SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission file number 1-12271
CARSON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1428605
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
64 Ross Road, Savannah Industrial Park
Savannah, Georgia 31405
(Address, including zip code, of principal executive offices)
Registrant's telephone number, including area code:(912) 651-3400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _x__ No
At July 30, 1997, 5,033,248 shares of the registrant's Class A Common
Stock, par value $0.01 per share, 1,859,677 shares of the registrant's Class B
Common Stock, par value $0.01 per share, and 8,127,937 shares of the
registrant's Class C Common Stock, par value $0.01 per share were outstanding.
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CARSON, INC.
INDEX
Part I. Financial Information Page
Item 1.
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996................................ 3
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 1997 and 1996.................. 4
Condensed Consolidated Statements of Cash Flow
Six Months Ended June 30, 1997 and 1996............................ 5
Notes to Condensed Consolidated Financial Statements............... 6-8
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................9-13
Part II. Other Information.................................................14
Signatures......................................................... 15
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Carson, Inc.
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
(In thousands)
<TABLE>
June 30, December 31,
ASSETS 1997 1996
(Unaudited) (Restated)
(See note 6)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,555 $ 4,191
Accounts receivable (less allowance for doubtful accounts and returns of $2,381
and $614 at June 30, 1997 and December 31, 1996, respectively) 21,863 15,117
Inventories, net 16,072 10,572
Other current assets 1,227 1,346
Total current assets 45,717 31,226
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation 18,130 15,089
INVESTMENT IN AM COSMETICS 3,381 3,187
GOODWILL, net 91,848 45,801
OTHER ASSETS 6,027 2,151
TOTAL ASSETS $ 165,103 $ 97,454
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,193 $ 7,065
Accrued expenses 4,919 5,709
Income taxes payable 2,281 --
Current maturities of long-term debt 3,000 2,600
Total current liabilities 16,393 15,374
LONG-TERM DEBT 84,789 24,501
MINORITY INTEREST IN SUBSIDIARY 3,996 1,664
DEFERRED INCOME TAXES AND OTHER LIABILITIES 1,720 1,700
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 150 150
Paid-in capital 62,878 62,418
Accumulated deficit (2,726) (5,679)
Note receivable from employee shareholders, net of discount (1,413) (1,365)
Foreign currency translation adjustment (684) (1,309)
Total stockholders' equity 58,205 54,215
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 165,103 $ 97,454
See notes to condensed consolidated financial statements.
</TABLE>
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Carson, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended June 30, 1997 and 1996
(In thousands, except per share data)
<TABLE>
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
(Restated)
(See note 6)
<S> <C> <C> <C> <C>
NET SALES $ 30,234 $18,799 $48,166 $ 36,591
COST OF GOODS SOLD 13,996 8,135 21,876 16,118
GROSS PROFIT 16,238 10,664 26,290 20,473
EXPENSES:
Marketing and selling 6,553 4,713 12,277 8,165
General and administrative 4,418 3,389 7,147 6,530
10,971 8,102 19,424 14,695
OPERATING INCOME 5,267 2,562 6,866 5,778
INTEREST EXPENSE (1,511) (1,826) (2,115) (3,673)
OTHER INCOME, net 171 38 394 184
INCOME BEFORE INCOME TAXES 3,927 774 5,145 2,289
PROVISION FOR INCOME TAXES 1,661 466 2,197 1,215
NET INCOME $ 2,266 $ 308 $ 2,948 $ 1,074
NET INCOME PER SHARE $ 0.15 $ 0.03 $ 0.20 $ 0.09
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 14,984 11,871 14,984 11,871
See notes to condensed consolidated financial statements.
</TABLE>
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CARSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
Six months ended June 30,
1997 1996
(Restated)
(See note 6)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,948 $ 1,074
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 1,570 1,185
Other, net (943) (2,023)
Minority interest in earnings of subsidiary 322 --
Foreign currency translation adjustment 625 (36)
Changes in operating assets and liabilities,
net of acquisitions
Accounts receivable (6,634) (3,377)
Inventories (3,556) (1,344)
Other current assets (454) 263
Accounts payable (1,928) 1,033
Income taxes payable 2,281 (168)
Accrued expenses (1,021) 255
Total adjustments (9,738) (4,212)
Net cash used in operating activities (6,790) (3,138)
INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,585) (1,401)
Acquisitions of business assets, net of cash acquired (49,406) --
Net cash used in investing activities (52,991) (1,401)
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 62,100 5,276
Principal payments on long-term debt (1,412) (500)
Other, net (68) 138
Proceeds from equity rights offering 1,525 --
Proceeds from sale of common stock -- 114
Net cash provided by financing activities 62,145 5,028
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,364 489
CASH AND CASH EQUIVALENTS AND BEGINNING OF PERIOD 4,191 378
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,555 $ 867
See notes to condensed consolidated financial statements.
</TABLE>
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CARSON, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated interim financial statements of
Carson, Inc. (the "Company") presented herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted from these 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's 1996 Transition Report on Form 10-K. In the opinion of
management, the accompanying unaudited financial statements contain all normal
recurring adjustments necessary to present fairly the Company's financial
position, results of operations and cash flows at the dates and for the periods
presented. Interim results of operations are not necessarily indicative of the
results to be expected for a full year. Certain prior period amounts have been
reclassified to conform with the current period presentation.
2. Inventories
Inventories are summarized as follows (in thousands):
(Restated)
June 30, 1997 December 31, 1996
-------------- ----------------------
Raw materials $9,130 $7,017
Work-in-process 1,671 1,236
Finished goods 5,271 2,319
-------------- ----------------------
$16,072 $10,572
============== ======================
The June 30, 1997 and December 30, 1996 inventory balances are net of valuation
allowances of $2.7 million and $181 thousand, respectively.
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3. Acquisitions
During March 1997, the Company entered into an Asset Purchase Agreement
with Conopco, Inc. d/b/a Chesebrough-Pond's USA Co. in order to acquire the
rights to manufacture and market Cutex in the United States and Puerto Rico (the
"Cutex acquisition"). Cutex is the leading brand of nail polish remover and is
also a line of nail enamels. The purchase price approximated $41.4 million
including amounts paid to Chesebrough-Pond's of $37.5 million and inventory
acquired of $3.9 million. In addition, the Company incurred direct acquisition
fees and expenses of $1.4 million including allowances for returned goods and
obsolete inventory. This acquisition has been accounted for under the purchase
method of accounting and the results of the operations have been included in the
condensed consolidated financial statements since the date of acquisition. Funds
were provided by additional long-term debt and the transaction was completed on
April 30, 1997.
During March 1997, concurrent with the Cutex acquisition, the Company
entered into an Asset Repurchase Agreement with Jean Philippe Fragrances, Inc.
On April 30, 1997, in connection with the termination of a license agreement
between Conopco, Inc. and Jean Philippe Fragrances, Inc. by Carson as successor
in interest to Conopco, Inc., Carson acquired certain assets of Jean Philippe
Fragrances, Inc. used in the packaging, distributing and selling of nail enamel
and nail care treatment products, nail care implements and lipstick under the
trademark Cutex in the United States and Puerto Rico.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the results of the Cutex
acquisition as if the acquisition had occurred as of the beginning of each
period presented:
(Dollars in thousands except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------- ---------- --------- ---------
Net sales $31,391 $23,282 $53,372 $44,447
Net income 2,288 478 3,030 1,266
Net income per share $0.15 $0.04 $0.20 $0.11
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as an adjustment to cost of
goods sold per a manufacturing agreement between the Company and
Chesebrough-Pond's USA Co., additional goodwill amortization, additional selling
expenses related to an agreement between the Company and AM Cosmetics and
additional interest expense on acquisition debt, among others. These unaudited
pro forma results are not necessarily indicative of what the actual consolidated
results of operations might have been if the Cutex acquisition had been in
effect as of the beginning of each period presented, or of future results of
operations of the consolidated Company. The pro forma six months ended June 30,
1996 reflects the change from last-in, first-out (LIFO) cost or market to the
lower of first-in, first-out (FIFO) cost or market.
During April 1997, the Company completed the acquisition of the Let's
Jam product line. This acquisition adds one of the leading hair care maintenance
brands in the ethnic retail market to the Company's portfolio of brands. The
purchase price was approximately $5.6 million cash with funds provided by
additional long-term debt. This acquisition has been accounted for under the
purchase method of accounting.
In addition, Carson Holdings Ltd. acquired the assets of Seasilk in a cash
transaction for $605 thousand. This acquisition has been accounted for under the
purchase method of accounting.
4. New Accounting Pronouncement
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" in February 1997.
SFAS No. 128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share and requires dual presentation of basic
and diluted earnings per share on the
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face of the income statement for all entities with complex capital
structures. SFAS No. 128 is effective for both interim and annual periods ending
after December 15, 1997. The Company currently has a simple capital structure
and therefore expects no material effect from the adoption of SFAS No. 128.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130") and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). The Company will adopt SFAS No. 130 and 131 in 1998. SFAS No. 130
establishes standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Management expects to report comprehensive
income for the effects of foreign currency translation adjustments which are
currently reported as a change in shareholders' equity. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. Management is currently determining
the effect, if any, SFAS No. 131 will have on the annual and interim
consolidated financial statements of the Company.
5. Credit Facility
On April 30, 1997, the Company entered into an Amended and Restated
Credit Agreement with Banque Indosuez, New York Branch, as agent, and the
lenders named therein. The Amended and Restated Credit Agreement replaced the
Company's existing $40 million senior credit facility with a $100 million senior
credit facility consisting of $25 million in Term A loans maturing in April
2002, $50 million in Term B loans maturing in April 2004 and $25 million in
revolving loan commitments maturing in April 2002. The proceeds of the new term
loans were used in part to finance the Cutex acquisition. In connection with
this refinancing, the Company incurred debt issuance costs of approximately $2.6
million, including $520 thousand paid to Morningside Capital Group, L.L.C.
6. Change in Accounting Method
During the second quarter of 1997, the Company changed its method of
valuing inventories in the United States from the lower of last-in, first-out
(LIFO) cost or market to the lower of first-in, first-out (FIFO) cost or market
in order to provide conformity among subsidiaries due to recent acquisitions.
The effect of this change has been reflected in all periods presented in these
financial statements. This change in valuing inventories was made in order to
provide conformity among all of the Company's subsidiaries as well as to conform
with general industry practices. As a result of this change in accounting
method, cost of goods sold increased and net income decreased for the three
months ended March 31, 1996 by $177 thousand and $102 thousand, respectively. In
addition, inventories as of December 31, 1996 decreased by $177 thousand,
retained earnings decreased by $102 thousand and accrued income taxes decreased
by $75 thousand. The effect on all other periods presented was not significant.
7. Year 2000 Computer Problem
Many computer applications were created with a two digit field for the
year in the date field, and as a result, such applications may fail or create
erroneous results by the year 2000 unless corrective measures are taken. The
Company has evaluated the extent of any problems and corrective measures have
been taken to ensure that the upcoming change of century will not have a
significant impact on future results of operations.
8
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Management's Discussion and Analysis of
Results of Operations and Financial Condition
OVERVIEW
Forward Looking Statements
This report on Form 10-Q as well as other public documents of the
Company contain forward-looking statements which involve risks 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. The Company's actual
results may differ materially from those discussed in such forward-looking
statements. When used herein and in the Company's future filings, the terms
"expects", "plans", "intends", "estimates", "projects", or "anticipates" or
similar expressions are intended to identify forward-looking statements (within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")). In addition to risk factors that may be described in the
Company's filings with the Securities and Exchange Commission (the "Commission")
(including this filing and the Company's prospectus dated October 14, 1996),
actual results could differ materially from those expressed in any
forward-looking statements made by the Company. Such risks, uncertainties and
factors include, but are not limited to, foreign business risks, industry
cyclicality, fluctuations in customer demand and order pattern, the seasonal
nature of the business, changes in pricing, the identification of suitable
acquisition candidates, changes in the implementation of the Company's
acquisition plans, and the availability of financing, and general economic
conditions, as well as other risks detailed in the Company's filings with the
Securities and Exchange Commission. Additional risk factors include, but are not
limited to, the following: (a) the Company's success in implementing its growth
strategy, including its success in obtaining financing where required, (b)
difficulties or delays in developing and introducing new products or the failure
of consumers to accept new product offerings, (C) changes in consumer
preferences, including reduced consumer demand for the Company's current
products, (d) the nature and extent of future competition in the Company's
principal marketing areas, and (e) political, economic and demographic
developments in the United States, Africa, Brazil, the Caribbean, Europe and
other countries where the Company now does or in the future may do business.
General
The Company is a leading manufacturer and marketer in the U.S. retail
ethnic hair care market for African-Americans. The Company currently sells over
70 different products in the United States and in over 60 other countries under
five principal brand names. In the six months ended June 30, 1997, approximately
27.5% of the Company's net sales were derived from sales within these other
countries. 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
1996 and 1997), hair color, shaving products and hair care maintenance products.
In July 1996, the Company's South African subsidiary, Carson Holdings,
Ltd. ("Carson South Africa") sold 25.0% of its shares in an initial public
offering on the Johannesburg Stock Exchange. As a result of the issuance of
these shares, the Company has reflected in its consolidated statement of
operations for periods subsequent to the share issuance a minority interest in
subsidiary earnings. The amount of the charge reflected in this line item equals
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, the
Company's U.S. subsidiary, Carson Products entered into an amendment to its
license agreement with Carson South Africa, which provides that commencing on
April 1, 1998, Carson South Africa 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.
With the exception of sales in South Africa, Botswana, Lesotho, Namibia
and Swaziland, which are denominated in South African Rand, all of the Company's
sales are recorded 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
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recognized as a component of stockholders' equity.
In June 1996, the Company made an investment of $3.0 million in
Morningside AM Acquisition Corp. ("AM Acquisition"), the parent of AM Cosmetics,
Inc. ("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 statements of
operations for periods subsequent to June 1996 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, the Company entered into a management agreement and has
entered into certain related sales agreements and manufacturing agreements with
AM Cosmetics. Pursuant to the agreement, AM Acquisition agreed on behalf of
itself and AM Cosmetics, that for a period of five years beginning on July 1,
1996, (I) AM Cosmetics will 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.
Results of Operations
Quarter Ended June 30, 1997 Compared to Quarter Ended June 30, 1996
Net Sales. Consolidated net sales for the quarter ended June 30, 1997 of $30.2
million increased 60.8% over the same quarter in 1996. This increase in sales is
primarily a result of strong gains in core hair care products, sales of which
rose 32.5%, augmented by incremental net sales related to the Cutex and Let's
Jam acquisitions of $4.8 million and $539 thousand, respectively. The Company's
domestic core business generated a sales increase of 25.6% for the quarter ended
June 30, 1997 compared to the same quarter in 1996. International sales
including South Africa increased by 52.9% for the quarter ended June 30, 1997.
Carson South Africa continued to demonstrate strong results with an increase in
net sales of 121.4% to $4.8 million in the quarter ended June 30, 1997 from $2.2
million in the quarter ended June 30, 1996.
Gross Profit. Gross profit increased to $16.2 million in the quarter ended
June 30, 1997 from $10.7 million in the quarter ended June 30, 1996. Gross
profit margin decreased to 53.7% from 56.7% for the quarter ended June 30, 1997
compared to the same quarter in 1996. The decline in gross margin is primarily
related to certain inefficiencies in the manufacturing process, due in part to
higher production volumes. The Company is currently enhancing material
management processes. Certain low volume maintenance products are being
outsourced to contract packagers, freeing the resources of the manufacturing
plant to concentrate on certain high volume relaxer and hair color products.
Marketing and Selling Expenses. Marketing and selling expenses increased to
$6.6 million in the quarter ended June 30, 1997 from $4.7 million in the quarter
ended June 30, 1996, an increase of 39.0%. As a percentage of net sales, these
expenses decreased to 21.7% from 25.1% during this period caused primarily by
the fact that the Company was in the process of changing advertising agencies
early in 1996, and had ceased most advertising during this period while awaiting
new creative material.
General and Administrative Expenses. General and administrative expenses
increased to $4.4 million in the quarter ended June 30, 1997 from $3.4 million
in the quarter ended June 30, 1996, an increase of 30.4%. As a percentage of net
sales, general and administrative expenses decreased to 14.6% from 18.0% during
this period. Contributing to this decrease was the incremental net sales
associated with the Cutex and Let's Jam acquisitions during the quarter ended
June 30, 1997. Additionally, the prior year second quarter contained a one time
incentive compensation charge of $800 thousand, without which general and
administrative expenses in that quarter as a percentage of net sales would have
been 13.8%.
Operating Income and EBITDA. As a result of the above changes, operating income
increased to $5.3 million in the quarter ended June 30, 1997 from $2.6 million
in the quarter ended June 30, 1996. EBITDA increased to $6.3 million from $3.2
million during this period. EBITDA is calculated by adding earnings before
interest, income taxes,
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depreciation and amortization expense.
Interest Expense. Interest expense decreased to $1.5 million in the quarter
ended June 30, 1997 from $1.8 million in the quarter ended June 30, 1996. The
decreased interest expense is a result of the use of the proceeds from the
Company's initial public offering to retire certain debt, offset in part by
interest on the additional borrowings used to finance the Cutex acquisition.
Other Income. Other income increased primarily as a result of the management
contract entered into in June 1996 with AM Cosmetics. Under the terms of the
investment and the management agreement, the Company is entitled to 12%
paid-in-kind dividend on its $3.0 million preferred stock investment and a
minimum annual management fee of $0.5 million. Other income includes the effects
of these transactions in the quarter ended June 30, 1997.
Provision for Taxes. The provision for taxes increased to $1.7 million from $466
thousand during this period. The effective tax rate was 42.3% for the quarter
ended June 30, 1997 compared to 60.2% for the quarter ended June 30, 1996. The
higher effective rate for the 1996 period is primarily a result of
non-deductible goodwill.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Net Sales. Consolidated net sales increased 31.6% to $48.2 million in the
six months ended June 30, 1997 from $36.6 million in the comparable period in
1996. This increase in sales is primarily a result of a strong performance by
core hair care products, sales of which rose 17.1%, augmented by incremental net
sales related to the Cutex and Let's Jam acquisitions of $4.8 million and $539
thousand, respectively. The Company's domestic core business generated a sales
increase of 3.6% for the first six months of 1997. International sales including
South Africa increased by 64.7% for the six months ended June 30, 1997. Carson
South Africa continued to demonstrate strong results with an increase in net
sales of 100.4% to $7.4 million in the six months ended June 30, 1997 from $3.7
million in the six months ended June 30, 1996.
Gross Profit. Gross profit increased to $26.3 million in the six months
ended June 30, 1997 from $20.5 million (as restated) in the six months ended
June 30, 1996. Gross profit margin decreased to 54.6% from 55.9% (as restated)
for the six months ended June 30, 1997 compared to the same period in 1996. The
decline in gross margin is primarily related to certain inefficiencies in the
manufacturing process, due in part to higher production volumes. The Company is
currently enhancing material management processes. Certain low volume
maintenance products are being outsourced to contract packagers, freeing the
resources of the manufacturing plant to concentrate on certain high volume
relaxer and hair color products.
Marketing and Selling Expenses. Marketing and selling expenses increased to
$12.3 million in the six months ended June 30, 1997 from $8.2 million in the six
months ended June 30, 1996, an increase of 50.4%. As a percentage of net sales,
these expenses increased to 25.5% from 22.3% during this period primarily as a
result of a $5.1 million increase in expenditures in the six months ended June
30, 1997 compared to the same period in 1996, caused primarily by the fact that
the Company was in the process of changing advertising agencies early in 1996,
and had ceased most advertising during this period while awaiting new creative
material.
General and Administrative Expenses. General and administrative expenses
increased to $7.1 million in the six months ended June 30, 1997 from $6.5
million in the six months ended June 30, 1996, a increase of 9.4%. As a
percentage of net sales, general and administrative expenses decreased to 14.8%
from 17.8% during this period. Contributing to this decrease was the incremental
net sales associated with the Cutex and Let's Jam acquisitions during the six
months ended June 30, 1997. Additionally, the prior year contained a one time
incentive compensation charge of $800 thousand, without which general and
administrative expenses in that six-month period as a percentage of net sales
would have been 15.7%.
Operating Income and EBITDA. As a result of the above changes, operating income
increased to $6.9 million in the six months ended June 30, 1997 from $5.8
million in the six months ended June 30, 1996. EBITDA increased to $8.4 million
from $7.0 million during this period. EBITDA is calculated by adding earnings
before interest, income taxes, depreciation and amortization expense.
Interest Expense. Interest expense decreased to $2.1 million in the six months
ended June 30, 1997 from $3.7 million in the six months ended June 30, 1996. The
decreased interest expense is a result of the use of the proceeds from the
Company's initial public offering to retire certain debt, offset in part by
interest on the additional borrowings used
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to finance the Cutex acquisition.
Other Income. Other income increased primarily as a result of the management
contract entered into in June 1996 with AM Cosmetics. Under the terms of the
investment and the management agreement, the Company is entitled to a 12%
paid-in-kind dividend on its $3.0 million preferred stock investment in AM
Cosmetics. In addition, as a result of the management contract, the Company
receives a minimum annual management fee of $0.5 million. Other income includes
the effects of these transactions in the six months ended June 30, 1997.
Provision for Taxes. The provision for taxes increased to $2.2 million from $1.2
million during this period. The effective tax rate was 42.7% for the six months
ended June 30, 1997 compared to 53.0% for the six months ended June 30, 1996.
The higher effective rate for the 1996 period is primarily a result of
non-deductible goodwill.
Liquidity and Capital Resources
The Company completed the offering (the "Offering") of 4,818,500 shares of
Class A common stock on the New York Stock Exchange on October 18, 1996 at a
price of $14 per share. Of these shares 3,113,000 were sold by the Company with
the balance sold by selling stockholders, none of which included any members of
management or the principal investors. The Company used the net proceeds of the
Offering to repay certain indebtedness.
In conjunction with the Offering, the Company refinanced the remaining
portion of its Senior Bank Credit Facility with borrowings under a New Senior
Bank Facility pursuant to a credit agreement dated as of October 18, 1996, which
included (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 provides more
availability than the current facility. The term loan A and revolving credit
facility bore interest at the applicable prime rate plus 0.5% or LIBOR rate plus
2.0% and had a final maturity of six years. The term loan B bore interest at the
applicable prime rate plus 1.0% or LIBOR rate plus 2.5% and had a final maturity
of seven years.
On April 30, 1997, the Company entered into an Amended and Restated Credit
Agreement with Banque Indosuez, New York Branch, as agent, and the lenders named
therein. The Amended and Restated Credit Agreement replaced the Company's
existing $40 million senior credit facility with a $100 million senior credit
facility consisting of $25 million in Term A loans, $50 million in Term B loans
and $25 million in revolving loan commitments. The proceeds of the new term
loans were used to finance the Cutex acquisition. The term loan A and revolving
credit facility bear interest at the lower of the applicable prime rate plus
0.5% or LIBOR rate plus 2.0% and have a final maturity date of April 2002. The
term loan B bears interest at the lower of the applicable prime rate plus 1.0%
or LIBOR rate plus 2.5% and has a final maturity date of April 2004. In
connection with this refinancing, the Company incurred debt issuance costs of
approximately $2.6 million, including $520 thousand paid to Morningside Capital
Group, L.L.C.
In the six months ended June 30, 1997, net cash flow used in operations was
$6.8 million largely as a result of a $3.6 million increase in inventory, a $6.6
million increase in accounts receivable, a $1.9 million decrease in accounts
payable and $1.0 million decrease in accrued expenses. These uses of cash were
offset in part by net income of $2.9 million and depreciation and amortization
of $1.6 million.
Net cash used in investing activities for the six months ended June 30,
1997 totaled $53.0 million which consisted primarily of cash paid for
acquisitions of business assets of $49.4 million and capital expenditures
necessary to maintain the Company's facilities in modern condition.
Net cash provided from financing activities for the six months ended June
30, 1997 totaled $62.1 million primarily as a result of additional borrowings
related to acquisitions. Additionally, the Company's South African subsidiary
completed an equity rights offering which generated $1.5 million of cash, net of
$4.2 million which was invested indirectly by the Company.
Effective February 1, 1997, the Company's South African subsidiary, Carson
Holdings Ltd., acquired the assets of Nu-Me in a transaction involving the
issuance of 500,000 shares of Carson Holdings Ltd. stock in a transaction valued
at approximately $767,000. In addition, Carson Holdings Ltd acquired the assets
of Restore Plus and Seasilk in cash transactions for $112 thousand and $605
thousand, respectively. These acquisitions are accounted for under the purchase
method of accounting.
During March 1997, the Company entered into an Asset Purchase Agreement
with Conopco, Inc. d/b/a
12
<PAGE>
Chesebrough-Pond's USA Co. in order to acquire the rights to manufacture and
market Cutex in the United States (the "Cutex acquisition"). Cutex is the
leading brand of nail polish remover and is also a line of nail enamels. The
purchase price approximated $41.4 million including amounts paid to
Chesebrough-Pond's of $37.5 million, inventory acquired from Chesebrough-Pond's
of $600 thousand and inventory acquired from Jean Phillipe Fragrances, Inc. of
$3.3 million. In addition, the Company incurred other direct acquisition fees
and expenses of $1.4 million including allowances for returned goods and
obsolete inventory. This acquisition is accounted for under the purchase method
of accounting. Funds were provided by additional long-term debt and the
transaction was completed on April 30, 1997.
During March 1997, the Company entered into an Asset Repurchase Agreement
with Jean Philippe Fragrances, Inc. Immediately upon execution of the Jean
Philippe Repurchase agreement on April 30, 1997, the license agreement with Jean
Philippe Fragrances, Inc. was terminated. On April 30, 1997 in connection with
the termination of the license agreement between Conopco, Inc. and Jean Philippe
Fragrances, Inc. by Carson as successor in interest to Conopco, Inc., Carson
acquired certain assets of Jean Philippe Fragrances, Inc. used in the packaging,
distributing and selling of nail enamel and nail care treatment products, nail
care implements and lipstick under the trademark Cutex in the United States and
Puerto Rico.
During April 1997, the Company completed the acquisition of the Let's Jam
product line. This acquisition adds one of the leading hair care maintenance
brands in the ethnic retail market to the Company's portfolio of brands. The
purchase price was approximately $5.6 million cash with funds provided by
additional long-term debt. This acquisition is accounted for under the purchase
method of accounting.
Carson South Africa consummated a rights offering of additional shares of
its common stock to its existing shareholders in June 1997 in order to raise
capital to fund the physical expansion of the Midrand, South Africa plant,
complete the factory in Accra, Ghana, accelerate the development of recently
acquired brands and provide additional working capital. The rights offering
raised approximately R 25.9 million (approximately $5.7 million). The Company
participated in the rights offering by subscribing for additional shares in the
amount of R 18.7 million (approximately $4.2 million), and will not have its
percentage ownership diluted.
The Company believes that cash flow from operating activities, existing
cash balances and available borrowings under its Amended and Restated Credit
Agreement will be sufficient to fund working capital requirements, capital
expenditures and debt service requirements in the foreseeable future.
13
<PAGE>
CARSON, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to lawsuits incidental to its business. Management
believes that the ultimate resolution of these matters will not have a material
adverse impact on the business or financial condition and operations of the
Company.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits --
18 Letter re change in accounting principle
27 Financial data schedule.
(b) Reports on Form 8-K --
On May 15, 1997, the Company filed a Current Report on Form 8-K which
included the Asset Purchase Agreement and Manufacturing Agreement with Conopco,
Inc. d/b/a Chesebrough-Pond's USA Co and the Asset Repurchase Agreement with
Jean Philippe Fragrances, Inc.
On July 14, 1997, the Company filed and amended Form 8-K/A which
incorporated the audited financial statements of the Cutex Brands of
Chesebrough-Pond's USA Co. A subsequent amendment was filed on July 16, 1997
which contained a correction of a typographical error included in the Form 8-K/A
filed on July 14, 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CARSON, INC.
Date: August 14, 1997
Roy Keith
Chairman and Chief Executive Officer
Date: August 14, 1997
Robert W. Pierce
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Deloitte & Touche LLP
Suite 1700
100 Peachtree Street
Atlanta, Georgia 30303-1911
August 11, 1997
Carson, Inc.
64 Ross Road
Savannah, GA 31405
Dear Sirs:
At your request, we have read the description included in your Form 10-Q for the
quarter ended June 30, 1997 of the facts relating to the change in accounting
for inventories from being valued at lower of Last-In, First-Out ("LIFO") cost
or market to the lower of First-In, First-Out ("FIFO") cost or market. We
believe, on the basis of the facts so set forth and other information furnished
to us by appropriate officials of Carson, Inc., that the accounting change
described in your Form 10-Q is to an alternative accounting principle that is
preferable under the circumstances.
We have not audited any consolidated financial statements of Carson, Inc. and
its consolidated subsidiaries as of any date or for any period subsequent to
December 31, 1996. Therefore, we are unable to express, and we do not express,
an opinion on the facts set forth in the above-mentioned Form 10-Q, on the
related information furnished to us by officials of Carson, Inc., or on the
financial position, results of operations, or cash flows of Carson, Inc. and its
consolidated subsidiaries as of any date or for any period subsequent to
December 31, 1996.
Yours truly,
Deloitte & Touche LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of the Company for the period ended June 30,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
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<NAME> Carson, Inc.
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<FISCAL-YEAR-END> DEC-31-1997
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