-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NIWEmcA8qLrddbq+7iC9D+5NHkwGPE5xgPGPcHfk2Kx2MtQGNTudvshhYpb6CWEn 6mCx2a9kEJsJr4LJHQ0jPw== 0000912057-96-016380.txt : 19960807 0000912057-96-016380.hdr.sgml : 19960807 ACCESSION NUMBER: 0000912057-96-016380 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960806 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COSMETIC GROUP USA INC /CA/ CENTRAL INDEX KEY: 0000867028 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 954040591 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-06277 FILM NUMBER: 96604635 BUSINESS ADDRESS: STREET 1: 11312 PENROSE ST CITY: SUN VALLEY STATE: CA ZIP: 91352 BUSINESS PHONE: 8187672889 MAIL ADDRESS: STREET 1: 11312 PENROSE STREET CITY: SUN VALLEY STATE: CA ZIP: 91352 FORMER COMPANY: FORMER CONFORMED NAME: K7 CAPITAL CORP DATE OF NAME CHANGE: 19930328 S-3/A 1 S-3/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1996 REGISTRATION NO. 333-06277 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________ AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ___________ COSMETIC GROUP U.S.A., INC. (Exact name of registrant as specified in its charter) CALIFORNIA 95-4040591 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11312 PENROSE STREET, SUN VALLEY, CALIFORNIA 91352, (818) 767-2889 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ___________ ALFRED E. BOOTH, JR., CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER COSMETIC GROUP U.S.A., INC. 11312 PENROSE STREET, SUN VALLEY, CALIFORNIA 91352, (818) 767-2889 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPY TO: DAVID R. EANDI, ESQ. ERVIN, COHEN & JESSUP 9401 WILSHIRE BOULEVARD BEVERLY HILLS, CALIFORNIA 90212 (310) 273-6333 ___________ Approximate date of proposed sale to the public: From time to time after the effective date of this registration statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. /x/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering./ / __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED AUGUST 6, 1996 PROSPECTUS 1,374,732 SHARES COSMETIC GROUP U.S.A., INC. COMMON STOCK This Prospectus relates to a shelf registration of an aggregate of 1,374,732 shares of the Common Stock of Cosmetic Group U.S.A., Inc. (the "Company") which are being offered for sale by certain selling shareholders (the "Selling Shareholders"). The shares offered hereby include 600,000 currently outstanding shares of Common Stock and 774,732 shares of Common Stock issuable upon the exercise of outstanding warrants (the "Warrants"). The 774,732 shares of Common Stock included in this Prospectus that are issuable upon the exercise of the Warrants consist of: (a) 44,732 shares of Common Stock issuable upon the exercise of Warrants at an exercise price of $1.95 per share at any time from August 16, 1996 to August 14, 2000 (the "August Placement Warrants"); (b) 600,000 shares of Common Stock issuable upon the exercise of Warrants at an exercise price of $3.75 per share at any time prior to September 30, 1997 (the "October Placement Warrants"); (c) 60,000 shares of Common Stock issuable upon the exercise of Warrants to purchase 60,000 units (the "Unit Warrants"), with each unit consisting of one share of Common Stock and one October Placement Warrant, at an exercise price of $2.70 per unit at any time from September 25, 1996 to September 30, 1998; (d) 60,000 shares of Common Stock issuable upon the exercise of the October Placement Warrants included in the Unit Warrants; and (e) 10,000 shares of Common Stock issuable upon the exercise of Warrants at an exercise price of $2.60 per share at any time prior to July 5, 1999 (the "Consultant Warrants"). The exercise prices of, and the number of shares of Common Stock subject to, the Warrants are subject to adjustment in certain circumstances. See "Selling Shareholders and Plan of Distribution". The Company will not receive any proceeds from the sale of shares by the Selling Shareholders. This Prospectus relates only to resales by the Selling Shareholders of the shares of Common Stock issuable upon the exercise of the Warrants and does not cover sales or transfers of the Warrants. The Warrants may be transferred only in transactions which are registered under, or exempt from the registration provisions of, the Securities Act of 1933, as amended (the "Securities Act"). The Common Stock is traded on the Nasdaq SmallCap Market under the symbol "CUSA" and on the Boston Stock Exchange under the symbol "CGU". On August 1, 1996, the last sales price of the Common Stock, as reported on the Nasdaq SmallCap Market, was $1.88 per share. ___________ THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS". ___________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The shares of Common Stock offered by the Selling Shareholders generally may be offered for sale from time to time in the over-the-counter market or on the Boston Stock Exchange in ordinary brokerage transactions at market prices prevailing at the time of sale or in negotiated transactions at prices related to prevailing market prices. Brokers or dealers will receive commissions or discounts from Selling Shareholders in amounts to be negotiated prior to the sale. Any brokers or dealers participating in the offering of any such shares may be deemed to be "underwriters" within the meaning of the Securities Act, and the compensation received by them may be deemed to be underwriting commissions or discounts. See "Selling Shareholders and Plan of Distribution". The date of this Prospectus is , 1996. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at 7 World Trade Center, 13th Floor, New York, NY 10048 and 500 West Madison Street, Suite 1400, Chicago, IL 60661. Copies of such material can be obtained from the Public Reference section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, and on the World Wide Web at the Commission's Web site located at "http://www.sec.gov". The Company's Common Stock is traded on the Nasdaq SmallCap Market and the Boston Stock Exchange, and such reports and other information also can be inspected at the office of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006 and at the office of the Boston Stock Exchange, One Boston Place, Boston, MA 02108. The Company has filed with the Commission a registration statement under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all the information set forth in the registration statement and the exhibits thereto, to which reference is hereby made. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement is qualified in its entirety by such reference. Any interested parties may inspect the registration statement, without charge, at the public reference facilities of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and any interested parties may obtain copies of all or any part of the registration statement from the Commission at prescribed rates. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents or portions of documents filed by the Company with the Commission are incorporated by reference into this Prospectus: 1. The Company's Annual Report on Form 10-KSB for the year ended December 31, 1995. 2. All other reports filed by the Company pursuant to Sections 13(a) or 15(d) of the Exchange Act since December 31, 1995, including the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996 and the Company's Current Reports on Form 8-K dated February 5, 1996, March 26, 1996, May 10, 1996 and July 16, 1996. 3. The description of the Company's Common Stock contained in its Registration Statement pursuant to Section 12 of the Exchange Act, as amended from time to time. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offering made hereby shall be deemed to be incorporated by reference into this Prospectus and made a part hereof from the date of filing of such documents. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is incorporated by reference herein modifies or -2- supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, upon written or oral request, a copy of any and all documents incorporated by reference in this Prospectus, other than exhibits to such documents, unless such exhibits are specifically incorporated by reference in such documents. Requests should be directed to Mr. Frank McGarvey, Corporate Secretary, Cosmetic Group U.S.A., Inc., 11312 Penrose Street, Sun Valley, CA 91352, or by telephone at (818) 767-2889. THE COMPANY 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. Products are manufactured both from formulas developed by the Company and proprietary formulas owned by the Company's customers. The Company's contract manufacturing operations consist of the manufacture of products in three principal categories: color cosmetics and fragrances, creams and lotions and hair care products. As part of the Company's efforts to expand its product offerings, the Company upgraded its in-house capacity to manufacture powder-based cosmetics and creams and lotions during 1993 and completed the installation of a high capacity system for the manufacture of hair care products and creams and lotions in February 1994. Contract manufacturers, such as the Company, formulate and manufacture cosmetics and other personal care products for companies that market products for sale at the retail level under their own brand names. Customers for contract manufacturers range from marketers of personal care products that lack manufacturing capabilities to marketers that manufacture a significant portion of their personal care products. Companies with manufacturing capabilities utilize services of contract manufacturers as a result of internal decisions not to devote manufacturing resources to certain product lines, due to the size of the product run or the nature of the manufacturing process, or in response to scheduling needs or a lack of sufficient manufacturing capacity. Although these customers eventually may bring in-house the production of products manufactured for them by contract manufacturers, it is the Company's experience that many manufacturers and distributors of cosmetics and other personal care products utilize the services of contract manufacturers on a regular basis and that the relationships established in filling specific product orders can lead to orders for additional products in the future. 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 under the Zegarelli name. The line includes shampoos, conditioners and styling and finishing products. The Company has entered into a license agreement with a corporation owned by Mr. Zegarelli which grants to the Company an exclusive, non-transferable license to use the Zegarelli name in connection with the manufacture and sale of hair care and other personal care products. The Company also has entered into a distribution agreement with Sally Beauty Company, Inc. ("Sally"), a subsidiary of Alberto-Culver Co., which grants to Sally the exclusive right to distribute the Zegarelli product line in the United States through beauty supply stores for sale to salons and professional hairdressers. The Company also uses independent distributors to sell the Zegarelli product line directly to larger salons and salon chains, and, in connection therewith, the Company generally expects to repurchase products from Sally for sale to its independent distributors and to use warehouse and shipping services provided by Sally. Sales of the -3- Zegarelli product line to Sally commenced in the second quarter of 1995, and sales to independent distributors commenced in the third quarter of 1995. The Company's efforts during 1995 with respect to its Zegarelli product line primarily focused on introducing the product line to the professional hair care industry through participation in trade shows and other promotional and marketing activities and on seeking to establish relationships with independent distributors. The Company also expended a significant effort in 1995 in developing the sales programs, sales aids and other promotional materials that the Company believes are necessary to establish relationships with independent distributors and promote salon sales. The Company believes that it now has in place the promotional materials and programs that are required to support its marketing efforts. The current sales levels of the Zegarelli line are not sufficient to cover the related costs and expenses. The Company's ability to increase sales of the Zegarelli line to the level 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 its Zegarelli product line or otherwise successfully compete in the professional hair care products market. See "Risk Factors - Competition; Introduction of Zegarelli Product Line" and "Risk Factors - Reliance on Independent Distributors". The Company is the product of a reorganization of two previously unaffiliated companies, Cosmetic Group USA, Inc. ("CUSA") and K7 Capital Corporation ("K7"). Unless the context indicates otherwise, as used in this Prospectus, the term the "Company" refers to the operations of CUSA prior to and following the reorganization of CUSA and K7. The Company is a California corporation, its executive offices and manufacturing facilities are located at 11312 Penrose Street, Sun Valley, CA 91352, and its telephone number is (818) 767-2889. RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS RELATING TO THE BUSINESS OF THE COMPANY IN EVALUATING AN INVESTMENT IN THE COMMON STOCK. DEPENDENCE ON CERTAIN CUSTOMERS During 1995, sales to the Company's three largest customers, Avon Products, Inc. ("Avon Products"), Victoria Jackson Cosmetics, Inc. ("Victoria Jackson") and Sally, accounted for approximately 39%, 22% and 13%, respectively, of net sales, and sales to the Company's four largest customers accounted for approximately 80% of net sales. During 1994, sales to the Company's largest customer, Avon Products, accounted for approximately 37% of net sales, and sales to the Company's four largest customers accounted for approximately 54% of net sales. With the exception of the Company's agreement with Sally, the Company does not have any long-term contractual relationships with any of its customers, nor are any of the Company's customers subject to any contractual provisions or other restrictions which preclude them from purchasing products from the Company's competitors. The loss of one or more significant customers, or a material reduction in the amount of orders placed by a significant customer, could have a material adverse effect on the Company's business and results of operations. -4- LIQUIDITY; RECENT CASH FLOW DEFICIENCIES The Company's working capital at December 31, 1995 was $1,891,000, a reduction of $52,000 from December 31, 1994, and was $1,830,000 at March 31, 1996. Operations resulted in a cash flow deficiency of $2,308,000 in 1995 and resulted in positive cash flow of $8,000 in the quarter ended March 31, 1996. Working capital needs during 1995 were met by drawing on the Company's cash balance of $1,026,000 at December 31, 1994 and from the proceeds of two private placements of equity securities completed by the Company in 1995. In the first placement (conducted between March 1995 and August 1995) (the "August Placement"), the Company received approximately $896,000 in proceeds (net of commissions) from the sale of 642,320 shares of Common Stock at a purchase price of $1.50 per share. In the second placement (completed in October 1995) (the "October Placement"), the Company received approximately $1,255,000 in proceeds (net of commissions) from the sale of 600,000 units at a purchase price of $2.25 per unit. Each unit consists of one share of Common Stock and one October Placement Warrant. The shares of Common Stock offered by this Prospectus include the 600,000 shares of Common Stock included in the units sold in the October Placement, the 600,000 shares of Common Stock issuable upon the exercise of the October Placement Warrants included in such units and 164,732 shares of Common Stock issuable upon the exercise of Warrants issued to placement agents in the August and October Placements. In addition to commissions, the Company incurred an aggregate of approximately $177,000 in expenses in connection with the August Placement and the October Placement. In order to supplement its working capital, in June 1996, the Company borrowed the sum of $150,000 from Third Century II, one of the Selling Shareholders. See "Selling Shareholders and Plan of Distribution". The Company believes that funds generated from operations, available borrowings under its credit facilities and the proceeds of the foregoing loan will be sufficient to finance its working capital and capital expenditure requirements through the end of 1996. However, there can be no assurance that such funds will be sufficient or that the Company's operations will not result in cash flow deficiencies. 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. RECENT OPERATING RESULTS For 1995, the Company reported a net loss of $1,964,000, as compared to net income of $23,000 for 1994. The loss for 1995 is primarily attributable to start-up and operating expenses incurred in connection with the Zegarelli product line and an increase in cost of sales as a percentage of net sales. The increase in the cost of sales percentage is primarily attributable to the write- down of a product purchased as a finished product for resale by the Company, changes in the sales mix and the effect of special promotional offerings for the Zegarelli product line. For the quarter ended March 31, 1996, the Company reported net income of $71,000, as compared to a net loss of $177,000 for the comparable period of the prior year. The improvement in operating results is primarily attributable to an increase in net sales and an improvement in the cost of sales percentage, the effects of which were partially offset by expenses incurred in connection with the Zegarelli product line and an increase in interest expense. DEPENDENCE ON KEY EXECUTIVES The Company's business is substantially dependent on the efforts and abilities of Mr. Booth, its Chairman of the Board, President and Chief Executive Officer, and Judith E. Zegarelli, its Senior -5- Vice President. The loss of the services of either of these executives could have a material adverse effect on the Company's business and results of operations. The Company currently is not a party to any employment agreements with Mr. Booth or Ms. Zegarelli. The Company maintains and is the beneficiary of term life insurance on the life of Mr. Booth in the amount of $1.0 million. There can be no assurance that the proceeds of such insurance will be sufficient to compensate the Company in the event of the death of Mr. Booth. The Company does not maintain any insurance against the loss of Mr. Booth's services as a result of disability or any other cause other than death, and the Company does not maintain any insurance on the life of Ms. Zegarelli or against the loss of her services. VARIABILITY OF QUARTERLY RESULTS The Company's contract manufacturing segment generally manufactures products only in response to specific customer orders. Since orders from a small number of customers (which may change from period to period) typically account for a substantial portion of the Company's net sales in any period, the Company's net sales and operating results may fluctuate significantly from quarter to quarter depending upon the timing of customer orders and shipment dates. Therefore, year-to-year comparisons of quarterly results may not be meaningful and quarterly results during the course of a year may not be indicative of the results that may be expected for the entire year. COMPETITION; INTRODUCTION OF ZEGARELLI PRODUCT LINE The market for the contract manufacturing of cosmetics and other personal care products is highly competitive. The industry is characterized by a large number of small to medium-sized manufacturers who may operate on a national, regional or local scale. Most of the Company's competitors are larger and have greater financial and other resources than the Company. In addition to direct competition, the Company also faces indirect competition from present and potential customers who from time to time evaluate the "make or buy" decision of whether to manufacture a particular product or purchase the product from outside sources. The Company's Zegarelli hair care product line competes in the professional hair care products segment of the health and beauty aids industry. The market for professional hair care products also is highly competitive. Competitors include divisions or subsidiaries of large, nationally-known consumer products companies and small to medium-sized independent professional hair care companies. The Company's competitors generally have substantially greater resources and name recognition than the Company. The Company historically has operated as a contract manufacturer and has not manufactured products for sale under its own brand name, nor has the Company directly competed in the professional hair care products market. There can be no assurance that the Company will be able to successfully introduce its Zegarelli product line or otherwise successfully compete in the professional hair care products market. RELIANCE ON INDEPENDENT DISTRIBUTORS The success of the Zegarelli product line will depend to a significant extent upon the Company's ability to establish and maintain a network of independent distributors. It is anticipated that all or substantially all of the Company's distributors will be multi-line distributors, i.e., distributors that will offer for sale both the Company's Zegarelli product line and products sold by competitors. Because many of the Company's competitors have substantially greater resources and name recognition than the Company, the Company's competitors may be able to provide greater incentives to independent distributors to sell their respective products rather than the Zegarelli product line. In addition, some distributors (in -6- particular, larger distributors) may be reluctant to take on the Zegarelli product line for fear of jeopardizing their relationship with the Company's larger competitors. There can be no assurance that the Company will be successful in establishing and maintaining the required network of independent distributors. While the Company currently has distribution agreements in place with nine independent distributors requiring them to purchase a minimum amount of product (none of which are material to the operation of the Company), all of such agreements may be terminated without cause by either the Company or the distributor on 30 days prior written notice. SINGLE MANUFACTURING FACILITY The Company's manufacturing facilities are located in two adjacent buildings in Sun Valley, California, a suburb of Los Angeles located in the San Fernando Valley. The facilities are occupied pursuant to a lease which expires in January 2001 and provides for an option to renew for an additional three-year period. If the buildings were to suffer substantial damage, whether by reason of fire, earthquake or otherwise, such damage could disrupt the Company's manufacturing activities and other business operations and have a material adverse effect on the Company's business and results of operations. The Company maintains property insurance for its own tangible assets and the property of its customers in the amount of $5.0 million and business interruption insurance which provides coverage in the amount of $3.0 million per claim and in the aggregate (determined annually). There can be no assurance that the proceeds of such insurance will be sufficient to compensate the Company in the event of any interruption of its business activities. The Company's property and business interruption insurance policies do not provide coverage against losses caused by earthquake or flood. LITIGATION The Company is a defendant in a lawsuit filed in March 1996 in the United States District Court for the District of Minnesota by Watkins Incorporated, a Minnesota corporation ("Watkins"). During the first half of 1995, the Company formulated and manufactured a product for Watkins that was included in a line of skin care products introduced by Watkins in late 1994 or the first part of 1995. The complaint alleges that a portion of the product delivered by the Company developed a mold which discolored the product and rendered it defective and that Watkins recalled any bottles of the product that had been shipped to its independent sales representatives and their customers. The Company promptly replaced the discolored product at the request of Watkins. 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 Watkins. The replacement product was formulated in cooperation with Watkins, and it is the Company's understanding that the replacement product did not discolor or develop any mold. In its complaint, Watkins alleges that, following the discovery of the discolored product, its independent distributors shunned the entire skin care line and lost confidence in Watkins, thereby adversely affecting sales of other Watkins products, and that, as a result, Watkins was forced to withdraw and discontinue the entire skin care line. The complaint seeks incidental and consequential damages in an unspecified amount, including damages for loss of sales, income and profits and loss of and damage to goodwill and business reputation and reimbursement of certain fees and expenses. The Company intends to vigorously defend the action and believes it has defenses against the plaintiff's claims. However, because the litigation has just commenced, the Company is unable to predict the ultimate outcome of the action. The Company's insurance carriers have informed the Company that the lawsuit is not covered by any of the Company's insurance policies. -7- PRODUCT LIABILITY RISKS The sale of any product can expose the seller to product liability claims. Although no material product liability claims ever have been asserted against the Company, there can be no assurance that such claims will not arise in the future. The Company currently maintains product liability insurance which provides coverage in the amount of $1.0 million per occurrence, with an annual limit of $2.0 million. A product liability claim that results in a judgment or settlement in excess of the Company's insurance coverage could have a material adverse effect on the Company's business and results of operations. GOVERNMENT REGULATION The Company's products and manufacturing operations are subject to regulation by federal and state governmental agencies and, in particular, by the United States Food and Drug Administration ("FDA"). The principal FDA regulations applicable to the Company generally pertain to the use of required ingredients, label contents and compliance with "Current Good Manufacturing Practices for Finished Pharmaceuticals". The Company believes that its products and manufacturing procedures comply in all material respects with existing regulations, and the Company never has been the subject of an FDA recall or other enforcement action by a governmental agency. The Company does not believe that existing regulations have had a material effect on its operations. There can be no assurance, however, that future FDA action, or other federal or state regulatory activity, would not be material to the operations of the Company. CONTROL BY MANAGEMENT As of August 1, 1996, the principal shareholders, directors and officers of the Company beneficially owned approximately 39% of the Common Stock. Because of their stock ownership and positions with the Company, these persons are in a position to control the affairs of the Company. The foregoing does not include any shares of Common Stock with respect to which Kennedy Capital Management, an investment advisor, has discretionary authority with respect to voting and disposition. SHARES ELIGIBLE FOR FUTURE SALE; OUTSTANDING REGISTRATION RIGHTS The registration statement of which this Prospectus is a part covers the sale of 600,000 shares of Common Stock which currently are outstanding and an aggregate of 774,732 shares of Common Stock issuable upon the exercise of the Warrants, which shares are, or upon their issuance will be, "restricted shares" under the Securities Act. Separate registration statements cover the sale of an additional 1,160,989 restricted shares, consisting of: (a) 160,749 shares of Common Stock issued by the Company in a 1993 private placement; (b) 137,500 shares of Common Stock issued by the Company in a private placement completed in April 1994; (c) 118,200 shares of Common Stock purchased by certain shareholders from affiliates of the Company; (d) 102,220 shares of Common Stock issued by the Company upon the conversion of convertible promissory notes; and (e) 642,320 shares of Common Stock issued by the Company in a private placement conducted between March 1995 and August 1995 (the "1995 Placement"). At March 31, 1996, the Company had outstanding five year warrants to purchase up to 465,839 shares of Common Stock, at an exercise price of $3.22 per share, which were issued as part of the Units sold in the Company's July 1994 public offering (the "Public Warrants"). The Company also granted to certain underwriters in such public offering warrants (the "Underwriters' Warrants") to purchase up to -8- 40,000 Units, at an exercise price of $7.35 per Unit, each Unit consisting of two shares of Common Stock and one Public Warrant. An aggregate of 126,583 shares of Common Stock are issuable upon exercise of the Underwriters' Warrants and the Public Warrants issuable as part of the Units underlying the Underwriters' Warrants. In addition, at March 31, 1996, the Company had outstanding, in addition to the Warrants, the following warrants and stock options: (a) warrants to purchase up to 189,061 shares of Common Stock, at an exercise price of $3.00 per share, issued as part of units sold in the 1993 private placement; (b) options to purchase up to 441,394 shares of Common Stock, at an exercise price of $2.25 per share, and options to purchase up to 64,232 shares of Common Stock, at an exercise price of $1.50 per share, issued to Sally pursuant to a stock option agreement entered into with Sally in connection with the distribution agreement described under "The Company"; and (c) incentive stock options to purchase up to 399,000 shares of Common Stock, at exercise prices ranging from $2.125 to $3.30 per share, and nonqualified stock options to purchase up to 446,000 shares of Common Stock, at exercise prices ranging from $1.75 to $4.00 per share. Set forth below is a summary of the foregoing warrants and options, including the Warrants:
SHARES ISSUABLE EXERCISE EXPIRATION DESCRIPTIONS UPON EXERCISE PRICE DATE - ------------------------------- ----------------- ------------ -------------- August Placement Warrants 44,732 $1.95 August 2000 October Placement Warrants 600,000 $3.75 September 1997 Unit Warrants 60,000 $2.70 September 1998 October Placement Warrants Included in the Unit Warrants 60,000 $3.75 September 1997 Consultant Warrants 10,000 $2.60 July 1999 Public Warrants 465,839 $3.22 July 1999 Underwriters' Warrants 40,000 Units(1) $7.35 July 1999 1993 Placement Warrants 189,061 $3.00 August 1997 Sally Options 441,394 $2.25 May 2000 Sally Options 64,232 $1.50 May 2000 Incentive Stock Options 399,000 $2.125-$3.30 Various Nonqualified Stock Options 446,000 $1.75-$4.00 Various ----------------- Total Shares Issuable 2,110,000 ----------------- -----------------
________________________ (1) Each Unit consists of two shares of Common Stock and one Public Warrant. An aggregate of 126,583 shares of Common Stock are issuable upon exercise of the Underwriters' Warrants and the Public Warrants issuable as part of the Units underlying the Underwriters' Warrants. The exercise of the foregoing warrants and options may result in a dilution of the interests of then existing shareholders of the Company. In addition, the issuance of the shares -9- of Common Stock issuable upon the exercise of the Public Warrants and the Underwriters' Warrants, including the Public Warrants issuable as part of the Units underlying the Underwriters' Warrants, and upon the exercise of the warrants issued as part of the 1993 private placement (an aggregate of approximately 781,000 shares of Common Stock) has been registered by the Company under the Securities Act pursuant to currently effective registration statements. The Company intends to file in the near future a registration statement under the Securities Act with respect to the shares of Common Stock issuable pursuant to the stock options granted and to be granted under the Company's stock option plan, and the Company has granted to Sally certain registration rights with respect to its options. The availability for sale, as well as actual sales, of currently outstanding shares of Common Stock, and shares of Common Stock issuable upon the exercise of outstanding options and warrants, may have a depressive effect upon the prevailing market price for the Common Stock and might adversely affect the terms upon which the Company may be able to obtain additional equity financing. DIVIDENDS The Company has no present intention to pay any cash dividends in the foreseeable future. In addition, the Company's credit agreement with its lenders contains a covenant which prohibits the payment of dividends on the Common Stock. SELLING SHAREHOLDERS AND PLAN OF DISTRIBUTION The 1,374,732 shares of Common Stock covered by this Prospectus are being offered for the account of the Selling Shareholders. The shares of Common Stock offered by the Selling Shareholders consist of 600,000 shares of Common Stock included in the units issued by the Company in the October Placement and 774,732 shares of Common Stock issuable by the Company upon the exercise of the Warrants. The shares of Common Stock included in this Prospectus that are issuable upon the exercise of the Warrants consist of: (a) 600,000 shares of Common Stock issuable at an exercise price of $3.75 per share at any time prior to September 30, 1997 upon the exercise of the October Placement Warrants included in the units issued in the October Placement; (b) 60,000 shares of Common Stock included in the units issuable upon the exercise of the Unit Warrants at an exercise price of $2.70 per unit at any time from September 25, 1996 to September 30, 1998; (c) 60,000 shares of Common Stock issuable at an exercise price of $3.75 per share at any time prior to September 30, 1997 upon the exercise of the October Placement Warrants included in the Unit Warrants; (d) 44,732 shares of Common Stock issuable at an exercise price of $1.95 per share at any time from August 16, 1996 to August 14, 2000 upon the exercise of the August Placement Warrants; and (e) 10,000 shares of Common Stock issuable at any time until July 5, 1999 upon the exercise of the Consultant Warrants. The exercise prices of, and the number of shares subject to, the Warrants are subject to adjustment in certain circumstances. The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholders. The August Placement Warrants were issued as part of the commissions payable by the Company to placement agents in connection with the August Placement. The August Placement Warrants were issued to the Selling Shareholders as follows: Schneider Securities, Inc. ("Schneider")--32,348 warrants; Thomas W. Schneider--5,422 warrants; Siegfried P. Duray-Bito--904 warrants; Thomas J. O'Rourke--904 warrants; Roger P. May--904 warrants; Ben Lichtenberg--1,875 warrants; Michael Golden--1,875 warrants; and Steven Schwartz--500 warrants. In addition, the Company paid commissions of approximately $94,000 to Schneider and approximately $6,375 to First Colonial Securities Group Inc., in connection with the August Placement. The Unit Warrants were issued to Schneider as part of the commissions and finder's fees payable by the Company in connection with the October Placement. In addition, the Company paid commissions of approximately $66,000 to Schneider in connection with the October Placement. For further information regarding these private placements, see "Risk Factors -- -10- Liquidity; Recent Cash Flow Deficiencies". The Consultant Warrants were issued to Schneider in July 1995 as partial compensation for financial consulting services to be provided by Schneider under the terms of a consulting agreement, which continues in effect until July 1997. Under the terms of the consulting agreement, the Company also is required to pay Schneider the sum of $48,000, at the rate of $2,000 per month, for such consulting services. Schneider also received the sum of $56,000 in 1993 as commissions in connection with its services as placement agent in the 1993 private placement. Substantially all of the August Placement Warrants, all of the Unit Warrants and all of the Consultant Warrants issued to Schneider were subsequently transferred to employees or shareholders of Schneider. The shares of Common Stock offered hereby by the Selling Shareholders may be sold from time to time by the Selling Shareholders or by pledgees, donees, transferees or other successors-in-interest of the Selling Shareholders. Such sales may be made on one or more exchanges (the Common Stock is listed on the Boston Stock Exchange, and the Company currently has no intention to list the Common Stock on any other exchange), in the over-the-counter market or otherwise, at prices and at terms then prevailing, at prices related to the then current market price or in negotiated transactions. The shares of Common Stock offered by the Selling Shareholders may be sold by any one or more of the following methods: (a) ordinary brokerage transactions and transactions in which the broker solicits purchasers; (b) purchases by a broker or dealer as principal and resales by such broker or dealer for its account pursuant to this Prospectus; and (c) block trades or exchange distributions in accordance with the rules of such exchange. In addition, any such shares which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than pursuant to this Prospectus. In effecting sales, brokers or dealers engaged by the Selling Shareholders may arrange for other brokers or dealers to participate. Brokers or dealers will receive commissions or discounts from Selling Shareholders in amounts to be negotiated prior to the sale. Such brokers or dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act, and the compensation received by them may be deemed to be underwriting commissions or discounts. Upon the Company being notified by a Selling Shareholder that any material arrangement has been entered into with a broker or dealer for the sale of any shares covered by this Prospectus, a prospectus supplement, if required, will be distributed which will set forth the name of each such Selling Shareholder and of the participating brokers or dealers, the number of shares involved, the price at which such shares were sold and the commissions paid or discounts or concessions allowed to such brokers or dealers. In certain jurisdictions, the shares of Common Stock offered by the Selling Shareholders may be offered or sold in such jurisdictions only through registered or licensed brokers or dealers. Under the Exchange Act, any person engaged in a distribution of shares of Common Stock offered by this Prospectus may not simultaneously engage in market making activities with respect to the Common Stock during the applicable "cooling off" period prior to the commencement of such distribution. In addition, and without limiting the foregoing, each Selling Shareholder will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including without limitation Rules 10b-6 and 10b-7, which provisions may limit the timing of purchases and sales of Common Stock by the Selling Shareholders. The Company will inform each Selling Shareholder in writing that he or she is subject to the applicable provisions of the Exchange Act and the rules and regulations thereunder. The Company will inform Nasdaq, the Boston Stock Exchange and each of the Selling Shareholders when the distribution of shares in this offering is completed. On June 18, 1996, Third Century II, one of the Selling Shareholders, loaned the Company the sum of $150,000, which loan bears -11- interest at the rate of 10% per annum and is due and payable on August 19, 1996. As additional incentive for making the loan, the Company issued to Third Century II 7,500 shares of Common Stock without additional consideration. In the event of default by the Company, Third Century II may convert the loan into shares of Common Stock at the rate of $2.50 per share. Eric Nickerson, who is the general partner of Third Century II and of Z Fund, another of the Selling Shareholders, and who has discretionary authority with respect to the shares of Common Stock owned by such entities, was elected a director of the Company at the Company's Annual Meeting of Shareholders held on July 16, 1996. The following table sets forth certain information, as of August 1, 1996, with respect to each of the Selling Shareholders. Other than Eric Nickerson, a director of the Company and a general partner of two of the Selling Shareholders, none of the Selling Shareholders is an executive officer or director of the Company. Third Century II purchased 11,817 shares of Common Stock in a 1993 private placement, purchased 160,000 shares of Common Stock in a 1995 private placement and acquired 22,222 shares of Common Stock upon the conversion of convertible promissory notes in 1995. Z Fund acquired 12,000 shares of Common Stock in the 1995 private placement. Kennedy Capital Management, an investment advisor that has discretionary authority with respect to the voting and disposition of shares being sold by certain of the Selling Shareholders, also has acted as investment advisor on behalf of purchasers in previous offerings made by the Company and may be deemed to be the beneficial owner of the shares owned by such purchasers.
BENEFICIAL OWNERSHIP PRIOR TO BENEFICIAL OWNERSHIP OFFERING(1) AFTER OFFERING (1) ---------------------- ---------------------- NUMBER NUMBER PERCENT OF SHARES NUMBER PERCENT OF SHARES OF CLASS TO BE SOLD OF SHARES OF CLASS NAME ------- ------- ------- ------- ------- Siegfried P. Duray-Bito(2) . . . . 5,547 * 5,547 -- -- Boston Safe Deposit Trust Co. FBO Fairfax County Public School(3) . . . . . . . . . . . . 256,000 4.94% 256,000 -- -- Michael Golden(4). . . . . . . . . 1,875 * 1,875 -- -- Ben Lichtenberg(4) . . . . . . . . 1,875 * 1,875 -- -- Marion Bradley Glass Trust(3). . . . . . . . . . . . . 60,000 1.18% 60,000 -- -- Marion Bradley Glass Via Part Trust(3) . . . . . . . . . . 60,000 1.18% 60,000 -- -- Roger P. May(5). . . . . . . . . . 15,297 * 5,547 9,750 * Floyd E. Murray LLC(6) . . . . . . 10,214 * 10,214 -- -- Newell Company(3). . . . . . . . . 200,000 3.88% 200,000 -- -- Thomas J. O'Rourke(2). . . . . . . 904 * 904 -- -- Pension Reserves Investment Management Board(3) . . . . . . . 150,000 2.92% 150,000 -- -- Steven Schwartz(4). . . . . . . . 500 * 500 -- -- Thomas W. Schneider(7) . . . . . . 43,279 * 33,279 10,000 * Schneider Securities, Inc.(8) . . 1,696 * 1,696 -- --
-12-
BENEFICIAL OWNERSHIP PRIOR TO BENEFICIAL OWNERSHIP OFFERING(1) AFTER OFFERING (1) ---------------------- ---------------------- NUMBER NUMBER PERCENT OF SHARES NUMBER PERCENT OF SHARES OF CLASS TO BE SOLD OF SHARES OF CLASS NAME ------- ------- ------- ------- ------- State Street Bank & Trust Co. FBO Montgomery County Employee Retirement System(3). . . . . . . 274,000 5.28% 274,000 -- -- Third Century II(9). . . . . . . . 389,817 7.56% 176,000 213,817 4.22% Marty L. Williams(10). . . . . . . 114,652 108,652 6,000 * Z Fund(9) . . . . . . . . . . . . 36,000 * 24,000 12,000 *
_____________________ * Indicates ownership of less than one percent. (1) Based on an aggregate of 5,056,256 shares of Common Stock outstanding and, with respect to particular persons, shares underlying options and warrants currently exercisable or exercisable within 60 days. Information set forth under the heading "Beneficial ownership prior to offering" assumes that all of the Warrants have been exercised, including any such Warrants that are not currently exercisable or are not exercisable within 60 days. Information set forth under the heading "Beneficial ownership after offering" assumes that all shares registered hereby on behalf of the Selling Shareholders are sold by the Selling Shareholders, including all of the shares issuable upon the exercise of the Warrants. Except as otherwise indicated in the table and the footnotes thereto, no effect has been given to shares issuable upon the exercise of outstanding options or warrants. (2) For each of Mr. Duray-Bito and Mr. O'Rourke, consists of (i) 904 shares issuable upon the exercise of the August Placement Warrants, (ii) 4,286 shares issuable upon the exercise of the Unit Warrants (including an aggregate of 2,143 shares issuable upon the exercise of the October Placement Warrants included in the Unit Warrants) and (iii) 357 shares issuable upon the exercise of the Consultant Warrants. Mr. Duray-Bito is the Chief Financial Officer of Schneider, and Mr. O'Rourke is the President of Schneider. (3) Includes 128,000 shares, 30,000 shares, 30,000 shares, 100,000 shares, 75,000 shares and 137,000 shares which may be acquired by Boston Safe Deposit Trust Co. FBO Fairfax County Public School, Marian Bradley Glass Trust, Marion Bradley Glass Via Part Trust, Newell Company, Pension Reserves Investment Management Board and State Street Bank & Trust Co. FBO Montgomery County Employee Retirement System, as the case may be, upon the exercise of the October Placement Warrants. Kennedy Capital Management, Inc., a registered investment advisor, has full discretionary authority with respect to the voting and disposition of the shares of Common Stock owned by each of the foregoing persons and may be deemed the beneficial owner of the shares owned by such entities. (4) Consists of shares issuable upon the exercise of the August Placement Warrants. Messrs. Golden, Lichtenberg and Schwartz are employees of First Colonial Securities Group, Inc. (5) Includes (I) 904 shares issuable upon the exercise of the August Placement Warrants, (Ii) 4,286 shares issuable upon the exercise of the Unit Warrants (including an aggregate of 2,143 shares issuable upon the exercise of the October Placement Warrants included in the Unit Warrants) and (iii) 357 Shares issuable upon the exercise of the Consultant Warrants. Also includes 750 shares owned by Mr. May as Custodian for Sarah E. May under the Uniform Gift to Minors Act, 500 shares owned by Mr. May in his IRA account and 2,500 shares and warrants to purchase 4,500 shares owned by Mr. May and his spouse as joint tenants, all of which were purchased in the open market. Mr. May is an employee of Schneider. (6) Includes 9,428 shares issuable upon the exercise of the Unit Warrants (including an aggregate of 4,714 shares issuable upon the exercise of the October Placement Warrants included in the Unit Warrants) and 786 shares issuable upon the exercise of the Consultant Warrants. Floyd E. Murray LLC is a shareholder of Schneider. (7) Includes (i) 5,422 shares issuable upon the exercise of the August Placement Warrants, (ii) 25,714 shares issuable upon the exercise of the Unit Warrants (including an aggregate of 12,857 shares issuable upon the exercise of the October Placement Warrants included in the Unit Warrants), (iii) 2,143 shares issuable upon the exercise of the Consultant Warrants, (iv) 5,000 shares issuable upon the exercise of warrants purchased by Mr. Schneider in the open market -13- and (v) 5,000 shares owned by Mr. Schneider's wife. Mr. Schneider is the Chief Executive Officer of Schneider. (8) Consists of shares issuable upon the exercise of the August Placement Warrants. (9) Includes 88,000 shares and 12,000 shares which may be acquired by Third Century II and Z Fund, respectively, upon the exercise of the October Placement Warrants. For Third Century II, also includes 11,817 shares which may be acquired upon the exercise of warrants issued in the 1993 private placement. Does not include 8,000 shares of Common Stock owned by Eric Nickerson, who has discretionary authority with respect to the voting and disposition of the shares of Common Stock owned by Third Century II and Z Fund. Mr. Nickerson, a director of the Company, may be deemed the beneficial owner of the shares owned by such entities. (10) Includes (i) 30,652 shares issuable upon the exercise of the August Placement Warrants, (ii) 72,000 shares issuable upon the exercise of the Unit Warrants (including an aggregate of 36,000 shares issuable upon the exercise of the October Placement Warrants included in the Unit Warrants), (iii) 6,000 shares issuable upon the exercise of the Consultant Warrants and (iv) 6,000 shares issuable upon the exercise of warrants purchased by Mr. Williams in the open market. Mr. Williams is an employee of Schneider. INDEMNIFICATION The Company's Articles of Incorporation contain provisions limiting the personal liability of directors to the Company and its shareholders, and the Company's Bylaws contain provisions indemnifying directors, officers, employees and agents of the Company for actions, in their capacity as such, to the fullest extent permitted by law. The Company also has entered into indemnification agreements with its directors and executive officers. Each of the foregoing may include indemnification for liabilities under the Securities Act. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. LEGAL MATTERS Certain matters with respect to the validity of the issuance of the Common Stock offered hereby are being passed upon for the Company by William B. Barnett, Esq., Sherman Oaks, California. EXPERTS The consolidated financial statements of Cosmetic Group U.S.A., Inc. incorporated by reference from the Company's Annual Report (Form 10-KSB) for the year ended December 31, 1995 have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. -14 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesman or other person is authorized to give any information or to make any representations other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any of the Selling Shareholders. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities covered hereby in any jurisdiction or to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this Prospectus nor any sale made hereunder shall, in any circumstances, create any implication that information contained herein is correct as of any time subsequent to the date hereof. ------------------------------------------- TABLE OF CONTENTS PAGE Available Information. . . . . . . . . . . . . . . . . . . . . . . . . Incorporation of Certain Documents . . . . . . . . . . . . . . . . . . by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling Shareholders and . . . . . . . . . . . . . . . . . . . . . . . Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COSMETIC GROUP U.S.A., INC. 1,374,732 SHARES COMMON STOCK PROSPECTUS , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses payable by the registrant in connection with the filing of this Registration Statement on Form S-3: Securities and Exchange Commission registration fee . . . . $ 1,362.88 Blue Sky fees and expenses (including legal fees) . . . . 4,000.00 Printing costs . . . . . . . . . . . . . . . . . . . . . . 1,500.00 Legal fees and expenses . . . . . . . . . . . . . . . . . . 15,000.00 Accounting fees and expenses . . . . . . . . . . . . . . . 7,000.00 Miscellaneous expenses . . . . . . . . . . . . . . . . . . 1,500.00 ---------- Total . . . . . . . . . . . . . . . . . . . . . . $30,362.88 ---------- ---------- ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Section 317 of the California General Corporation Law (the "CGCL"), the registrant is in certain circumstances permitted to indemnify its directors and officers against certain expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with threatened, pending or completed civil, criminal, administrative or investigative actions, suits or proceedings (other than an action by or in the right of the registrant), in which such persons were or are parties, or are threatened to be made parties, by reason of the fact that they were or are directors or officers of the registrant, if such persons acted in good faith and in a manner they reasonably believed to be in the best interests of the registrant, and with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. In addition, the registrant is in certain circumstances permitted to indemnify its directors and officers against certain expenses incurred in connection with the defense or settlement of a threatened, pending or completed action by or in the right of the registrant, and against amounts paid in settlement of any such action, if such persons acted in good faith and in a manner they believed to be in the best interests of the registrant and its shareholders, provided that the specified court approval is obtained. As permitted by Section 317 of the CGCL, the Articles of Incorporation and By-Laws of the registrant provide that the registrant is authorized to provide indemnification for its directors and officers for breach of their duty to the registrant and its shareholders through bylaw provisions or through agreements with the directors and officers, or both, in excess of the indemnification otherwise permitted by Section 317 of the CGCL. The registrant's Bylaws provide for indemnification of its directors and officers to the maximum extent permitted by Section 317 of the CGCL. In addition, agreements entered into by the registrant with its directors and its executive officers require the registrant to indemnify such persons against expenses, judgments, fines, settlements and other amounts reasonably incurred in connection with any proceeding to which any such person may be made a party by reason of the fact that such person was an agent of the registrant or by reason of any action or inaction on the part of such person while serving as an agent of the registrant (including judgments, fines and settlements in or of a derivative action, unless indemnification is otherwise prohibited by law), provided such person acted in good faith and in a manner he reasonably believed to be in the best interests of the registrant and, in the case of a criminal proceeding, had no reason to believe his conduct was unlawful. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder. II-1 The Articles of Incorporation of the registrant provide that the personal liability of the directors of the registrant for monetary damages shall be eliminated to the fullest extent permissible under California law. Under Section 204(a)(10) of the CGCL, the personal liability of a director for monetary damages in an action brought by or in the right of the corporation for breach of the director's duty to the corporation may be eliminated, except for the liability of a director resulting from (i) acts or omissions involving intentional misconduct or the absence of good faith, (ii) any transaction from which a director derived an improper personal benefit, (iii) acts or omissions showing a reckless disregard for the director's duty, (iv) acts or omissions constituting an unexcused pattern of inattention to the director's duty, or (v) the making of an illegal distribution to shareholders or an illegal loan or guaranty. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS 4.1 Form of certificate representing shares of the registrant's Common Stock.(1) 5.1 Opinion of William B. Barnett, Esq. 23.1 Consent of Ernst & Young LLP (set forth on Page II-4). 23.2 Consent of William B. Barnett, Esq. (included in Exhibit 5.1). 24.1 Powers of Attorney.(2) 99.1 10% Subordinated Convertible Note, dated June 18, 1996, issued by the registrant in favor of Third Century II. __________ (1) Incorporated by reference to the registrant's Registration Statement on Form SB-2 (No. 33-78936) filed May 13, 1994 and amended on June 23, 1994, July 12, 1994 and July 14, 1994. (2) Previously filed. ITEM 17. UNDERTAKINGS A. The undersigned registrant hereby undertakes that it will: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; and II-2 (iii) Include any additional or changed material information on the plan of distribution. PROVIDED, HOWEVER, that paragraphs (A)(1)(i) and (A)(1)(ii) do not apply if the information required in a post-effective amendment is incorporated by reference form periodic reports filed by the registrant under the Securities Exchange Act of 1934. (2) For determining liability under the Securities Act of 1933, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering thereof. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. B. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in Amendment No. 1 to Registration Statement (Form S-3 No. 333-06277) and related Prospectus of Cosmetic Group U.S.A., Inc. for the registration of 1,374,732 shares of its common stock and to the incorporation by reference therein of our report dated March 8, 1996 with respect to the consolidated financial statements of Cosmetic Group U.S.A., Inc. incorporated by reference in its Annual Report (Form 10-KSB) for the year ended December 31, 1995, filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Los Angeles, California August 5, 1996 II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sun Valley, State of California, on August 5, 1996. COSMETIC GROUP U.S.A., INC. By: /s/ Alfred E. Booth, Jr. -------------------------------------------- Alfred E. Booth, Jr., Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE /S/ Alfred E. Booth, Jr. Chairman of the Board, President August 5, 1996 - -------------------------- Alfred E. Booth, Jr. and Chief Executive Officer /s/ Frank X. McGarvey* Executive Vice President , Secretary August 5, 1996 - -------------------------- Frank X. McGarvey and Director /s/Jennifer Eggers* Chief Financial Officer, Chief Accounting August 5, 1996 - -------------------------- Jennifer Eggers Officer and Assistant Secretary /S/ Judith E. Zegarelli Senior Vice President and Director August 5, 1996 - -------------------------- Judith E. Zegarelli /S/ William B. Barnett Director August 5 , 1996 - -------------------------- William B. Barnett
II-5 /s/Jack Brehm* Director August 5, 1996 - -------------------------- Jack Brehm /s/ Eric Nickerson Director August 5, 1996 - -------------------------- Eric Nickerson *By: /S/ Alfred E. Booth, Jr. - ------------------------------ Alfred E. Booth, Jr. Attorney-in-fact
II-6 EX-5.1 2 EXHIBIT 5.1 OPINION OF WILLIAM B. BARNETT ESQ. [logo] [LETTERHEAD] August 5, 1996 Cosmetic Group U.S.A., Inc. 11312 Penrose Street Sun Valley, California 91352 Re: Registration Statement on Form S-3 File No. 333-06277 Gentlemen: We have acted as counsel for Cosmetic Group U.S.A., Inc. (the "Company") in connection with the initial distribution of 600,000 shares of Common Stock and Warrants to purchase 774,732 shares of Common Stock at exercise prices ranging between $3.75 per share to $1.95 per share. The Company has filed a Registration Statement on Form S-3, File No. 33-36277 (the "Registration Statement") with the Securities and Exchange Commission under the Securities Act of 1933, as amended. The Registration Statement relates to a shelf registration of an aggregate of 1,374,732 shares of the Company's Common Stock which are being offered from time to time by certain selling shareholders (the "Selling Shareholders"). The 1,374,732 shares being registered consist of 600,000 currently outstanding shares of Common Stock and 774,732 shares of Common Stock issuable upon the exercise of outstanding Warrants into such 774,732 shares of Common Stock. In giving this opinion, we have reviewed the Company's articles of incorporation, by-laws and corporate proceedings, the Registration Statement, and such other documents and certificates of officers of the Company with respect to the factual matters contained therein as we have felt necessary or appropriate in order to render the opinions expressed herein. In making our examination, we have assumed the genuineness of all signatures, the authenticity of all documents presented to us as originals, the conformity to original documents of all documents presented to us as copies thereof and the authenticity of the original documents from which any such copies were made, which assumptions we have not independently verified. [logo] Cosmetic Group, U.S.A., Inc. August 5, 1996 Page 2 Based upon the foregoing, we are of the opinion that: 1. The issuance of the currently outstanding 600,000 shares of Common Stock has been duly authorized by the Board of Directors of the Company, and such shares are legally issued, fully paid and non-assessable. 2. The issuance of the currently outstanding Warrants has been duly authorized by the Board of Directors of the Company, and the Warrants constitute legal, valid and binding obligations of the Company, and are enforceable against the Company in accordance with their terms, except (i) as enforceability may be limited by bankruptcy, insolvency, fraudulent transfer moratorium or other similar laws relating to of limiting creditors' rights generally and by general principles or equity (regardless of whether such enforceability is considered in a proceeding at law or in equity) and (ii) to the extent that rights to indemnity and contribution thereunder may be limited under applicable laws. 3. The 774,732 shares of Common Stock issuable upon the exercise of the Warrants have been duly authorized by the Board of Directors of the Company, and, upon exercise of the Warrants in accordance with their terms and payment of the exercise price therefor, will be validly issued, fully paid and nonassessable. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Prospectus filed as a part of the Registration Statement. Very truly yours, /s/ William B. Barnett ---------------------- Law Offices of William B. Barnett EX-99.1 3 EXHIBIT 99.1 COSMETIC GROUP U.S.A., INC. (A California Corporation) --------------------------------- 10% SUBORDINATED CONVERTIBLE NOTE $150,000.00 PRINCIPAL AMOUNT DUE AUGUST 18, 1996 --------------------------------- NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF AS PROVIDED HEREIN HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE LAWS OF ANY STATE OR OTHER JURISDICTION. TRANSFER OF THIS NOTE AND SUCH SECURITIES IS RESTRICTED PURSUANT TO SUCH LAWS. Los Angeles, California $150,000.00 June 18, 1996 1. NOTE. 1.1 Cosmetic Group U.S.A., Inc., a California corporation (the "Company" or the "Borrower"), hereby promises to pay to the order of Third Century II (the "Holder") the amount of $150,000.00 by August 15, 1996 ("Due Date") and to pay interest at ten percent (10%) per annum on the outstanding principal. Payments shall be made to the Holder in lawful money of the United States at 1711 Chateau Court, Fallston, MD 21047, or at such other place as the Holder may specify in writing. 1.2 In the event the Company does not make, when due, any payment of principal or interest required to be made hereunder, the Company will pay, on demand, interest on the amount of any overdue payment of principal or interest for the period following the Due Date of such payment, at a rate of eleven percent (11%) per annum. 1 2. DEFAULT. In the event of an occurrence of an occurrence of any event of default specified below, the principal and all accrued interest on the Note shall become immediately due and payable without notice, except as specified below. The occurrence of any of the following events shall constitute an event of default under this Note: 2.1 The Company fails to make any payment hereunder when due, which failure has not been cured within fifteen (15) days following such failure. 2.2 If the Company shall default in the observance or performance of any covenant contained in or provision of the Promissory Note Purchase Agreement herewith between the Company and the Holder and which has not been cured within ten (10) days of the receipt by the Company of written notice thereof from or on behalf of the Holder. 2.3 If the Borrower shall file a petition to take advantage of any insolvency act; make an assignment for the benefit of its creditors; commence a proceeding for the appointment of a receiver, trustee, liquidator or conservator of itself of a whole or any substantial part of its property; file a petition or answer seeking reorganization or arrangement or similar relief under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any state; or 2.4 If a court of competent jurisdiction shall enter an order, judgment or decree appointing a custodian, receiver, trustee, liquidator or conservator of the Borrower or of the whole or any substantial part of its properties, or approve a petition filed against the Borrower seeking reorganization or arrangement or similar relief under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any state; or if, under the provisions of any other law for the relief or aid of debtors, a court of competent jurisdiction shall assume custody or control of the Borrower or of the whole or any substantial part of its properties; or if there is commenced against the Borrower any proceeding for any of the foregoing relief and such proceeding or petition remains undismissed for a period of 30 days; or if the Borrower by any act indicates its consent to or approval of any such proceeding or petition; or 2.5 If (i) any judgment, remaining unpaid, unstayed or undismissed for a period of 60 days is rendered against the Borrower which by itself or together with all other such judgments rendered against the Borrower remaining unpaid, unstayed or undismissed for a period of 60 days, is in excess of $200,000, or (ii) there is any attachment or execution against the Borrower's properties remaining unstayed or undismissed for a period of 60 days which by itself or together with all other attachments and executions against the Borrower's properties remaining unstayed or undismissed for a period of 60 days is for an amount in excess of $200,000. 2 3. CONVERSION. 3.1 CONVERSION RIGHTS. The Holder will have the right, at its option, to convert the Note into Shares of Common Stock of the Company (the "Shares") at any time before the close of business on August 30, 1996 at the conversion rate then in effect. The initial conversion rate is 400 Shares of Common Stock per $1,000 principal amount at maturity of the Note, or a total of 60,000 shares, subject to adjustments in certain events. No fractional Share or script representing a fractional Share will be issued upon conversion of the Notes. Cash will be paid in lieu of any fractional Shares equal to the then current market value of such fractional Share. A Holder may convert a portion of the Notes provided that the portion is $1,000 principal amount at maturity or an integral multiple thereof. The conversion rate will be appropriately adjusted if the Company (a) pays a dividend or makes a distribution on its Shares of Common Stock which is paid or made in Shares of Common Stock, (b) subdivides or reclassifies its outstanding Shares of Common Stock, (c) combines its outstanding Shares of Common Stock into a smaller number of Shares of Common Stock, (d) issues Shares of Common Stock, or issues rights or warrants to all Holders of its Common Stock entitling them to subscribe for or purchase Shares of Common Stock (or securities convertible into Common Stock), at a price per Share less than $3.00 per Share, or (e) distributes to all Holders of its Common Stock evidences of its indebtedness or assets (excluding any dividend paid in cash out of legally available funds) subject to the limitation that adjustments by reason of any of the foregoing need not be made until they result in a cumulative change in the conversion rate of at least five percent (5%). The conversion rate will not be adjusted upon the conversion of presently outstanding stock options or warrants. In case of any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the surviving corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in case of any statutory exchange of securities with another corporation, there will be no adjustment of the conversion price, but each Holder of the Notes then outstanding will have the right thereafter to convert such Notes into the kind and amount of securities, cash or other property which he would have owned or have been entitled to receive immediately after such consolidation, merger, statutory exchange, sale or conveyance had such Notes been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale or conveyance. In the case of a cash merger of the Company into another corporation or any other cash transaction of the type mentioned above, the effect of these provisions would be that the conversion features of the Notes would thereafter be limited to converting the Notes at the conversion price in effect at such time into the same amount of cash per Share that such Holder would 3 have received had such Holder converted the Notes into Common Stock immediately prior to the effective date of such cash merger or transaction. 3.2 MECHANICS OF CONVERSION The Note may be converted upon surrender of the Notes at any time prior to the close of business on August 30, 1996 at the offices of the Company, 11312 Penrose Street, Sun Valley, California, with the form of "Notice of Conversion" duly completed and executed as indicated. Shares of Common Stock issued upon conversion will be fully paid and non-assessable. 4. REDEMPTION. The Note will not be redeemable prior to the Maturity Date. The Note is not subject to any sinking fund or any other similar provision. 5. SUBORDINATION. The indebtedness evidenced by this Note shall be subordinated in right of payment to the prior payment in full of all existing and future Senior Indebtedness of the Company. Senior Indebtedness is defined in the Promissory Note Purchase Agreement between the Company and the Holder. 6. SECURITIES LAW COMPLIANCE. The Holder understands that the right of conversion of this Note is subject to full compliance with the provisions of all applicable securities laws and the availability thereunder upon any conversion of any exemption from registration thereunder for such conversion, and that the certificate or certificates evidencing such Note and Shares will bear a legend to the following effect: "THE SECURITIES EVIDENCED HEREBY MAY NOT BE TRANSFERRED WITHOUT (i) THE OPINION OF COUNSEL SATISFACTORY TO THIS CORPORATION THAT SUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE FEDERAL SECURITIES ACT OF 1933, AS AMENDED, OR (ii) SUCH REGISTRATION." 7. "PIGGYBACK" REGISTRATION. If the Company, at any time after the date of this Note and before two years thereafter, files a registration statement under the Securities Act of 1933, as amended (the "Act"), relating to any shares of Cosmetic Group U.S.A., Inc. Common Stock to be offered and sold by the Company pursuant to an underwriting (except with respect to registration statements filed on Forms S-8 or S-14, or any other inappropriate form), the Company shall give written notice to the the Holder of this Note (the "Holder") as promptly as possible for the proposed filing of such registration statement and will use all reasonable efforts to cause such number of shares of Common Stock issuable upon conversion of this Note as the Holder shall request in writing, within fifteen days after the giving of such 4 notice, to be included in such registration statement for offering and sale upon the same terms and in the same manner as the Company proposes to offer and to sell such shares of its Common Stock pursuant thereto; provided, that (a) the Company shall not be required to include any Common Stock in any such registration statement if the Company is advised by its investment banking firm that the inclusion of such shares may, in such firm's opinion, interfere with the orderly sale and distribution of the shares of Cosmetic Group U.S.A., Inc. Common Stock to be offered and sold by the Company; and (b) the Company, at its sole discretion, and without the consent of the Holder, may decide not to file or to withdraw such registration statement and may abandon the proposed offering at any time. In connection with any registration statement in which Common Stock is included, the Company will pay all Commission and "blue sky" registration and other necessary filing fees, printing expenses, fees and disbursements of legal counsel for the Company and "blue sky" counsel, transfer agents' and registrars' fees, fees and disbursements of experts used by the Company in connection with such registration and expenses incidental to any post-effective amendment to such registration statement. The Holder/Seller shall pay all other expenses attributable to inclusion in the offering of Common Stock, including, without limitation, Commission and "blue sky" registration and other necessary filing fees and underwriting discounts, commissions and expenses attributable thereto and fees and disbursements of the Holder/Seller's counsel, accountants and experts, if any. The Common Stock issued upon conversion of the Note, which bear restrictive legends as a result of the manner in which they were issued by the Company, generally may be sold in the public market (in the absence of registration) only if the sale is made in compliance with Rule 144 under the Act. In general, under Rule 144, a person (or persons whose shares are aggregated with those of others) who has beneficially owned "restricted" shares for at least two years, and a person who is deemed to be an "affiliate" of the Company, is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume in the over-the-counter market during the four calendar weeks preceding such sale. Non-affiliates who have held their shares for at least three years are entitled to sell their shares under Rule 144 without regard to volume limitations. The Common Stock bearing restrictive legends should satisfy the two-year holding period required by Rule 144, from time to time, commencing two years from the date of this Note. 8. NOTICES. Any notice herein required or permitted to be given shall be in writing and may be personally served, sent by United States Mail, certified, or by overnight delivery service. For the purposes hereof, the address of the Holder and the address of the Company shall be as reflected in the Promissory Note Purchase Agreement between the Purchaser and the Company of even date herewith. Both the Holder and the Company may change the address for service by written notice to the other as herein provided. 9. NO WAIVER: RIGHTS AND REMEDIES CUMULATIVE. No failure on the part of the Holder to exercise, and no delay in exercising any right hereunder shall operate as a waiver 5 thereof; nor shall any single or partial exercise by the Holder of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The rights and remedies herein provided are cumulative and not exclusive of any remedies or rights provided by law or by any other agreement between the Borrower and the Holder. 10. COSTS AND EXPENSES. The Borrower shall reimburse the Purchaser for all costs and expenses incurred by the Purchaser in connection with the preparation, execution and closing of this Note and shall pay the reasonable fees and disbursements of counsel to the Purchaser in connection with the enforcement of the Purchaser's rights hereunder. 11. AMENDMENTS. No amendment, modification or waiver of any provision of this Note nor consent to any departure by the Holder therefrom shall be effective unless the same shall be in writing and signed by the Holder and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 12. SUCCESSORS AND ASSIGNS. This Note shall be binding upon the Borrower and its successors and assigns and the terms hereof shall inure to the benefit of the Holder and its successors and assigns, including subsequent holders hereof. 13. SEVERABILITY. The provisions of this Note are severable, and if any provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall not in any manner affect such provision in any other jurisdiction or any other provision of this Note in any jurisdiction. 14. WAIVER OF NOTICE. The Borrower hereby waives presentment, demand for payment, notice of protest and all other demands in connection with the delivery, acceptance, performance, default or enforcement of this Note. 15. GOVERNING LAW. this Note has been executed in and shall be governed by the laws of the State of California. 16. NOTE HOLDER IS NOT A SHAREHOLDER. No Holder of this Note, solely by virtue of the ownership of this Note, shall be considered a shareholder of the Company for any purpose, nor shall anything in this Note be construed to confer on any Holder of this Note any rights of a shareholder of the Company including, without limitation, any right to vote, give or withhold consent to any corporate action, receive notice of meetings of shareholders or receive dividends. 17. EXCHANGE AND REPLACEMENT OF NOTE. Upon surrender of this Note to the Borrower, the Borrower shall execute and deliver, at its expense, one or more new Notes of such denominations and in such names, as requested by the holder of the surrendered Note. Upon receipt of evidence satisfactory to the Company of the loss, theft, mutilation, or destruction of any Note, the Borrower will make and deliver a new Note, of like tenor, at the request of the holder of such Note. 6 IN WITNESS WHEREOF, the Company has caused this Note to be signed by its authorized officers as of the _______ day of June, 1996. ATTEST: COSMETIC GROUP U.S.A., INC. By: /s/ Frank X. McGarvey By: /s/ Alfred E. Booth, Jr. --------------------- -------------------------- FRANK X. McGARVEY ALFRED E. BOOTH, JR. Secretary Chairman and CEO 7 -----END PRIVACY-ENHANCED MESSAGE-----