassau, Bahamas
</TABLE>

         (1)  The Gifford Fund presently holds $1,000,000 of Series E Preferred
         Stock of Crown Laboratories, Inc. The Series E  Preferred Stock
         provides for conversion into Crown Laboratories, Inc. Common Stock
         based upon market prices.  If converted, the Gifford Fund, Ltd. may
         become a holder of more than 5% of the common shares outstanding of
         Crown Laboratories, Inc. depending upon the market price of the shares
         at time of conversion.





                                       18
<PAGE>   19
SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth certain information as of December 31, 1996 with
respect to the beneficial ownership of the Company's Common Stock by each
executive officer and director, and by all executive officers and directors as
a group:

<TABLE>
<CAPTION>
NAME AND ADDRESS                                    AMOUNT AND NATURE           PERCENT
OF BENEFICIAL OWNER                              OF BENEFICIAL OWNERSHIP      OF CLASS (1)
-------------------                              -----------------------      ------------
<S>                                                <C>           <C>              <C>
MR. CRAIG E. NASH                                  2,260,014     Direct           12.02%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

MR. SCOTT O. NASH                                  2,656,276     Direct           14.13%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

CHRIS DEMETREE                                       965,575     Direct           5.13%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

VINCENT J. CASELLA                                   643,850     Direct           3.42%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

LEE ALLEN HOOKER                                     126,478     Direct           0.67%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

ARTHUR M. BERKOWITZ                                  271,029     Direct           1.44%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

DR. LINDA CARRICK, PH.D.                             126,500     Direct           0.67%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119


All Executive Officers and
Directors as a Group                               7,049,722                     37.5%
</TABLE>


(1)  Percentages are calculated based on outstanding shares and options and
     warrants exercisable within 60 days.





                                       19
<PAGE>   20

DIRECTORS' REMUNERATION

In 1994, outside members of the Board of Directors, Lee Allen Hooker, Arthur M.
Berkowitz, Dr. Linda Carrick, Ph.D., and Myles Cane, a former director, each
received options to purchase 50,000 shares of Common Stock at exercise prices
ranging from $1.275 to $2.50 per share.  Of the options received, options to
purchase 25,000 shares of common stock vested immediately and options to
purchase 25,000 shares of Common Stock will vest on different schedules ranging
between the thirteenth to the twenty-third month of their term.  Additionally
in 1995, Lee Allen Hooker, Arthur M. Berkowitz, Dr. Linda Carrick, and Myles
Cane received options to purchase 10,000 shares of Common Stock at an exercise
price of  $2.44 per share, and Vince Cassella received options to purchase
50,000 shares of Common Stock at an exercise price of $1.275 per share.

Additionally in 1995, Arthur Berkowitz entered into a six month agreement
(beginning on July 27, 1995, through December 31, 1996, and is renewable every
six months) to receive $1,500 per month  for serving as Chairman of the Audit
Committee of the Company's Board of Directors.  The Company anticipates
continuing this agreement at the same level of compensation through July 1997,
at which time the agreement becomes renewable.

Vincent Casella and his associates were granted a total of 230,000 options to
purchase the Company's Common Stock for their roles in assisting the Company in
strategic planning issues.  Mr. Casella was granted 100,000 options at an
exercise price of $1.44 per share which expire five years from the date of
grant (November 13, 1995).

Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CRAIG AND SCOTT NASH 

Craig and Scott Nash had guaranteed certain indebtedness of the Company related
to the First Security Bank of Nevada loans, and pledged a total of 500,000
shares of Common Stock of the Company to secure such guarantee. As the
indebtedness was liquidated on October 15, 1996,  the 500,000 shares were
returned to Craig and Scott Nash. Mr. Nash's also personally guaranteed the
G.E. Capital Corporation loan.   At that time, Craig and Scott Nash received no
compensation for the risks of such commitments.





                                       20
<PAGE>   21
                                    PART IV


Item 13.  EXHIBITS AND REPORTS ON FORM 8K

    (a)  Exhibits

<TABLE>
         <S>              <C>
           3(c)           Certificate of Incorporation, as amended (6)
           3(b)           Bylaws, as amended (4)
           4(a)           Form of Warrant Agreement, including Form of Warrant, for private placement investors (4)
           4(b)(1)        Certificate of Amendment to Certificate of Designation of Series E Preferred Stock (1)
           4(b)(2)        Certificate of Designation of Series E Preferred Stock (1)
           4(c)           Specimen of Common Stock Certificate of Registrant (1)
           4(d)           Regulation S Subscription Agreement, dated July 31, 1996 (2)
           4(e)           Regulation S Subscription Agreement, dated March 7, 1997 (7)
          10(a)           1992 Stock Option Plan (5)*
          10(b)           Employment Agreement with Craig Nash (3)*
          10(c)           Employment Agreement with Scott Nash (3)*
          10(d)           Employment Agreement with Christopher Demetree (3)*
          10(h)           Lease for Las Vegas, Nevada (2)
          10(j)           Agreement with NME (2)
          10(k)           Agreement with McKesson (1)

         22               Subsidiaries, (both 100% owned):   Crown Russia OOO
                                                             Crown Puerto Rico
         24               Consent of Arthur Andersen LLP
</TABLE>

   (b)   Form 8(K)'s:  Filed on:  March 1, 1996; March 12, 1996; April 2, 1996;
and March 25, 1997.

*     Management Compensation Contract or Plan

(1)   Filed herewith

(2)   Previously filed in connection with the Registrant's Registration
      Statement on Form SB-2, File No.33-72912.

(3)   Previously filed as an exhibit to the Form 10-KSB for the fiscal year
      ended December 31, 1992.

(4)   Previously filed as an exhibit to the Form 10-KSB for the fiscal year
      ended December 31, 1994.

(5)   Previously filed as an exhibit to the Form 8-K of the Registrant filed
      September 24, 1991.

(6)   Previously filed as an exhibit to the Form 10QSB for the quarter ended
      September 30, 1995.

(7)   Previously filed as an exhibit to the Form 8(K) of the Registrant filed
      March 25, 1997.





                                       21
<PAGE>   22

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities 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:  April 14, 1997                   By:  /s/ Craig E. Nash
                                             -----------------------------------
                                             CRAIG E. NASH
                                             Chief Executive Officer
                                             Chairman of the Board of Directors


Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


<TABLE>
<S>                                        <C>
/s/ Craig E. Nash                          Chief Executive Officer
----------------------------------         Chairman of the Board of Directors
CRAIG E. NASH                              (Principal Executive Officer)
                                           

/s/ Scott O. Nash                          Vice Chairman of the Board of Directors
----------------------------------         President     
SCOTT O. NASH                              


/s/ Christopher Demetree                   Director
----------------------------------                 
CHRISTOPHER DEMETREE


/s/ Vincent J. Casella                     Director
----------------------------------                 
VINCENT J. CASELLA


/s/ Lee Allen Hooker                       Director
----------------------------------                 
LEE ALLEN HOOKER


/s/ Arthur M. Berkowitz                    Director
----------------------------------                 
ARTHUR M. BERKOWITZ


/s/ Linda Carrick                          Director
----------------------------------                 
LINDA CARRICK, PH.D.
</TABLE>




                                       22
<PAGE>   23

                            CROWN LABORATORIES, INC.

                          CONSOLIDATED BALANCE SHEETS
 

                                     ASSETS

<TABLE>
<CAPTION>
                                                DECEMBER 31, 1996     DECEMBER 31, 1995
                                                -----------------     ----------------- 
<S>                                                <C>                 <C>
CURRENT ASSETS
  Cash and cash equivalents                        $    579,486        $    677,431
  Accounts Receivable                                    11,882              60,121
  Inventory
    Raw & Packaging Materials                           243,686              97,647
    Work in Process                                       5,800
    Finished Goods                                       33,418              11,347

  Prepaid expenses & employee and
    officer advances                                    155,806              44,509
                                                   ------------         -----------
    Total current assets                              1,030,080             891,055

PROPERTY AND EQUIPMENT
  Leasehold improvements                              1,300,043           1,291,497
  Machinery & Equipment                               8,410,629           7,595,945
                                                   ------------         -----------
                                                      9,710,672           8,887,442
Accumulated Depreciation & Amortization                (423,674)           (208,679)
                                                   ------------         -----------
  Net Property and Equipment                          9,286,998           8,676,763

MACHINERY RIGHTS & BLUEPRINTS                           242,917             184,478

DEPOSITS & DEFERRED ASSETS                              490,700             232,006
                                                   ------------         -----------
    TOTAL ASSETS                                   $ 11,050,695         $ 9,986,302
                                                   ============         ===========


                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
  Current maturities of long-term debt and
    capital lease liabilities                       $   480,810          $  267,713
  Accounts payable and accrued expenses               1,285,019           1,451,633
                                                   ------------         -----------
    Total current liabilities                         1,765,829           1,719,346

ACCRUED SALES TAX PAYABLE                               288,289             387,123

LONG-TERM DEBT & CAPITAL LEASE LIABILITIES            2,558,191           1,408,912

SHAREHOLDERS' EQUITY

  PREFERRED STOCK - $0.001 par value;                 1,024,997           2,121,233
    5,000,000 shares authorized;
    100 and 209 shares outstanding in 1996
      and 1995, respectively

  COMMON STOCK - $0.001 par value;                       18,795              14,290
    50,000,000 shares authorized;
    18,795,486 and 14,290,513 shares
    outstanding in 1996 and 1995,
    respectively

  Additional paid-in capital                         17,846,466          12,163,601

  Accumulated deficit                               (12,451,872)         (7,828,203)

    Total shareholder's equity                        6,436,386           6,470,921
                                                   ------------         -----------
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY     $ 11,050,695         $ 9,986,302
                                                   ============         ===========
</TABLE>


      The Accompanying Notes to the Consolidated Financial Statements are
                 an Integral Part of these Financial Statements



                                      F-1

<PAGE>   24
                            CROWN LABORATORIES, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                                  FOR THE YEAR ENDED
                                        DECEMBER 31, 1996      DECEMBER 31, 1995
                                        -----------------      -----------------
Net Sales                                  $    --                $    80,100

  Cost of Sales                                 --                    (28,639) 
                                           ------------
Gross Profit                                    --                     51,461
  Research & Development Start Up Costs      1,870,957              1,202,031
  General and Administrative Expenses        2,483,490              2,507,487
                                        -----------------      -----------------
Loss From Operations                        (4,354,447)            (3,658,057)

  Other Income/(Expense)
    Other Income                                75,600                 25,200
    Other Expense                             (146,902)                 --
    Interest expense                          (238,851)              (236,011)
    Interest income                             32,695                 46,776
                                        ----------------       ----------------
Loss before income taxes                    (4,631,905)            (3,824,092)

  Income Tax Provision                                                (15,000)
                                        -----------------      -----------------
Net Loss                                   ($4,631,905)           ($3,839,092)
                                        =================      =================
NET LOSS PER SHARE                              ($0.27)                ($0.30)
                                        =================      =================
WEIGHTED AVERAGE NUMBER OF COMMON       
AND COMMON EQUIVALENT SHARES
OUTSTANDING                                 17,079,951             12,884,527
                                        =================      =================

      The Accompanying Notes to the Consolidated Financial Statements are
                 an Integral Part of these Financial Statements


                                       F2
<PAGE>   25
                            CROWN LABORATORIES, INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
                      FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                  SHARES OF    COMMON       ADDITIONAL      ACCUMULATED   PREFERRED     TOTAL
                                                   COMMON       STOCK     PAID-IN-CAPITAL     DEFICIT       STOCK
<S>                                               <C>          <C>          <C>               <C>           <C>         <C>
Balance as of December 31, 1995                   14,290,513   $14,290      $12,163,601     $(7,828,203)  $2,121,233    $6,470,921

   Compensation expense for options granted          320,000       320          550,651          --           --           550,971
    to employees and consultants
   Series C/Series E Preferred Stock Issued           --         --               --             --       $1,500,000     1,500,000
   Shares issued on the conversion of              2,041,288     2,041        2,585,959          --       (2,588,000)        --
    Series C Preferred Stock
   Shares sold in private placement                1,529,999     1,530        1,910,970          --           --         1,912,500
   Fund raising expenses                              --         --            (207,922)         --           --          (207,922)
   Warrants converted                                613,688       614          843,207          --           --           843,821
   Imputed interest for Series C/Series E             --         --               --              8,236       (8,236)        --
    Preferred
   Net loss for the period ended                      --         --               --         (4,631,905)      --        (4,631,905)
    December 31, 1996
                                                  ----------   -------      -----------    ------------    ----------   ----------
Balance as of December 31, 1996                   16,795,480   $18,795      $17,846,466    ($12,451,672)   $1,024,937   $6,438,386
                                                  ==========   =======      ===========    ============    ==========   ==========

</TABLE>
      The Accompanying Notes to the Consolidated Financial Statements are
                  an Integral Part of this Financial Statement


                                       F3

<PAGE>   26
                            CROWN LABORATORIES, INC.

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

                      FOR THE YEAR ENDED DECEMBER 31, 1995


<TABLE>
<CAPTION>
                                             SHARES OF     COMMON     ADDITIONAL     ACCUMULATED      PREFERRED        TOTAL
                                               COMMON       STOCK   PAID-IN CAPITAL    DEFICIT          STOCK  

<S>                                          <C>           <C>        <C>            <C>            <C>             <C>
BALANCE AS OF DECEMBER 31, 1994              11,840,941    $11,841    $ 8,653,500    $(3,955,878)         -         $ 4,709,463

   Shares sold in Private Placement           1,196,125      1,196      2,391,054          -         3,500,000       5,892,250

   Fund raising expenses                          -          -           (437,990)         -              -            (437,990)

   Proceeds from option conversions               -          -              7,500          -              -               7,500

   Compensation expense for options              
      granted to employees and consultants        -          -            138,790          -              -             138,790

   Shares issued on the conversion           
      of Series C Preferred Stock             1,253,447      1,253      1,410,747          -         (1,412,000)          -

   Imputed interest for Series C Preferred        -          -              -            (33,233)        33,233           -

   Net loss for the period ended                 
      December 31, 1995                           -          -              -         (3,839,092)         -          (3,839,092)
                                             ----------    -------    -----------    -----------    -----------     -----------
BALANCE AS OF DECEMBER 31, 1995              14,290,513    $14,290    $12,163,601    $(7,828,203)   $ 2,121,233     $ 6,470,921
                                             ==========    =======    ===========    ===========    ===========     ===========
</TABLE>


      The Accompanying Notes to the Consolidated Financial Statements are
                 an Integral Part of these Financial Statements



                                       F4





<PAGE>   27
                            CROWN LABORATORIES, INC.

                      Consolidated Statements of Cash Flow


<TABLE>
<CAPTION>
                                                                  FOR THE YEAR ENDED
                                                        -----------------------------------------
                                                        DECEMBER 31, 1996       DECEMBER 31, 1995
                                                        -----------------       -----------------
<S>                                                       <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES

NET LOSS                                                  $(4,631,905)            $(3,839,092)

ADD/(DEDUCT) ITEMS NOT IMPACTING CASH:
        Depreciation and amortization                         214,995                 172,395
        Loss on Repayment of Debt                              53,000                   -
        Issuance of shares to employees                      
           and consultants                                    550,971                 138,790 

CHANGES IN ASSETS AND LIABILITIES:
        Decrease/(Increase) in receivables                     48,239                 (60,121)
        (Increase) in inventories                            (173,910)               (107,406)
        (Increase)/Decrease in prepaid expenses             
           and employee advances                             (111,297)                 23,802
        (Decrease)/Increase in accounts payable             
           and accrued expenses                              (166,614)              1,207,802
                                                          -----------             -----------

NET CASH USED FOR OPERATIONS                               (4,216,521)             (2,463,830)
                                                          -----------             -----------

CASH FLOWS FROM INVESTING ACTIVITIES
        Capital Expenditures and leasehold improvements      (823,230)             (5,582,072)
        (Increase) in rights and blueprints                   (58,439)               (184,478)
        (Increase)/Decrease in deposits and deferred assets    (8,587)                667,118
        (Decrease)/Increase in accrued sales taxes payable    (98,834)                387,124

NET CASH USED FOR INVESTING ACTIVITIES                       (989,090)             (4,712,308)
                                                          -----------             -----------

CASH FLOWS FROM FINANCING ACTIVITIES
        Proceeds from loans                                 3,000,000                 767,853
        Repayment of loans payable                         (1,690,624)               (202,979)
        Proceeds from issuance of common and               
           preferred stock and the exercise of warrants     4,256,321               5,899,750
        Cost of Debt Financing                               (250,107)
        Equity Fundraising costs                             (207,922)               (437,990)
                                                          -----------             -----------

NET CASH PROVIDED BY FINANCING ACTIVITIES                   5,107,668               6,026,634
                                                          -----------             -----------

   Net (decrease) in cash and cash equivalents                (97,943)             (1,149,504)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                677,431               1,826,935
                                                          -----------             -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD                  $   579,488             $   677,431
                                                          ===========             ===========
</TABLE>


      The Accompanying Notes to the Consolidated Financial Statements are
                an Integral Part of these Financial Statements



                                       F5


<PAGE>   28
                            CROWN LABORATORIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995


1.  BACKGROUND AND ORGANIZATION

Crown Laboratories, Inc. (the "Company" or "Crown") was incorporated on February
23, 1989, in Delaware, as Industrialistics, Inc. In November 1991,
Industrialistics, Inc. changed its name to Crown Laboratories, Inc.

Since its inception, the Company has been principally engaged in the research
and development of proprietary medical nutritional dry-mix and liquid supplement
products to be sold primarily to nursing homes, hospitals, and home health care
agencies.

On June 25, 1996, the Company received final U.S. Food & Drug Administration
(F.D.A.) approval to commence manufacturing its proprietary line of aseptic
liquid nutritional products. Commissioning of the equipment is required by the
F.D.A. The commissioning process began on April 13, 1995 and delays were
experienced primarily as a result of the aseptic filler's inability to meet
F.D.A. certification criteria when it was shipped to the Company. A panel of
tests must be passed in order to file with the F.D.A. On June 25, 1996, the
Company received approval for its aseptic manufacturing and filling equipment.
Since that date, the Company has been involved in modifying its product
formulation and aseptic packaging equipment to support commercial level
production in anticipation of its entry into the market.

As a result of delays in installing the equipment, problems encountered with
bacteriological tests which delayed filing with the F.D.A. and the modification
of the process to support commercial level production, the Company has been
required to raise further funds to sustain operations until the plant becomes
operational and it may require further funds to support working capital needs as
it begins to enter the market or to provide for normal operating expenses. The
Company is exploring possible alternatives for raising additional debt and
equity funds. There can be no assurances that the Company will be able to secure
the necessary financing, or if a source of funding is identified, that the
funding will be on terms and conditions which are favorable to the Company.

The Company and its operations are subject to the various risks inherent in the
start-up and development of a new business enterprise. The operating history of
the Company is limited. There can be no assurance the Company will be able to
produce its products and operate profitably. Competitors of the Company have
substantially greater resources than the Company. The Company may require
further financial resources. The Company will not have any sales of liquid
nutritional products until the Las Vegas manufacturing facility can sustain
commercial production levels. To the extent that the Company uses equity
securities to raise additional funds to satisfy its working capital needs, there
will be additional dilution to the Company's existing shareholders.

The Company regards the formulations of its products to be proprietary and has
filed for a patent covering the formulation and production process for its
primary liquid nutritional product, "WINLAC(TM)". The Company has also
trademarked its Company name, its liquid nutritional product names as well as
"PEEL AND DRINK(TM)" and "THE NUTRITIONAL DIFFERENCE(TM)". There can be no
assurances that any patent will be issued. Currently, the Company exerts
substantial efforts to protect trade secrets and to keep formulas and related
process know-how confidential. Currently, the Company requires each of its
employees to sign 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.




                                       F6



<PAGE>   29
2.  SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Crown
Laboratories, Inc. and its wholly-owned subsidiaries, which include Crown Russia
OOO and Crown Puerto Rico (inactive). All intercompany balances have been
eliminated in consolidation.

USES OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of certain estimates by management in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. Actual
results could differ from those estimates.

REVENUE RECOGNITION

The Company records sales upon shipment of product to its customers which is
concurrent with the transfer of title. No sales were recorded in 1996. However,
in the fourth quarter of 1995, the Company sold, through its subsidiary, product
to Eastern European customers. Differences in commercial practices and language
have presented some challenges, but the Company has collected a large portion of
the receivables and management is confident that it will ultimately collect the
balance of the outstanding receivables. Accordingly, the Company has not
established any allowance for receivables which may ultimately be uncollectible.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include highly liquid investments with original
maturity dates of three months or less at the date of purchase.

INVENTORY

Inventory is stated at the lower of cost or market using the first-in first-out
method of accounting. At December 31, 1996 and 1995, inventory consisted of the
following:

<TABLE>
<CAPTION>
                                              1996                1995
                                            --------            --------
<S>                                         <C>                  <C>    
Raw Materials                               $243,686             $97,647
Work in Progress                               5,800                   0
Finished Goods                                33,418              11,347
                                            --------            --------
Total Inventory                             $282,904            $108,994
</TABLE>

PROPERTY AND EQUIPMENT/MACHINERY RIGHTS AND BLUEPRINTS

Property and equipment are stated at historical cost. Depreciation and
amortization are recorded using the straight line method over the estimated
useful lives of assets which range from 5 to 15 years. Recently acquired
equipment and improvements for the liquid products production facility will not
be depreciated until production begins. The Company only capitalizes those costs
directly related to the equipment and external costs for installation and has
not capitalized any management, executive or overhead costs. Such costs are
charged to expense as they are incurred.

During 1995, the Company obtained the rights and blueprints to its aseptic
filler machine from the German bankruptcy court. Costs incurred to obtain
intangible liquid products machinery rights and blueprints are capitalized and
will be amortized over the same life as the underlying liquid products
equipment. The Company's total depreciation and amortization expense for 1996
was $214,995 and relates to depreciation of office equipment and dry-mix
production equipment and the amortization of the rights and blueprints.

                                       F7


<PAGE>   30
INCOME TAXES

The Company has operated at a loss since inception and has a net operating loss
carry-forward of approximately $12,000,000 as of December 31, 1996. The Company
is researching the availability of such net operating losses to the Company. The
availability of all loss carry-forwards to offset U.S. taxable income may be
limited as a result of changes in shareholders and certain elections made by the
Company For accounting purposes, the Company has provided a full valuation
allowance for these loss carry-forwards and has not established a deferred tax
asset. The Company's non-U.S. subsidiaries are subject to taxation in those
countries in which they conduct business.

Situations may arise where the Company pays cash taxes on profits earned in
foreign countries, but such taxes paid cannot be used to offset U.S. taxable
income until such period as the Company's U.S. operations have generated taxable
income and utilized available net operating loss carry-forwards. For the year
ended December 31, 1995, the Company recorded an income tax provision of $15,000
for its estimate of income-based taxes which may be payable to Russian tax
authorities on profits earned in Russia. Given the complexities of Russian tax
legislation and in the application of those regulations by authorities, actual
taxes which may be owed could be different, but such difference is not expected
to be material. To date, the Company has only conducted operations in the State
of Nevada, which does not impose a tax on income.

STOCK-BASED COMPENSATION

The Company accounts for employee stock options in accordance with Accounting
Principles Board No. 25 ("APB No. 25") "Accounting for Stock Issued to
Employees". Under APB No. 25, the Company values its compensation cost for
stock-based employee compensation plans using the intrinsic value method of
accounting.

During 1996, Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation", became effective for the
Company. SFAS No. 123 encourages, but does not require companies to record such
compensation costs at fair value. The Company has elected to continue to account
for stock-based compensation using the intrinsic value method. For companies
that choose to continue applying the intrinsic value method, SFAS No. 123
mandates certain pro forma disclosures as if the fair value method had been
utilized. Refer to Note 7.

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOW INFORMATION

The following information supplements the consolidated statements of cash flow
for the years ended December 31, 1996 and 1995. 1996 1995

<TABLE>
<S>                                                                <C>                          <C>     
Interest Paid                                                      $ 238,851                    $220,126

Income Taxes                                                             -0-                         -0-

Assets acquired through capital lease financing                          -0-                    $ 29,755
</TABLE>

FINANCIAL INSTRUMENTS

The Financial Accounting Standards Board (FASB) requires disclosure of the fair
value of financial instruments under Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments." For cash and
cash equivalents, the carrying amount reported in the balance sheet approximates
fair value. The Company's long-term debt instrument was issued during 1996 and
its book value approximates its current fair market value.

OTHER

Certain reclassifications have been made to the December 31, 1995, financial
statements to conform with the current year presentation.

                                       F8

<PAGE>   31
ACCOUNTING CHANGES

Effective January 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No.121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 121
requires that long-lived assets and certain identifiable intangibles, including
goodwill, to be held and used or disposed of by an entity be reviewed for
impairment whenever events for changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Under provisions of SFAS No.
121, impairment losses are recognized when expected future cash flows are less
than the assets' carrying value. Accordingly, when indicators of impairment are
present, the Company will evaluate the carrying value of property, plant and
equipment and intangibles in relation to the operation performance and future
undiscounted cash flows of the underlying business. As the Company has been
primarily engaged in research and development activities and has had no
production nor sales for the year, the Company determined that no impairment
loss needed to be recognized for applicable assets of operations for the year
ended December 31, 1996.

RECENTLY ISSUED ACCOUNTING STANDARDS

In March 1997, the FASB issued SFAS No. 128, "Earnings per Share". This
statement establishes standards for computing and presenting earnings per share
and applies to entities with publicly held common stock. This statement is
effective for financial statements for fiscal years beginning after December 15,
1997. The Company has not concluded its evaluation of the effect, if any, that
the adoption of SFAS No. 128 will have on its financial statements.

3.    DEBT

The Company obtained debt financing from Finova Capital Corporation ("FINOVA")
that provides for a term loan of $3 million which increases to $4.5 million when
the Company secures commitments for $7 million of sales. The loan calls for
interest-only payments over the course of the first six months with the loan
fully amortizing over the remaining 54 months. The interest rate of 11.93% which
was fixed at the time of closing, was pegged at a 561 basis point spread to the
5 year treasury note rate at the time of closing. The loan agreement contains
certain covenants and ratios that must be maintained. Specifically, the Company
is required to maintain a minimum tangible net worth of $5 million, a senior
debt to tangible net worth ratio of 1 to 1, and a cash flow ratio of 2 to 1. The
first two covenants are effective with the closing of the loan while the cash
flow ratio is effective as of December 31, 1997. The proceeds of the loan were
used to pay off existing debt, trade payables and provide working capital funds.
Additionally, as part of the loan agreement, the Company issued 300,000 five
year warrants to purchase shares of the Company's Common Stock at the closing
market price of the shares on the date of closing. For accounting purposes,
these warrants were deemed to have been issued at fair market value.


The Company paid $80,000 as a cash fee to a finder and the finder's nominee.
Additionally, 100,000 warrants were issued to purchase the Company's Common
Stock at the closing market price of the stock on the date of closing the loan
($1.4375 per share). The cost of the finder's fee is being amortized over the
life of the loan (5 years). For accounting purposes, these warrants were deemed
to have been issued at fair market value.

In connection with the loan from FINOVA, the Company incurred legal expenses,
for both its attorneys and for FINOVA's attorneys (as provided for in the loan
agreement) totaling approximately $49,000. These amounts have been capitalized
and are being expensed over the life of the loan.

                                       F9

<PAGE>   32
From the proceeds of the loan, the Company paid off its loans with First
Security Bank of Nevada (secured term loan and Small Business Administration
loan), its lease with G.E. Capital Corporation financing its aseptic processor,
its telephone system lease, and its fork lift and pallet lift leases. The
Company paid a pre-payment penalty on its lease with G.E. Capital Corporation of
$53,983, which has been expensed during 1996 and is included in the "Other
Income/(Expense)" section contained in the Consolidated Statements of
Operations.

Minimum principal payments due on the loan over the next 5 years are as follows:

<TABLE>
<CAPTION>
                 Year                   Principal Due
                 ----                   -------------
<S>                                      <C>       
                 1997                    $  441,805
                 1998                       591,221
                 1999                       665,739
                 2000                       749,653
                 2001                       551,582
                                         ----------
                 Total Principal         $3,000,000
</TABLE>


                                       F10

<PAGE>   33
<TABLE>
<CAPTION>
LONG-TERM DEBT AND CAPITAL LEASE LIABILITIES           Collateral                December 31, 1996     December 31, 1995
                                                       ----------                -----------------     -----------------
<S>                                                  <C>                             <C>                   <C>
FIRST SECURITY BANK OF NEVADA -
Guaranteed by Messrs. Craig and Scott Nash
Monthly payments of $8,430 for 84 months
ending January 2003. (Prime + 2%)                    Unsecured                        $       -            $ 451,811
                                                                                    
                                                                                    
FIRST SECURITY BANK OF NEVADA                                                       
(Guaranteed by the U.S. Small Business                                              
   Administration)                                                                  
Guaranteed by Messrs. Craig and Scott Nash                                          
Monthly Payments of $10,440 for 120 months           All Assets of                  
ending February 2005.  (Prime + 2 3/4%)              The Company                              -              714,286
                                                                                    
FINOVA CAPITAL CORPORATION                                                          
Monthly payment of $72,065 for 60                    All Assets of                       3,000,000                -
months ending September 2001.  Original              The Company                    
balance $3,000,000 (11.93% interest)                                                
                                                                                    
GENERAL ELECTRIC CAPITAL CORPORATION -                                              
Guaranteed by Messrs. Craig and Scott Nash                                          
Monthly payments of $11,100 for 60 months                                           
ending July 1999.  Original balance $541,605         Stork Processor                           -             402,825
(10.65% Interest)                                                                   
                                                                                    
MCBA, INC. -                                                                        
Monthly lease payments of $3,401 for 36 months       Computer                       
ending June 1997.  Original balance $109,000         Software                              26,700              57,197
(15% Interest)                                                                      
                                                                                    
MEMOREX-TELEX -                                                                     
Monthly lease payments of $1,396 for 36 months       Computer                       
ending June 1997.  Original balance $35,727          Equipment                              12,301            23,808
(24% Interest)                                                                      
                                                                                    
SPRINT/NORTH LEASING                                                                
Monthly lease payments of $533 for 36 months          Telephone                     
ending August 1997.  (12.85% Interest)                System                                   -               9,718
                                                                                    
                                                                                    
ASSOCIATES LEASING -                                                                
Monthly lease payments of $567 for 36 months          Fork Lift Truck/                         -              16,980
ending in September 1998.  (10.5% Interest)           Pallet Lift                   
                                                                                        ----------       -----------
Total Long Term Debt and Capital Lease Liabilities                                       3,039,001         1,676,625
Less:  current portion                                                                     480,810           267,713
                                                                                        ----------       -----------
Long-term debt net of current portion                                                   $2,558,191       $ 1,408,912
                                                                                        ==========       ===========
</TABLE>

The amounts due under the lease obligations are net of interest expense.

Capital lease liabilities and long-term debt as of December 31, 1996 are payable
as follows:

<TABLE>
<S>                                                  <C>      
                           1997                       $ 480,810
                           1998                         591,221
                           1999                         665,739
                           2000                         749,653
                           2001                         551,582

                  Gross Amount                       $3,039,005
                           Less: amount representing
                           capitalized lease interest         4
                                                     ----------
                  Principal Amount                   $3,039,001
</TABLE>



                                       F11

<PAGE>   34
Craig and Scott Nash had guaranteed certain indebtedness of the Company related
to the First Security Bank of Nevada loans, and pledge a total of 500,000
shares of Common Stock of the Company to secure such guarantee. As the
indebtedness was liquidated on October 15, 1996, the 500,000 shares were
returned to Craig and Scott Nash. At that time, Craig and Scott Nash received no
compensation for the risk of such commitment.

4.  MANAGEMENT EMPLOYMENT AND CONSULTING CONTRACTS

The Company has an obligation to make minimum cash payments for management
employment contracts of $456,000 for 1997, $175,250 for 1998, $155,000 for 1999,
and $102,500 for 2000.

During 1995, 411,000 options were issued to consultants for services rendered.
These options expire 5 years from, November 13, 1995, the date of grant. All
options were granted at exercise prices that were equal to or greater than 85%
of the market price of the Company's shares at the time of grant.

Additionally in 1995, the Company issued stock to two employees (total of 40,000
shares) which vest 40%, two years after the date of their employment, and 60%,
five years after their date of employment. Also in 1995, the Company issued an
additional 141,000 options to employees at an exercise price which was based
upon an 85% discount to the market price at the time of grant. Vesting of these
options will occur 40%, two years after the date of their employment and 60%,
five years after their date of employment. Salary expense for these options is
being accrued over the life of the vesting schedules. During 1996, the Company
recognized compensation expense of $182,221 and recorded a corresponding
increase to additional paid-in-capital.

In 1996, the Company issued stock to two employees (total of 40,000 shares)
which vest 40% two years after the date of their employment and 60%, five years
after the date of their employment. During 1996, 180,000 shares of Common Stock
was also issued to Dr. Kouri (refer to Note 12). Also in 1996, the Company
issued an additional 210,000 options to employees at an exercise price which was
based upon 85% discount to the market price at the time of grant. Vesting of
these options will occur 40%, two years after the date of their employment and
60%, five years after their date of employment. Salary expense for these options
is being accrued over the life of the vesting schedules. During 1996, 50,000
options were issued to consultants for services rendered. These options expire 3
years from the dates of grant, June 6, 1996, and October 28, 1996.

5.  1992 STOCK OPTION PLAN

In December 1992, the Company adopted the 1992 Stock Option Plan (the "Plan").
The Plan provides for the granting of non-statutory stock options or incentive
stock options to certain key employees to purchase up to an aggregate of
2,100,000 shares of Common Stock. The option price per share for non-statutory
options must be at least 85% of the fair market value on the date of grant. The
Plan terminates in 2003.

Options are not transferable under the Plan and terminate within specified
periods of time after termination of an optionee's employment.

On November 18, 1993, options to purchase 2,100,000 shares of the Company's
Common Stock were granted to the Company's employees. The schedule below
outlines the amount of options outstanding as of December 31, 1996. These
options have an exercise price of $1.275 and are fully vested. All 1,874,967
options expire in 2003.

<TABLE>
<CAPTION>
                  NAME                    NUMBER OF OPTIONS GRANTED
                  ----                    -------------------------
<S>                                                 <C>    
                  Craig Nash                        768,028
                  Scott Nash                        768,029
                  Other Employees                   338,910
                                                  ---------
 Total Employee Stock Option Plan Options         1,874,967
</TABLE>

                                      F12

<PAGE>   35
6.  OTHER STOCK OPTIONS AND WARRANTS

As of December 31, 1995, the Company had granted the following options to
purchase 2,310,700 shares of its Common Stock, (in addition to those in the 1992
Stock Option Plan, summarized above), at the following exercise prices:

<TABLE>
<CAPTION>
                                                                              # SHARES SUBJECT TO          DATES OF
                                                                                   FORFEITURE               VESTING
                                                                                   ----------               -------
<S>                   <C>                                                     <C>                          <C>
       241,000        shares at $0.25   per share through November 2005                 231,000            1/96-11/00
       125,000        shares at $1.01   per share through June 2005                     112,500             6/95-6/00
       360,000        shares at $1.275 per share through June 1997                      100,000             2/96-6/96
       200,000        shares at $1.44   per share through November 1998                     -0-                Vested
        15,834        shares at $1.50   per share through January 2001                      -0-                Vested
       246,503        shares at $1.65   per share through August 1998                       -0-                Vested
       125,000        shares at $1.70   per share through September 2004                114,584             9/95-9/99
        75,000        shares at $1.75   per share through October 1998                      -0-                Vested
       200,000        shares at $1.75   per share through September 1999                200,000             see below
       200,000        shares at $2.00   per share through November 2000                     -0-                Vested
       296,363        shares at $2.40   per share through April 2000                        -0-                Vested
        40,000        shares at $2.44   per share through July 2000                         -0-                Vested
        50,000        shares at $2.50   per share through July 2000                      25,000                Vested
       100,000        shares at $3.00   per share through December 2000                     -0-                Vested
        36,000        shares at $3.00   per share through July 2000                      15,000             8/95-7/96
</TABLE>


The option to purchase 200,000 shares of Common Stock at $1.75 per share has
been granted to a marketing consultant. The vesting of these options is based on
various levels of performance as per the marketing agreement. Such options may
be compensatory if and when granted based upon the market price of the Company's
stock then prevailing.

During 1996, the Company granted the following options to purchase 854,110
shares of its Common Stock (in addition to those in the 1992 stock option plan
and outstanding options as of December 31, 1995, summarized above) at the
following exercise prices:

<TABLE>
<CAPTION>
                                                                     # SHARES SUBJECT TO       DATES OF
                                                                         FORFEITURE             VESTING
                                                                         ----------             -------
<S>             <C>                                                  <C>                     <C>
      30,000    shares at $0.225 per share through June 1999                   -0-               Vested
      50,000    shares at $0.225 per share through August 2006              50,000            8/96-8/99
     140,000    shares at $0.250 per share through June 2006               140,000            3/96-6/01
     150,000    shares at $1.44 per share through August 1999              150,000            8/96-6/98
      50,000    shares at $1.4375 per share through August 2001                -0-               Vested
     300,000    shares at $1.4375 per share through December 2001              -0-               Vested
      24,110    shares at $1.625 per share through June 1998                12,055            6/96-6/97
      40,000    shares at $1.75 per share through September 1999               -0-            see below
      50,000    shares at $2.00 per share through July 2001                    -0-               Vested
      20,000    shares at $2.40 per share through October 1999                 -0-               Vested
</TABLE>

The options to purchase 40,000 shares of Common Stock at $1.75 per share has
been granted to Arthur Berkowitz for his efforts in the establishment of a
marketing consulting agreement for the Company. These options (20,000 of which
will vest immediately with the remaining vesting based upon the signing of a
marketing agreement) expire on September 24, 1999.



                                      F13
<PAGE>   36
In connection with the private placements of 1,547,975 shares of the Company's
Common Stock in November 1994 and an additional 1,196,125 shares of the
Company's Common Stock in 1995, the Company issued warrants to acquire 877,500
shares and 598,063 shares, respectively, of the Company's Common Stock at an
exercise price of $3.00 per share. The Company has the right to call such
warrants at a call price of $.10 per warrant if, at any time, the current market
price of the Company's Common Stock has been at least $4.00 per share for 30
consecutive days, ending within 15 days of the notice of such call. All
unexercised and uncalled warrants will expire from December 31, 1996 to April
1997 depending on the date of investment. On February 15, 1996, the Company
offered the holders of its warrants (issued in conjunction with private
placements in 1994 and 1995), the opportunity to lower the exercise price of the
warrants from $3.00 to $1.375 per share provided that they exercise at least 60%
of their holdings. The expiration date of the remaining warrants, if any, would
be extended for one year at the same exercise prices. This offer was extended on
March 12, 1996 until March 28, 1996. A total of 613,688 warrants representing
$843,821 were exercised.

The Company also issued to its placement agent and brokers, options to acquire
165,750 shares of the Company's Common Stock at an exercise price of $2.40 per
share in the November 1994 private placement and 110,613 shares of the Company's
Common Stock at an exercise price of $2.40 per share in the 1995 private
placement. These options will expire in November 1999 and March/April 2000,
respectively.


7.   STOCK OPTION AND INCENTIVE PLAN

The Company has stock option plans and other arrangements currently in effect
under which future grants of stock options may be issued to executives, key
employees, and directors. Refer to Notes 5 and 6. The Company has adopted the
disclosure only provisions of SFAS No.123 and is continuing to recognize
compensation expense using the intrinsic value method under APB No.25 as
discussed in Note 2. Had compensation expense for the Company's stock options
been determined based on the fair market value at the grant date for awards in
1995 and 1996, consistent with the provisions of SFAS No. 123, the Company's net
loss and loss per share would have been as follows:

<TABLE>
<CAPTION>
                                               1996                        1995
                                               ----                        ----
<S>                        <C>              <C>                        <C>         
Net Loss:                  as reported      ($4,631,905)               ($3,839,092)
Net Loss:                  pro forma        ($4,636,621)               ($3,864,273)
Loss per Share:            as reported      ($0.27)                    ($0.30)
Loss per Share:            pro forma        ($0.27)                    ($0.30)
</TABLE>

This pro forma impact only takes into account options granted since January 1,
1995. The SFAS No. 123 fair value of each option granted was estimated on the
date of the grant using a number of factors that resulted in a net value of
approximately 60% of the stock price on the grant date.

<TABLE>
<CAPTION>
                                                              Number of
                                                                shares
                                                              ---------
<S>                                                          <C>      
Outstanding at December 31, 1994                              2,209,967
Granted                                                         421,834
Exercised                                                             -
Forfeited                                                             -

Outstanding at December 31, 1995                              2,631,801
Granted                                                         360,000
Exercised                                                             -
Forfeited                                                      (262,500)

Outstanding at December 31,1996                               2,729,301
</TABLE>



                                       F14

<PAGE>   37
8.  PREFERRED STOCK AND POTENTIAL ANTI-TAKEOVER RIGHTS

The Company is authorized to issue 5,000,000 shares of $0.001 par value
preferred stock with the rights, preferences, privileges and restrictions
thereof to be determined by the Board of Directors of the Company. Preferred
stock can be issued without the vote of holders of Common Stock. Rights could be
granted to the holders of preferred stock that could reduce the attractiveness
of the Company as a potential takeover target, make the removal of management
more difficult, or adversely impact the rights of holders of Common Stock.

During 1995, the Company raised $3.5 million through the issuance of Series C
Preferred Stock. During the quarter ended March 31, 1996, the Company raised an
additional $500,000 through a placement pursuant to Regulation S under the
Securities Act of 1933, as amended, of its Series C Preferred Stock, bringing
the total of Series C Preferred Stock issued to $4 million. The Series C
Preferred Stock pays no dividends, but imputes a 6% effective annual rate of
return upon conversion into Common Stock. This return to holders is being
accounted for as a direct reduction to accumulated deficit over the time during
which the preferred stock is outstanding. The conversion rate is determined by
the acquisition value of the preferred stock (plus imputed interest referred to
above) and an 18% discount to the 5 day average market price of the common
shares at the time of exercise. As of July 2, 1996 all of the Series C Preferred
Stock issued had been converted into 3,294,735 shares of Common Stock. The
shareholders had waived their interest in the conversion for all past, present,
and future transactions.

On July 31, 1996, the Company raised $1 million through the sale of its Series E
Preferred Stock to a "Regulation S" investor. The Series E Preferred Stock
imputes an average effective interest rate of 6% which is payable in shares of
the Company's Common Stock on the "Dividend Dates" (August 1, 1997 and August 1,
1998). The Series E Preferred Stock is convertible into common shares based on
discounts to the market price at the time of conversion which range from 15% to
31% depending on the time they are held from the issuance date, (the longer the
stock is held, the deeper the discount). Under this conversion formula, as the
Common Stock price drops, the number of Common Shares into which Series E
Preferred Stock is convertible continues to grow. The number of preferred shares
convertible to common shares is not subject to a ceiling. As of December, 31,
1996, there was $1,000,000 in Series E Preferred Stock outstanding.

The Company's Certificate of Incorporation contains certain provisions designed
to require a beneficial owner of over 25% of the Common Stock to comply with
certain provisions regarding transactions with the Company and membership on the
Board of Directors, or pay certain prices (usually the highest price per share
paid) for the Company's stock in certain business combinations involving the
beneficial owner. These provisions are in addition to those provided by Delaware
law.

9.  EQUITY

During 1995, the Company raised approximately $2.4 million in additional common
equity financing through a private placement which is reflected in the
accompanying financial statements. Each unit was purchased for $50,000. A unit
consisted of 25,000 shares of Common Stock and warrants to purchase 12,500
shares of Common Stock for $3 per share. The warrants expire two years from the
date of investment. Fractional units have also been sold. In addition, the
Company issued to the Placement Agent and brokers 2,500 options to acquire
shares of the Company's Common Stock at a price of $2.40 per share for each unit
sold. These options expire five years from the date of issuance.

On May 10, 1996, the Company offered a private placement of equity securities
with a minimum of $540,000 to a maximum of $2,520,000 (the private placement
provides for an over-subscription of the placement up to $3,000,000 at the
Company's discretion) in units of $45,000. Each unit consisted of 30,000 shares
of the Company's Common Stock and 30,000 warrants to purchase the Company's
Common Stock at a price of $1.60 for a period of six months after the closing of
the private placement. The Company raised $1,912,500 through the private
placement which was closed on July 30, 1996.


                                       F15

<PAGE>   38
During 1996, the Company incurred $207,922 of costs relating to issuances of
stock. These costs have been accounted for as a reduction of Additional Paid-in
Capital.

Please refer to note 6 for a summary of options and warrants outstanding.

10.  DIVIDEND POLICY

Since its inception, the Company has not generated any earnings and has not paid
any dividends on its Common Stock. Payment of future dividends, if any, will be
determined by the Company's Board of Directors based upon a number of
considerations, including the Company's financial condition, capital
requirements, cash flow, profitability, business outlook, contractual
restrictions and other factors. In the foreseeable future, the Company intends
to retain all of its earnings to finance the development and expansion of its
business.

11.  COMMITMENTS AND CONTINGENCIES

The Company has entered into a five year lease for its Las Vegas manufacturing
facility, (with an option to renew the lease for an additional five year
period), which requires monthly payments of $26,576 subject to annual inflation
escalations which commenced in September 1996. During 1996, the Company paid
$311,946 in lease payments for the building. Minimum payments due under the
building lease are as follows:

<TABLE>
<CAPTION>
            Year Ending
            December 31,
            ------------
<S>                                 <C>     
                 1997               $318,912
                 1998               $318,912
                 1999               $159,456
                 2000                    -0-
</TABLE>


The Company has obtained a twelve month option to purchase its current
manufacturing facility for $3,185,000. The Company sub-leased 20,000 square feet
of space in its Las Vegas facility under a one year lease signed in October of
1995 with two, one month renewal options. The Company collected $25,200 in lease
revenue during 1995 and $75,600 during 1996 which amounts are reflected in the
financial statements of the Company.

The Company has also signed an agreement with a firm that will write research
reports on the Company. The contract calls for the issuance of warrants
exercisable at $1.75 per share. These warrants expire two years from the date of
issuance.

The Company is also negotiating with other various parties to enter into
consulting arrangements. The Company will compensate consultants either in cash,
shares of Common Stock, or a combination thereof.

To the extent the fair market value of options issued for services rendered
exceeds exercise prices, the Company is required to recognize compensation
expense.



12. LEGAL PROCEEDINGS

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. SWINNEY ET AL., the Company sought to enforce the legends on
         its stock requiring compliance with 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 supercedeas bond in the amount of $89,695 secured by a certificate of
         deposit, included


                                       F16

<PAGE>   39
         in Deposits and Deferred Assets on the Balance Sheet, to cover its
         potential liability in this case. As the enforceability of the
         Company's legends on its securities was at stake, the Company posted a
         bond and appealed the Nevada District Court's decision. This appeal was
         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
         in 1995. Subsequent to December 31, 1996, this dispute was resolved.
         The final settlement amount was $69,000.

         CROWN V. ROLFENADE ET AL., was filed by the Company, in March, 1995,
         and subsequently amended to incorporate all of the defendant "alter
         egos" in September 1995. The action is for breach of contract,
         misrepresentation, fraud, and alter ego. Rolfenade warranted that the
         packaging machine would be in compliance with F.D.A. requirements. The
         packaging machine was not in compliance with the applicable regulations
         and the Company has made substantial modifications to the filler to
         bring it into compliance. The Company has served all defendants under
         the Hague Convention. Other defendants named in the suit filed a Motion
         to Quash Service which was lost. They appealed to the Nevada Supreme
         Court. Their appeal was denied. They have since filed an answer. The
         Company cannot predict the outcome of its claims.

         CROWN V. LLOYDS On August 8, 1996, a settlement was reached whereby
         Lloyds would reduce its claim from $123,000 to $35,000 which Crown
         subsequently paid on August 8, 1996 with complete releases on both
         sides.

         On September 9, 1996, the Company entered into a settlement agreement
         with Dr. Kouri to settle all claims, demands and/or causes of action
         which may exist between them, whether known, unknown, or suspected
         relating to a claim by Dr. Kouri to 25% ownership interest in the
         Company. Under the Settlement Agreement, the Company has agreed, among
         other things, to provide to Dr. Kouri 180,000 shares of Common Stock.
         The Company has further agreed to include these shares in the next
         registration statement which the Company would use its best efforts to
         file within 30 days from the date of the Settlement Agreement. In
         return, Dr. Kouri has agreed to enter into a non-assignable four year
         marketing agreement with the Company pursuant to which Dr. Kouri will
         assist the Company in marketing its products. The Company has valued
         these shares at $225,000 and is amortizing the cost over the four year
         period of the marketing agreement.


13.  SUBSEQUENT EVENTS

Subsequent to December 31, 1996, the following events occurred:

                  (i) On February 28, 1997, the Company announced a three-year
                      agreement with renewal options with McKesson Corporation's
                      U.S. Health Care unit. The agreement calls for McKesson to
                      distribute Crown's liquid nutritional and dietary products
                      to the home health care, hospital, and nursing home
                      markets. Management believes that, while this best effort
                      agreement will produce revenues growing to $1.5 million
                      per month during the ensuing months, there can be no
                      assurances that this estimate will be reached. The
                      agreement has a thirty day cancellation provision.

                  (ii)On March 4, 1997, the Company announced that Crown and
                      Tufts University had created an alliance in human
                      nutrition to pursue a variety of joint activities in the
                      area of nutritional product research, education, and
                      public information dissemination. Specific activities of
                      the initiative will include the formation of a Crown\Tufts
                      steering committee to be guided by a Tufts Associate Dean,
                      and the establishment of graduate fellowships to be funded
                      by Crown for their advanced graduate students studying
                      human nutrition science. Crown will contribute $80,000
                      during the first


                                       F17

<PAGE>   40
                      year, and if continued, $100,000 each following year for
                      four years. The agreement is a year to year obligation
                      with cancellation clauses for both parties.

                (iii) On March 7, 1997, the Company raised $3 million through
                      the sale pursuant to Regulation S under the Securities Act
                      of 1933, as amended, of its Series E Preferred Stock. The
                      Series E Preferred Stock imputes an average effective
                      interest rate of 6% which is payable in shares of the
                      Company's Common Stock on the "Dividend Dates", (August 1,
                      1997 and August 1, 1998). The Series E Preferred Stock is
                      convertible into common shares at a rate equal to 10,000
                      divided by the market value of the Common Stock adjusted
                      by a discount factor which ranges from 15% to 31%
                      depending on the time the shares are held from the
                      issuance date (the longer the stock is held,the deeper the
                      discount, unless the Common Stock price falls below $0.75,
                      in which case the discount no longer applies). Under this
                      conversion formula, as the Common Stock price drops, the
                      number of Common Shares into which Series E Preferred
                      Stock is convertible continues to grow. The number is not
                      subject to a ceiling. A total of 200,000 five year options
                      to purchase the Company's Common Stock at $2.50 per share
                      were issued to two finders for their role in raising these
                      funds.

                 (iv) On April 9, 1997, the Company announced the authorization
                      of expenditures up to $500,000 for purchases of its common
                      stock to be retained as treasury stock. The authorization
                      to make these purchases may be discontinued at any time
                      and does not constitute a commitment by the Company to buy
                      a specific amount of its shares.

         Based upon the above cash proceeds provided by the sale of preferred
         stock offset by the required and intended use of proceeds, losses
         incurred since December 31, 1996, and anticipated results of operations
         expected to be incurred during the remainder of 1997, management of the
         Company believes that sufficient cash resources are available to enable
         the Company to continue in existence through at least December 31,
         1997.





                                       F18


<PAGE>   41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of Crown Laboratories, Inc.:

We have audited the accompanying consolidated balance sheets of Crown
Laboratories, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Crown Laboratories, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

                                            s/Arthur Andersen LLP
                                            ------------------------------------
                                              ARTHUR ANDERSEN LLP

New York, New York
April 14, 1997


                                       F19


<PAGE>   42
                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


As independent public accountants, we hereby consent to the incorporation of our
report dated April 14, 1997, included in this form 10-KSB into the Company's
previously filed Form S-3 Registration Statements (File Nos.
33-59055 and 33-65421).

                                            s/ Arthur Andersen LLP
                                            ------------------------------------
                                               ARTHUR ANDERSEN LLP

New York, New York
April 14, 1997


                                      F20