<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 June 30, 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: 5,755,438 shares of common
stock outstanding at August 1, 1997.
Transitional Small Business Disclosure Format (check one) Yes No X
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INDEX
COSMETIC GROUP U.S.A., INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheet - June 30, 1997
Condensed consolidated statements of operations - Three months and six months
ended June 30, 1997 and 1996
Condensed consolidated statements of cash flows - Six months ended June 30,
1997 and 1996
Notes to condensed consolidated financial statements - June 30, 1997
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 2. Change in Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Agreement in Principle dated May 30, 1997 between Registrant
and CGUSA LLC.
(b) There were no reports filed on Form 8-K during the quarter ended
June 30, 1997
SIGNATURES
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1.
COSMETIC GROUP U.S.A., INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1997
<TABLE>
ASSETS - Note 3 and 5
CURRENT ASSETS
<S> <C>
Cash $ 8,000
Accounts receivable, less allowance of $49,000 1,273,000
Inventory - Note 2 3,590,000
Prepaid expenses and other 662,000
Due from officer/director/shareholder 74,000
---------
TOTAL CURRENT ASSETS 5,607,000
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization of $2,009,000 2,093,000
OTHER ASSETS 306,000
$8,006,000
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Due under finance agreement $ 574,000
Short term note payable - Note 3 100,000
Accounts payable 1,814,000
Accrued liabilities 342,000
Current portion of long term debt 323,000
---------
TOTAL CURRENT LIABILITIES 3,153,000
LONG TERM NOTES PAYABLE, less current portion 304,000
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 5,755,438 shares 7,228,000
Retained deficit (2,979,000)
4,249,000
$8,006,000
==========
</TABLE>
See accompanying notes.
3
<PAGE> 4
COSMETIC GROUP U.S.A., INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996*
----------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales $ 439,000 $ 630,000 $1,003,000 $1,405,000
Cost of sales 226,000 302,000 492,000 734,000
--------- --------- ------- ---------
Gross profit 213,000 328,000 511,000 671,000
Selling, general and
administrative expenses 1,265,000 1,133,000 2,039,000 1,989,000
Interest expense 47,000 73,000 94,000 139,000
--------- --------- --------- ---------
1,312,000 1,206,000 2,133,000 2,128,000
--------- --------- --------- ---------
Loss from continuing
operations before
income taxes (1,099,000) (878,000) (1,622,000) (1,457,000)
Income taxes - - - -
--------- --------- --------- -------
Loss from continuing
operations (1,099,000) (878,000) (1,622,000) (1,457,000)
Income from operations
of discontinued
Contract Packaging
Business - Note 5 10,000 970,000 613,000 1,620,000
----------- -------- --------- ---------
Net income (loss) $(1,089,000) $ 92,000 $(1,009,000) $ 163,000
============ ========== ============ ==========
Per share:
Loss from continuing
operations $(.21) $(.17) $(.31) $(.29)
Income from discontinued
operations - .19 .12 .32
------ ------ ------ -----
Net income (loss) $(.21) $ .02 $(.19) $ .03
====== ===== ====== =====
Weighted average number
of common shares
outstanding 5,356,938 5,057,089 5,265,768 5,056,673
========= ========= ========= =========
</TABLE>
* - Restated - Note 1
See accompanying notes.
4
<PAGE> 5
COSMETIC GROUP U.S.A., INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash (used in) provided by
operating activities $(581,000) $ 17,000
INVESTING ACTIVITIES
Purchase of property, plant and equipment (56,000) (376,000)
--------- ---------
Net cash used in investing activities (56,000) (376,000)
FINANCING ACTIVITIES
Issuance of common stock 748,000 15,000
Expenses for registration of common stock
sold in 1995 private placements (35,000)
Loan to officer/director/shareholder (2,000) (2,000)
Net (payments) proceeds under finance
agreement (470,000) 244,000
Other borrowings 697,000 412,000
Repayment of borrowings (395,000) (140,000)
--------- ---------
Net cash provided by (used in)
financing activities 578,000 494,000
--------- ---------
Net increase (decrease) in cash (59,000) 135,000
Cash at beginning of period 67,000 22,000
--------- ---------
Cash at end of period $ 8,000 $ 157,000
========= =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
COSMETIC GROUP U.S.A., INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 and six months ended June 30, 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.
As discussed in Note 5, the Company has entered into an agreement for the sale
of its Contract Packaging Business. The operations of the Contract Packaging
Business is reported as discontinued operations in the accompanying statements
of operations for all periods. The statement of operations for the 1996 periods
have been restated therefor.
2. Inventory
Inventory at June 30, 1997 consists of:
<TABLE>
<S> <C>
Raw materials and components $1,983,000
Work-in-process 949,000
Finished goods 658,000
$3,590,000
===========
</TABLE>
3. Debt
In March 1997 the Company borrowed $200,000, of which $100,000 was due and paid
in May 1997 and the balance, which was originally due in June 1997 was extended
to August 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 is being charged to interest
expense over the original term of the loan. The proceeds of the loan were used
to finance short term inventory increases.
In June 1997, the Company borrowed an additional $385,000 under its equipment
loan. The new loan is payable in monthly installments of approximately $18,000
plus interest at 4 1/2% above the prime rate and a monthly service charge of
0.4% of the outstanding principal balance.
The Company's obligations to its lenders (other than that referred to in the
first paragraph above) are secured by a security interest in substantially all
of the assets of the Company and its subsidiary.
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4. Shareholders's Equity
During the six months ended June 30, 1997 common stock was issued as follows:
<TABLE>
<CAPTION>
Shares Amount
------ ------
<S> <C> <C>
Settlement of an obligation 11,682 $ 20,000
Additional consideration for loan 10,000 10,000
Exercise of stock options 45,000 59,000
Exercise of warrants, less expenses 525,000 661,000
------- -------
Total 591,682 $750,000
======= ========
</TABLE>
The above warrants were issued as part of warrants for 600,000 shares in
connection with private placements, and originally had an exercise price of
$3.75 per share. In May, 1997 the exercise price was reduced to $1.30 per share.
As a result of the issuance of shares during the six months ended June 30, 1997,
additional options were granted to Sally Beauty Company ("SBC") and, at June 30,
1997, there were outstanding 571,644 options issued to SBC. The options are
exercisable at $1.23 to $2.06 per share and expire in May 2000.
At June 30, 1996, there were outstanding, as adjusted, 506,756 warrants issued
in connection with the 1994 public offering at an adjusted exercise price of
$2.96 per share. The warrants expire in July 1999.
5. Sale of Contract Packaging Business
On May 30, 1997, the Company entered into an Agreement in Principle which, among
other things, provided for the sale by the Company of the assets and business of
its Contract Packaging Business to CGUSA LLC, a newly-formed privately held New
Jersey limited liability company ("CGUSA"). Such assets and business constitute
the major portion of the Company's assets and business. On July 24, 1997, the
Company and CGUSA entered into an Asset Purchase Agreement pursuant to which the
Company proposes to sell to CGUSA the aforementioned assets and business. The
purchase price, subject to adjustment, is $7,600,000, consisting of $4,100,000
cash and a 10% subordinated promissory note for $3,500,000. The note is payable
in annual installments of $500,000, commencing one year after closing of the
transaction. For financial reporting purposes (and assuming no adjustment to the
purchase price), the Company plans to reduce the original carrying amount of the
note to $2,426,000 to provide an effective yield of 20% to the Company.
The purchase price is subject to upward or downward adjustment in the event that
at closing, the net assets (i.e. total assets acquired, less assumed
liabilities) is more or less than $4,400,000. The Company believes that the sale
will result in a gain.
Concurrently with the signing of the Asset Purchase Agreement, CGUSA loaned the
Company $700,000. The loan provides for interest at the rate of 10% a year and
is collateralized by liens on substantially all assets of the Company, which
lien is subordinate to the liens of the Company's existing secured creditors.
The loan, together with accrued interest, is payable at the earlier of closing,
termination of the Asset Purchase Agreement or December 31, 1997. Proceeds of
the loan may be used only to fund the Contract Packaging Business. The loan
places certain restrictions of the use of cash flow from the Contract Packaging
Business and
7
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5. Sale Of Contract Packaging Business (continued)
limits additional borrowings by the Company.
Closing of the Asset Purchase Agreement is subject, among other matters, to
clearance of the Company's proxy materials with the Securities and Exchange
Commission and approval by the Company's shareholders.
A summary of the assets to be purchased and liabilities which would be assumed
of the Contract Packaging Business at June 30, 1997 included in the accompanying
consolidated balance sheet is as follows:
<TABLE>
<S> <C>
Current assets $4,128,000
Property, plant and equipment 2,010,000
Other assets 66,000
----------
Total assets 6,204,000
----------
Current liabilities 1,500,000
Long-term debt 304,000
----------
Total liabilities 1,804,000
----------
Net $4,400,000
==========
</TABLE>
A summary of the operations of the Contract Packaging Business shown as
discontinued operations in the accompanying statements of operations is as
follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
3 mos ended 6 mos ended 3 mos ended 6 mos ended
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net sales $1,589,000 $3,807,000 $2,651,000 $5,335,000
Cost of sales 1,230,000 2,460,000 1,480,000 3,189,000
---------- ---------- ---------- ----------
Gross profit 359,000 1,347,000 1,171,000 2,146,000
Selling, general and
administrative 328,000 693,000 167,000 459,000
Interest expense 20,000 41,000 34,000 67,000
---------- ---------- ---------- ----------
348,000 734,000 201,000 526,000
---------- ---------- ---------- ----------
Income from operations
of discontinued
business $ 11,000 $ 613,000 $ 970,000 $1,620,000
========== ========== ========== ==========
</TABLE>
8
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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 has operated, since 1995, 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. On May 30,
1997, the Company entered into an Agreement in Principle and on July 24, 1997
signed an Asset Purchase Agreement, pursuant to which the Company proposes to
sell all the assets and business of its contract manufacturing segment (Contract
Packaging Business). The operations of that segment has been shown as a
discontinued operation and the following discusses the operations of each
segment separately.
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.
9
<PAGE> 10
RESULTS OF OPERATIONS
PROFESSIONAL HAIR CARE PRODUCTS
Net sales for the quarter and for the six months ended June 30, 1997 were
$439,000 and $1,003,000, respectively, compared to $630,000 and $1,405,000,
respectively for the same periods in 1996, reductions of $191,000 (30%) for the
three month period and $402,000 (29%) for the six month period. Sales to Sally
Beauty Company accounted for approximately -0- % of net sales for the second
quarter of 1997 and 26% for the six months ended June 30, 1997. Other sales for
the 1997 periods were to independent distributors. Substantially all sales for
three and six months ended June 30, 1996 were to Sally Beauty Company.
Cost of sales decreased $76,000 (25%) in the three months ended June 30, 1997
and $242,000 (33%) in the six months then ended as compared to the same periods
in 1996. As a percentage of net sales, cost of sales was 52% for the three
months ended June 30, 1997 and 49% for the six months ended June 30, 1997,
compared to 48% and 52%, respectively for the three months and six months ended
June 30, 1996. The changes in the percentages to net sales are due to changes in
product mix.
Selling, general and administrative expenses increased $132,000 to $1,265,000
for the three months ended June 30, 1997 and increased $50,000 to $2,039,000 for
the six months then ended, compared to the same periods in 1996. As a percentage
of net sales, such expenses were 288% and 203%, respectively, for the three
months and six months ended June 30, 1997 compared to 180% and 142% for the same
periods in 1996. The increase in expenses is principally the result of increased
costs for trade shows, dealer promotions and product education required for the
expansion of the product distribution program.
Interest expense was $47,000 (three months ended June 30, 1997), $94,000 (six
months ended June 30, 1997), compared to $73,000 (three months ended June 30,
1996) and $139,000 (six months ended June 30, 1996). The decrease of $26,000 for
the three month period and $45,000 for the six month period 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 June 30, 1997 and for the six months ended June 30,
1997 the Company reported losses of $1,099,000 and $1,622,000, respectively from
the hair care segment, compared to losses of $878,000 and $1,457,000 for the
comparable period in 1996. The losses were principally the result of increased
selling, general and administrative expenses for the expansion of the product
line and insufficient sales to support such expenses.
10
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CONTRACT PACKAGING BUSINESS
Net sales for the three months ended June 30, 1997 were $1,589,000, a reduction
of $1,062,000 (40%) from the $2,651,000 for the same quarter last year. For the
six months ended June 30, 1996 net sales amounted to $3,807,000, compared to
$5,335,000 for the same period in 1996, a reduction of $1,528,000, or 29%. Sales
to customers accounting for more than 10% of net sales in any period were as
follows:
<TABLE>
<CAPTION>
3 mos 6/30/97 6 mos 6/30/97 3 mos 6/30/96 6 mos 6/30/96
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Customer A 21% 17% 36% 36%
Customer B 14% 12% 14% 9%
Customer C 9% 7% 21% 26%
Customer D - - 12% 12%
</TABLE>
Cost of sales decreased $250,000 (17%) to $1,230,000 for the three months ended
June 30, 1997 and decreased $729,000 (23%) to $2,460,000 for the six months
ended June 30, 1997, compared to the same periods in 1996. As a percentage of
sales, cost of sales was 77% for the three months ended June 30, 1997 and 65%
for the six months ended June 30, 1997, compared to 56% for the three months
ended June 30, 1996 and 60% for the six months ended June 30, 1996. The
percentage increase in cost of sales is attributable to lower sales in 1996 and
the effect of charging fixed costs to a lower sales base and changes in product
mix.
Selling, general and administrative expenses increased $161,000 (96%) to
$328,000 in the three months ended June 30, 1997 and increased $234,000 (51%) in
the six months ended June 30, 1997, compared to the same periods in 1996. The
increase was principally the result of additional personnel costs for marketing
and administration in expectation of improved sales volume.
Interest expense decreased $14,000 to $20,000 for the three months ended June
30, 1997 and decreased $26,000 to $41,000 in the six months ended June 30, 1997,
compared to the same periods last year. The decrease is attributable to the
lower interest rate on the accounts receivable line from that of last year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital amounted to $2,454,000 at June 30, 1997, a decrease of $30,000
from December 31, 1996. For the six months ended June 30, 1997, operations
resulted in cash flow deficiency of $581,000 compared to positive cash flow of
$17,000 for the same period of 1996. Operating cash flow deficiency for the six
months ended June 30, 1997 resulted from a net loss, reduced by 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
six months ended June 30, 1997 $56,000 was invested in new equipment, borrowings
amounted to $697,000 , the amount due under the accounts receivable finance
agreement was reduced $470,000, repayment of other borrowings were $395,000 and
$748,000 was raised through the sale of common stock upon exercise of warrants
and options, etc.
The Company borrowed $700,000 from the proposed buyer of the Contract Packaging
Business on July 24, 1997. The loan, together with interest at the rate of 10% a
year, is payable upon closing of the sale to the buyer, termination of the
related Asset Purchase Agreement or December 31, 1997, whichever occurs first.
11
<PAGE> 12
On August 8, 1997, the Company borrowed $200,000 from an unaffiliated party and
extended the due date of the balance of $100,000 due to that party. The balance
of $300,000 plus interest at 10% a year is due at the closing of the Asset
Purchase Agreement or December 31, 1997, whichever is earlier. On August 15,
1997, the Company borrowed $200,000 from a partnership of which a director of
the Company is the general partner. The amount of $200,000 plus interest at 10%
a year is due at the closing of the Asset Purchase Agreement or December 31,
1997, whichever is earlier. Neither of these loans is payable until the $700,000
loan from the proposed buyer of the Contract Packaging Business has been paid in
full. As additional consideration for making the loans, the Company issued the
lenders an aggregate of 75,000 shares of common stock. The proceeds of the loans
will be used for working capital for the Zegarelli business.
The Company believes that funds generated from operations, borrowings under its
credit facilities together with the financings discussed in the preceding
paragraphs will be sufficient to finance its working capital and capital
expenditure requirements through closing of the sale of the Contract Packaging
Business. If such sale is not consummated the Company may be required to raise
additional funds through the private placement of debt or equity securities to
repay the loan from the proposed buyer of the Contract Packaging Business.
12
<PAGE> 13
PART II. OTHER INFORMATION
Item 2. Change in Securities
(a) Not applicable
(b) Not applicable
(c) In January, 1997 the Company issued 11,682 shares of common stock to an
individual in settlement of an obligation of $20,000. In March, 1997, the
Company issued 10,000 shares of common stock to a firm as additional
consideration for a loan.
The issuances were not effected through any broker-dealer, and no underwriting
discounts or commissions were paid in connection with such issuances. Exemption
from registration requirements is claimed under the Securities Act of 1933 ("the
Securities Act") in reliance on Section 4(2) of the Securities Act and
Regulation D promulgated thereunder. The recipients of the securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to, or for sale in connection with, any
distribution thereof and appropriate legends were affixed to the certificates
evidencing the securities in such transactions. All recipients had adequate
access to information about the Company.
Item 4. Submission of matters to a vote of security holders
The annual meeting of shareholders was held on June 20, 1997. The names of each
of the directors elected at the meeting is Alfred E. Booth, Jr., Judith E.
Zegarelli, Frank X. McGarvey, Jack Brehm, William B. Barnett and Eric Nickerson.
The only other matter considered at the annual meeting was the ratification of
the appointment of Ernst & Young LLP as the Company's independent accountants
for the 1997 fiscal year; such proposal received 4,541,857 votes for, 5,700
votes against, and 1,000 votes abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Agreement in Principle dated May 30, 1997 between Registrant and CGUSA
LLC.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended June 30,
1997.
13
<PAGE> 14
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: August 18, 1997 -------------------------------
Jennifer J. Eggers
Chief Financial Officer and
Chief Accounting Officer
14
<PAGE> 1
EXHIBIT 10.1
CGUSA LLC
May 30, 1997
COSMETIC GROUP U.S.A., INC.
11312 Penrose Street
Sun Valley, California 91352
Attn: Alfred E. Booth, Jr.
Ladies and Gentlemen:
The purpose of this letter is to confirm our present mutual intentions
regarding the proposed acquisition (the "Acquisition") by CGUSA LLC, a newly
formed New Jersey limited liability company, of substantially all of the
assets used or held for use in the contract manufacturing business (the
"Business") of Cosmetic Group U.S.A., Inc., a California corporation (the
"Company").
The Acquisition is proposed to be structured as set forth on Exhibit A
hereto.
Consummation of the Acquisition is subject to (1) the negotiation and
execution of a mutually acceptable definitive acquisition agreement setting
forth the terms and conditions of the Acquisition, (2) the completion of a due
diligence investigation in all respects satisfactory to us, (3) regulatory
approval, (4) the Company's receipt of a written opinion of L.H. Friend,
Weinress, Frankson & Presson, Inc. that the terms of the Acquisition are fair to
the Company and its stockholders from a financial point of view and (5) approval
of the Acquisition by the Board of Directors and stockholders of the Company. We
are prepared to commence negotiation of a definitive acquisition agreement and
to commence our due diligence investigation immediately.
We expect that a definitive acquisition agreement would contain
customary terms and conditions for an acquisition of this nature, including (1)
representations and warranties from you with respect to your ownership of the
assets of this Business and your ability to consummate the Acquisition, the
business, condition (financial or otherwise), results of operations, assets,
liabilities, properties and prospects of the Business and the absence of any
material adverse changes with respect to any of the foregoing since the date of
your last regularly prepared financial statements, (ii) covenants with respect
to the operation of the Business between the time of the execution of the
definitive acquisition agreement and the closing, (iii) conditions to the
parties' obligations to close, including, without limitation, continued
accuracy of representations and warranties and compliance with covenants and
receipt by all parties of all shareholder, corporate, regulatory and other
third party approvals and authorizations necessary to consummate the Acquisition
and (iv)
<PAGE> 2
COSMETIC GROUP U.S.A., INC.
May 30, 1997
Page 2
indemnities from you with respect to breaches of representations, warranties,
covenants and agreements contained in the definitive acquisition agreement. Our
legal counsel is prepared to commence the preparation of a first draft of such
a definitive acquisition agreement as soon as you return a signed copy of this
letter to us.
Promptly following your execution and delivery of this letter in the
manner provided below and until the Termination Date (as defined below), you
shall provide us and our officers, directors, employees, agents, counsel,
accountants, financial advisors, bankers, consultants and other representatives
(together "Representatives") with full access, upon reasonable prior notice, to
your officers, employees and accountants and to your assets, properties,
contracts, books, records and all such other information and data concerning
the Business as we or our Representatives reasonably may request in connection
with such investigation. We will not disclose to third parties the information
obtained in our due diligence investigation, unless compelled to disclose by
judicial or administrative process or by other requirements of law (including,
without limitation, in connection with obtaining the necessary approvals of the
Acquisition of governmental or regulatory authorities), and we will refrain
from using for any purpose other than determining the desirability of the
Acquisition, any documents and information concerning the Business made
available pursuant to this letter in connection with our due diligence
investigation, except to the extent that such documents or information can be
shown to have been or become available to us or our Representatives on a
non-confidential basis. At any time after the Termination Date, upon your
request, we will promptly redeliver or destroy any confidential information
obtained in our investigation and will certify to the Company that all of such
not returned to you has bee destroyed by us.
In consideration of the substantial expenditure of time, effort and
expense to be undertaken by us and our Representatives immediately upon your
execution and delivery of this letter, you hereby undertake and agree (and will
undertake and agree in the definitive acquisition agreement) that, for the
period from the date hereof until the consummation of the Acquisition, or if a
definitive acquisition agreement is not executed and delivered on or prior to
July 31, 1997 (the "Termination Date"), until the Termination Date, you will
not, nor will you permit any of your subsidiaries or affiliates (or authorize
or permit any of their respective Representatives) to, take, directly or
indirectly, any action to initiate, assist, solicit, receive, negotiate,
encourage or accept any offer or inquiry from any person (a) to engage in any
sale or other disposition of all or any substantial part of the Business (a
"Disposition of the Business"), (b) to reach any agreement or understanding
(whether or not
<PAGE> 3
COSMETIC GROUP U.S.A., INC.
May 30, 1997
Page 3
such agreement or understanding is absolute, revocable, contingent or
conditional) for, or otherwise attempt to consummate, any Disposition of the
Business or (c) to furnish or cause to be furnished any information with
respect to you or any of your subsidiaries to any person (other than as
contemplated by this letter) who you or any such subsidiary, affiliate or
Representative knows or has reason to believe is in the process of considering
any transaction that would result in a Disposition of the Business; provided,
however, that the Company, its subsidiaries and their directors, officers and
affiliates will remain free to participate in any discussions or negotiations
regarding furnishing any information with respect to, assist or participate in,
or facilitate in any other manner any offer or attempt by any person to do or
seek any of the foregoing to the extent their fiduciary duties may require and
that if any of them exercise such fiduciary duty, the Company shall immediately
pay to Acquiror as a breakup fee the lesser of 20% of the aggregate purchase
price set forth on Exhibit A or the maximum amount permitted under applicable
law. If you or any such subsidiary, affiliate or Representative receives from
any person any offer, inquiry or informational request referred to above, you
will promptly advise such person, by written notice, of the terms of this
paragraph and will promptly, orally and in writing, advise us of such offer,
inquiry or request and deliver a copy of the foregoing notice to us.
Without the prior consent of the other (which shall not be unreasonably
delayed), neither we nor you will, and we will cause our respective
Representatives not to, make any release to the press or other public
disclosure, or make any statement to any competitor, customer, client or
supplier of yours or any other person, with respect to either the fact that
discussions or negotiations are taking place concerning our possible
acquisition of the Business or the existence or contents of this letter, except
for such public disclosure as may be required by law based on the good faith
opinion of counsel. If either party proposes to make any disclosure based upon
such an opinion, that party will deliver a copy of such opinion to the other
party, together with the text of the proposed disclosure, as far in advance of
its disclosure as is practicable, and will in good faith consult with and
consider the suggestions of the other party concerning the nature and scope of
the information it proposes to disclose. Notwithstanding the foregoing, we
hereby consent to your making of the press release in substantially the form
attached hereto as Exhibit B hereto at or after the time this letter is signed
by you and redelivered to us as set forth below.
Whether or not the transactions contemplated hereby are consummated,
you and we shall each pay our own costs and expenses, including all costs
incurred in connection
<PAGE> 4
COSMETIC GROUP U.S.A., INC.
May 30, 1997
Page 4
with the preparation and negotiation of this letter and any definitive
acquisition agreement and our due diligence investigation.
This letter shall be governed by and construed in accordance with the
laws of the State of California without giving to the conflicts of laws
principles thereof.
<PAGE> 5
COSMETIC GROUP U.S.A., INC.
May 30, 1997
Page 5
If you are in agreement with the foregoing, please so indicate by
signing two copies of this letter in the space set forth below and returning
one of such signed copies to the undersigned, whereupon this letter shall
constitute our binding agreement in accordance with the terms and provisions
set forth above. Notwithstanding anything to the contrary contained herein,
this letter shall not be effective against us unless signed by you and returned
to us on or prior to June 4, 1997.
Please send all correspondence and notices regarding this matter to:
CGUSA
c/o Milbank, Tweed, Hadley & McCoy
601 South Figueroa Street
30th Floor
Los Angeles, California 90017
Attn: Kenneth J. Baronsky, Esq.
Phone: (213) 892-4000
Fax: (213) 629-5063
Very truly yours,
CGUSA LLC
By: /s/ JEFFREY S. HERSH
-------------------------
Name: Jeffrey S. Hersh
Title:
Accepted and agreed to as of the
30th day of May, 1997:
COSMETIC GROUP U.S.A., INC.
By: /s/ ALFRED E. BOOTH
- ----------------------------------
Name: Alfred E. Booth
Title: Chief Executive Officer and President
<PAGE> 6
EXHIBIT A
TERM SHEET
FOR ACQUISITION OF
CONTRACT MANUFACTURING BUSINESS OF
COSMETIC GROUP U.S.A., INC.
Asset Purchase
Agreement:
Seller . . . . . . . Cosmetic Group U.S.A., a California corporation
("Seller").
Purchaser . . . . . CGUSA LLC, a newly formed New Jersey limited liability
company ("Acquiror").
Anticipated Closing
Date . . . . . . . . Third Quarter 1997 (the "Closing Date").
Assets
Transferred . . . . All of the assets and properties of Seller used or held
for use in connection with its contract manufacturing
business (the "Business"), including without limitation,
all real property leases, inventory, accounts
receivable, tangible personal property, personal
property leases, business contracts, prepaid expenses,
intellectual property (including without limitation the
trade name "Cosmetic Group USA" and all variations
thereof and logos used in the Business), licenses,
vehicles, security deposits and books and records
(collectively, the "Assets"). At closing, Seller will
cease using any trade names and logos which constitute
Assets including the legal name of Seller.
Stock
Transferred . . . . In addition to the Assets, Seller shall issue to
Acquiror shares of Seller's common stock equal to the
lesser of 500,000 shares or shares worth $750,000
(calculated based on the closing bid price of the Shares
on Nasdaq on the Closing Date) (the "Shares"). Until
such time as the Shares are freely tradeable, Acquiror
shall be entitled
<PAGE> 7
to unlimited piggy-back registration rights with respect
to the Shares.
Liabilities Assumed Acquiror shall not assume any of Seller's liabilities
other than real property lease obligations, accounts
payable, personal property lease obligations,
obligations under business contacts and licenses and
accrued expenses reflected or reserved against on
Seller's most recent balance sheet.
Purchase Price . . . The aggregate purchase price for the Assets, the Stock
and the Consulting and Noncompete Agreement (described
below) shall be $10,000,000 payable as follows: (i)
$5,750,000 in immediately available funds on the Closing
Date, (ii) a subordinated note in the principal amount
of $3,500,000 and (iii) $750,000 in respect of the
Consulting and Noncompete Agreement. The cash portion of
the purchase price shall be adjusted upward or downward
on a dollar-for-dollar basis to the extent that the
"tangible net assets" of the Business is higher or lower
than $4,400,000, based upon an audit of the Business to
be completed within 60 days following the Closing Date.
For purposes of the foregoing, "tangible net assets"
shall mean the total amount of assets (excluding the
Shares and less applicable reserves and other properly
deductible items) after deducting therefrom (i) all
current liabilities, (ii) all goodwill, trade names,
trademarks, patents and other like intangibles and (iii)
all inventory which Acquiror and Seller reasonably agree
is unsuitable for purposes of this Business due to age,
quality, type, category and/or quantity. The parties
will agree either that a portion of the purchase price
shall be held in escrow for a period of 60 days pending
a final determination of such adjustment or that
Acquiror shall have a right of setoff against payments
on the subordinated notes described below upon terms and
amount to be negotiated.
2
<PAGE> 8
Subordinated Notes . The subordinated notes of Acquiror shall have a term of
8 years and shall bear interest at a rate of 10% per
annum, payable interest-only in the first year, with
principal payable thereafter in $500,000 annual
installments. The terms of the covenants and
subordination provisions shall be reasonable acceptable
to the Acquiror and Seller. On the Closing Date,
Acquiror will provide Seller with a pro forma balance
sheet of Acquisition.
Consulting and
Noncompete
Agreement . . . . . Al Booth and Judy Zegarelli shall enter into consulting
and noncompete agreements ("Consulting and Noncompete
Agreements") with Acquiror, for an aggregate
consideration of $500,000 and $250,000, respectively,
payable in equal installments over three years, whereby
each of them shall provide consulting services to
Acquiror and agree not to compete directly or
indirectly, either personally or through an affiliate,
with Acquiror or its subsidiaries or affiliates for a
period of three years.
Employment
Agreement(s) . . . . Howard Simon shall enter into an employment contract
with Acquiror, on terms mutually agreeable to Mr. Simon
and Acquiror.
Supply Contract . . Seller shall agree to purchase from Acquiror all of
Seller's requirements for any products manufactured by
Acquiror for a period of 10 years. Initial pricing terms
shall be mutually determined by both parties prior to
the Closing Date on a product by product basis based on
comparable industry standards. To the extent Acquiror's
net sales to Seller exceed $2,000,000 in any calendar
year, Seller shall be entitled to receive from Acquiror
a rebate equal to 10% of such net sales; provided that
the aggregate rebate over a ten year period shall not
exceed $2,000,000.
Representations and
Warranties . . . . . Customary representations and warranties.
-3-
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,000
<SECURITIES> 0
<RECEIVABLES> 1,322,000
<ALLOWANCES> 49,000
<INVENTORY> 3,590,000
<CURRENT-ASSETS> 5,607,000
<PP&E> 4,102,000
<DEPRECIATION> 2,009,000
<TOTAL-ASSETS> 8,006,000
<CURRENT-LIABILITIES> 3,153,000
<BONDS> 0
0
0
<COMMON> 7,228,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,006,000
<SALES> 1,003,000
<TOTAL-REVENUES> 1,003,000
<CGS> 492,000
<TOTAL-COSTS> 2,039,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94,000
<INCOME-PRETAX> (1,622,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,622,000)
<DISCONTINUED> 613,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,009,000)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
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