<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark one)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
( ) 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: 5,183,756 shares of common
stock outstanding at April 15, 1997.
Transitional Small Business Disclosure Format (check one) Yes No X
<PAGE> 2
INDEX
COSMETIC GROUP U.S.A., INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheet - March 31, 1997
Condensed consolidated statements of income - Three months ended March 31,
1997 and 1996
Condensed consolidated statements of cash flows - Three months ended March
31, 1997 and 1996
Notes to condensed consolidated financial statements - March 31, 1997
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> 3
PART I. FINANCIAL INFORMATION
Item 1.
COSMETIC GROUP U.S.A., INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, 1997
ASSETS - Note 3
<TABLE>
<S> <C>
CURRENT ASSETS
Cash $ 91,000
Accounts receivable, less allowance of $135,000 1,450,000
Inventory - Note 2 3,494,000
Prepaid expenses and other 689,000
Due from officer/director/shareholder 73,000
-----------
TOTAL CURRENT ASSETS 5,797,000
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization of $1,887,000 2,215,000
OTHER ASSETS 206,000
-----------
$ 8,218,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Due under finance agreement $ 601,000
Short term note payable - Note 3 200,000
Accounts payable 1,800,000
Accrued liabilities 369,000
Current portion of long term debt 225,000
-----------
TOTAL CURRENT LIABILITIES 3,195,000
LONG TERM NOTES PAYABLE, less current portion 105,000
10% SUBORDINATED CONVERTIBLE NOTES 300,000
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 5,183,756 shares 6,508,000
Retained deficit (1,890,000)
-----------
4,618,000
-----------
$ 8,218,000
===========
</TABLE>
See accompanying notes.
<PAGE> 4
COSMETIC GROUP U.S.A., INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
-----------------------
<S> <C> <C>
Net sales $2,783,000 $3,460,000
Cost of sales 1,497,000 2,142,000
---------- ----------
Gross profit 1,286,000 1,318,000
Selling, general and
administrative expenses 1,138,000 1,148,000
Interest expense 68,000 99,000
---------- ----------
1,206,000 1,247,000
---------- ----------
Income before income taxes $ 80,000 $ 71,000
Income taxes - -
---------- ----------
Net income $ 80,000 $ 71,000
========== ==========
Net income per share $ .02 $ .01
========== ==========
Weighted average number of
common shares outstanding 5,173,756 5,056,256
========== ==========
</TABLE>
See accompanying notes.
<PAGE> 5
COSMETIC GROUP U.S.A., INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating
activities $ 391,000 $ 8,000
INVESTING ACTIVITIES
Purchase of property, plant and equipment (56,000) (203,000)
--------- ---------
Net cash used in investing activities (56,000) (203,000)
FINANCING ACTIVITIES
Expenses paid by issuing common stock 30,000
Expenses for registration of common stock
sold in 1995 private placements (2,000) (35,000)
Loan to officer/director/shareholder (1,000) (1,000)
Net (payments) proceeds under finance
agreement (443,000) 189,000
Other borrowings 237,000 97,000
Repayment of borrowings (132,000) (48,000)
--------- ---------
Net cash (used in) provided by
financing activities (311,000) 202,000
--------- ---------
Net increase in cash 24,000 7,000
Cash at beginning of period 67,000 22,000
--------- ---------
Cash at end of period $ 91,000 $ 29,000
========= =========
</TABLE>
See accompanying notes.
<PAGE> 6
COSMETIC GROUP U.S.A., INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,1997
1. Basis of Preparation
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and 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 ended March 31, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. For further
information refer to the consolidated financial statements and footnotes thereto
included in Form 10-KSB for the year ended December 31, 1996 filed by the
Company.
2. Inventory
Inventory at March 31, 1997 consists of:
<TABLE>
<S> <C>
Raw materials and components $1,684,000
Work-in-process 998,000
Finished goods 812,000
----------
$3,494,000
==========
</TABLE>
3. Debt
In March 1997 the Company borrowed $200,000, of which $100,000 is due in May
1997 and the balance in June 1997. Interest is at the rate of 10% a year. As
additional consideration for the loan, the Company issued the lender 10,000
shares of common stock. The fair market value of the shares are being charged to
interest expense over the term of the loan. The proceeds of the loan were used
to finance short term inventory increases.
The Company's obligations to its lenders (other than the above) are secured by a
security interest in substantially all of the assets of the Company and its
subsidiary.
4. Shareholders's Equity
During the three months ended March 31, 1997 the Company issued 20,000 shares of
common stock for the settlement of an obligation and for the purpose discussed
in Note 3. above.
<PAGE> 7
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, in 1994, the
Company 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 Company believes that it now has in
place the promotional programs and materials that are required to support its
marketing efforts.
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> 8
RESULTS OF OPERATIONS
Net sales for the quarter ended March 31, 1997 were $677,000 (20%) less than net
sales for the same quarter of last year. The decrease is attributable to lower
sales of approximately $560,000 to the Company's largest contract manufacturing
customer and lower sales of approximately $200,000 of Zegarelli products. For
the three months ended March 31, 1997 the two largest customers accounted for
12% and 10% of net sales. For the three months ended March 31, 1996, the four
largest customers accounted for 29%, 24%, 21% and 10% of net sales. The Company
believes that the current quarter reduction of sales to the largest contract
customer is a temporary situation and that sales will shortly increase to the
prior level.
Cost of sales decreased $645,000 (30%) in the three months ended March 31, 1997
as compared with the same period last year. As a percentage of net sales, cost
of sales was 54% for the three months ended March 31, 1997, compared to 62% for
the three months ended March 31, 1996. The decrease in the cost of sales
percentage is primarily attributable to increased margins on products
manufactured for new customers and the elimination or reduction of low margin
products.
Selling, general and administrative expenses were approximately the same for the
quarter ended March 31, 1997 ($1,138,000) and the comparable quarter of last
year ($1,148,000). As a percentage of net sales such expenses increased to 41%
in the current quarter from 33% for the same quarter of last year. The
percentage increase results because most of the expenses are fixed.
Interest expense was $68,000 for the three months ended March 31, 1997 compared
to $99,000 for the same three months of 1996. The decrease of $31,000 is
attributable to the lower interest rate under the accounts receivable credit
facility which replaced the previous accounts receivable line in May 1996 offset
by the interest on new debt.
For the three months ended March 31, 1997, the Company recorded net income of
$80,000 compared to net income of $71,000 for the three months ended March 31,
1996. Although net sales for the current quarter were less than that of the same
quarter of last year, an improvement on gross profit and reduction of interest
expense resulted in a small increase in net income in the 1997 quarter. Net
income per share was $.02 for the three months ended March 31, 1997 and $.01 for
the three months ended March 31, 1996. The average number of shares used in
computing per share amounts was approximately the same for both quarters.
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
Working capital amounted to $2,602,000 at March 31, 1997, an increase of
$118,000 from December 31, 1996. For the three months ended March 31, 1997,
operations resulted in cash flow of $391,000 compared to $8,000 for the same
period of 1996. Operating cash flow for the 1997 quarter resulted from net
income plus depreciation and the reduction of accounts receivable, offset by
increases in inventory, prepaid expenses, etc. and reductions in accounts
payable and accrued expenses. In the current quarter $56,000 was invested in new
equipment, borrowings amounted to $237,000 (of which $200,000 was due within
three months), the amount due under the finance agreement was reduced $443,000,
repayment of other borrowings were $132,000 and $30,000 of common stock was used
for the payment of expenses.
The Company believes that funds generated from operations, borrowings under its
credit facilities will be sufficient to finance its working capital and capital
expenditure requirements through the end of 1997. In addition, in order to take
advantage of business opportunities, the Company may consider raising additional
funds from time to time through the private placement of debt or equity
securities.
<PAGE> 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during this quarter.
<PAGE> 11
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: April 24, 1997 ____________________________
Jennifer J. Eggers
Chief Financial Officer and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 91,000
<SECURITIES> 0
<RECEIVABLES> 1,585,000
<ALLOWANCES> 135,000
<INVENTORY> 3,494,000
<CURRENT-ASSETS> 5,797,000
<PP&E> 4,102,000
<DEPRECIATION> 1,887,000
<TOTAL-ASSETS> 8,218,000
<CURRENT-LIABILITIES> 3,195,000
<BONDS> 0
0
0
<COMMON> 6,508,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,218,000
<SALES> 2,783,000
<TOTAL-REVENUES> 2,783,000
<CGS> 1,497,000
<TOTAL-COSTS> 1,138,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,000
<INCOME-PRETAX> 80,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,000
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
