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 September 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 October 29, 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
September 30, 1997 and December 31, 1996......................... 3
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1997 and 1996.......... 4
Condensed Consolidated Statements of Cash Flow
Nine Months Ended September 30, 1997 and 1996.................... 5
Notes to Condensed Consolidated Financial Statements............. 6-9
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................10-14
Part II. Other Information...............................................15
Signatures....................................................... 16
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2
Carson, Inc.
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(In thousands)
<TABLE>
<S> <C> <C>
September 30, December 31,
ASSETS 1997 1996
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 4,987 $ 4,191
Accounts receivable (less allowance for doubtful accounts and returns of
$3,054 and $614 at September 30, 1997 and December 31, 1996, respectively) 26,259 15,117
Inventories, net 18,413 10,572
Other current assets 723 1,421
Total current assets 50,382 31,301
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation 19,314 15,089
INVESTMENT IN AM COSMETICS 3,483 3,187
GOODWILL, net 91,473 45,801
OTHER ASSETS 6,197 2,151
TOTAL ASSETS $ 170,849 $ 97,529
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,382 $ 7,065
Accrued expenses 7,447 5,784
Income taxes payable 2,577 --
Current maturities of long-term debt 3,000 2,600
Total current liabilities 21,406 15,449
LONG-TERM DEBT 84,918 24,501
MINORITY INTEREST IN SUBSIDIARY 3,919 1,664
DEFERRED INCOME TAXES AND OTHER LIABILITIES 1,701 1,700
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 150 150
Paid-in capital 62,899 62,418
Accumulated deficit (1,234) (5,679)
Note receivable from employee shareholders, net of discount (1,437) (1,365)
Foreign currency translation adjustment (1,473) (1,309)
Total stockholders' equity 58,905 54,215
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 170,849 $ 97,529
See notes to condensed consolidated financial statements.
3
</TABLE>
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Carson, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 1997 and 1996
(In thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
(Restated)
(See Note 6)
NET SALES $ 29,625 $ 19,897 $ 77,791 $ 56,488
COST OF GOODS SOLD 13,555 8,735 35,431 24,853
GROSS PROFIT 16,070 11,162 42,360 31,635
EXPENSES:
Marketing and selling 7,325 5,118 19,602 13,283
General and administrative 4,544 2,758 11,691 8,488
Incentive compensation -- 6,323 -- 7,123
11,869 14,199 31,293 28,894
OPERATING INCOME 4,201 (3,037) 11,067 2,741
INTEREST EXPENSE (1,809) (1,850) (3,924) (5,523)
OTHER INCOME, net 214 313 608 497
INCOME (LOSS) BEFORE INCOME TAXES 2,606 (4,574) 7,751 (2,285)
PROVISION FOR INCOME TAXES 1,113 593 3,310 1,808
NET INCOME (LOSS) $ 1,493 $ (5,167) $ 4,441 $ (4,093)
EARNINGS (LOSS) PER SHARE $ 0.10 $ (0.44) $ 0.30 $ (0.34)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 15,021 11,871 15,005 11,871
See notes to condensed consolidated financial statements.
</TABLE>
4
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Carson, Inc.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and September 30, 1996
(In thousands)
<TABLE>
<S> <C> <C>
Nine months ended September 30,
1997 1996
OPERATING ACTIVITIES:
Net income $ 4,441 $ (4,093)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,686 1,830
Other, net (1,295) (456)
Minority interest in earnings of subsidiary 507 88
Foreign currency translation adjustment (164) (578)
Changes in operating assets and liabilities,
net of acquisitions
Accounts receivable (10,030) (2,070)
Inventories (5,897) (1,850)
Other current assets (1,547) (1,074)
Accounts payable 261 591
Income taxes payable 2,577 (52)
Accrued expenses 1,501 783
Total adjustments (11,401) (2,788)
Net cash used in operating activities (6,960) (6,881)
INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,108) (3,895)
Acquisitions of business assets, net of cash acquired (49,406) 0
Net cash used in investing activities (54,514) (3,895)
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 62,979 5,991
Principal payments on long-term debt (2,162) (2,000)
Incentive compensation - - 7,123
Other, net (72) 456
Proceeds from equity rights offering 1,525 0
Proceeds from sale of common stock 0 2,814
Net cash provided by financing activities 62,270 14,384
NET CHANGE IN CASH AND CASH EQUIVALENTS 796 3,608
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,191 378
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,987 $ 3,986
See notes to condensed consolidated financial statements.
</TABLE>
5
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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):
September 30, 1997 December 31, 1996
------------------------ -------------------------
Raw materials $7,899 $7,017
Work-in-process 1,391 1,236
Finished goods 9,123 2,319
------------------------ -------------------------
$18,413 $10,572
======================== =========================
The September 30, 1997 and December 30, 1996 inventory balances are net of
valuation allowances of $1.7 million and $181 thousand, respectively.
6
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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 nail polish remover, nail enamel, nail
care treatment products and nail care implements 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,
inventory acquired from Chesebrough-Pond's USA of $600,000 and inventory
acquired from Jean Phillipe of $3.3 million. In addition, the Company incurred
debt-related acquisition costs of approximately $2.6 million and other direct
acquisition fees and expenses of $1.4 million. This acquisition is 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, the Company entered into an Asset Repurchase
Agreement with Jean Philippe Fragrances, Inc., the entity that previously held
the license to package, distribute and sell nail enamel and nail care treatment
products, nail care implements and lipstick under the Cutex trademark in the
United States and Puerto Rico. In connection with the termination on April 30,
1997 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 connection
with the Cutex license agreement.
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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------- ----------- --------- ------------
Net sales $29,625 $25,396 $82,997 $69,843
Net income 1,493 (4,454) 4,669 (2,977)
Earnings per share $0.10 $(0.38) $0.31 $(0.25)
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 nine-month period ended
September 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 acquired the complete Let's Jam product
line from New Images Laboratories, Inc. in a cash transaction valued at $5.6
million. This acquisition adds one of the leading hair care maintenance brands
in the ethnic retail market to the Company's portfolio of brands. Funds were
provided by additional long-term debt and the transaction was completed on April
8, 1997. This acquisition is accounted for under the purchase method of
accounting.
In the first half of 1997, Carson Holdings Ltd. ("Carson South Africa")
consummated, through Carson Products, S.A., three acquisitions in the African
personal care industry including the African Nu-Me Cosmetics, Restore Plus and
Seasilk brand names and certain related assets. The total purchase price,
including fees, for these three acquisitions was approximately $1.5 million,
comprised of $0.7 million in cash and 500,000 shares of Carson South Africa
stock. These acquisitions are accounted for under the purchase method of
accounting.
7
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Carson South Africa announced on November 13, 1997 that it had completed
the acquisition of A&J Cosmetics, a toiletries company with sales of less than
$10.0 million in 1996. A&J Cosmetics manufactures and owns the Sadie brand of
toiletry products, which has been selling in the ethnic market for over 20 years
and competes primarily in the roll-on deodorant market. Carson South Africa will
fund the acquisition with the issuance of shares of its common stock. The
purchase consideration payable for the acquisition is approximately $12.0
million, adjusted according to the after tax profit of the business for the year
ended December 31, 1998. Approximately $5.9 million of the purchase price is
payable on January 31, 1998, approximately $4.4 million is payable on or before
January 3, 1999 and the remainder (subject to adjustment) is payable by no later
than March 31, 1999.
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 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 recently
issued stock options to certain officers, employees and directors at prices
equal to the market value on the dates granted. Management is currently
determining the effect, if any, SFAS No. 128 will have on the consolidated
financial statements of the Company.
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. Long-Term Debt
On April 30, 1997, the Company entered into an Amended and Restated
Credit Agreement (the" Existing Credit Facility") with Banque Indosuez as agent,
and the lenders named therein. The Existing Credit Facility replaced the
Company's $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 $520,000 paid to Morningside Capital Group, L.L.C.
On November 6, 1997, the Company completed a private offering under Rule
144A and Regulation S of the Securities Act of 1933, as amended, of $100 million
aggregate principal amount of ten year, fixed rate 10 3/8% senior subordinated
notes. The Company used the net proceeds from the offering, after initial
purchasers' discounts and other offering expenses, to repay in full outstanding
indebtedness and accrued interest under the Existing Credit Facility and
transaction fees and expenses related to a new credit facility. The balance of
the proceeds of the offering will be used for working capital and general
corporate purposes. The Company entered into a new credit facility
simultaneously with the closing of the proposed offering. The new credit
facility provides for loans of up to $75 million, $25 million of which is a
revolver for working capital purposes and $50 million of which can be drawn as
term loans to fund acquistions.
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. 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 $177,000 and $102,000, respectively. In addition, inventories as of
December 31, 1996 decreased by $177,000, retained earnings decreased by $102,000
and other assets decreased by $75,000. The effect on all other periods presented
was not material.
8
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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.
9
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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 entrance into 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), 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. 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 United States
of selected personal care products for both the ethnic market and the mass
market. The Company currently sells over 70 different products specially
formulated to address the unique physiological characteristics of persons of
African descent in the United States and more than 60 other countries under six
principal brand names. The majority of the Company's net sales have historically
been 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, men's depilatory products and
hair care maintenance products. The Company is also a leading marketer of nail
care products to the United States mass market under the Cutex brand name.
In the nine months ended September 30, 1997, approximately 28.2% of the
net sales of the Company were to customers outside the United States. The
following table presents the Company's net sales by geographic region for such
period:
Net sales to: 1997 % 1996 %
----------- ------- ------------ --------
United States $55,895 71.8% $42,128 74.6%
Africa 13,360 17.2 6,858 12.1
Other 8,536 11.0 7,502 13.3
----------- ------- ------------ --------
Total $77,791 100.0% $56,488 100.0%
=========== ======= ============ ========
In July 1996, the Company's South African subsidiary, Carson Holdings,
Limited. ("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
10
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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 owned by the Company.
In conjunction with the South African initial public offering, the Company's
U.S. subsidiary, Carson Products Company 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
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 a manufacturing agreement with
AM Cosmetics. Pursuant to the management 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 September 30, 1997 Compared to Quarter Ended September 30, 1996
Net Sales. Consolidated net sales for the quarter ended September 30, 1997 of
$29.6 million increased 48.9% over the same quarter in 1996. This increase is
primarily a result of incremental net sales related to the Cutex and Let's Jam
acquisitions of $7.3 million and $663,000, respectively. Dark & Lovely Cosmetics
generated net sales of $821,000 in the third quarter. Sales of the Company's
domestic core business, ethnic hair care products, amounted to $12.2 million, a
decrease of 10.4% in the quarter ended September 30, 1997 compared to the same
quarter in 1996, reflecting industry softness due in part to drug chain
consolidation. International sales including South Africa increased by 36.9% for
the quarter ended September 30, 1997. Carson South Africa continued to
demonstrate strong results with an increase in net sales of 109.5% to $5.6
million in the quarter ended September 30, 1997 from $2.7 million in the quarter
ended September 30, 1996.
Gross Profit. Gross profit increased to $16.1 million in the quarter ended
September 30, 1997 from $11.2 million in the quarter ended September 30, 1996.
Gross margin decreased to 54.2% from 56.1% for the quarter ended September 30,
1997 compared to the same quarter in 1996. Gross margin continues to be affected
by inefficiencies in the logistics and manufacturing processes, due in part to
complexities associated with the rapid growth in number of stock keeping units,
multiple inventory locations and difficulties in coordination with new outsource
manufacturers. During the third quarter the Company hired a Senior Vice
President, with extensive experience in consumer products manufacturing and
logistics, who has assumed responsibility for all operations at the Savannah
plant. Additionally, the Company has hired in October an experienced director of
materials management who will have full responsibility for procurement and
warehousing of inventories. Management believes it is taking the appropriate
steps to address the operational inefficiencies and to improve related customer
service performance.
11
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Marketing and Selling Expenses. Marketing and selling expenses increased to $7.3
million in the quarter ended September 30, 1997 from $5.1 million in the quarter
ended September 30, 1996, an increase of 43.1%. As a percentage of net sales,
these expenses decreased to 24.7% from 25.7% during this period. This decrease
as a percentage of net sales is primarily a result of Cutex marketing and
selling expenses incurred at a relatively low 11.3% of net sales.
General and Administrative Expenses. Excluding a nonrecurring incentive
compensation charge of $6.3 million recorded in the third quarter of 1996,
general and administrative expenses increased to $4.5 million in the quarter
ended September 30, 1997 from $2.8 million in the quarter ended September 30,
1996, an increase of 64.8%. As a percentage of net sales, general and
administrative expenses increased to 15.3% from 13.9% during this period. This
increase is due in part to increased amortization related to recent acquisitions
combined with increased professional fees and personnel costs associated with
the enhancement of infrastructure needed to support the Company's growth.
Operating Income. As a result of the above changes, operating income increased
to $4.2 million in the quarter ended September 30, 1997 from an operating loss
of $3.0 million in the quarter ended September 30, 1996.
Interest Expense. Interest expense was relatively flat at $1.8 million in the
quarter ended September 30, 1997 compared to $1.9 million in the quarter ended
September 30, 1996.
Other Income. Other income decreased in the quarter ended September 30,
1997 compared to the same period in 1996 primarily because of higher minority
interest recorded as a result of higher net earnings for Carson South Africa.
Provision for Income Taxes. The provision for income taxes increased to $1.1
million from $593,000 during this period. The effective tax rate was 42.7% for
the quarter ended September 30, 1997. This rate is not comparable to the 1996
rate due to nonrecurring incentive compensation charges recorded in the third
quarter of 1996 which were not fully deductible for tax purposes.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Net Sales. Consolidated net sales increased 37.7% to $77.8 million in the nine
months ended September 30, 1997 from $56.5 million in the comparable period in
1996. This increase is primarily a result of incremental net sales related to
the Cutex and Let's Jam acquisitions of $12.1 million and $1.2 million,
respectively. Dark & Lovely Cosmetics generated year to date net sales of
$854,000. Sales of the Company's domestic core business, ethnic hair care
products, amounted to $41.7 million, a decrease of approximately 0.9% for the
nine months ended September 30, 1997 compared to the same period in 1996,
reflecting industry softness due in part to drug chain consolidation.
International sales including South Africa increased by 52.5% for the nine
months ended September 30, 1997. Carson South Africa continued to demonstrate
strong results with an increase in net sales of 104.2% to $12.9 million in the
nine months ended September 30, 1997 from $6.3 million in the comparable period
of 1996.
Gross Profit. Gross profit increased to $42.4 million in the nine months
September 30, 1997 from $31.6 million in the nine months ended September 30,
1996. Gross profit margin decreased to 54.4% from 56.0% for the nine months
ended September 30, 1997 compared to the same period in 1996. Gross margin
continues to be affected by inefficiencies in the logistics and manufacturing
processes, due in part to complexities associated with the rapid growth in
number of stock keeping units, multiple inventory locations and difficulties in
coordination with new outsource manufacturers. During the third quarter the
Company hired a Senior Vice President, with extensive experience in consumer
products manufacturing and logistics, who has assumed responsibility for all
operations at the Savannah plant. Additionally, in October, the Company hired an
experienced director of materials management who will have full responsibility
for procurement and warehousing of inventories. Management believes it is taking
the appropriate steps to address the operational inefficiencies and to improve
related customer service performance.
Marketing and Selling Expenses. Marketing and selling expenses increased to
$19.6 million in the nine months ended September 30, 1997 from $13.3 million in
the nine months ended September 30, 1996, an increase of 47.6%. As a percentage
of net sales, these expenses increased to 25.2% from 23.5% during this period.
This increased spending is a result of increased advertising and promotional
spending as well as higher selling expenses associated with Cutex. Advertising
spending in 1997 is higher in part because the Company changed advertising
agencies early in 1996, and had ceased most advertising during first and second
quarters while awaiting new creative material.
General and Administrative Expenses. Excluding a nonrecurring incentive
compensation charge of $7.1 million recorded in the nine months ended
September 30, 1997, general and administrative expenses increased to $11.7
million
12
<PAGE>
in 1997 from $8.5 million in 1996, an increase of 37.7%. This increase is due in
part to increased amortization related to recent acquisitions combined with
increased professional fees and personnel costs associated with the enhancement
of infrastructure needed to support the Company's growth. As a percentage of net
sales, general and administrative expenses were level at 15.0% during this
period.
Operating Income. As a result of the above changes, operating income increased
to $11.1 million in the nine months ended September 30, 1997 from $2.7 million
in the nine months ended September 30, 1996.
Interest Expense. Interest expense decreased to $3.9 million in the nine months
ended September 30, 1997 from $5.5 million in the nine months ended September
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 in the nine months ended September 30,
1997 compared to the same period in 1996 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 $500,000. Other income includes the
effects of these transactions since June 1996.
Provision for Income Taxes. The provision for income taxes increased to $3.3
million from $1.8 million during this period. The effective tax rate was 42.7%
for the nine months ended September 30, 1997. This rate is not comparable to the
1996 rate due to nonrecurring incentive compensation charges recorded in the
second and third quarters of 1996 which were not fully deductible for tax
purposes.
Liquidity and Capital Resources
The Company completed the offering (the "Initial 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 Initial Offering to repay certain indebtedness.
In conjunction with the Initial 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. On April 30, 1997, the Company entered
into an Amended and Restated Credit Agreement with Banque Indosuez as agent, and
the lenders named therein. The Existing Credit Facility replaced the Company's
$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 bore interest at the lower of the applicable prime rate plus 0.5% or
LIBOR rate plus 2.0% and had a final maturity date of April 2002. The term loan
B bore interest at the lower of the applicable prime rate plus 1.0% or LIBOR
rate plus 2.5% and had a final maturity date of April 2004. In connection with
this refinancing, the Company incurred debt issuance costs of approximately $2.6
million, including $520,000 paid to Morningside Capital Group, L.L.C.
On November 6, 1997, the Company completed a private offering under Rule
144A and Regulation S of the Securities Act of 1933, as amended, of $100 million
aggregate principal amount of ten year, fixed rate 10 3/8% senior subordinated
notes (the "Note Offering") The Company used the net proceeds from the Note
Offering, after initial purchasers' discounts and other offering expenses, to
repay in full outstanding indebtedness and accrued interest under the Existing
Credit Facility and transaction fees and expenses related to a new credit
facility. The balance of the proceeds of the Note Offering will be used for
working capital and general corporate purposes. The Company entered into a new
credit facility simultaneously with the closing of the proposed offering. The
new credit facility provides for loans of up to $75 million, $25 million of
which is a revolver for working capital purposes and $50 million of which can be
drawn as term loans to fund acquistions.
13
<PAGE>
In the nine months ended September 30, 1997, net cash flow used in
operations was $7.0 million largely as a result of a $5.9 million increase in
inventory and a $10.0 million increase in accounts receivable offset in part by
a $6.0 million increase in current liabilities. The increase in accounts
receivable is primarily a result of collections through September 1997 of $5.7
million on total Cutex sales of $12.1 million. The Company believes that the
slow collections on Cutex sales is a temporary phenomenon related to the
transition of order entry, invoicing and cash collection by third parties on
behalf of the Company. The majority of the increase in inventory is in finished
goods and is in part attributable to increases in domestic core products
finished goods inventory necessary to improve customer service performance.
Net cash used in investing activities for the nine months ended September
30, 1997 totaled $54.5 million which consisted primarily of cash paid for
acquisitions of business assets of $49.4 million and capital expenditures of
$5.1 million.
Net cash provided from financing activities for the nine months ended
September 30, 1997 totaled $62.3 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.
In the first half of 1997, Carson South Africa consummated, through Carson
Products, S.A., three acquisitions in the African personal care industry
including the African Nu-Me Cosmetics, Restore Plus and Seasilk brand names and
certain related assets. The total purchase price, including fees, for these
acquisitions was approximately $1.5 million, comprised of $0.7 million in cash
and 500,000 shares of Carson South Africa common stock. 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 Chesebrough- Pond's USA Co. in order to acquire the
rights to sell, distribute, package, manufacture and market Cutex nail polish
remover, nail enamel, nail care treatment products and nail care implements in
the United States and Puerto Rico. The purchase price was approximately $41.4
million, with funds 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 Phillipe Fragrances, Inc. In connection with the termination of the
license agreement between Conopco, Inc. and Jean Phillipe by Carson as successor
in interest to Conopco, Inc., the Company acquired certain assets of Jean
Phillipe used to package, distribute and sell nail enamel and nail care
treatment products, nail care implements and lipstick under the Cutex trademark
in the United States and Puerto Rico on April 30, 1997. Immediately upon
consummation of the Jean Phillipe Repurchase Agreement on April 30, 1997, the
license agreement with Jean Phillipe was terminated.
The Company believes that cash flow from operating activities, existing
cash balances and available borrowings under its new credit facility will be
sufficient to fund working capital requirements, capital expenditures and debt
service requirements in the foreseeable future.
14
<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 --
27 Financial data schedule.
(b) Reports on Form 8-K --
On October 9, 1997, the Company filed and amended Form 8-K/A-3 which
incorporated various revisions to the 8-K/A-2 filed on July 16, 1997.
15
<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.
/s/ Roy Keith
- --------------------------------------- Date: November 14, 1997
Roy Keith
Chairman and Chief Executive Officer
/s/ Robert W. Pierce
- -------------------------------------- Date: November 14, 1997
Robert W. Pierce
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
16
<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 September
30, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0001019808
<NAME> Carson, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,987
<SECURITIES> 0
<RECEIVABLES> 29,313
<ALLOWANCES> 3,054
<INVENTORY> 18,413
<CURRENT-ASSETS> 50,382
<PP&E> 21,178
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<TOTAL-ASSETS> 170,849
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0
0
<COMMON> 150
<OTHER-SE> 58,755
<TOTAL-LIABILITY-AND-EQUITY> 170,849
<SALES> 77,791
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