<PAGE>
Form 10-QSB-Quarterly or Transitional Report
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark one)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from _______ to________
Commission file number 0-19227
COSMETIC GROUP U.S.A., INC.
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 95-4040591
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11312 Penrose Street, Sun Valley, CA 91352
(Address of principal executive offices)
(818) 767-2889
(Issuer's telephone number)
Check whether the issuer (1) filed all 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
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 5,063,756 shares of
common stock outstanding at July 31, 1996.
<PAGE>
INDEX
COSMETIC GROUP U.S.A., INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheet - June 30, 1996
Condensed consolidated statements of operations - Three months
and six months ended June 30, 1996 and 1995
Condensed consolidated statements of cash flows - Six months ended
June 30, 1996 and 1995
Notes to condensed consolidated financial statements - June 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1.
COSMETIC GROUP U.S.A., INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1996
ASSETS - Note 3
CURRENT ASSETS
Cash $ 157,000
Accounts receivable, less allowance of $98,000 1,782,000
Inventory - Note 2 2,058,000
Prepaid expenses and other 660,000
Due from officer/director/shareholder 69,000
---------
TOTAL CURRENT ASSETS 4,726,000
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization of $1,527,000 2,274,000
OTHER ASSETS 211,000
---------
$7,211,000
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Due under finance agreement $ 849,000
Accounts payable 1,265,000
Accrued liabilities 204,000
Loan payable - Note 3 150,000
Current portion of notes payable 311,000
---------
TOTAL CURRENT LIABILITIES 2,779,000
NOTES PAYABLE, less current portion 161,000
DEFERRED INCOME TAXES 20,000
SHAREHOLDERS' EQUITY - Notes 3 and 4
Preferred stock, $.01 par value, authorized
1,000,000 shares, none issued -
Common stock, no par value, authorized 25,000,000
shares, issued and outstanding 5,063,756 shares 6,463,000
Retained deficit (2,212,000)
----------
4,251,000
---------
$7,211,000
=========
See accompanying notes.
<PAGE>
COSMETIC GROUP U.S.A., INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Net sales $3,280,000 $1,547,000 $6,740,000 $2,901,000
Cost of sales 1,781,000 1,484,000 3,923,000 2,412,000
--------- --------- --------- ---------
Gross profit 1,499,000 63,000 2,817,000 489,000
Selling, general and
administrative expenses 1,300,000 876,000 2,448,000 1,431,000
Interest expense 107,000 106,000 206,000 154,000
--------- --------- --------- ---------
1,407,000 982,000 2,654,000 1,585,000
--------- --------- --------- ---------
Income (loss) before
income taxes 92,000 (919,000) 163,000 (1,096,000)
Income taxes - - - -
--------- --------- --------- ---------
Net income (loss) $ 92,000 $ (919,000) $ 163,000 ($1,096,000)
========= ========= ========= =========
Net income (loss) per share $ .02 ($ .23) $ .03 ($ .29)
===== ===== ===== =====
Weighted average number of
common shares outstanding 5,057,089 3,992,701 5,056,673 3,792,208
========= ========= ========= =========
See accompanying notes.
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COSMETIC GROUP U.S.A., INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
1996 1995
---------- ---------
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities $ 17,000 $(1,219,000)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (376,000) (57,000)
---------- ---------
Net cash used in investing activities (376,000) (57,000)
FINANCING ACTIVITIES
Issuance of common stock 15,000 773,000
Registration costs (35,000) -
Loan from officer/director/shareholder - 36,000
(Loan) repayment of loan to officer/director/
shareholder (2,000) 27,000
Net proceeds from short term receivable line 244,000 398,000
Other borrowings 412,000 -
Repayment of borrowings (140,000) (905,000)
Net cash provided by financing
activities 494,000 329,000
--------- ---------
Net increase (decrease) in cash 135,000 (947,000)
Cash at beginning of period 22,000 1,026,000
---------- ---------
Cash at end of period $ 157,000 $ 79,000
========= =========
See accompanying notes.
<PAGE>
COSMETIC GROUP U.S.A., INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. Basis of Preparation
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and, for the 1996 period, its subsidiary. The
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information pursuant to Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months and six months ended June 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information refer to the consolidated
financial statements and footnotes thereto included in Form 10-KSB for the year
ended December 31, 1995 filed by the Company.
2. Inventory
Inventory at June 30, 1996 consists of:
Raw materials and components $1,405,000
Work-in-process 297,000
Finished goods 356,000
----------
$2,058,000
===========
3. Debt
In May 1996, the Company terminated its Account Purchase and Finance Agreement
which provides the Company with accounts receivable financing and entered into a
new accounts receivable financing arrangement. The new Accounts Receivable
Security Agreement provided for advances of up to 75% of eligible accounts
receivable with a maximum advance of $1,000,000. Obligations of the Company bear
interest at 16% per annum, which rate may increase if the prime rate exceeds
8.25%. The initial proceeds of the new financing was used to repay the balance
due under the former financing.
The Company's obligations to its lenders are secured by a security interest in
substantially all of the assets of the Company and its subsidiary.
(continued)
<PAGE>
COSMETIC GROUP U.S.A., INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 (CONTINUED)
3. Debt (continued)
In June 1996, the Company borrowed $150,000 from a shareholder that is
affiliated with a Director. The loan is due in August 1996 and bears interest at
the rate of 10% a year. As additional incentive for making the loan, the Company
issued the individual 7,500 shares of the Company's common stock. In the event
of default by the Company, the individual may convert the loan into 60,000
shares of the Company's common stock.
4. Shareholders's Equity
During the six months ended June 30, 1996, the Company charged common stock
$35,000 for costs incurred in connection with the registration of common stock
sold in private placements.
5. Litigation
The Company is a defendant in a lawsuit filed in March 1996 in the United States
District Court for the District of Minnesota. The complaint alleges that a
portion of a product formulated and manufactured by the Company for the
plaintiff developed a mold which discolored the product and rendered it
defective. The product was included in a line of skin care products introduced
by the plaintiff in late 1994 or early 1995. The plaintiff recalled any product
shipped and the Company, at the request of the plaintiff, promptly replaced the
discolored product. The Company believes that the growth of the mold and the
resulting discoloration were caused by a component included in the product at
the request of the plaintiff, and it is the Company's understanding that the
replacement product, which was reformulated in cooperation with the plaintiff,
did not discolor or develop any mold.
In its complaint, the plaintiff alleges that, following the discovery of the
discolored product, its independent distributors shunned the entire skin care
line and lost confidence in the plaintiff, thereby adversely affecting sales of
its other products, and that, as a result, the plaintiff was forced to withdraw
and discontinue the entire skin care line. The complaint includes causes of
action for breach of implied warranties, negligent formulation and other causes
of action and seeks incidental and consequential damages in an unspecified
amount, including damages for loss of sales, income and profits and damage to
goodwill and business reputation. The Company believes that it has defenses
against the plaintiff's claims and intends to vigorously defend the action.
<PAGE>
Item 2.
COSMETIC GROUP U.S.A., INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended. There are certain important
factors that could cause future results to differ materially from those
anticipated by management in the forward-looking statements included in the
following discussion. Among these important factors are (a) the Company's
dependence on a small number of customers, (b) recent operating losses and cash
flow deficiencies, (c) risks associated with the introduction of the Company's
Zegarelli product line, including the need to increase sales levels and expand
the Company's distribution network, (d) the Company's dependence on key
executives, (e) the variability of quarterly results, (f) the competitive
environment in the Company's markets, (g) the Company's reliance on a single
manufacturing facility, (h) product liability risks, (i) government regulation,
(j) control by management, and (k) volatility in the price of the Company's
common stock, including the possible effect on the market price of the
availability for sale and actual sales of currently outstanding shares of common
stock and shares of common stock issuable upon the exercise of outstanding
options and warrants.
GENERAL
The Company operates in two segments, contract manufacturing and the manufacture
and sale of professional hair care products under the "Zegarelli" name. Through
its contract manufacturing operations, the Company custom develops, formulates
and manufactures a wide range of color cosmetics and other personal care
products for customers that market products for sale under their own brand
names. In addition to its operations as a contract manufacturer, the Company
recently developed with Arnold Zegarelli, a professional hair designer, a line
of professional hair care products which are manufactured by the Company and
marketed to beauty salons and hair care professionals. Sales of the Zegarelli
product line commenced in the second quarter of 1995.
The Company continues to devote substantial resources to the introduction and
marketing of its Zegarelli product line. The current sales level of the
Zegarelli line are not sufficient to cover related costs and expenses. The
Company's ability to increase sales of the Zegarelli line to the extent
necessary to meet ongoing costs and expenses is dependent upon an expansion of
the Company's distribution network and increased market acceptance of the
product line. There can be no assurance that the Company will be able to
successfully establish and maintain the necessary distribution network for the
Zegarelli product line or otherwise successfully compete in the professional
hair care products market.
<PAGE>
RESULTS OF OPERATIONS
Net sales for the quarter ended June 30, 1996 increased $1,733,000 (112%) and
net sales for the six months ended June 30, 1996 increased $3,839,000 (132%)
from the comparable periods of 1995 as the Company's revenues continue to
recover from the depressed levels in the first half of 1995. The increase for
the three month period is primarily attributable to increased levels of sales to
Avon Products ("Avon"), the Company's largest customer for its contract
packaging business, and to infomercial marketing customers and the addition of a
major new customer. The increase for the six month period is primarily
attributable to the above and sales of Zegarelli hair care products, which
commenced in the second quarter of 1995. Sales of Zegarelli hair care products
and current levels of sales in the contract packaging business are expected to
continue for the balance of the year. For the three month period, sales to Avon
were $954,000 in 1996 compared to $446,000 in 1995
and for the six month period were $1,945,000 in 1996, compared to $1,049,000 in
1995. Sales to the infomercial marketing customers and a major new customer were
$1,259,000 in the second quarter of 1996, and $2,548,000 for the six months
ended June 30, 1996 and were immaterial in the comparable periods of 1995. Sales
of Zegarelli hair care products amounted to $630,000 for the three months ended
June 30, 1996 and $1,405,000 for the six months ended June 30, 1996; for the
three months ended June 30, 1995 sales of Zegarelli products were approximately
$700,000.
Cost of sales increased $297,000 in the three months ended June 30, 1996 and
$1,511,000 in the six months ended June 30, 1996 as compared with the same
periods last year. As a percentage of net sales, cost of sales was 54% for the
three months ended June 30,
1996 and 58% for the six months ended June 30, 1996, compared to 96% for the
three months ended June 30, 1995 and 83% for the six months ended June 30, 1995.
The decrease in the cost of sales percentage is primarily attributable to
efficiencies associated with significantly higher sales levels and changes in
the sales mix.
Selling, general and administrative expenses were $1,300,000 for the three
months ended June 30, 1996 and $2,448,000 for the six months ended June 30,
1996, compared to $876,000 and $1,431,000, respectively for the same periods in
1995. These amounts represent an increase of $424,000 (48%) for the three month
period and $1,017,000 (71%) for the six month period. As a percentage of net
sales, these expenses were 40% and 36% for the three months and six months ended
June 30, 1996, compared to 57% and 49% for the same periods last year. The
dollar increase is primarily attributable to expenses in connection with the
development and marketing of the Zegarelli hair care line, including the
addition of executive and support personnel required for its current and
anticipated operations. The decrease in the percentage to net sales is the
result of significantly higher sales in the 1996 periods, with a portion of
expenses being of a fixed nature.
<PAGE>
Interest expense was $107,000 for the three months ended June 30, 1996 and
$206,000 for the six months ended June 30, 1996. For the comparable periods in
1995 such expenses were $106,000 and $154,000, respectively. The increase for
the six month period is attributable to the higher interest rate and greater
balances outstanding under the accounts receivable credit facility and term
loan, partially offset by the elimination of interest on the convertible
subordinated notes which were converted in the latter part of 1995. In May 1996,
the accounts receivable financing was replaced with a new line which provides a
lower interest cost.
For the three months and six months ended June 30, 1996 the Company recorded net
income of $92,000 and $163,000, respectively. For the comparable periods in
1995, the Company had a net loss of $919,000 and $1,096,000. The improvement in
operating results is the result of higher sales and the resulting gross profit,
offset by the increased selling, general and administrative expenses and
interest expense. Net income per share was $.02 for the three months ended June
30, 1996 and $.03 for the six months ended June 30, 1996. Net loss per share was
($.23) for the three months ended June 30, 1995 and ($.29) for the six months
ended June 30, 1995. The average number of shares used in computing per share
amounts increased as a result of private placements of common stock and
conversion of convertible debt in the latter part of 1995.
LIQUIDITY AND CAPITAL RESOURCES
Working capital amounted to $1,947,000 at June 30, 1996, an increase of $56,000
from December 31, 1995. For the six months ended June 30, 1996, operations
resulted in cash flow of $17,000, $376,000 was invested in new equipment,
borrowings, net of repayments, were $516,000 and registration costs amounted to
$35,000.
The Company believes that funds generated from operations and available
borrowings under its credit arrangements will be sufficient to finance its
working capital and capital expenditure requirements for the next twelve months.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
Report on Form 8-K was filed under date of May 10, 1996
with respect to Item 5.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereto
duly authorized.
COSMETIC GROUP U.S.A., INC.
/s/ Jennifer J. Eggers
---------------------------
Date: , 1996 Jennifer J. Eggers
Chief Financial Officer
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<PAGE>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 157,000
<SECURITIES> 0
<RECEIVABLES> 1,880,000
<ALLOWANCES> 98,000
<INVENTORY> 2,058,000
<CURRENT-ASSETS> 4,726,000
<PP&E> 3,801,000
<DEPRECIATION> 1,527,000
<TOTAL-ASSETS> 7,211,000
<CURRENT-LIABILITIES> 2,779,000
<BONDS> 0
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<COMMON> 6,463,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,211,000
<SALES> 6,740,000
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<CGS> 3,923,000
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