<PAGE>
RULE NO. 424(b)(4)
REGISTRATION NO. 333-10191
PROSPECTUS
4,190,000 SHARES
CARSON, INC.
CLASS A COMMON STOCK
---------------
Of the 4,190,000 shares of Class A Common Stock of Carson, Inc. offered
hereby, 2,484,500 shares are being offered by Carson, Inc. (the "Company") and
1,705,500 shares are being offered by the Selling Stockholders. See "Principal
and Selling Stockholders." The Company will not receive any of the proceeds
from the sale of the shares of Common Stock by the Selling Stockholders.
Of the shares being offered hereby, 3,352,000 shares are being offered for
sale initially in the United States and Canada by the U.S. Underwriters and
838,000 shares are being offered for sale initially in a concurrent offering
outside of the United States and Canada by the International Managers. The
initial public offering price and the underwriting discount per share are
identical for both Offerings. Of the shares being offered hereby, up to
400,000 will be reserved for sale to certain directors, officers, employees,
business associates and related persons of the Company. See "Underwriting."
Upon consummation of the Offerings, the Company's issued and outstanding
capital stock will consist of 4,190,000 shares of Class A Common Stock offered
hereby, 1,859,677 shares of Class B Common Stock and 8,306,014 shares of Class
C Common Stock, each with a par value of $.01 per share (the "Common Stock").
The Class A Common Stock entitles each holder to one vote per share and the
Class C Common Stock entitles each holder to ten votes per share. The Class B
Common Stock generally is not entitled to vote on any matter submitted for the
vote of stockholders. Immediately after the Offerings, the percentage of the
combined voting power with respect to all matters submitted for the vote of
all stockholders held by holders of the Class A Common Stock, Class B Common
Stock and Class C Common Stock will be 4.8%, 0% and 95.2%, respectively. See
"Description of Capital Stock." Immediately after the Offerings, DNL Partners,
Limited Partnership will have approximately 75.8% of the combined voting
power. See "Principal and Selling Stockholders."
Prior to the Offerings, there has been no public market for the Class A
Common Stock. For a discussion relating to the factors to be considered in
determining the initial public offering price, see "Underwriting."
The Class A Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "CIC," subject to official notice of issuance.
SEE "RISK FACTORS," BEGINNING ON PAGE 11, FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A
COMMON STOCK OFFERED HEREBY.
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............. $14.00 $.98 $13.02 $13.02
- ---------------------------------------------------------------------------------------------
Total(3)............... $58,660,000 $4,106,200 $32,348,190 $22,205,610
- ---------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,500,000.
(3) The Company has granted the U.S. Underwriters and the International
Managers options, exercisable within 30 days after the date hereof, to
purchase up to an additional 502,800 shares and 125,700 shares of Class A
Common Stock, respectively, solely to cover over-allotments, if any. If
such options are exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $67,459,000,
$4,722,130 and $40,531,260, respectively. See "Underwriting."
---------------
The shares of Class A Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Class A Common Stock will be made in
New York, New York on or about October 18, 1996.
---------------
MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
---------------
The date of this Prospectus is October 14, 1996.
<PAGE>
[ART WORK]
[pictures of models, product advertisements and
packaging, brand names and logos, text as follows:
900 million people of African descent; Carson
products--spanning the globe]
The names Dark & Lovely(R), Dark & Lovely Excelle(R), Dark & Natural(R),
Beautiful Beginnings(R), Reviving Colors(R), and Magic(R) are included among
the registered trademarks of the Company. The names Fail Safe(TM),
DL 2000(TM), Comfort Plus(TM) and Color Care(TM) are the subject of pending
trademark registrations.
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
CLASS A COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the related notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated or
where the context otherwise requires, (i) all information in this Prospectus
gives effect to the Recapitalization (as defined herein) and assumes no
exercise of the Underwriters' over-allotment options, and (ii) all references
herein to the "Company" refer to Carson, Inc., Aminco, Inc. (the "Predecessor")
and their direct and indirect subsidiaries. Unless otherwise indicated, certain
industry data and data regarding the Company's products in this Prospectus are
based on (i) the December 1995 Combined Food and Drug Store Report (the "Towne-
Oller Report") published by Towne-Oller & Associates, Inc., a market research
organization and a subsidiary of Information Resources Inc., and (ii) a July
1995 report published by Packaged Facts, an independent market research company
that provides market data to consumer products companies and relies on a
variety of information sources including the Towne-Oller Report (the "Packaged
Facts Report"). Towne-Oller's data is based on market samples from food and
drug chain stores, which constitute approximately 20% of the total ethnic
health and beauty aids product distribution channels, and is therefore limited
in scope. While the Company believes these reports to be reliable, the Company
has not independently verified the data contained therein. References herein to
fiscal years refer to the Company's fiscal year ending March 31 in the year
referenced.
THE COMPANY
GENERAL
The Company is a leading manufacturer and marketer in the U.S. retail ethnic
hair care market for African-Americans. The Company believes that it is one of
the leading global manufacturers and marketers of ethnic hair care products for
persons of African descent. The Company's flagship brand, Dark & Lovely, is the
most widely recognized ethnic brand name in the U.S. retail ethnic hair care
market. The Company currently sells over 60 different products under five
principal brand names, including Dark & Lovely, Excelle, Beautiful Beginnings,
Dark & Natural and Magic. The majority of the Company's sales are derived from
four categories of the ethnic health and beauty aids market: hair relaxers and
texturizers, which are used to chemically treat and straighten hair
(constituting approximately 50% of the Company's net sales in fiscal 1996),
hair color, shaving products and hair care maintenance products. The Company's
products are specifically formulated to address the unique physiological
characteristics of hair of persons of African descent, which typically include
curliness and dryness. The Company markets its products in the United States
with its own experienced direct sales force. The Company also currently markets
its products in 60 countries outside of the United States, primarily through
local distributors. In fiscal 1996, approximately 23.8% of the Company's net
sales were derived from sales within these countries.
On August 23, 1995, the Predecessor was acquired (the "Acquisition") by an
investor group for a purchase price of approximately $95 million (inclusive of
transaction costs), funded primarily with Company debt. This investor group
assembled a new management team to focus on enhancing the Company's position in
the ethnic hair care market. Several important initiatives have been undertaken
by the new management, including establishing a manufacturing facility in South
Africa, expanding the in-house direct sales force, selecting a new ethnic-
oriented advertising agency, reinvigorating the product line with new packaging
and accelerating the introduction of new products. The Company experienced a
17.5% increase in net sales from $58.1 million in fiscal 1995 to $68.3 million
in fiscal 1996 and a 45.6% increase in operating income from $8.2 million in
fiscal 1995 to $12.0 million in fiscal 1996.
ETHNIC MARKET LEADERSHIP
The Company's resources are focused primarily on satisfying the unique hair
care needs of individuals of African descent worldwide. The Company believes
that it has the number one U.S. retail market position in three of the four
ethnic hair care categories in which it competes (hair relaxers and
texturizers, hair color and shaving
3
<PAGE>
products). The Company attributes its leading market position to its strong
brand names, combined with its direct sales force, broad distribution, research
and development capabilities and experienced management team. Because of these
strengths, the Company believes that it has a competitive advantage over both
the companies specializing in products for the ethnic hair care market and the
few general market companies that compete in the ethnic hair care market, but
whose principal resources are targeted to the general health and beauty aids
market.
. Strong brands. The Company currently sells its products under five
principal brand names including Dark & Lovely, Excelle, Beautiful
Beginnings, Dark & Natural and Magic. The Company's flagship brand, Dark
& Lovely, is the most widely recognized ethnic brand name in the U.S.
retail ethnic hair care market for African-Americans. The Company
believes that its brand strength is based upon product quality, properly
targeted advertising, package design, reputation for innovation and
focused commitment to the unique needs of ethnic consumers.
. Experienced Sales Force and Broad Distribution. In April 1995, the
Company established a direct sales force to enhance its ability to
further penetrate existing markets with both current and new products.
The sales force has significant sales experience both with major
consumer product companies and ethnic hair care competitors. The Company
believes that it now has the largest direct sales force serving the U.S.
retail ethnic hair care market. Historically, the Company used
commissioned sales brokers, as is the industry norm, who tended to have
conflicting brand loyalties and provided minimal marketing and sell-
through support. In the United States, the Company benefits from having
its extensive product line distributed broadly through three principal
channels: (i) multi-warehouse chains, including mass merchandisers
(e.g., Wal-Mart, K-Mart), major drug chains (e.g., Walgreens, Revco),
food chains (e.g., Winn Dixie, Kroger) and discount chains (e.g., Family
Dollar, Dollar General), (ii) beauty and barber supply stores ("B&Bs")
such as Alberto-Culver Company's Sally's Beauty Supply stores and
members of the National Beauty Supply Dealers Association, and (iii)
ethnic product distributors.
. Research and Development. The Company believes that its heritage of
technological innovation and its focused research and development
("R&D") effort are important to maintaining its market leadership
position. Three of the ethnic hair care industry's most significant
innovations were introduced by the Company: the first hair color
developed exclusively for hair of persons of African descent (1972), the
first no-lye relaxer, which provided a safe relaxer product for home use
(1978), and the Fail Safe technology for no-lye relaxers (1993), which
eliminates problems associated with imprecise mixing which can make no-
lye products too weak, thereby impacting straightening, or too strong,
leading to hair damage. One of the most significant sources of consumer
complaints in the industry is inconsistent results caused by mixing
errors. The Company believes that its R&D department, led by two
industry experienced chemists with Ph.D.s and including nine other
researchers and technicians, represents the largest R&D effort focused
on the ethnic hair care market.
. Experienced Management Team. In connection with the Acquisition, the
senior management of the Predecessor was replaced. A team of seasoned
senior executives with extensive experience in the ethnic market and
consumer products industry was recruited to build on the Company's
strong position in the global ethnic hair care market. As Chairman and
Chief Executive Officer, Dr. Leroy Keith, former President of Morehouse
College and Director of the Predecessor, entrepreneur and prominent
member of the African-American community, provides the Company with
leadership and vision. Joyce M. Roche, President and Chief Operating
Officer, has over 20 years of experience in the health and beauty aids
industry, including positions as Senior Vice President of Marketing and
Vice President of Global Marketing at Avon Products, Inc. ("Avon") and
Director of Marketing at Revlon, Inc. ("Revlon"). Dennis Smith,
Executive Vice President of Sales, has over 20 years of experience in
the ethnic hair
4
<PAGE>
care industry, including senior management positions with a competitor
and 14 years with the Company. Miriam Muley, Executive Vice President of
Marketing, has over 17 years of consumer products industry experience,
having held marketing positions at Avon, Bristol-Myers Squibb Company's
Clairol division and Johnson & Johnson. This management team has focused
the Company's strategy to further develop the ethnic hair care market
both in the United States and internationally.
GROWTH STRATEGY
The Company believes that it is well positioned to grow both internally and
through acquisitions, in order to enhance its market position in the ethnic
hair care market. The Company intends to achieve its goals by (i) increasing
its share of existing markets, (ii) increasing international expansion, (iii)
leveraging brands into new categories, (iv) targeting the U.S. professional
salon market and (v) capitalizing on selective acquisition opportunities.
. Increase Share of Existing Markets. Product innovation and ongoing
upgrading of existing products are the cornerstone of the Company's
efforts to increase its market share in existing markets. The Company
recently incorporated into all of its relaxer products its latest
innovation in relaxer technology, called Fail Safe, which eliminates the
problem of mixing errors which occur with the in-home use of no-lye
relaxers. The Company's Fail Safe technology assures that the consumer
will not make a mixing error and thereby vary the relaxer strength. The
Company has been on an aggressive schedule of new product introductions
or existing product upgrades during the last several years with over 10
products that have been recently introduced or that will be introduced
during the next six months, including improved Dark & Lovely and Excelle
products, a new shampoo and conditioner to complement the Company's hair
color products and a new Magic mild cream formula shaving product.
. Increase International Expansion. The Company believes it is poised for
growth in markets such as Africa, Brazil and the Caribbean, each of
which has a significant concentration of consumers of African descent.
The Company currently markets its entire product line in over 60
countries worldwide under the same brand names as it uses in the United
States. International sales in fiscal 1996 of $16.3 million represented
23.8% of the Company's fiscal 1996 net sales and increased 48.0%
compared to fiscal 1995.
-- Africa: In fiscal 1996, the Company had sales of approximately $7.7
million to 17 of the 55 African countries. The Company commenced its
own manufacturing operations in South Africa in March 1996 to
support its African strategic initiatives. The Company's key
strategic initiatives to achieve growth throughout the African
continent are to: (i) continue market penetration and expansion of
the core Southern African business; (ii) establish and develop
distribution and/or manufacturing facilities in East Africa and West
Africa; (iii) extend existing product lines to include related
product categories such as cosmetics; and (iv) identify selected
strategic acquisitions.
-- Brazil: Brazil has a population of approximately 100 million people
of African descent, almost three times the number of people of
African descent as the United States. Moreover, the Company believes
that the ethnic hair care industry in Brazil is underdeveloped and
that the country's improving economy and demographic trends make
this market attractive for the introduction of the Company's
products. The Company began establishing a distribution network and
training stylists in Brazil in October 1995, through a strategic
alliance with Servico Nacional de Aprendizagem (SENAC), a national
professional services training organization. The Company intends to
use Brazil as a base for expanding its products and facilities to
other Central and South American countries.
5
<PAGE>
-- Caribbean: In order to increase sales penetration in the Caribbean
region, the Company recently appointed a Caribbean Sales Manager and
is investigating whether to establish a factory in Jamaica which
would enable the Company to produce in a Caribbean Community and
Common Market (CARICOM) nation, thereby substantially reducing taxes
and tariffs. The Company has sold products into the Caribbean on an
export basis through brokers since before 1975, but expects to
benefit from a more focused local marketing and manufacturing
presence.
. Leverage Brands into New Product Categories. The Company believes that
its flagship Dark & Lovely brand name is transferable to other ethnic
health and beauty aids categories, including cosmetics. According to the
Packaged Facts Report, the cosmetics segment of the U.S. retail ethnic
health and beauty aids market was projected to be approximately $251
million in retail sales in 1995, and is forecasted to grow at 15% per
year until 1999. The Company intends to enter the ethnic cosmetics
market with a product line that is consistent with the positioning of
its ethnic hair care brands. The Company intends to take advantage of
(i) its ability to introduce its consumers to the Dark & Lovely cosmetic
line through inserts in Dark & Lovely relaxer and hair color kits (which
total 11 million units annually), (ii) its strong relationships with its
current customers which will enable it to distribute new cosmetics
products efficiently through the same channels, and (iii) its exclusive
contract manufacturing arrangement with AM Cosmetics, Inc. ("AM
Cosmetics"), a leading low-cost manufacturer of cosmetics. The Company
is engaged in market research and product development and, although no
specific product launch date has been set, expects to enter the ethnic
cosmetics market by the end of 1997.
. Target the U.S. Professional Salon Market. The Company believes that its
R&D expertise and heritage as the technological innovator in the ethnic
hair care market will facilitate its entry into the United States
professional salon market. The Company is developing a new professional
product line under a distinct brand name that will offer certain
technological advantages versus products currently offered in salons, as
well as a complementary line of hair care maintenance products for
exclusive purchase in salons. The Company estimates that there are in
excess of 28,000 African-American hair care salons in the United States
and Company market research indicates that African-American women are
twice as likely as their Caucasian counterparts to patronize salons. The
Company believes that it is well positioned to deliver products to the
salon market, in significant part because many ethnic stylists purchase
their supplies at B&Bs, a distribution channel in which the Company is
well established. Additionally, the Company has successfully entered the
professional salon market internationally through its South African
subsidiary and is implementing a professional salon strategy in other
parts of Africa as well as in Brazil. The Company will use the expertise
gained from its international efforts to create teams of technical
experts to educate salon owners and stylists about the new brand and
provide ongoing training and education on the latest techniques in
ethnic hair care through trade shows, clinics and newsletters. The
Company is engaged in market research and product development and
although no specific launch date has been set, expects to be able to
enter the salon market by the end of 1997.
. Capitalize on Selective Acquisition Opportunities. In addition to
internally generated growth, the Company will consider the selective
acquisition of related brands and businesses which would increase the
Company's market share or expand and complement its product lines. The
Company does not currently have any outstanding agreements, commitments
or understandings to make any acquisitions or enter into any joint
ventures. There can be no assurance that suitable acquisition or joint
venture candidates can be identified, or if an acquisition is completed,
that the operations will be successfully integrated or otherwise not
have an adverse effect on the Company.
6
<PAGE>
BACKGROUND
On August 23, 1995, DNL Savannah Acquisition Corp. ("Acquisition Corp."), a
wholly-owned subsidiary of the Company, acquired all of the stock of the
Predecessor in the Acquisition. Acquisition Corp. was formed by Morningside
Capital Group, L.L.C. ("Morningside"), as financial sponsor, on behalf of an
investor group consisting of DNL Partners, Limited Partnership ("DNL
Partners"), a partnership formed by the principals of Morningside, the lenders
providing the acquisition financing, and certain members of management,
specifically, Dr. Leroy Keith and Mr. Bradford N. Creswell. The Predecessor was
acquired for a purchase price of approximately $95 million (inclusive of
transaction costs), funded primarily with Company debt. See "Use of Proceeds."
The principal shareholder of the Predecessor, Mr. A. Minis, Jr., owned and
controlled the Predecessor since 1951 when he purchased it from its original
founders and owners who had started the business in 1901 with a single
product--Magic shaving powder. The Minis family and certain related trusts and
entities (the "Selling Stockholders") will sell all of their shares of Common
Stock in the Offerings. Concurrent with the Acquisition, Acquisition Corp.
merged into Carson Products Company ("Carson Products").
The Company's equity structure has been altered by the filing of its Amended
and Restated Certificate of Incorporation (the "Recapitalization"). The Company
has effected the conversion of each outstanding share of the Company's former
Class A common stock into 11,370 shares of its newly created Class C Common
Stock and the conversion of each outstanding share of the Company's former
Class B common stock into 11,370 shares of its newly created Class B Common
Stock. After the Recapitalization, holders of Class A Common Stock, Class B
Common Stock and Class C Common Stock have 4.8%, 0% and 95.2% of the combined
voting power of the outstanding shares of Common Stock of the Company. See
"Description of Capital Stock."
Upon the consummation of the Offerings, senior management will own
approximately 6.2% of the total number (including shares held in a voting
trust), and 4.4% of the combined voting power, of the outstanding shares of
Common Stock of the Company. DNL Partners will own approximately 46.1% of the
total number and 75.8% of the combined voting power of the outstanding shares
of Common Stock of the Company.
THE OFFERINGS
The offering of 3,352,000 shares of Class A Common Stock in the United States
and Canada (the "U.S. Offering") and the offering of 838,000 shares of Class A
Common Stock outside the United States and Canada (the "International
Offering") are collectively referred to herein as the "Offerings."
<TABLE>
<S> <C>
Class A Common Stock
offered(a):
By the Company........ 2,484,500 shares
By the Selling Stock-
holders.............. 1,705,500 shares
Total............... 4,190,000 shares
Common Stock to be Out-
standing After the Of-
ferings................ 4,190,000 shares of Class A Common Stock(b)
1,859,677 shares of Class B Common Stock(c)
8,306,014 shares of Class C Common Stock(c)
Total............... 14,355,691 shares of Common Stock(b)
=====
Voting Rights........... The Class A Common Stock and Class C Common Stock vote
as a single class on all matters, except as otherwise
required by law, with each share of Class A Common
Stock entitling its holder to one vote and each share
of Class C Common Stock entitling its holder to ten
votes. The Class B Common Stock generally is not
entitled to vote on any matter submitted for the vote
of stockholders. See "Description of Capital Stock."
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Use of Proceeds......... The net proceeds to be received by the Company from the
Offerings (which will be $30.8 million based on the
initial public offering price of $14.00 per share) will
be used to repay certain outstanding indebtedness. The
Company will not receive any proceeds from the sale of
shares by the Selling Stockholders. See "Use of
Proceeds."
New York Stock Exchange
Symbol................. "CIC"
</TABLE>
- --------
(a) Of the shares being offered hereby, 400,000 shares of Class A Common Stock
will be reserved for sale to certain directors, officers, employees,
business associates and related persons of the Company. See "Underwriting."
(b) Excludes 400,000 shares of Class A Common Stock reserved for issuance
pursuant to the Company's 1996 Non-Employee Directors Equity Incentive
Program (including 10,500 shares issuable upon the exercise of options to
be granted to the Company's non-employee directors immediately prior to the
consummation of the Offerings). Also excludes 600,000 shares of Class A
Common Stock reserved for issuance pursuant to the Company's 1996 Long-Term
Incentive Plan (including 59,500 shares issuable upon the exercise of
options to be granted to the Company's management immediately prior to the
consummation of the Offerings). The exercise price for the options to be
granted under each of these programs will be the initial public offering
price of the Class A Common Stock.
(c) Each share of Class B Common Stock and Class C Common Stock is convertible
at any time at the option of the holder thereof into one share of Class A
Common Stock and converts automatically into one share of Class A Common
Stock upon transfer to any person other than specified permitted
transferees. The Class C Common Stock will automatically convert to Class A
Common Stock if, at any time, the then outstanding Class C Common Stock
represents less than 9% of the outstanding shares of Common Stock. See
"Description of Capital Stock."
RISK FACTORS
An investment in the Class A Common Stock involves certain risks associated
with the Company's business and the industry in which it competes, including
(i) risks inherent in the Company's growth strategy, (ii) the Company's
dependence on its trademarks in its current and future markets, (iii) increased
risk of disruption of the business because of the concentration of the
Company's manufacturing operations in Savannah, Georgia, (iv) the Company's
reliance on certain of its suppliers, (v) social, political and economic risks
that may affect the Company's foreign operations or cause foreign currency
fluctuations, (vi) competition, (vii) quarterly fluctuations in operating
results, (viii) changes in the retail industry, and (ix) the effect on the
Company of compliance with environmental laws, consumer laws and government
regulation. For a more detailed discussion of these and certain other risks,
see "Risk Factors."
8
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA(A)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND FOOTNOTES)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY PREDECESSOR COMPANY
------------------------------- --------------- -------------- --------------
FULL FISCAL YEAR 1996
-----------------------------
YEAR ENDED
MARCH 31, APRIL 1 AUGUST 23, 1995 THREE MONTHS THREE MONTHS
---------------- TO AUGUST 22, TO MARCH 31, ENDED JUNE 30, ENDED JUNE 30,
1994 1995 1995 1996 1995 1996
------- ------- ------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $50,108 $58,126 $26,854 $41,465 $17,271 $18,799
Cost of sales........... 23,622 25,692 11,513 18,629 7,351 8,135
------- ------- ------- ------- ------- -------
Gross profit........... 26,486 32,434 15,341 22,836 9,920 10,664
SG&A expenses........... 21,473 23,134 9,743 14,642 6,545 6,673
Incentive compensation.. 800(b)
Depreciation and amorti-
zation................. 828 1,085 502 1,331(c) 301 629(c)
------- ------- ------- ------- ------- -------
Operating income....... 4,185 8,215 5,096 6,863 3,074 2,562
Interest expense........ 97 136 56 4,487(c) 34 1,826(c)
Other income............ 699 783 1,137(d) 182 328 37
------- ------- ------- ------- ------- -------
Income from continuing
operations before in-
come taxes and changes
in accounting princi-
ples................... 4,787 8,862 6,177 2,558 3,368 773
Provision for income
taxes.................. 1,704 3,174 2,243 1,352 1,230 465
------- ------- ------- ------- ------- -------
Income from continuing
operations before
changes in accounting
principles............. $ 3,083 $ 5,688 $ 3,934 $ 1,206 $ 2,138 $ 308
======= ======= ======= ======= ======= =======
Net income............. $ 1,897 $ 5,438 $ 3,934 $ 1,206 $ 2,138 $ 308
======= ======= ======= ======= ======= =======
Net income per
share(e)............... $ .10 $ .03
======= =======
Weighted average shares
outstanding............ 11,871 11,871
======= =======
<CAPTION>
PREDECESSOR
YEAR ENDED PREDECESSOR COMPANY
MARCH 31, COMBINED THREE MONTHS THREE MONTHS
---------------- YEAR ENDED ENDED JUNE 30, ENDED JUNE 30,
1994 1995 MARCH 31, 1996 1995 1996
------- ------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Capital expenditures.... $ 1,515 $ 979 $ 1,953 $ 263 $ 540
EBITDA(f)............... 5,121 9,053 13,977 3,452 3,185(b)
EBITDA as a percentage
of net sales(f)........ 10.2% 15.6% 20.5% 20.0% 16.9%(b)
<CAPTION>
PREDECESSOR COMPANY
COMBINED THREE MONTHS THREE MONTHS
YEAR ENDED ENDED JUNE 30, ENDED JUNE 30,
MARCH 31, 1996 1995 1996
--------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA(G):
Net sales............................................. $68,319 $17,271 $18,799
Operating income...................................... 11,259 2,545 2,640(b)
Interest expense...................................... 3,007 756 652
Net income............................................ 4,809 1,159 1,084(h)
Net income per share(i)............................... .33 .08 .08
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED(J)
------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $14,860 $16,584
Total assets............ 92,246 89,515
Total long-term debt
(excluding current
portion)............... 67,219 34,877
Stockholders' equity.... 10,091 42,669
</TABLE>
(footnotes on following page)
9
<PAGE>
- --------
(a) The period beginning August 23, 1995 reflects data of the Company and its
subsidiaries. The periods prior to and including August 22, 1995 reflect
data of the Predecessor, all of the stock of which was acquired by the
Company on August 23, 1995. See "The Company--Background." Because of the
revaluation of the assets and liabilities acquired and the related impact
to the statement of operations, the financial statements of the Predecessor
for the periods prior to August 23, 1995 are not strictly comparable to
those of the Company subsequent to that date.
(b) The Company recognized $0.8 million of incentive compensation expense
during the quarter ended June 30, 1996 relating to anticipated costs under
certain long-term incentive compensation agreements. Upon completion of the
Offerings, the Company will record additional compensation charges of
approximately $0.4 million (based on the initial public offering price)
principally for final payments under these awards.
During August 1996, several outside directors and members of senior
management purchased 115,373 and 385,818 shares, respectively, of the
Company's Common Stock. The purchase of such shares by senior management was
financed with $1.3 million (net of discount) in non-interest bearing long-
term full recourse loans from the Company. The Company will record
additional non-cash compensation expense of approximately $5.8 million (with
no associated income tax benefits) during the three months ended September
30, 1996 for the excess of the initial public offering price over the actual
purchase price of such shares and the share awards made by Carson South
Africa to certain members of its management. See "Management."
(c) Results for the period from August 23, 1995 to March 31, 1996 include $0.7
million of amortization expense related to acquired goodwill and $4.4
million of interest expense related to debt used to fund the Acquisition.
Results for the three months ended June 30, 1996 include $0.3 million of
amortization expense related to acquired goodwill and $1.8 million of
interest expense related to debt used to fund the Acquisition.
(d) Includes realized gains of $0.8 million recorded by the Predecessor for
investment securities of the Predecessor which were sold prior to the
Acquisition. The cash received from the sale of such investment securities
was used to fund a portion of the consideration for the Acquisition.
(e) Net income per share data has been computed assuming there were 11,871,191
weighted average shares of Common Stock outstanding for the periods
presented, after giving effect to the Recapitalization and shares of
Common Stock purchased by several outside directors and members of senior
management.
(f) EBITDA represents earnings before interest expense, provision for income
taxes, depreciation and amortization, adjusted to exclude investment income
and the pre-tax effect of changes in accounting principles. While EBITDA
should not be construed as a substitute for net income or a better
indicator of liquidity than cash flow from operating activities, which are
determined in accordance with generally accepted accounting principles, it
is included herein to provide additional information with respect to the
ability of the Company to meet its future debt service, capital expenditure
and working capital requirements. EBITDA is not necessarily a measure of
the Company's ability to fund its cash needs.
(g) The unaudited pro forma statements of operations data have been prepared to
give effect to the Acquisition, the Recapitalization, the Offerings and the
application of the net proceeds therefrom, and the refinancing of the
Senior Bank Credit Facility as if these events had occurred on April 1,
1995. See "Unaudited Pro Forma Financial Data."
(h) Excludes extraordinary loss of approximately $3.6 million, net of tax,
which will result from prepayment penalties and the write-off of
unamortized debt discount and deferred financing costs associated with the
repayment of the Senior Bank Credit Facility, the Senior Subordinated
Notes, and the PIK Subordinated Notes.
(i) Pro forma net income per share has been computed assuming there were
14,355,691 weighted average shares of Common Stock outstanding for the
periods presented, after giving effect to the Recapitalization, the
Offerings and 501,191 shares of Common Stock purchased by several outside
directors and members of senior management.
(j) The unaudited as adjusted balance sheet data as of June 30, 1996 has been
prepared to give effect to the purchase of shares of Common Stock by
several outside directors and members of senior management, the Offerings
and the application of the net proceeds therefrom, and the refinancing of
the Senior Bank Credit Facility with the New Senior Bank Facility, as if
these events had occurred on June 30, 1996. See "Use of Proceeds" and
"Capitalization."
10
<PAGE>
RISK FACTORS
Prospective purchasers of the shares of Class A Common Stock offered hereby
should consider carefully all of the information set forth in this Prospectus
and, in particular, should evaluate the following risks in connection with an
investment in the Class A Common Stock being offered hereby.
RISK OF INABILITY TO SUCCESSFULLY IMPLEMENT GROWTH STRATEGY
The Company's growth strategy is to (i) increase its share of existing
markets, (ii) increase international expansion, (iii) leverage brands into new
product categories, (iv) target the U.S. professional salon market and (v)
capitalize on selective acquisition opportunities. The Company's continued
ability to implement its growth strategy successfully will be dependent on
business, financial and other factors beyond the Company's control, including
prevailing economic conditions, changes in consumer preferences and changes in
the competitive environment. There can be no assurance that the Company will
continue to be successful in the implementation of its growth strategy. See
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company included herein.
The Company's ability to anticipate changes in market and industry trends
and to successfully develop and introduce new and enhanced products on a
timely basis will be a critical factor in its ability to grow and remain
competitive. There can be no assurance that new products and product
enhancements will be completed on a timely basis or will enjoy market
acceptance following their introduction. In addition, the anticipated
development schedules for new or improved products are inherently difficult to
predict and are subject to change as a result of shifting priorities in
response to customers' requirements and competitors' new product
introductions. Moreover, the Company expects that it will devote substantial
resources to R&D efforts, including Quality Control. The costs of such efforts
are likely to be expensed as they are incurred, notwithstanding that the
benefits, if any, from such efforts (in the form of increased revenues or
decreased product costs) may not be reflected until subsequent periods. See
"Business--Research and Development and Quality Control."
The Company's growth will be partially dependent upon its ability to
increase its manufacturing capacity. The Company is currently operating at
capacity in its Savannah facility. However, the Company is in the process of
reconfiguring its production lines and expanding its physical space in order
to increase the capacity of the Savannah facility. While the Company believes
its sources of financing are adequate to fund its current level of operations,
the Company will need to seek additional debt or equity financing if it makes
significant expansions or acquisitions. Future growth will be dependent, in
part, upon the capital resources available to the Company from time to time.
There can be no assurance that such additional financing, if required, will be
available in amounts and on terms satisfactory to the Company, if at all. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Another element of the Company's growth strategy is to capitalize on
selective acquisition opportunities. However, there can be no assurance that
suitable acquisition or joint venture candidates can be identified, or that,
if identified, adequate financing sources will be available on terms
satisfactory to the Company. If an acquisition is completed, there can be no
assurance that the operations will be successfully integrated with those of
the Company or that such an acquisition will not otherwise have an adverse
effect on the Company.
If the Company is unable to increase its share of existing and international
markets, leverage brands into new product categories, penetrate the U.S.
professional salon market or capitalize on selective acquisition
opportunities, such failure could have a material adverse effect on the
Company's business, results of operations or financial condition.
DEPENDENCE ON TRADEMARKS FOR CURRENT AND FUTURE MARKETS
The market for the Company's products is significantly dependent upon the
goodwill engendered by its trademarks and trade names. Trademark protection is
therefore material to the Company's business. Although all of the Company's
material trademarks and trade names are registered in the United States and in
the principal
11
<PAGE>
foreign countries in which the Company sells its products, there can be no
assurance that the Company will be successful in asserting trademark or trade
name protection for its significant marks and names in the United States or
other markets, and the costs to the Company of such efforts may be
substantial. See "Business-- Trademarks and Patents."
CONCENTRATED MANUFACTURING OPERATIONS INCREASE RISK OF DISRUPTION
The Company manufactures its products domestically at its facility in
Savannah, Georgia, which includes five manufacturing and warehousing
buildings, and internationally at its recently-acquired facility in Midrand,
South Africa. Any prolonged disruption to the operations of either such
facility, whether due to labor difficulties, destruction of or damage to the
facility, severe weather conditions or other reasons, could have a material
adverse effect on the Company's business, results of operations or financial
condition. For example, hurricanes caused the evacuation of the City of
Savannah for two days during September 1996, resulting in shortfalls in
production at the Company's Savannah facility. The Company maintains business
interruption insurance in an amount which it deems reasonable to cover the
occurrence of such events; however, there can be no assurance that the
proceeds of any such insurance would be sufficient to meet the Company's needs
if such an event were to occur.
RELIANCE ON SUPPLIERS
The Company purchases raw materials from third-party suppliers for use in
its manufacturing operations. The Company does not have any long-term written
contracts with suppliers. Although the Company believes that other suppliers
are available who can produce similar materials and products, there can be no
guarantee that such materials would be available to the Company on an
immediate basis if needed, or at prices similar to those now paid by the
Company. From time to time, the Company has experienced delays in shipments
from suppliers in the ordinary course of operations, but none of such delays
has had a material adverse effect on the Company's business, results of
operations or financial condition. Guanidine carbonate is an essential raw
material used in the manufacturing of no-lye relaxer products and has been
purchased by the Company for over 15 years from the one principal supplier to
all manufacturers of no-lye relaxers, located in Austria. The Company
maintains a stock of guanidine carbonate at its Savannah facility which would
satisfy its requirements for approximately four to six months of future
production. Based on previous testing of alternative guanidine carbonate
supplies, the Company believes that guanidine carbonate of comparable quality
could be made available within this time period from other suppliers on
comparable terms. The failure to timely secure such an alternative source of
guanidine carbonate would have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business--
Manufacturing."
SOCIAL, POLITICAL AND ECONOMIC RISKS AFFECTING FOREIGN OPERATIONS AND EFFECTS
OF FOREIGN CURRENCY FLUCTUATIONS
The Company's products are sold in approximately 60 countries and
territories outside the United States and the Company has a manufacturing
facility in Midrand, South Africa as well as in Savannah, Georgia. For fiscal
1996 and fiscal 1995, approximately 23.8% and 19.6%, respectively, of the
Company's net sales were outside the United States, including domestic exports
and sales by the Company's South African operations. All of the Company's
sales are in dollars with the exception of sales to South Africa, Botswana,
Lesotho, Namibia and Swaziland which are denominated in South African Rand. A
significant component of the Company's business strategy is to expand its
international operations. In March 1996, the Company commenced operations at
its own manufacturing facility in Midrand South Africa, 15 miles north of
Johannesburg. The Company is exposed to the risk of changes in social,
political and economic conditions inherent in foreign operations, including
changes in the laws and policies that govern foreign investment in countries
where it has operations as well as, to a lesser extent, changes in United
States laws and regulations relating to foreign trade and investment. In
addition, the Company's results of operations and the value of its foreign
assets are affected by fluctuations in foreign currency exchange rates, which
may favorably or adversely affect reported earnings and accordingly, the
comparability of period-to-period results of operations. The Company does not
currently engage in hedging activities to minimize its exposure to such
fluctuations. Changes in currency exchange rates may affect the relative
prices at which the Company and foreign competitors sell their products in the
same market. There can be no assurance as to the future effect of any such
changes in social, political and economic conditions on the Company's
business, results of operations or financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"The Company--Corporate Structure."
12
<PAGE>
COMPETITION
The U.S. retail ethnic hair care market for African-Americans is competitive
and highly fragmented with a number of market participants that focus
specifically on this market. Six companies generated approximately 50% of
industry sales in the U.S. retail ethnic hair care market in 1995 with the
remainder being generated by a number of smaller companies, according to the
Towne-Oller Report. Some of the larger companies, such as Soft Sheen Products,
Inc. ("Soft Sheen"), Luster Products and Pro-Line Corp., are privately-owned
and compete only in the ethnic market, as does the Johnson Products subsidiary
of IVAX, Inc., a New York Stock Exchange traded company. However, a few
general market companies, such as Revlon and Alberto-Culver Company, also
produce a limited line of specialized products for the ethnic consumer. In
certain product categories, such as shampoos and hair color, competition also
arises from general market manufacturers such as the Procter & Gamble Company
and Bristol-Myers Squibb Company's Clairol division. Some of the Company's
competitors are general market companies which are larger and have
substantially greater financial and other resources than the Company.
Internationally, the Company's competitors differ from market to market, and
include Revlon, Soft Sheen and several regionally based foreign companies.
Competitive market conditions could materially and adversely affect the
Company's business, results of operations and financial condition if the
Company were required to reduce product prices to remain competitive or
experienced decreased sales volume. The Company plans to increase sales
internationally, particularly in Africa, Brazil and the Caribbean. Expanding
the Company's share of international markets will require the Company to
address competitive factors similar to those it faces in the United States, as
well as comply with any local regulatory requirements.
OPERATING RESULTS MAY FLUCTUATE QUARTERLY
The Company's operating results may vary significantly from quarter to
quarter, in part because of the changes in net sales and costs associated with
changes in the Company's product mix, timing of promotions, changes in
consumer buying patterns, aggressive competition, and the timing of, and costs
related to, any future acquisitions. Historically, the Company has typically
experienced its slowest quarter in the three months ending December 31 of any
given year. The Company's operating results for any particular quarter are not
necessarily indicative of any future results primarily due to the Company's
marketing decisions, including the factors cited above. The uncertainties
associated with new or improved product introductions and market trends may
limit management's ability to accurately forecast short-term results of
operations. Fluctuations caused by variations in quarterly operating results
may adversely affect the market price of the Class A Common Stock.
CHANGES IN THE RETAIL INDUSTRY
The retail industry has periodically experienced consolidation and other
ownership changes. Major retailers in the United States and in foreign markets
may in the future consolidate, undergo restructurings or realign their
affiliations which could decrease the number of stores that sell the Company's
products or increase the ownership concentration within the retail industry.
While such changes in the retail industry to date have not had a material
adverse effect on the Company's business, results of operations or financial
condition, there can be no assurance as to the future effect of any such
changes. See "Business--Distribution and Sales."
COMPLIANCE WITH CONSUMER LAWS AND GOVERNMENT REGULATIONS
The Company is subject to the Food, Drug and Cosmetics Act, the Consumer
Product Safety Act, the Federal Hazardous Substance Act and to the
jurisdiction of the Consumer Product Safety Commission as well as product
safety laws in foreign jurisdictions. Such regulations subject the Company to
the possibility of requirements to repurchase or recall products found to be
defective and the possibility of fines or penalties. The Food and Drug
Administration ("FDA") has promulgated certain regulations concerning product
ingredients, product labeling and product claims. In addition, the Federal
Trade Commission ("FTC") regulates product claims. The Company is subject to
consumer laws in foreign countries where its products are sold, for example,
bilingual packaging requirements (Canada) and new product registration
requirements (Brazil). Existing and future FDA, FTC and foreign regulations
could impact distribution and sales of certain of the Company's products. See
"Business--Consumer Laws, Government and Industry Regulations."
13
<PAGE>
RELIANCE ON KEY MANAGEMENT
The Company's executive officers have extensive experience serving the
consumer products industry and the ethnic market. If, for any reason, key
members of senior management, including Dr. Leroy Keith, Joyce M. Roche,
Dennis E. Smith, Miriam Muley and Bradford N. Creswell, do not continue to be
active in management, the Company's business, results of operations or
financial condition could be adversely affected. Other than Mr. Creswell,
these key senior management employees have employment contracts, which
generally contain non-compete clauses, with the Company as described in
"Management--Compensation of Executive Officers--Employment Agreements", but
there can be no assurance that such individuals will remain with the Company.
Upon the consummation of the Offerings, the Company's senior management will
own approximately 6.2% of the total number (including shares held in a voting
trust), and 4.4% of the combined voting power of the outstanding Common Stock.
RISK ASSOCIATED WITH NEW MANAGEMENT
In connection with the Acquisition, most of the senior management and
members of the Board of Directors of Carson Products were replaced. Although
the new team of senior executives has had extensive experience in the ethnic
market and consumer products industry, each such senior executive, other than
Executive Vice President of Sales, Dennis E. Smith, has been with the Company
for approximately 15 months or less. Also in connection with the Acquisition,
Carson Products increased the number of members serving on its Board of
Directors. In addition, since the Acquisition, Carson Products has expanded
its board by adding new members. Included as new members on the Board of
Directors of Carson Products and the Company are Melvyn Estrin and Abbey
Butler, each of whom was a Co-Chief Executive Officer of Foxmeyer Drug Company
when it filed for protection under Chapter 11 of the U.S. Bankruptcy Code on
August 27, 1996. Although Carson Products has experienced improved operating
results since the new senior management and directors were installed, there
can be no assurance that the new senior management and directors will continue
to maintain or improve upon the Company's current level of performance. See
"Management--Executive Officers and Directors."
CONTROL BY CERTAIN EXISTING STOCKHOLDERS
The Company has three classes of authorized Common Stock, Class A Common
Stock, which is offered hereby, Class B Common Stock, which generally has no
voting rights, and Class C Common Stock. The Class B Common Stock and Class C
Common Stock are convertible into Class A Common Stock at the option of the
holder and will automatically convert to Class A Common Stock upon transfer to
persons other than specified permitted transferees. While holders of Class A
Common Stock are entitled to one vote per share, holders of the Class C Common
Stock are entitled to 10 votes per share. The Class A Common Stock and Class C
Common Stock generally vote together as a single class, with certain limited
exceptions. Immediately after the consummation of the Offerings, DNL Partners
will beneficially own approximately 46.1% of the total shares of Common Stock
and will have 75.8% of the combined voting power of the outstanding Common
Stock. Accordingly, DNL Partners will have sufficient voting power to elect
the Board of Directors of the Company and to control the vote on all matters
submitted to a vote of stockholders, including extraordinary transactions such
as mergers, sales of all or substantially all of the Company's assets or going
private transactions. Such concentration of ownership may have the effect of
delaying or preventing certain types of transactions involving an actual or
potential change in control of the Company, including transactions in which
the holders of the Class A Common Stock might receive a premium on their
shares over prevailing market prices. See "Principal and Selling
Stockholders."
POSSIBLE ADVERSE EFFECT ON MARKET PRICE DUE TO SHARES ELIGIBLE FOR FUTURE SALE
AND ISSUANCE OF ADDITIONAL SHARES
Upon completion of the Offerings, the Company will have 4,190,000 shares of
Class A Common Stock outstanding, 1,859,677 shares of Class B Common Stock
outstanding and 8,306,014 shares of Class C Common Stock outstanding. The
shares of Class A Common Stock sold in the Offering will be freely tradeable
without restriction or further registration under the Securities Act unless
held by an "affiliate" of the Company, as that term is defined under Rule 144
of the Securities Act, which shares will be subject to the resale limitations
of Rule 144. In addition, all existing stockholders have registration rights,
either "demand" or "piggyback", with
14
<PAGE>
respect to the Common Stock held by them. See "Description of Capital Stock--
Registration Rights." Such stockholders have waived all rights to register
securities owned by them in connection with the Offerings. In addition, all
existing stockholders have agreed not to dispose of any shares for a period of
180 days from the date of this Prospectus, or to make any demand for or
exercise any right with respect to the registration of the shares, and the
Company has agreed not to dispose of any shares (other than shares sold in the
Offerings or issuances by the Company of certain employee stock options and
shares covered thereby) for a period of 180 days from the date of this
Prospectus, without the prior written consent of Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch"). Upon expiration of such 180-day
period, 10,165,691 shares will be eligible for sale subject to the resale
limitations of Rule 144 and Rule 144A under the Securities Act. No prediction
can be made as to the effect, if any, that the availability of additional
shares of Common Stock for sale will have on the market price of the Class A
Common Stock. The sale of a substantial number of shares held by the existing
stockholders, whether pursuant to a subsequent public offering or otherwise,
or the perception that such sales could occur, could adversely affect the
market price of the Class A Common Stock and could materially impair the
Company's future ability to raise capital through an offering of equity
securities. See "Shares Eligible For Future Sale" and "Underwriting." At the
request of the Company, the Underwriters have reserved shares to be issued by
the Company and sold to directors, officers, employees, business associates
and related persons of the Company at the initial public offering price. Such
persons will be required to agree not to sell or otherwise dispose of any
shares of Class A Common Stock for a period of 90 days following the date of
this Prospectus. See "Underwriting." Pursuant to its Amended and Restated
Certificate of Incorporation, the Company has the authority to issue
additional shares of Common Stock and shares of one or more series of
preferred stock. The issuance of such shares could result in the dilution of
the voting power of the shares of Class A Common Stock purchased in the
Offerings.
DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing shares of
Class A Common Stock in the Offerings will therefore incur immediate and
substantial dilution of $14.26 per share based on an initial public offering
price of $14.00 per share. See "Dilution."
NO PRIOR MARKET FOR CLASS A COMMON STOCK; DETERMINATION OF PUBLIC OFFERING
PRICE
Prior to the Offerings, there has been no public market for the Class A
Common Stock. Although the Company has been approved for listing on the New
York Stock Exchange, there can be no assurance that an active or liquid
trading market for the Class A Common Stock will develop or be sustained. The
initial public offering price of the Class A Common Stock has been determined
by negotiations among the Company, the Selling Stockholders and the
Representatives of the Underwriters and may not be indicative of the market
price for the Class A Common Stock after the Offerings. The market price for
shares of Class A Common Stock may be highly volatile depending on news
announcements and changes in general market conditions. In recent years, the
stock market has experienced extreme price and volume fluctuations. See
"Underwriting."
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements contained in this Prospectus, including in the sections
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" contain "forward-looking" information
(as defined in the U.S. Private Securities Litigation Reform Act of 1995) that
involves risk and uncertainties, including (i) the Company's plans to
introduce new products and product enhancements, (ii) the Company's plans to
expand its international operations in Africa, Brazil and the Caribbean, (iii)
the Company's plans to enter the ethnic cosmetics product category, (iv) the
Company's plans to enter the U.S. professional salon market for ethnic hair
care products, (v) the Company's plans to make selective acquisitions, and
(vi) the Company's marketing, distribution and manufacturing expansion plans.
Actual future results and trends may differ materially depending on a variety
of factors discussed in this "Risk Factors" section and elsewhere in this
Prospectus, including (a) the Company's success in implementing its growth
strategy, including its success in arranging financing where required, (b) the
nature and extent of future competition in the Company's principal marketing
areas, and (c) political, economic and demographic developments in the U.S.,
Africa, Brazil, the Caribbean, Europe and other countries where the Company
now does business or in the future may do business.
15
<PAGE>
COST OF FUTURE COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS MAY BE MATERIAL
The Company is subject to Federal, state, local and foreign environmental
requirements, including those relating to discharges to air, water and land,
the handling and disposal of solid and hazardous waste and the cleanup of
properties affected by hazardous substances. Certain environmental laws, such
as the Comprehensive Environmental Response, Compensation, and Liability Act,
as amended ("CERCLA"), impose strict, retroactive, joint and several liability
upon persons responsible for releases of hazardous substances.
The Company is not aware of any liabilities arising under environmental
requirements, except as would not be expected to have a material adverse
effect on the Company's business, results of operations or financial
condition. However, some risk of environmental liability is inherent in the
nature of the Company's current and former businesses and the Company might in
the future incur material costs to meet current or more stringent compliance,
cleanup or other obligations pursuant to environmental requirements.
The Company has had certain difficulties meeting its permit levels for
various parameters for its wastewater discharge to the City of Savannah's
sewer system resulting in the issuance of notices of violation to the Company
by the City of Savannah. In response, the Company installed pretreatment
equipment, which has reduced the concentrations of many of the constituents of
concern. However, the Company continues to experience difficulty meeting
certain discharge limitations. If the Company cannot either improve the
reliability of its present treatment system, or obtain modifications to its
discharge limits from the sewer authorities, it may be required to install
additional treatment equipment. The Company is working cooperatively with the
City of Savannah to address this issue and has not been nor does it expect to
be fined. However, there can be no guarantee that the Company will not incur
future costs, including but not limited to, fines in connection with waste
water compliance. The costs for installing additional treatment equipment
could be as much as $0.5 million. The Company does not expect the current
costs of environmental compliance to have a material adverse effect on its
business, results of operations or financial condition, however, the potential
costs associated with future environmental compliance obligations could be
substantial. See "Business--Environmental Matters."
16
<PAGE>
THE COMPANY
GENERAL
The Company is a leading manufacturer and marketer in the U.S. retail ethnic
hair care market for African-Americans. The Company believes that it is one of
the leading global manufacturers and marketers of ethnic hair care products
for persons of African descent. The Company's flagship brand, Dark & Lovely,
is the most widely recognized ethnic brand name in the U.S. retail ethnic hair
care market. The Company currently sells over 60 different products under five
principal brand names, including Dark & Lovely, Excelle, Beautiful Beginnings,
Dark & Natural and Magic. The majority of the Company's sales are derived from
four categories of the ethnic health and beauty aids market: hair relaxers and
texturizers, which are used to chemically treat and straighten hair, hair
color, shaving products and hair care maintenance products. The Company's
products are specifically formulated to address the unique physiological
characteristics of hair of persons of African descent, which typically include
curliness and dryness. The Company markets its products in the United States
with its own experienced direct sales force. The Company also currently
markets its products in 60 countries outside of the United States, primarily
through local distributors. The Company believes that in 1995, it had the
number one U.S. retail market position in three of the four ethnic hair care
categories in which it competes (hair relaxers and texturizers, hair color and
shaving products). In addition, the Company believes that the strength of its
competitive position in the ethnic hair care industry is attributable, in
part, to its heritage of technological innovation and its focused R&D effort.
BACKGROUND
The Company (formerly DNL Savannah Holding Corp.) was established in May
1995. On August 23, 1995, Acquisition Corp., a wholly-owned subsidiary of the
Company, acquired all of the stock of the Predecessor from the Minis family
and the Aminco, Inc. ESOP (the "ESOP"). Acquisition Corp. was formed by
Morningside, as financial sponsor, on behalf of an investor group consisting
of DNL Partners, the lenders providing the acquisition financing and certain
members of management, specifically Dr. Leroy Keith and Mr. Bradford N.
Creswell. The purchase price (inclusive of transaction costs) consisted of
approximately $83.2 million in cash, and $11.8 million in junior subordinated
promissory notes (the "Junior Subordinated Notes") bearing interest at 10.0%
and 15.0% of the common stock of the Company which was retained by the
sellers. The Acquisition was financed primarily by debt incurred by the
Company including borrowings of $35.0 million aggregate principal amount under
a Credit Agreement dated as of August 23, 1995 (as amended, the "Senior Bank
Credit Facility"), the issuance of 12.5% Senior Subordinated Notes due 2002
(the "Senior Subordinated Notes") in an aggregate principal amount of $18.0
million, the issuance of 15.0% Subordinated Notes due 2003 (the "PIK
Subordinated Notes") in an aggregate principal amount of $3.0 million and the
issuance of the Junior Subordinated Notes to the sellers in an aggregate
principal amount of approximately $11.8 million, as well as equity
contributions of $12.0 million and $15.2 million of the Predecessor's
available cash. Concurrent with the Acquisition, the following events took
place: (i) two subsidiaries of the Predecessor, Carson Products Company, a
Georgia Corporation, and Aminco, Inc., a Georgia corporation, merged into the
Predecessor; (ii) the Predecessor changed its name to Carson Products Company;
and (iii) Acquisition Corp. merged with Carson Products Company, with Carson
Products as the surviving entity.
The principal shareholder of the Predecessor, Mr. A. Minis, Jr., owned and
controlled the Company since 1951 when he purchased it from its original
founders and owners who had started the business in 1901 with a single
product--Magic shaving powder. In 1985, the Predecessor formed the ESOP, which
was terminated with the Acquisition. The shares of the Company collectively
owned by the Minis family are currently held by a trust established for the
benefit of Mr. Minis, certain Minis family members individually and certain
other affiliated trusts and entities, each of which will sell all of their
shares in the Offerings and consequently will no longer have an ownership
interest in the Company. The Selling Stockholders have agreed that
simultaneously with the closing of the Offerings, the Company will purchase
all of the outstanding Junior Subordinated Notes held by the Selling
Stockholders for a purchase price of approximately $4.7 million to be paid in
cash at the closing of the Offerings. The Company intends to use a portion of
the proceeds from the Offerings to repurchase the Junior Subordinated Notes.
See "Use of Proceeds."
17
<PAGE>
CORPORATE STRUCTURE
The following chart sets forth the corporate structure of the Company.
Except as noted below, each of the Company's direct and indirect subsidiaries
are wholly-owned.*
CARSON, INC.
CARSON PRODUCTS COMPANY
CARSON
SOUTH AFRICA
(73.125% OWNED)
CARSON PRODUCTS
S.A.
- --------
* Does not include inactive subsidiaries.
Carson Holdings Limited ("Carson South Africa"), a South African company
incorporated on February 14, 1996, is currently 73.125% owned by Carson
Products. Carson Products (Proprietary) Limited ("Carson Products S.A."), a
South African registered company, wholly-owned by Carson South Africa, serves
as the operating company for the Company's South African operations. On July
3, 1996, Carson South Africa sold 25% of its shares to the public in an
initial public offering on the Johannesburg Stock Exchange, which raised
approximately $4.2 million in net proceeds. At the same time an additional
1.875% of Carson South Africa shares were issued to certain employees,
directors and officers of the Company involved in the South Africa operations.
The net proceeds were used by Carson South Africa to purchase a manufacturing
facility and related equipment as well as to provide funds for the Company's
strategic initiatives in Africa.
Carson Products S.A. has been in operation for the past three years and
manufactures and distributes ethnic hair care products under license from
Carson Products. In-house manufacturing of products, previously carried out
through a contract manufacturer, began in March 1996 and is being phased in
over a one-year period. Pursuant to a distribution agreement with Carson
Products dated May 14, 1996, Carson Products S.A. has the exclusive right to
distribute and sell the Company's entire product line throughout the African
continent and has the right to supply the Company's products to the European
market up to 20% of the Company's budgeted European sales. The initial term of
the agreement expires on April 1, 2001; however, the agreement continues
indefinitely thereafter until terminated by either party upon 12 months
written notice. Carson Products S.A. has a license agreement with Carson
Products whereby Carson Products S.A. has licensed a number of the products of
Carson Products (totalling over 60). In conjunction with the South African
initial public offering, the license agreement was amended to provide that,
commencing on April 1, 1998, Carson Products S.A. will pay to Carson Products
a royalty in the amount of 3.0% of the net sales price of all licensed
products sold. The amount of the royalty increases to 3.5% on April 1, 1999
and 4.0% on April 1, 2000 until the termination of the agreement. The initial
term of the agreement expires on April 1, 1999, however, the agreement
continues indefinitely thereafter until terminated by either party upon 12
months written notice.
The Company's principal executive offices are located at 64 Ross Road,
Savannah Industrial Park, Savannah, GA 31405, and its telephone number is
(912) 651-3400.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to be received from the sale of the 2,484,500 shares of
Class A Common Stock by the Company in the Offerings (after deducting the
underwriting discounts and estimated expenses of the Offerings payable by the
Company) are estimated to be approximately $30.8 million ($39.0 million if the
Underwriters exercise their over-allotment options in full), based on the
initial public offering price of $14.00 per share. The Company intends to use
a portion of such net proceeds, (i) to purchase all of the $18.0 million
aggregate principal amount of the 12.5% Senior Subordinated Notes due 2002,
plus prepayment premium for an aggregate purchase price of approximately $19.3
million plus accrued and unpaid interest thereon, (ii) to redeem all of the
$3.0 million aggregate principal amount of the 15.0% PIK Subordinated Notes
due 2003, plus prepayment premium for an aggregate redemption price of
approximately $3.6 million plus accrued and unpaid interest thereon, and
(iii) to purchase all of the $11.8 million aggregate principal amount of the
Junior Subordinated Notes, for a purchase price of $4.7 million, which Junior
Subordinated Notes bear interest at a rate of 10.0% per annum and of which
$5.0 million aggregate principal amount matures in August 2000 and
approximately $3.4 million aggregate principal amount matures in each of
August 2001 and August 2002. The balance of such net proceeds along with
borrowings under the New Senior Bank Facility will be used to repay
approximately $37.5 million currently outstanding under the Senior Bank Credit
Facility, which matures in September 2001 and which bears interest at floating
rates based on the prime rate or the Eurodollar rate (the weighted average
interest rate on this indebtedness at June 30, 1996 was 8.4%), plus accrued
and unpaid interest thereon and related financing fees and expenses.
The Company will not receive any proceeds from the sale of shares of Class A
Common Stock by the Selling Stockholders.
DIVIDEND POLICY
Since the Acquisition, the Company has not declared or paid any cash or
other dividends on its Common Stock and does not expect to pay dividends for
the foreseeable future. The Company anticipates that for the foreseeable
future, earnings will be reinvested in the business to finance its growth and
development. The declaration and payment of dividends by the Company are
subject to the discretion of the Board of Directors of the Company (the
"Board"). The Company anticipates entering into a new senior bank facility
(the "New Senior Bank Facility") prior to or simultaneous with the
consummation of the Offerings. The New Senior Bank Facility will restrict the
ability of the Company's subsidiaries to pay dividends or make other
distributions on their common stock to the Company which will limit cash
available at the Company for dividends. Any future determination to pay
dividends will depend on the Company's results of operations, financial
condition, capital requirements, contractual restrictions and other factors
deemed relevant by the Board.
19
<PAGE>
DILUTION
The net tangible book value (deficit) of the Company as of June 30, 1996 was
approximately ($36.2 million) or ($3.19) per share of Common Stock. Net
tangible book value (deficit) per share represents the amount of the Company's
total assets (excluding intangible assets) less its total liabilities, divided
by the number of shares of Common Stock outstanding. In August 1996, several
outside directors and members of senior management bought 501,191 shares of
Common Stock for aggregate consideration of $1.9 million of which $1.6 million
($1.3 million net of discount) was financed with full recourse loans and $0.3
million was paid in cash. After adjusting for this purchase, the net tangible
book value as of June 30, 1996 would have increased $0.16 per share. The pro
forma net tangible book value (deficit) of the Company at June 30, 1996 as
adjusted, would have been approximately ($3.7) million, or ($0.26) per share
of Common Stock, after giving effect to the Offerings and the use of the net
proceeds therefrom and the purchase of shares of Common Stock by several
outside directors and members of senior management. This represents an
immediate increase in net tangible book value of $2.77 per share to the
existing stockholders and an immediate net tangible book value dilution of
$14.26 per share to new investors purchasing shares in the Offerings. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $14.00
Net tangible book value (deficit) per share at June 30,
1996...................................................... $(3.19)
Increase in net tangible book value per share attributable
to the purchase of shares in August 1996 by several out-
side directors and members of senior management........... .16
Increase in net tangible book value per share attributable
to new 2.77
investors................................................. ------
Pro forma net tangible book value (deficit) per share after the (.26)
Offerings(1).................................................. ------
Dilution per share to new investors............................ $14.26
======
</TABLE>
The following table summarizes, the shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
by the existing stockholders (including the shares purchased in August 1996 by
several outside directors and members of senior management) and new
stockholders, adjusted as of June 30, 1996 to give effect to the sale of
shares of Class A Common Stock offered hereby:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
AMOUNT PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)... 11,871,191 82.7% $10,546,000 23.3% $ 0.89
New investors.............. 2,484,500 17.3% $34,783,000 76.7% $14.00
</TABLE>
- --------
(1) Excludes 400,000 shares of Class A Common Stock reserved for issuance
pursuant to the Company's 1996 Non-Employee Directors Equity Incentive
Program (including 10,500 shares issuable upon exercise of options to be
granted to the Company's non-employee directors immediately prior to the
consummation of the Offerings). Also excludes 600,000 shares of Class A
Common Stock reserved for issuance pursuant to the Company's 1996 Long-
Term Incentive Plan (including 59,500 shares issuable upon the exercise
of options to be granted to the Company's management immediately prior to
the consummation of the Offerings). The exercise price for the options to
be granted under each of these programs will be the initial public
offering price of the Class A Common Stock.
(2) The sale by the Selling Stockholders in the Offerings will cause the
number of shares held by the existing stockholders to be reduced by
1,705,500 shares, or 11.9% of the total number of shares to be
outstanding after the Offerings.
20
<PAGE>
CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE DATA AND FOOTNOTES)
The following table sets forth the short-term debt and the consolidated
capitalization of the Company at June 30, 1996 after giving effect to the
Recapitalization and as adjusted to give effect to the purchase of shares of
common stock by certain outside directors and members of senior management in
August 1996, the Offerings and the application of the net proceeds therefrom,
and the refinancing of the Senior Bank Credit Facility with the New Senior
Bank Facility. This table should be read in conjunction with the Consolidated
Financial Statements of the Company and accompanying Notes thereto appearing
elsewhere in this Prospectus. See "Use of Proceeds" and "Selected Consolidated
Historical Financial Data."
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------
AS
ACTUAL ADJUSTED
------- ---------
<S> <C> <C>
Short-term debt (including current portion of
long-term debt)................................ $ 2,510 $ 1,960
======= =======
Long-term debt:
Senior Bank Credit Facility:
Term loan................................... $29,000 --
Revolving line of credit.................... 7,500 --
New Senior Bank Facility(a):
Term loans.................................. -- $23,050
Revolving line of credit.................... -- 11,800
12.5% Senior Subordinated Notes due 2002...... 16,726 (b) --
15.0% PIK Subordinated Notes due 2003......... 2,414 (b) --
10.0% Junior Subordinated Notes due through
2002......................................... 11,552 (b) --
Other......................................... 27 27
------- -------
Total long-term debt........................ 67,219 34,877
------- -------
Stockholders' equity:
Preferred stock, par value $.01 per share,
10,000,000 shares authorized, none issued.... -- --
Class A Common Stock, par value $.01 per
share, 150,000,000 shares authorized, no
shares (actual) and 4,190,000 shares (as
adjusted) issued and outstanding (c)......... -- 42
Class B Common Stock, par value $.01 per
share, 2,000,000 shares authorized, 1,859,677
shares (actual) and 1,859,677 shares (as
adjusted) issued and outstanding............. 19 19
Class C Common Stock, par value $.01 per
share, 13,000,000 shares authorized,
9,510,323 shares (actual) and 8,306,014
shares (as adjusted) issued and outstanding.. 95 83
Paid-in capital............................... 8,557 51,804 (d)(e)
Retained earnings (deficit)................... 1,514 (7,860)(e)(f)(g)
Foreign currency translation adjustment....... (94) (94)
Notes receivable, net of discount............. (1,325)(e)
------- -------
Total stockholders' equity.................. 10,091 42,669
------- -------
Total capitalization...................... $77,310 $77,546
======= =======
</TABLE>
(footnotes on following page)
21
<PAGE>
- --------
(a) Prior to or simultaneously with the consummation of the Offerings, the
Company will enter into the New Senior Bank Facility. The New Senior Bank
Facility will include a $15.0 million revolving credit facility subject to
borrowing base limitations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital
Resources."
(b) Net of unamortized discount of $1,274, $986, and $201 for the Senior
Subordinated Notes, PIK Subordinated Notes, and Junior Subordinated Notes,
respectively.
(c) Does not include 59,500 shares issuable upon exercise of options to be
granted immediately prior to the consummation of the Offerings under the
Company's 1996 Long-Term Incentive Plan having a weighted average exercise
price of $14.00 per share and 10,500 shares issuable upon exercise of
options to be granted immediately prior to the consummation of the
Offerings under the Company's 1996 Non-Employee Directors Equity Incentive
Plan having a weighted average exercise price of $14.00 per share.
(d) Paid-in capital has been increased for the addition of the excess of the
carrying value of the Junior Subordinated Notes (net of related prepaid
interest and deferred financing costs of $1.8 million) over the purchase
price to be paid ($4.7 million). Since the Junior Subordinated Notes are
held by a related party, the gain on extinguishment of debt will be
recorded as a capital transaction.
(e) Retained earnings has been reduced for a compensation charge of $5.8
million (with no associated income tax benefits) as a result of the
purchase of 501,191 shares of common stock by several outside directors
and members of senior management and the share awards made by Carson South
Africa to certain members of its management during August 1996. Paid-in
capital has been increased for the compensation charge of $5.8 million and
for the purchase price of $0.3 million and $1.3 million (net of discount)
for shares of Common Stock purchased by such outside directors and members
of senior management, respectively. The purchase of such shares by senior
management was financed with non-interest bearing long-term full recourse
loans from the Company.
(f) Retained earnings has been reduced for the extraordinary loss of
approximately $3.6 million, net of tax, resulting from prepayment
penalties, write-off of unamortized debt discount and deferred financing
costs associated with the repayment of the Senior Bank Credit Facility,
the Senior Subordinated Notes and the PIK Subordinated Notes.
(g) Retained earnings has not been reduced for compensation charges of
approximately $0.4 million principally for cash awards under certain
incentive compensation agreements which will be recorded upon completion
of the Offerings.
22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND FOOTNOTES)
The following unaudited pro forma statements of operations for the year
ended March 31, 1996 and the three months ended June 30, 1996 and 1995 give
effect to (i) the Acquisition and (ii) the Offerings including the application
of the net proceeds therefrom, and (iii) the refinancing of the Senior Bank
Credit Facility as if such events had occurred on April 1, 1995.
The unaudited pro forma financial data are based on the historical
consolidated financial statements for the Predecessor and the Company and the
assumptions and adjustments described in the accompanying notes. The unaudited
pro forma statements of continuing operations do not purport to be
representative of the Company's actual results of operations had the events
described above occurred as of the dates indicated or what such results will
be for any future periods. The unaudited pro forma financial data are based
upon assumptions that the Company believes are reasonable and should be read
in conjunction with the Consolidated Financial Statements and accompanying
notes thereto included elsewhere in this Prospectus.
PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
APRIL 1, AUGUST 23,
1995 TO 1995 TO COMBINED ADJUSTMENTS ADJUSTMENTS PRO FORMA
AUGUST 22, MARCH 31, FISCAL RELATING TO THE RELATING TO THE FISCAL
1995 1996 1996(A) ACQUISITION OFFERINGS 1996
----------- ---------- -------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $26,854 $41,465 $68,319 $68,319
Cost of sales........... 11,513 18,629 30,142 30,142
------- ------- ------- -------
Gross profit.......... 15,341 22,836 38,177 38,177
SG&A expenses........... 9,743 14,642 24,385 $ 266 (b) 24,651
Depreciation and amorti-
zation................. 502 1,331 1,833 745 (c) $ (311)(d) 2,267
------- ------- ------- ------- ------ -------
Operating income...... 5,096 6,863 11,959 (1,011) 311 11,259
Interest expense........ 56 4,487 4,543 3,160 (e) (4,696)(d) 3,007
Other income............ 1,137 182 1,319 (1,068)(f) 251
------- ------- ------- ------- ------ -------
Income before income
taxes.................. 6,177 2,558 8,735 (5,239) 5,007 8,503
Provision for income
taxes.................. 2,243 1,352 3,595 (1,804)(g) 1,903 (g) 3,694
------- ------- ------- ------- ------ -------
Net income.............. $ 3,934 $ 1,206 $ 5,140 $(3,435) $3,104 $ 4,809(h)(i)
======= ======= ======= ======= ====== =======
Net income per share.... $ 0.33(j)
=======
Weighted average shares
outstanding............ 14,356
=======
</TABLE>
23
<PAGE>
THREE MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
COMPANY ADJUSTMENTS PRO FORMA
THREE MONTHS RELATING TO THE THREE MONTHS ENDED
ENDED JUNE 30, 1996 OFFERINGS JUNE 30, 1996
------------------- --------------- ------------------
<S> <C> <C> <C>
Net sales......................... $18,799 $18,799
Cost of sales..................... 8,135 8,135
------- -------
Gross profit.................... 10,664 10,664
SG&A expenses..................... 6,673 6,673
Incentive compensation............ 800 800(k)
Depreciation and amortization..... 629 $ (78)(d) 551
------- ------ -------
Operating income................ 2,562 78 2,640
Interest expense.................. 1,826 (1,174)(d) 652
Other income...................... 37 37
------- ------ -------
Income before income taxes........ 773 1,252 2,025
Provision for income taxes........ 465 476 (g) 941
------- ------ -------
Net income........................ $ 308 $ 776 $ 1,084(h)(i)
======= ====== =======
Net income per share.............. $ 0.08(j)
=======
Weighted average shares outstand-
ing.............................. 14,356
=======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
PREDECESSOR ADJUSTMENTS ADJUSTMENTS PRO FORMA
THREE MONTHS RELATING TO THE RELATING TO THE THREE MONTHS ENDED
ENDED JUNE 30, 1995 ACQUISITION OFFERINGS JUNE 30, 1995
------------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Net sales............... $17,271 $17,271
Cost of sales........... 7,351 7,351
------- -------
Gross profit.......... 9,920 9,920
SG&A expenses........... 6,545 $ 160 (b) 6,705
Depreciation and amorti-
zation................. 301 447 (c) $ (78)(d) 670
------- ------- ------ -------
Operating income...... 3,074 (607) 78 2,545
Interest expense........ 34 1,896 (e) (1,174)(d) 756
Other income............ 328 (147)(f) 181
------- ------- ------ -------
Income before income
taxes.................. 3,368 (2,650) 1,252 1,970
Provision for income
taxes.................. 1,230 (895) (g) 476 (g) 811
------- ------- ------ -------
Net income ............. $ 2,138 $(1,755) $ 776 $ 1,159(h)(i)
======= ======= ====== =======
Net income per share.... $ 0.08(j)
=======
Weighted average shares
outstanding............ 14,356
=======
</TABLE>
(footnotes on following page)
24
<PAGE>
- --------
(a) The statement of operations of the Predecessor for the period from April
1, 1995 to August 22, 1995 is combined with the statement of operations of
the Company for the period August 23, 1995 to March 31, 1996.
(b) Adjustment to reflect the pro forma effect of a full year of executive
salary expense increase and management fee arising from the Acquisition.
(c) Adjustment to reflect (i) amortization of goodwill and deferred financing
costs arising from the Acquisition and depreciation expense resulting from
the revaluation of the Company's fixed assets as a result of the
Acquisition, and (ii) the elimination of package design costs amortization
(net of actual costs incurred) resulting from a change from the
Predecessor's policy of capitalizing to the Company's policy of expensing
package design costs as incurred as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
JUNE 30, 1995 MARCH 31, 1996
------------- --------------
<S> <C> <C>
Goodwill...................................... $ 295 $ 491
Deferred financing costs...................... 136 228
Depreciation expense.......................... (23) (38)
Package design costs.......................... 39 64
----- -----
$ 447 $ 745
===== =====
</TABLE>
(d) Reflects a reduction in amortization of deferred financing costs and
interest expense resulting from the use of net proceeds from the Offerings
to repay $2.2 million of the term loan under the Senior Bank Credit
Facility (and the refinancing of remaining amounts thereunder into the New
Senior Bank Facility), the Senior Subordinated Notes, and the PIK
Subordinated Notes and to repurchase the Junior Subordinated Notes.
(e) Adjustment to reflect interest expense for the entire period presented
related to indebtedness under (i) the Senior Bank Credit Facility, (ii)
the Senior Subordinated Notes (which bear interest of 12.5% per annum),
(iii) the PIK Subordinated Notes (which bear interest of 15.0% per annum),
(iv) the Junior Subordinated Notes (which bear interest of 10.0% per
annum), and amortization of related debt discounts.
(f) Adjustment to eliminate investment income related to investment securities
held by the Predecessor which were sold in connection with the financing
of the Acquisition.
(g) Adjustment to reflect income tax effects of the pro forma adjustments
presented herein based on the statutory tax rate (38%) in effect.
(h) Excludes extraordinary loss of approximately $3.6 million, net of tax,
which will result from prepayment penalties and write-off of unamortized
debt discount and deferred financing costs associated with the repayment
of the Senior Bank Credit Facility, the Senior Subordinated Notes and the
PIK Subordinated Notes.
(i) Excludes the effect of non-cash compensation charges aggregating
approximately $5.8 million (with no associated income tax benefits) to be
recorded during the three months ended September 30, 1996 resulting from
the purchase of shares of Common Stock by several outside directors and
members of senior management during August 1996 and the share awards made
by Carson South Africa to certain members of its management. Also excludes
compensation charges of approximately $0.4 million principally for cash
awards under certain incentive compensation agreements which will be
recorded upon completion of the Offerings.
(j) Net income per share is based on the weighted average shares of Common
Stock outstanding during the period from August 23, 1995 to March 31,
1996. All Common Stock issued prior to the Offerings has been included in
the calculation of Common Stock outstanding as if such shares were
outstanding for the entire period presented. The total weighted average
shares of Common Stock outstanding has been adjusted to give effect to the
Recapitalization, the Offerings and the purchase of shares of Common Stock
by several outside directors and senior management.
(k) The Company recognized $0.8 million of incentive compensation expense
during the quarter ended June 30, 1996 relating to anticipated costs under
certain long-term incentive compensation agreements.
25
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA (A)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND FOOTNOTES)
Set forth below are selected historical financial data of the Predecessor
and the Company as of the dates and for the periods shown. The selected
historical financial data of the Predecessor as of March 31, 1995 and for the
years ended March 31, 1994 and 1995 and for the period from April 1, 1995
through August 22, 1995 were derived from the audited historical financial
statements of the Predecessor for such periods appearing elsewhere in this
Prospectus. The selected historical financial data of the Predecessor as of
March 31, 1992, 1993, and 1994 and for the periods ended March 31, 1992 and
1993 were derived from audited historical financial statements of the
Predecessor not included in this Prospectus. The selected historical financial
data of the Company as of March 31, 1996 and for the period from August 23,
1995 through March 31, 1996 were derived from the audited historical financial
statements of the Company for such period appearing elsewhere in this
Prospectus. The selected historical financial data of the Predecessor as of
and for the three months ended June 30, 1995 and of the Company as of and for
the three months ended June 30, 1996 are unaudited; however, in the opinion of
management such unaudited data include all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the information
included therein. The results of operations for the three months ended June
30, 1996 are not necessarily indicative of the results for the entire fiscal
year or any other interim period. Because of the revaluation of the assets and
liabilities and related impact to the statement of operations, the financial
statements of the Predecessor for the periods prior to August 22, 1995 are not
strictly comparable to those of the Company subsequent to that date. The
selected historical financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Financial Data" and the Consolidated
Financial Statements of the Predecessor and the Company and accompanying notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY PREDECESSOR
--------------------------------------------- ------------ --------------
FULL FISCAL YEAR 1996
-------------------------
<CAPTION>
COMPANY
---------------
YEAR ENDED APRIL 1 AUGUST 23,
MARCH 31, TO 1995 THREE MONTHS
--------------------------------- AUGUST 22, TO MARCH 31, ENDED JUNE 30,
1992 1993 1994 1995 1995 1996 1995
------- ------- ------- ------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $49,947 $49,335 $50,108 $58,126 $26,854 $41,465 $17,271
Cost of sales...................... 21,211 21,585 23,622 25,692 11,513 18,629 7,351
------- ------- ------- ------- ------- ------- -------
Gross profit...................... 28,736 27,750 26,486 32,434 15,341 22,836 9,920
SG&A expenses...................... 20,077 20,316 21,473 23,134 9,743 14,642 6,545
Incentive compensation.............
Depreciation and amortization...... 566 695 828 1,085 502 1,331 (c) 301
------- ------- ------- ------- ------- ------- -------
Operating income.................. 8,093 6,739 4,185 8,215 5,096 6,863 3,074
Interest expense................... 81 115 97 136 56 4,487 (c) 34
Other income....................... 697 916 699 783 1,137(d) 182 328
------- ------- ------- ------- ------- ------- -------
Income from continuing operations
before income taxes and changes in
accounting principles............. 8,709 7,540 4,787 8,862 6,177 2,558 3,368
Provision for income taxes......... 3,104 2,601 1,704 3,174 2,243 1,352 1,230
------- ------- ------- ------- ------- ------- -------
Income from continuing operations
before changes in accounting prin-
ciples............................ 5,605 4,939 3,083 5,688 3,934 1,206 2,138
Income (loss) from discontinued op-
erations, net of tax(e)........... 63 (353) (574)
Loss on disposal of discontinued
operations, net of tax(e)......... (635)
------- ------- ------- ------- ------- ------- -------
Income before cumulative effect of
changes in accounting principles.. 5,668 4,586 1,874 5,688 3,934 1,206 2,138
Cumulative effect of changes in ac-
counting principles, net of tax... 23 (250)
------- ------- ------- ------- ------- ------- -------
Net income......................... $ 5,668 $ 4,586 $ 1,897 $ 5,438 $ 3,934 $ 1,206 $ 2,138
======= ======= ======= ======= ======= ======= =======
Net income per share(f)............ $ .10
=======
Weighted average shares
outstanding(f).................... 11,871
- --------------------------------------------------
=======
THREE MONTHS
ENDED JUNE 30,
1996
---------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $18,799
Cost of sales...................... 8,135
---------------
Gross profit...................... 10,664
SG&A expenses...................... 6,673
Incentive compensation............. 800 (b)
Depreciation and amortization...... 629 (c)
---------------
Operating income.................. 2,562
Interest expense................... 1,826 (c)
Other income....................... 37
---------------
Income from continuing operations
before income taxes and changes in
accounting principles............. 773
Provision for income taxes......... 465
---------------
Income from continuing operations
before changes in accounting prin-
ciples............................ 308
Income (loss) from discontinued op-
erations, net of tax(e)...........
Loss on disposal of discontinued
operations, net of tax(e).........
---------------
Income before cumulative effect of
changes in accounting principles.. 308
Cumulative effect of changes in ac-
counting principles, net of tax...
---------------
Net income......................... $ 308
===============
Net income per share(f)............ $ .03
===============
Weighted average shares
outstanding(f).................... 11,871
- --------------------------------------------------
===============
</TABLE>
26
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
PREDECESSOR MARCH 31,
-------------------------------
COMPANY PREDECESSOR COMPANY
MARCH 31, JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital......... $14,184 $14,256 $11,653 $15,140 $13,957 $16,364 $14,860
Total assets............ 37,848 37,572 39,209 43,863 88,082 44,555 92,246
Total long-term debt
(excluding current por-
tion).................. 552 288 -- -- 63,778 -- 67,219
Stockholders' equity.... 29,141 30,473 29,699 34,358 9,877 35,928 10,091
</TABLE>
- --------
(a) The period beginning August 23, 1995 reflects data of the Company and its
subsidiaries. The periods prior to and including August 22, 1995 reflect
data of the Predecessor, all of the stock of which was acquired by the
Company on August 23, 1995. See "The Company--Background." Because of the
revaluation of the assets and liabilities acquired and the related impact
to the statement of operations, the financial statements of the
Predecessor for the periods prior to August 23, 1995 are not strictly
comparable to those of the Company subsequent to that date.
(b) The Company recognized $0.8 million of incentive compensation expense
during the quarter ended June 30, 1996 relating to anticipated costs under
certain long-term incentive compensation agreements. Upon completion of
the Offerings, the Company will record additional compensation charges of
approximately $0.4 million (based on the initial public offering price)
principally for final payments under these awards.
During August 1996, several outside directors and members of senior
management purchased 115,373 and 385,818 shares, respectively, of the
Company's Common Stock. The purchase of such shares by senior management
was financed with $1.3 million (net of discount) in non-interest bearing
long-term full recourse loans from the Company. The Company will record
additional non-cash compensation expense of approximately $5.8 million
(with no associated income tax benefits) during the three months ended
September 30, 1996 for the excess of the estimated initial public offering
price over the actual purchase price of such shares and for the shares of
Carson South Africa awarded to certain members of its management.
(c) Results for the period from August 23, 1995 to March 31, 1996 include $0.7
million of amortization expense related to acquired goodwill and $4.4
million of interest expense related to debt used to fund the Acquisition.
Results for the three months ended June 30, 1996 include $0.3 million of
amortization expense related to acquired goodwill and $1.8 million of
interest expense related to debt used to fund the Acquisition.
Upon completion of the Offerings, the Company will record an extraordinary
loss of approximately $3.6 million, net of tax, which will result from
prepayment penalties and write-off of unamortized debt discount and
deferred financing costs associated with the repayment of the Senior Bank
Credit Facility, the Senior Subordinated Notes and the PIK Subordinated
Notes. See "Use of Proceeds."
(d) Includes realized gains of $0.8 million recorded by the Predecessor for
investment securities of the Predecessor which were sold prior to the
Acquisition. The cash received from the sale of such investment securities
was used to fund a portion of the consideration in the acquisition.
(e) Effective January 31, 1994, the Predecessor discontinued operations of a
subsidiary and sold certain assets of the subsidiary for proceeds of $1.1
million.
(f) Net income per share data has been computed assuming there were 11,871,191
weighted average shares of Common Stock outstanding, after giving effect
to the Recapitalization and 501,191 shares of Common Stock purchased by
several outside directors and members of senior management.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT OPERATING RESULTS
The Company's operating results for the five month period ended August 31,
1996 (prior to any incentive compensation expense) include sales of $32.5
million, operating income of $5.6 million and EBITDA of $6.7 million,
representing an increase of 14.2%, 12.4% and 21.7%, respectively, over such
results for the five month period ended August 31, 1995 (on a combined basis,
before the effect of Acquisition adjustments). The Company does not expect as
great an increase in the operating results for the six month period ended
September 30, 1996 over the six month period ended September 30, 1995 due to
shortfalls in September 1996 production arising from the evacuation of the
City of Savannah and the Company's Savannah manufacturing facility for two
days due to hurricanes.
OVERVIEW
The Company is the leading manufacturer and marketer in the U.S. retail
ethnic hair care market for African-Americans. The Company currently sells
over 60 different products in the United States and 60 other countries under
five principal brand names. The majority of the Company's net sales are
derived from four categories of the ethnic health and beauty aids market: hair
relaxers and texturizers (which constituted approximately 50% of the Company's
net sales in fiscal 1996), hair color, shaving products and hair care
maintenance products. The Predecessor had and the Company currently has a
March 31 fiscal year end. The Company intends to change its fiscal year to a
calendar year beginning on January 1, 1997.
The Company introduced the first no-lye relaxer in the U.S. ethnic retail
hair care market in 1978. This allowed the Company to grow and secure a
significant position in the U.S. ethnic retail hair care market. This growth
continued throughout the 1980s until fiscal 1992. The five-year compounded
annual growth rate in net sales for the period from March 31, 1987 to March
31, 1992 was 9.4%. From fiscal year 1992 to fiscal year 1994, net sales
remained flat and gross margin decreased from 57.5% to 52.9%. The Company
faced competitive pressure during this same time period in the relaxer market,
and responded by reformulating and improving its relaxer products, in addition
to introducing several other product lines. At the same time, the Company
developed and designed new packaging for many of its products and introduced a
new marketing campaign. Additionally, the Company introduced, Beautiful
Beginnings, a children's relaxer, Dark & Natural, a men's texturizer and new
hair care maintenance products. The effect of these competitive responses is
reflected in fiscal 1995 results as net sales increased 16.0% and gross margin
recovered to 55.8%. In fiscal 1996 on a combined basis the growth continued
with a net sales increase of 17.5% and an operating income increase of 45.6%
as compared to fiscal 1995. For the three months ended June 30, 1996 net sales
increased 8.8% and, excluding the effect of an unusual incentive compensation
charge, operating income increased 9.4% and EBITDA increased 15.4% over the
Predecessor three month period ended June 30, 1995.
On August 23, 1995, Acquisition Corp., a wholly-owned subsidiary of the
Company, acquired the stock of the Predecessor from the Minis family and the
ESOP. Acquisition Corp. was formed by Morningside as financial sponsor, on
behalf of an investor group consisting of DNL Partners, the lenders providing
the acquisition financing and certain members of management. The purchase
price consisted of approximately $83.2 million in cash and $11.8 million in
Junior Subordinated Notes bearing interest at 10.0% and 15.0% of the common
stock of the Company retained by the sellers. The Acquisition was financed by
borrowings of $35.0 million aggregate principal amount under the Senior Bank
Credit Facility, the issuance of 12.5% Senior Subordinated Notes in an
aggregate principal amount of $18.0 million, the issuance of 15.0% PIK
Subordinated Notes in an aggregate principal amount of $3.0 million, the
issuance of the Junior Subordinated Notes to the sellers in an aggregate
principal amount of approximately $11.8 million, equity contributions of $12.0
million and $15.2 million of available cash. Concurrent with the Acquisition,
Acquisition Corp. merged into Carson Products Company. In connection with the
Acquisition, the senior management of the Predecessor was replaced and a team
of seasoned senior executives with extensive experience in the ethnic market
and consumer products industry was recruited to build on the Company's strong
position in the global ethnic hair care market.
In fiscal 1996, 23.8% of the net sales of the Company were to customers
outside the United States. The following table presents the combined
Predecessor and Company net sales by geographic region for fiscal 1996:
28
<PAGE>
<TABLE>
<CAPTION>
NET SALES TO: (IN MILLIONS) % OF TOTAL
------------- ------------- ----------
<S> <C> <C>
United States....................................... $52.0 76.2%
Africa.............................................. 7.7 11.3
Europe.............................................. 5.6 8.2
Other international................................. 3.0 4.3
----- -----
$68.3 100.0%
===== =====
</TABLE>
In March 1996, the Company commenced operations at its own manufacturing
facility in Midrand, South Africa, 15 miles north of Johannesburg. Previously,
the Company used a contract manufacturer to produce its products for the
Southern African market.
On July 3, 1996, the Company's South African subsidiary, Carson South
Africa, sold 25.0% of its shares in an initial public offering on the
Johannesburg Stock Exchange. This offering resulted in net proceeds of
approximately $4.2 million. At the same time, Carson South Africa issued
1.875% of its shares to certain employees, officers and directors involved in
the Company's South African operations. As a result of the issuance of these
shares, the Company will reflect in its consolidated statement of operations
for periods subsequent to the share issuance a minority interest in subsidiary
earnings. The amount of the charge to be reflected in this line item will
generally equal Carson South Africa's net income for the applicable period
multiplied by the percentage of the Carson South Africa shares which are not
indirectly owned by the Company. In conjunction with the South African initial
public offering, Carson Products entered into an amendment to its license
agreement with Carson Products S.A., which provides that commencing on April
1, 1998, Carson Products S.A. will pay to Carson Products a royalty in the
amount of 3.0% of the net sales of all licensed products. The amount of the
royalty increases to 3.5% on April 1, 1999 and 4.0% on April 1, 2000 until the
termination of the agreement. The initial term of the agreement expires on
April 1, 1999; however, the agreement continues indefinitely thereafter until
terminated by either party upon 12 months written notice. See "The Company--
Corporate Structure."
With the exception of sales by Carson Products S.A. to South Africa,
Botswana, Lesotho, Namibia and Swaziland which are denominated in South
African Rand, all of the Company's sales are made in U.S. Dollars. The Company
does not view the exposure to Rand exchange rate fluctuations as significant
because the South African subsidiary incurs all of its costs in Rand. Assets
and liabilities of the Company's South African operations are translated for
consolidation purposes from South African Rand into U.S. Dollars at the rate
of currency exchange at the end of the fiscal period. Revenues and expenses
are translated at average monthly prevailing exchange rates. Resulting
translation differences are recognized as a component of stockholders' equity.
Adjustments resulting from translations have historically been immaterial to
the Company's financial statements.
On June 26, 1996, Carson Products made an investment of $3.0 million in
Morningside AM Acquisition Corp., the parent of AM Cosmetics, a leading low-
cost manufacturer of cosmetics. The investment was made through the purchase
of $3.0 million of 12% cumulative, payment-in-kind preferred stock. The
Company's consolidated statement of operations for periods subsequent to June
26, 1996 will include the dividend income from this investment, although
dividends are anticipated to be paid through the issuance of additional
preferred stock. Therefore, it is anticipated that no cash will be generated
from this investment in the near future. In connection with the investment,
Carson Products entered into a management agreement and will enter into
certain related sales agreements and manufacturing agreements with AM
Cosmetics. See "Certain Relationships and Related Transactions--AM Cosmetics."
EFFECT OF THE ACQUISITION ON RESULTS OF OPERATIONS
The consummation of the Acquisition affected the Company's results of
operations following the Acquisition in certain significant respects. The
Acquisition was reflected using purchase accounting with the purchase price
being allocated to the Company's identifiable assets and liabilities based on
fair values at the Acquisition Date. The excess of the purchase price over the
fair value of the Company's identifiable net assets has been classified as
goodwill. Therefore, the depreciation and amortization expense of the Company
are significantly higher than the corresponding amounts for the Predecessor.
Additionally, interest expense increased due to debt used to finance the
Acquisition. The impact of the Acquisition on the Company's results of
operations is discussed below in the comparison of combined fiscal 1996 to
fiscal 1995.
29
<PAGE>
RESULTS OF OPERATIONS
The Acquisition was completed on August 23, 1995. Because of the application
of purchase accounting and the resulting revaluation of the Predecessor's
assets and liabilities and the impact on certain expenses, the financial
statements of the Predecessor for the periods prior to August 23, 1995 are not
strictly comparable to those of subsequent periods. However, the following
table combines historical fiscal 1996 data for the Predecessor and the Company
in order to facilitate discussion of financial results.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
PREDECESSOR
-----------------------------
PREDECESSOR COMPANY
COMBINED YEAR THREE MONTHS THREE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED ENDED
MARCH 31, 1994 MARCH 31, 1995 MARCH 31, 1996 JUNE 30, 1995 JUNE 30, 1996
-------------- -------------- -------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales............... $50,108 $58,126 $68,319 $17,271 $18,799
Cost of sales........... 23,622 25,692 30,142 7,351 8,135
------- ------- ------- ------- -------
Gross profit.......... 26,486 32,434 38,177 9,920 10,664
Selling expenses........ 14,639 17,888 17,047 4,938 4,713
General and administra-
tive
expenses............... 6,834 5,246 7,338 1,607 1,960
Incentive compensation.. -- -- -- -- 800
Depreciation and amorti- 828 1,085 1,833 301 629
zation................. ------- ------- ------- ------- -------
Operating income...... 4,185 8,215 11,959 3,074 2,562
Interest expense........ 97 136 4,543 34 1,826
Investment income....... 591 633 1,134 251 43
Other income (expense), 108 150 185 77 (6)
net.................... ------- ------- ------- ------- -------
Income before taxes..... 4,787 8,862 8,735 3,368 773
Provision for income 1,704 3,174 3,595 1,230 465
taxes.................. ------- ------- ------- ------- -------
Net income (a).......... $ 3,083 $ 5,688 $ 5,140 $ 2,138 $ 308
======= ======= ======= ======= =======
EBITDA.................. $ 5,121 $ 9,053 $13,977 $ 3,452 $ 3,185
DATA AS A PERCENTAGE OF
SALES:
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 47.1 44.2 44.1 42.6 43.3
------- ------- ------- ------- -------
Gross profit.......... 52.9 55.8 55.9 57.4 56.7
Selling expenses........ 29.2 30.8 25.0 28.6 25.1
General and administra-
tive
expenses............... 13.6 9.0 10.7 9.3 10.4
Incentive compensation.. -- -- -- -- 4.3
Depreciation and amorti-
zation................. 1.7 1.9 2.7 1.7 3.3
------- ------- ------- ------- -------
Operating income...... 8.4% 14.1% 17.5% 17.8% 13.6%
======= ======= ======= ======= =======
</TABLE>
- --------
(a) Before effects of discontinued operations and changes in accounting
principles in the years ended March 31, 1994 and 1995.
30
<PAGE>
COMPANY THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO PREDECESSOR THREE MONTHS
ENDED JUNE 30, 1995
Net Sales. Net sales increased from $17.3 million in the three months ended
June 30, 1995 to $18.8 million in the three months ended June 30, 1996, an
increase of 8.8%. In the United States, relaxers and texturizers, hair color
and hair care maintenance products all generated net sales increases. Shaving
products decreased as a result of the shaving products' manufacturing line
being out of service while it was reorganized and moved to another building to
optimize capacity. Carson South Africa continued to demonstrate strong results
with an increase in net sales of 47.2% from $1.5 million in the three months
ended June 30, 1995 to $2.2 million in the three months ended June 30, 1996.
International sales excluding South Africa decreased slightly, primarily as a
result of delayed shipments to Nigeria due to changes in import regulations.
Gross Profit. Gross profit increased from $9.9 million in the three months
ended June 30, 1995 to $10.7 million in the three months ended June 30, 1996,
an increase of 7.5%. This increase was almost entirely the result of the
increase in net sales. Gross margin decreased slightly from 57.4% to 56.7%
during this period, primarily as a result of an addition to the LIFO (last in,
first out) provision recorded in the three months ended June 30, 1996.
Selling Expenses. Selling expenses decreased from $4.9 million in the three
months ended June 30, 1995 to $4.7 million in the three months ended June 30,
1996, a decrease of 4.6%. As a percentage of net sales, selling expenses
decreased from 28.6% to 25.1% during this period. This decrease was due
primarily to the timing of advertising and promotional expenses and, to a
lesser extent, the inclusion of a full quarter in the three months ended June
30, 1996 of the effect of the establishment of an in-house sales organization
and termination of the majority of the Company's sales broker relationships.
General and Administrative Expenses. General and administrative expenses
increased from $1.6 million in the three months ended June 30, 1995 to $2.0
million in the three months ended June 30, 1996, an increase of 22.0%. As a
percentage of net sales, general and administrative expenses increased from
9.3% to 10.4% during this period. This increase in general and administrative
expenses as a percentage of net sales was a function of several factors
relating to the Acquisition and the new management structure. First, the new
management team included the addition of several new senior executives and the
promotion of certain key executives that increased personnel costs by
approximately $0.3 million which management believed were necessary to support
the future growth of the Company. Second, the Company entered into a
management agreement with Morningside which provides strategic consulting
advice to the Company for a fee of $350,000 per annum. Third, travel expenses
increased significantly due to the new management's focus on international
markets which required extensive travel. Finally, bank fees and professional
fees increased due to the new credit agreements relating to the debt incurred
to finance the Acquisition.
Incentive Compensation Expenses. The Company recognized $0.8 million of
incentive compensation expense during the quarter ended June 30, 1996 relating
to anticipated costs under certain long-term incentive compensation
agreements. Upon completion of the Offerings, the Company will record
additional compensation charges of approximately $0.4 million (based on the
initial public offering price) principally for final payments under these
awards. During August 1996, several outside directors purchased 115,373 shares
of Common Stock at approximately $2.17 per share for an aggregate purchase
price of $250,000, and members of senior management purchased 385,818 shares
of Common Stock at approximately $4.15 per share, for an aggregate purchase
price of $1.6 million. The purchase of such shares by senior management was
financed with $1.3 million (net of discount) in non-interest bearing long-term
full recourse loans from the Company. The Company will record additional non-
cash compensation expense of approximately $5.8 million (with no associated
income tax benefits) during the three months ended September 30, 1996 for the
excess of the estimated initial public offering price over the actual purchase
price of such shares and for the shares of Carson South Africa awarded to
certain members of its management. See "Management."
Depreciation and Amortization. Depreciation and amortization expense
increased from $0.3 million in the three months ended June 30, 1995 to $0.6
million in the three months ended June 30, 1996. As a percentage of net sales,
depreciation and amortization expense increased from 1.7% to 3.3% during this
period. This increase was primarily due to goodwill amortization which
resulted from the application of purchase accounting. The increase in
amortization due to the Acquisition was partially offset by a change in the
way the Company accounts for package design costs. Prior to the Acquisition,
the Predecessor capitalized package design costs and amortized it over a four
year period. Since the Acquisition, the Company has expensed package design
costs as
31
<PAGE>
incurred. The application of purchase accounting related to the Acquisition
did not have a material impact on the Company's depreciation expense.
Operating Income and EBITDA. As a result of the above changes, operating
income decreased from $3.1 million in the three months ended June 30, 1995 to
$2.6 million in the three months ended June 30, 1996, a decrease of 16.7%. As
a percentage of net sales, operating income decreased from 17.8% to 13.6%
during this period. EBITDA decreased from approximately $3.5 million to $3.2
million, a decrease of 7.7% during this period. Excluding the effects of the
incentive compensation charge, operating income and EBITDA increased 9.4% and
15.4% respectively during this period.
Interest expense. Interest expense increased substantially from $0.0 million
in the three months ended June 30, 1995 to $1.8 million in the three months
ended June 30, 1996 as a result of the new debt incurred to finance the
Acquisition.
Other Income; Investment Income. Other income decreased as a result of the
elimination of royalty income associated with the Caribbean. The Company now
handles Caribbean sales through its in-house sales organization. Investment
income decreased because most of the Predecessor's investments were liquidated
in conjunction with the Acquisition.
Provision for Income Taxes. The provision for income taxes decreased from
$1.2 million in the three months ended June 30, 1995 to $0.5 million in the
three months ended June 30, 1996 as a result of the decrease in pre-tax
income. The effective tax rate increased from 36.5% to 60.2% primarily as a
result of goodwill amortization which is not deductible for income tax
purposes.
COMBINED YEAR ENDED MARCH 31, 1996 COMPARED TO PREDECESSOR YEAR ENDED MARCH
31, 1995
Net Sales. Net sales increased from $58.1 million in fiscal 1995 to $68.3
million in fiscal 1996, an increase of 17.5%, as a result of positive market
acceptance of new product formulations and new packaging, and the efforts of
the Company's in-house sales organization which was established in April 1995.
In the United States, relaxers and texturizers, hair color, shaving products
and hair care maintenance products all generated net sales increases. Carson
South Africa continued to show strong growth with an increase in net sales of
84.0% from $3.6 million in fiscal 1995 to $6.7 million in fiscal 1996, a
function of both the rapid expansion of the African market and increasing
market share. International sales excluding sales by Carson South Africa also
increased, primarily due to European sales where the Company increased its
sales representation.
Gross Profit. Gross profit increased from $32.4 million in fiscal 1995 to
$38.2 million in fiscal 1996, an increase of 17.7%. This increase was almost
entirely the result of the increase in net sales. Gross margin increased
slightly from 55.8% to 55.9% during this period.
Selling Expenses. Selling expenses decreased from $17.9 million in fiscal
1995 to $17.0 million in fiscal 1996, a decrease of 4.7% despite an increase
in net sales of 17.5%. As a percentage of net sales, selling expenses
decreased from 30.8% to 25.0% during this period. This decrease was due to the
Company's decision to establish an in-house sales organization and terminate
the majority of its sales broker relationships. In fiscal 1995, brokers were
paid a commission which averaged slightly above 5%. The commission expense was
almost entirely eliminated in fiscal 1996. This savings was offset in part by
an increase in sales salaries and other payroll costs related to the new sales
employees.
General and Administrative Expenses. General and administrative expenses
increased from $5.2 million in fiscal 1995 to $7.3 million in fiscal 1996, an
increase of 39.9%. As a percentage of net sales, general and administrative
expenses increased from 9.0% to 10.7% during this period. The increase in
general and administrative expenses as a percent of net sales was a function
of several factors relating to the Acquisition and the new management
structure. First, the new management team included the addition of several new
senior executives and the promotion of certain key executives that increased
personnel costs by approximately $0.4 million which management believed were
necessary to support the future growth of the Company. Second, the Company
entered into a management agreement with Morningside which provides strategic
consulting advice to the Company for a fee of $350,000 per annum. Third,
travel expenses increased significantly due to the new management's focus on
international markets, including the establishment of the South African
manufacturing
32
<PAGE>
operations which required extensive travel. Finally, bank fees and
professional fees increased approximately $0.2 million due to the new credit
agreements relating to the debt incurred to finance the Acquisition.
Depreciation and Amortization. Depreciation and amortization expense
increased from $1.1 million in fiscal 1995 to $1.8 million in fiscal 1996. As
a percentage of net sales, depreciation and amortization expense increased
from 1.9% to 2.7% during this period. This increase was due to goodwill
amortization which resulted from the application of purchase accounting. The
increase in amortization due to the Acquisition was partially offset by a
change in the way the Company accounts for package design costs. Prior to the
Acquisition, the Predecessor capitalized package design costs and amortized
them over a four year period. Since the Acquisition, the Company has expensed
package design costs as incurred. The application of purchase accounting
related to the Acquisition did not have a material impact on the Company's
depreciation expense.
Operating Income and EBITDA. As a result of the above changes, operating
income increased from approximately $8.2 million in fiscal 1995 to $12.0
million in fiscal 1996, an increase of 45.6%. As a percentage of net sales,
operating income increased from 14.1% to 17.5% during this period. EBITDA
increased from approximately $9.1 million to $14.0 million, an increase of
54.4% during this period.
Interest expense. Interest expense increased substantially from $0.1 million
in fiscal 1995 to $4.5 million in fiscal 1996 as a result of the new debt
incurred to finance the Acquisition.
Other Income; Investment Income. Other income remained approximately the
same in fiscal 1996 as compared to fiscal 1995. Investment income increased
from $0.6 million in fiscal 1995 to $1.1 million in fiscal 1996 as the
Predecessor realized gains on the liquidation of certain investment
securities.
Provision for Income Taxes. The provision for income taxes increased from
$3.2 million in fiscal 1995 to $3.6 million in fiscal 1996, an increase of
13.3%. This increase occurred despite pre-tax income decreasing from $8.9
million in fiscal 1995 to $8.7 million in fiscal 1996 as a result of goodwill
amortization of $0.7 million in fiscal 1996 which was not deductible for tax
purposes. Accordingly, the effective tax rate increased from 35.8% to 41.2%
during this period.
PREDECESSOR YEAR ENDED MARCH 31, 1995 COMPARED TO PREDECESSOR YEAR ENDED
MARCH 31, 1994
Net Sales. Net sales increased from $50.1 million in fiscal 1994 to $58.1
million in fiscal 1995, an increase of 16.0%. In the United States, net sales
of relaxers and texturizers, hair color, and shaving products all increased,
offset by a nominal decrease in the hair care maintenance category. The
Company's South African subsidiary's sales increased from $1.8 million in
fiscal 1994, the first full fiscal year of South African operations, to
$3.6 million in fiscal 1995, an increase of 105.1%. International sales
excluding South Africa also increased, primarily due to increased European
sales penetration.
Gross Profit. Gross profit increased from $26.5 million in fiscal 1994 to
$32.4 million in fiscal 1995, an increase of 22.5%. Gross margin improved from
52.9% to 55.8% during this period. Several of the product reformulations
completed in fiscal 1995 resulted in lower manufacturing costs. Additionally,
due to new packaging and increased advertising, the Predecessor implemented
the first significant price increase on the Dark & Lovely relaxer kits in
several years.
Selling Expenses. Selling expenses increased from $14.6 million in fiscal
1994 to $17.9 million in fiscal 1995, an increase of 22.2%. This increase was
primarily a result of the increase in net sales since most of the components
of selling expense were directly variable with sales. As a percentage of net
sales, selling expenses increased from 29.2% to 30.8% during this period,
almost entirely attributable to increased advertising.
General and Administrative Expenses. General and administrative expenses
decreased from $6.8 million in fiscal 1994 to $5.2 million in fiscal 1995, a
decrease of 23.2%. As a percentage of net sales, general and administrative
expenses decreased from 13.6% to 9.0% during this period. This decrease was
due primarily to a $1.0 million reduction in compensation paid to the previous
owners, decreased computer training expenses and lower legal costs as a result
of the settlement of law suits in 1994.
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Depreciation and Amortization. Depreciation and amortization expense
increased from $0.8 million in fiscal 1994 to $1.1 million in fiscal 1995. As
a percentage of net sales, depreciation and amortization increased from 1.7%
to 1.9% during this period. This increase was due to higher capitalized
package design cost and higher depreciation expense related to a new
administrative building and finished goods warehouse.
Operating Income and EBITDA. As a result of the above changes, operating
income increased from approximately $4.2 million in fiscal 1994 to $8.2
million in fiscal 1995, an increase of 96.3%. As a percentage of net sales,
operating income increased from 8.4% to 14.1% during this period. EBITDA
increased from approximately $5.1 million to $9.1 million, an increase of
76.8% during this period.
Interest Expense. Interest expense remained approximately the same at $0.1
million in fiscal 1995 as compared to fiscal 1994.
Other Income; Investment Income. Other income and investment income remained
approximately the same in fiscal 1995 as compared to fiscal 1994.
Provision for Income Taxes. The provision for income taxes increased from
$1.7 million in fiscal 1994 to $3.2 million in fiscal 1995, an increase of
86.3%, due to the increase in pre-tax income. The effective tax rate remained
constant at approximately 36% during this period.
Discontinued Operation; Effect of Changes in Accounting Principles. The
charge for the discontinued operation related to the loss on disposal of Fine
Products, a candy manufacturing company that was sold in fiscal 1994. The
effect of changes in accounting principles related to the adoption of FAS
115--"Accounting for Certain Investments in Debt and Equity Securities", FAS
106--"Accounting for Post-retirement Benefits other than Pensions", and FAS
109--"Accounting for Income Taxes" (see Note 1 to the Predecessor's
Consolidated Financial Statements for the years ended March 31, 1994 and 1995
contained elsewhere in this Prospectus).
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Acquisition, the Predecessor's liquidity requirements arose
primarily from working capital needs, especially increases in inventory and
receivables, as well as capital expenditures. The Predecessor maintained lines
of credit totalling $5.0 million but did not use these lines in fiscal 1994 or
1995. The Predecessor maintained substantial balances of cash and marketable
securities which were available for liquidity needs, although cash flow from
operations was historically sufficient to fund the Predecessor's liquidity
requirements.
Upon consummation of the Acquisition, the Company's liquidity requirements
increased significantly due to the debt service requirements associated with
borrowings used to finance the Acquisition. See "The Company--Background."
Under the Senior Bank Credit Facility, the Company maintains a revolving
credit line which matures in July 2001 and provides for borrowings of up to
$10.0 million at a floating rate based upon the Base Rate as defined in the
Senior Bank Credit Facility or the Eurodollar Rate as defined in the same
agreement, subject to the maintenance of a borrowing base. The Company used
$5.0 million of the revolving credit line as part of the financing for the
Acquisition. As of March 31, 1996, the Company had borrowed an additional
$2.5 million under the revolving credit line to finance short term working
capital requirements. The Company had $1.6 million of cash and cash
equivalents on hand at March 31, 1996, and availability under the revolving
credit line of $2.5 million. The Company had $0.9 million of cash and cash
equivalents on hand at June 30, 1996 and availability under the revolving line
of credit of $2.5 million.
At March 31, 1996, the Company did not comply with certain covenants of the
Senior Bank Credit Facility and the Senior Subordinated Notes related to
capital expenditures and net worth. The net worth covenant had originally been
set without regard to the carryover for accounting purposes of predecessor
basis; as a result of such carryover the net worth covenant was amended. The
Company has received waivers of these events of default from the lenders under
the Senior Bank Credit Facility and Senior Subordinated Notes and is currently
in compliance with all such covenants.
The Company intends to use the net proceeds of the Offerings (i) to purchase
$18.0 million aggregate principal amount of the 12.5% Senior Subordinated
Notes due 2002, plus prepayment premium for an aggregate redemption price of
approximately $19.3 million plus accrued and unpaid interest thereon, (ii) to
redeem $3.0 million aggregate principal amount of the 15.0% PIK Subordinated
Notes due 2003, plus prepayment premium for an aggregate redemption price of
approximately $3.6 million plus accrued and unpaid interest thereon, and (iii)
to purchase $11.8 million aggregate principal amount of the Junior
Subordinated Notes for a repurchase price
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of $4.7 million. The balance of the net proceeds, along with borrowings under
the New Senior Bank Facility, will be used to repay all outstanding borrowings
under the Senior Bank Credit Facility, plus accrued and unpaid interest
thereon and related financing fees and expenses.
In conjunction with the Offerings, the Company intends to refinance the
remaining portion of the Senior Bank Credit Facility with borrowings under the
New Senior Bank Facility which is anticipated to include (i) a $15.0 million
term loan A, (ii) a $10.0 million term loan B and (iii) a $15.0 million
revolving credit facility, which will provide more availability than the
current facility. The term loan A and revolving credit facility would bear
interest at the applicable prime rate plus 0.5% or LIBOR plus 2.0% and would
have a final maturity of six years. The term loan B would bear interest at the
applicable prime rate plus 1.0% or LIBOR plus 2.5% and would have a final
maturity of seven years. Management believes that the New Senior Bank Facility
will contain less restrictive covenants compared to the existing facility,
since the Company will be substantially less leveraged following the
Offerings.
In the seven month period since the Acquisition, August 23, 1995 to March
31, 1996, the Company generated $3.3 million in cash flow from operations
adjusted for depreciation and amortization and deferred income taxes. However,
changes in assets and liabilities used $4.5 million of cash. Therefore, net
cash used in operating activities was $1.2 million. The use of cash relating
to changes in assets and liabilities was driven primarily by increases in
accounts receivable and inventory due to the increase in net sales, increases
in other current assets relating to a deposit, and decreases in accrued
expenses primarily relating to the timing of advertising expenditures. These
changes were partially offset by increases in accounts payable relating to the
higher net sales of the Company, higher interest payable relating to the
acquisition debt and decreases in other assets relating to the amortization of
the prepaid interest on the Junior Subordinated Notes.
Net cash used in investing activities (other than to acquire the
Predecessor) for the seven months since the Acquisition was $1.5 million of
capital expenditures. The two largest capital projects involved equipping the
new South African manufacturing facility and reorganizing the shaving powder
production in Savannah to better optimize capacity.
Net cash provided by financing activities (other than to acquire the
Predecessor) for the seven months since the Acquisition totaled $1.5 million
which included additional borrowings under the revolving credit line of $2.5
million and payments on senior term debt of $1.0 million. The net cash flow
for the seven month period since the Acquisition was an outflow of $1.2
million, which, when combined with acquired cash of $2.7 million, results in a
net increase in cash of $1.5 million.
For the three months ended June 30, 1996, the Company generated $1.0 million
in cash flow from operations adjusted for depreciation and amortization.
However, changes in assets and liabilities used $0.6 million in cash.
Therefore, net cash provided by operating activities for the three months
ended June 30, 1996 was $0.4 million. Net cash used in investing activities
during this period totaled $3.5 million including the $3.0 million investment
in the parent of AM Cosmetics and $0.5 million of capital expenditures. Net
cash provided by financing activities totaled $2.5 million resulting from $3.0
million of additional borrowings to fund the investment in the parent of AM
Cosmetics, less a payment on the term loan of $0.5 million. The net decrease
in cash for the three months ended June 30, 1996 was $0.7 million.
The Company's and the Predecessor's capital expenditures for fiscal 1996,
fiscal 1995 and fiscal 1994 were $2.2 million (including package design costs
of $0.2 million), $1.3 million (including package design costs of $0.4
million), and $2.5 million (including package design costs of $1.0 million),
respectively. The Company anticipates that capital expenditures for the twelve
month period ending March 31, 1997 will be approximately $4.3 million, which
includes $1.7 million for the purchase of the South African manufacturing
plant and additional related equipment (the land and buildings were leased as
of March 31, 1996) and the expansion of the Savannah manufacturing and
warehousing facility.
The Company believes that cash flow from operating activities, existing cash
balances and available borrowings under its existing revolving credit facility
or the New Senior Bank Facility will be sufficient to fund working capital
requirements, capital expenditures and debt service requirements in the
foreseeable future.
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BUSINESS
GENERAL
The Company is a leading manufacturer and marketer in the U.S. retail ethnic
hair care market for African-Americans. The Company believes that it is one of
the leading global manufacturers and marketers of ethnic hair care products
for persons of African descent. The Company's flagship brand, Dark & Lovely,
is the most widely recognized ethnic brand name in the U.S. retail ethnic hair
care market. The Company currently sells over 60 different products under five
principal brand names, including Dark & Lovely, Excelle, Beautiful Beginnings,
Dark & Natural and Magic. The majority of the Company's sales are derived from
four categories of the ethnic health aid beauty aids market: hair relaxers and
texturizers, which are used to chemically treat and straighten hair
(constituting approximately 50% of the Company's net sales in fiscal 1996),
hair color, shaving products and hair care maintenance products. The Company's
products are specifically formulated to address the unique physiological
characteristics of hair of persons of African descent, which typically include
curliness and dryness. The Company believes that it has the number one U.S.
retail market position in three of the four ethnic hair care categories in
which it competes (hair relaxers and texturizers, hair color and shaving
products). In addition, the Company believes that the strength of its
competitive position in the ethnic hair care industry is attributable, in
part, to its heritage of technological innovation and its focused R&D effort.
The Company markets its products in the U.S. with its own experienced direct
sales force. The Company currently markets its products in 60 countries
outside of the United States, primarily through local distributors. In fiscal
1996, approximately 23.8% of the Company's net sales were derived from sales
within these countries.
In order to capitalize on new growth opportunities, the Company has
assembled a senior management team of seasoned executives with extensive
experience serving the consumer products industry and the ethnic market. As
Chairman and Chief Executive Officer, Dr. Leroy Keith, former President of
Morehouse College and director of the Predecessor, entrepreneur and prominent
member of the African-American community, provides the Company with leadership
and vision. Joyce M. Roche, President and Chief Operating Officer, has over 20
years of experience in the health aid beauty aids industry, including
positions as Senior Vice President of Marketing and Vice President of Global
Marketing at Avon and Director of Marketing at Revlon. Dennis Smith, Executive
Vice President of Sales, has over 20 years of experience in the ethnic hair
care industry, including senior management positions with a competitor and 14
years with the Company. Miriam Muley, Executive Vice President of Marketing,
has over 17 years of consumer products industry experience, having held
marketing positions at Avon, Bristol-Myers Squibb Company's Clairol division
and Johnson & Johnson, and as a Vice President at Uniworld Group, a leading
advertising agency targeting the African-American market segment.
The Company has recently taken several important initiatives to enhance its
position in the ethnic hair care marketplace. In 1996, the Company's R&D
department finalized the development of several product innovations, including
the Fail Safe and DL 2000 hair relaxer technologies and a full line of hair
care maintenance products. After 20 years of using the same advertising
agency, the Company, in early 1996, appointed a new advertising agency, Don
Coleman & Associates, Inc., which specializes in the African-American market.
The introduction of new and attractive product packaging for many of the
Company's products will be completed in 1996. The in-house sales force formed
in April 1995 was further expanded in 1996 with the addition of several
experienced senior sales executives. In addition, the Company established its
own manufacturing plant in South Africa by acquiring a former Pfizer facility,
and began operations in early 1996. The Company began establishing a
distribution network and training stylists in Brazil in October 1995, through
a strategic alliance with Servico Nacional de Aprendizagem (SENAC), a national
professional services training organization. The Company intends to use Brazil
as a base for expanding to other Central and South American countries.
The Company experienced a 17.5% increase in net sales from $58.1 million in
fiscal 1995 to $68.3 million in fiscal 1996 and a 45.6% increase in operating
income from $8.2 million in fiscal 1995 to $12.0 million in fiscal 1996.
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INDUSTRY OVERVIEW
The U.S. retail ethnic hair care market, principally targeting the distinct
hair care needs of African-Americans, was estimated in the Packaged Facts
Report to be a $1.2 billion retail business in 1995. According to 1995 U.S.
Census Data ("Census Data") published by the U.S. Department of Commerce, the
African-American population was approximately 34 million and represented 12.7%
of the U.S. population. This segment of the U.S. population is projected by
the U.S. Department of Commerce to grow significantly faster than the general
population through the middle of the next century. The personal income of
African-Americans doubled from 1980 to 1990 and their combined purchasing
power was estimated to be approximately $260 billion in 1990, according to the
Census Data. Moreover, the Packaged Facts Report indicates that African-
American consumers generally spend up to three times as much of their
disposable income on health and beauty products as Caucasian consumers.
The Company believes that the U.S. retail ethnic hair care market is highly
fragmented, with six companies generating approximately one half of the sales
in 1995 in this market and the remaining sales generated by a large number of
smaller companies, according to the Towne-Oller Report. Most of the larger
competitors in the ethnic hair care market are privately owned and compete
only in this market. A few general market health and beauty aids companies
produce a limited line of ethnic products.
In addition to the retail segment of the U.S. ethnic hair care market, there
are also professional ethnic hair care salons which the Company estimates to
exceed 28,000 in the United States. According to market research studies
commissioned by the Company in 1990, which have been updated through focus
groups and other internal research conducted by the Company (collectively,
"Company Market Research"), approximately 40% of African-American women
patronize salons exclusively, 40% maintain their hair at home exclusively and
20% switch between salons and home hair care. The professional segment of the
U.S. ethnic hair care market is also highly fragmented, with the leading
competitor being a general market health and beauty aids company. The Company
does not currently participate in the U.S. professional segment but intends to
do so in the near future. See "--Growth Strategy."
On a global scale, the Company currently estimates that there are
approximately 900 million people of African descent outside the United States,
including an estimated 750 million people on the African continent, 100
million people in Brazil, 20 million people in the Caribbean, 10-15 million
people in Europe and 10-13 million people in Central America. The Company's
experience in developing regions such as South Africa, the Caribbean and
Brazil, indicates the percentage of women who patronize salons is dramatically
higher in these developing markets than in developed markets such as the
United States. These women tend to patronize salons because relaxer products
are generally unavailable on a retail basis, professionals have the expertise,
as well as ready access to hot water, which is necessary for effective use of
relaxer products, and the local salon is often a social gathering place for
its patrons. Although there is no independent market data to support the size
of the international market, the Company believes that the international
market is significant. For example, the Company estimates that in Southern
Africa, with a Black population of approximately 100 million, manufacturers of
ethnic hair care products generated approximately $40 million in sales in
1995. Southern Africa refers to Angola, Botswana, Lesotho, Malawi, Mozambique,
Namibia, South Africa, Swaziland, Zambia and Zimbabwe.
The major segments of the ethnic hair care market in which the Company
competes are described below:
. Relaxers and Texturizers. Chemical hair relaxing is the process of
permanently straightening curly hair. Texturizers generally work in a
similar manner as relaxers to loosen curly hair, but do not straighten
the hair completely. The amount of curl in any type of hair is
determined by the abundance of disulfide bonds as well as the shape of
the hair follicle from which the hair emerges, either straight, slightly
curved or curly. Relaxed hair serves as the foundation for and
facilitator of daily hair styling. Consequently, its popularity is not
significantly related to current fashion trends. For the person with
relaxed hair, relaxers represent a basic personal care product, similar
to shampoos and conditioners for the general market. Further, the
continual need for "touch-ups" approximately every six weeks requires
the relaxer user to frequently purchase relaxers and related products.
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According to the Packaged Facts Report, over 50% of African-American
women use chemical relaxers in their hair. For persons of African
descent, chemical relaxation became popular in the 1940's with the
introduction of sodium hydroxide or "lye" relaxer which was the sole
product available until the Company invented and patented "no-lye," or
guanidine carbonate hydroxide relaxers in 1978. In the retail market,
no-lye relaxers are generally sold in kits which include a cream base
component and a chemical activator component, which are mixed together
to create the requisite chemical reaction. One of the most significant
sources of consumer complaints in the industry is inconsistent results
caused by mixing errors. Fail Safe technology, developed by the Company,
eliminates such mixing problems. Although lye relaxers do not require
mixing and tend to work faster than no-lye relaxers, they have a much
higher risk of hair damage and skin irritation than no-lye relaxers.
Until the Company invented no-lye relaxers, relaxing hair was relegated
primarily to salons where it was applied by trained technicians for
safety reasons. The introduction of Dark & Lovely no-lye relaxers by the
Company offered an effective and less expensive in-home alternative
which significantly changed the industry.
In 1995, the U.S. retail ethnic relaxer and texturizer segment was the
largest category of U.S. retail ethnic hair care products, representing
approximately 31% of the U.S. retail ethnic hair care market, according
to the Towne-Oller Report. The relaxer and texturizer market is highly
fragmented with almost 50 brands available; however, according to the
Towne-Oller Report, the top five brands generated almost half of the
sales volume in 1995, with the Company's Dark & Lovely brand having the
largest market share with approximately 14.5% of the total sales in this
segment.
. Hair Color. Hair coloring involves the addition of chemical coloring
agents to the natural pigment of hair, or a lightening or "lifting" of
the natural pigment followed by the addition of color to brighten hair.
The hair of individuals of African descent has more pigment in the hair
cortex than Caucasian hair. This type of hair also has a lower sulfur
content, a slightly lower lipid content and possesses sulfur-containing
bonds that have a different configuration than Caucasian hair. As a
consequence of these characteristics, the pigment in hair of individuals
of African descent reacts to coloring agents differently than Caucasian
hair and chemically relaxed hair will react more quickly to lightening
which can result in a brassy appearance. All of the Company's Dark &
Lovely hair colors are formulated to react appropriately to the hair of
individuals of African descent to ensure the delivery of the intended
color without brassiness.
The three major categories of hair color are: temporary, semi-permanent
and permanent. Temporary hair colors are generally removed from the
hair in the first or second shampooing. Temporary color is only
deposited on the hair surface and for the most part, no chemical
reactions take place, so it is safe to use immediately after relaxing.
Temporary color can only deposit pigment, it cannot lighten the hair
color. Semi-permanent hair colors are more resistant to removal and are
formulated to last from four to six shampoos. They are applied without
peroxide, so they do not change the basic structure of the hair and are
also safe to use immediately after relaxing. Semi-permanent colors are
only designed to add color to the hair. Permanent hair colors produce
the most effective and durable coloration. Due to dye penetration of
the cortex of the hair as well as the addition of peroxide, these
colors can both lighten hair and deposit color. Therefore, permanent
color offers the greatest range of shades. According to the Packaged
Facts Report, approximately one quarter of all African-American women
color their hair, with approximately one half of this group coloring
their hair at home.
In 1995 the U.S. retail ethnic hair color segment represented
approximately 6% of the U.S. retail ethnic hair care market, according
to the Towne-Oller Report. The Company believes that it has the leading
market share in this segment. Three ethnic and two general market
health and beauty aids companies produce hair color product lines
specifically targeted to consumers of African descent.
. Hair Care Maintenance Products. The physiological differences between
the hair of individuals of African descent and Caucasian hair create the
need for a variety of products to treat or "maintain" the hair and
scalp. Hair is lubricated by the sebaceous gland which excretes oil that
flows down and lubricates the hair shaft. While this generally happens
in straight hair and in wavy hair, it is very difficult for oils to
follow the curves and undulations of curly or kinky hair. The lack of
oil causes
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curly or kinky hair to become very dry and brittle, leaving the hair
with a matte, almost dull finish. This condition is the major reason
that hair care maintenance products such as oil sheens, hair dress
conditioners, comb-outs/detanglers and wave products are popular among
individuals of African descent.
Women, children and men of African descent use a variety of products in
order to permanently change the structure of their hair. In most
instances, chemical processes (e.g., relaxing and color treating hair)
leave the hair more dry and brittle than it would be otherwise and can
significantly damage hair if used improperly. Thus there is an even
greater need to condition, replenish and protect hair before, after and
in between treatments. In order to protect the hair, strengthen it and
return it to a soft, shiny condition with a healthy-looking appearance,
the consumer in this market has an even greater need for hair care
maintenance products than her or his general market counterpart.
Numerous ethnic hair care companies and several general market health
and beauty aids companies sell hair care maintenance products to
consumers of African descent.
. Shaving Products. "Razor bumps," known medically as Pseudofolliculitis
Barbae (PFB), is a condition which primarily affects men of African
descent. Razor bumps are both caused and aggravated by shaving due to
the way curly facial hairs grow on these men, because as their beards
grow back after shaving with a razor, the sharp tip of each hair will
continue curling until it grows back into the skin. Razor bumps may lead
to an unpleasant appearance or even permanent disfigurement and can
cause great discomfort during the shaving process. The incidence of men
of African descent who suffer from some degree of razor bumps is
estimated to range from 35% to 40% and, of this group, an estimated 50%
seek some sort of relief, according to reports published by the National
Medical Association, a group of predominantly African-American
physicians. The primary alternative to shaving is using a depilatory
such as the Company's Magic product line. The advantage of depilatories
is that they remove hair chemically by weakening and dissolving the hair
so that it can be easily removed to give a smooth, close, razorless
shave. Because depilatories do not leave sharp tips on the ends of hair,
they reduce the probability that hair will grow back into the skin.
Two companies specializing in men's hair depilation compete in this
market, with the Company dominating this segment.
ETHNIC MARKET LEADERSHIP
The Company's resources are focused primarily on satisfying the unique hair
care needs of individuals of African descent worldwide. The Company believes
that it has the number one U.S. retail market position in three of the four
ethnic hair care categories in which it competes (hair relaxers and
texturizers, hair color and shaving products). The Company attributes its
leading market position to its strong brand names, combined with its direct
sales force, broad distribution, R&D capabilities and experienced management
team. Because of these strengths, the Company believes that it has a
competitive advantage over both the companies specializing in products for the
ethnic hair care market and the few general market companies that compete in
the ethnic hair care market but whose principal resources are targeted to the
general health and beauty aids market.
. Strong brands. The Company currently sells its products under five
principal brand names including Dark & Lovely, Excelle, Beautiful
Beginnings, Dark & Natural and Magic. The Company's flagship brand, Dark
& Lovely, is the most widely recognized ethnic brand name in the U.S.
retail ethnic hair care market for African-Americans. The Company
believes that its brand strength is based upon product quality, properly
targeted advertising, package design, reputation for innovation and
focused commitment to the unique needs of ethnic consumers.
. Experienced Sales Force and Broad Distribution. In April 1995, the
Company established a direct sales force to enhance its ability to
further penetrate existing markets with both current and new products.
The sales force has significant sales experience both with major
consumer product companies and ethnic hair care competitors. The Company
believes that it now has the largest direct sales force serving the U.S.
retail ethnic hair care market. Historically, the Company used
commissioned sales
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brokers, as is the industry norm, who tended to have conflicting brand
loyalties and provide minimal marketing and sell-through support. In the
United States, the Company benefits from having its extensive product
line distributed broadly through three principal channels: (i) multi-
warehouse chains, including mass merchandisers (e.g., Wal-Mart, K-Mart),
major drug chains (e.g., Walgreens, Revco), food chains (e.g., Winn
Dixie, Kroger) and discount chains (e.g., Family Dollar, Dollar
General), (ii) B&Bs such as Alberto-Culver Company's Sally's Beauty
Supply stores and members of the National Beauty Supply Dealers
Association, and (iii) ethnic product distributors. See "--
Distribution."
. Research and Development. The Company believes that its heritage of
technological innovation and its focused R&D effort are important to
maintaining its market leadership position. Three of the ethnic hair
care industry's most significant innovations were introduced by the
Company: the first hair color developed exclusively for hair of persons
of African descent (1972), the first no-lye relaxer, which provided a
safe relaxer product for home use (1978), and the Fail Safe technology
for no-lye relaxers (1993), which eliminates problems associated with
imprecise mixing which can make no-lye products too weak, thereby
impacting straightening, or too strong, leading to hair damage. One of
the most significant sources of consumer complaints in the industry is
inconsistent results caused by mixing errors. The Company believes that
its R&D department, led by two industry experienced chemists with Ph.D.s
and including nine other researchers and technicians, represents the
largest R&D effort focused on the ethnic hair care market.
. Experienced Management Team. In connection with the Acquisition, the
senior management of the Predecessor was replaced. A team of seasoned
senior executives with extensive experience in the ethnic market and
consumer products industry were recruited to build on the Company's
strong position in the global ethnic hair care market. This management
team has focused the Company's strategy to further develop the ethnic
hair care market both in the United States and internationally. See
"Management."
GROWTH STRATEGY
The Company believes that it is well positioned to grow both internally and
through acquisitions, in order to enhance its market position in the ethnic
hair care market. The Company intends to achieve its goals by (i) increasing
its share of existing markets, (ii) increasing international expansion, (iii)
leveraging brands into new categories, (iv) targeting the U.S. professional
salon market and (v) capitalizing on selective acquisition opportunities.
. Increase Share of Existing Markets. Product innovation and ongoing
upgrading of existing products are the cornerstone of the Company's
efforts to increase its market share in existing markets. The Company
recently incorporated into all of its relaxer products its latest
innovation in relaxer technology, called Fail Safe, which eliminates the
problem of mixing errors which occur with the in-home use of no-lye
relaxers. The Company's Fail Safe technology assures that the consumer
will not make a mixing error and thereby vary the relaxer strength. The
Company believes it has the only no-lye relaxer that can consistently
deliver the same results every time. The Company has been on an
aggressive schedule of new product introductions or existing product
upgrades during the last several years with over 10 products that have
been recently introduced or will be introduced during the next six
months, including the following:
-- Improved Dark & Lovely Relaxer: The Company's flagship line was
upgraded to include its innovative Fail Safe technology.
Simultaneously, conditioning benefits (ultra-conditioning relaxer
base and shampoo) were added to every step of the relaxer system and
the packaging was updated. Company research indicates that the new
product out-performs both the competition and the former Dark &
Lovely product in five key areas: straightening, manageability,
softness, health and shine.
-- Improved Excelle Relaxer: The improved Excelle relaxer brand will
use Fail Safe technology as well as increased moisturizing benefits
to deliver more body and a finished, salon look. The components of
the Excelle kit will be improved and the packaging will be
redesigned and upgraded to a modern, more elegant look.
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-- Excelle Hair Care: An Excelle hair care moisturizing line will be
added at the same time as the Excelle relaxer relaunch. Three
"after-care" products will initially be added, highlighting the
Excelle relaxer product and providing necessary hair care
maintenance items.
-- Dark & Lovely Color Care Shampoo and Conditioner: Traditional
shampoos and conditioners can strip or dull the hair of individuals
of African descent that has been color treated. The Company will
introduce a shampoo and conditioner especially designed to add body
and shine to color-treated hair to complement the Company's hair
color products.
-- Magic Mild Cream Formula: The Company has developed a mild cream
formula which is in a no-mix, easy-to-use form and is targeted to
younger users. The current Magic product line is sold primarily to
older men of African descent.
. Increase International Expansion. The Company believes it is poised for
growth in markets such as Africa, Brazil and the Caribbean, each of
which has a significant concentration of consumers of African descent.
The Company currently markets its entire product line in over 60
countries worldwide under the same brand names as it uses in the United
States. International sales in fiscal 1996 of $16.3 million represented
23.8% of the Company's fiscal 1996 net sales and increased 48.0%
compared to fiscal 1995.
-- Africa: The Company currently sells to 17 of the 55 African
countries, with fiscal 1996 net sales of approximately $7.7
million, 84% of which was in Southern Africa (Angola, Botswana,
Lesotho, Malawi, Mozambique, Namibia, South Africa, Swaziland,
Zambia, and Zimbabwe). In Southern Africa the current customer
base, which consists primarily of professional salon owners and
stylists, is serviced through regional distributors and specialty
cash-and-carry wholesale outlets. The Company currently offers
professional training through salons and seminars in order to
educate the professional salon owner or stylist as well as to
differentiate itself from its competitors in South Africa. Retail
product distribution is currently being expanded to mass
merchandisers and other large retail chains in South Africa. The
Company commenced its own manufacturing operations in South Africa
in March 1996 to support its African strategic initiatives. The
Company expects to benefit from the cost and quality advantages of
in-house production going forward. The Company's key strategic
initiatives to achieve growth throughout the African continent are
to: (i) continue market penetration and expansion of the core
Southern African business; (ii) establish and develop distribution
and/or manufacturing facilities in East Africa and West Africa;
(iii) extend existing product lines to include related product
categories such as cosmetics; and (iv) identify selected strategic
acquisitions. Carson South Africa recently sold 25% of its shares
in an initial public offering on the Johannesburg Stock Exchange.
The proceeds of such offering were used to purchase the
manufacturing facility and related equipment as well as to fund the
Company's African strategic initiatives.
-- Brazil: Brazil has a population of approximately 100 million people
of African descent, almost three times the number of people of
African descent as the United States. Moreover, the Company
believes that the ethnic hair care industry in Brazil is
underdeveloped and that the country's improving economy and
demographic trends make this market attractive for the introduction
of the Company's products. The Company began establishing a
distribution network and training stylists in Brazil in October
1995, through a strategic alliance with Servico Nacional de
Aprendizagem (SENAC), a national professional services training
organization. The Company intends to use Brazil as a base for
expanding its products and facilities to other Central and South
American countries.
-- Caribbean: In order to increase sales penetration in the Caribbean
region, the Company recently appointed a Caribbean Sales Manager
position and is investigating whether to establish a factory in
Jamaica which would enable the Company to produce in a Caribbean
Community and Common Market (CARICOM) nation, thereby substantially
reducing taxes and tariffs. The Company has sold products into the
Caribbean on an export basis through brokers since before 1975, but
expects to benefit from a more focused local marketing and
manufacturing presence.
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. Leverage Brands into New Product Categories. The Company believes that
its flagship Dark & Lovely brand name is transferable to other ethnic
health and beauty aids categories, including cosmetics.
-- Cosmetics Market Opportunity: According to the Packaged Facts
Report, the cosmetics segment of the U.S. retail ethnic health and
beauty aids market was projected to be approximately $251 million
in retail sales in 1995, and is forecasted to grow at 15% per year
until 1999. The Company intends to enter the ethnic cosmetics
market with a product line that is consistent with the positioning
of its ethnic hair care brands. The Company intends to take
advantage of (i) its ability to introduce its consumers to the Dark
& Lovely cosmetic line through inserts in Dark & Lovely relaxer and
hair color kits (which total 11 million units annually), (ii) its
strong relationships with its current customers which will enable
it to distribute new cosmetics products efficiently through the
same channels, and (iii) its exclusive contract manufacturing
arrangement with AM Cosmetics, a leading low-cost manufacturer of
cosmetics. See "Certain Relationships and Related Transactions--AM
Cosmetics." The Company is engaged in market research and product
development and, although no specific product launch date has been
set, expects to be able to enter the ethnic cosmetics market by the
end of 1997.
. Target the U.S. Professional Salon Market. The Company believes that its
R&D expertise and heritage as the technological innovator in the ethnic
hair care market will facilitate its entry into the United States
professional salon market. The Company is developing a new professional
product line under a distinct brand name that will offer certain
technological advantages versus products currently offered in salons, as
well as a complementary line of hair care maintenance products for
exclusive purchase in salons. The Company estimates that there are in
excess of 28,000 African-American hair care salons in the United States
and Company market research indicates that African-American women are
twice as likely as their Caucasian counterparts to patronize salons and
that of the total number of African-American women who relax their hair,
40% are exclusive salon users, 40% are exclusive at-home users, and 20%
switch between salon and at-home care. Of the approximately 40% of all
African-American women who color treat their hair, approximately one
half treat their hair at salons.
The Company believes that it is well positioned to deliver products to
the salon market, in significant part because many ethnic stylists
purchase their supplies at B&Bs, a distribution channel in which the
Company is well established. Additionally, the Company has successfully
entered the professional salon market internationally through its South
African subsidiary and is implementing this strategy in other parts of
Africa as well as in Brazil. The Company will use the expertise gained
from its international efforts to create teams of technical experts to
educate salon owners and stylists about the new brand and provide
ongoing training and education on the latest techniques in ethnic hair
care through trade shows, clinics and newsletters. The Company is
engaged in market research and product development and although no
specific launch date has been set, expects to be able to enter the salon
market by the end of 1997.
. Capitalize on Selective Acquisition Opportunities. In addition to
internally generated growth, the Company will consider the selective
acquisition of related brands and businesses which would increase the
Company's market share or expand and complement its product lines. The
Company does not currently have any outstanding agreements, commitments
or understandings to make any acquisitions or enter into any joint
ventures. There can be no assurance that suitable acquisition or joint
venture candidates can be identified, or if an acquisition is completed,
that the operations will be successfully integrated or otherwise not
have an adverse effect on the Company.
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PRODUCTS
The Company manufactures and markets a variety of products worldwide. The
following table sets forth the Company's principal products, by brand, as of
July 1, 1996.
<TABLE>
<CAPTION>
BRAND PRODUCTS
- -----------------------------------------------------------------------------------------
<C> <S>
Dark & Lovely Relaxers: Creme Relaxer, Regular Strength; Creme Relaxer Plus,
Super Strength
Hair Care Maintenance Products: Corrective Leave-in Condition
Therapy; Pro Therapy Protein Intensive Conditioner; Rich & Natural
Hair Dress Conditioner; Silky Set Conditioning Set & Wrap Lotion;
Quik Freeze Super Shine Spritz;
3-N-1 Plus Detangling/Conditioning Shampoo; Deep Conditioning
Treatment; Restore & Repair Reconstructive Hair Therapy; Styling
Gel; Super Hold Gel; Cholesterol Super Strengthening/Conditioning
Treatment; 24-hr. Therapy Moisture & Shine Replenisher; Ultra
Nourish Vitamin Hair Therapy;
The Restorer Super Strengthening Hot Oil; Healthy Shine Oil Sheen
Spray
Hair Color: Permanent: Jet Black; Natural Black; Brown Sable; Rich
Auburn; Sunset Auburn; Autumn Red; Light Brown; Honey Blonde;
Golden Bronze; Chestnut Blonde; Spicy Cinnamon; Midnight Blue;
Black Ruby; Light Golden Blonde
Reviving Colors Hair Color: Semi-Permanent: Radiant Black; Ebone
Brown; Spiced Auburn; Passion Plum
- -----------------------------------------------------------------------------------------
Excelle Relaxers: Creme Relaxer, Regular Strength; Creme Relaxer Plus,
Super Strength
- -----------------------------------------------------------------------------------------
Beautiful Beginnings Relaxers: Children's Relaxer
Hair Care Maintenance Products: Conditioning Shampoo Plus
Detangler; Leave-In Conditioner Plus Detangler; Natural Oil
Moisturizer Plus Detangler; Scalp Conditioner and Hair Dress
- -----------------------------------------------------------------------------------------
Dark & Natural Texturizers: Texture Enhancer, Regular Strength; Texture Enhancer,
Extra Strength; Texture Enhancer for Short Hair and Fades
Hair Care Maintenance Products: Moisturizing Shampoo; Dry Hair &
Scalp Moisturizer Conditioner; Wave Lotion; Wave & Style Gel
Hair Color: Jet Black; Natural Black; Darkest Brown
Moustache & Beard Color: Jet Black; Natural Black
- -----------------------------------------------------------------------------------------
Magic Shaving Products: Shaving Powder: Gold, Platinum, Blue and Red;
Pre-shave/after-shave lotion; Cream Shave
</TABLE>
. Dark & Lovely. The Dark & Lovely relaxer was introduced in 1978 and
effectively changed the way African-American women could relax their
hair. The introduction of the no-lye technology by the Company
significantly reduced the possibility of hair damage and skin irritation
frequently caused by sodium-based (lye) relaxers. The Dark & Lovely
brand is positioned to appeal to the younger African-American woman who
is looking for a "straight" look.
For more than 20 years, Dark & Lovely Hair Color--the first hair color
formulated specifically for the distinct hair needs of African-American
women--has been the market leader in ethnic hair color. Introduced in
1972, Dark & Lovely Hair Color targets African-American consumers who
are interested in changing and enhancing the appearance of their hair
color. The brand is supported with a complete line of hair care
maintenance products for daily care. In addition, Reviving Colors by
Dark & Lovely offers African-American women a range of semi-permanent
shades to choose from for a subtle change in color. Two new shades will
be introduced in late 1996, offering a total of six shades. A new line
of hair care products, Color Care, will also be launched in autumn of
1996 to address the need to maintain and refresh hair that has been
color-treated.
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<PAGE>
. Excelle. This is the Company's premiere brand targeted to the more
mature fashion conscious African-American woman concerned with the
appearance and health of her hair who is trying to achieve a finished
salon look at home. Introduced in 1984, Excelle Salon Performance
relaxer will be relaunched in 1996 with the aim of offering its target
audience healthier looking hair with luxurious body and sheen. The new
Excelle formula has improved relaxing capabilities and natural
ingredients such as aloe vera, vitamin E and protein. The Company
believes that upgraded packaging, a new hair care maintenance product
line and increased advertising will help communicate the brand's
upscale image to consumers.
. Beautiful Beginnings. This brand, targeted to parents of girls aged 5
to 12 years old, achieved the number three position in sales among
children's relaxers within three years of its introduction in 1993.
Beautiful Beginnings is an advanced conditioning Fail Safe relaxer
system for children with an exclusive Comfort Plus pretreatment that
protects sensitive young hair and scalp without inhibiting the
relaxing process. The Company believes Beautiful Beginnings is one of
the safest and gentlest children's relaxer systems available. The
brand is complemented with a complete line of hair care maintenance
products.
. Dark & Natural. This brand is targeted to men of African descent. The
Dark and Natural texturizer product delivers rich, natural-looking
waves. DL 2000 technology, a tension activated process in the Dark &
Natural product line, allows the user to control the amount of
relaxation in his hair through combing. Dark & Natural Hair Color for
men was introduced in 1992 and represents the first hair color
targeted to and developed exclusively for the African-American male.
Dark & Natural hair color products are designed to recapture the
natural color of hair that is dull or graying and produces a richer,
deeper and healthier looking color. The easy-to-mix formula contains
no ammonia and therefore is gentle to men's hair.
. Magic. This brand of shaving products is the top-selling male
depilatory product in the United States and globally among Black men.
On the market since 1901, Magic shaving products are the only
depilatory products endorsed by the National Medical Association for
the treatment and prevention of "razor bumps". A new no-mix cream
targeted to younger African-American men is planned for introduction
in the autumn of 1996.
MARKETING AND PROMOTIONS
The Company believes that understanding the consumer, meeting her or his
needs and delivering on product promises are critical in maintaining the
Company's competitive position. The Company spent an average of approximately
1% of net sales for each of the last two fiscal years on market research, such
as in-home consumer product placements for new products, tracking studies,
concept testing, package testing and advertising testing aimed at improving
its understanding of and effectively targeting its consumer. The Company also
maintains a toll-free telephone number to answer consumer questions and to
gather consumer feedback used to focus the Company's marketing programs.
Over 15% of net sales in fiscal 1996 was allocated to advertising and
consumer promotions. The Company believes that it is the leading advertiser in
the ethnic hair care market, with most of its emphasis on television and
print. The Company regularly advertises in magazines aimed at consumers of
African descent, such as Essence, Ebony, Black Enterprise and Jet, and in
targeted spot advertising on television and cable channels such as Black
Entertainment Television (BET) and engages in promotional activities and in-
store displays to introduce new products or attract new consumers. The Company
also uses its kit packaging format to conduct sampling programs for new
products.
In January 1996, the Company's advertising account was awarded to Don
Coleman & Associates, Inc., considered by the Company to be in the forefront
of ethnic advertising. The previous agency had been in place for over 20
years. A new campaign for the Company's flagship brand, Dark & Lovely,
including television, print, and radio advertising is scheduled for late
autumn of 1996.
The Company is actively involved in numerous public relations and community
relationship events. In 1996, the Company was involved in the Olympics both in
Savannah and Atlanta. In Atlanta, the Company was one of the sponsors of La
Maison Olympique Africaine, The African Olympic House, providing the Company
with an
44
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opportunity to highlight its presence in the global African business
community. The Company's commitment to the African-American community is
demonstrated through several support programs including sponsorship of the
Black Family Reunion Program and a Safe Shelter Program for homeless women and
children and the establishment of the Carson Scholarship Program at
historically Black universities such as Dillard, Hampton and Fisk
Universities. From October to December 1996, the Company, in conjunction with
several leading African-American women's organizations and the Celebrating
Life Foundation, will be promoting awareness of breast cancer among African-
American women. In addition, the Company has committed to donate $0.10 from
the sale of every Dark & Lovely relaxer and hair color unit sold during that
period, up to $150,000, to the Celebrating Life Foundation to help provide
education on breast cancer and make screening available to African-American
women unable to afford the examination.
DISTRIBUTION AND SALES
The Company's customers can be categorized into three principal distribution
channels in the U.S. retail ethnic hair care market, as follows:
. Multi-warehouse Chains. Multi-warehouse chains are groups of stores
operating under the same name that have a number of different
distribution points, warehouses or shipping points. Chains which carry
the Company's products include mass merchandisers (e.g., Wal-Mart, K-
Mart), drug chains (e.g., Walgreens, Revco, CVS, Rite Aid, Duane Reade),
food chains (e.g., Winn Dixie, Kroger), and discount chains (e.g.,
Family Dollar, Dollar General). The chains generally are an important
part of the Company's retail business because of their ability to draw
ethnic customers from a large geographic area. The Company's multi-
warehouse chain customers may purchase the Company's products directly
from the Company, through an ethnic product distributor, or both.
. Beauty & Barber Supply Stores. The Beauty & Barber Supply Stores
("B&Bs") are dominated by the Sally's Beauty Supply retail chain
(Alberto-Culver Company) and the National Beauty Supply Dealers
Association (the "NBSDA"), a large group of independent family-
controlled retail outlets. B&Bs that are members of the NBSDA are
prevalent in the African-American community, typically in retail outlets
in strip shopping malls. B&Bs generally have convenient locations, low
everyday prices, and a wide selection of ethnic products relative to
retail chains.
. Ethnic Product Distributors. Ethnic product distributors are wholesalers
who either place products directly in stores or have a warehouse-to-
warehouse relationship with the major chains. K-Mart is an example of a
chain that has a warehouse-to-warehouse relationship in which K-Mart
obtains the Company's products for certain of its stores through a major
ethnic product distributor in Detroit. The overall importance of this
class of trade has gained increasing significance in recent years.
The combination of multi-warehouse chains, B&Bs and ethnic product
distributors accounted for approximately 87.0% of the Company's domestic net
sales in fiscal 1996. The balance of the Company's net sales during this
period were generated by general market distributors, regional chains and
military exchanges and commissaries. No single Company customer accounted for
more than approximately 8% of the Company's net sales in fiscal 1996.
As the Company develops new stock keeping units (SKUs) for existing product
lines, launches new products and enters new markets in the U.S. ethnic health
and beauty aids sector, the Company believes that its strong, direct
relationships with multi-warehouse chains, B&Bs and ethnic product
distributors will play an increasingly valuable role in maintaining market
share as well as gaining additional shelf space, promotional/advertising space
and store merchandising coverage. The Company has been selected by one of its
multi-warehouse chain customers to be the ethnic category manager for all
ethnic health and beauty aids products carried by such customer. As ethnic
category manager, the Company assists in the development of the customer's
merchandising program for ethnic health and beauty aids products.
45
<PAGE>
The Company's strong relationships with its customers in the various
distribution channels are enhanced by its direct sales force which totals over
30 and is comprised of two divisional managers, eight regional managers and
between three and six sales merchandisers per region, covering the Northeast,
Mid-Atlantic, Mideast and Midwest regions in the Northern Division and the
Mid-South, Southeast, Southwest and Western regions in the Southern Division.
The sales force in each region sells to all of the distribution channels doing
business in its market.
The Company has established distributor relationships in various countries
in international markets. In South Africa, the Company focuses its direct
sales efforts primarily on hair care salons which are serviced through
regional distributors and specialty cash-and-carry wholesale outlets. Retail
product distribution in South Africa is currently being expanded to include
mass merchandisers and other large retail chains.
RESEARCH AND DEVELOPMENT AND QUALITY CONTROL
The Company believes that the strength of its competitive position in the
ethnic hair care industry is attributable, in part, to its heritage of
technological innovation and its focused R&D effort. Three of the ethnic hair
care industry's most significant innovations were introduced by the Company:
the first hair color developed exclusively for African-American hair (1972),
the first no-lye relaxer, which provided a safe relaxer product for home use
(1978), and the Fail Safe technology for no-lye relaxers, which eliminates
problems associated with mixing no-lye relaxer products to obtain the correct
strength (1993). The Company believes that its R&D department, led by two
industry experienced chemists with Ph.D.s and including nine other researchers
and technicians, represents the largest R&D effort focused on the ethnic hair
care market. In 1996, the Company's R&D department finalized the development
of several product innovations, including the Fail Safe and DL 2000 hair
relaxer technologies, as well as a full line of hair care maintenance
products.
The R&D department pursues an aggressive product development schedule and
intends to maintain its leadership in product innovations and technological
improvements. In particular, the R&D department intends to: (i) facilitate the
Company's entry into the U.S. professional salon market with a line of
specially formulated products; (ii) expand the rapidly growing line of Dark &
Natural products; (iii) develop new and innovative hair care maintenance
products; (iv) strengthen the Company's hair color products; (v) and develop
more effective, milder depilatories for both men and women. The R&D
department's agenda also includes the continued review and evaluation of
various packaging alternatives to ensure that the Company's products are
delivered in safe, secure and cost-effective containers. The Company's R&D
costs (principally for new products) for the years ended March 31, 1994, 1995
and 1996 was $0.4 million, $0.3 million and $0.4 million, respectively. The
Company's estimated budget for R&D costs for fiscal 1997 is $0.5 million.
These amounts do not include amounts spent on quality control, analytical
chemistry, microbiology, package testing and consumer products testing.
The R&D department also supervises the Quality Control staff of 13 who
perform extensive safety and quality tests on the Company's products,
including analytical chemistry, microbiology and package testing. The Company
tests its new products with the aid of its four in-house cosmetology
technicians at its on-site salon.
MANUFACTURING
The Company uses a batching process in its manufacturing operations for
virtually all of its products. The batching process begins with chemical
ingredients being mixed in kettles in batch sizes ranging from 2,000 lbs. to
21,000 lbs. The kettles heat, cool, homogenize and blend each batch of
materials according to standard operating procedures (SOPs). The SOPs for each
product are established by the Company's R&D and Quality Control staff and are
periodically reviewed and improved to ensure uniformity and batch-to-batch
conformity with the manufacturing specifications for the product.
The product is then transferred from the kettles into a holding tank or
another type of storage device until it is pumped into a filling machine that
volumetrically fills the liquid or cream into plastic jars, tubes, bottles or
packets. Each container (i.e., jar, tube, bottle or packet) is coded to
identify or track a specific batch. Hair care maintenance products are then
packed in shipping boxes and sent to the finished goods warehouse ready for
shipment to the Company's customers. Certain other products are filled,
capped, labeled, coded and stored temporarily until they are assembled as
components in the relaxer, texturizer or hair color kits.
46
<PAGE>
The Company emphasizes quality and adherence to Good Manufacturing Practices
(according to FDA guidelines) throughout the production operation. Each batch
of finished product is tested by Quality Control staff before it is packaged
and shipped. The Company's quality control measures and standards include
testing raw materials and packaging materials.
The Company purchases raw materials, packaging, and components throughout
the world and reviews the efficiency and quality of its purchasing contracts.
Except as described below, the Company believes that alternate sources of
supplies exist and does not anticipate any significant shortages of, or
difficulty in obtaining, such supplies.
Guanidine carbonate is an essential raw material used in the manufacturing
of no-lye relaxer products and has been purchased by the Company for over 15
years from the one principal supplier to all manufacturers of no-lye relaxers,
located in Austria. The Company maintains a stock of guanidine carbonate at
its Savannah facility which would satisfy its requirements for approximately
four to six months of future production. The Company believes that guanidine
carbonate of comparable quality could be made available within this time
period from other suppliers on comparable terms.
FACILITIES
The Company owns and occupies six buildings on an 11.6-acre tract in
Savannah. The plant, warehouses and offices encompass approximately 225,000
sq. ft. on seven acres of the property, with the remaining 4.6 acres
undeveloped. Four of the buildings are used primarily for warehousing and
storage. The largest building (more than 120,000 sq. ft) houses the
manufacturing equipment for substantially all of the Company's products,
shipping, quality control, the R&D laboratories, customer research and a
professional hair salon which tests new products. The manufacturing and
warehousing space has been expanded seven times since it was originally built
in 1954. The Company is in the process of reconfiguring its production lines
and expanding its physical space in order to increase the capacity of the
Savannah facility. Following the planned capacity increase, the Company
believes that the capacity in the Savannah facility will be adequate for its
needs in the reasonably foreseeable future.
Carson South Africa owns and occupies one building on 4.5 acres in Midrand,
South Africa, 15 miles north of Johannesburg in a developing industrial park
located on the major highway between Johannesburg and Pretoria. The property
was previously occupied by Pfizer as a manufacturing facility and was easily
converted to suit the Company's needs. The building encompasses approximately
40,000 sq. ft. and houses the manufacturing equipment for all products,
shipping and receiving, raw material and finished goods storage, an R&D
laboratory and executive office space. Ample acreage is available for
expansion of the facility. The Company believes that capacity in the South
African facility is adequate for its needs in the reasonably foreseeable
future.
COMPETITION
The U.S. retail ethnic hair care market is competitive and highly fragmented
with a number of market participants that focus specifically on this market.
Six companies generated approximately 50% of industry sales in 1995 with the
remainder being generated by a number of smaller companies, according to the
Towne-Oller Report. Some of the larger companies, such as Soft Sheen, Luster
Products and Pro-Line Corp., are privately-owned and compete only in the
ethnic market, as does the Johnson Products subsidiary of IVAX, Inc., a New
York Stock Exchange traded company. However, a few general market companies,
such as Revlon and Alberto-Culver Company, also produce a limited line of
specialized products for the ethnic consumer. In certain product categories,
such as shampoos and hair color, competition also arises from general market
manufacturers such as the Procter & Gamble Company and Bristol-Myers Squibb
Company's Clairol division. Such general market companies are larger and have
substantially greater financial and other resources than the Company.
Internationally, the Company's competitors differ from market to market, and
include Revlon, Soft Sheen and several regionally based foreign companies.
47
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The Company primarily competes on the basis of brand recognition, product
quality, performance and price. Advertising, promotions, merchandising,
packaging and the timing of new product introductions and line extensions also
have a significant impact on buying decisions and the structure and quality of
the sales force affect product reception, in-store position, display space and
inventory levels in retail outlets.
TRADEMARKS AND PATENTS
The Company owns all of the trademark rights used in connection with its
principal brands both in the United States and in the other countries in which
its products are principally sold. Significant trademarks include: Dark &
Lovely, Dark & Lovely Excelle, Beautiful Beginnings, Dark & Natural and Magic.
The Company utilizes certain proprietary or patented technologies in the
formulation or manufacture of a number of its products; however, the loss of
such proprietary rights would not have a material adverse effect on the
business, results of operations or financial condition of the Company.
CONSUMER LAWS, GOVERNMENT AND INDUSTRY REGULATIONS
The Company is subject to the Food, Drug and Cosmetics Act, the Consumer
Product Safety Act, the Federal Hazardous Substance Act and to the
jurisdiction of the Consumer Product Safety Commission as well as product
safety laws in foreign jurisdictions. Such regulations subject the Company to
the possibility of requirements of repurchase or recall of products found to
be defective and the possibility of fines or penalties. The FDA has
promulgated certain regulations concerning product ingredients, product
labeling and product claims. In addition, the FTC regulates product claims.
The Company is subject to consumer laws in foreign countries where its
products are sold, for example, bilingual packaging requirements (Canada) and
new product registration requirements (Brazil). Existing and future FDA, FTC
and foreign regulations could impact distribution and sales of certain of the
Company's products.
The Company operates under the FDA's Good Manufacturing Practices (GMP)
guidelines and is regulated by the FDA, although its product formulas do not
have to be approved in advance by the FDA. Coloring agents used in the
Company's products may be either Food, Drug & Cosmetic (FD&C) or Drug &
Cosmetic (D&C) classified. Additionally, as a member of the Cosmetics,
Toiletries and Fragrances Association ("CTFA"), the Company agrees to adhere
to Quality Assurance Guidelines as promulgated by CTFA. The Company believes
that it is substantially in compliance with such guidelines and uses such
guidelines as standards for its operational activities. The Company is also
subject to various other Federal, state, local and foreign regulations.
Federal, State and local regulations in the United States that are designed to
protect customers or the environment have had an increasing influence on
product claims, contents and packaging. The Company believes that it is in
substantial compliance with such regulations.
EMPLOYEES
The Company is organized into seven departments--Marketing, R&D (including
Quality Control), Sales, Operations (Production and Materials Management),
Finance, Administration and Human Resources. As of July 1, 1996, the Company
employed approximately 252 persons in Savannah, an additional 30 elsewhere in
the United States and 90 internationally. In the United States, 188 were
hourly personnel and 94 were salaried employees. The Company also utilizes
temporary workers as needed, primarily in manufacturing. An average of 82 such
temporary workers were utilized on a daily basis by the Company during the
quarter ended June 30, 1996. The Company is non-union and believes that its
relationship with employees is good.
LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings incident to the
ordinary course of its business and believes that the outcome of all pending
legal proceedings, in the aggregate, will not have a material adverse effect
on the business, results of operations or financial condition of the Company.
48
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ENVIRONMENTAL MATTERS
The Company is subject to various Federal, state, local and foreign
environmental requirements, including those relating to discharges to air,
water and land, the handling and disposal of solid and hazardous waste and the
cleanup of properties affected by hazardous substances. Certain environmental
laws, such as the Comprehensive Environmental Response, Compensation, and
Liability Act, as amended ("CERCLA"), impose strict, retroactive, joint and
several liability upon persons responsible for releases of hazardous
substances.
The Company is not aware of any liabilities arising under environmental
requirements, except as would not be expected to have a material adverse
effect on the Company's business, results of operations or financial
condition. However, some risk of environmental liability is inherent in the
nature of the Company's current and former businesses and the Company might in
the future incur material costs to meet current or more stringent compliance,
cleanup or other obligations pursuant to environmental requirements.
The Company has had difficulty meeting its permit levels for various
parameters for its wastewater discharge to the City of Savannah's sewer system
resulting in the issuance of notices of violation to the Company by the City
of Savannah. In response, the Company installed pretreatment equipment, which
has reduced the concentrations of many of the constituents of concern.
However, the Company continues to experience difficulty meeting certain
discharge limitations. If the Company cannot either improve the reliability of
its present treatment system, or obtain modifications to its discharge limits
from the sewer authorities, it may be required to install additional treatment
equipment. The Company is working cooperatively with the City of Savannah to
address this issue and has not been nor does it expect to be fined. However,
there can be no guarantee that the Company will not incur future costs,
including but not limited to, fines in connection with waste water compliance.
The costs for installing additional treatment equipment could be as much as
$0.5 million. The Company does not currently expect the costs of environmental
compliance to have a material adverse effect on its business, results of
operations or financial condition.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and Carson Products, and
their ages as of July 1, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Dr. Leroy Keith......... 57 Chairman of the Board of Directors and Chief Executive Officer
Joyce M. Roche.......... 49 President, Chief Operating Officer, Director
Dennis E. Smith......... 49 Executive Vice President of Sales, Director
Miriam Muley............ 41 Executive Vice President of Marketing
Bradford N. Creswell.... 36 Executive Vice President of Finance and Chief Financial Officer
Lawrence E. Bathgate, 57
II..................... Director
Abbey J. Butler......... 59 Director
Suzanne de Passe........ 49 Director
Melvyn J. Estrin........ 53 Director
James L. Hudson......... 56 Director
John L. Sabre........... 37 Director
Vincent A. Wasik........ 51 Director
Jack Kemp............... 60 Director*
Henry H. Minis.......... 49 Director**
</TABLE>
- --------
* Mr. Kemp resigned from the Board of Directors of Carson Products on August
13, 1996 due to his recent decision to be a candidate for the Vice
Presidency of the United States. Mr. Kemp retains his ownership interest in
the Company. See "--Compensation of Board of Directors--Outside Director
Stock Purchases."
** Mr. Minis is a Director of Carson Products only, and will resign from such
position upon the closing of the Offerings.
Dr. Keith became Chairman and Chief Executive Officer of Carson Products
concurrent with the Acquisition in August 1995 and a Director of the Company
upon its inception in May 1995, and served as Vice President until August
1996. Dr. Keith became Chairman and Chief Executive Officer of the Company in
August 1996. Dr. Keith has served as Chairman of the Board of Directors of AM
Cosmetics since June 1996. He served on the Board of Directors of the
Predecessor from June 1994 to August 1995. Prior to that, he served as
President of Morehouse College from 1987 to 1994. Dr. Keith is a member of the
Board of Directors of Keystone Investment Group, the Mutual Funds Board of
Phoenix Home Life Insurance Company, One to One Partnership, Inc. and the
National Committee for the Performing Arts of the John F. Kennedy Center.
Ms. Roche became President and Chief Operating Officer of Carson Products in
July 1996 and President, Chief Operating Officer and Director of the Company
in August 1996. Prior to July 1996, she held the position of Executive Vice
President of Global Marketing and Director since joining Carson Products in
August 1995. Before joining Carson Products, Ms. Roche was employed with Avon,
Inc. for 19 years where she held the titles of Senior Vice President of
Marketing from 1991 to 1993 and Vice President of Global Marketing from 1993
to 1994.
Mr. Smith became Executive Vice President of Sales of Carson Products
concurrent with the Acquisition in August 1995 and of the Company in August
1996. Mr. Smith became a Director of Carson Products in December 1995. Prior
to August 1995, he held the position of Vice President of Sales of Carson
Products from 1990 to 1995.
Ms. Muley became Executive Vice President of Marketing of Carson Products in
July 1996 and of the Company in August 1996. Prior to July 1996, she held the
position of Vice President, Marketing since joining Carson Products in April
1996. She was previously employed by Avon from 1992 to 1996 as General
Manager, African-American Business Unit and by Bristol-Myers Squibb's Clairol
division as Product Manager from 1990 to 1992.
Mr. Creswell became Executive Vice President of Finance and Chief Financial
Officer of Carson Products concurrent with the Acquisition in August 1995 and
of the Company in August 1996. He has also served as
50
<PAGE>
President of Northwest Capital, Inc. since 1992. Prior to that time, he was
employed as Vice President, Investment Banking with Bankers Trust Company from
1987 to 1992.
Mr. Bathgate became a Director of the Company upon its inception in May 1995
and of Carson Products in August 1995. He served as Secretary of the Company
from May 1995 to August 1996. He also serves as President and Chief Executive
Officer of Bathgate, Wegener & Wolf, P.A., a law firm with which he has been
affiliated since 1970. Mr. Bathgate is a founder and principal of Morningside,
and has served on the Board of Directors of AM Cosmetics since June 1996. He
also serves on the Board of Trustees of Villanova University, the Board of
Regents of Seton Hall University and served as Finance Chairman of the
Republican National Committee from 1988 to 1992.
Mr. Butler became a Director of Carson Products in June 1996 and of the
Company in August 1996. Mr. Butler currently serves in the following
capacities for the following companies and organizations: FoxMeyer Health
Corporation, Director from 1990, Co-Chairman of the Board of Directors from
1990, Co-Chief Executive Officer from 1990 ; Ben Franklin Retail Stores, Inc.,
Director from 1992 and Co-Chairman of the Board of Directors from 1992; C.B.
Equities Capital Corp., President from 1982 and Director from 1982; FWB
Bancorporation, Director from 1994; CST Entertainment Inc., Director from
1994; UroHealth Systems, Inc., Director from 1995; Cyclone Fence Corp.,
Director from 1995; Phar-Mor, Inc., Director from 1995; The American
University, Trustee from 1986; Starlight Foundation, Director from 1990;
Executive Council of the National Committee for the Performing Arts of the
John F. Kennedy Center, Director from 1989; and President's Advisory Committee
on the Arts, Member from 1992. Mr. Butler is the former Co-Chief Executive
Officer of FoxMeyer Drug Company which filed for protection under Chapter 11
of the U.S. Bankruptcy Code on August 27, 1996.
Ms. de Passe became a Director of Carson Products in June 1996 and of the
Company in August 1996. Ms. de Passe has served as Chief Executive Officer of
de Passe Entertainment since 1991. She currently serves on the Board of
Directors of The American Film Institute and the Los Angeles Opera.
Mr. Estrin became a Director of Carson Products in June 1996 and of the
Company in August 1996. Mr. Estrin currently serves in the following
capacities for the following companies: FoxMeyer Health Corporation, Director
since 1990, Co-Chairman of the Board of Directors from March 1991, Co-Chief
Executive Officer from October 1991; Washington Gas Light Company, Director
from October 1991; Ben Franklin Retail Stores, Inc., Co-Chairman of the Board
of Directors from November 1991, Co-Chief Executive Officer from 1994,
Director from 1991; FWB Bank, Director from August 1993; FoxMeyer Canada,
Inc., Director from February 1995, Co-Chairman of the Board of Directors from
February 1996, Co-Chief Executive Officer from 1995; UroHealth Systems, Inc.,
Director from July 1995; Phar-Mor, Inc., Director from September 1995; and
Centaur Partners, L.P., Managing Partner from 1990. Mr. Estrin has also served
in the following capacities for the following companies and organizations:
University of Pennsylvania, Trustee from 1990 to 1995; and National Capital
Planning Commission, Commissioner from 1993 to 1995. Mr. Estrin is the former
Co-Chief Executive Officer of FoxMeyer Drug Company which filed for protection
under Chapter 11 of the U.S. Bankruptcy Code on August 27, 1996.
Mr. Hudson became a Director of Carson Products in June 1996 and of the
Company in August 1996. Mr Hudson has served as Chairman of JAH Development
Company since 1985. Mr. Hudson served as Chairman of the Board of Trustees of
Morehouse College, and as a member of the Board of the Metropolitan Washington
Airports Authority.
Mr. Sabre became a Director of Carson Products concurrent with the
Acquisition in August 1995 and of the Company in August 1996. He currently
serves as Managing Director of Indosuez Capital, a position he has held since
April 1992. Prior to that, Mr. Sabre was a Vice President at Kidder, Peabody &
Co. from March 1990 to April 1992.
Mr. Wasik became Chairman of the Board of Directors and President of the
Company upon its inception in May 1995 and served as such until August 1996.
Mr. Wasik has been a Director of Carson Products since August 1995 and of the
Company since its inception. He became a member of the Board of Directors of
AM Cosmetics in June 1996 and currently serves as President. He is also a
founder and serves as President of Morningside. From 1985 to 1995, Mr. Wasik
served as President of Fidelco Capital Group. He was also President
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<PAGE>
of Wondercamp Entertainment Company from 1994 to 1995. He served as Chairman
and Chief Executive Officer of National Car Rental Systems, Inc. from December
1986 to January 1992. He is also currently a member of the Board of Directors
of the One to One Partnership, Inc., the National Committee for the Performing
Arts of the John F. Kennedy Center and the Board of Trustees for Boston
College.
Mr. Kemp was a Director of Carson Products from February 1996 to August
1996. Mr. Kemp served as Secretary of Housing and Urban Development for the
United States Government from 1989 to 1992. Mr. Kemp is also a member of the
Board of Directors of Landair, Cyrix Corp., Oracle Corp., Columbus Trust
Realty, American Bankers Insurance Corp., and Worldcorp and has served as Co-
Director of Empower America since 1993.
Mr. Minis served as a Director of the Predecessor from 1978 to August 1995
and is currently a Director of Carson Products. Mr. Minis will resign from
such position upon the closing of the Offerings. He served as Vice President-
International of the Predecessor from April 1988 until August 23, 1995. Prior
to that, he was Export Sales Manager of the Predecessor from June 1981 to
April 1988.
COMPENSATION OF EXECUTIVE OFFICERS
Summary of Cash and Certain Other Compensation. The following table sets
forth in summary form information concerning the compensation for all services
rendered in all capacities to the Company for Dr. Keith, the three other most
highly compensated executive officers of the Company at the end of fiscal
1996, David A. Young (the Predecessor's Chief Executive Officer) and two other
highly compensated executive officers of the Predecessor who served as such
during fiscal 1996 (collectively, the "named executive officers").
SUMMARY COMPENSATION TABLE(A)
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------------------------ ------------
SECURITIES
RESTRICTED UNDERLYING
NAME AND PRINCIPAL FISCAL STOCK OPTIONS/SARS ALL OTHER
POSITION YEAR SALARY BONUS AWARDS (#) OF SHARES COMPENSATION
------------------ ------ ------------------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Leroy Keith(b)...... 1996 $ 190,816 $ 215,000 $ -- -- $ --
Chairman of the Board
and
Chief Executive Officer
Joyce M. Roche(b)....... 1996 117,692 35,000 -- (c) --
President and Chief
Operating Officer
Dennis E. Smith......... 1996 150,405 75,870 -- (c) --
Executive Vice 1995 99,312 19,813 --
President of Sales
Bradford N. 1996 146,681 -- -- -- --
Creswell(b)............
Executive Vice
President of Finance
and
Chief Financial Officer
David A. Young(d)....... 1996 88,039 80,600 197,306 -- 100,000(e)
Former Chief Executive 1995 181,680 15,056 107,472 -- --
Officer
Mario J. de la 1996 147,608 71,364 -- -- --
Guardia(f)............. 1995 155,700 12,583 -- -- --
Former President
H. L. Cornish, Jr.(d)... 1996 55,918 51,760 -- -- 100,000(e)
Former Senior Vice 1995 114,885 9,771 -- -- --
President,
Treasurer and Secretary
</TABLE>
- --------
(a) The summary compensation table does not include the value of perquisites
and other personal benefits made available by the Company. However, no
named executive officer received such compensation in any fiscal year
valued in excess of the lesser of $50,000 or 10% of such officer's total
salary and bonus reported for such fiscal year.
(b) Dr. Keith, Ms. Roche and Mr. Creswell became executive officers of Carson
Products on August 23, 1995 and of the Company on August 14, 1996.
(c) The securities underlying the SARs were shares of the former Class A
common stock of the Company. In August 1996, Ms. Roche surrendered her
SAR, and Mr. Smith surrendered one-half of his SAR, in exchange for the
right to subscribe for 118,713 shares and 59,357 shares of Class C Common
Stock, respectively. See
52
<PAGE>
"Management--Compensation of Executive Officers--Employment Agreements,"
for a discussion of the exercise of such rights and the treatment of Mr.
Smith's remaining SAR.
(d) The employment of Messrs. Young and Cornish was terminated on August 23,
1995 in connection with the Acquisition.
(e) Severance payment made in connection with the Acquisition.
(f) Mr. de la Guardia resigned as President of the Predecessor on August 23,
1995 and retired from Carson Products on December 31, 1995.
Stock Options and Stock Appreciation Rights. No options to purchase stock
were granted during fiscal 1996. The following table sets forth information
concerning the grant of stock appreciation rights ("SARs") to each of the
named executive officers during fiscal 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
------------------------------------------------------------ -------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING SARS GRANTED TO
SARS EMPLOYEES EXERCISE OR EXPIRATION
NAME GRANTED (#)(A) IN FISCAL YEAR BASE PRICE ($/SH) DATE 5% ($) 10% ($)
- ---- -------------- ---------------- ----------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dr. Leroy Keith......... -- -- -- -- -- --
Joyce M. Roche.......... (b) 23.53% (b) 8/23/05 -- --
Dennis E. Smith......... (b) 23.53% (b) 8/23/05 -- --
Bradford N. Creswell.... -- -- -- -- -- --
David A. Young.......... -- -- -- -- -- --
Mario J. de la Guardia.. -- -- -- -- -- --
H. L. Cornish, Jr....... -- -- -- -- -- --
</TABLE>
- --------
(a) The securities underlying the SARs are shares of the former Class A common
stock of the Company.
(b) In August 1996, Ms. Roche surrendered her SAR, and Mr. Smith surrendered
one-half of his SAR, in exchange for the right to subscribe for 118,713
shares and 59,357 shares of Class C Common Stock, respectively. Both Ms.
Roche and Mr. Smith have exercised such rights. See "Management--
Compensation of Executive Officers--Employment Agreements" for a
discussion of the exercise of such rights and the treatment of Mr. Smith's
remaining SAR.
Option/SAR Exercises and Holdings. No options to purchase Common Stock were
outstanding and no SARs were exercised by the named executive officers during
fiscal 1996.
Long-Term Incentive Plans. No long term incentive plan awards were granted
to the named executive officers during fiscal 1996.
Employment Agreements. Carson Products has entered into employment
agreements with Dr. Keith, Ms. Roche, Mr. Smith and Ms. Muley which agreements
provide for the terms discussed below (the "Employment Agreements"). The
Employment Agreements provide for a term of employment expiring on the third
anniversary of the closing of the Offerings. Under the Employment Agreements,
the annual base salary amounts for Dr. Keith, Ms. Roche, Mr. Smith and Ms.
Muley are $385,000, $260,000, $200,000 and $155,000 respectively. In addition
to such base salary, the Employment Agreements provide for, among other
things: an annual bonus determined under a formula based on specified net
revenue growth, net income, earnings per share and/or stock price growth;
eligibility in any pension and welfare benefit plans (other than certain
profit sharing plans) maintained by Carson Products; a monthly automobile
allowance for Dr. Keith, Ms. Roche and Mr. Smith equal to $1,000, $750 and
$500, respectively; reimbursement for specified relocation expenses, including
without
53
<PAGE>
limitation general relocation payments to Dr. Keith, Ms. Muley and Ms. Roche,
equal to $50,000, $10,000 and $10,000 respectively; and such other fringe
benefits generally provided by Carson Products to its employees.
Carson Products retains the right to terminate the employment of Dr. Keith,
Ms. Roche, Mr. Smith and Ms. Muley, and each such executive officer retains
the right to resign, at any time for any reason. If Carson Products terminates
the employment of any of the executive officers named above for "cause" (as
defined in the Employment Agreements) or with "good reason" (as defined in the
Employment Agreements) such officers will only be entitled to any unpaid base
salary amounts through and including the date of termination. If Carson
Products terminates the officer's employment without cause, the officer will
be entitled to receive severance pay equal to 150% of the officer's base
annual salary (200%, in the case of Mr. Smith). If the officer (other than Mr.
Smith and Ms. Muley) terminates his or her employment with Carson Products for
good reason, the officer will be entitled to receive severance pay equal to
200% of the officer's annual base salary (payable in one lump sum). In the
event of "disability," as defined in the Employment Agreements, Carson
Products may terminate the officer's employment and the officer will thereupon
be entitled to receive 150% (200%, in the case of Mr. Smith) of the officer's
annual base salary (payable in one lump sum).
Pursuant to the Employment Agreements, Ms. Roche, Mr. Smith and Ms. Muley
have purchased 118,713, 59,357 and 59,357 shares, respectively, of the Class C
Common Stock of the Company at a price per share equal to $4.21. The aggregate
purchase price for the shares acquired by each officer was paid in the form of
a non-interest bearing long-term full recourse promissory note. In connection
with such purchase, each officer pledged the shares he or she acquired to the
Company to secure payment of the principal amount of the promissory notes. The
principal amount of the notes will be due and payable on the earlier to occur
of the sale of the shares acquired, termination of employment or the third
anniversary of the date of purchase. The officer may prepay the principal
amount of his or her promissory note at any time and from time to time.
Pursuant to Dr. Keith's agreement, the Company has issued him 341,100 shares
of the Class C Common Stock, which represented at the time of issuance 3% of
the Company's then outstanding common stock. These shares were issued in
consideration for securing the Acquisition. These shares were transferred
immediately after issuance to DNL Partners, as trustee under a certain voting
trust agreement, dated August 23, 1995, by and among DNL Partners, Dr. Keith
and certain other stockholders.
Upon the occurrence of a "triggering event" (as defined in the Employment
Agreement for Mr. Smith), which will include the closing of the Offerings, Mr.
Smith will be entitled to receive, within 90 days after the closing of the
Offerings, a lump sum amount in cash equal to the difference between (i) the
product obtained when (A) the Specified Percentage of the value of the Company
on the closing of the Offerings (reduced by the aggregate underwriting
discount in connection with the Offerings) is multiplied by (B) the Dilution
Percentage, and (ii) the Specified Base Value. The Specified Percentage and
the Specified Base Value (as defined in the Employment Agreement for Mr.
Smith) for Mr. Smith is 0.5%, and $250,000. For purposes of the Employment
Agreement for Mr. Smith, the Dilution Percentage (as defined therein) is equal
to the quotient resulting when (i) the number of shares of all classes of the
Company's Common Stock outstanding on July 31, 1996 is divided by (ii) the
number of shares of all classes of the Company's Common Stock outstanding
immediately after the closing of the Offerings.
The Employment Agreements also provide that Dr. Keith, Ms. Roche, Mr. Smith
and Ms. Muley, while employed by Carson Products and in the case of Mr. Smith
and Ms. Muley, during the period in which Mr. Smith or Ms. Muley,
respectively, is receiving Base Salary (as defined in the Employment
Agreements) payments from Carson Products (regardless as to whether Mr. Smith
or Ms. Muley, respectively, is employed by Carson Products), may not directly
or indirectly (i) own, operate, represent, promote, consult for, control or
participate in the ownership, operation, acquisition or management of any
business manufacturing and/or distributing ethnic hair care products or
cosmetics within a 500-mile radius of Carson Products' headquarters, (ii)
solicit (other than on behalf of Carson Products on any of its affiliates),
divert or take away the business of any customers of Carson Products or any of
its affiliates, or any prospective customers of Carson Products or any of its
affiliates whose business Carson Products or any of its affiliates actively
solicits during such officer's employment with Carson Products, or (iii)
solicit or induce any employee of Carson Products or any of its affiliates to
terminate such employee's employment with Carson Products or such affiliates.
54
<PAGE>
Management Agreement. Carson has entered into a Management Agreement with
Morningside Capital Group, L.L.C. regarding the services of Mr. Wasik. See
"Certain Relationships and Related Transactions--Morningside."
1996 Long-Term Incentive Plan. Prior to the closing of the Offerings, the
Board will establish and approve, and the Company will adopt, the 1996 Long-
Term Incentive Plan (the "1996 Plan"), which will be administered by a
committee of the Board comprised of non-employee directors (the "Committee").
The purpose of the 1996 Plan is to attract, retain and motivate executives and
other key individuals who will make significant contributions to the growth
and overall success of the Company and its subsidiaries and to align the
interests of such executives and individuals with those of the Company's
shareholders.
All salaried employees and consultants of the Company and its subsidiaries
are eligible to participate in the 1996 Plan. The 1996 Plan authorizes the
grant of (i) options to acquire shares of the Class A Common Stock of the
Company intended to qualify as "incentive stock options" under Section 422 of
the Code ("ISOs"), (ii) options to acquire the same that do not, or are not
intended to, so qualify, (iii) restricted shares of the Class A Common Stock,
subject to specified forfeiture risks (the "Restricted Shares"), (iv) stock
appreciation rights ("SARs") based on the Class A Common Stock and payable in
cash or in shares of the new Class A Common Stock, and (v) performance-based
awards, payable in cash or in shares of the Class A Common Stock.
The 1996 Plan authorizes 600,000 shares of the Class A Common Stock (equal
to 4.2% of the aggregate shares of the Common Stock to be outstanding after
the Offerings) for issuance, subject to adjustment in certain circumstances.
The Committee has determined to grant options to the following officers
contemporaneously with the Offerings to acquire the following number of shares
of the Class A Common Stock: Dr. Keith, 7,500, Ms. Roche, 6,000 and Mr. Smith,
4,000, respectively. Additional option grants will be made to other members of
management. The number of shares underlying these grants, in the aggregate,
will be equal to 59,500 shares. The exercise price per share for these options
will be equal to the initial public offering price paid by the public for the
Class A Common Stock. All such options granted to an officer contemporaneously
with the Offerings will be either non-statutory stock options or incentive
stock options, to the extent permitted by Section 422 of the Code, and will
become exercisable by such officer on a cumulative basis in equal installments
at a rate of 33 1/3% per year commencing one year from the date of grant. All
options granted to an officer will be 100% exercisable in the event of a
change in control (as defined in the 1996 Plan) or in the event the optionee
terminates his or her employment due to death, disability (as defined in the
1996 Plan) or retirement (as defined in the 1996 Plan). The exercise price may
be paid in cash or shares of new Class A Common Stock.
Pursuant to the regulations under Section 16(b) of the Exchange Act, so long
as certain conditions are met, an officer receiving an option award may be
able to exercise options that are then exercisable and sell the underlying
shares of the Class A Common Stock on the same day without incurring liability
under such Section 16(b). The ability to exercise options and concurrently
sell the Class A Common Stock obtained upon exercise means that officers face
no investment risk with respect to the shares subject to options, since they
will generally only exercise an option if the market value of the Class A
Common Stock is greater than the exercise price of the option.
No awards may be granted under the 1996 Plan after December 31, 2006.
Restricted shares, performance-based awards and options intended to be ISOs
will be transferable only by will or the laws of descent and distribution.
ISOs granted to any person who is the beneficial owner of more than 10% of
the total combined voting of all classes of stock of the Company or Carson
Products will contain special limitation provisions required by Section 422 of
the Code. Unless otherwise determined by the Committee, no stock option
granted in connection with the 1996 Plan will be exercisable more than ninety
days after the date on which the optionee ceases to perform services for
Carson Products, except that in the event of death, disability or retirement
or a termination after a change of control, options may be exercised for up to
one year after such event. If, however, an optionee ceases to perform services
for Carson Products, any ISO exercised more than three months following the
date the optionee ceases to perform services will be treated as a non-
statutory stock option.
The Committee generally is empowered to interpret the 1996 Plan, prescribe
rules and regulations relating thereto, determine the terms of awards and
other agreements, amend them (in certain cases only with the consent
55
<PAGE>
of the optionee), determine the individuals to whom awards are to be granted,
determine the number of shares subject to each award and the exercise price
thereto, and take all actions in connection with the Plan and the awards
thereunder as the Committee, in its sole discretion, deems necessary or
desirable. In general, the Board may modify, suspend, or terminate the Plan at
any time; provided, however, that any change in the 1996 Plan that may
adversely affect an award previously granted under the Plan requires the
consent of the adversely affected awardee.
The Company submitted the 1996 Plan to its existing stockholders for
approval. The purpose of seeking stockholder approval was to qualify the 1996
Plan for the granting of ISOs. Although options and other awards may be
granted under the 1996 Plan prior to the receipt of such stockholder approval,
the exercisability of such options is contingent upon the receipt of such
stockholder approval.
BOARD OF DIRECTORS
The Company has three classes of directors, which are elected for staggered
terms of three years. The initial terms of each class expire at the annual
meeting of stockholders in 1997 (Class I), 1998 (Class II) and 1999 (Class
III), respectively. Dennis E. Smith, Suzanne de Passe and James Hudson are
Class I directors, Joyce M. Roche, Abbey J. Butler and Melvyn J. Estrin are
Class II directors and Dr. Leroy Keith, Lawrence E. Bathgate, II, John L.
Sabre and Vincent A. Wasik are Class III directors. Each director holds office
until his or her successor is duly elected and qualified or until his or her
resignation or removal, if earlier.
COMMITTEES OF THE BOARD OF DIRECTORS
In connection with the Offerings, the Board will create an Audit Committee,
a Compensation Committee and an Executive Committee of the Board. Following
the Offerings, the Audit Committee will initially be comprised of Messrs.
Butler and Sabre and will be charged with reviewing the Company's annual audit
and meeting with the Company's independent accountants to review the Company's
internal controls and financial management practices. The Compensation
Committee will initially be comprised of Messrs. Butler and Sabre. The
Executive Committee will initially be comprised of Dr. Keith and Messrs.
Bathgate, Butler, Sabre and, Wasik and will have the authority to act on
behalf of the full Board with respect to all matters.
COMPENSATION OF BOARD OF DIRECTORS
1996 Non-Employee Directors Equity Incentive Program. Prior to the closing
of the Offerings, the Board will establish and approve, and the Company will
adopt, the 1996 Non-Employee Directors Equity Incentive Program (the "Outside
Directors Program"). The Outside Directors Program is designed to attract,
retain and motivate individuals who the Company believes are capable of making
significant contributions to the Board and the Company generally, and to align
their interests with those of the shareholders.
The Outside Directors Program authorizes the issuance of up to 400,000
shares of the Class A Common Stock, subject to adjustment in certain
circumstances. Under the Outside Directors Program, each non-employee director
of the Company will receive in connection with the Offerings an option to
acquire 1,500 shares of the Class A Common Stock. The exercise price per share
for these options will be equal to the initial public offering price paid by
the public for the Class A Common Stock. Each such option will become
exercisable upon grant and will expire on the first anniversary of the closing
of the Offerings (if such option is not exercised prior thereto by the non-
employee director grantee). In the aggregate, a total of 10,500 shares of the
Class A Common Stock will underlie such options granted to the seven non-
employee directors of the Company in connection with the closing of the
Offerings.
In addition, pursuant to the Outside Directors Program, each non-employee
director will receive, immediately following each annual meeting of the
Company's stockholders occurring after the closing of the Offerings (i) a
number of shares, subject to certain forfeiture restrictions, of the Class A
Common Stock (the "Outside Director Restricted Shares") equal to the quotient
resulting when $25,000 is divided by the average fair market value of the
Class A Common Stock for the five trading days preceding such annual meeting
(the
56
<PAGE>
"Trading Period"), and (ii) an option to acquire 5,000 shares of the Class A
Common Stock with an exercise price equal to the average fair market value of
the Class A Common Stock for the Trading Period (the "Outside Director
Options").
The Outside Director Restricted Shares will vest and become non-forfeitable
as to one-third of the aggregate shares granted on each of the next succeeding
three anniversaries of the date of grant of such Restricted Shares. If a non-
employee director resigns voluntarily from the Board or is removed therefrom
with "cause" (as defined in the Outside Directors Program), the unvested
Outside Director Restricted Shares held by such non-employee director will be
immediately forfeited and automatically cancelled by the Company.
The Outside Director Options will become exercisable on the first
anniversary of the date of grant of any such option and will expire on the
tenth anniversary of such date (if any such option is not exercised prior
thereto by the non-employee director grantee). If a non-employee director
resigns voluntarily from the Board or is removed therefrom for cause, the
Outside Director Option held by such director, if then unexercisable, will be
immediately forfeited by such director and automatically cancelled by the
Company or, if then exercisable, must be exercised by such non-employee
director within 90 days after any such resignation or removal.
The Outside Directors Program will be administered by the Board or a duly
appointed committee of the Board. The Board (or such committee thereof) will
have the full and final authority to interpret the Outside Directors Program
and to adopt and amend such rules and regulations for the administration of
the Outside Directors Program as the Board or such committee may deem
desirable. In addition, the Board has the right to amend or terminate the
Outside Directors Program, subject to certain restrictions set forth therein.
Outside Director Stock Purchases. Messrs. Kemp and Sabre invested $100,000
and $50,000, respectively, in the former Class A common stock of the Company
and Messrs. Butler, Estrin and Hudson and Ms. de Passe each invested $25,000
in the former Class A common stock. These investments resulted in the
acquisition of 46,139 shares for Mr. Kemp, 23,070 shares for Mr. Sabre, and
11,541 shares each for Messrs. Butler, Estrin, Hudson and Ms. de Passe. Mr.
Kemp's shares were placed in a blind trust. As of September 23, 1996, the
shares purchased by Mr. Hudson were transferred to his daughter.
57
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock (i) immediately prior to the Offerings and (ii) as
adjusted to reflect the sale of shares of Common Stock pursuant to the
Offerings, by (a) each person or entity known by the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock,
(b) each of the Company's directors, (c) each of the named executive officers,
(d) all directors and officers of the Company as a group and (e) all other
selling stockholders. Unless otherwise noted in the footnotes to the table,
the persons named in the table have sole voting and investing power with
respect to all shares of Common Stock indicated as being beneficially owned by
them.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT FOOTNOTES)
CLASS B
COMMON CLASS C COMMON
CLASS A COMMON STOCK STOCK STOCK
----------------------------------------------- ---------------- ------------------
TO BE TO BE OWNED PRIOR OWNED PRIOR
SOLD IN OWNED TO AND TO AND
OWNED PRIOR TO THE AFTER THE AFTER THE AFTER THE
OFFERINGS(a)(b) OFFERINGS OFFERINGS(a)(b) OFFERINGS(a)(b) OFFERINGS (a)(b)
NAME AND ADDRESS OF ------------------ --------- ----------------- ---------------- ------------------
BENEFICIAL OWNERS NUMBER % NUMBER NUMBER % NUMBER % NUMBER %
- ------------------- ---------- ------ --------- ----------------- ---------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DNL 0 0 0 0 6,617 80.0%
Partners(c)....
c/o Morningside
Capital L.L.C.
One Morningside
Drive North,
Suite 200
Westport, CT
06880
Banque 0 0 0 1,860 100% 0
Indosuez(d)....
c/o Indosuez
Capital
1211 Avenue of
the Americas
7th Floor
New York, NY
10036-8701
Minis 1,706 100% 1,706 0 0 0
Family(e)......
c/o Hunter,
Maclean, Exley
& Dunn, P.C.
200 East St.
Julian St.
P.O. Box 9848
Savannah, Geor-
gia 31401
Morgan Guaranty 0 0 0 0 1,187 14.3%
Trust
Company(f).....
c/o J.P. Morgan
Investment
Management
522 Fifth Ave-
nue
New York, NY
10036
Dr. Leroy
Keith(g)....... 0 0 0 0 0
Joyce M. Roche.. 0 0 0 0 119 1.4%
Dennis E.
Smith.......... 0 0 0 0 59 0.7%
Bradford N.
Creswell(h).... 0 0 0 0 0
David A. Young.. 0 0 0 0 0
Mario J. de la
Guardia........ 0 0 0 0 0
H. L. Cornish,
Jr............. 0 0 0 0 0
Lawrence E.
Bathgate,
II(i).......... 0 0 0 0 0
Abbey J.
Butler(i)...... 0 0 0 0 13 0.2%
Suzanne de Pas-
se............. 0 0 0 0 13 0.2%
Melvyn J.
Estrin(i)...... 0 0 0 0 13 0.2%
James L.
Hudson(i)(j)... 0 0 0 0 13 0.2%
John L. Sabre... 0 0 0 0 26 0.3%
Vincent A.
Wasik(c)....... 0 0 0 0 6,617 80.0%
All Directors
and Executive
Officers as a
Group (12 per-
sons).......... 0 0 0 0 6,919 83.3%
<CAPTION>
TOTAL COMMON STOCK
-------------------------------
TO BE VOTING
OWNED POWER
AFTER THE AFTER THE
OFFERINGS(a)(b) OFFERINGS(A)(B)
NAME AND ADDRESS OF --------------- ---------------
BENEFICIAL OWNERS % %
- ------------------- --------------- ---------------
<S> <C> <C>
DNL 46.1% 75.8%
Partners(c)....
c/o Morningside
Capital L.L.C.
One Morningside
Drive North,
Suite 200
Westport, CT
06880
Banque 13.0% 0%
Indosuez(d)....
c/o Indosuez
Capital
1211 Avenue of
the Americas
7th Floor
New York, NY
10036-8701
Minis 0% 0%
Family(e)......
c/o Hunter,
Maclean, Exley
& Dunn, P.C.
200 East St.
Julian St.
P.O. Box 9848
Savannah, Geor-
gia 31401
Morgan Guaranty 8.3% 13.6%
Trust
Company(f).....
c/o J.P. Morgan
Investment
Management
522 Fifth Ave-
nue
New York, NY
10036
Dr. Leroy
Keith(g).......
Joyce M. Roche.. 0.8% 1.4%
Dennis E.
Smith.......... 0.4% 0.7%
Bradford N.
Creswell(h)....
David A. Young..
Mario J. de la
Guardia........
H. L. Cornish,
Jr.............
Lawrence E.
Bathgate,
II(i)..........
Abbey J.
Butler(i)...... 0.1% 0.1%
Suzanne de Pas-
se............. 0.1% 0.1%
Melvyn J.
Estrin(i)...... 0.1% 0.1%
James L.
Hudson(i)(j)... 0.1% 0.1%
John L. Sabre... 0.2% 0.3%
Vincent A.
Wasik(c)....... 46.1% 75.8%
All Directors
and Executive
Officers as a
Group (12 per-
sons).......... 48.2% 79.3%
</TABLE>
- -------
(a) Does not give effect to purchases, if any, by such persons in the
Offerings. Percentage indicates percentage of class, except for the Total
Common Stock column.
(b) Based on 1,705,500, 1,859,677 and 8,306,014 shares of Class A Common
Stock, Class B Common Stock and Class C Common Stock, respectively,
outstanding prior to the Offerings and 4,190,000, 1,859,677 and 8,306,014
shares of Class A Common Stock, Class B Common Stock and Class C Common
Stock, respectively, outstanding after the Offerings, assuming no exercise
of the Underwriters' over-allotment options. Calculation of percentage of
beneficial ownership assumes the exercise of all options and warrants
exercisable within 60 days of the date hereof only by the respective named
stockholder.
58
<PAGE>
(c) Amounts shown represent the aggregate number of shares beneficially owned
by DNL Partners, including 818,640 shares subject to a Voting Trust
Agreement dated August 23, 1995. Pursuant to the Voting Trust Agreement,
DNL Partners was granted full power and authorization to vote the shares
of the members of the DNL Partners Limited Partnership Voting Trust (the
"Voting Trust"), including Dr. Keith and Northwest Capital, Inc., on all
matters. Mr. Wasik has a 99% ownership interest in the general partner of
DNL Partners, DNL Group L.L.C., and therefore is deemed to have voting
and dispositive control as to the shares held by DNL Partners and the
Voting Trust. Messrs. Wasik, Bathgate, Butler, Estrin and Hudson, who
serve as Directors of the Company, are, or have interests in, limited
partners of DNL Partners, including in the case of Messrs. Wasik and
Bathgate, ownership interests in Morningside, one of the limited partners
in DNL Partners.
(d) Includes Indosuez Carson Partners and Indosuez CM II, Inc. Mr. Sabre is a
general partner of Indosuez Carson Partners.
(e) Includes Vango L.P. (Don L. Waters and Russell W. Carpenter, as co-
Trustees, u/a/w Abram Minis, Jr. dated July 15, 1993 as the General
Partner), Henry H. Minis, Marguerite M. Trethewey, James E. Hungerpiller,
as Trustee of The James E. Hungerpiller Charitable Remainder Unitrust--
1996 u/a/dtd September 20, 1996, James E. Hungerpiller, as Trustee of The
Edith Hunter Minis Charitable Remainder Unitrust--1996 u/a/dtd September
20, 1996, and Don L. Waters and Russell W. Carpenter, as Co-Trustees,
u/a/w Abram Minis, Jr. dated July 15, 1993. Henry Minis was Vice
President and Director of the Predecessor for three years prior to the
Acquisition, and has been a Director of Carson Products since the
Acquisition. The shares held by the Minis family will be converted from
Class C Common Stock to Class A Common Stock immediately prior to the
effectiveness of the Registration Statement.
(f) Includes Morgan Guaranty Trust Company, as Trustee of a Commingled
Pension Fund-Multi-Market Special Investment Fund II, Multi-Market
Special Investment Trust Fund of Morgan Guaranty Company of New York and
Morgan Guaranty Trust Company New York as Investment Manager and Agent
for the Alfred P. Sloan Foundation Multi-Market Account.
(g) Excludes 341,100 shares held by the Voting Trust. See Note (c).
(h) Excludes 159,180 shares held by the Voting Trust on behalf of Northwest
Capital, Inc., a company of which Mr. Creswell is the President and a
stockholder. See Note (c).
(i) These directors are, or have direct or indirect interests in, limited
partners of DNL Partners. See Note (c).
(j) As of September 23, 1996, the shares purchased by Mr. Hudson were
transferred to his daughter. Mr. Hudson disclaims beneficial ownership
of such shares.
59
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MORNINGSIDE
Carson Products and Morningside Capital Group, L.L.C., a Connecticut limited
liability company ("Morningside") entered into a Management Assistance
Agreement dated August 23, 1995 (the "Management Agreement"), pursuant to
which Morningside agreed to supply the services of Vincent A. Wasik (a
principal member of Morningside) to provide advice and assistance with respect
to (i) the formulation of a "strategic direction"; (ii) the formulation of
business plans, capital budgets and financial strategies; (iii) the
formulation of marketing, sales and operational plans; (iv) the evaluation of
investment and acquisition opportunities; and (v) dealings with banks and
other lending institutions. Such services are provided for a fee of $350,000
per year, payable on a monthly basis in advance plus reimbursement for out of
pocket expenses. The Management Agreement provides that Carson Products
indemnify Morningside, its members, employees and agents, including Mr. Wasik,
for all actions, claims, damages and liabilities based upon or arising from
the acceptance of or performance of the obligations of Morningside under the
Management Agreement (other than actions resulting from gross negligence,
willful misconduct or a material breach of the Management Agreement by
Morningside or Mr. Wasik). The termination date of the Management Agreement is
August 23, 1998; however, the term of the agreement shall continue after such
termination date until terminated by not less than 30 days' advance notice by
either party.
Additionally, for the term of the Management Agreement, Morningside has
agreed that neither it nor Mr. Wasik shall directly or indirectly (i) own
(other than through the ownership of five percent (5%) or less of any class of
securities registered under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), manage, operate, represent, promote, consult for,
control or participate in the ownership, operation, acquisition or management
of any business manufacturing and/or distributing ethnic hair care products or
cosmetics within a 500-mile radius of Carson Products' headquarters, or (ii)
solicit (other than on behalf of Carson Products or any of its affiliates),
divert or take away the business of any customers of Carson Products or any of
its affiliates or any prospective customers of Carson Products or any of its
affiliates.
In connection with the Acquisition, Morningside received fees of $500,000
from the Company for arranging and negotiating the financing for the
Acquisition and performing other consulting and financial advisory services
and was reimbursed by the Company for certain related expenses. Under the
Management Agreement, the Company paid Morningside approximately $25,000 in
fiscal 1996 for reimbursement of out-of-pocket expenses. Morningside will
receive a fee of $100,000 for arranging and negotiating the terms of the New
Senior Bank Facility and performing other consulting and financial advisory
services. In addition, the Company will reimburse Morningside for
approximately $35,000 of out-of-pocket expenses incurred in connection with
the Offerings. From time to time Morningside may provide additional financial
advisory services to the Company, for which Morningside will receive usual and
customary compensation.
FEES RELATED TO THE ACQUISITION
Northwest Capital, Inc., a corporation in which Bradford N. Creswell serves
as President and is a principal stockholder, was paid $290,000 and received
159,180 shares of the Company's Class C Common Stock from the Company in
connection with financial advisory services related to the Acquisition.
Bathgate, Wegener & Wolf, P.A., a law firm in which Lawrence E. Bathgate, II
serves as President and Chief Executive Officer, was paid approximately
$690,000 for services rendered in arranging the equity investment in the
Company in connection with the Acquisition. Banque Indosuez received fees and
reimbursement of out-of-pocket expenses totalling $1,783,000 in connection
with the Acquisition.
AM COSMETICS
Morningside AM Acquisition Corp., a Delaware corporation ("AM Acquisition"),
entered into a Subscription Agreement dated as of June 26, 1996 (the
"Subscription Agreement") with Carson Products, providing for the purchase by
Carson Products of 300 shares of cumulative Payment in Kind Preferred Shares
(the "PIK Preferred Shares") issued by AM Acquisition, at a price of $10,000
per share. AM Acquisition was formed by Morningside on behalf of an investor
group to acquire the assets of Arthur Matney Co., Inc. ("Matney"). AM
Acquisition created a wholly-owned operating subsidiary, AM Cosmetics, to hold
such
60
<PAGE>
assets and to continue the operations of Matney as a low-cost manufacturer of
cosmetics. AM Cosmetics sells three brands of "budget" cosmetics, one of which
is targeted at the African-American consumer. The PIK Preferred Shares are
non-voting and are entitled to cumulative dividends payable quarterly in
additional PIK Preferred Shares at a rate of 12% per annum. Additionally, the
PIK Preferred Shares are subject to redemption in whole at the option of
Carson Products on or after July 1, 2005, at the stated value per share (which
is $10,000 per share) plus an amount in cash equal to all accrued and unpaid
dividends on the PIK Preferred Shares (the "Redemption Price"), and are
subject to redemption in whole at any time (or in part from time to time if
all dividends accrued and unpaid have been paid for all past dividend periods
and full dividends have been paid or declared and the amount set apart for
payment for the current dividend period) at the option of AM Acquisition at
the same redemption price.
Pursuant to the Subscription Agreement, AM Acquisition agreed on behalf of
itself and its wholly-owned subsidiary, AM Cosmetics, that for a period of
five years commencing on July 1, 1996, (i) AM Cosmetics would not "contract
manufacture" for any other ethnic cosmetics line, (ii) AM Cosmetics will agree
to produce a cosmetics line for Carson Products, as designed and directed by
Carson Products, at AM Cosmetics' cost plus a maximum 25% markup, and (iii) AM
Cosmetics will agree to provide the necessary research and development for
formulations for the ethnic cosmetic product line(s) as determined by Carson
Products, at no additional cost to Carson Products.
Concurrent with its investment in AM Acquisition, Carson Products entered
into a Management Agreement (the "Carson-AM Management Agreement") with AM
Cosmetics, pursuant to which Carson Products agreed to manage the business
operations of, and provide certain other services to AM Cosmetics. Under the
Carson-AM Management Agreement, Carson Products is required to supervise the
production of a detailed business plan and budget for AM Cosmetics each year.
Once the business plan is approved by AM Cosmetics' Board of Directors, Carson
Products will supervise and administer AM Cosmetics within the confines of the
business plan, with the approval of AM Cosmetics' board for any material
deviations. In return for the management and other services it will provide,
Carson Products is entitled to fees equal to 1% of AM Cosmetics' annual net
sales subject to a minimum of $500,000 per annum. The Carson-AM Management
Agreement expires on June 26, 2004 unless terminated earlier, or renewed for
an additional three-year period at AM Cosmetics' option by giving Carson
Products written notice thereof at least 180 days prior to the expiration
date. Either party may terminate the AM Management Agreement by providing the
other party with written notice, at least 360 days in advance if terminated by
Carson Products and 60 days in advance if terminated by AM Cosmetics. The
Company anticipates that to perform its obligations under the Carson-AM
Management Agreement, certain members of senior management of the Company will
devote a portion of their time to assisting the management of AM Cosmetics.
The Carson-AM Management Agreement also provides that the parties may enter
into (i) sales agreements, substantially in the form agreed upon by the
parties which provides for a five percent sales commission on net sales, and
(ii) manufacturing agreements which will include the specifications of each
product, substantially in the form agreed upon by the parties which provides
that AM Cosmetics will be entitled to a 25% profit margin above all costs,
including general administrative costs. The Company is currently negotiating
such a sales agreement, which the Company believes will provide it with the
opportunity to increase its revenues with little additional expense. The
Company believes that it can use its existing relationships with its
distribution channels to expand the sales of AM Cosmetics' products, and that
the Company's sales force will be motivated by the opportunity to earn
additional commissions without lowering their targets for sales of the
Company's products. The Company expects to enter into a manufacturing
agreement with AM Cosmetics in the near future once precise product
specifications have been determined, which the Company believes will provide
it with the basis for launching its own line of cosmetics targeted to women of
African descent under the Dark & Lovely brand name. Pursuant to discussions
among the parties, the Company expects that the manufacturing agreement will
not contain volume requirements or termination rights for AM Cosmetics.
Certain of the principal and management stockholders of the Company have
ownership interests in AM Cosmetics, including Vincent A. Wasik, Dr. Leroy
Keith and Bradford N. Creswell. In addition, Dr. Keith serves as Chairman of
the Board of Directors of AM Cosmetics and Mr. Wasik serves as President.
61
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
Simultaneous with the consummation of the Offerings, Carson Products expects
to enter into a new Credit Agreement (the "Credit Agreement") with Banque
Indosuez, as agent and a lender (the "Bank"), and the other lenders party
thereto under which the Bank and the other lenders will provide term loans and
a revolving credit facility to Carson Products, subject to the conditions set
forth therein. The following summary of the New Senior Bank Facility is
subject to, and qualified in its entirety by, the Credit Agreement that will
be filed as an exhibit to the Registration Statement of which this Prospectus
is a part. The Company intends to use a portion of the net proceeds received
from the Offerings, together with borrowings under the New Senior Bank
Facility, to repay all of the outstanding borrowings under the Senior Bank
Credit Facility. See "Use of Proceeds" and "Capitalization."
The New Senior Bank Facility will include (i) a $15.0 million term loan A,
(ii) a $10.0 million term loan B and (iii) a $15.0 million revolving credit
facility, including up to $5.0 million of letters of credit. The aggregate of
the revolving credit facility and the aggregate outstanding letters of credit
may not exceed Carson Product's Borrowing Base, which equals the sum of (i)
80% of Eligible Accounts Receivable and (ii) 50% of Eligible Inventory (each
such term is as defined in the Credit Agreement). The final maturity date for
term loan A, term loan B and the revolving credit facility is expected to be
the last business day of September 2002, 2003 and 2002, respectively. Term
loan A will amortize in equal quarterly installments of $625,000 beginning in
December 1996 and ending in September 2002. Term loan B will amortize in equal
quarterly installments of $25,000 beginning in December 1996 through September
2002 and in equal quarterly installments of $2,350,000 beginning in December
2002 and ending in September 2003.
Borrowings under term loan A, term loan B and the revolving credit facility
will generally bear interest at the Base Rate (as defined in the Credit
Agreement) plus 0.5%, the Base Rate plus 1.0% and the Base Rate plus 0.5%,
respectively, or at the Company's option, the Eurodollar Rate (as defined in
the Credit Agreement) plus 2.0%, the Eurodollar Rate plus 2.5%, and the
Eurodollar Rate plus 2.0%, respectively. Interest on Base Rate borrowings are
payable quarterly in arrears and interest on Eurodollar Rate borrowings are
payable at the end of the applicable interest period and, if such interest
period is in excess of three months, at three month intervals thereafter. If
any borrowings are not repaid when due, the outstanding principal amount of
such borrowings will bear interest at the then applicable rate plus 2.0%.
The Credit Agreement will provide for (i) a commitment fee of 0.5% per annum
on the unutilized portion of the revolving credit facility, payable quarterly
in arrears, (ii) a fee of 2.0% per annum on the maximum amount available to be
drawn under letters of credit, payable quarterly in arrears, and (iii) a
letter of credit issuance fee equal to the greater of (x) 0.25% of the maximum
amount available at any time to be drawn under any letter of credit or (y)
$1,500.
The obligations of Carson Products under the New Senior Bank Facility will
be secured by security interests in all accounts receivable, inventory,
property, plant and equipment and other personal, intellectual and real
property of Carson Products and its subsidiaries, as well as by a pledge of
the capital stock of Carson Products and its subsidiaries. The New Senior Bank
Facility will be guaranteed by the Company and each present and future
subsidiary of Carson Products (other than Carson South Africa and its
subsidiaries). The New Senior Bank Facility will contain customary covenants
with respect to, among other things, (i) maintenance by Carson Products of
certain total interest coverage ratios, fixed charge coverage ratios and
leverage ratios, and (ii) restrictions on the incurrence of additional liens
or indebtedness. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
62
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
The Company has amended and restated its Restated Certificate of
Incorporation to (i) change the authorized capital stock of the Company to
150,000,000 shares of Class A Common Stock, par value $0.01 per share ("Class
A Common Stock"), 2,000,000 shares of Class B Common Stock, par value $0.01
per share ("Class B Common Stock"), 13,000,000 shares of Class C Common Stock,
par value $0.01 per share ("Class C Common Stock"), and 10,000,000 shares of
preferred stock, par value $0.01 per share (the "Preferred Stock"), (ii)
reclassify each outstanding share of Class A Common Stock into 11,370 shares
of its newly created Class C Common Stock and (iii) reclassify each
outstanding share of Class B Common Stock into 11,370 shares of its newly
created Class B Common Stock (the "Amended and Restated Certificate of
Incorporation"). Upon completion of the Offerings, 4,190,000 shares of Class A
Common Stock, 1,859,677 shares of Class B Common Stock and 8,306,014 shares of
Class C Common Stock will be issued and outstanding and no shares of Preferred
Stock will be issued and outstanding. The discussion herein describes the
Company's capital stock, the Amended and Restated Certificate of Incorporation
and Bylaws in effect upon effectiveness of the Registration Statement. The
following summary of certain provisions of the Company's capital stock
describes all material provisions, but does not purport to be complete and is
subject to, and qualified in its entirety by, the Amended and Restated
Certificate of Incorporation and the Bylaws of the Company that are included
as exhibits to the Registration Statement and by the provisions of applicable
law.
Certain provisions described herein may have the effect of impeding
stockholder actions with respect to certain business combinations and the
election of new members to the Board. As such, the provisions could have the
effect of discouraging open market purchases of the Company's Common Stock
because they may be considered disadvantageous by a stockholder who desires to
participate in a business combination or elect a new director.
COMMON STOCK
Dividends. Holders of record of shares of Common Stock on the record date
fixed by the Company's Board are entitled to receive such dividends as may be
declared by the Board out of funds legally available for such purpose, subject
to the rights of the holders of any series of Preferred Stock. No dividends
may be declared or paid in cash or property on any share of any class of
Common Stock, unless simultaneously the same dividend is declared or paid on
each share of the other classes of Common Stock except that if dividends are
declared that are payable in Common Stock or options or warrants to purchase
Common Stock or securities convertible into or exchangeable for Common Stock,
a like dividend or other distribution will also be paid on each other class of
Common Stock, as the case may be, in an equal amount per share.
Voting Rights. Holders of shares of Class A Common Stock and Class C Common
Stock will vote as a single class on all matters submitted to a vote of the
stockholders, with each share of Class A Common Stock entitled to one vote and
each share of Class C Common Stock entitled to ten votes, except as otherwise
provided by law. Holders of shares of Class B Common Stock will not be
entitled to vote on any matter submitted to a vote of the stockholders, except
as otherwise provided by law and except that the holders of the Class B Common
Stock will be entitled to vote as a separate class on any amendment, repeal or
modification of any provision of the Amended and Restated Certificate of
Incorporation that adversely affects the powers, preferences or special rights
of the Class B Common Stock in a manner different from the adverse effect on
the powers, preferences or special rights of the Class A Common Stock. On any
matter on which holders of Class A Common Stock, Class B Common Stock (other
than with respect to matters referred to in the previous sentence) and Class C
Common Stock are entitled to vote, such holders shall vote together as a
single class with each share of Class A Common Stock entitled to one vote and
each share of Class B Common Stock and Class C Common Stock entitled to ten
votes, except as otherwise provided by law. Holders of Common Stock are not
entitled to cumulate votes in the election of Directors.
63
<PAGE>
Pursuant to the Voting Trust Agreement, DNL Partners, as trustee of the
Voting Trust, will vote the shares of Common Stock held in the Voting Trust.
Dr. Keith and Mr. Creswell hold trust certificates in the Voting Trust.
Liquidation Rights. Upon liquidation, dissolution or winding-up of the
Company, the holders of Class A Common Stock are entitled to share ratably
with the holders of Class B Common Stock and Class C Common Stock in all
assets available for distributions after payment in full of creditors and
payment in full to any holders of Preferred Stock then outstanding of any
amount required to be paid under the terms of such Preferred Stock.
Conversion. Each share of Class B Common Stock is convertible at any time,
at the option of its holder, into one share of Class A Common Stock or, prior
to a Triggering Event (as defined below), one share of Class C Common Stock.
Each share of Class C Common Stock is convertible at any time, at the option
of its holder, into one share of Class A Common Stock at any time. In
addition, certain stockholders ("Regulated Holders") that are subject to
regulation under Regulation Y of the Board of Governors of the Federal Reserve
System or the Bank Holding Company Act of 1956, as amended, may convert their
shares of Class C Common Stock into the same number of shares of Class B
Common Stock at any time. The Company is required to notify each Regulated
Holder prior to converting or directly or indirectly purchasing or otherwise
acquiring any shares of Class A Common Stock or Class C Common Stock or taking
any other action affecting the voting rights of the holders of such shares if
such action will increase the percentage of outstanding Class A Common Stock
or Class C Common Stock owned by or controlled by any Regulated Holder. The
Company will defer making any such conversion, purchase or other acquisition
or taking any such other action for a period of 30 days after giving such
notice to allow each such Regulated Holder to make a determination as to
whether it wishes to effect a conversion or take any other action with respect
to the Class A Common Stock or the Class C Common Stock it owns prior to the
expiration of such 30 day period. The Company is prohibited from directly or
indirectly redeeming, purchasing, acquiring or taking any other action
affecting outstanding Class A Common Stock or Class C Common Stock if such
action will increase above 24.9% the percentage of outstanding Common Stock
owned by or controlled by any Regulated Holder and its affiliates.
Each share of Class C Common Stock converts automatically into one share of
Class A Common Stock upon transfer to any person other than a Permitted
Transferee. For purposes hereof, a "Permitted Transferee" means any beneficial
owner of the Class C Common Stock on the date hereof, any affiliate of such
owner, any member of such owner's immediate family, or any trust or foundation
for the benefit of any of the foregoing. In the event that the number of
shares of Class C Common Stock issued and outstanding at any time shall
constitute less than 9% of the total number of shares of Common Stock issued
and outstanding at such time (a "Triggering Event"), then without further act
on the part of the holder of the Class C Common Stock, all shares of Class C
Common Stock then issued and outstanding will be deemed converted into shares
of Class A Common Stock. Additionally, upon the occurrence of a Triggering
Event, the holders of the shares of issued and outstanding Class B Common
Stock will no longer have the option to convert such shares into Class C
Common Stock.
The holders of Common Stock are not entitled to preemptive rights. Certain
stockholders have the right to purchase additional shares of Common Stock
pursuant to (i) a Subscription Agreement dated as of August 23, 1995 between
the Company and the investors set forth in Schedule I thereto (entities
affiliated with Banque Indosuez and Morgan Guaranty Trust Company), and (ii) a
Subscription Agreement dated as of August 23, 1995 between the Company and DNL
Partners. These rights will be waived in connection with the Offerings. The
shares of Common Stock obtained upon the conversion of the Company's former
common stock presently outstanding are, and the shares of Class A Common Stock
offered hereby will be, upon conversion or issuance, validly issued, fully
paid and nonassessable. Pursuant to the Amended and Restated Certificate of
Incorporation, in any merger, consolidation or business combination, the
consideration to be received per share by holders of Class A Common Stock must
be identical to that received by holders of Class B Common Stock and Class C
Common Stock, except that in any such transaction in which voting securities
(or options or warrants to purchase voting securities, or securities
convertible into or exchangeable for voting securities), are distributed, such
voting securities (or options or warrants to purchase voting securities, or of
securities convertible into or exchangeable for, voting securities) may differ
as to voting rights to the extent that voting rights now differ among the
classes
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of Common Stock. Pursuant to the Amended and Restated Certificate of
Incorporation, no class of Common Stock may be subdivided, reclassified or
otherwise changed unless concurrently the other classes of Common Stock are
subdivided, consolidated, reclassified or otherwise changed in the same
proportion and in the same manner.
Except as expressly set forth in the Amended and Restated Certificate of
Incorporation, the rights of the holders of Class A Common Stock, Class B
Common Stock and Class C Common Stock are in all respects identical.
PREFERRED STOCK
The 10,000,000 authorized and unissued shares of Preferred Stock may be
issued with such designations, preferences, limitations and relative rights as
the Company's Board may authorize, including, but not limited to: (i) the
distinctive designation of each series and the number of shares that will
constitute such series; (ii) the voting rights, if any, of shares of such
series; (iii) the dividend payable on the shares of such series, any
restriction, limitation or condition upon the payment of such dividends,
whether dividends shall be cumulative, and the dates on which dividends are
payable; (iv) the prices at which, and the terms and conditions on which, the
shares of such series may be redeemed, if such shares are redeemable; (v) the
purchase or sinking fund provisions, if any, for the purchase or redemption of
shares of such series; (vi) any preferential amount payable upon shares of
such series in the event of liquidation, dissolution or winding-up of the
Company or the distribution of its assets; and (vii) the prices or rates of
conversion at which, and the terms and conditions on which, the shares of such
series may be converted into other securities, if such shares are convertible.
Although the Company has no present intention to issue Preferred Stock, the
issuance of Preferred Stock, or the issuance of rights to purchase such
shares, could discourage an unsolicited acquisition proposal.
CERTAIN PROVISIONS OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
AND BYLAWS AND STATUTORY PROVISIONS
The Amended and Restated Certificate of Incorporation and Bylaws contain
certain provisions that could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest or otherwise.
Board of Directors. The Amended and Restated Certificate of Incorporation
provides that the Board will consist of 10 to 15 Directors, and that the
number of directors may be increased or decreased from time to time in such
manner as may be prescribed in the Bylaws. The Board is classified into three
classes, each of which, after a transitional arrangement, will serve for three
years, with one class being elected each year. All Directors are elected by
the holders of the Class A Common Stock and Class C Common Stock, voting as a
class.
Directors may be removed only for cause and only with the approval of the
holders of at least 80% of the voting power of the then outstanding shares of
capital stock of the Company entitled to vote generally in the election of
directors, voting together as a single class. In addition, the Bylaws provide
that any vacancy on the Board shall be filled only by the remaining directors
then in office, even if the remaining Directors constitute less than a quorum,
and that directors so appointed will serve for the remainder of the term of
the class in which the vacancy occurred rather than until the next annual
meeting of stockholders.
Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals. The Amended and Restated Certificate of Incorporation requires that
any action required or permitted to be taken by the Company's stockholders
must be effected at a duly called annual or special meeting of stockholders
and such action may not be effected by consent in writing. Additionally, the
Amended and Restated Certificate of Incorporation requires that special
meetings of the stockholders of the Company be called only by the Chairman of
the Board or the Secretary pursuant to a resolution adopted by a majority of
the entire Board, and that advance notice of stockholder nominations for the
election of directors be given in the manner provided in the Bylaws.
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The Amended and Restated Bylaws provide that stockholders seeking to bring
business before or to nominate directors at any annual meeting of stockholders
must provide timely notice thereof in writing. To be timely, a stockholder's
notice must be delivered to, or mailed and received at, the principal
executive offices of the Company not less than 60 days nor more than 90 days
prior to such meeting or, if less than 70 days' notice was given for the
meeting, within ten days following the date on which such notice was given.
The Bylaws also specify certain requirements for a stockholder's notice to be
in proper written form. These provisions restrict the ability of stockholders
to bring matters before the stockholders or to make nominations for directors
at meetings of stockholders.
Amendment to the Charter and Bylaws. The Amended and Restated Certificate of
Incorporation provides that the stockholder vote required to alter, amend, or
repeal the foregoing provisions and certain other provisions of the Amended
and Restated Certificate of Incorporation and the Amended and Restated Bylaws,
or to adopt any provision inconsistent therewith, shall be 80% of the Voting
Stock, voting together as a single class.
Rights to Purchase Stock. The Amended and Restated Certificate of
Incorporation also provides that the Board is authorized to create and issue
rights entitling the holders thereof to purchase from the Company shares of
stock or other securities of the Company or any other corporation. The
creation and issuance of such rights could have the effect of discouraging
third party attempts to acquire the Company.
Section 203 of Delaware Law. Following the consummation of the Offerings,
the Company will be subject to the "business combination" provisions of the
Delaware General Corporation Law. In general, such provisions prohibit a
publicly-held Delaware corporation from engaging in various "business
combination" transactions with any "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
"interested stockholder," unless (i) the transaction is approved by the Board
prior to the date the interested stockholder obtained such status, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the "interested stockholder" owned at least 85% of
the voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by (a) persons who are directors and also
officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) on or subsequent
to such date the "business combination" is approved by the Board and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the "interested stockholder." A "business combination" is defined to include
mergers, asset sales and other transactions resulting in financial benefit to
a stockholder. In general, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of a corporation's voting stock. The statute could prohibit or
delay mergers or other takeover or change in control attempts with respect to
the Company and, accordingly, may discourage attempts to acquire the Company.
In addition, the Amended and Restated Certificate of Incorporation will
provide that the affirmative vote of at least 80% of the outstanding voting
stock is required for a business combination between the Company or any
subsidiary and the beneficial owner of more than five percent of the
outstanding voting stock unless such transaction (i) has been approved by a
majority of the disinterested directors or (ii) involves a person who, as of
the effectiveness of the Offerings, was the beneficial owner of more than five
percent of the outstanding voting stock.
Limitations on Liability and Indemnification of Officers and Directors. The
Delaware Law provides that a corporation may limit the liability of each
director to the corporation or its stockholders for monetary damages except
for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii) in
respect of certain unlawful dividend payments or stock redemptions or
repurchases and (iv) for any transaction from which the director derives an
improper personal benefit. The Company's Amended and Restated Certificate of
Incorporation provides that, to the fullest extent permitted by Delaware law,
no director of the Company shall be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duties as a
director. The effect of these provisions is to eliminate the rights of the
Company and its stockholders (through
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stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of fiduciary duty as a director
(including breaches resulting from grossly negligent conduct). This provision
does not exonerate the directors from liability under Federal securities laws
nor does it limit the availability of non-monetary relief in any action or
proceeding against a director. In addition, the Amended and Restated
Certificate of Incorporation provides that the Company shall, to the fullest
extent permitted by Delaware Law, indemnify its officers and directors against
liabilities, cost and expenses as provided by Delaware Law. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or others pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices of the Class A Common Stock.
Upon the closing of the Offerings there will be 4,190,000 shares of Class A
Common Stock, 1,859,677 shares of Class B Common Stock and 8,306,014 shares of
Class C Common Stock outstanding. The shares of Class A Common Stock sold in
the Offerings will be freely tradeable without restriction or further
registration under the Securities Act, unless held by an "affiliate" of the
Company as that term is defined in the Securities Act, which shares will be
subject to the resale limitations of Rule 144. All of the remaining shares
will be "restricted securities" under the Securities Act and may not be sold
unless they are registered or unless an exemption from registration, such as
the exemptions provided by Rule 144 or Rule 144A under the Securities Act, is
available. Upon the completion of the Offerings, 10,165,691 restricted shares
of Common Stock will be eligible for sale pursuant to Rule 144, subject to the
holding period and volume limitations described below.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities acquired
from the Company or an affiliate of the Company in a non-public transaction)
for at least two years, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent of the
outstanding Common Stock or the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the date on which notice of
such sale is filed pursuant to Rule 144. Sales under Rule 144 are also subject
to certain provisions regarding the manner of sale, notice requirements and
the availability of current public information about the Company. A
stockholder (or stockholders whose shares are aggregated) who is not an
affiliate of the Company for at least 90 days prior to a proposed transaction
and who has beneficially owned "restricted securities" for at least three
years is entitled to sell such shares under Rule 144 without regard to the
limitations described above.
Rule 144A provides a nonexclusive safe harbor exemption from the
registration requirements of the Securities Act for specified resales of
restricted securities to certain institutional investors. In general, Rule
144A allows unregistered resales of restricted securities to a "qualified
institutional buyer," which generally includes an entity, acting for its own
account or for the account of other qualified institutional buyers, that in
the aggregate owns or invests at least $100 million in securities of
unaffiliated issuers. Rule 144A does not extend an exemption to the offer or
sale of securities that, when issued, were of the same class as securities
listed on a national securities exchange or quoted on Nasdaq. The shares of
Class B Common Stock and Class C Common Stock outstanding as of the date of
this Prospectus would be eligible for resale under Rule 144A because such
shares, when issued, were not of the same class as any listed or quoted
securities.
All of the Company's existing stockholders, including the officers and
directors of the Company (other than the Selling Stockholders with respect to
the shares included in the Offerings), have agreed, subject to certain
exceptions, that they will not, without the prior written consent of Merrill
Lynch on behalf of the Underwriters,
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sell or otherwise dispose of any shares of Common Stock for a period of 180
days after the date hereof or make any demand for or exercise any rights with
respect to the registration of the securities. All existing stockholders have
also waived all rights (including demand and "piggyback" registration rights)
to register securities owned by them for such 180 day period and rights to
purchase additional shares of Common Stock in connection with the Offerings.
All of the outstanding shares of Common Stock (other than those sold in the
Offerings) are subject to such agreements. At the request of the Company, the
Underwriters have reserved shares to be issued by the Company to be sold to
directors, officers, employees, business associates and related persons of the
Company at the initial public offering price. Such persons will be required to
agree not to sell or otherwise dispose of any shares of Common Stock for a
period of 90 days following the date of this Prospectus. See "Underwriting."
REGISTRATION RIGHTS
"Piggyback" registration rights will be available for a total of 9,688,151
shares of Common Stock held by members of management and certain other persons
with respect to the registration of Common Stock by the Company under (i) a
Subscription Agreement dated as of August 23, 1995 between the Company and
Indosuez Carson Partners and Indosuez CM II, Inc., (ii) a Subscription
Agreement dated as of August 23, 1995 between the Company and the investors
set forth in Schedule I thereto (entities affiliated with Banque Indosuez and
Morgan Guaranty Trust Company), (iii) a Subscription Agreement dated as of
August 23, 1995 between the Company and DNL Partners, (iv) a Registration
Rights Agreement dated as of August 23, 1995 between the Company and Dr. Leroy
Keith, (v) a Subscription and Registration Rights Agreement between the
Company and the outside directors named therein and (vi) a Subscription and
Registration Rights Agreement between the Company and the members of senior
management named therein, each of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. Such rights are
being waived in connection with the Offering.
In addition, the Company has granted certain stockholders "demand"
registration rights pursuant to the agreements referred to in clauses (i),
(ii) and (iii) of the preceding paragraph. In general, such stockholders may
request registration of their shares at the Company's expense 180 days after
the effective date of the Registration Statement of which this Prospectus is a
part, subject to a minimum amount of the requesting stockholder's shares per
requested registration, and subject to the Company's right to register its own
shares or shares of other requesting stockholders, which may limit the total
number of shares that may be sold in a single offering. However, the Company
is not obligated to register any of such stockholders' shares that may
immediately be sold under Rule 144 in full during any 90 day period. Such
rights are being waived in connection with the Offering.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following discussion of certain United States federal income and estate
tax consequences of the ownership and disposition of Class A Common Stock
applicable to Non-U.S. Holders has been prepared by Milbank, Tweed, Hadley &
McCloy, special tax counsel to the Company, and all statements of law and
legal conclusions contained in the discussion represent the opinion of
Milbank, Tweed, Hadley & McCloy. In general, a "Non-U.S. Holder" is any holder
other than (i) a citizen or resident of the United States, (ii) a corporation
or partnership created or organized in the United States or under the laws of
the United States or of any state, or (iii) an estate or trust, the income of
which is includable in gross income for United States federal income tax
purposes regardless of its source.
This discussion is based on current law only. This discussion does not
address aspects of United States federal taxation other than income and estate
taxation and does not address all aspects of income and estate taxation, nor
does it consider any specific facts or circumstances that may apply to a
particular Non-U.S. Holder. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR TAX ADVISERS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL,
AND NON-UNITED STATES INCOME AND OTHER TAX CONSEQUENCES OF HOLDING AND
DISPOSING OF SHARES OF CLASS A COMMON STOCK.
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An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a non-resident alien) by virtue of being present in the
United States on at least 31 days in the calendar year and for an aggregate of
at least 183 days during a three year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). Resident aliens are subject
to U.S. federal tax as if they were U.S. citizens.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder will be subject to United
States withholding tax at a 30% rate (or a lower rate prescribed by an
applicable tax treaty) unless the dividends are either (i) effectively
connected with a trade or business carried on by the Non-U.S. Holder within
the United States, or (ii) if certain income tax treaties apply, attributable
to a permanent establishment in the United States maintained by the Non-U.S.
Holder. Dividends effectively connected with such a United States trade or
business or attributable to such a United States permanent establishment
generally will not be subject to United States withholding tax (if the Non-
U.S. Holder files certain forms, including Internal Revenue Service Form 4224,
with the payor of the dividend) and generally will be subject to United States
federal income tax on a net income basis, in the same manner as if the Non-
U.S. Holder were a resident of the United States. A Non-U.S. Holder that is a
corporation may be subject to an additional branch profits tax at a rate of
30% (or such lower rate as may be specified by an applicable treaty) on the
actual or deemed repatriation from the United States of its "effectively
connected earnings and profits," subject to certain adjustments. To determine
the applicability of a tax treaty providing for a lower rate of withholding,
dividends paid to an address in a foreign country are presumed under the
current interpretation of existing Treasury Regulations to be paid to a
resident of that country absent knowledge to the contrary. However, proposed
Treasury Regulations issued April 15, 1996, if finalized, would eliminate this
presumption with respect to payments made after December 31, 1997. These
proposed Treasury Regulations also would require Non-U.S. Holders to provide
the withholding agent with a beneficial owner withholding certificate to
obtain the benefit of any applicable tax treaty providing for a lower rate of
withholding tax on dividends. The beneficial owner withholding certificate
would contain the Non-U.S. Holders' name, permanent residence address and
taxpayer identifying number ("TIN"), certified by the Internal Revenue Service
(the "Service"). The Service would certify the TIN based on a certificate of
residence issued by the competent authority of the treaty country of which a
Non-U.S. Holder claims to be a resident or on certain documentary evidence
establishing residence in the treaty country. A Non-U.S. Holder that is
eligible for a reduced rate of U.S. withholding tax pursuant to a tax treaty
may obtain a refund of any excess amounts withheld by filing an appropriate
claim for refund with the Service.
SALE OF COMMON STOCK
In general, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon the disposition of such holder's shares
of Class A Common Stock unless (i) the gain is effectively connected with a
trade or business carried on by the Non-U.S. Holder within the United States
or, alternatively, if certain tax treaties apply, attributable to a permanent
establishment in the United States maintained by the Non-U.S. Holder (and in
either such case, the United States branch profits tax may also apply upon
actual or deemed repatriation of the gain if the Non-U.S. Holder is a
corporation); (ii) in the case of Non-U.S. Holder who is a nonresident alien
individual and holds shares of Class A Common Stock as a capital asset, such
individual is present in the United States for 183 days or more in the taxable
year of disposition, and either (a) such individual has a "tax home" (as
defined for United States federal income tax purposes) in the United States
(unless the gain from the disposition is attributable to an office or other
fixed place of business maintained by such Non-U.S. Holder in a foreign
country and such gain has been subject to a foreign income tax equal to at
least 10% of the gain derived from such disposition), or (b) the gain is
attributable to an office or other fixed place of business maintained by such
individual in the United States; (iii) the Non-U.S. Holder is subject to tax
pursuant to the provisions of United States tax law applicable to certain
United States expatriates whose loss of United States citizenship had as one
of its principal purposes the avoidance of United States taxes; or (iv) the
Company is or has been a United States real property holding corporation (a
"USRPHC") for United States federal income tax purposes (which the Company
does not believe that it is or is likely to become) at any time within the
shorter of the five-year period preceding such disposition or such Non-U.S.
Holder's holding period. If the Company were
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or were to become a USRPHC, gains realized upon a disposition of Class A
Common Stock by a Non-U.S. Holder which did not directly or indirectly own
more than 5% of the Class A Common Stock during the shorter of the periods
described above generally would not be subject to United States federal income
tax, provided that the Class A Common Stock is "regularly traded" on an
established securities market. The Company intends to make an application to
list the Class A Common Stock on the New York Stock Exchange. Assuming the
application is made and approved, the Company believes that the Class A Common
Stock will be "regularly traded" on an established market.
ESTATE TAX
Class A Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as defined for United States federal estate tax purposes)
of the United States at the time of death will be includable in the
individual's gross estate for United States federal estate tax purposes
(unless an applicable estate tax treaty provides otherwise), and therefore may
be subject to United States federal estate tax.
BACKUP WITHHOLDING, INFORMATION REPORTING AND OTHER REPORTING REQUIREMENTS
The Company must report annually to the Service and to each Non-U.S. Holder
the amount of dividends paid to, and the tax withheld with respect to, each
Non-U.S. Holder. These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
this information also may be made available under the provisions of a specific
treaty or agreement with the tax authorities in the country in which the Non-
U.S. Holder resides or is established.
United States backup withholding (which generally is imposed at the rate of
31% on certain payments to persons that fail to furnish the information
required under the United States information reporting requirements) and
information reporting generally will not apply to dividends paid on Class A
Common Stock to a Non-U.S. Holder at an address outside the United States.
If the proceeds of the disposition of Class A Common Stock by a Non-U.S.
Holder are paid over, by or through a United States office of a broker, the
payment is subject to information reporting and to backup withholding unless
the disposing holder certifies as to its name, address and status as a Non-
U.S. Holder under penalties of perjury or otherwise establishes an exemption.
Generally, United States information reporting and backup withholding will not
apply to a payment of disposition proceeds if the payment is made outside the
United States through a non-U.S. office of a non-U.S. broker. However, United
States information reporting requirements (but not backup withholding) will
apply to a payment of disposition proceeds outside the United States if (a)
the payment is made through a non-U.S. office of a broker that is (i) a United
States person for United States federal income tax purposes, (ii) a
"controlled foreign corporation" for United States federal income tax purposes
or (iii) a foreign person 50% or more of whose gross income from certain
periods is effectively connected with a United States trade or business, and
(b) the broker fails to maintain documentary evidence in its files that the
holder is a Non-U.S. Holder or certain conditions are not met.
Backup withholding is not an individual tax. Any amounts withheld under the
backup withholding rules from a payment to a Non-U.S. Holder will be refunded
or credited against the Non-U.S. Holder's United States federal income tax
liability, if any, provided that the required information is furnished to the
Service.
These backup withholding tax and information reporting rules are currently
under review by the United States Treasury Department and proposed Treasury
Regulations issued on April 15, 1996, would modify certain of such rules
generally with respect to payments made after December 31, 1997. Accordingly,
the application of such rules to the Class A Common Stock could be changed.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
Donaldson, Lufkin & Jenrette Securities Corporation are acting as
representatives (the "U.S. Representatives") of each of the Underwriters named
below (the "U.S. Underwriters"). Subject to the terms and conditions set forth
in a U.S. purchase agreement (the "U.S. Purchase Agreement") among the
Company, each of the Selling Stockholders and the U.S. Underwriters, and
concurrently with the sale of 838,000 shares of Class A Common Stock to the
International Managers (as defined below), the Company, for its own account,
and the Selling Stockholders severally have agreed to sell to the U.S.
Underwriters, and each of the U.S. Underwriters severally has agreed to
purchase from the Company and the Selling Stockholders, the number of shares
of Class A Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................. 796,000
Donaldson, Lufkin & Jenrette Securities Corporation................... 796,000
Allen & Company Incorporated.......................................... 80,000
Bear, Stearns & Co. Inc. ............................................. 80,000
Dean Witter Reynolds Inc. ............................................ 80,000
A.G. Edwards & Sons, Inc. ............................................ 80,000
Goldman, Sachs & Co. ................................................. 80,000
Hudson Knight Securities, Inc. ....................................... 80,000
Morgan Stanley & Co. Incorporated..................................... 80,000
PaineWebber Incorporated.............................................. 80,000
Prudential Securities Incorporated.................................... 80,000
Pryor, McClendon, Counts & Co., Inc. ................................. 80,000
Salomon Brothers Inc.................................................. 80,000
Smith Barney Inc. .................................................... 80,000
Utendahl Capital Partners, L.P. ...................................... 80,000
Wasserstein Perella Securities, Inc. ................................. 80,000
The Williams Capital Group, L.P. ..................................... 80,000
M.R. Beal & Company................................................... 40,000
Blaylock & Partners, L.P. ............................................ 40,000
J.C. Bradford & Co. .................................................. 40,000
The Chapman Company................................................... 40,000
Interstate/Johnson Lane Corporation................................... 40,000
Edward D. Jones & Co., L.P. .......................................... 40,000
WR Lazard, Laidlaw & Luther........................................... 40,000
Legg Mason Wood Walker, Incorporated.................................. 40,000
Morgan Keegan & Company, Inc. ........................................ 40,000
Ormes Capital Markets, Inc. .......................................... 40,000
Ragen MacKenzie Incorporated.......................................... 40,000
Raymond James & Associates, Inc. ..................................... 40,000
The Robinson-Humphrey Company, Inc. .................................. 40,000
Vector Securities International, Inc. ................................ 40,000
---------
Total............................................................ 3,352,000
=========
</TABLE>
The Company and the Selling Stockholders have also entered into an
international purchase agreement (the "International Purchase Agreement") with
certain underwriters outside the United States and Canada (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters") for
whom Merrill Lynch International and Donaldson, Lufkin & Jenrette Securities
Corporation are acting as lead managers (the
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"Lead Managers"). Subject to the terms and conditions set forth in the
International Purchase Agreement, and concurrently with the sale of 3,352,000
shares of Class A Common Stock to the U.S. Underwriters pursuant to the U.S.
Purchase Agreement, the Company and the Selling Stockholders have agreed to
sell to the International Managers, and the International Managers severally
have agreed to purchase from the Company and the Selling Stockholders, an
aggregate of 838,000 shares of Class A Common Stock. The initial public
offering price per share and the total underwriting discount per share of
Class A Common Stock are identical under the U.S. Purchase Agreement and the
International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement, the
several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Class A Common Stock being sold
pursuant to each such agreement if any of the shares of Class A Common Stock
being sold pursuant to such agreement are purchased. Under certain
circumstances, the commitments of non-defaulting U.S. Underwriters or
International Mangers (as the case may be) may be increased. The closings with
respect to the sale of Class A Common Stock to be purchased by the U.S.
Underwriters and the International Managers are conditioned upon one another.
The U.S. Representatives have advised the Company and the Selling
Stockholders that the U.S. Underwriters propose initially to offer the shares
of Class A Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $.55 per share of Class A Common
Stock. The U.S. Underwriters may allow, and such dealers may allow, a discount
not in excess of $.10 per share of Class A Common Stock on sales to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Company has granted an option to the U.S. Underwriters, exercisable for
30 days after the date of this Prospectus, to purchase up to an aggregate of
502,800 additional shares of Class A Common Stock at the initial public
offering price set forth on the cover page of this Prospectus, less the
underwriting discount. The U.S. Underwriters may exercise this option only to
cover over-allotments, if any, made on the sale of the Class A Common Stock
offered hereby. To the extent that the U.S. Underwriters exercise this option,
each U.S. Underwriter will be obligated, subject to certain conditions, to
purchase the same percentage of such additional shares of Class A Common Stock
as such U.S. Underwriter's initial amount reflected in the foregoing table
bears to the total number of shares of Class A Common Stock initially offered
by the U.S. Underwriters. The Company also has granted an option to the
International Managers, exercisable for 30 days after the date of this
Prospectus, to purchase up to an aggregate of 125,700 additional shares of
Class A Common Stock to cover over-allotments, if any, on terms similar to
those granted to the U.S. Underwriters.
At the request of the Company, the U.S. Underwriters have reserved for sale,
at the initial public offering price, up to 400,000 shares to be issued by the
Company and offered hereby for directors, officers, employees, business
associates and related persons of the Company. The number of shares of Class A
Common Stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares which
are not so purchased will offered by the Underwriters to the general pubic on
the same basis as the other shares offered hereby. Such persons will be
required to agree not to sell or otherwise dispose of any shares of Class A
Common Stock, or securities convertible into or exchangeable or exercisable
for Class A Common Stock for a period of 90 days following the date of this
Prospectus.
The Company, its directors and executive officers, the Selling Stockholders
and all other existing stockholders have agreed, subject to certain
exceptions, not to directly or indirectly sell, offer to sell, grant any
option for the sale of or otherwise dispose of any shares of Class A Common
Stock or securities or rights convertible into or exercisable or exchangeable
for Class A Common Stock, without the prior written consent of Merrill Lynch,
on behalf of the Underwriters, for a period of 180 days after the date of this
Prospectus. In addition, all existing stockholders have agreed not to make any
demand for or exercise any rights with respect to the registration of Common
Stock and have waived all rights (including demand and "piggyback"
registration rights) to register securities owned by them for such 180 day
period and rights to purchase additional shares of Common Stock in connection
with the Offerings. See "Shares Eligible for Future Sale."
72
<PAGE>
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the U.S. Underwriters and the International Managers are permitted
to sell shares of Class A Common Stock to each other for purposes of resale at
the initial public offering price, less an amount not greater than the selling
concession. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and any dealer to whom they sell shares of Class A Common Stock
will not offer to sell or sell shares of Class A Common Stock to persons who
are non-U.S. or non-Canadian persons or to persons they believe intended to
resell to persons who are non-U.S. or non-Canadian persons, and the
International Managers and any dealer to whom they sell shares of Class A
Common Stock will not offer to sell or sell shares of Class A Common Stock to
U.S. persons or to Canadian persons or to persons they believe intended to
resell to United States or Canadian persons, except in the case of
transactions pursuant to the Intersyndicate Agreement.
Prior to the Offerings, there has been no public market for the Class A
Common Stock of the Company. The initial public offering price has been
determined through negotiations among the Company, the Selling Stockholders
and the U.S. Representatives and the Lead Managers. Among the facts considered
in determining the initial public offering price, in addition to prevailing
market conditions, are price-earnings ratios of publicly traded companies that
the Representatives believe to be comparable to the Company, certain financial
information of the Company, the history of, and the prospects for, the Company
and the industry in which it competes, and assessment of the company's
management, its past and present operations, the prospects for, and timing of,
future revenues of the Company, the present state of the Company's
development, and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to the
Company. There can be no assurance that an active trading market will develop
for the Class A Common Stock or that the Class A Common Stock will trade in
the public market subsequent to the Offerings at or above the initial public
offering price.
Application has been made to list the Class A Common Stock on the New York
Stock Exchange under the symbol "CIC," subject to official notice of issuance.
In order to meet the requirements for listing of the Class A Common Stock on
that exchange, the U.S. Underwriters have undertaken to sell lots of 100 or
more shares to a minimum of 2,000 beneficial owners.
The Underwriters do not intend to confirm sales of the Class A Common Stock
offered hereby to any accounts over which they exercise discretionary
authority.
The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including liabilities under the Securities Act.
Merrill Lynch has been retained to act as financial advisor and provide
investment banking advice to the Company and may be retained in the future to
provide additional investment banking services to the Company. Merrill Lynch
will receive customary fees in connection with such services.
LEGAL MATTERS
The validity of the Class A Common Stock being offered hereby and certain
other legal matters relating to the Offerings will be passed upon for the
Company by Milbank, Tweed, Hadley & McCloy, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Cahill Gordon & Reindel (a
partnership including a professional corporation), New York, New York.
EXPERTS
The financial statements of the Predecessor as of March 31, 1995 and for
each of the two years in the period ended March 31, 1995 included in this
Prospectus and the financial statement schedule for the two years ended
73
<PAGE>
March 31, 1995 included in this Registration Statement have been so included
in reliance on the report of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in accounting and auditing.
The consolidated balance sheet as of March 31, 1996 and the consolidated
statements of operations, stockholders' equity and cash flows of the Company
for the period from August 23, 1995 through March 31, 1996 and the
consolidated statements of income, stockholders' equity, and cash flows of the
Predecessor for the period from April 1, 1995 to August 22, 1995 and the
related financial statement schedule have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
On August 23, 1995 the Company engaged Deloitte & Touche LLP as its
independent public accountants, replacing the Predecessor's independent public
accountants, Price Waterhouse LLP. There were no disagreements with Price
Waterhouse LLP regarding accounting principles or practices, financial
statement disclosure, or auditing scope or procedure during each of the two
fiscal years ended March 31, 1995 and the period from April 1, 1995 to August
22, 1995. Price Waterhouse LLP issued reports without adverse opinions,
disclaimers of opinions, or qualifications or modifications as to uncertainty,
audit scope or accounting principles (other than as required by generally
accepted accounting principles), with respect to the consolidated financial
statements of the Predecessor as of and for the years ended March 31, 1994 and
1995. The decision to change accountants was approved by the Company's Board
of Directors.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 with respect to
the Class A Common Stock being offered hereby with the Commission under the
Securities Act. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain items of which are omitted in accordance with the rules and
regulations of the Commission. Statements contained in this Prospectus
concerning the provisions of documents filed with the Registration Statement
as exhibits are necessarily summaries of such documents, and each such
statement is qualified in its entirety by reference to the copy of the
applicable document filed as an exhibit to the Registration Statement. Upon
the consummation of the Offerings, the Company will be subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports and other information with the Commission. The Registration
Statement and the exhibits and schedules thereto filed by the Company with the
Commission, as well as such reports and other information filed by the Company
with the Commission, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; at its Chicago Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and at its New York Regional Office, Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained from the public reference section of the Commission,
450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. Such
material may also be accessed electronically by means of the Commission's home
page on the Internet at http://www.sec.gov. The Class A Common Stock is
expected to be listed on the New York Stock Exchange, and copies of such
material will be available for inspection at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005. The Company intends to
furnish to its stockholders annual reports containing audited consolidated
financial statements and a report thereon by the Company's independent
accountants and quarterly reports containing unaudited consolidated financial
data for the first three quarters of each fiscal year.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS FOR THE COMPANY
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheet at March 31, 1996............................. F-3
Consolidated Statement of Operations--Period from August 23, 1995 to
March 31, 1996.......................................................... F-4
Consolidated Statement of Changes in Stockholders' Equity--Period from
August 23, 1995 to March 31, 1996....................................... F-5
Consolidated Statement of Cash Flows--Period from August 23, 1995 to
March 31, 1996.......................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
AUDITED FINANCIAL STATEMENTS FOR THE PREDECESSOR
Report of Independent Accountants........................................ F-16
Independent Auditors' Report............................................. F-17
Consolidated Balance Sheet at March 31, 1995............................. F-18
Consolidated Statements of Income--Years Ended March 31, 1994 and 1995
and Period from April 1, 1995 to August 22, 1995........................ F-19
Consolidated Statements of Changes in Stockholders' Equity--Years Ended
March 31, 1994 and 1995 and Period from April 1, 1995 to August 22,
1995.................................................................... F-20
Consolidated Statements of Cash Flows--Years Ended March 31, 1994 and
1995 and Period from April 1, 1995 to August 22, 1995................... F-21
Notes to Consolidated Financial Statements .............................. F-22
UNAUDITED FINANCIAL STATEMENTS FOR THE PREDECESSOR AND THE COMPANY
Consolidated Balance Sheet at June 30, 1996.............................. F-31
Consolidated Statements of Operations--Three Months Ended June 30, 1995
and 1996................................................................ F-32
Consolidated Statements of Cash Flows--Three Months Ended June 30, 1995
and 1996................................................................ F-33
Notes to Consolidated Financial Statements............................... F-34
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of Carson, Inc.:
We have audited the accompanying consolidated balance sheet of
Carson, Inc. (formerly DNL Savannah Holding Corp.) and its
subsidiaries as of March 31, 1996 and the related consolidated
statements of operations, changes in stockholders' equity, and cash
flows for the period from August 23, 1995 to March 31, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Carson,
Inc. and its subsidiaries as of March 31, 1996 and the results of
their operations and their cash flows for the period from August 23,
1995 to March 31, 1996 in conformity with generally accepted
accounting principles.
Atlanta, Georgia
June 21, 1996 (October 8, 1996 as to Note 14)
F-2
<PAGE>
CARSON, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 1,553
Accounts receivable, net of allowance for doubtful accounts of $531.. 12,611
Inventories.......................................................... 8,663
Other................................................................ 3,094
-------
Total current assets............................................... 25,921
PROPERTY, PLANT, AND EQUIPMENT--Net.................................... 11,986
GOODWILL--Net of accumulated amortization of $688...................... 46,633
OTHER ASSETS........................................................... 3,542
-------
$88,082
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $ 3,600
Accrued expenses..................................................... 5,354
Current maturities of long-term debt................................. 3,010
-------
Total current liabilities.......................................... 11,964
LONG-TERM DEBT......................................................... 63,778
OTHER LIABILITIES...................................................... 1,678
DEFERRED INCOME TAXES.................................................. 785
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none
issued.............................................................. --
Common stock:
Class A, voting, $.01 par value, 150,000,000 shares authorized, no
shares issued and outstanding..................................... --
Class B, nonvoting, $.01 par value, 2,000,000 shares authorized,
1,859,677 shares issued and outstanding........................... 19
Class C, voting, $.01 par value, 13,000,000 shares authorized,
9,510,323 shares issued and outstanding........................... 95
Paid-in capital...................................................... 8,557
Retained earnings.................................................... 1,206
-------
Total stockholders' equity......................................... 9,877
-------
$88,082
=======
See notes to consolidated financial statements.
F-3
<PAGE>
CARSON, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM AUGUST 23, 1995 TO MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
NET SALES.............................................................. $41,465
COST OF SALES.......................................................... 18,629
-------
Gross profit......................................................... 22,836
OPERATING EXPENSES:
Selling.............................................................. 9,581
General and administrative........................................... 5,061
Depreciation and amortization........................................ 1,331
-------
15,973
-------
OPERATING INCOME....................................................... 6,863
INTEREST EXPENSE....................................................... 4,487
OTHER INCOME........................................................... 182
-------
INCOME BEFORE INCOME TAXES............................................. 2,558
INCOME TAX PROVISION................................................... 1,352
-------
NET INCOME............................................................. $ 1,206
=======
NET INCOME PER SHARE................................................... $ .10
=======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................. 11,871
=======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CARSON, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
PERIOD FROM AUGUST 23, 1995 TO MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------
CLASS B CLASS C
------------- -------------
PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------ ------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of common stock.... 569 $ 6 5,799 $58 $11,936 $12,000
Issuance of common stock
in connection with
acquisition
of Predecessor......... 1,291 13 2,006 20 2,717 2,750
Carryover of Predecessor
basis.................. 1,705 17 (6,096) (6,079)
Net income.............. $1,206 1,206
----- --- ----- --- ------- ------ -------
BALANCE--March 31,
1996................... 1,860 $19 9,510 $95 $ 8,557 $1,206 $ 9,877
===== === ===== === ======= ====== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CARSON, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM AUGUST 23, 1995 TO MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income.......................................................... $ 1,206
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization..................................... 1,443
Provision for deferred income taxes............................... 805
Changes in assets and liabilities (excluding effects of acquisi-
tion):
Accounts receivable............................................. (2,385)
Inventories..................................................... (1,586)
Other current assets............................................ (970)
Other noncurrent assets......................................... 617
Accounts payable................................................ 1,360
Accrued expenses................................................ (1,677)
Other liabilities............................................... (28)
-------
Total adjustments............................................. (2,421)
-------
Net cash used in operating activities......................... (1,215)
INVESTING ACTIVITIES:
Acquisition of Predecessor (net of cash acquired)................... (65,300)
Purchases of property, plant, and equipment......................... (1,470)
-------
Net cash used in investing activities......................... (66,770)
FINANCING ACTIVITIES:
Proceeds from long-term borrowings.................................. 58,550
Principal payments on long-term debt................................ (1,012)
Sale of common stock................................................ 12,000
-------
Net cash provided by financing activities..................... 69,538
-------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................. 1,553
CASH AND CASH EQUIVALENTS at August 23, 1995.......................... --
-------
CASH AND CASH EQUIVALENTS at March 31, 1996........................... $ 1,553
=======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.......................................................... $ 3,991
=======
Income taxes...................................................... $ 2,497
=======
Non-cash financing activities:
Long-term debt issued in Acquisition.............................. $11,753
=======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND FOR THE PERIOD FROM
AUGUST 23, 1995 TO MARCH 31, 1996
1. ORGANIZATION AND BUSINESS
Carson, Inc. (formerly DNL Savannah Holding Corp. and also referred to
herein as the Company) was established in May 1995 and until August 1995
its operations were de minimus. On August 23, 1995, the Company acquired
all of the outstanding stock of Aminco, Inc. (also referred to as the
Predecessor). Aminco's operations were principally conducted by its wholly
owned subsidiary, Carson Products Company. Subsequent to the acquisition of
Aminco, Carson Products Company was merged into Aminco; the surviving
entity was renamed Carson Products Company. The accompanying financial
statements include the operating results of the Carson Products Company
from the acquisition date.
The Company is the leading manufacturer and marketer in the U.S. retail
ethnic hair care market for African-Americans. The Company is also a
leading global manufacturer and marketer of ethnic hair care products for
persons of African descent. The Company's more than 60 products are
marketed under five principal brand names. Certain of the Company's
international activities are conducted by its South African subsidiary.
The Company's acquisition of the Predecessor for approximately $95 million
in cash (including $6 million for fees and other costs directly associated
with the acquisition) has been accounted for as a purchase. Accordingly,
the purchase price has been allocated to the Predecessor's identifiable
assets and liabilities based on fair values at the acquisition date. The
excess of the purchase price over the fair value of the Predecessor's
identifiable net assets has been classified as goodwill.
The Company borrowed $56 million from various institutions, issued $11.8
million of Junior Subordinated Notes to certain previous shareholders of
the Predecessor, and sold $12 million of its common stock to finance the
acquisition (also see Note 7).
Certain previous shareholders of the Predecessor received 1,705,500 shares
of Class A Common Stock in the acquisition. Such share interest has been
carried over at such shareholders' proportionate equity in the book value
of Aminco (predecessor basis) in accordance with Emerging Issues Task Force
Issue No. 88-16, "Basis in Leveraged Buyout Transactions."
The purchase price of the Predecessor (net of the carryover of the negative
predecessor basis of approximately $6.1 million) has been allocated as
follows (in millions):
<TABLE>
<S> <C>
Current assets (including $17.9 of cash acquired)................... $37.9
Property, plant, and equipment...................................... 10.8
Goodwill............................................................ 47.2
Other assets........................................................ 4.5
Liabilities assumed................................................. (11.4)
-----
$89.0
=====
</TABLE>
In connection with the acquisition and its associated financing, the
Company also issued shares of its common stock to certain lenders and
individuals as follows:
(i)1,187,483 shares of Class C Common Stock and 1,291,177 shares of Class B
Common Stock were issued to lenders at the acquisition date with an
aggregate fair value of approximately $2.4 million and which has been
recorded as debt discount and netted against the carrying value of the
associated debt instrument. Such discount is being amortized using the
interest method over the life of the underlying debt.
F-7
<PAGE>
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND FOR THE PERIOD FROM
AUGUST 23, 1995 TO MARCH 31, 1996--(CONTINUED)
(ii) 818,640 shares of Class C Common Stock were issued to certain
individuals who assisted the Company in securing the acquisition and had a
fair value of approximately $360,000. These shares are being held in a
trust and are subject to certain voting and other restrictions. The fair
value of all shares issued to individuals has been recorded as additional
purchase price.
The fair value of all shares issued above was based on valuations obtained
from a third-party appraiser.
Entities affiliated with certain stockholders of the Company received $1.7
million in cash for their fees associated with assisting the Company with
its purchase of the Predecessor. Also, the Company paid consulting fees of
$219,000 to certain of such affiliated entities during the period from
August 23, 1995 to March 31, 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The accompanying financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany transactions and accounts have been eliminated.
Inventories--Inventories in the U.S. are valued at the lower of Last-In,
First-Out (LIFO) cost or market. Inventories of the South African
subsidiary are valued at the lower of First-In, First-Out (FIFO) cost or
market.
Property, Plant, and Equipment--Property, plant, and equipment is recorded
at assigned values or cost less an allowance for depreciation. The Company
capitalizes eligible expenditures with a cost greater than $1,000.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
Buildings......................................................... 42 years
Land improvements................................................. 20 years
Machinery and equipment........................................... 12 years
Furniture and fixtures............................................ 10 years
Office equipment.................................................. 8 years
Vehicles.......................................................... 5 years
Information systems............................................... 5 years
Intangible Assets--Goodwill is amortized over 40 years using the straight-
line method. Debt issue costs are amortized on the interest method over the
life of the related debt. Patents are amortized using the straight-line
method over 17 years. The Company periodically assesses the recoverability
of goodwill based on judgments as to future undiscounted cash flows from
operations.
Income Taxes--Deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying currently enacted statutory rates to
differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in the results of operations in the
period that includes the enactment date.
Revenue Recognition--Revenue from sales of manufactured goods are
recognized upon shipment to customers.
Research and Development Costs--Research and development costs (principally
for new products) are expensed as incurred and aggregated $250,000 for the
period from August 23, 1995 to March 31, 1996. These costs are included in
general and administrative expenses in the accompanying statement
of operations.
F-8
<PAGE>
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND FOR THE PERIOD FROM
AUGUST 23, 1995 TO MARCH 31, 1996--(CONTINUED)
Self-Insurance--The Company is self-insured for employee medical costs (up
to $35,000 annually per employee) and for product liability claims (up to
$500,000 annually in the aggregate). The Company carries medical and
liability insurance for amounts exceeding the self-insured limits in
medical and product liability claims. Medical claim costs are accrued based
upon the Company's estimates of the aggregate liability for medical claims
incurred using certain actuarial assumptions followed in the insurance
industry and based on Company experience.
Estimates of accrued liabilities for self-insured product liability claims
are based on an evaluation of the merits of individual claims and
historical claims experience; thus, the Company's ultimate liability may
exceed or be less than the amounts accrued. The methods of making such
estimates and establishing the resulting accrued liability are reviewed
continually and any adjustments resulting therefrom are reflected in
current earnings.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Foreign Currency Translation--Assets and liabilities of the Company's South
African operations are translated from South African Rand into U.S. dollars
at the rate of currency exchange at the end of the fiscal period. Revenues
and expenses are translated at average monthly exchange rates prevailing
during the year. Resulting translation differences are recognized as a
component of stockholders' equity. Adjustments resulting from translations
are immaterial to the accompanying financial statements.
Net Income Per Share--Net income per share is computed by dividing net
income by weighted average common shares outstanding. In accordance with
the rules of the Securities and Exchange Commission, all shares of common
stock issued prior to the Company's initial public offering are included in
weighted average shares outstanding as if they were issued at the Company's
formation.
Cash and Cash Equivalents--Cash and investments with maturities of three
months or less when purchased are considered cash and cash equivalents.
Fair Value of Financial Instruments--The carrying values of cash and cash
equivalents, accounts receivable, inventories, accounts payable, and
accrued liabilities approximate fair values due to the short-term
maturities of the instruments.
3. INVENTORIES
Inventories at March 31, 1996 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Raw materials....................................................... $4,562
Work-in-process..................................................... 1,002
Finished goods...................................................... 3,099
------
Total............................................................. $8,663
======
</TABLE>
There were no material differences between inventories valued on a LIFO
basis or their valuation on a FIFO basis at March 31, 1996.
4. OTHER CURRENT ASSETS
Other current assets at March 31, 1996 consist of the following (in
thousands):
<TABLE>
<S> <C>
Prepaid interest (Note 7).......................................... $1,090
Deferred income taxes.............................................. 785
Other.............................................................. 1,219
------
Total............................................................ $3,094
======
</TABLE>
F-9
<PAGE>
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND FOR THE PERIOD FROM
AUGUST 23, 1995 TO MARCH 31, 1996--(CONTINUED)
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31, 1996 is summarized as follows
(in thousands):
Land.............................................................. $ 545
Buildings and improvements........................................ 5,427
Machinery and equipment........................................... 5,806
Furniture and fixtures............................................ 277
Construction-in-progress.......................................... 282
-------
12,337
Less accumulated depreciation..................................... 351
-------
Total........................................................... $11,986
=======
Depreciation expense for property, plant, and equipment was $351,000 for
the period from August 23, 1995 to March 31, 1996.
6. OTHER ASSETS
Other assets at March 31, 1996 are summarized as follows (in thousands):
Deferred financing costs........................................... $3,275
Prepaid interest (Note 7).......................................... 433
Patents............................................................ 152
------
3,860
Less accumulated amortization...................................... 318
------
Total............................................................ $3,542
======
7. LONG-TERM DEBT
Long-term debt at March 31, 1996 is summarized as follows (in thousands):
Term loan......................................................... $29,000
Revolving line of credit.......................................... 7,500
Senior Subordinated Notes, interest at 12.5%, due 2002, net of
unamortized discount of $1,307................................... 16,693
Subordinated Notes, interest at 15%, due 2003, net of unamortized
discount of $996................................................. 2,004
Junior Subordinated Notes, interest at 10%, due 2002, net of
unamortized discount of $209..................................... 11,544
Other............................................................. 47
-------
66,788
Less current portion.............................................. 3,010
-------
$63,778
=======
During August 1995, the Company entered into various borrowing arrangements
in connection with its acquisition of the Predecessor (Note 1). The
principal terms of such arrangements are as follows:
F-10
<PAGE>
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND FOR THE PERIOD FROM
AUGUST 23, 1995 TO MARCH 31, 1996--(CONTINUED)
Term Loan and Revolving Line of Credit--The Company has a $40 million
credit facility (the "Senior Bank Facility") with a commercial bank. This
facility is comprised of a $30 million term loan repayable in quarterly
installments through 2001 and a $10 million revolving line of credit which
expires in July 2001. The Senior Bank Facility requires compliance with
certain financial tests and restricts certain activities including, but not
limited to, capital expenditures, creation of indebtedness, and payment of
dividends by Carson Products Company. Substantially all assets of the
Company, including the stock of its wholly owned subsidiaries, are pledged
as collateral under the Senior Bank Facility.
Borrowings under the Senior Bank Facility bear interest at a base rate as
defined (8.25% at March 31, 1996) plus 1.5% or LIBOR (5.4% at March 31,
1996) plus 3%. The weighted average rate on borrowings under the Senior
Bank Facility was 9.4% for the period from August 23, 1995 to March 31,
1996.
Borrowings under the line of credit are limited to percentages of certain
eligible assets. The line can also be used for letters of credit which,
when issued, reduce availability under the line; no letters of credit were
outstanding at March 31, 1996. At March 31, 1996, the Company had $2.5
million of unused capacity under the line of credit.
Subordinated Notes--The Senior Subordinated Notes, the Subordinated Notes,
and the Junior Subordinated Notes (collectively, the "Subordinated
Financing") are subordinate to debt outstanding under the term loan and
revolving line of credit. The terms of the Subordinated Financing contain
certain cross default provisions with the Senior Bank Facility. The Company
believes that it is not practicable to estimate the fair value of the
Subordinated Financing due to the lack of comparable securities and the
lack of a credit rating of the Company by an established rating agency.
Interest on the Senior Subordinated Notes is payable quarterly in arrears.
Interest on the Subordinated Notes and the Junior Subordinated Notes is
payable semi-annually in arrears and can be paid in cash or, at the
Company's option, by the issuance of additional subordinated notes with
similar terms. The Junior Subordinated Notes were issued to certain former
shareholders of the Predecessor and the Company prepaid interest thereon in
cash aggregating $2.2 million. The effective interest rate for the Senior
Subordinated Notes, Subordinated Notes, and Junior Subordinated Notes was
14.2%, 24.5%, and 10.5%, respectively.
Annual maturities of outstanding indebtedness at March 31, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 3,010
1998............................................................... 4,255
1999............................................................... 5,214
2000............................................................... 5,664
2001............................................................... 6,119
Thereafter......................................................... 42,526
-------
$66,788
=======
</TABLE>
At March 31, 1996, the Company did not comply with certain covenants of the
Senior Bank Facility and the Senior Subordinated Notes related to capital
expenditures and net worth. The Company has received waivers of these
events of default from its lenders (Note 14).
F-11
<PAGE>
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND FOR THE PERIOD FROM
AUGUST 23, 1995 TO MARCH 31, 1996--(CONTINUED)
8. ACCRUED LIABILITIES
Accrued liabilities at March 31, 1996 consist of the following (in
thousands):
<TABLE>
<S> <C>
Compensation and benefits.......................................... $2,227
Advertising........................................................ 1,340
Self insurance..................................................... 927
Interest........................................................... 384
Other.............................................................. 476
------
$5,354
======
</TABLE>
9.INCOME TAXES
Income tax expense for the period from August 23, 1995 to March 31, 1996
consists of (in thousands):
<TABLE>
<S> <C>
Current:
Federal.......................................................... $ 204
State............................................................ 33
Foreign.......................................................... 310
------
Total current provision........................................ 547
Deferred:
Federal.......................................................... 609
State............................................................ 114
Foreign.......................................................... 82
------
Total deferred provision....................................... 805
------
Total provision................................................ $1,352
======
</TABLE>
The following is a reconciliation of the statutory tax rate to the
Company's effective tax rate for the period from August 23, 1995 to March
31, 1996:
<TABLE>
<S> <C>
Statutory rate......................................................... 34%
State income taxes (net of federal benefit)............................ 4
Permanent differences (primarily nondeductible goodwill)............... 15
---
Effective rate......................................................... 53%
===
</TABLE>
F-12
<PAGE>
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND FOR THE PERIOD FROM
AUGUST 23, 1995 TO MARCH 31, 1996--(CONTINUED)
The effects of temporary differences which gave rise to the deferred tax
asset and liability at March 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
CURRENT LONG-TERM
------- ---------
<S> <C> <C>
Deferred tax assets related to:
Accrued expenses....................................... $522 $ 826
Allowance for doubtful accounts........................ 199
Package design costs................................... 412
Inventories............................................ 50
Other.................................................. 14
---- ------
785 1,238
Deferred tax liabilities related to:
Inventories............................................ (801)
Property, plant, and equipment......................... (1,222)
------
(2,023)
---- ------
$785 $ (785)
==== ======
</TABLE>
Deferred income taxes were not provided on undistributed earnings of
certain foreign subsidiaries ($1.0 million at March 31, 1996) because such
undistributed earnings are expected to be reinvested indefinitely overseas.
If these amounts were not considered permanently reinvested, additional
deferred taxes of approximately $125,000 would have been provided.
10. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan which covers substantially all U.S.
employees. Contributions to the plan are discretionary, as determined by
the Board of Directors. Contributions are made on an annual basis. The
Company contributed $246,000 to the plan for the period from August 23,
1995 to March 31, 1996.
The Company is obligated for retirement benefits to a former employee for
the remainder of his (and his spouse's) life. The expected present value of
this obligation ($1.7 million at March 31, 1996) is classified in other
liabilities in the accompanying balance sheet.
The Company provides postretirement health care benefits to a limited
number of key executives. The accumulated postretirement benefit obligation
("APBO") was $499,000 at March 31, 1996. For measurement purposes, the cost
of providing medical benefits was assumed to increase by 10% in the fiscal
year ended March 31, 1996, decreasing to an annual rate of 8% after March
31, 2000. The medical cost trend rate assumption could have an effect on
amounts reported. For example, an increase of 1% in the assumed rate of
increase would have an effect of increasing the APBO by $78,000 and the net
periodic postretirement benefit cost by $21,000. The weighted average
discount rate used in determining the APBO was 8%. Net periodic
postretirement benefit cost for the period from August 23, 1995 to March
31, 1996 was $9,000.
Certain members of senior management are eligible to receive incentive
compensation based on the future fair market value of the Company in excess
of $50 million subject to five year vesting requirements and payable in
cash in the year 2000 (or earlier upon a public offering or sale of the
Company). No expense was recognized for such incentives during the period
from August 23, 1995 to March 31, 1996 (based on management's estimate of
the Company's fair market value at March 31, 1996. Such estimate of fair
market value was based upon the same methodology and factors used to
determine the purchase price of the Predecessor, i.e. a multiple of annual
cash flow).
F-13
<PAGE>
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND FOR THE PERIOD FROM
AUGUST 23, 1995 TO MARCH 31, 1996--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
The Company is a party to lawsuits incidental to its business. Management
believes that the ultimate resolution of these matters will not have a
materially adverse impact on the business or financial condition and
operations of the Company.
12. U.S. AND FOREIGN OPERATIONS
The Company's operations are located in the United States and South Africa.
Financial information by geographic area for the period from August 23,
1995 to March 31, 1996 is as follows (in thousands):
<TABLE>
<S> <C>
Net sales by:
United States:
Domestic...................................................... $31,775
Export........................................................ 5,227
South Africa.................................................... 4,463
-------
$41,465
=======
Operating Profit:
United States................................................... $ 5,861
South Africa.................................................... 1,002
-------
$ 6,863
=======
Identifiable assets (at end of period):
United States................................................... $83,538
South Africa.................................................... 4,404
-------
$87,942
=======
</TABLE>
Transfers of product from the United States to South Africa were not
material during the period presented above. Export sales from the United
States include sales to customers in Europe, the Carribean, and Africa.
The Company is in the process of effecting an initial public offering of
approximately 25% of the common stock of its South African subsidiary. The
subsidiary expects to receive net proceeds of approximately $4.2 million
from this sale (which will result in a gain to the Company of approximately
$2.8 million which will be recorded in paid-in capital upon the completion
of the public offering). Proceeds from the offering will be used by the
subsidiary to acquire a manufacturing facility in South Africa and for
general corporate purposes.
13. FINANCIAL INFORMATION OF CARSON, INC. (PARENT COMPANY)
The assets of Carson, Inc. on an unconsolidated basis consist solely of its
investment in Carson Products Company. During the period from August 23,
1995 to March 31, 1996, the results of operations of Carson, Inc. consisted
solely of its equity in the earnings of Carson Products Company and its
cash flows consisted solely of the cash provided by financing activities of
$12 million from the sale of its common stock and cash used in investing
activities of $12 million for its investment in Carson Products Company.
F-14
<PAGE>
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND FOR THE PERIOD FROM
AUGUST 23, 1995 TO MARCH 31, 1996--(CONTINUED)
14. SUBSEQUENT EVENTS
During August 1996, the long-term incentive compensation agreements (Note
10) were restructured to allow such employees to purchase shares of the
Company's common stock as described below; certain future cash awards under
the restructured agreements are still possible. The Company may record
additional compensation charges through 2000 for possible cash awards under
the restructured agreements.
During August 1996, several outside directors and members of senior
management purchased 501,191 shares of the Company's Common Stock. The
purchase of such shares by senior management was financed with $1.3 million
(net of discount) in non-interest bearing long-term full recourse loans
from the Company. The Company will record additional non-cash compensation
expense of approximately $5.8 million (with no associated income tax
benefits) during the three months ended September 30, 1996 for the excess
of the initial public offering price over the actual purchase price of such
shares and the share awards made by Carson South Africa to certain members
of its management.
During August 1996, the Company received waivers of noncompliance with
certain covenants of its various borrowing arrangements from its lenders
(Note 7.)
On October 8, 1996, the Company amended its Certificate of Incorporation to
change the authorized capital stock to Class A Common Stock, Class B Common
Stock, Class C Common Stock, and Preferred Stock (each with a par value of
$.01 per share). Each share of the Company's former Class A Common Stock
was converted into 11,370 shares of newly created Class C Common Stock, and
each share of former Class B Common Stock was converted into 11,370 shares
of newly created Class B Common Stock. These stock conversions have been
given retroactive recognition in the accompanying financial statements.
F-15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Directors of Aminco, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Aminco, Inc. and its subsidiaries (the "Company") at March 31, 1995, and the
results of their operations and their cash flows for each of the two years in
the period ended March 31, 1995 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Notes 2 and 10 to the financial statements, the Company
changed its methods of accounting for investment securities and accounting for
postretirement benefits other than pensions during the fiscal year ended March
31, 1995. As discussed in Note 6 to the financial statements, the Company
changed its method of accounting for income taxes during the fiscal year ended
March 31, 1994.
PRICE WATERHOUSE LLP
Atlanta, Georgia
May 8, 1995
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of Carson, Inc.:
We have audited the accompanying consolidated statements of income, changes
in stockholders' equity, and cash flows of Aminco, Inc. and its subsidiaries
(the "Company") for the period from April 1, 1995 to August 22, 1995. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of Aminco,
Inc. and its subsidiaries for the period from April 1, 1995 to August 22, 1995
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 2, 1996
F-17
<PAGE>
AMINCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................................. $ 1,620
Investments available for sale, at market (Note 2)................ 4,699
Accounts receivable (less allowance for doubtful accounts of
$242)............................................................ 10,338
Inventories (Note 3).............................................. 5,980
Other current assets.............................................. 696
-------
Total current assets............................................ 23,333
PROPERTY, PLANT, AND EQUIPMENT--Net of accumulated depreciation
(Note 4)........................................................... 9,696
INVESTMENTS AVAILABLE FOR SALE--At market (Note 2).................. 9,702
OTHER NONCURRENT ASSETS............................................. 1,132
-------
$43,863
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................. $ 2,685
Accrued expenses (Note 7)......................................... 5,508
-------
Total current liabilities....................................... 8,193
OTHER LIABILITIES (Note 9).......................................... 1,312
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY (Notes 8 and 9):
Preferred stock, $10 par value, 700,000 shares authorized, 606,752
issued (liquidation preference of $15,243)....................... 6,068
Common stock, $3 par value, 500,000 shares authorized, 406,699 is-
sued............................................................. 1,220
Additional paid-in capital........................................ 308
Retained earnings................................................. 33,187
Valuation adjustment, investments available for sale, net of in-
come taxes....................................................... 283
-------
41,066
Treasury stock, at cost........................................... (6,708)
-------
34,358
-------
$43,863
=======
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
AMINCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
MARCH 31, APRIL 1, 1995
--------------- TO
1994 1995 AUGUST 22, 1995
------- ------- ---------------
<S> <C> <C> <C>
NET SALES.................................... $50,108 $58,126 $26,854
COST OF GOODS SOLD........................... 23,622 25,692 11,513
------- ------- -------
Gross margin............................... 26,486 32,434 15,341
EXPENSES:
Selling.................................... 14,639 17,888 7,467
General and administrative................. 6,834 5,246 2,276
Depreciation and amortization.............. 828 1,085 502
------- ------- -------
22,301 24,219 10,245
------- ------- -------
INCOME FROM CONTINUING OPERATIONS............ 4,185 8.215 5,096
OTHER INCOME--Net............................ 108 150 17
INTEREST EXPENSE............................. 97 136 56
------- ------- -------
OPERATING INCOME............................. 4,196 8,229 5,057
INVESTMENT INCOME:
Dividends and interest..................... 396 549 297
Net gain on sales and maturities of invest-
ments..................................... 195 84 823
------- ------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CHANGES IN ACCOUNTING
PRINCIPLES.................................. 4,787 8,862 6,177
PROVISION FOR INCOME TAXES (Note 6).......... 1,704 3,174 2,243
------- ------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE
CHANGES IN ACCOUNTING PRINCIPLES............ 3,083 5,688 3,934
DISCONTINUED OPERATIONS (Note 11):
Loss from operations of Fine Products (net
of income tax benefit of $314)............ 574 -- --
Loss on disposal of assets of Fine Products
(net of income tax benefit of $354)....... 635 -- --
------- ------- -------
INCOME BEFORE CHANGES IN ACCOUNTING PRINCI-
PLES........................................ 1,874 5,688 3,934
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES--
Net of income taxes (Notes 1, 6, and 10).... 23 (250) --
------- ------- -------
NET INCOME................................... 1,897 5,438 3,934
DIVIDENDS ON PREFERRED STOCK--Declared $2.00
per share in 1994 and 1995.................. 1,113 1,109 554
------- ------- -------
INCOME AVAILABLE TO ALL SHAREHOLDERS......... $ 784 $ 4,329 $ 3,380
======= ======= =======
50% OF INCOME ALLOCABLE TO COMMON STOCK...... $ 392 $ 2,164 $ 1,690
INCOME ALLOCABLE TO PREFERRED STOCK.......... 1,505 3,274 2,244
------- ------- -------
NET INCOME................................... $ 1,897 $ 5,438 $ 3,934
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
AMINCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1994 AND 1995 AND
PERIOD FROM APRIL 1, 1995 TO AUGUST 22, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED
STOCK COMMON STOCK ADDITIONAL
-------------- -------------- PAID-IN RETAINED VALUATION ESOP DEBT TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT GUARANTEE STOCK TOTAL
------- ------ ------- ------ ---------- -------- ---------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE--March 31,
1993................... 606,752 $6,068 406,699 $1,220 $187 $28,074 $(552) $(4,524) $30,473
Net income.............. 1,897 1,897
Cash dividends, pre-
ferred stock........... (1,113) (1,113)
Reduction in ESOP debt
guarantee.............. 264 264
Purchase of treasury
stock.................. (1,913) (1,913)
Issuance of treasury
stock.................. 27 64 91
------- ------ ------- ------ ---- ------- ---- ----- ------- -------
BALANCE--March 31,
1994................... 606,752 6,068 406,699 1,220 214 28,858 (288) (6,373) 29,699
Net income.............. 5,438 5,438
Cash dividends, pre-
ferred stock........... (1,109) (1,109)
Reduction in ESOP debt
guarantee.............. 288 288
Purchase of treasury
stock.................. (567) (567)
Issuance of treasury
stock.................. 94 232 326
Unrealized gains on in-
vestments available for
sale, net of income
taxes.................. $283 283
------- ------ ------- ------ ---- ------- ---- ----- ------- -------
BALANCE--March 31,
1995................... 606,752 6,068 406,699 1,220 308 33,187 283 (6,708) 34,358
Net income.............. 3,934 3,934
Cash dividends, pre-
ferred stock........... (554) (554)
Purchase of treasury
stock.................. 296 296
------- ------ ------- ------ ---- ------- ---- ----- ------- -------
BALANCE--August 22,
1995................... 606,752 $6,068 406,699 $1,220 $308 $36,567 $283 $ -- $(6,412) $38,034
======= ====== ======= ====== ==== ======= ==== ===== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
AMINCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
MARCH 31, APRIL 1, 1995
---------------- TO
1994 1995 AUGUST 22, 1995
------- ------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................. $ 1,897 $ 5,438 $ 3,934
Adjustments to reconcile net income to net
cash provided by operating activities:
Stock issued for compensation............ 91 326
Depreciation and amortization............ 1,020 1,085 502
Cumulative effect of accounting change,
net of income taxes..................... (23) 250 62
Provision (benefit) for deferred income
taxes................................... (145) 25
Loss on disposal of Fine Products........ 989
Loss on sale of assets................... 101
Net gain on sales of investments......... (195) (84) (823)
Gain on sale of trademark................ (328) (299)
(Decrease) increase in cash due to
changes in:
Accounts receivable.................... (800) (1,275) (588)
Inventories............................ (607) 467 190
Other current assets................... (675) 313 (546)
Other noncurrent assets................ 150 172 (630)
Accounts payable....................... 399 755 (732)
Accrued expenses....................... 1,813 479 1,688
Other liabilities...................... (465) 29 (77)
------- ------- -------
Total adjustments.................... 1,224 2,243 (853)
------- ------- -------
Net cash provided by operating activ-
ities............................... 3,121 7,681 3,081
INVESTING ACTIVITIES:
Purchases of investments................... (12,055) (15,704) (6,760)
Proceeds from sale of assets of Fine Prod-
ucts...................................... 1,073
Proceeds from sale of trademark............ 328 299
Proceeds from sales and maturities of in-
vestments................................. 10,520 12,498 21,428
Purchase of property, plant, and equip-
ment...................................... (1,515) (979) (483)
Package design costs....................... (984) (356) (244)
Proceeds from sale of property, plant, and
equipment................................. 5 108
------- ------- -------
Net cash (used in) provided by investing
activities................................. (2,633) (4,237) 14,049
FINANCING ACTIVITIES:
Dividends paid, preferred stock............ (1,113) (1,109) (554)
Purchases of treasury stock................ (1,913) (567) (296)
Checks outstanding......................... 1,043 (1,043)
------- ------- -------
Net cash used in financing activi-
ties................................ (1,983) (2,719) (850)
------- ------- -------
NET INCREASE (DECREASE) IN CASH.............. (1,495) 725 16,280
CASH--Beginning of period.................... 2,390 895 1,620
------- ------- -------
CASH--End of period.......................... $ 895 $ 1,620 $17,900
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
AMINCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 AND 1995 AND THE PERIOD
FROM APRIL 1, 1995 TO AUGUST 22, 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Aminco, Inc.
and subsidiaries (the "Company"). The principal subsidiaries are Aminco,
Inc. (a Georgia corporation), Carson Products Company ("Carson Products"),
and Carson South Africa ("Carson-South Africa"). Carson Products is a
manufacturer and marketer of ethnic health and beauty-aid products. Carson-
South Africa, a subsidiary formed on May 18, 1993, is a foreign subsidiary
which distributes ethnic health and beauty-aid products, produced under
contract, in the southern cone of Africa. Fine Products Company, a
subsidiary which manufactured and distributed candy products, is inactive;
the majority of its assets were sold in 1994 (see Note 11).
Significant accounting policies followed by the Company are summarized
below:
a. Consolidation--The consolidated financial statements include the
accounts of the Company. All significant intercompany transactions and
balances have been eliminated in the consolidation.
b. Changes in Accounting Principles--As discussed in Note 2, the Company
adopted Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("FAS 115"), effective April
1, 1994, the first day of the year ended March 31, 1995.
As discussed in Note 10, the Company adopted Financial Accounting
Standard No. 106 "Accounting for Postretirement Benefits Other than
Pensions" ("FAS 106"), effective April 1, 1994, the first day of the
year ended March 31, 1995.
As discussed in Note 6, the Company adopted Financial Accounting
Standard No. 109, "Accounting for Income Taxes" ("FAS 109"), effective
April 1, 1993, the first day of the year ended March 31, 1994. The
adoption of FAS 109 changed the Company's method of accounting for
income taxes from the deferred method ("APB 11") to an asset and
liability approach.
c. Revenue Recognition--Revenues from sales of manufactured goods are
recognized as these goods are shipped to customers. Net export sales
aggregated $5,918,000, $7,383,000, and $4,467,000 or 11.8%, 12.7%, and
16.6% of net sales for the years ended March 31, 1994 and 1995 and the
period from April 1, 1995 to August 23, 1995, respectively.
d. Investments Available for Sale--In conjunction with the adoption of FAS
115, management has classified all investments as available for sale.
Investments available for sale are carried at estimated fair value with
unrealized gains and losses, net of deferred income taxes, recorded as a
separate component of shareholders' equity.
Investments available for sale, current, include money market funds and
U.S. Treasury securities which mature within one year. These assets are
retained to meet the Company's current cash operating requirements.
F-22
<PAGE>
AMINCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 AND 1995 AND FOR THE PERIOD
FROM APRIL 1, 1995 TO AUGUST 22, 1995--(CONTINUED)
Investments available for sale, noncurrent, include money market funds,
U.S. Treasury securities, corporate bonds, foreign investments,
marketable equity securities, and other long-term investments primarily
consisting of precious metals. Most of these assets are managed by an
investment advisor and are assets which management currently intends to
hold to meet future obligations related to the Carson Employee Stock
Ownership Plan ("ESOP") upon the retirement of employees. U.S. Treasury
securities included in investments available for sale, noncurrent,
mature at various times during the period through March 1, 1999.
In determining gains and losses, the specific identification method is
used to determine the cost of investments.
e. Inventories--Inventories are valued at the lower of cost (last-in,
first-out method) ("LIFO") or market.
f. Depreciation and Amortization--Depreciation of property and equipment is
computed on the straight-line method for financial reporting purposes
and accelerated methods for income tax purposes over estimated useful
lives ranging from three to forty-five years. Goodwill, formulae,
trademarks, and package design costs of $1,128,000 at March 31, 1995,
net of accumulated amortization, are included in other noncurrent assets
in the accompanying balance sheet and are amortized on a straight-line
method over estimated useful lives ranging from four to twenty years.
g. Advertising--Advertising costs are expensed as incurred by the Company.
Advertising costs, included in selling expense in the accompanying
income statements, aggregated $4,922,000, $7,181,000, and $3,501,000 for
the years ended March 31, 1994 and 1995 and the period from April 1,
1995 to August 22, 1995, respectively.
h. Statements of Cash Flows--Supplemental disclosures of cash flows
information follows (in thousands):
<TABLE>
<CAPTION>
PERIOD
FROM
YEAR ENDED APRIL 1,
MARCH 31, 1995 TO
------------- AUGUST 22,
1994 1995 1995
------ ------ ----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest........................................ $ 176 $ 136 $ 56
Income taxes.................................... 1,602 2,654 457
Stock issued for compensation..................... 91 326 --
</TABLE>
i. Research and Development Costs--Research and development costs
(principally for new products) are expensed as incurred and aggregated
$404,000, $323,000, and $160,000 for the years ended March 31, 1994 and
1995 and the period from April 1, 1995 to August 22, 1995, respectively,
and are included in general and administrative expenses in the
Consolidated Statements of Income.
2. INVESTMENTS AVAILABLE FOR SALE
Effective April 1, 1994, the Company adopted FAS 115. The effect of the
adoption was to increase investments available for sale by $186,000 for net
unrealized gains, reduce the net deferred tax asset by $69,000, calculated
using an effective tax rate of 37%, and to increase shareholders' equity by
$117,000. For the year ended March 31, 1995, investments available for sale
increased by an additional $263,000 for
F-23
<PAGE>
AMINCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 AND 1995 AND FOR THE PERIOD
FROM APRIL 1, 1995 TO AUGUST 22, 1995--(CONTINUED)
net unrealized gains, the net deferred tax asset decreased by an additional
$97,000, and shareholders' equity increased by $166,000 to $283,000.
The aggregate cost and market values of investments available for sale
carried at fair market value as of March 31, 1995 were as follows (in
thousands):
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------ ---------- ---------- ------
<S> <C> <C> <C> <C>
Investments available for sale, cur-
rent:
Money market funds................. $3,718 $3,718
U.S. Treasury securities........... 957 $ 24 981
------ ----- ------
Total current.................... $4,675 $ 24 $4,699
====== ===== ======
Investments available for sale,
noncurrent:
Money market funds................. $ 376 $ 376
U.S. Treasury securities........... 3,528 $ 8 $ (54) 3,482
Corporate bonds.................... 752 14 766
Foreign investments................ 1,263 (119) 1,144
Marketable equity securities....... 2,862 704 (31) 3,535
Other.............................. 496 (97) 399
------ ----- ----- ------
Total noncurrent................. $9,277 $ 726 $(301) $9,702
====== ===== ===== ======
</TABLE>
For the year ended March 31, 1994, proceeds from the sales and maturities
of investment securities were $10,520,000, resulting in gross realized
gains of $195,000 and no gross realized losses. For the year ended March
31, 1995, proceeds from the sale and maturities of investments available
for sale were $12,498,000, resulting in gross realized gains of $100,000
and gross realized losses of $16,000.
For the period from April 1, 1995 to August 22, 1995, proceeds from the
sale and maturity of investments available for sale were $21,428,000,
resulting in gross realized gains of $1,029,000 and gross realized losses
of $206,000.
3. INVENTORIES
The components of inventories at March 31, 1995 are summarized as follows
(in thousands):
<TABLE>
<S> <C>
Raw materials...................................................... $3,403
Work-in-process.................................................... 909
Finished goods..................................................... 3,081
LIFO reserve....................................................... (1,413)
------
$5,980
======
</TABLE>
If valued on the first-in, first-out ("FIFO") method, inventories would
have been $1,413,000 higher as of March 31, 1995. Income before income
taxes would have been $600,000 and $85,000 higher for the years ended March
31, 1994 and 1995, respectively.
During the period from April 1, 1995 to August 22, 1995, inventory
quantities were reduced which resulted in a liquidation of LIFO inventory
layers carried at lower costs which prevailed in prior years. The effect of
this liquidation was to decrease cost of goods sold by $399,000 and to
increase net income by approximately $240,000.
F-24
<PAGE>
AMINCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 AND 1995 AND FOR THE PERIOD
FROM APRIL 1, 1995 TO AUGUST 22, 1995--(CONTINUED)
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31, 1995 is summarized as follows
(in thousands):
<TABLE>
<S> <C>
Buildings and improvements......................................... $7,367
Machinery and equipment............................................ 6,397
Furniture and fixtures............................................. 327
Construction-in-progress........................................... 125
------
14,216
Less accumulated depreciation...................................... 5,138
------
9,078
Land............................................................... 618
------
$9,696
======
</TABLE>
Depreciation expense for property, plant, and equipment was $678,000,
$679,000, and $322,000 for the years ended March 31, 1994 and 1995 and for
the period from April 1, 1995 to August 22, 1995, respectively.
5. LINES OF CREDIT
At March 31, 1995, the Company had lines of credit totaling $5,000,000 with
banks. Interest is payable at the prime rate. There were no borrowings
under lines of credit during the years ended March 31, 1994 and 1995. The
prime rate at March 31, 1995 was 9%.
6. INCOME TAXES
In April 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). The adoption
of FAS 109 changes the Company's method of accounting for income taxes from
the deferred method APB 11 to an asset and liability approach. Previously,
the Company deferred the past tax effects of timing differences between
financial reporting and taxable income. The asset and liability approach
requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of other assets and liabilities.
The difference at April 1, 1993 between deferred taxes accounted for under
APB 11 and deferred taxes accounted for under FAS 109 resulted in a benefit
of $23,000 and is reflected in the accompanying income statement for the
year ended March 31, 1994 as the effect of a change in accounting
principle.
F-25
<PAGE>
AMINCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 AND 1995 AND FOR THE PERIOD
FROM APRIL 1, 1995 TO AUGUST 22, 1995--(CONTINUED)
The provision for income taxes is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
MARCH 31, APRIL 1, 1995
-------------- TO
1994 1995 AUGUST 22, 1995
------ ------ ---------------
<S> <C> <C> <C>
Provision for income taxes on continuing
operations:
Current:
Federal............................. $1,678 $2,760 $1,744
State............................... 162 294 333
Foreign............................. 9 95 104
------ ------ ------
1,849 3,149 2,181
Deferred:
Federal............................. (135) 23 52
State............................... (10) 2 10
------ ------ ------
(145) 25 62
------ ------ ------
1,704 3,174 2,243
Benefit for income taxes on discontinued
operations:
Loss from operations on Fine Prod-
ucts................................. (314)
Loss on disposal on Fine Products..... (354)
------
(668)
Benefit for adoption of FAS 106......... (147)
------ ------ ------
Net provision for income taxes...... $1,036 $3,027 $2,243
====== ====== ======
The following is a reconciliation of the statutory tax rate to the Company's
effective tax rate:
<CAPTION>
YEAR ENDED PERIOD FROM
MARCH 31, APRIL 1, 1995
-------------- TO AUGUST 22,
1994 1995 1995
------ ------ ---------------
<S> <C> <C> <C>
Statutory rate.......................... 34.0% 34.0% 34.0%
State income taxes (net of federal bene-
fit)................................... 4.0 4.0 4.0
Other items............................. (2.4) (2.2) (1.7)
------ ------ ------
Effective rate.......................... 35.6% 35.8% 36.3%
====== ====== ======
</TABLE>
F-26
<PAGE>
AMINCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 AND 1995 AND FOR THE PERIOD
FROM APRIL 1, 1995 TO AUGUST 22, 1995--(CONTINUED)
The effects of the temporary differences which gave rise to deferred tax
assets and liabilities at March 31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
CURRENT LONG-TERM
------- ---------
<S> <C> <C>
Deferred tax assets related to:
Accrued expenses....................................... $312
Allowance for doubtful accounts........................ 78
Deferred compensation.................................. $640
Other.................................................. 15 153
---- ----
405 793
Deferred tax liabilities related to:
Property, plant, and equipment......................... (694)
Other.................................................. (111) (167)
---- ----
(111) (861)
---- ----
$294 $(68)
==== ====
</TABLE>
Deferred income taxes were not provided on undistributed earnings of
certain foreign subsidiaries because such undistributed earnings have been
immaterial and are expected to be reinvested indefinitely overseas.
The current deferred tax assets of $294,000 at March 31, 1995 are included
in the accompanying financial statements in other current assets. The long-
term deferred tax liabilities of $68,000 at March 31, 1995 are included in
other liabilities.
7. ACCRUED EXPENSES
Accrued expenses at March 31, 1995 consist of (in thousands):
<TABLE>
<S> <C>
Compensation and benefits.......................................... $2,532
Advertising........................................................ 1,355
Self-insurance..................................................... 818
Other.............................................................. 803
------
$5,508
======
</TABLE>
F-27
<PAGE>
AMINCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 AND 1995 AND FOR THE PERIOD
FROM APRIL 1, 1995 TO AUGUST 22, 1995--(CONTINUED)
8.CAPITAL STOCK
<TABLE>
<CAPTION>
MARCH 31, 1995
--------------
<S> <C>
Preferred stock ($10.00 par):
Number of shares:
Authorized............................................... 700,000
=======
Issued................................................... 606,752
=======
Common stock ($3.00 par):
Number of shares:
Authorized............................................... 500,000
=======
Issued................................................... 406,699
=======
Treasury stock:
Number of shares:
Preferred................................................ 52,461
=======
Common................................................... 84,445
=======
Cost (in thousands):
Preferred................................................ $ 1,344
Common................................................... 5,364
-------
$ 6,708
=======
Liquidation preference of preferred shares outstanding (in
thousands).................................................. $15,243
=======
</TABLE>
Seven hundred thousand shares of preferred stock are authorized with the
first 675,000 shares designated as Series A. The voting rights and dividend
rights of the preferred stock other than Series A will be determined by the
Company's Board of Directors when and if they are issued.
Dividends on the Series A preferred stock at an annual rate of $2 are
payable in preference to dividends on shares of regular common stock.
Series A preferred stock participates as a class in any further dividends
and receives 50% of such further dividends, with the remaining 50% being
attributed to common stock. The Series A preferred stock is redeemable at
the option of the Company at a price of $27.50 per share. Upon redemption,
no current or accumulated dividends shall be paid. No dividends can be paid
on common stock until all current Series A preferred dividends, as well as
dividends in arrears, have been satisfied.
There are no dividends in arrears on Series A preferred stock at March 31,
1995. Votes per share are 15 for Series A preferred stock and one for
common stock.
9.STOCK AND OTHER COMPENSATION PLANS
Carson Products has a defined contribution profit sharing plan covering
substantially all Carson Products employees. Contributions to the plan,
which are discretionary, are determined by the Board of Directors and
funded annually. Profit sharing contributions were $220,000, $190,000, and
$176,000 in the years ended March 31, 1994 and 1995 and for the period from
April 1, 1995 to August 22, 1995, respectively.
F-28
<PAGE>
AMINCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 AND 1995 AND FOR THE PERIOD
FROM APRIL 1, 1995 TO AUGUST 22, 1995--(CONTINUED)
The Company has entered into a deferred compensation agreement with an
officer who retired in 1991 which provides for annual benefits equal to a
percentage of his average salary for the two years preceding his
retirement. Such benefits continue for as long as he or his spouse shall
live. The Company has accrued an amount equal to the present value of the
computed future payments under the agreement ($1,241,000 at March 31,
1995), which is classified in other liabilities in the accompanying balance
sheet.
During the years ended March 31, 1994 and 1995, respectively, the Company
issued, from treasury stock, 1,100 and 1,210 shares of common stock with an
independently-appraised value of $91,000 and $107,000 to a key executive in
accordance with his employment agreement. Additional shares may be issued
in future years contingent upon continued employment.
During the year ended March 31, 1995, the Company issued 2,460 shares of
common stock with an appraised value of $219,000 to a major shareholder
employed by the Company.
During the year ended March 31, 1985, Carson Products established an ESOP
which covers substantially all Carson Products employees. In February 1985,
the ESOP borrowed $2,000,000 from a bank and acquired 232,410 shares of the
Company's common stock from certain existing shareholders. Under the loan
agreement, the Company guaranteed the loan and was obligated to make annual
contributions sufficient to enable the ESOP to repay the loan, including
interest. This obligation of the ESOP was recorded in the Company's
accounts as a liability and as a reduction of shareholders' equity. The
liability and the reduction of shareholders' equity were both decreased
when the ESOP made payments on the loan. The liability was paid in full by
February 1995. The Company made contributions to the ESOP of $298,000 and
$254,000 for the years ended March 31, 1994 and 1995, respectively.
10.POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Carson Products provides postretirement health care benefits to a limited
number of key executives who meet applicable eligibility requirements.
Effective April 1, 1994, the first day of the year ended March 31, 1995,
Carson Products adopted FAS 106 which requires accrual of the expected cost
of providing postretirement benefits to these executives and their spouses
during the years that the executives provide services and become eligible
for benefits. Prior to April 1, 1994, Carson Products expensed the costs of
health care benefits provided to retirees in the period in which these
costs were paid.
The cumulative effect of this change in accounting principle was a one-time
charge of $397,000 before taxes, or $250,000 net of tax benefits calculated
at an estimated effective tax rate of 37%.
At March 31, 1995, Carson Products recorded a liability of $420,000
representing the accumulated postretirement benefit obligation (APBO) for
retirees and active executives. This liability was calculated using the
following assumptions.
<TABLE>
<S> <C>
Discount rate.......................................................... 8%
Healthcare cost trend rate:
First five years..................................................... 10%
Next five years...................................................... 8%
Thereafter........................................................... 6%
</TABLE>
The medical cost trend rate assumption could have an effect on amounts
reported. For example, an increase in 1% in the assumed rate of increase
would have an effect of increasing the APBO by $53,000 and the net
postretirement benefit cost by $14,000. The cost of the benefits for the
year ended March 31, 1995 and the period April 1, 1995 to August 22, 1995,
primarily relating to interest cost, was approximately $32,000 and $10,000,
respectively.
F-29
<PAGE>
AMINCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 AND 1995 AND FOR THE PERIOD
FROM APRIL 1, 1995 TO AUGUST 22, 1995--(CONTINUED)
11.DISPOSAL OF FINE PRODUCTS
Effective January 31, 1994, the Company discontinued operations of Fine
Products and sold certain assets of Fine Products, to include inventories,
fixed assets, and trademarks for proceeds of $1,073,000. The Company
incurred losses from operations of approximately $574,000, net of tax
benefits of $314,000 for the year ended March 31, 1994. Additionally,
during fiscal year 1994, the Company recorded a loss on the sale of certain
assets of Fine Products of approximately $635,000, net of tax benefits of
approximately $354,000.
12.COMMITMENTS AND CONTINGENCIES
The nature of the Company's business results in a certain amount of
litigation. Accordingly, the Company is a party (as plaintiff and
defendant) to lawsuits incidental to its business. Management believes that
the ultimate resolution of these matters will not have a material adverse
effect on the business, financial condition, results of operations or cash
flows of the Company.
F-30
<PAGE>
CARSON, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 867
Accounts receivable (less allowance for doubtful accounts of
$641)........................................................ 14,169
Inventories................................................... 10,177
Other current assets.......................................... 2,090
-------
Total current assets........................................ 27,303
PROPERTY, PLANT, AND EQUIPMENT--Net of accumulated deprecia-
tion........................................................... 12,337
INVESTMENT...................................................... 3,000
GOODWILL........................................................ 46,335
OTHER........................................................... 3,271
-------
$92,246
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................. $ 3,678
Accrued expenses.............................................. 6,255
Current maturities of long-term debt.......................... 2,510
-------
Total current liabilities................................... 12,443
LONG-TERM DEBT.................................................. 67,219
DEFERRED INCOME TAXES........................................... 827
OTHER LIABILITIES............................................... 1,666
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock............................................... --
Common stock.................................................. 114
Paid-in capital............................................... 8,557
Retained earnings............................................. 1,514
Foreign currency translation adjustment....................... (94)
-------
Total stockholders' equity.................................. 10,091
-------
$92,246
=======
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE>
CARSON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------- -------
THREE MONTHS ENDED
JUNE 30,
-------------------
1995 1996
----------- -------
<S> <C> <C>
NET SALES.................................................................................................. $17,271 $18,799
COST OF GOODS SOLD......................................................................................... 7,351 8,135
------- -------
Gross profit........................................................................................... 9,920 10,664
EXPENSES:
Selling.................................................................................................. 4,938 4,713
General and administrative............................................................................... 1,607 1,960
Incentive compensation................................................................................... 800
Depreciation and amortization............................................................................ 301 629
------- -------
6,846 8,102
------- -------
OPERATING INCOME........................................................................................... 3,074 2,562
INTEREST EXPENSE........................................................................................... 34 1,826
OTHER INCOME (EXPENSE)..................................................................................... 77 (6)
INVESTMENT INCOME:
Dividends and interest................................................................................... 157 43
Net gain on sales and maturities of investments.......................................................... 94
------- -------
INCOME BEFORE INCOME TAXES................................................................................. 3,368 773
PROVISION FOR INCOME TAXES................................................................................. 1,230 465
------- -------
NET INCOME................................................................................................. $ 2,138 $ 308
======= =======
NET INCOME PER SHARE....................................................................................... $ .03
=======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................................................................. 11,871
=======
</TABLE>
See notes to consolidated financial statements.
F-32
<PAGE>
CARSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------- -------
THREE MONTHS ENDED
JUNE 30,
-------------------
1995 1996
----------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................................................... $2,138 $ 308
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.......................................................................... 301 682
Net gain on sales and maturities of investments........................................................ (94)
Foreign currency translation adjustment................................................................ (94)
Provision for deferred income taxes.................................................................... 43
(Decrease) increase in cash due to changes in:
Accounts receivable.................................................................................. (1,166) (1,558)
Inventories.......................................................................................... (27) (1,514)
Other current assets................................................................................. 291 1,004
Other noncurrent assets.............................................................................. (3) 271
Accounts payable..................................................................................... (900) 78
Accrued expenses..................................................................................... 26 1,157
Other liabilities.................................................................................... (4) (12)
------ ------
Total adjustments.................................................................................. (1,576) 57
------ ------
Net cash provided by operating activities.......................................................... 562 365
INVESTING ACTIVITIES:
Investment in AM Cosmestics.............................................................................. (3,000)
Purchases of investments................................................................................. (1,109)
Proceeds from sales of maturities of investments......................................................... 1,037
Purchase of property, plant, and equipment............................................................... (263) (540)
Package design costs..................................................................................... (169)
------ ------
Net cash used in investing activities................................................................ (504) (3,540)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt................................................................. 3,000
Principal payment on long-term debt...................................................................... (511)
Dividends paid on preferred stock........................................................................ (277)
Purchases of treasury stock.............................................................................. (297)
------ ------
Net cash provided by (used in) financing activities.................................................. (574) 2,489
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................................................. (516) (686)
CASH AND CASH EQUIVALENTS--Beginning of period............................................................. 1,620 1,553
------ ------
CASH AND CASH EQUIVALENTS--End of period................................................................... $1,104 $ 867
====== ======
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE>
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
1. INTERIM FINANCIAL STATEMENTS
The interim financial statements presented herein include the accounts of
the Predecessor (Aminco, Inc.) as of and for the three months ended June
30, 1995 and of the Company as of and for the three months ended June 30,
1996. In the opinion of management, the unaudited condensed consolidated
financial statements reflect all normal recurring adjustments necessary for
a fair statement of the results of the interim periods. The results for the
three months ended June 30, 1996 are not necessarily indicative of the
results to be obtained for the entire fiscal year or any other interim
period. Because of the revaluation of assets and liabilities and related
impact to the statement of operations, the financial statements of the
Predecessor for the periods prior to August 22, 1995 are not strictly
comparable to those of the Company subsequent to that date. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been omitted from these condensed consolidated financial
statements pursuant to applicable rules and regulations of the Securities
and Exchange Commission. These financial statements should be read in
conjunction with the audited Consolidated Financial Statements and the
notes thereto of the Company and Predecessor included elsewhere in this
Prospectus.
2. INVENTORIES
Inventories at June 30, 1996 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Raw materials...................................................... $ 5,587
Work-in-process.................................................... 1,692
Finished goods..................................................... 2,898
-------
$10,177
=======
</TABLE>
3. INVESTMENT IN AM COSMETICS
On June 26, 1996, the Company purchased $3.0 million of 12% cumulative,
payment-in-kind preferred stock of the parent of AM Cosmetics, a leading
low-cost manufacturer of cosmetics, at par value. Certain owners of the
Company are also owners of AM Cosmetics. In connection with the investment,
the Company entered into a management agreement and will enter into certain
related sales agreements and manufacturing agreements with AM Cosmetics.
4. PUBLIC OFFERING OF SOUTH AFRICAN SUBSIDIARY
In July 1996, the Company's South African subsidiary sold 25% of its shares
in an initial public offering on the Johannesburg Stock Exchange. The
subsidiary received net proceeds of approximately $4.2 million from this
sale (which resulted in a gain to the Company of approximately $2.8 million
which will be recorded in paid-in capital during the three months ended
September 30, 1996). In conjunction with this public offering, the Company
entered into an amendment to its license agreement with its South African
subsidiary which provides that commencing on April 1, 1998, its South
African subsidiary will pay the Company a royalty in the amount of 3.0% of
the net sales price of all licensed products. The amount of the royalty
increases to 3.5% on April 1, 1999 and 4.0% on April 1, 2000 until the
termination of the agreement.
F-34
<PAGE>
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1995 AND 1996--(CONTINUED)
5. POSSIBLE INITIAL PUBLIC OFFERING
The Company is in process of pursuing an initial public offering of its
common stock. Should such an offering be completed, the Company anticipates
that it will use its proceeds to repay certain indebtedness. This repayment
will result in an extraordinary loss to be recorded at that time currently
estimated to be approximately $3.6 million (net of tax) for prepayment
penalties and the write-off of unamortized debt discount and deferred issue
costs.
6. EMPLOYEE BENEFITS
The Company recognized $800,000 of compensation expense during the quarter
ended June 30, 1996 relating to anticipated costs under certain equity-
based long-term incentive compensation arrangements (in light of the
contemplated initial public offering, such awards and compensation expense
are based upon the fair market value of the Company at the time of the
initial public offering). Such arrangements were awarded originally as
stock appreciation rights ("SARs"). During July 1996 some of the SARs were
amended and converted into accelerated, immediately exercisable stock
purchase rights, on a complete or partial basis, as agreed to by the
Company and the awardee. The SARs entitled the holder to a specified value
(determined as a percentage of the Company's equity value) over a fixed
base value subject to five year vesting requirements (or earlier upon a
public offering or sale of the Company). Upon amendment and conversion, the
SAR rights were cancelled (and replaced with the accelerated, immediately
exercisable stock purchase rights referred to above). These rights have a
fixed purchase price equal in amount to the cancelled SAR's fixed base
value. As a result of the fact that not all SARs were amended and converted
into these accelerated stock purchase rights, future payment of cash awards
under the remaining SAR arrangements are still possible. The Company may
record additional compensation charges through 2000 for possible cash
awards under the remaining SAR arrangements. Should the Company complete
the initial public offering of its common stock, such cash awards would be
payable and the Company would record additional compensation charges of
approximately $400,000 at that time (based on the initial public offering
price) for payments under SAR arrangements.
During August 1996, several outside directors and members of senior
management (pursuant to the stock purchase rights described above)
purchased 501,191 shares of the Company's Common Stock. The purchase of
such shares by senior management was financed with $1.3 million (net of
discount) in non-interest bearing long-term full recourse loans from the
Company. The Company will record additional non-cash compensation expense
of approximately $5.5 million (with no associated income tax benefits)
during the three months ended September 30, 1996 for the excess of the
initial public offering price over the actual purchase price of such
shares. In connection with the South African offering (Note 4), the Company
also issued shares of the subsidiary to certain members of its management;
the Company will record compensation expense of approximately $.3 million
for these share awards.
F-35
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, THE CLASS A COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET
FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HERE-
OF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 11
The Company............................................................... 17
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Dilution.................................................................. 20
Capitalization............................................................ 21
Unaudited Pro Forma Financial Data........................................ 23
Selected Consolidated Historical Financial Data........................... 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 28
Business.................................................................. 36
Management................................................................ 50
Principal and Selling Stockholders........................................ 58
Certain Relationships and Related Transactions............................ 60
Description of Certain Indebtedness....................................... 62
Description of Capital Stock.............................................. 63
Shares Eligible for Future Sale........................................... 67
Certain United States Federal Tax Considerations for Non-United States
Holders.................................................................. 68
Underwriting.............................................................. 71
Legal Matters............................................................. 73
Experts................................................................... 73
Available Information..................................................... 74
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL NOVEMBER 8, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,190,000 SHARES
[LOGO]
CARSON, INC.
CLASS A COMMON STOCK
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
OCTOBER 14, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
4,190,000 SHARES
CARSON, INC.
CLASS A COMMON STOCK
---------------
Of the 4,190,000 shares of Class A Common Stock of Carson, Inc. (the
"Company") offered hereby, 2,484,500 shares are being offered by the Company
and 1,705,500 shares are being offered by the Selling Stockholders. See
"Principal and Selling Stockholders." The Company will not receive any of the
proceeds from the sale of the shares of Common Stock by the Selling
Stockholders.
Of the shares being offered hereby, 838,000 shares are being offered for
sale initially outside of the United States and Canada by the International
Managers and 3,352,000 shares are being offered for sale initially in a
concurrent offering in the United States and Canada by the U.S. Underwriters.
The initial public offering price and the underwriting discount per share are
identical for both Offerings. Of the shares being offered hereby, up to
400,000 will be reserved for sale to certain directors, officers, employees,
business associates and related persons of the Company. See "Underwriting."
Upon consummation of the Offerings, the Company's issued and outstanding
capital stock will consist of 4,190,000 shares of Class A Common Stock offered
hereby, 1,859,677 shares of Class B Common Stock and 8,306,014 shares of Class
C Common Stock, each with a par value of $.01 per share (the "Common Stock").
The Class A Common Stock entitles each holder to one vote per share and the
Class C Common Stock entitles each holder to ten votes per share. The Class B
Common Stock generally is not entitled to vote on any matter submitted for the
vote of stockholders.Immediately after the Offerings, the percentage of the
combined voting power with respect to all matters submitted for the vote of
all stockholders held by holders of the Class A Common Stock, Class B Common
Stock and Class C Common Stock will be 4.8%, 0% and 95.2%, respectively. See
"Description of Capital Stock." Immediately after the Offerings, DNL Partners,
Limited Partnership and its affiliates will have approximately 75.8% of the
combined voting power with respect to all matters submitted for the vote of
all stockholders. See "Principal and Selling Stockholders."
Prior to the Offerings, there has been no public market for the Class A
Common Stock. For a discussion relating to the factors to be considered in
determining the initial public offering price, see "Underwriting."
The Class A Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "CIC," subject to official notice of issuance.
SEE "RISK FACTORS," BEGINNING ON PAGE 11, FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A
COMMON STOCK OFFERED HEREBY.
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............. $14.00 $.98 $13.02 $13.02
- ----------------------------------------------------------------------------------------------
Total(3)............... $58,660,000 $4,106,200 $32,348,190 $22,205,610
- ----------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,500,000.
(3) The Company has granted the International Managers and the U.S.
Underwriters options, exercisable within 30 days after the date hereof, to
purchase up to an additional 125,700 shares and 502,800 shares of Class A
Common Stock, respectively, solely to cover over-allotments, if any. If
such options are exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $67,459,000,
$4,722,130 and $40,531,260, respectively. See "Underwriting."
---------------
The shares of Class A Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Class A Common Stock will be made in
New York, New York on or about October 18, 1996.
---------------
MERRILL LYNCH INTERNATIONAL DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
---------------
The date of this Prospectus is October 14, 1996.
<PAGE>
UNDERWRITING
Merrill Lynch International ("Merrill Lynch") and Donaldson, Lufkin &
Jenrette Securities Corporation are acting as representatives (the
"International Representatives") of each of the International Managers named
below (the "International Managers"). Subject to the terms and conditions set
forth in an international purchase agreement (the "International Purchase
Agreement") among the Company, each of the Selling Stockholders and the
International Managers, and concurrently with the sale of 3,352,000 shares of
Class A Common Stock to the U.S. Underwriters (as defined below), the Company,
for its own account, and the Selling Stockholders severally have agreed to
sell to the International Managers, and each of the International Managers
severally has agreed to purchase from the Company and the Selling
Stockholders, the number of shares of Class A Common Stock set forth opposite
its name below.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- ---------
<S> <C>
Merrill Lynch International......................................... 419,000
Donaldson, Lufkin & Jenrette Securities Corporation................. 419,000
-------
Total.............................................................. 838,000
=======
</TABLE>
The Company and the Selling Stockholders have also entered into a U.S.
purchase agreement (the "U.S. Purchase Agreement") with certain underwriters
in the United States and Canada (the "U.S. Underwriters" and, together with
the International Managers, the "Underwriters") for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Donaldson, Lufkin & Jenrette
Securities Corporation are acting as representatives (the "U.S.
Representatives"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of 838,000 shares of Class
A Common Stock to the International Managers pursuant to the International
Purchase Agreement, the Company and the Selling Stockholders have agreed to
sell to the U.S. Underwriters, and the U.S. Underwriters severally have agreed
to purchase from the Company and the Selling Stockholders, an aggregate of
3,352,000 shares of Class A Common Stock. The initial public offering price
per share and the total underwriting discount per share of Class A Common
Stock are identical under the International Purchase Agreement and the U.S.
Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement, the
several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Class A Common Stock being sold
pursuant to each such agreement if any of the shares of Class A Common Stock
being sold pursuant to such agreement are purchased. Under certain
circumstances, the commitments of non-defaulting International Managers or
U.S. Underwriters (as the case may be) may be increased. The closings with
respect to the sale of Class A Common Stock to be purchased by the
International Managers and the U.S. Underwriters are conditioned upon one
another.
The International Representatives have advised the Company and the Selling
Stockholders that the International Managers propose initially to offer the
shares of Class A Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus, and to certain dealers
at such price less a concession not in excess of $.55 per share of Class A
Common Stock. The International Managers may allow, and such dealers may
allow, a discount not in excess of $.10 per share of Class A Common Stock on
sales to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The Company has granted an option to the International Managers, exercisable
for 30 days after the date of this Prospectus, to purchase up to an aggregate
of 125,700 additional shares of Class A Common Stock at the initial public
offering price set forth on the cover page of this Prospectus, less the
underwriting discount. The International Managers may exercise this option
only to cover over-allotments, if any, made on the sale of the Class A Common
Stock offered hereby. To the extent that the International Managers exercise
this option, each International Manager will be obligated, subject to certain
conditions, to purchase the same percentage of such
71
<PAGE>
additional shares of Class A Common Stock as such International Manager's
initial amount reflected in the foregoing table bears to the total number of
shares of Class A Common Stock initially offered by the International
Managers. The Company also has granted an option to the U.S. Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to
an aggregate of 502,800 additional shares of Class A Common Stock to cover
over-allotments, if any, on terms similar to those granted to the
International Managers.
The Company, its directors and executive officers, the Selling Stockholders
and all other existing stockholders have agreed, subject to certain
exceptions, not to directly or indirectly sell, offer to sell, grant any
option for the sale of or otherwise dispose of any shares of Class A Common
Stock or securities or rights convertible into or exercisable or exchangeable
for Class A Common Stock, without the prior written consent of Merrill Lynch,
on behalf of the Underwriters, for a period of 180 days after the date of this
Prospectus. In addition, all existing stockholders have agreed not to make any
demand for or exercise any rights with respect to the registration of Common
Stock and have waived all rights (including demand and "piggyback"
registration rights) to register securities owned by them for such 180 day
period and rights to purchase additional shares of Common Stock in connection
with the Offerings. See "Shares Eligible for Future Sale."
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the International Managers and the U.S. Underwriters are permitted
to sell shares of Class A Common Stock to each other for purposes of resale at
the initial public offering price, less an amount not greater than the selling
concession. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and any dealer to whom they sell shares of Class A Common Stock
will not offer to sell or sell shares of Class A Common Stock to persons who
are non-U.S. or non-Canadian persons or to persons they believe intended to
resell to persons who are non-U.S. or non-Canadian persons, and the
International Managers and any dealer to whom they sell shares of Class A
Common Stock will not offer to sell or sell shares of Class A Common Stock to
U.S. persons or to Canadian persons or to persons they believe intended to
resell to United States or Canadian persons, except in the case of
transactions pursuant to the Intersyndicate Agreement.
Each International Manager has agreed that (i) it has not offered or sold,
and will not for a period of six months following consummation of the Offering
offer or sell, in the United Kingdom by means of any document, any shares of
Common Stock offered hereby, other than to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances that do not constitute an offer to the public within the meaning
of the Public Offers of Securities Regulations 1995, (ii) it has complied with
and will comply with all applicable provisions of the Financial Services Act
1986 with respect to anything done by it in relation to the shares of Common
Stock in, from, or otherwise involving the United Kingdom and (iii) it has
only issued or passed on and will only issue or pass on to any person in the
United Kingdom any document received by it in connection with the issue of the
shares of Common Stock if that person is of a kind described in Article 11(3)
of the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1995, as amended, or is a person to whom the document may otherwise
lawfully be issued or passed on.
Prior to the Offerings, there has been no public market for the Class A
Common Stock of the Company. The initial public offering price has been
determined through negotiations among the Company, the Selling Stockholders
and the U.S. Representatives and the Lead Managers. Among the facts considered
in determining the initial public offering price, in addition to prevailing
market conditions, are price-earnings ratios of publicly traded companies that
the Representatives believe to be comparable to the Company, certain financial
information of the Company, the history of, and the prospects for, the Company
and the industry in which it competes, and assessment of the company's
management, its past and present operations, the prospects for, and timing of,
future revenues of the Company, the present state of the Company's
development, and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to the
Company. There can be no assurance that an active trading market will develop
for the Class A Common Stock or that the Class A Common Stock will trade in
the public market subsequent to the Offerings at or above the initial public
offering price.
72
<PAGE>
Application has been made to list the Class A Common Stock on the New York
Stock Exchange, under the symbol "CIC," subject to official notice of
issuance. In order to meet the requirements for listing of the Class A Common
Stock on that exchange, the U.S. Underwriters have undertaken to sell lots of
100 or more shares to a minimum of 2,000 beneficial owners.
The Underwriters do not intend to confirm sales of the Class A Common Stock
offered hereby to any accounts over which they exercise discretionary
authority.
Purchasers of the Common Stock offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the
country of purchase, in addition to the offering price set forth on the cover
page hereof.
The Company and the Selling Stockholders have agreed to indemnify the
International Managers and the U.S. Underwriters against certain liabilities,
including liabilities under the Securities Act.
Merrill Lynch, Pierce, Fenner & Smith Incorporated has been retained to act
as financial advisor and provide investment banking advice to the Company and
may be retained in the future to provide additional investment banking
services to the Company. Merrill Lynch, Pierce, Fenner & Smith Incorporated
will receive customary fees in connection with such services.
LEGAL MATTERS
The validity of the Class A Common Stock being offered hereby and certain
other legal matters relating to the Offerings will be passed upon for the
Company by Milbank, Tweed, Hadley & McCloy, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Cahill Gordon & Reindel (a
partnership including a professional corporation), New York, New York.
EXPERTS
The financial statements of the Predecessor as of March 31, 1995 and for
each of the two years in the period ended March 31, 1995 included in this
Prospectus and the financial statement schedule for the two years ended March
31, 1995 included in this Registration Statement have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in accounting and auditing.
The consolidated balance sheet as of March 31, 1996 and the consolidated
statements of operations, stockholders' equity and cash flows of the Company
for the period from August 23, 1995 through March 31, 1996 and the
consolidated statements of income, stockholders' equity, and cash flows of the
Predecessor for the period from April 1, 1995 to August 22, 1995 and the
related financial statement schedule have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
On August 23, 1995 the Company engaged Deloitte & Touche LLP as its
independent public accountants, replacing the Predecessor's independent public
accountants, Price Waterhouse LLP. There were no disagreements with Price
Waterhouse LLP regarding accounting principles or practices, financial
statement disclosure, or auditing scope or procedure during each of the two
fiscal years ended March 31, 1995 and the period from April 1, 1995 to August
22, 1995. Price Waterhouse LLP issued reports without adverse opinions,
disclaimers of opinions, or qualifications or modifications as to uncertainty,
audit scope or accounting principles (other than as required by generally
accepted accounting principles), with respect to the consolidated financial
statements of the Predecessor as of and for the years ended March 31, 1994 and
1995. The decision to change accountants was approved by the Company's Board
of Directors.
73
<PAGE>
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 with respect to
the Class A Common Stock being offered hereby with the Commission under the
Securities Act. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain items of which are omitted in accordance with the rules and
regulations of the Commission. Statements contained in this Prospectus
concerning the provisions of documents filed with the Registration Statement
as exhibits are necessarily summaries of such documents, and each such
statement is qualified in its entirety by reference to the copy of the
applicable document filed as an exhibit to the Registration Statement. Upon
the consummation of the Offerings, the Company will be subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports and other information with the Commission. The Registration
Statement and the exhibits and schedules thereto filed by the Company with the
Commission, as well as such reports and other information filed by the Company
with the Commission, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; at its Chicago Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and at its New York Regional Office, Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained from the public reference section of the Commission,
450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. Such
material may also be accessed electronically by means of the Commission's home
page on the Internet at http://www.sec.gov. The Class A Common Stock is
expected to be listed on the New York Stock Exchange, and copies of such
material will be available for inspection at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005. The Company intends to
furnish to its stockholders annual reports containing audited consolidated
financial statements and a report thereon by the Company's independent
accountants and quarterly reports containing unaudited consolidated financial
data for the first three quarters of each fiscal year.
74
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, THE CLASS A COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH
IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
IN THIS PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE UNITED STATES DOLLARS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 11
The Company............................................................... 17
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Dilution.................................................................. 20
Capitalization............................................................ 21
Unaudited Pro Forma Financial Data........................................ 23
Selected Consolidated Historical Financial Data........................... 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 28
Business.................................................................. 36
Management................................................................ 50
Principal and Selling Stockholders........................................ 58
Certain Relationships and Related Transactions............................ 60
Description of Certain Indebtedness....................................... 62
Description of Capital Stock.............................................. 63
Shares Eligible for Future Sale........................................... 67
Certain United States Federal Tax Considerations for Non-United States
Holders.................................................................. 68
Underwriting.............................................................. 71
Legal Matters............................................................. 73
Experts................................................................... 73
Available Information..................................................... 74
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL NOVEMBER 8, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,190,000 SHARES
[LOGO]
CARSON, INC.
CLASS A COMMON STOCK
----------------
PROSPECTUS
----------------
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
OCTOBER 14, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
