COSMETIC GROUP U.S.A., INC.
(A California Corporation)
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10% SUBORDINATED CONVERTIBLE NOTE
$150,000.00 PRINCIPAL AMOUNT
DUE AUGUST 18, 1996
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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.
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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.
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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
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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
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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
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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.
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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.
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FRANK X. McGARVEY ALFRED E. BOOTH, JR.
Secretary Chairman and CEO
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