SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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
Securities Registered Pursuant to Section 12 (b) of the Act:
Title of Each Class: Name of Exchange On Which Registered:
Common Stock - Class A, $0.01 Par Value New York Stock Exchange
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___
Securities Registered Pursuant to Section 12 (g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price on The New York Stock
Exchange on December 31, 1997 was: $ 17,999,660
Indicate the number of shares outstanding of each of the registrant's classes,
as of the latest practicable date.
Title of Each Class: Outstanding at February 28, 1998:
Common Stock - Class A, $0.01 Par Value 5,033,248 shares
Common Stock - Class B, $0.01 Par Value 1,859,677 shares
Common Stock - Class C, $0.01 Par Value 8,127,937 shares
15,020,862 shares
Documents incorporated by reference:
Definitive Proxy Statement to be filed for the 1998 Annual Meeting of
Shareholders on May 8, 1998 -- Part III.
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Part I.
Item 1. Business
Forward Looking Statements
This report on Form 10-K for the year ended December 31, 1997 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 marketing,
distribution and manufacturing expansion plans,(iii) the Company's plans to make
selective acquisitions, (iv) future financial performance, (v) cash flows from
operations, (vi) capital expenditures, (vii) the availability of funds from
currently available credit facilities and (viii) the cost and timely
implementation of the Company's Year 2000 compliance modifications. 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")). Such statements reflect the current
views of the Company with respect to future events and are subject to certain
risks, uncertainties and assumptions. 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, the Company's IPO prospectus dated
October 14, 1996 and the Company's debt offering prospectus dated October 31,
1997), actual results could differ materially from those expressed in any
forward-looking statements made by the Company. 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, (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, and
(f) unanticipated costs, difficulties or delays in implementing the Company's
Year 2000 compliance modifications. The Company assumes no responsibility to
update forward-looking information contained herein.
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 of the Company include
the operating results of Carson Products Company ("Carson Products") from the
acquisition date.
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) was initially
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financed with long-term borrowings aggregating approximately $68.0 million and
has been accounted for as a purchase (the "Aminco Acquisition"). Accordingly,
the purchase price has been allocated to the Predecessor's identifiable assets
and liabilities based on the fair values at the acquisition date. Liabilities
assumed aggregated approximately $11.4 million. The excess of the purchase price
over the fair value of the Predecessor's identifiable net assets has been
classified as goodwill. In connection with the Aminco Acquisition, the senior
management of the Predecessor was replaced. The Predecessor had a March 31
fiscal year-end. Effective December 31, 1996, the Company changed its fiscal
year-end from March 31 to December 31. The decision to change the fiscal
year-end was made in order to conform the Company's financial reporting year to
the natural business year of the industry.
In July 1996, the Company's South African subsidiary, Carson Holdings,
Ltd. ("Carson South Africa") 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 was recorded in paid in
capital). In conjunction with this public offering, the Company entered into an
amendment to its license agreement with Carson South Africa 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. 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 Note 12 to the Consolidated Financial Statements of the Company for
financial information related to the Company's operations in the United States
and South Africa.
The Company completed an initial public offering of 4,818,500 shares of
its common stock on October 18, 1996. The Company used the proceeds of such
offering to repay certain indebtedness. This repayment resulted in an
extraordinary loss recorded at that time of approximately $3.5 million (net of
tax) for prepayment penalties and the write-off of unamortized debt discount and
deferred financing costs. Also in October 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.
Recent Developments
In 1997, the Company acquired the right to use the Cutex brand name and
certain related assets in the United States and Puerto Rico (the "Cutex
Acquisition") and the Let's Jam hair styling products brand name and certain
related assets. During 1997, Carson South Africa acquired the Nu-Me cosmetics
and skin care brand name and certain related assets, the Restore Plus hair care
brand name and certain related assets, the Seasilk toiletries brand name and
certain related assets, and the Sadie roll-on deodorant brand name and certain
related assets. The Company believes that the Cutex Acquisition complements the
Company's existing product lines and will enable the Company to increase its
market share for existing products by expanding the number of stores served by
the Company.
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During 1997, the Company completed an offering of $100.0 million aggregate
principal amount of ten year, fixed rate 10 3/8% senior subordinated notes (the
"Offering"). 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 its then existing credit facility and to
pay fees and expenses of $4.4 million related to a new credit facility (the "New
Credit Facility"). The balance of the proceeds was used for working capital and
general corporate purposes. As a result, the Company recognized $2.1 million
(net of related tax benefit of $1.1 million) in 1997 of debt-related charges and
write-offs reflected in the accompanying statements of operations as an
extraordinary item. Concurrent with the Offering, the Company entered into the
New Credit Facility which includes (i) a $50.0 million term loan to be used
solely for the purpose of making acquisitions and (ii) a $25.0 million revolving
credit facility.
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 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 United States retail ethnic hair care market. The Company
currently sells over 70 different products specifically formulated to address
the unique physiological characteristics of persons of African descent under six
principal brand names, including Dark & Lovely, Excelle, Beautiful Beginnings,
Dark & Natural, Magic and Let's Jam. The majority of the Company's net sales
have historically been derived from hair relaxers and texturizers, which are
used to chemically treat and straighten hair (constituting approximately 50% of
the Company's sales in 1997), hair color, men's depilatory products and hair
care maintenance products, primarily for persons of African descent. The
Company's hair care products are specifically formulated to address the unique
physiological characteristics of hair of persons of African descent, which
typically include curliness and dryness. In addition, the Company is expanding
its product offerings to other segments of the ethnic personal care market,
including cosmetics and skin care products.
The Company is also a leading marketer of nail care products to the
United States mass market under the Cutex brand name. Cutex is the leading brand
of nail polish remover. Other products marketed under the Cutex brand name
include nail enamel, nail care treatments and the newly introduced women's
depilatory product, Naturally Soft Body Creme. The Company acquired the rights
to use the Cutex brand name in the United States and Puerto Rico in April 1997.
The Company believes that the Cutex product line complements its existing hair
care and cosmetics product lines. The Cutex Acquisition is expected to create an
entree into the United States mass market for the Company's newly developed
products and increase the Company's overall distribution strength. The Company
has contracted with AM Cosmetics to manufacture, market and distribute certain
Cutex products to capitalize on AM Cosmetic's expertise in cosmetics and to
limit operating and financial risk. Management believes that AM Cosmetics, an
affiliate of the Company, is the largest manufacturer and distributor of nail
enamel in the United States.
Industry Overview
Ethnic Hair Care Market
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The United States retail ethnic hair care market, principally targeting
the distinct hair care needs of African-Americans, was estimated, according to a
July 1995 report published by Packaged Facts, and independent market research
company (the "Packaged Facts Report") to be a $1.2 billion retail business in
1995. According to 1995 United States Census Data ("Census Data") published by
the United States Department of Commerce, the African-American population was
approximately 34 million and represented 12.7% of the United States population.
This segment of the population is projected by the United States 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,
research 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 United States 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. The five largest companies generated
approximately 48.2% of industry sales for the twelve months ended December 31,
1997 based on sales information collected from store register scanners at a
sampling of food store chains, drug store chains and mass merchandisers in the
United States and published by Information Resources, Inc. ("IRI"). 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 United States 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 annually
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 United States ethnic hair care market is also highly fragmented with the
leading competitor being a general market health and beauty aids company. The
Company developed a new professional ethnic hair care product line under the
Carson Compositions brand name that offers certain technological advantages
compared to other ethnic hair care products currently offered in salons, as well
as a complimentary line of hair care maintenance products for exclusive purchase
in salons. The Company entered the United States salon market in the fourth
quarter of 1997.
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.
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Ethnic Cosmetics Market
The physiological differences between the skin of women of African descent
and Caucasian women create the need for a variety of products specifically
manufactured for women of African descent. The differences between the two
groups stem from the wide variety of skin tones that are representative of women
of African descent versus Caucasian women. First, the skin tones of women of
African descent are captured in 33 distinct shades versus seven shades for
Caucasian women. This variety of skin tones makes it important for an ethnic
cosmetics line to have a wide variety of shades to appeal to the broader range
of consumers. Second, hyperpigmentation and hypopigmentation - or uneven skin
tone - makes cosmetic selection more complex for women of color. Uneven skin
tone is a problem experienced by many African-American women. Products that
provide ample coverage are important to blend away uneven skin tone color and
provide a smooth, even palate. Third, certain ingredients that are widely used
in general market brands produce unacceptable results for women of African
descent. These ingredients include titanium dioxide and zinc oxide, which
produce a graying or whitening effect on darker skin tone; oil-based formulas,
which tend to clog skin pores of women of African descent who have a greater
tendency to have oily skin; and lanolin-based formulas which are not conducive
to the skin condition of African-American women.
In 1995, the Packaged Facts Report projected that the United States
retail cosmetics segment would include approximately $251.0 million in sales of
ethnic cosmetics products. Sales of ethnic cosmetics products were forecasted to
grow at an annual rate of 15% in future years according to the same source.
Personal Care Market
o Nail Care Market. Nail care has been a rapidly growing segment in the
cosmetics market, with an estimated increase in sales volume of
approximately 9.2% over the twelve months ended December 31, 1997,
according to IRI. Three segments, namely nail enamel/treatments and cuticle
treatments, artificial nail products and nail polish removers (including
dryers and thinners), make up the nail care market.
o Women's Depilatory Market. Current methods of removing unwanted hair
include shaving with a razor (approximately 60%), waxing and using a creme
or lotion depilatory (approximately 15%).Shaving,while fast, easy and
inexpensive, can cause nicks, cuts, razor burns and bumps. Shaving with a
razor must be performed more often to maintain smooth skin. Waxing, while
longer lasting, can be very painful and expensive if done in a salon on a
regular basis. Depilatories offer longer lasting smoothness, and are safer
and less likely to cause bumps or burns. Current depilatory products often
contain an unpleasant odor and are not completely effective in removing
unwanted hair. Nair, Sally Hansen and Neet represent the principal brands,
according to IRI, targeting women aged 18-44 years.The Company, with its
almost century-old expertise in men's depilatories, introduced its first
women's depilatory product in 1997 under the Cutex Naturally Soft Body
Creme brand name. The Company believes it has an opportunity to penetrate
this market with a product
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that delivers smooth, soft skin in less time than existing brands. In
addition, the Company believes that the pleasant scent and ease of use
of the brand should give it a competitive advantage.
Competitive Strengths
The Company had the number one United States retail market in three of
the four ethnic hair care categories in which it competes (hair relaxers and
texturizers, hair color and men's depilatory products) for the 1997 year,
according to IRI. The acquisition of the Let's Jam product line adds one of the
leading brands in the fourth category, ethnic hair care maintenance products.
According to the same source, the Company had the number one market position in
the United States in nail polish remover during the same period. The Company
attributes its leading market positions to a number of competitive strengths,
including its strong brand names, dedicated sales force, broad distribution, R&D
capabilities and experienced management team.
o Strong Brands. The Company currently sells its products under seven
principal brand names including Dark & Lovely, Excelle, Beautiful
Beginnings, Dark & Natural, Magic,Let's Jam and Cutex. The Company's
flagship brand, Dark & Lovely, is the most widely recognized ethnic brand
name in the United States retail ethnic hair care market for
African-Americans and Cutex is the leading brand name for nail polish
removers in the United States mass market. 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 its consumers.
o Experienced Sales Force and Broad Distribution. The Company believes it has
the largest direct sales force serving the United States retail ethnic hair
care market. The Company also utilizes the experienced sales force of AM
Cosmetics, an affiliate of the Company, in the United States mass market.
Both of these sales forces enhance the Company's ability to further
penetrate its markets with current and new products. The Company's
competitors primarily use commissioned sales brokers who tend 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, Eckerd's,
CVS/Revco), food chains (e.g., Winn Dixie, Kroger) and discount chains
(e.g., Family Dollar, Dollar General), (ii) Beauty and Barber Supply Stores
("B&B's") 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.
o Focused 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 recently patented Fail Safe technology
for no-lye relaxers (1998), the only relaxer system to eliminate problems
associated with imprecise mixing, which the Company believes is the most
common cause of consumer complaints regarding relaxers.The Company recently
introduced a women's depilatory product, Cutex
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Naturally Soft Body Creme,which the Company believes eliminates many of the
negative features usually associated with women's hair removers. The
Company, through its affiliation with AM Cosmetics, also developed Dark &
Lovely Cosmetics, which the Company believes is the first hypoallergenic,
premium quality ethnic cosmetics line to be marketed through the Company's
existing distribution channels.
o Experienced Management Team. Since the Aminco Acquisition, a team of
seasoned senior executives with extensive experience in the ethnic market
and consumer products industry has been recruited to build on the Company's
strong position in the global ethnic hair care market.
Key Brands
The Company manufactures and markets a variety of products worldwide. The
following table sets forth the Company's principal porducts, as of December 31,
1997.
Brand Products
Dark & Lovely Relaxers
Hair Color
Hair Care Maintenance
Excelle Relaxers
Hair Care Maintenance
Beautiful Beginnings Relaxers
Hair Care Maintenance
Shampoo
Dark & Natural Texturizers
Hair Color
Moustache & Beard Color
Magic Shaving Products
Let's Jam Hair Care Maintenance
Cutex Polish
Remover
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
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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 10.7% of net sales in 1997 was allocated to advertising and consumer
promotions. 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.
Distribution and Sales
The Company's products are sold through five principal distribution
channels in the United States retail personal care market, as follows:
o Mass Merchandisers. The Company's products are sold by mass merchandisers,
including WalMart and K-Mart.
o Drug Chains. The Company's products are sold by drug chains, including
Walgreens, Eckerd's and CVS/Revco.
o Food Chains. The Company's products are sold by food chains, including Winn
Dixie and Kroger.
o Discount Chains. The Company's products are sold by discount chains,
including Family Dollar and Dollar General.
o 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.
The chains generally are an important part of the Company's retail
business because of their ability to draw customers from a large geographic
area. The Company's chain customers may purchase the Company's products directly
from the Company, through an ethnic product distributor or both. No single
customer accounted for more that 10.0% of the Company's net sales in the twelve
months ended December 31, 1997.
The Company's strong relationships with its customers in the various
distribution channels are enhanced by its direct sales force comprised of
divisional managers, regional managers and sales merchandisers, covering the
Northeast, Mid-Atlantic, Mideast and Midwest regions in the Northern Division
and the Mid-South, Southeast, Southwest and
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Western regions in the Southern Division. The sales force in each region markets
the Company's products to all of the distribution channels doing business in its
geographic region.
The Company distributes its cosmetics and nail care products through AM
Cosmetics' dedicated sales force and broker network.
The Company has established distributor relationships in various
countries in international markets. In Africa, the Company focuses its direct
sales efforts primarily on hair care salons which are serviced through regional
distributors, specialty cash-and-carry wholesale outlets, mass merchandisers and
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 tradition 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 recently patented Fail Safe technology for no-lye relaxers (1998), the
only relaxer system to eliminate problems associated with imprecise mixing,
which the Company believes is the most common cause of consumer complaints
regarding relaxers. 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 DL2000 hair relaxer
technologies, as well as a full line of hair care maintenance products.
The Company's R&D costs (principally for new products) for the year
ended March 31, 1995 was approximately $300,000 and was $535,000 for the year
ended December 31, 1997. For the nine months ended December 31, 1996, the
Company's R&D costs were $300,000. These amounts do not include amounts spent on
quality control, analytical chemistry, microbiology, package testing and
consumer products testing.
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
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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.
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. The Company believes that alternate sources of supplies exist and
does not anticipate any significant shortages of, or difficulty in obtaining,
such supplies.
In order to increase the Company's manufacturing capacity, the Company
has added new production lines in Savannah and outsourced the production of
certain low volume maintenance products, freeing the resources of the Savannah
facility to concentrate on certain high volume relaxer and hair care products.
The Company relies on a limited number of contractors to manufacture its
products to the Company's specifications. For example, the Company currently
relies on AM Cosmetics to manufacture the Dark & Lovely line of cosmetics and
Cutex nail enamels., Chesebrough-Pond's USA to manufacture Cutex nail polish
remover products and CEI to manufacture the Company's shampoos and conditioners
as well as the Let's Jam line.
Competition
The United States retail ethnic hair care market is competitive and
highly fragmented with a number of market participants that focus specifically
on this market. The five largest companies generated approximately 50% of
industry sales in 1997 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, Inc. 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.
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.
Some of the Company's competitors are general market companies which
are larger and have substantially greater financial and other resources than the
Company.
10
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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, Cutex, Magic, Let's Jam, Dark & Lovely Excelle, Beautiful Beginnings and
Dark & Natural. 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 Food and Drug
Administration ("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
As of December 31, 1997, the Company employed approximately 343 persons
in Savannah, and additional 38 elsewhere in the United States and 317
internationally. In the United States, 254 were hourly personnel and 127 were
salaried employees. The Company also utilizes temporary workers as needed,
primarily in manufacturing. An average of 75 such temporary workers were
utilized on a daily basis by the Company during the twelve months ended December
31, 1997. The Company is non-union and believes that its relationship with
employees is good.
Environmental Matters
11
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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.
Based upon recent experience, the Company believes that the future cost
of compliance with existing environmental requirements, and liability for known
environmental claims pursuant to such requirements, will not have a material
adverse effect on the Company's business, results of operations and financial
condition. However, future events, such as new information, changes in existing
requirements or their interpretation, and more vigorous enforcement policies of
regulatory agencies, may give rise to additional expenditures or liabilities
that could be material.
Item 2. Properties
The Company owns and occupies six buildings on a 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 is used to
test 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 to increase the capacity of the Savannah
facility. The Company has signed a five year lease agreement for additional
warehouse and office space which expires in 2003. The annual lease commitment is
approximately $445,000. The Company believes that the capacity in the Savannah
facility combined with the additional warehouse space will be adequate for its
needs in the reasonably foreseeable future.
The Company's South African subsidiary 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 80,000 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.
In late 1996, the Company purchased a production facility in Ghana
located near the Ghanaian Coca-Cola bottling plant which will enable the Company
to better service the 200 million Black people located in the region. The plant
is expected to be operational by June 1997. In Tanzania, East Africa, the
Company anticipates having a similar facility to the West African Ghanaian plant
which should be operational by early 1999.
Item 3. Legal Proceedings
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The Company is involved in various routine legal proceedings incident
to the ordinary course of 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.
Item 4. Submission of Matters to Vote of Security Holders
Not applicable.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
The Company's Class A Common Stock is traded on the New York Stock
Exchange. The Company's Class B Common Stock and Class C Common Stock have no
established public trading market. The high and low sales prices for the
Company's Class A Common Stock as reported by the New York Stock Exchange for
each full quarterly period for which prices are available follow:
1997 Quarterly Stock Prices*
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
High 14 7/8 11 5/8 13 11 11/16
Low 11 3/8 7 1/2 9 6 1/8
* Represents the closing price per share on the New York Stock Exchange, which
is the market on which shares of the Company's Class A Common Stock are listed.
The first quarter of 1997 is the first full quarterly period for which such
prices are available. The Company's symbol is CIC.
At December 31, 1997, there were approximately 42 holders of record of the
Company's Class A Common Stock, 2 holders of the Company's Class B Common Stock
and 12 holders of the Company's Class C Common Stock. Since the Aminco
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
entered into a new bank credit facility and issued $100,000,000 of Senior
Subordinated Notes which restricts the ability of the Company or any subsidiary
of the Company from paying cash dividends other than dividends or distributions
payable in shares of capital stock. 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.
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Item 6. Selected Consolidated Historical Financial Data
<TABLE>
Company (1) Full Fiscal Year Predecessor
Twelve Nine
Months Months Predecessor Company (2)
Ended Ended April 1, 1995 August 23, 1995
December 31, December 31, to August 22, to March 31, Year Ended March 31,
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts in 000s except per share data 1997 1996 (4) 1995 1996 1995 1994 (3) 1993
Statement of Operations Data:
Net sales ............................... $109,631 $ 59,938 $ 26,854 $ 41,465 $ 58,126 $ 50,108 $ 49,335
Income (loss) from
continuing operations (4) ............. 3,754 (3,256) 3,934 1,104 5,688 2,697 4,939
Basic and diluted earnings (loss)
per share from continuing
operations (4) ........................ $ 0.25 $ (0.25) -- $ 0.09 -- -- --
Weighted average common
shares outstanding .................... 15,003 12,715 -- 11,871 -- -- --
Company Predecessor
December 31, December 31, March 31, March 31,
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data: ............................... 1997 1996 (3) 1996 (3) 1995 1994 (3) 1993
Total assets ...................................... $201,424 $ 97,529 $ 87,980 $ 43,863 $ 38,609 $ 37,572
Long-term debt (including current portion) ........ 103,623 27,101 66,788 -- -- 288
Stockholders' equity .............................. 61,531 54,215 9,775 34,358 29,313 30,473
Working capital ................................... $ 44,944 $ 15,852 $ 13,855 $ 15,140 $ 11,267 $ 14,256
</TABLE>
(1) Effective December 31, 1996, the Company changed its fiscal year-end from
March 31 to December 31.
(2) The acquisition of Aminco, Inc. (the Predecessor) was completed on August
23, 1995. The Company's financial statements include the operating results from
the acquisition date.
(3) During the second calendar quarter of 1997 the Company changed its method of
valuing inventories. See Note 3 and Note 15 to the financial statements.
(4) Before extraordinary item and cumulative effect of accounting change.
14
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Item 7.Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Carson, Inc. (formerly DNL Savannah Holding Corp. and also referred to herein as
the "Company" or "Carson") is a leading manufacturer and marketer of personal
care products. 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 approximaely 50% of the Company 's net sales in
1997), hair color, men's depilatory products and hair care maintenance products.
Carson 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 Carson
Products Company ("Carson Products") from the acquisition date .
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) was initially financed with long-term borrowings aggregating
approximately $68.0 million and has been accounted for as a purchase (the
"Aminco Acquisition"). Accordingly, the purchase price has been allocated to the
Predecessor's identifiable assets and liabilities based on the fair values at
the acquisition date. Liabilities assumed aggregated approximately $11.4
million. The excess of the purchase price over the fair value of the
Predecessor's identifiable net assets has been classified as goodwill. In
connection with the acquisition, the senior management of the Predecessor was
replaced. The Predecessor had a March 31 fiscal year-end . Effective December
31, 1996, the Company changed its fiscal year-end from March 31 to December 31.
The decision to change the fiscal year-end was made in order to conform the
Company 's financial reporting year to the natural business year of the
industry.
On July 3, 1996, the Company 's South African subsidiary, Carson Holdings,
L t d . ("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 employ e e s , officers and directors
involved in the Company 's South African operations. 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 Products Proprietary Limited ("Carson Products
S.A."), a South African registered company wholly owned by Carson South Africa,
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 twelve months
written notice.
In the twelve months ended December 31, 1997, 30.8% 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:
Dollars in thousands % of Total
Net sales to:
United States ............................ $ 75,834 69.2 %
South Africa ............................. 21,662 19.8
Other International ...................... 12,135 11.0
Total .................................... $109,631 100.0 %
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 recorded in United States 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. However, due to
fluctuations in the exchange rate , there is a potential for losses on the
consolidated level. Assets and
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<PAGE>
liabilities of the Company's South African operations are translated for
consolidation purposes from South African Rand into United States 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.
On June 26, 1996, Carson made an investment of $3.0 million in Morningside
AM Acquisition Corp., 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
26, 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, Carson entered into a
management agreement and will enter into certain related sales agreements and
manufacturing agreements with AM Cosmetics.
The Company completed the offering (the "initial public 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 original buy out group.
In the first half of 1997, Carson's South African subsidiary consummated
three acquisitions in the African personal care industry i n cluding 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, subject to post closing adjustments, comprised
of $0.7 million in cash and 500,000 shares of Carson South Africa common stock
(which resulted in a gain to the Company of approximately $460,000 which was
recorded in paid-in capital in the year ended December 31, 1997) . These
acquisitions are accounted for under the purchase method of accounting.
On April 30, 1997, the Company purchased 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 "Cutex Acquisition" ) .The purchase price was
approximately $41.4 million, subject to post closing adjustments, with funds
provided by additional long-term debt. Net product sales of Chesebrough-Pond 's
USA Cutex line approximated $18.2 million, excluding any results from the sale
of nail enamel or other products under license by Jean Philippe, for the twelve
months ended December 31, 1996. This acquisition is accounted for under the
purchase method of accounting.
Also on April 30, 1997, the Company terminated its just acquired license
agreement with Jean Philippe 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.
During April 1997, the Company completed the acquisition of the Let's Jam
product line from New Image Laboratories, Inc.This acquisition added 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
in cash, subject to post-closing adjustments, funded primarily by additional
long term debt. This acquisition is accounted for under the purchase method of
accounting.
In November 1997, Carson South Africa completed the acquisition of A&J
Cosmetics, which owns and manufactures the Sadie brand of toiletry products. The
purchase consideration payable for the acquisition is approximately $9.5
million, subject to post closing adjustments, of which approximately $9.3
million was recorded as intangible assets; additional consideration of up to
$3.7 million based upon the after tax profit of the business for the year ended
December 31, 1998 may be paid. To fund this purchase, Carson South Africa issued
stock with net proceeds of approximately $9.1 million (which resulted in a gain
to the Company of approximately $5.9 million, which was recorded in paid-in
capital in the year ended December 31, 1997). Approximately $5.4 million of the
purchase price was paid in January 1998, approximately $4.1 million is payable
on or before January 3, 1999 and the remainder (subject to adjustment) is
payable no later than March 1999.
Effect of the Recent Acquisitions on Results of Operations
The consummation of recent acquisitions affected the Company 's results of
operations in certain significant respects. The Cutex Acquisition and the other
recent acquisitions have been reflected using purchase accounting, with the
excess of the purchase price over the fair value of the identifiable net assets
being classified as goodwill. Therefore, depreciation and amortization expense
increased for periods following each such acquisition, and interest expense also
increased following the Cutex Acquisition due to increased debt used to finance
the Cutex Acquisition.Similarly, the Aminco Acquisition
16
<PAGE>
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 date of acquisition, which was August 23, 1995. The excess of the purchase
price over the fair value of the Company 's identifiable net assets has been
classified as goodwill. 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 Aminco
Acquisition. Due to these increased expenses, the financial statements of the
Predecessor are not strictly comparable to those of the Company for subsequent
periods. However, the following table combines historical fiscal 1995 data for
the Predecessor and the Company in order to facilitate discussion of financial
results.
<TABLE>
Statement of Operations Data
Company Combined (b)
Twelve-Month Twelve-Month Nine-Month Nine-Month
Period Ended Period Ended Period Ended Period Ended
Dollars in 000s December 31,1997 December 31,1996(a) December 31,1996 December 31,1995
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales .............................................. $109,631 $ 77,730 $ 59,938 $ 50,527
Cost of goods sold ..................................... 50,510 34,923 26,940 22,336
Gross profit ........................................... 59,121 42,807 32,998 28,191
Marketing and selling expenses ......................... 28,158 19,144 15,692 13,596
General and administrative expenses .................... 18,714 10,873 7,732 6,029
Incentive compensation ................................. -- 7,123 7,123 --
Operating income ....................................... $ 12,249 $ 5,667 $ 2,451 $ 8,566
Data as a Percentage of Sales:
Net sales .................................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ......................................... 46.1 44.9 44.9 44.2
Gross profit ............................................... 53.9 55.1 55.1 55.8
Marketing and selling expenses ............................. 25.7 24.6 26.2 26.9
General and administrative expenses ........................ 17.1 14.0 12.9 11.9
Incentive compensation ..................................... -- 9.2 11.9 --
Operating income ........................................... 11.1% 7.3% 4.1% 17.0%
</TABLE>
(a) The unaudited statement of operations for the twelve-month period ended
December 31, 1996 includes the audited results for the nine-month period ended
December 31, 1996 and the unaudited results for the three-month period ended
March 31, 1996. (b) The combined unaudited statement of operations for the
nine-month period ended December 31, 1995 includes results of Predecessor
operations for the period from April 1, 1995 to August 22, 1995 combined with
Company results of operations for the period from August 23, 1995 to December
31, 1995. The combined presentation is not in conformity with generally accepted
accounting principles but is included for comparative purposes only.
Company Twelve-Month Period Ended December 31, 1997 Compared to Twelve-Month
Period Ended December 31, 1996 Net Sales.
Consolidated net sales for the year ended December 31, 1997 amounted to
$109.6 million, an increase of 41.0% over the $77.7 million reported for 1996.
This sales increase is principally attributable to incremental sales of the
domestic acquisitions of the Cutex and Let's Jam brands in addition to strong
growth in sales of the South African subsidiary, which saw sales increase by
110.0%. Cutex, which was acquired on April 30, 1997, contributed $17.8 million
to consolidated sales, and Let's Jam, which was acquired on April 8,1997,
contributed $2.4 million to sales. Total international sales amounted to $33.8
million, an increase of 65.4% over the $ 20.4 million reported for all of 1996.
The South Africa subsidiary contributed $21.7 million of this international
sales performance.
In the United States, the Company 's core ethnic hair care sales declined
by 5.2% to $54.3 million. However, during this period, the Company 's overall
market share of this category, as published by Information Resources, Inc.
("IRI") (based on sales data from store register scanners at a sampling of food
and drug store chains and mass merchandisers), increased slightly. These market
share results outperformed the ethnic hair care products market where sales at
retail declined by approximately 2.6% as published by IRI. The Company believes
that the softness in this market is attributable in part to continuing drug
chain consolidation as well as consolidation in the distribution channel.
During the second half of 1997, the Company introduced a new line of
cosmetics under the Dark & Lovely
17
<PAGE>
brand name. Due to delays in the execution of the launch, net sales of Dark &
Lovely Cosmetics were limited to $1.2 million for 1997.
Gross Profit. Gross profit increased to $59.1 million for the year ended
December 31, 1997 compared to $42.8 million in the prior year. Gross profit
margin decreased from 55.1% in 1996 to 53.9% in 1997. Management believes that
this contraction in gross margin is principally attributable to inefficiencies
in its manufacturing processes which resulted without a comparable increase in
production volume. The Company is addressing these issues and by year end had
added a Senior Vice President, Operations and a Director of Materials
Management. Management believes that it has made significant progress in
resolving the issues that adversely impacted gross margin in 1997.
During 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. The effect of this change
has been reflected to the extent material in all periods presented in these
financial statements. This change in value in 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, cost
of goods sold increased and net income decreased for the period from August 23,
1995 to March 31, 1996 by $177,000 and $102,000, respectively, from amounts
previously reported. In addition, inventories decreased by $177,000, retained
earnings decreased by $102,000, and deferred income taxes decreased by $75,000
at December 31, 1996.
Marketing and Selling Expenses. Marketing and selling expenses increased to
$28.2 million in 1997 compared to $19.1 million in 1996, an increase of 47.1%.
As a percentage of sales, marketing and selling expenses amounted to 25.7% in
1997 compared to 24.6% in 1996. There were several reasons for the substantial
increase in marketing and selling expenses. As a result of the Cutex
Acquisition,the Company began paying sales commissions to brokers hired to sell
Cutex. Prior to the Cutex Acquisition, essentially all sales were obtained by
the Company 's internal sales force. Additionally, in connection with the launch
of the Color Cosmetics and Salon Professional lines, the Company incurred
significant start-up marketing and selling expenses in amounts disproportionate
to the sales volume generated by these new lines. A total of $1.5 million was
incurred in the Color Cosmetics development and $1.6 million was incurred in the
development of the Salon Professional line. These amounts were expensed as part
of marketing and selling expenses during 1997.
General and Administrative Expenses. General and administrative expenses
increased from $10.9 million in 1996 to $18.7 million in 1997, an increase of
72.1%. 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 . An example of the infrastructure improvements include costs
to enhance the Company 's information services technology needed to meet
financial reporting requirements as well as customer service demands. The
increases in personnel costs were attributable in large measure to the addition
of a Chief Financial Officer, a Senior Vice President, Operations and a Senior
Vice President, Finance. In addition, two incumbent executives who terminated
their services at the end of 1997 were included in the cost structure throughout
1997. Nonrecurring severance benefits aggregating $430,000 were paid or accrued
and expensed in 1997 for these individuals.
Incentive Compensation. During 1996, a nonrecurring charge for pre-initial
public offering incentive compensation of $7.1 million was incurred. No similar
cost was incurred in 1997.
Operating Income. As a result of the above changes, operating income amounted to
$12.2 million for 1997, an increase of 116.1% over operating income of $5.7
million reported for 1996. The operating margin was 11.1% in 1997 compared to
7.3% in 1996.
Interest Expense. Interest expense amounted to $6.4 million in 1997 compared to
$6.2 million in 1996. Although total interest expense did not increase
materially from year to year, the Company refinanced its debt in November 1997
by issuing $100.0 million of 10 3/8 % Senior Subordinated Notes. Accordingly,
interest expense in future years, including amortization of debt issuance costs,
can be expected to amount to a minimum of $11.0 million per year. See "Liquidity
and Capital Resources" for further description of the Company 's financing.
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Extraordinary Item. In connection with the debt refinancing mentioned
previously, unamortized debt issuance costs of $3.2 million related to the early
extinguishment of existing debt was written off as an extraordinary charge.
After taxes, this charge amounted to $2.1 million ($0.14 per share). During
1996, there was an extraordinary charge of $3.5 million, ($0.28 per share) net
of income taxes, related to the write off of debt issuance costs in conjunction
with the extinguishment of debt as a result of the Company's IPO.
Provision for Income Taxes. The provision for income taxes amounted to $2.8
million in 1997, or 42.5% of income before income taxes. In 1996, the provision
for income taxes was $2.5 million, although income before income taxes was
negligible. The effective tax rate in 1996 was not proportionate to the
statutory rate as a result of the majority of the non-deductibility of incentive
compensation charges for income tax purposes.
Company Nine-Month Period Ended December 31, 1996 Compared to Combined
Nine-Month Period Ended December 31, 1995.
The Company is comparing its actual historical results of operations for
the nine-month period ended December 31, 1996 to a Predecessor period of April
1, 1995 to August 22, 1995 combined with a Company period of August 23, 1995 to
December 31, 1995.This combined presentation is not in conformity with generally
accepted accounting principles but is included for comparative purposes only.
Net Sales. Net sales increased from $50.5 million for the combined nine-month
period ended December 31, 1995 to $59.9 million for t h e nine-month period
ended December 31, 1996, an increase of 18.6%. In the United States, relaxers
and texturizers, hair color and hair care maintenance products each generated
net sales increases. Carson South Africa continued to demonstrate strong results
with an increase in net sales of 69.2% from $5.2 million for the combined
nine-month period ended December 31, 1995 to $8.8 million for the nine-month
period ended December 31, 1996.
Gross Profit. Gross profit increased from $28.2 million for the combined
nine-month period ended December 31, 1995 to $33.0 million for the nine-month
period ended December 31, 1996, an increase of 17.0%. This increase was almost
entirely due to the increase in net sales. As a percent of net sales, gross
profit decreased from 55.8% for the combined nine-month period ended December
31, 1995 to 55.1% for the nine-month period ended December 31, 1996, primarily
due to an inventory adjustment related to repackaging and reformulation of
several product lines.
Marketing and Selling Expenses. Marketing and selling expenses increased from
$13.6 million for the combined nine-month period ended December 31, 1995 to
$15.7 million for the nine-month period ended December 31, 1996, an increase of
15.4%. The increase in marketing and selling expense was almost entirely a
result of the increase in net sales. As a percentage of net sales, marketing and
selling expenses decreased from 26.9% to 26.2% during this period, primarily as
a result of the timing of advertising and promotional expenses.
General and Administrative Expenses. General and administrative expenses other
than depreciation and amortization increased from $4.8 million for the combined
nine-month period ended December 31, 1995 to $5.8 million for the nine-month
period ended December 31, 1996, an increase of 20.8%. As a percentage of net
sales, general and administrative expenses increased from 9.4% to 9.7% 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 which management believed
was 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 $400,000 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 Aminco Acquisition.
Incentive Compensation Expenses. The Company recognized $7.1 million of
incentive compensation expenses during the nine-month period ended December 31,
1996 relating to costs under certain long-term incentive compensation agreements
and the purchase of shares prior to the initial public offering by several
outside directors and certain members of senior management and for the shares of
Carson South Africa awarded to certain members of its management. No similar
costs were previously recorded.
Depreciation and Amortization. Depreciation and amortization expense increased
from $1.3 million for the combined nine-month period ended December 31, 1995 to
$1.9 million for the nine-month period ended December 31, 1996. As a percentage
of net sales, depreciation and amortization expense increased from 2.5% to 3.2%
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 Aminco Acquisition was partially offset by a change in
the way the Company accounts for package design costs. Prior to the Aminco
Acquisition, the Predecessor capitalized package design costs and amortized it
over a four year period. Since the Aminco Acquisition, the Company has expensed
package design costs as incurred.
Operating Income. As a result of the above changes, operating income decreased
from $8.6 million for the combined nine-month period ended December 31, 1995 to
$2.5 million for the nine-month period ended December 31, 1996.
Interest Expense. Interest expense increased substantially from $2.7 million for
the combined nine-month period ended December 31, 1995 to $4.5 million for the
nine-month period ended December 31, 1996, as a result of the new debt incurred
to finance the Aminco Acquisition.
Other Income, net. 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 Aminco Acquisition .Additionally, in June of 1996, the Company made an
investment and entered into a management contract with AM Cosmetics, a leading
low-cost producer of 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 investment and an annual management fee of the greater of
$500,000 or 1% of net sales.
Provision for Taxes. The provision for taxes decreased from $2.8 million to $1.7
million during this period. The effective tax rate is not proportionate to the
statutory rates as a result of the majority of the incentive compensation charge
not being deductible for income tax purposes .
Liquidity and Capital Resources
On June 26, 1996, Carson Products Company invested $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
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 Company entered into a management agreement and certain related sales
agreements and manufacturing agreements with AM Cosmetics. See "Certain
Relationships and Related Transactions--AM Cosmetics."
The Company completed the offering of 4,818,500 shares of Class A common
stock on the NYSE on October 18, 1996 at a price of $14.00 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 such offering to repay certain
indebtedness of Carson Products Company used to finance the Aminco Acquisition.
In April 1997, the Company amended its credit facility to change the
Company 's then existing $40.0 million senior credit facility to a $100.0
million senior credit facility consisting of $25.0 million of Term A loans,
$50.0 million of Term B loans and a $25.0 million revolving loan commitment. The
proceeds of the new term loans were used in part to finance the Cutex
Acquisition. In connection with the refinancing , the Company incurred debt
issuance costs of approximately $2.6 million, including $520,000 paid to
Morningside Capital Group,L. L. C.
In November 1997, the Company completed a private offering of $100.0
million aggregate principal amount of ten year, fixed rate 10 3/8 % senior
subordinated notes (the "offering"). The notes are
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<PAGE>
guaranteed by the Company 's wholly-owned subsidiary, Carson Products Company.
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 amended credit facility and to pay transaction
fees and expenses of $4.4 million related to a new credit facility. The balance
of the proceeds of the offering was used for working capital and general
corporate purposes. As a result, the Company recognized $2.1 million (net of the
related tax benefit of $1.2 million) in 1997 of debt-related charges and
write-offs reflected in the accompanying statements of operations as an
extraordinary item. The Company defers all loan fees and amortizes them over the
term of the loan. The private offering contains covenants with respect to, among
other things, (i) maintenance by Carson Products Company of certain cash flow
coverage ratios; (ii) restrictions on the incurrence of additional liens or
indebtedness. The private offering contains restrictions on the payment of any
cash dividends by the Company or any subsidiary.
Concurrently with the consummation of the private offering, the Company
entered into a new credit facility with Credit Agricole Indosuez as agent and
lender, which is guaranteed by the Company 's wholly-owned subsidiary, Carson
Products Company. The facility provides a term acquisition loan facility of
$50.0 million and a revolving loan facility of $25.0 million. The final maturity
date for each of the term loan facility and revolving loan facility is October
2005 and 2003, respectively. Borrowings under the term loan facility and
revolving loan facility will bear interest at the Base Rate (as defined) plus
1.0% and the Base Rate plus 0.5%, respectively, or at the Company's option, the
Eurodollar Rate (as defined) plus 2.5% and the Eurodollar Rate plus 2.0%,
respectively. Debt issue costs related to the new credit facility were
approximately $1.7 million.
The new credit facility provides for (i) a commitment fee of 0.25% per
annum on the unutilized portion of the revolving credit facility, (ii) a fee of
0.25% per annum on the maximum amount available to be drawn under letters of
credit and (iii) a letter of credit insurance fee. The new facility contains
covenants with respect to, among other things, (i) maintenance by Carson
Products Company of certain total interest coverage ratios, fixed charge
coverage ratios and leverage ratios and (ii) restrictions on the incurrence of
additional liens or indebtedness. The new facility contains restrictions on the
payment of any cash dividends by the Company or any subsidiary except for
dividends or distributions payable in shares of capital stock.
In the year ended December 31, 1997, net cash flow used in operations was
$17.3 million, largely as a result of a $11.6 million increase in inventory, a
$13.0 million increase in accounts receivable, and a $8.7 million decrease in
accrued expenses. These uses of cash were offset in part by net income of $1.7
million, depreciation and amortization of $3.8 million and an increase in
accounts payable of $6.9 million.
Net cash used in investing activities for the year ended December 31, 1997
totaled $57.6 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 totaled $84.8 million primarily
as a result of additional borrowings related to acquisitions plus the $100.0
million notes issuance discussed above, offset in part by payments on long-term
debt of $92.7 million. Additionally, Carson South Africa completed an equity
rights offering which generated $1.5 million of cash, net of $4.2 million which
was invested by Carson Products Company. The rights offering of additional
shares of its common stock to its existing shareholders was consummated 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 Company participated in the rights offering indirectly by having Carson
Products Company subscribe for additional shares in the amount of approximately
R19.0 million (approximately $4.2 million), and therefore its ownership
percentage remained approximately the same. The rights offering raised
approximately R25.9 million (approximately $5.7 million), including amounts paid
by Carson Products Company. In addition, Carson South Africa issued 8,480,000
shares of its Common Stock during 1997 related to the purchase of A&J Cosmetics
which generated cash of $9.0 million.
The Company 's non-acquisition related capital expenditures for the years
ended December 31, 1997 and 1996 were $8.2 million and $3.8 million,
respectively.
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.
Inflation
The Company 's manufacturing costs and operating expenses are affected by price
changes. The
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<PAGE>
Company has historically mitigated inflationary effects by passing price changes
along to its customers and by continually developing more cost-effective
manufacturing and operational procedures. The Company 's ability to mitigate the
effects of price changes will depend on market factors.
Outlook
Statements contained herein are forward-looking statements. It is important to
note that the Company 's actual results could differ materially from those
projected in such forward-looking statements based on a number of factors, some
of which are beyond the Company 's control.
Risk factors include, but are not limited to, the Company 's ability to
successfully implement its growth strategy, the nature and extent of future
competition in the Company 's principal marketing areas and increased costs of
compliance with any developments in the U.S., Brazil, the Caribbean, Europe and
other countries where the Company now does business or in the future may do
business.
Year 2000 Issue
The Company currently utilizes two computer information systems. The JD Edwards
financial package is used to support several financial applications. In its
distribution and manufacturing operations, the Company uses a software package
known as PRISM developed by MARCAM. The JD Edwards and PRISM packages run on an
IBM AS/400 computer and are currently not year 2000 compliant.
The Company has received newer releases of the JD Edwards and PRISM
packages that are year 2000 compliant but has not implemented these releases.
New releases are covered by maintenance agreements with JD Edwards and MARCAM
and as a result there were no additional software costs for the releases. The
Company is currently working on a plan to upgrade current versions of JD Edwards
and PRISM with the newer releases. The new releases have additional features and
functions that will require a significant amount of user training. Management
believes that the consulting and training for the upgrade could cost between
$50,000 to $100,000, which includes the Company 's commitment of resources. The
Company anticipates that both the JD Edwards and PRISM upgrades will be
functional by December 31, 1998.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130") .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. The Company
will adopt SFAS No. 130 during 1998 and expects to report comprehensive income
for the effects of foreign currency translation adjustments which are reported
as a component of stockholders' equity.
In addition, during 1997 the FASB issued SFAS No. 131," Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
revised standards for the manner in which companies report information about
operating segments. The Company does not believe that this statement will
significantly alter the segment disclosures it provides. This statement is
effective for the Company 's year ending December 31, 1998.
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<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
Consolidated Statements of Operations
Company Twelve-Month Period
Nine-Month Period
Unaudited Predecessor Company
January 1,1997 to April 1,1996 to August 23,1995 to April 1,1995 to August 23,1995 to
Amounts in 000s,except per share data December 31,1997 December 31,1996 December 31,1995 August 22,1995 March 31,1996
<S> <C> <C> <C> <C> <C>
Net sales ................................. $ 109,631 $ 59,938 $ 23,673 $ 26,854 $ 41,465
Cost of sales ............................. 50,510 26,940 10,823 11,513 18,806
Gross profit ............................. 59,121 32,998 12,850 15,341 22,659
Marketing and selling expenses ............ 27,007 15,692 6,129 7,467 9,581
AM Cosmetics sales commissions ............ 1,151 -- -- -- --
General and administrative expenses ....... 14,551 5,603 2,475 2,276 5,061
General and administrative -
fees paid to Morningside ................ 370 233 -- -- --
Incentive compensation,directors and
management .............................. -- 7,123 -- -- --
Depreciation and amortization ............. 3,793 1,896 776 502 1,331
Operating income .......................... 12,249 2,451 3,470 5,096 6,686
Interest expense .......................... (6,444) (4,545) (2,640) (56) (4,487)
Other (expense) income, net ............... (172) 121 35 1,137 182
Other income,AM Cosmetics management
fee and dividend ........................ 900 444 -- -- --
Income (loss) before income tax ........... 6,533 (1,529) 865 6,177 2,381
Provision for income tax .................. 2,779 1,727 527 2,243 1,277
Income (loss) before extraordinary item ... 3,754 (3,256) 338 3,934 1,104
Extraordinary item,net of tax benefit ..... (2,086) (3,527) -- -- --
Net income (loss) ......................... 1,668 (6,783) 338 3,934 1,104
Dividends on preferred stock .............. -- -- -- 554 --
Income (loss) available to all shareholders $ 1,668 $ (6,783) $ 338 $ 3,380 $ 1,104
Basic and diluted earnings (loss) per common share:
Before extraordinary item ........................ $ 0.25 $ (0.25) $ 0.03 $ 0.09
Extraordinary item,net of tax benefit ............. (0.14) (0.28) -- --
Net Income (loss) per share .......................$ 0.11 $ (0.53) $ 0.03 $ 0.09
Weighted average common shares outstanding ......... 15,003 12,715 11,871 11,871
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
Consolidated Balance Sheets
December 31, December 31,
Dollars in 000s except share and par value data 1997 1996
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents .................................................................. $ 14,043 $ 4,191
Accounts receivable less allowance for doubtful accounts of
$3,881 (1997) and $614 (1996) ........................................................... 28,148 15,117
Inventories ................................................................................ 24,861 10,572
Other current assets ....................................................................... 832 1,421
Total current assets ....................................................................... 67,884 31,301
Property, Plant and Equipment, net ......................................................... 22,202 15,089
Investment in AM Cosmetics ................................................................. 3,587 3,187
Intangibles,net of accumulated amortization of $3,737 (1997) and $1,573 (1996) ............. 100,385 46,108
Other Assets ............................................................................... 7,366 1,844
Total Assets ............................................................................... $201,424 $ 97,529
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................................................... $ 8,567 $ 7,065
Due for A&J Cosmetics ...................................................................... 5,416 --
Accrued expenses ........................................................................... 7,413 5,291
Income taxes payable ....................................................................... 1,544 493
Current maturities of long-term debt ....................................................... -- 2,600
Total current liabilities .................................................................. 22,940 15,449
Long-term Debt ............................................................................. 103,623 24,501
Due for A&J Cosmetics ...................................................................... 4,088 --
Other Liabilities .......................................................................... 1,742 1,700
Minority Interest in Subsidiary ............................................................ 7,500 1,664
Commitments and Contingencies (Notes 11 and 14) ............................................ -- --
Stockholders' Equity:
Preferred stock,$.01 par value,10,000,000 shares authorized, none outstanding ............ -- --
Common stock:
Class A,voting, $.01 par value,150,000,000 shares authorized,5,033,248
and 4,996,568 shares issued as of December 31, 1997 and 1996,respectively .............. 50 50
Class B,nonvoting, $.01 par value, 2,000,000 shares authorized,1,859,677 shares
issued and outstanding ................................................................. 19 19
Class C,voting, $.01 par value,13,000,000 shares authorized, 8,127,937
shares issued and outstanding .......................................................... 81 81
Paid-in capital .......................................................................... 69,022 62,418
Accumulated deficit ...................................................................... (4,011) (5,679)
Foreign currency translation adjustment .................................................. (2,170) (1,309)
Notes receivable from employee shareholders, net of discount ............................. (1,353) (1,365)
Treasury stock,13,245 shares of Class A common stock ..................................... (107) --
Total stockholders' equity ............................................................... 61,531 54,215
Total Liabilities and Stockholders' Equity ............................................... $ 201,424 $ 97,529
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
24
<PAGE>
<TABLE>
Consolidated Statement of Stockholders' Equity
Common Stock Preferred Stock
Amounts in 000s Shares Amount Shares Amount
PREDECESSOR
<S> <C> <C> <C> <C>
Balance,March 31,1995 ................................ 406,699 $1,220 606,752 $6,068
Net income ........................................... -- -- -- --
Cash dividends,preferred stock ....................... -- -- -- --
Issuance of treasury stock ........................... -- -- -- --
Balance,August 22, 1995 .............................. 406,699 $1,220 606,752 $6,068
Class A Class B Class C
Amounts in 000s Shares Amount Shares Amount Shares Amount
COMPANY, beginning
August 23,1995
<S> <C> <C> <C> <C> <C> <C>
Sale of common stock ....................... -- $-- 569 $ 6 5,799 $58
Issuance of common stock in connection
with acquisition ......................... -- -- 1,291 13 2,006 20
Carryover of predecessor basis ............. -- -- -- -- 1,705 17
Net income ................................. -- -- -- -- -- --
Balance,March 31,1996 ...................... -- -- 1,860 19 9,510 95
Reduction of debt from shareholders ........ -- -- -- -- -- --
Sale of common stock,net ................... 3,113 31 -- -- -- --
Conversion of Class C shares
to Class A shares ........................ 1,884 19 -- -- (1,884) (19)
Reduction of debt from sharehoders ........ -- -- -- -- -- --
Net loss ................................... -- -- -- -- -- --
Translation adjustment ..................... -- -- -- -- -- --
Employee shareholder loans,
less discount ............................ -- -- -- -- -- --
Incentive compensation and other ........... -- -- -- -- 502 5
Balance,December 31,1996 ................... 4,997 50 1,860 19 8,128 81
Gain on sale of South Africa stock,net ..... -- -- -- -- -- --
Restricted share awards .................... 36 -- -- -- -- --
Net income ................................. -- -- -- -- -- --
Translation adjustment ..................... -- -- -- -- -- --
Change in employee shareholder loans ....... -- -- -- -- -- --
Purchase of treasury stock ................. -- -- -- -- -- --
Balance,December 31, 1997 .................. 5,033 $50 1,860 $19 8,128 $81
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Paid-in Retained Valuation Treasury Total
Capital Earnings Adjustment Stock Stockholders' Equity
$ 308 $ 33,187 $ 283 $ (6,708) $ 34,358
-- 3,934 -- -- 3,934
-- (554) -- -- (554)
-- -- -- 296 296
$ 308 $ 36,567 $ 283 $ (6,412) $ 38,034
<S> <C> <C> <C> <C> <C>
Paid-in Retained Earnings Translation Receivable From Treasury Total
Capital (Accumulated Deficit) Adjustment Employee Shareholders Stock Shareholders' Equity
$11,936 $ -- $ -- $ -- $ -- $ 12,000
2,717 -- -- -- -- 2,750
(6,096) -- -- -- -- (6,079)
-- 1,104 -- -- -- 1,104
8,557 1,104 -- -- -- 9,775
2,808 -- -- -- -- 2,808
38,162 -- -- -- -- 38,193
-- -- -- -- -- --
5,530 -- -- -- -- 5,530
-- (6,783) -- -- -- (6,783)
-- -- (1,309) -- -- (1,309)
-- -- -- (1,365) -- (1,365)
7,361 -- -- -- -- 7,366
62,418 (5,679) (1,309) (1,365) -- 54,215
6,360 -- -- -- -- 6,360
244 -- -- -- -- 244
-- 1,668 -- -- -- 1,668
-- -- (861) -- -- (861)
-- -- -- 12 -- 12
-- -- -- -- (107) (107)
$69,022 $(4,011) $ (2,170) $ (1,353) $ (107) $ 61,531
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
Twelve-Month Period
Nine-Month Period
Company Company Company Unaudited Predecessor Company
January 1, 1997 to April 1, 1996 to August 23, 1995 to April 1, 1995 to August 23, 1995
Dollars in 000s December 31, 1997 December 31, 1996 December 31, 1995 August 22, 1995 March 31, 1996
Operating Activities:
<S> <C> <C> <C> <C> <C>
Net income (loss) ................................... $ 1,668 $ (6,783) $ 338 $ 3,934 $ 1,104
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization ....................... 3,793 1,896 776 502 1,331
Extraordinary item, net of tax benefit .............. 2,086 3,527 -- -- --
Incentive compensation .............................. -- 6,163 -- -- --
Provision for doubtful accounts ..................... 935 112 110 -- --
Deferred income taxes ............................... (142) (957) -- -- 805
Other, net .......................................... 398 (1,363) (2,238) (1,367) 701
Prepayment penalty on long-term debt ................ -- (1,328) -- -- --
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable ................................. (13,078) (2,618) (446) (588) (2,385)
Inventories ......................................... (11,589) (2,086) (1,579) 190 (1,409)
Other current assets ................................ 1,711 1,748 (89) (546) (1,045)
Accounts payable .................................... 6,852 3,465 366 (732) 1,360
Accrued liabilities ................................. (9,912) 430 (985) 1,688 (1,677)
Total adjustments ................................... (18,946) 8,989 (4,085) (853) (2,319)
Net cash (used in) provided by operating activities . (17,278) 2,206 (3,747) 3,081 (1,215)
Investing Activities:
Additions to property, plant and equipment .......... (8,220) (3,805) (624) (375) (1,470)
Purchase of long-term investments ................... -- (3,000) -- -- --
Proceeds from sales and maturities of investments ... -- -- -- 21,428 --
Purchase of package design costs .................... -- -- -- (244) --
Acquisitions of business assets, net of cash acquired (49,406) -- (65,300) -- (65,300)
Purchases of investments ............................ -- -- -- (6,760) --
Net cash (used in) provided by investing activities . $(57,626) $ (6,805) $(65,924) $ 14,049 $(66,770)
</TABLE>
27
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<TABLE>
Consolidated Statements of Cash Flows
Twelve-Month Period
Nine-Month Period
Company Company Company Unaudited Predecessor Company
January 1, 1997 to April 1, 1996 to August 23, 1995 to April 1, 1995 to August 23, 1995
Dollars in 000s December 31, 1997 December 31, 1996 December 31, 1995 August 22, 1995 March 31, 1996
Financing Activities:
<S> <C> <C> <C> <C> <C>
Proceeds from long-term borrowings .............. $ 166,860 $ 32,704 $ 58,550 $ -- $ 58,550
Principal payments on long-term debt ............ (92,661) (67,876) (500) -- (1,012)
Dividends paid, preferred stock ................. -- -- -- (554) --
Purchases of treasury stock ..................... -- -- -- (296) --
Proceeds from subsidiary's equity rights offering 1,525 -- -- -- --
Proceeds from sale of common stock .............. -- 38,193 12,000 -- 12,000
Proceeds from sale of subsidiary stock .......... 9,032 4,216 -- -- --
Net cash provided by (used in)
financing activities .......................... 84,756 7,237 70,050 (850) 69,538
Net Increase in Cash and
Cash Equivalents .............................. 9,852 2,638 379 16,280 1,553
Cash and Cash Equivalents at Beginning of Period 4,191 1,553 -- 1,620 --
Cash and Cash Equivalents at End of Period ...... $ 14,043 $ 4,191 $ 379 $ 17,900 $ 1,553
Cash paid during the period for:
Interest ...................................... $ 6,683 $ 4,178 $ 3,034 $ 56 $ 3,991
Income taxes .................................. $ 2,764 $ 2,421 $ 1,276 $ 457 $ 2,497
Non-cash financing activities:
Long-term debt issued in Acquisition .......... $ -- $ -- $ 11,753 $ -- $ 11,753
Reduction of debt from shareholders ........... $ -- $ 5,530 $ -- $ -- $ --
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
28
<PAGE>
Notes to Consolidated Financial Statements
Note 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 Carson Products Company from the acquisition
date.
The Company is the leading manufacturer and marketer in the United States
of selected personal care products for both the ethnic and the mass market. 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 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 (Carson Holdings, Limited).
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 the 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.
Certain previous stockholders 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):
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
In July 1996, the Company's South African subsidiary ("Carson South Africa")
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 was recorded in paid-in capital for the period ended December 31,
1996). In conjunction with this public offering, the 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 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. The initial term of the agreement
expires on April 1, 1999; however, the agreement may be renewed indefinitely
thereafter until terminated by either party upon 12 months written notice.
The Company completed an initial public offering of 4,818,500 shares of
its Class A common stock on October 18, 1996. The Company used the proceeds of
such offering to repay certain indebtedness. This repayment resulted in an
extraordinary loss recorded at that time of approximately $3.5 million (net of
tax) for prepayment penalties and the write-off of unamortized debt discount and
deferred financing costs.
In October 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.
29
<PAGE>
In the first half of 1997, Carson South Africa consummated 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, subject to post closing adjustments, comprised of
$0.7 million in cash and 500,000 shares of Carson South Africa common stock
(which resulted in a gain to the Company of approximately $460,000 which was
recorded in paid-in capital in the year ended December 31, 1997). These
acquisitions are accounted for under the purchase method of accounting.
On April 30, 1997, the Company purchased 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 in cash, subject to
post closing adjustments, of which approximately $41.2 million was recorded as
intangible assets, with funds provided by additional long-term debt. This
acquisition is accounted for under the purchase method of accounting.
Also on April 30, 1997, the Company terminated its just acquired license
agreement with Jean Philippe 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 Pico.
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:
<TABLE>
Twelve Months Ended Nine Months Ended
(Dollars in thousands except per share amounts) December 31, 1997 December 31, 1996
<S> <C> <C>
Net sales ........................................................... $114,837 $ 74,781
Net income (loss) before extraordinary item ......................... 3,982 (1,708)
Net income (loss) ................................................... 1,896 (5,235)
Basic and diluted income (loss) per share before extraordinary item . 0.27 (0.13)
Basic and diluted income (loss) per share ........................... $ 0.13 $ (0.41)
</TABLE>
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 intangible 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.
During April 1997, the Company completed the acquisition of the Let's Jam
product line from New Image Laboratories, Inc. This acquisition added 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
in cash, of which approximately $5.3 million was recorded as intangible assets,
subject to post-closing adjustments, funded primarily by additional long-term
debt. This acquisition is accounted for under the purchase method of accounting.
In November 1997, Carson South Africa completed the acquisition of A&J
Cosmetics, which owns and manufactures the Sadie brand of toiletry products. The
purchase consideration payable for the acquisition is approximately $9.5
million, subject to post closing adjustments, of which approximately $9.3
million was recorded as intangible assets; additional consideration of up to
$3.7 million based upon the after tax profit of the business for the year ended
December 31, 1998 may be paid. To fund this purchase, Carson South Africa issued
stock with net proceeds of approximately $9.1 million (which resulted in a gain
to the Company of approximately $5.9 million, which was recorded in paid-in
capital in the year ended December 31, 1997). Approximately $5.4 million of the
purchase price was paid in January 1998, approximately $4.1 million is payable
on or before January 3, 1999 and the remainder (subject to adjustment) is
payable no later than March 1999.
Note 2. Significant Accounting Policies
Change in Fiscal Year
Effective December 31, 1996, the Company changed its fiscal year-end from March
31 to December 31.
30
<PAGE>
Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and accounts have
been eliminated.
Inventories
Inventories are valued at the lower of first-in, first-out (FIFO) cost or market
(see Note 3 and Note 15).
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:
Years
Buildings ................................................................. 42
Land improvements ......................................................... 20
Machinery and equipment ................................................... 12
Furniture and fixtures .................................................... 10
Office equipment .......................................................... 8
Vehicles .................................................................. 5
Information systems ....................................................... 5
Intangible Assets
Intangible assets are substantially comprised of goodwill which is amortized
over periods ranging from 15 to 40 years using the straight-line method. Patents
and trademarks are amortized using the straight-line method over 17 years.
Trademarks are amortized using the straight-line method over 17 years. The
Company periodically assesses the recoverability of tangible and intangible
assets 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 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 is recognized upon shipment to
customers.
Research and Development Costs
Research and development costs (principally for new products) are expensed as
incurred. These costs are included in general and administrative expenses in the
accompanying statements of operations. The Company's R&D costs (principally for
new products) for the year ended December 31,1997 and nine months ended December
31, 1996 were $535,000 and $349,000,respectively. Research and development costs
aggregated $250,000 for the period August 23, 1995 to March 31, 1996 and
$160,000 for the period from April 1, 1995 to August 22, 1995. These costs are
included in general and administrative expenses in the accompanying statements
of operations.
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.
Sale of Subsidiary Stock
The Company accounts for the gain on the sale of subsidiary stock as an increase
in paid-in capital in stockholders' equity.
Foreign Currency Translation
Assets and liabilities of the Company's South African operations are translated
from South African Rand
31
<PAGE>
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 period. Resulting translation differences are recognized
as a component of stockholders' equity. Adjustments resulting from transactions
are immaterial to the accompanying financial statements.
Basic and Diluted Earnings (Loss) Per Share
During the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." This pronouncement
requires dual presentation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing net earnings (loss) by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per share is computed by dividing net earnings (loss) by the sum of (1)
the weighted average number of shares of common stock outstanding during the
period, (2) the dilutive effect of the assumed exercise of stock options using
the treasury stock method and (3) the dilutive effect of other potentially
dilutive securities. SFAS No. 128 has been applied retroactively to all periods
presented.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). 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. The Company
will adopt SFAS No. 130 during 1998 and expects to report comprehensive income
for the effects of foreign currency translation adjustments which are reported
as a component of stockholders' equity.
In addition, during 1997 the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
revised standards for the manner in which companies report information about
operating segments. The Company does not believe that this statement will
significantly alter the segment disclosures it provides. This statement is
effective beginning with the Company's year ending December 31, 1998.
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. The carrying value of
long-term debt approximates fair value. The fair value of the Company's
investment in AM Cosmetics is not determinable because of the related party
aspects of the investment.
Reclassification
Certain prior periods have been reclassified to conform with current year
presentation.
Note 3. Inventories
Effective June 30, 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 (See Note 15).
Inventories are summarized as follows (in thousands):
December 31, 1997 December 31, 1996
Raw materials .......................... $10,873 $ 7,017
Work-in-process ........................ 1,651 1,236
Finished goods ......................... 12,337 2,319
Total .............................. $24,861 $10,572
32
<PAGE>
Note 4. Other Current Assets
Other current assets consist of the following (in thousands):
December 31, 1997 December 31, 1996
Deferred income taxes .................. $ 161 $ 203
Income tax receivable .................. 188 872
Other .................................. 483 346
Total ............................. $ 832 $1,421
Note 5. Property, Plant and Equipment
Property, plant and equipment is summarized as follows (in thousands):
December 31, 1997 December 31, 1996
Land .................................... $ 545 545
Buildings and improvements .............. 7,706 6,689
Machinery and equipment ................. 9,423 7,436
Furniture and fixtures .................. 1,537 396
Construction-in-progress ................ 5,242 1,004
24,453 16,070
Less: accumulated depreciation .......... 2,251 981
Total .............................. $22,202 $15,089
Depreciation expense for the twelve months ended December 31, 1997 was $1.3
million. For the nine months ended December 31, 1996 and December 31, 1995,
depreciation expense was $672,000 and $586,000, respectively. For the periods
from August 23, 1995 to March 31, 1996 and April 1, 1995 to August 22, 1995,
depreciation expense was $351,000 and $322,000, respectively.
Note 6. Other Assets
Other assets are summarized as follows (in thousands):
December 31, 1997 December 31, 1996
Deferred financing costs ................. $6,074 $ 937
Deferred income taxes .................... 1,156 935
Other .................................... 251 5
7,481 1,877
Less: accumulated amortization ........... 115 33
Total .................................... $7,366 $1,844
Note 7. Long-Term Debt
Long-term debt is summarized as follows (in thousands):
December 31, 1997 December 31, 1996
10 3/8% Senior subordinated notes due 2007 $ 100,000 $ --
Term loans ............................... -- 24,350
Revolving line of credit ................. 3,000 2,052
Other .................................... 623 699
103,623 27,101
Less: current portion .................... -- 2,600
$103,623 $24,501
33
<PAGE>
Annual maturities of outstanding indebtedness at December 31, 1997 are as
follows (in thousands):
Year ended December 31,
1998 $ 370
1999 253
2000 --
2001 --
2002 --
Thereafter 103,000
$103,623
Concurrently with the consummation of the Company's initial public offering in
October 1996, the Company entered into a credit facility with Credit Agricole
Indosuez, as agent and a lender, 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, including up to $5.0 million of letters of credit. The Company used
the proceeds from the initial public offering to retire senior subordinated
notes, subordinated notes and junior subordinated notes which were issued in
connection with the acquisition of the Company. As a result, during the nine
months ended December 31, 1996, the Company incurred $3.5 million (net of the
relate tax benefit of $2.4 million) of debt-related charges and write-offs
reflected in the accompanying statements of operations as an extraordinary item.
In addition, a shareholder forgave a portion of junior subordinated notes
totaling $5.5 million, which is reflected as a capital addition in the statement
of shareholders' equity.
In April 1997, the Company amended its credit facility to change the
Company's then existing $40.0 million senior credit facility to a $100.0 million
senior credit facility consisting of $25.0 million of Term A loans, $50.0
million of Term B loans and a $25.0 million revolving loan commitment. The
proceeds of the new term loans were used in part to finance the Cutex
Acquisition. In connection with the refinancing, the Company incurred debt
issuance costs of approximately $2.6 million, including $520,000 paid to
Morningside Capital Group, L.L.C.
In November 1997, the Company completed a private offering of $100.0
million aggregate principal amount of ten year, fixed rate 10 3/8 % senior
subordinated notes (the "offering"). The notes are guaranteed by the Company's
wholly-owned subsidiary, Carson Products Company. 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 amended credit facility and to pay transaction fees and
expenses of $4.4 million related to a new credit facility. The balance of the
proceeds of the offering was used for working capital and general corporate
purposes. As a result, the Company recognized $2.1 million (net of the related
tax benefit of $1.2 million) in 1997 of debt-related charges and write-offs
reflected in the accompanying statements of operations as an extraordinary item.
The Company defers all loan fees and amortizes them over the term of the loan.
The private offering contains covenants with respect to, among other things, (i)
maintenance by Carson Products Company of certain cash flow coverage ratios;
(ii) restrictions on the incurrence of additional liens or indebtedness. The
private offering contains restrictions on the payment of any cash dividends by
the Company or any subsidiary.
Concurrently with the consummation of the private offering, the Company
entered into a new credit facility with Credit Agricole Indosuez as agent and
lender, which is guaranteed by the Company's wholly-owned subsidiary, Carson
Products Company. The facility provides a term acquisition loan facility of
$50.0 million and a revolving loan facility of $25.0 million. The final maturity
date for each of the term loan facility and revolving loan facility is October
2005 and 2003, respectively. Borrowings under the term loan facility and
revolving loan facility will bear interest at the Base Rate (as defined) plus
1.0% and the Base Rate plus 0.5%, respectively, or at the Company's option, the
Eurodollar Rate (as defined) plus 2.5% and the Eurodollar Rate plus 2.0%,
respectively. Debt issue costs related to the new credit facility were
approximately $1.7 million.
The new credit facility provides for (i) a commitment fee of 0.25% per
annum on the unutilized portion of the revolving credit facility, (ii) a fee of
0.25% per annum on the maximum amount available to be drawn under letters of
credit and (iii) a letter of credit insurance fee. The new facility contains
covenants with respect to, among other things, (i) maintenance by Carson
Products Company of certain total interest coverage ratios, fixed charge
coverage ratios and leverage ratios and (ii) restrictions on the incurrence of
additional liens or indebtedness. The new facility contains restrictions on the
payment of any cash dividends by the Company or any subsidiary except for
dividends or distributions payable in shares of capital stock.
34
<PAGE>
Note 8. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
December 31, 1997 December 31, 1996
Compensation and benefits .................. $2,788 $1,587
Advertising ................................ 774 1,070
Self insurance ............................. 766 719
Interest ................................... 1,592 240
Directors and officers ..................... 138 1,333
Other ...................................... 1,355 342
$7,413 $5,291
Note 9. Income Taxes
The following is a reconciliation of the statutory tax rate on income (loss)
from continuing operations to the Company's effective tax rate for the periods
noted:
<TABLE>
Company Predecessor Company
January 1, 1997 to April 1, 1996 to Aug. 23, 1995 to April 1, 1995 to Aug. 23, 1995 to
December 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Aug. 22, 1995 March 31, 1996
(Unaudited)
<S> <C> <C> <C> <C> <C>
Statutory rate ...................... 34.0% (34.0)% 34.0% 34.0% 34.0%
State income taxes
(net of federal benefit) ............ 1.2% (2.6)% 2.6% 4.0% 4.0%
Foreign taxes ....................... -- 33.8% 21.5% -- 21.5%
Foreign tax credit .................. -- (33.8)% (21.5)% -- (21.5)%
Permanent differences:
Incentive compensation .............. -- 93.9% -- -- --
Goodwill ............................ 6.1% 21.8% 24.3% -- 16.0%
Other taxes ......................... 1.2% 33.8% -- (1.7)% --
Effective rate ...................... 42.5% 112.9% 60.9% 36.3% 54.0%
</TABLE>
<TABLE>
Income tax expense (benefit) for the periods noted include the following (in
thousands):
Company Predecessor Company
January 1, 1997 to April 1, 1996 to Aug. 23, 1995 to April 1, 1995 toAug. 23, 1995 to
December 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Aug. 22, 1995 March 31, 1996
(Unaudited)
Current:
<S> <C> <C> <C> <C> <C>
Federal ..................................... $-- $ 1,685 $117 $1,744 $ 204
State ....................................... -- 405 19 333 33
Foreign ..................................... 1,728 594 177 104 310
Total current provision ..................... 1,728 2,684 313 2,181 547
Deferred:
Federal ..................................... 885 (749) 102 52 546
State ....................................... 104 (269) 65 10 102
Foreign ..................................... 62 61 47 -- 82
Total deferred provision .................... 1,051 (957) 214 62 730
Total provision before extraordinary
items .................................... 2,779 1,727 527 2,243 1,277
Benefit for extraordinary item .............. (1,201) (2,351) -- -- --
Total income tax expense(benefit) ........... $ 1,578 $ (624) $527 $2,243 $1,277
</TABLE>
35
<PAGE>
The effects of temporary differences which gave rise to the deferred tax asset
and liability are as follows:
<TABLE>
(in thousands) December 31, 1997 December 31, 1996
Current Long-term Current Long-term
Deferred domestic tax assets related to:
<S> <C> <C> <C> <C>
Deferred compensation ...................................... $-- $ 622 $-- $ 643
Accrued expenses ........................................... 758 -- 813 --
Package design costs ....................................... -- 538 -- 533
Allowance for doubtful accounts ............................ -- -- 219 --
Foreign tax credit carryforward ............................ -- 702 -- 702
NOL carryforward ........................................... -- 696 -- 241
Inventories ................................................ 897 -- 14 --
Other ...................................................... 101 256 -- 116
1,756 2,814 1,046 2,235
Deferred domestic tax liabilities related to:
Allowance for doubtful accounts ............................ (923) -- -- --
Inventories ................................................ (621) -- (752) --
Property, plant and equipment .............................. -- (1,658) -- (1,300)
Other ...................................................... (51) -- (91) --
(1,595) (1,658) (843) (1,300)
Deferred domestic tax asset ................................ $ 161 $ 1,156 $ 203 $ 935
Deferred foreign tax liability ............................. $-- $ (143) $-- $ (106)
</TABLE>
Deferred income taxes were not provided on undistributed earnings of
certain foreign subsidiaries ($9.2 million at December 31, 1997 and $5.7 million
at December 31, 1996) because such undistributed earnings are expected to be
reinvested indefinitely overseas. If these amounts were not considered
permanently invested, additional deferred taxes of approximately $1.2 million
and $712,000 would have been provided as of December 31, 1997 and December 31,
1996, respectively. The foreign tax credit and NOL carryforwards of $.7 million
and $2.0 million at December 31, 1997 expire at December 31, 2001 and December
31, 2002, respectively.
Note 10. Employee Benefit Plans
The Company has a profit sharing plan which covers substantially all United
States employees. Contributions to the plan are discretionary, as determined by
the Board of Directors. Contributions are made on an annual basis. The Company
contributed $262,500 to the plan in 1997, $401,000 to the plan for the period
from April 1, 1996 to December 31, 1996 and $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 December 31, 1997 and $1.6 million at December 31,
1996) is classified in other liabilities in the accompanying balance sheets.
The Company provides postretirement health care benefits to a limited
number of key executives. The accumulated postretirement benefit obligation
("APBO") was $548,000 at December 31, 1997 and $517,000 at December 31, 1996.
For measurement purposes, the cost of providing medical benefits was assumed to
increase by 8% in the fiscal year ended December 31, 1997, decreasing to an
annual rate of 7% after December 31, 2002, 6% after December 31, 2008 and 5%
after December 31, 2014. 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 $92,000 and the net
periodic postretirement benefit cost by $25,000. 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, for the
nine months ended December 31, 1996 was $18,000 and for 1997 was $14,000.
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 (such awards and compensation
expense were 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 1996 the SARs were amended and converted
into accelerated, immediately exercisable
36
<PAGE>
stock pur-chase 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 canceled (and replaced with accelerated, immediately exercisable stock
purchase rights which have been exercised). These rights have a fixed purchase
price equal in amount to the canceled SARs' fixed base value.
During August 1996, pursuant to the terms of the accelerated, immediately
exercisable stock purchase rights, 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 $4.21 per share for an aggregate
purchase price of $1.6 million. The purchase of such shares by senior management
was financed with $1.4 million (net of discount) in noninterest bearing
long-term full recourse loans from the Company. The incentive compensation of
$7.1 million expense represents the excess of the initial public offering price
over the actual purchase price of these shares plus certain cash payments. In
connection with the South African offering, the Company also issued shares of
the subsidiary to certain members of its management; the Company recorded
compensation expense of approximately $0.3 million for these share awards.
Note 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 material
adverse impact on the business or financial condition and operations of the
Company.
At the beginning of 1997, the Company entered into purchase commitment
agreements with two vendors. The duration of each commitment agreement is three
years. The annual aggregate commitment amount under the two agreements is
approximately $4.1 million. Total purchases under these agreements totaled $4.1
million in 1997.
Note 12. U.S. and Foreign Operations
The Company's operations are located primarily in the United States and South
Africa. Financial information by geographic area is as follows:
<TABLE>
Twelve-Month Period
Nine-Month Period
January 31, 1997 to April 1, 1996 to August 23, 1995 to April 1, 1995 to Aug 23, 1995 to
December 31, 1997 December 31,1996 December 31, 1995 August 22, 1995 March 31, 1996
(UNAUDITED)
Net sales:
United States:
<S> <C> <C> <C> <C> <C>
Domestic ................................... $ 75,834 $ 42,855 $ 17,386 $ 20,189 $30,676
Export ..................................... 12,135 8,274 3,304 4,407 6,494
South Africa ............................... 21,662 8,809 2,983 2,258 4,295
$ 109,631 $ 59,938 $ 23,673 $ 26,854 $41,465
Operating income:
United States .............................. $ 7,582 $ 723 $ 3,096 $ 4,733 $ 5,713
South Africa ............................... 4,667 1,728 374 363 973
$ 12,249 $ 2,451 $ 3,470 $ 5,096 $ 6,686
Identifiable assets (at end of period):
United States .............................. $ 190,264 $ 95,283 $ 82,109 $ 84,886
South Africa ............................... 42,545 11,529 2,953 4,404
Eliminations ............................... (31,385) (9,283) (971) (1,310)
$ 201,424 $ 97,529 $ 84,091 $ 87,980
</TABLE>
Transfers of products from the United States to South Africa were not material
during the periods presented above. Export sales from the United states include
sales to customers in Europe, the Caribbean and Africa.
37
<PAGE>
Note 13. Consolidating Financial Information of Carson, Inc.
The following condensed consolidating financial information is presented for
regulatory purposes in connection with the registration of Carson, Inc.'s 10 3/8
% Senior Subordinated Notes due 2007 (the "Notes"). The Notes have been
guaranteed on a senior subordinated basis by Carson Products Company, a direct
wholly-owned subsidiary of Carson, Inc. (the " subsidiary guarantor"). The
following table presents condensed consolidating financial information for
Carson, Inc., the subsidiary guarantor, the non-guarantor subsidiaries of
Carson, Inc. (other than inconsequential non-guarantor subsidiaries) and the
eliminations necessary to arrive at the consolidated financial statements of
Carson, Inc. and its subsidiaries. Separate financial statements for the
subsidiary guarantor are not included and the subsidiary guarantor is not filing
separate reports under the Securities Exchange Act of 1934, as amended, because
the subsidiary guarantor has fully and unconditionally guaranteed the Notes, and
separate financial statements and other disclosures concerning the subsidiary
guarantor are not deemed material to investors.
Consolidating Statement of Operations for the Year Ended December 31, 1997
<TABLE>
Carson
Carson Holdings
Products Limited
Carson,Inc. Company (non-guarantor Consolidated
(parent)(guarantor subsidiary)subsidiaries) Eliminations Carson,Inc.
<S> <C> <C> <C> <C> <C>
Net sales .............................................. $-- $ 87,969 $ 21,662 $-- $ 109,631
Cost of goods sold ..................................... -- 39,782 10,728 -- 50,510
Gross profit ........................................... -- 48,187 10,934 -- 59,121
Marketing and selling
expenses ............................................. -- 24,036 4,122 -- 28,158
General and administrative
expenses ............................................. -- 16,569 2,145 -- 18,714
Operating income ....................................... -- 7,582 4,667 -- 12,249
Other income (expense) ................................. -- (6,317) 601 -- (5,716)
Equity in subsidiary
earnings (net of taxes) ............................... 1,668 -- -- (1,668) --
Income before income taxes 1,668 1,265 5,268 (1,668) 6,533
Provision for income taxes ............................. -- 989 1,790 -- 2,779
Income from continuing operations 1,668 276 3,478 (1,668) 3,754
Extraordinary loss,net of taxes ........................ -- (2,086) -- -- (2,086)
Net income (loss) ...................................... $1,668 $ (1,810) $ 3,478 $ (1,668) $ 1,668
</TABLE>
Consolidating Balance Sheet as of December 31, 1997
<TABLE>
Carson Carson
Products Holdings
Company Limited
Carson,Inc. (guarantor (non-guarantor Consolidated
(parent) subsidiary) subsidiaries) Eliminations Carson,Inc.
Assets
Current assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ......................... $ -- $ 2,614 $ 11,420 $ 9 $ 14,043
Accounts receivable,net ........................... -- 24,058 10,817 (6,727) 28,148
Inventory ......................................... -- 20,438 4,423 -- 24,861
Other current assets .............................. -- 730 102 -- 832
Property,plant and equipment,net -- 16,216 6,021 (35) 22,202
Intangibles assets, net
and other assets ................................ -- 101,690 9,762 (114) 111,338
Investment in subsidiary .......................... 61,531 24,518 -- (86,049) --
Total assets ...................................... $61,531 $190,264 $ 42,545 $ (92,916) $ 201,424
</TABLE>
38
<PAGE>
<TABLE>
Carson Carson
Products Holdings
Company Limited
Carson,Inc. (guarantor (non-guarantor Consolidated
(Parent) subsidiary) subsidiaries) Eliminations Carson,Inc
Liabilities and stockholders' equity Current liabilities:
<S> <C> <C> <C> <C> <C>
Accounts payable ........................................ $ -- $ 10,599 $ 4,840 $ (6,872) $ 8,567
Other current liabilities ............................... -- 6,047 8,321 5 14,373
Long-term debt .......................................... -- 103,000 623 -- 103,623
Other liabilities ....................................... -- 9,087 4,243 -- 13,330
Common stock and
paid in capital ..................................... 69,172 16,760 20,131 (36,891) 69,172
Other equity accounts ................................... (3,630) (3,678) (1,526) 5,204 (3,630)
Retained earnings
(Accumulated Deficit) .................................. (4,011) 48,449 5,913 (54,362) (4,011)
Total liabilities and
stockholders equity .................................... $ 61,531 $ 190,264 $ 42,545 $(92,916) $201,424
</TABLE>
Consolidating Statement of Cash Flows for the Year Ended December 31, 1997
<TABLE>
Carson Carson
Products Holdings
Company Limited
Carson,Inc. (guarantor (non-guarantor
(parent) subsidiary) subsidiaries) Eliminations Carson,Inc
<S> <C> <C> <C> <C> <C>
Net income (loss) .................................... $ 1,668 $ (1,810) $ 3,478 $(1,668) $ 1,668
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization ........................ -- 3,341 452 -- 3,793
Extraordinary item,net of tax benefit ................ -- 2,086 -- -- 2,086
Other, net ........................................... (1,668) (1,493) 463 2,954 256
Changes in operating assets
and liabilities ...................................... -- (16,423) (12,143) 3,485 (25,081)
Total adjustments .................................... (1,668) (12,489) (11,228) 6,439 (18,946)
Net cash provided by (used in)
operating activities ................................. -- (14,299) (7,750) 4,771 (17,278)
Investing Activities:
Additions to property, plant
and equipment ....................................... -- (6,626) (1,631) 37 (8,220)
Acquisitions of business assets,
net of cash activities ............................... -- (48,706) (700) -- (49,406)
Net cash (used in) provided by
investing activities ................................. -- (55,332) (2,331) 37 (57,626)
Financing Activities:
Proceeds from long-term borrowings ................... -- 162,848 3,763 249 166,860
Principal payments on long-term debt ................. -- (92,175) -- (486) (92,661)
Proceeds from sale of
equity from subsidiary .............................. -- -- 15,129 (4,572) 10,557
Net cash provided by (used in)
financing activities ................................. -- 70,673 18,892 (4,809) 84,756
Net Increase in Cash
and Cash Equivalents ................................ -- 1,042 8,811 (1) 9,852
Cash and Cash Equivalents
at Beginning of Period .............................. -- 1,572 2,609 10 4,191
Cash and Cash Equivalents
at End of Period .................................... $ -- $ 2,614 $ 11,420 $ 9 $14,043
</TABLE>
Carson Holdings Limited, an indirect 70%-owned non-guarantor subsidiary of
Carson, Inc., has three wholly-owned subsidiaries which are also non-guarantors:
Carson Products (Proprietary) Limited, Carson Products West Africa Limited and
Carson Products East Africa (EPZ) Limited. The financial information for these
three non- guarantor subsidiaries is included in the consolidated financial
statements of Carson Holdings Limited. Carson Inc. also has two inactive
subsidiaries (Fine Products Company and Carson Botswana (PTY Limited)), which
are inconsequential to the Company on an individual and combined basis and
separate financial information for those subsidiaries has not been included in
this table.
Note 14. Certain Relationships and Related Transactions
Morningside
Carson Products and Morningside Capital Group, L. L. C. ("Morningside") entered
into a Management Assistance Agreement dated August 23 , 1995 (the "Management
Agreement"), pursuant to which Morningside (a shareholder of the Company) and
a shareholder of the Company agreed to supply the services of a principal member
of Morningside to the Company to provide certain advice and assistance. 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 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.
In connection with the Aminco 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. In addition,
Morningside received fees of $520,000 and $125,000 in 1997 for similar services
and expenses relating to the Cutex Acquisition and the acquisition of the Let's
Jam brand, respectively. Morningside received fees of $250,000 in November 1997
related to the offering of the Notes. Under the Management Agreement, the
Company paid Morningside approximately $40,000 and $25,000 in fiscal 1997 and
1996, respectively, for reimbursement of out-of-pocket expenses. In 1996,
Morningside received 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 reimbursed Morningside for
approximately $35,000 of out-of-pocket expenses incurred in connection with the
initial public offering. 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
A corporation in which the Company's former chief financial officer 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 Aminco Acquisition. A law firm
in which a director and a shareholder of the Company 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 Aminco
Acquisition. A principal lender and a shareholder of the Company received fees
and reimbursement of out-of-pocket expenses totaling $1,783,000 in connection
with the Aminco Acquisition .
AM Cosmetics
Morningside AM Acquisition Corp. ("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. Certain key management personnel and shareholders of the
Company are also key management and shareholders of AM 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.
Concurrent with its investments 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. 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 for 1997
39
<PAGE>
and $250,000 for 1998 and thereafter. For the twelve months ended December 31,
1997, the Company received $500,000 in management fees. 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.
Pursuant to the Carson-AM Management Agreement , the parties have entered
into a manufacturing agreement in May 1997 expiring on May 1, 1999 (the "AM
Manufacturing Agreement"). Under the AM Manufacturing Agreement, AM Cosmetics
manufactures the Dark & Lovely line of cosmetics and the Cutex nail
enamel/treatments and nail care treatment products in strict accordance with
Carson Products' specifications. AM Cosmetics is entitled to a 25% profit margin
above all costs, including general and administrative costs, on the cosmetics
products it produces under the AM Manufacturing Agreement, except for Cutex
products for which the pricing is specified by SKU. The Company purchased
approximately $2.0 million from AM Cosmetics in 1997 under the AM Manufacturing
Agreement.
Carson Products and AM Cosmetics have also entered into a sales and
marketing agreement (the "AM Sales/Marketing Agreement") in accordance with the
Carson-AM Management Agreement in 1997. Under the AM Sales/Marketing Agreement,
which expires on September 19, 1999, AM Cosmetics is entitled to a 7.5% sales
commission on its sales of all Cutex products. Such sales commission was
approximately $1.2 million in 1997.
Dr. Leroy Keith, Chairman and Chief Executive Officer of the Company, has
an ownership interest in AM Cosmetics and Vincent A. Wasik, a principal
stockholder of the Company, indirectly owns a controlling ownership interest in
AM Cosmetics. In addition, Mr. Wasik served as a member of AM Cosmetics' Board
of Directors and Dr. Keith served as President and Chief Executive Officer of AM
Cosmetics for the twelve months ended December 31, 1997. Currently, Mr. Wasik
serves as President and Chief Executive Officer of AM Cosmetics and Dr. Keith
serves as a member of AM Cosmetics' Board of Directors. In addition, Lawrence E.
Bathgate, II serves as a member of AM Cosmetics' Board of Directors and chairman
of its executive committee.
Note 15. Change in Accounting Method
Effective June 30, 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. 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, net income decreased and basic and diluted
earnings per share decreased for the period ended March 31, 1996 by $177,000,
$102,000, and $0.01, respectively, from amounts previously reported. In
addition, inventories decreased by $177,000, retained earnings decreased by
$102,000 and deferred income taxes decreased by $75,000 as of March 31, 1996 and
December 31, 1996.The effect on all other periods presented was not
significant.
Note 16. Stock Compensation Plans
The Company has fixed option plans which reserve shares of common stock for
issuance to executives, key employees and directors. Under the Company's two
stock option plans, officers, directors and key employees may be granted options
to purchase the Company's common stock at no less than 100% of the market price
on the date the option is granted. Options have been granted only during the
year ended December 31,1997. No options were exercised or forfeited during such
period.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation expense has been recorded for the
stock option plans. Had compensation expense for the two stock option plans been
determined based on the fair value at the grant date for awards in 1997
consistent with the provisions of SFAS No. 123, the Company 's net income and
basic and diluted earnings per share for the year ended December 31,1997 would
have been reduced to the pro forma amounts indicated below :
Net income, as reported $ 1,668
Net income, pro forma 1,243
Basic and diluted earnings per share, as reported 0.11
Basic and diluted earnings per share, pro forma 0.08
40
<PAGE>
The fair value of each option granted during 1997 was estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: (i) dividend yield of 0%, (ii) expected volatility of 57%, (iii)
risk-free interest rate of 6.5% and (iv) expected life of 4.9 years. The
weighted average fair value of the options granted during 1997 was $4.74.
The following table summarizes information about stock options outstanding
at December 31, 1997:
Number
Number Outstanding at Weighted Average Remaining Exercisable at
Exercise Price December 31, 1997 Contractual Life December 31, 1997
$14.00 67,500 9.4 10,500
7.50 100,000 9.4 50,000
9.22 40,000 9.4 --
12.00 187,000 9.4 --
9.56 50,000 9.6 --
10.94 25,000 9.6 --
469,500 60,500
The Company also maintains a restricted stock award plan which provides for
awards to officers and certain key employees of the Company.
41
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders of Carson, Inc.:
We have audited the accompanying consolidated balance sheets of Carson,
Inc. and its subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1997 and for the periods from April 1, 1996 to
December 31, 1996 and from August 23,1995 to March 31, 1996. We also audited the
accompanying statements of operations, stockholders' equity, and cash flows of
Aminco, Inc. (the Predecessor) 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 audits.
We conducted our audits 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 audits provide 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 December 31, 1997 and 1996, and the results of its operations and its cash
flows for the year ended December 31, 1997 and for the periods from April 1,
1996 to December 31, 1996 and from August 23, 1995 to March 31, 1996, and the
results of operations and cash flows of the Predecessor for the period from
April 1, 1995 to August 22, 1995 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 18, 1998
42
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors is incorporated by reference to "Proposal
Number 1 Election of Directors" on pages 9-11 of the Company's Proxy Statement
to be filed for its 1998 Annual Meeting of Stockholders(the "Proxy Statement").
Information concerning executive officers who are not directors is incorporated
by reference to page 13 of the Proxy Statement. Reference is also made to Item
4(A), Part I of this report, "Executive Officers of the Registrant," which
information is incorporated herein.
Section 16(a) of the Exchange Act requires the directors, executive
officers and persons who own beneficially more than 10% of certain equity
securities of the Company to file reports of ownership with the Commission.
Copies of all such reports are required to be furnished to the Company. Based on
the reports received by the Company (and on written representations from the
reporting persons), the Company believes that each of the Company's directors,
officers and 10% beneficial owners of its Class A Common Stock failed to file on
a timely basis the required Forms 4 or 5 at the time such forms were due: Joyce
M. Roche, Form 4 with respect to one transaction not filed on a timely basis;
Dennis E. Smith, Form 4 with respect to one transaction not filed on a timely
basis; and Lawrence E. Bathgate, III, Abbey J. Butler, Melvyn J. Estrin, James
L. Hudson, Jack Kemp, Miriam Muley, Suzanne de Passe, John L. Sabre and Vincent
A. Wasik, Form 5 not filed on a timely basis.
Item 11. Executive Compensation
This information is incorporated herein by reference to "Compensation and
Other Transactions with Executive Officers and Directors - Executive Officer
Compensation" on pages 15-22 of the Company Proxy Statement to be filed for its
1998 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This information is incorporated herein by reference to "Principal
Stockholders and Management Ownership" on pages 2-3 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
This information is incorporated herein by reference to "Certain
Relationships and Related Transactions" on pages x-x of the Proxy Statement to
be filed for its 1998 Annual Meeting of Shareholders.
43
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report::
1. Financial Statements
The Consolidated Financial Statements included herein contain the Balance Sheet
as of December 31, 1997 and 1996, the related statements of operations,
shareholders' equity and cash flows for the following periods: Company January
1, 1997 through December 31, 1997 and April 1, 1996 through December 31, 1996,
Unaudited Company August 23, 1995 to December 31, 1995, Predecessor April 1,
1995 to August 22, 1995, and Company August 23, 1995 to March 31, 1996 and the
related report of Deloitte Touche LLP.
44
<PAGE>
3. Exhibits incorporated by reference or filed with this report
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
*3.1 Amended and Restated Certificate of Incorporation of Carson, Inc.
*3.2 By-laws of Carson, Inc.
***3.3 Restated Certificate of Incorporation of Carson Products Company
***3.4 By-laws of Carson Products Company
***4.1 Indenture, dated as of November 6 1997, among Carson, Inc., Carson
Products Company and Marine Midland Bank, as trustee
***4.2 Form of 103/8% Senior Subordinated Note due 2007, Series B (included as
Exhibit B to Exhibit 4.1)
*9 Voting Trust Agreement dated as of August 23, 1995, by and among Dr. Leroy
Keith, S. Garrett Stonehouse, Harrow-Lewis Corporation and Northwest
Capital, Inc.
*10.1 Employment Agreement dated as of August 23, 1995,as amended as of July
31, 1996, between Carson Products Company and Dr. Leroy Keith
*10.2 Employment Agreement dated as of July 7, 1995, as amended as of July 31,
1996, between Carson Products Company and Joyce M. Roche
*10.3 Employment Agreement dated as of June 7, 1995, as amended as of July 31,
1996, between Carson Products Company and Dennis E. Smith
*10.4 Employment Agreement dated as of June 7, 1995, as amended as of July 31,
1996, between Carson Products Company and John P. Brown, Jr.
*10.7 Employment Agreement dated as of September 1, 1995, as amended as of July
31, 1996, between Carson Products Company and Allena Lee-Brown
*10.8 Employment Agreement dated as of March 11, 1996, as amended as of July 31,
1996, between Carson Products Company and Miriam Muley
***10.9 Employment Agreement dated as of May 9, 1995, between Carson Products
Company and Robert W. Pierce
*10.10 Management Assistance Agreement dated as of August 23, 1995 between
Carson Products Company and Morningside Capital Group L.L.C.
***10.11 First Amendment dated as of October 18, 1996 to the Management
Assistance Agreement dated as of August 23, 1995 between Carson Products
Company and Morningside Capital Group L.L.C.
***10.12 Second Amendment dated as of November 6, 1996 to the Management
Assistance Agreement dated as of August 23, 1995 between Carson Products
Company and Morningside Capital Group L.L.C.
*10.13 Management Agreement dated as of June 26, 2996 between Carson Products
Company and AM Cosmetics, Inc.
***10.14 First Amendment dated as of June 1, 1997 to the Management Agreement
dated as of June 26, 1996 between Carson Products Company and AM Cosmetics,
Inc.
***10.15 Second Amendment dated as of October 6, 1997 to the Management
Agreement dated as of June 26, 1996 between Carson Products Company and AM
Cosmetics, Inc.
*10.16 Subscription Agreement dated as of June 26, 1996 between Carson Products
Company and Morningside AM Acquisition Corp.
45
<PAGE>
*10.17 Carson, Inc. 1996 Long-term Incentive Plan
*10.18 Carson, Inc. 1996 Non-Employee Directors Equity Incentive Program
*10.19 Subscription Agreement dated as of August 23, 1995 by and among Carson,
Inc. and Investors set forth in Schedule I
*10.20 Subscription Agreement dated as of August 23, 1995 by and among Carson,
Inc. and DNL Partners, Limited Partnership
*10.21 Subscription Agreement dated as of August 23, 1995 by and among Carson,
Inc. and Indosuez Carson Partners and Indosuez CM II, Inc.
*10.22 Subscription Agreement dated as of August 15, 1995 by and among Carson,
Inc. and the individuals (outside directors) named therein
*10.23 Subscription Agreement dated as of August 15, 1995 by and among Carson,
Inc. and the individuals (members of senior management) named therein
*10.24 Licensing Agreement dated April 7, 1994, as amended May 14, 1996, between
Carson Products Company and Carson Products Company S.A. (Proprietary)
Limited
*10.25 Distribution Agreement dated May 14, 1996 between Carson Products Company
and Carson Products Company S.A. (Proprietary) Limited
*10.26 Promissory note between Joyce Roche and Carson, Inc.
*10.27 Promissory note between John P. Brown and Carson, Inc.
*10.28 Promissory note between Dennis Smith and Carson, Inc.
*10.33 Pledge Agreement dated August 13, 1996 between John P. Brown and Carson,
Inc.
*10.34 Pledge Agreement dated August 13, 1996 between Miriam Muley and Carson,
Inc.
*10.35 Pledge Agreement dated August 13, 1996 between Joyce Roche and Carson,
Inc.
*10.36 Pledge Agreement dated August 13, 1996 between Dennis Smith and Carson,
Inc.
**10.37 Asset Purchase Agreement dated as of March 27, 1997 between Carson
Products Company and Conopco, Inc. d/b/a Chesebrough-Pond's USA Co.
**10.38 Asset Purchase Agreement dated as of March 27, 1997 between Carson
Products Company and Jean Philippe Fragrances, Inc.
**10.39 Service Agreement dated as of April 30, 1997 between Carson Products
Company and Conopco, Inc. d/b/a Chesebrough-Pond's USA Co.
**10.40 Broker Agreement dated as of September 19, 1997 between Carson Products
Company and AM Cosmetics, Inc.
***10.41 Manufacturing Agreement dated as of April 30, 1997 between Carson
Products Company and AM Cosmetics, Inc.
***10.42 Credit Agreement dated as of November 6, 1997 among Carson Products
Company, Credit Agricole Indosuez and the lenders named therein
***10.43 Term Loan and Revolving Credit Deed to Secure Debt, Assignment of
Leases and Security Agreement dated as of November 6, 1997 made by Carson
Products Company in favor of Credit Agricole Indosuez
***10.44 Borrower General Security Agreement dated as of November 6, 1997 made
by Carson Products Company in favor of Credit Agricole Indosuez
***10.45 Borrower Intellectual Property Security Agreement dated as of November
6, 1997 made by Carson Products Company in favor of Credit Agricole
Indosuez
***10.46 Borrower Securities Pledge Agreement dated as of November 6, 1997 made
by Carson Products Company in favor of Credit Agricole Indosuez
***10.47 Holdings Securities Pledge Agreement dated as of November 6, 1997 made
by Carson, Inc. In favor of Credit Agricole Indosuez
10.48 Employment Agreement dated as of July 14, 1997, between Carson Products
Company and Richard A. Bozzell
10.49 Employment Agreement dated as of September 8, 1997, between Carson
Products Company and Donald Riley
10.50 Promissory note between Miriam Muley and Carson, Inc.
***12.1 Statement re Computation of Ratio of Earnings to Fixed Charges
*16 Letter regarding Change in Certifying Accountant from Price Waterhouse LLP
***18 Letter re Change in Accounting Principles, dated August 11, 1997 from
Deloitte & Touche LLP to Carson, Inc., incorporated herein by reference to
Carson, Inc.'s Quarterly Report on Form 10-Q of the quarter ended June 30,
1997, as amended
***21.1 Subsidiaries of Carson, Inc.
23.2 Consent of Deloitte & Touche LLP
***24.1 Powers of Attorney (included on signature pages of this Annual Report on
Form 10-K)
27 Financial Data Schedule
* Incorporated herein by reference to the Registrant's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on October 14, 1996
File No. 333-10191 and the amendments thereto.
** Incorporated herein by reference to Carson, Inc.'s Current Report on Form 8-K
as of May 15, 1997, as amended by Form 8-KA dated July 14, 1997, July 16, 1997
and October 9, 1997.
*** Incorporated herein by reference to the Registrant's Registration Statement
on Form S-4 filed with the Securities and Exchange Commission on October 31,
1997 File No. 333-42831.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registration has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CARSON, INC.
Date: March 30, 1998 By: /s/ Dr. Leroy Keith
Dr. Leroy Keith
Chairman, Chief Executive Officer
and Director
Power of Attorney
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dr. Leroy Keith, Robert W. Pierce and
John P. Brown, Jr., his or her true and lawful attorneys-in-fact and agents,
with full power of substitution and revocation, for him or her in his or her
name, place and stead in any and all capacities to sign any and all amendments
to this report and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or his substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates included.
Date: March 30, 1998 By: /s/ Dr. Leroy Keith
Dr. Leroy Keith
Chairman, Chief Executive Officer
and Director
Date: March 30, 1998 By: /s/ Joyce M. Roche
Joyce M. Roche
President and Chief Operating
Officer and Director
Date: March 30, 1998 By: /s/ Dennis E. Smith
Dennis E. Smith
Executive Vice President, Sales and
47
<PAGE>
Director
Date: March 30, 1998 By: /s/ Lawrence E. Bathgate, II
Lawrence E. Bathgate, II
Director
Date: March 30, 1998 By: /s/Abbey J. Butler
Abbey J. Butler
Director
Date: March 30, 1998 By: /s/ Suzanne de Passe
Suzanne de Passe
Director
Date: March 30, 1998 By: /s/ Melvyn J. Estrin
Melvyn J. Estrin
Director
Date: March 30, 1998 By: / / James L. Hudson
James L. Hudson
Director
Date: March 30, 1998 By: / / Jack Kemp
Jack Kemp
Director
Date: March 30, 1998 By: /s/ John L. Sabre
John L. Sabre
Director
Date: March 30, 1998 By: /s/ Vincent A. Wasik
Vincent A. Wasik
Director
Date: March 30, 1998 By: /s/ Robert W. Pierce
Robert W. Pierce
Executive Vice President and Chief
Financial Officer(Principal
Accounting and Financial Officer)
48
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT,dated as of July 14, 1997 by and between Carson Products Company,
a Georgia Corporation (the "Company"), and Richard A. Bozzell ("Executive").
WITNESSETH:
WHEREAS, the Company wishes to retain the services of Executive from and
after the date of the execution of this Agreement (the "Execution Date"), and
Executive wishes to be eployed in the services of the Company from and after the
Execution Date, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:
1. Term of Covered Employment. The term of Executive's employment covered
under this Agreement (the "Term of Covered Employment") shall commence on the
Execution Date and shall end on the third anniversary of the Execution Date (the
"Expiration Date"), unless terminated earlier under Section 4.
2. Employment and Duties. Subject to the terms and conditions hereinafter
set forth, during the Term of Covered Employment, the Company shall employ
Executive and Executive shall serve, as Senior Vice President-Finance.
In such capacity, Executive shall perform the duties and responsibilities
assigned by the Company, and such performance shall be Executive's principal
activity to which he shall devote substantially all his working hours. Executive
shall report the Chairman and Chief Executive Officer of the Company.
3. Compensation and Benefits.
3.1 Compensation. For all srvices to be rendered during the Term of Covered
Employment, the Company shall pay Executive a salary ("Base Salary") of $150,000
per annum, payable bi-weekly in arrears. The executive shall also receive a
one-time signing bonus in the amount of $25,000. In addition, the Executive
shall receive stock options to acquikre 50,000 shares of Class A Common Stock of
Carson, Inc. At the per share price equal to the closing price on July 11, 1997,
as reported on the consolidated traqnsaction reporting system for the New York
Stock Exchange. The options, which shall be granted at the execution of this
employment agreement, shall be exercisable one-third (1/3) on each of the first
three anniversaries of the date of the execution of this agreement if Executive
is empoyed by the Company on such dates. In addition, for each fiscal year of
the Company ending within the Term of Covered Employment, Executive shall
receive a (pro-rated for 1997) bonus (the "Bonus") in an amount equal to (i)
thirty percent (30%) of Bae Salary if the "base case" objectives (but not the
"anticipated case" objectives) for such fiscal year as specified by the Board,
or a committee thereof are achieved, or (ii) fifty percent (50%) of Base Salary
if the "anticipated case" objectives for such fiscal year as specified by the
Board, or a committee thereof are met The objectives utilized in determining the
Bonus shall be net revenue growth, net income, earnings per share and/or stock
price growth, suh as defined by the board (or a committee thereof) in its sole
discretion. A lesser percentage of Base Salary may be paid hereunder if one or
more, but not all, of the targeted objectives are met.The value of the Bonus, if
any, shall be paid seventy-five percent (75%) in a single lump sum cash payment
and twenty-five percent (25%) in shares of restricted stock of Carson, Inc. If
the "anticipated case" objectives are met, the value of the Bonus, if any, shall
be paid fifty percent (50%) in a single lump sum cash payment and fifty percent
(50%) in shares of restricted stock of Carson, Inc. Such restricted stock shall
vest aS to one-third (1/3) of the aggregate number of shares delivered to
Executive on each of he first three anniversaries of the date of payment of the
Bonus if Executive is employed by the Company on such dates. The Bonus shall be
paid no later than 120 days ater the end of the fiscal year for which the
applicable objectives have been met.
3.2 Pension and Welfare Plans. During the Term of Covered Employment,
Executive shall also be eligible to participate in any pension and welfare plans
maintained by the Company for its employees, except profit-sharing and the
Christmas bonus plan, subject to the requirements of applicable law.
3.3 Fringe Benefits.
(a) Automobile. Executive shall be entitled to an automobile allowance from
the Company of $250 for each month during the Term of Covered Employment.
Executive shall be solely responsible for all maintenance, repair and other
expenss with respect to such automobile.
(b) Relocation Expenses/Allowance. The Company shall reimburse Executive
for all expenses incurred by him in relocating to Savannah, Georgia ro its
vicinity. The company shall reimburse Executive for all travel and temporary
lodging expenses incurred, including spouse-accompanied trips to Savannah,
Georgia to secure his permanent residence in Savannah, Georgia or its vicinity.
In addition, the Company shall pay Executive 100% of final closing costs
associated with purchase of residence in Savannah or its vicinity, 100% of
moving expenses, and up to $15,000 of closing costs associated with the sale of
residence in Memphis, Tennessee.
(c)Other Fringe Benefits. During the Term of covered Employment, Executive
shall receive any other fringe benefits generally provided by the Company to its
employees.
4.Termination of Employment. Notwithstanding any other provision of this
Agreement, but subject to the notice provisions contained in this Section 4, the
Company retains the right to terminate Executive's employment, and Executive
retains the right to resign from employment with the Company, at any time and
for any reason.
4.1 Termination for Cause. The Company may terminate Executive's employment
with the Company for "Cause" (as hereinafter defined) in the manner specified in
this Section 4.1. In the event that on or after the Execution Date and prior to
the Expiration Date, the Company terminates Executive's employment with the
Company for Cause, the Term of Covered Employment shall end on the date of such
termination (which shall be the date specified in the notice described in this
Section 4.1) and Executive shall be entitled only to any unpaid amount of Base
Salary for his employment with the Company throughout and including the date of
such termination. In any event, Executive shall not be entitled to receive any
amount of Base Salary with respect to any period following the date of such
termination, or any portion of the Bonus for the fiscal year of the Company in
which such date of termination occurs.
For purposes of this Agreement, termination for "Cause" means termination
by the Company due to Executive's gross dereliction of his duties under this
Agreement, including, without limitation, his refusal to follow or gross neglect
of the directions of the Chief Executive Officer of the Company or any other
executive of the Company senior to Executive, or any willful misconduct by
Executive that is materially injurious to the Company, or the indictment of
Executive for a felony involving moral turpitude.
To terminate Executive for Cause, the Company shall give a written notice
of such termination to Executive ("Notice of Termination"), and shall specify
the date of such termination, which shall not be earlier than the date on which
such notice is given to Executive. Such notice shall be given to Executive no
later than 10 days after actual knowledge of the events or circumstances which
purportedly constitute Cause for such termination, and shall specify the
particular act or acts, or failure to act, or other events or circumstances
constituting Cause for such termination. Executive shall be given the
opportunity within 30 days after receiving such notice to explain why Cause for
such termination does not exist. Within 15 days after any such explanation,
Executive will be given the final decision regarding whether Cause exists. If
the final decision is that Cause exists, Executive's employment with the Company
shall be terminated under this Section4.1 pursuant to the notice of Termination
as of the date of termination specified in such Notice. If the final decision is
that Cause does not exist, Executive's employment with the Company shall not be
terminated under this
Section 4.1.
4.2 Resignation. Executive may resign from employment with the Company by
giving the Company written notice of such resignation, which notice shall
specify the date of resignation, which shall not be earlier than 30 days after
the date such written notice is given to the Company. In the event of
Executive's resignation on or after the Execution and prior to the Expiration
Date, the Term of Covered Employment shall end on the date of resignation which
shall be the date specified in Executive's notice of resignation), and Executive
shall be entitled only to any unpaid amount of Base Salary for his employment
with the Company through and including such date of resignation. Executive shall
not be entitled to receive any amount of Base Salary with respect to any period
following such date of resignation, or any portion of the bonus for the fiscal
year of the Company in which such date of resignation occurs.
4.3 Termination Other Than For Cause. The Company may terminate Executive's
employment with the Company other than for Cause by giving Executive written
notice of such termination, which notice shall specify the date of such
termination, which shall not be earlier than 30 days after such written notice
is given to Executive. In the event that on or after the Execution Date and
prior to the Expiration Date Executive's employment with the Company is
terminated by the Company other than for Cause, the Term of Covered Employment
shall end upon such specified date of termination and the Company shall pay
Executive, within 30 days after such date of termination, an additional lump sum
amount equal to any unpaid amount of Base Salary for his term of employment with
the Companythrough and including such date of termination. Executive shall not
be eligible to participate in any of the Company's employee benefit plans
following such date of termination of employment, except as may be required by
applicable law.
4.4 Termination Due to Death or Disability. The Company may terminate
Executive's employment with the Company due to "Disability", as hereinafter
defined, by giving Executive written notice of such termination, which notice
shall specify the date of such termination, which shall not be earlier than 30
days after such written notice is given to Executive. If on or after the
Execution Date and prior to the Expiration Date Executive's employment with the
Company is terminated due to Disability, or if during such period Executive
dies, the Term of Covered Employment shall end upon such specified date of
termination or date of death, as applicable, and the Company shall pay
Executive, or his beneficiary of estate, as the case may be, within 15 days
after such date of termination or death, an additional lump sum amount equal to
150% of one year's Base Salary.
For purposes of this Agreement, "Disability" means Executive's inability to
perform his duties under this Agreement for a period of at least six consecutive
months because of medically determinable physical or mental impairment, as
determined by a physician mutually agreeable to Executive and the Company. If
Executive and the Company are unable to agree on such a physician, each shall
appoint one physician and those two physicians shall appoint a third physician
who shall make such a determination.
5. Non-Competition; Non-Solicitation. While Executive is employed by the
Company (including any period of such employment following the expiration of the
Term of Covered Employment), and during the period in which Executive is
receiving payments of Base Salary from the Company (regardless of whether or not
Executive is then employed by the Company), Executive shall not directly or
indirectly (i) own, manage, operate, represent, promote, consult for, control or
participate in the ownership, operation, acquisition or management of any other
business which manufactures and/or distributes ethnic hair care products or
cosmetics, (ii) solicit (other than on behalf of the Company or any of its
affiliates), divert or take away the business of any customers of the Company or
any of its affiliates, or any prospective customers of the Company or any of its
affiliates whose business the Company or any of its affiliates is actively
soliciting, or has actively solicited, during Executive's employment with the
Company with whom Executive had any material personal contact, or (iii) solicit
or induce any employee of the Company or any of its affiliates to terminate such
employee's employment with the Company or such affiliate. It is expressly
acknowledged that a breach of this covenant may result in irreparable harm to
the Company for which there is no adequate remedy at law and that, therefore, in
the event of such a breach, the Company shall be entitled to obtain injunctive
relief restraining Executive from engaging in activities prohibited by this
Section 5 or any other relief as may be required to specifically enforce this
covenant.
6. Confidentiality. While employed by the Company and at all times
thereafter, Executive shall maintain the confidentiality of all information of
and relating to, and all material of, the Company and its affiliates that have
not been made available to the public (other than by reason of a breach by
Executive of his obligations under this Section 6) and shall not, without the
Company's prior written permission, disclose to any person outside of the
Company and its affiliates any such information or material. Without limiting
the foregoing sentence, such information and material shall include pricing
plans and price policies, business plans, sales forecasts, research and
development, formulas, procedures and the identity of customers and suppliers
and the terms upon which the Company or any of its affiliates deals with them.
Upon termination of employment with the Company, Executive shall return to the
Company all property in his possession, whether or not containing confidential
information, including but not limited to originals and copies of any written
documents, drawings and reports, diskettes and other storage media, belonging to
the Company or any of its affiliates or received from the Company or any of its
affiliates. It is expressly acknowledged that a breach of this covenant may
result in irreparable harm to the Company for which there is no adequate remedy
at law and that, therefore, in the event of such a breach, the Company shall be
entitled to obtain injunctive relief restraining Executive from engaging in
activities prohibited by this Section 6 or any other relief as may be required
to specifically enforce this covenant.
7. Notices. All notices and other communications under this Agreement shall
be in writing and shall be given by hand delivery to the party receiving such
notice or by certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Executive: Mr. Richard A. Bozzell
If to the Company: Carson Products Company
64 Ross Road
Savannah, Georgia 31405
Attention: Chairman and Chief Executive
Officer
or to such other address as either party shall have furnished to the other
party in writing as the address to send future notices and communications in
accordance herewith. Any notice or communication shall be deemed given when
actually received by the party who is its intended recipient.
8. Severability. If any provision of this Agreement is held to be invalid
under applicable law, such provision shall be ineffective only to the extent of
such invalidity, and the remaining provisions of this Agreement shall be
unimpaired.
9. Waivers. The waiver by either party of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent breach
of such provision, or as a waiver of any other provision of this Agreement.
10. Assignability. The Company may assign its rights and obligations
hereunder to any of its affiliates, or to any successor of the Company.
Executive may not assign any of his rights, duties, obligations or interests
hereunder to any other person without the prior express written consent of the
Board of Directors of the Company.
11. Entire Agreement. This instrument contains the entire agreement of the
parties with respect to, and supersedes all prior agreements relating to,
Executive's employment with the Company.
12. Governing Law. This Agreement shall be governed by, and construed and
enforced under, the laws of the State of Georgia.
13. Effectiveness of Agreement. This Agreement shall be and become
effective as of the Execution Date.
IN WITNESS WHREOF, the parties have executed this Agreement as of the date
first written above.
Carson Products Company
By:__________________________
Leroy Keith
Chairman and CEO
_______________________________
Mr. Richard A. Bozzell
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of September 8, 1997 by and between Carson Products
Company, a Georgia Corporation (the "Company"), and Donald N. Riley
("Executive").
WITNESSETH:
WHEREAS, the Company wishes to retain the services of Executive from and
after the date of the execution of this Agreement (the "Execution Date"), and
Executive wishes to be employed in the services of the Company from and after
the Execution Date, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:
1. Term of Covered Employment. The term of Executive's employment covered
under this Agreement (the "Term of Covered Employment") shall commence on the
Execution Date and shall end on the third anniversary of the Execution Date (the
"Expiration Date"), unless terminated earlier under Section 4.
2. Employment and Duties. Subject to the terms and conditions hereinafter
set forth, during the Term of Covered Employment, the Company shall employ
Executive and Executive shall serve, as Senior Vice President-Operations.
In such capacity, Executive shall perform the duties and responsibilities
assigned by the Company, and such performance shall be Executive's principal
activity to which he shall devote substantially all his working hours. Executive
shall report to the Chairman and Chief Executive Officer of the Company.
3. Compensation and Benefits.
3.1 Compensation. For all services to be rendered during the Term of
Covered Employment, the Company shall pay Executive a salary ("Base Salary") of
$125,000 per annum, payable bi-weekly in arrears. The executive shall also
receive a one-time signing bonus in the amount of $10,000. The executive shall
be eligible for a performance review on the anniversaries of the date of the
execution of this agreement if the Executive is employed by the Company on such
dates. In addition, the Executive shall receive stock options to acquire 25,000
shares of Class A Common Stock of Carson, Inc. at the per share price equal to
the closing price on August 7, 1997, as reported on the consolidated transaction
reporting system for the New York Stock Exchange. The options, which shall be
granted at the execution of this employment agreement, shall be exercisable
one-third (1/3) on each of the first three anniversaries of the date of the
execution of this agreement if Executive is employed by the Company on such
dates. In addition, for each fiscal year of the Company ending within the Term
of Covered Employment, Executive shall receive a (pro-rated for 1997) bonus (the
"Bonus") in an amount equal to (i) thirty percent (30%) of Base Salary if the
"base case" objectives (but not the "anticipated case" objectives) for such
fiscal year as specified by the Board, or a committee thereof are achieved, or
(ii) fifty percent (50%) of Base Salary if the "anticipated case" objectives for
such fiscal year as specified by the Board, or a committee thereof, are met. The
objectives utilized in determining the Bonus shall be net revenue growth, net
income, earnings per share and/or stock price growth, such as defined by the
Board (or a committee thereof) in its sole discretion. A lesser percentage of
Base Salary may be paid hereunder if one or more, but not all, of the targeted
objectives are met. The value of the Bonus, if any, shall be paid seventy- five
percent (75%) in a single lump sum cash payment and twenty-five percent (25%) in
shares of restricted stock of Carson, Inc. If the "anticipated case" objectives
are met, the value of the Bonus, if any, shall be paid fifty percent (50%) in a
single lump sum cash payment and fifty percent (50%) in shares of restricted
stock of Carson, Inc. Such restricted stock shall vest as to one-third (1/3) of
the aggregate number of shares delivered to Executive on each of the first three
anniversaries of the date of payment of the Bonus if Executive is employed by
the Company on such dates. The Bonus shall be paid no later than 120 days after
the end of the fiscal year for which the applicable objectives have been met.
3.2 Pension and Welfare Plans. During the Term of Covered Employment,
Executive shall also be eligible to participate in any pension and welfare plans
maintained by the Company for its employees, except profit-sharing and the
Christmas bonus plan, subject to the requirements of applicable law.
3.3 Fringe Benefits.
(a) Automobile. Executive shall be entitled to an automobile allowance from
the Company of $500 for each month during the Term of Covered Employment.
Executive shall be solely responsible for all maintenance, repair and other
expenses with respect to such automobile.
(b) Relocation Expenses/Allowance. The Company shall reimburse Executive
for all expenses incurred by him in relocating to Savannah, Georgia or its
vicinity. The company shall reimburse Executive for all travel and temporary
lodging expenses incurred, including spouse- accompanied trips to Savannah,
Georgia to secure his permanent residence in Savannah, Georgia or its vicinity.
In addition, the Company shall pay Executive 100% of final closing costs
associated with purchase of residence in Savannah or its vicinity, 100% of
moving expenses, and the real estate commision associated with the sale of your
primary residence in Little Rock, Arkansas.
(c) Other Fringe Benefits. During the Term of Covered Employment, Executive
shall receive any other fringe benefits generally provided by the Company to its
employees.
4. Termination of Employment. Notwithstanding any other provision of this
Agreement, but subject to the notice provisions contained in this Section 4, the
Company retains the right to terminate Executive's employment, and Executive
retains the right to resign from employment with the Company, at any time and
for any reason.
4.1 Termination for Cause. The Company may terminate Executive's employment
with the Company for "Cause" (as hereinafter defined) in the manner specified in
this Section 4.1. In the event that on or after the Execution Date and prior to
the Expiration Date, the Company terminates Executive's employment with the
Company for Cause, the Term of Covered Employment shall end on the date of such
termination (which shall be the date specified in the notice described in this
Section 4.1) and Executive shall be entitled only to any unpaid amount of Base
Salary for his employment with the Company throughout and including the date of
such termination. In any event, Executive shall not be entitled to receive any
amount of Base Salary with respect to any period following the date of such
termination, or any portion of the Bonus for the fiscal year of the Company in
which such date of termination occurs.
For purposes of this Agreement, termination for "cause" means termination
by the Company due to Executive's gross dereliction of his duties under this
Agreement, including, without limitation, his refusal to follow or gross neglect
of the directions of the Chief Executive Officer of the Company or any other
executive of the Company senior to Executive, or any willful misconduct by
Executive that is materially injurious to the Company, or the indictment of
Executive for a felony involving moral turpitude.
To terminate Executive for Cause, the Company shall give a written notice
of such termination to Executive ("Notice of Termination"), and shall specify
the date of such termination, which shall not be earlier than the date on which
such notice is given to Executive. Such notice shall be given to Executive no
later than 10 days after actual knowledge of the events or circumstances which
purportedly constitute Cause for such termination, and shall specify the
particular act or acts, or failure to act, or other events or circumstances
constituting Cause for such termination. Executive shall be given the
opportunity within 30 days after receiving such notice to explain why Cause for
such termination does not exist. Within 15 days after any such explanation,
Executive will be given the final decision regarding whether Cause exists. If
the final decision is that Cause exists, Executive's employment with the Company
shall be terminated under this Section4.1 pursuant to the notice of Termination
as of the date of termination specified in such Notice. If the final decision is
that Cause does not exist, Executive's employment with the Company shall not be
terminated under this Section 4.1.
4.2 Resignation. Executive may resign from employment with the Company by
giving the Company written notice of such resignation, which notice shall
specify the date of resignation, which shall not be earlier than 30 days after
the date such written notice is given to the Company. In the event of
Executive's resignation on or after the Execution and prior to the Expiration
Date, the Term of Covered Employment shall end on the date of resignation which
shall be the date specified in Executive's notice of resignation), and Executive
shall be entitled only to any unpaid amount of Base Salary for his employment
with the Company through and including such date of resignation. Executive shall
not be entitled to receive any amount of Base Salary with respect to any period
following such date of resignation, or any portion of the bonus for the fiscal
year of the Company in which such date of resignation occurs.
4.3 Termination Other Than For Cause. The Company may terminate Executive's
employment with the Company other than for Cause by giving Executive written
notice of such termination, which notice shall specify the date of such
termination, which shall not be earlier than 30 days after such written notice
is given to Executive. In the event that on or after the Execution Date and
prior to the Expiration Date Executive's employment with the Company is
terminated by the Company other than for Cause, the Term of Covered Employment
shall end upon such specified date of termination and the Company shall pay
Executive, within 15 days after such date of termination, an additional lump sum
amount equal to 150% of one year's Base Salary. Executive shall not be eligible
to participate in any of the Company's employee benefit plans following such
date of termination of employment, except as may be required by applicable law.
4.4 Termination Due to Death or Disability. The Company may terminate
Executive's employment with the Company due to "Disability", as hereinafter
defined, by giving Executive written notice of such termination, which notice
shall specify the date of such termination, which shall not be earlier than 30
days after such written notice is given to Executive. If on or after the
Execution Date and prior to the Expiration Date Executive's employment with the
Company is terminated due to Disability, or if during such period Executive
dies, the Term of Covered Employment shall end upon such specified date of
termination or date of death, as applicable, and the Company shall pay
Executive, or his beneficiary of estate, as the case may be, within 15 days
after such date of termination or death, an additional lump sum amount equal to
150% of one year's Base Salary.
For purposes of this Agreement, "Disability" means Executive's inability to
perform his duties under this Agreement for a period of at least six consecutive
months because of medically determinable physical or mental impairment, as
determined by a physician mutually agreeable to Executive and the Company. If
Executive and the Company are unable to agree on such a physician, each shall
appoint one physician and those two physicians shall appoint a third physician
who shall make such a determination.
5. Non-Competition; Non-Solicitation. While Executive is employed by the
Company (including any period of such employment following the expiration of the
Term of Covered Employment), and during the period in which Executive is
receiving payments of Base Salary from the Company (regardless of whether or not
Executive is then employed by the Company), Executive shall not directly or
indirectly (i) own, manage, operate, represent, promote, consult for, control or
participate in the ownership, operation, acquisition or management of any other
business which manufactures and/or distributes ethnic hair care products or
cosmetics, (ii) solicit (other than on behalf of the Company or any of its
affiliates), divert or take away the business of any customers of the Company or
any of its affiliates, or any prospective customers of the Company or any of its
affiliates whose business the Company or any of its affiliates is actively
soliciting, or has actively solicited, during Executive's employment with the
Company with whom Executive had any material personal contact, or (iii) solicit
or induce any employee of the Company or any of its affiliates to terminate such
employee's employment with the Company or such affiliate. It is expressly
acknowledged that a breach of this covenant may result in irreparable harm to
the Company for which there is no adequate remedy at law and that, therefore, in
the event of such a breach, the Company shall be entitled to obtain injunctive
relief restraining Executive from engaging in activities prohibited by this
Section 5 or any other relief as may be required to specifically enforce this
covenant.
6. Confidentiality. While employed by the Company and at all times
thereafter, Executive shall maintain the confidentiality of all information of
and relating to, and all material of, the Company and its affiliates that have
not been made available to the public (other than by reason of a breach by
Executive of his obligations under this Section 6) and shall not, without the
Company's prior written permission, disclose to any person outside of the
Company and its affiliates any such information or material. Without limiting
the foregoing sentence, such information and material shall include pricing
plans and price policies, business plans, sales forecasts, research and
development, formulas, procedures and the identity of customers and suppliers
and the terms upon which the Company or any of its affiliates deals with them.
Upon termination of employment with the Company, Executive shall return to the
Company all property in his possession, whether or not containing confidential
information, including but not limited to originals and copies of any written
documents, drawings and reports, diskettes and other storage media, belonging to
the Company or any of its affiliates or received from the Company or any of its
affiliates. It is expressly acknowledged that a breach of this covenant may
result in irreparable harm to the Company for which there is no adequate remedy
at law and that, therefore, in the event of such a breach, the Company shall be
entitled to obtain injunctive relief restraining Executive from engaging in
activities prohibited by this Section 6 or any other relief as may be required
to specifically enforce this covenant.
7. Notices. All notices and other communications under this Agreement shall
be in writing and shall be given by hand delivery to the party receiving such
notice or by certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Executive:
Mr. Donald N. Riley
If to the Company:
Carson Products Company
64 Ross Road
Savannah, Georgia 31405
Attention: Chairman and Chief Executive Officer
or to such other address as either party shall have furnished to the other
party in writing as the address to send future notices and communications in
accordance herewith. Any notice or communication shall be deemed given when
actually received by the party who is its intended recipient.
8. Severability. If any provision of this Agreement is held to be invalid
under applicable law, such provision shall be ineffective only to the extent of
such invalidity, and the remaining provisions of this Agreement shall be
unimpaired.
9. Waivers. The waiver by either party of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent breach
of such provision, or as a waiver of any other provision of this Agreement.
10. Assignability. The Company may assign its rights and obligations
hereunder to any of its affiliates, or to any successor of the Company.
Executive may not assign any of his rights, duties, obligations or interests
hereunder to any other person without the prior express written consent of the
Board of Directors of the Company.
11. Entire Agreement. This instrument contains the entire agreement of the
parties with respect to, and supersedes all prior agreements relating to,
Executive's employment with the Company.
12. Governing Law. This Agreement shall be governed by, and construed and
enforced under, the laws of the State of Georgia.
13. Effectiveness of Agreement. This Agreement shall be and become
effective as of the Execution Date.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first written above.
Carson Products Company
By:________________________
Leroy Keith
Chairman and CEO
___________________________
Mr. Donald N. Riley
$250,000 Savannah, Georgia
as of August 15, 1996
PROMISSORY NOTE
FOR VALUE RECEIVED, Miriam Muley (the "Payor") hereby unconditionally promises
to pay to the order of Carson, Inc., a Delaware corporation (the "Payee"), the
principal sum of Two Hundred Fifty Thousand Dollars ($250,000) on the third
anniversary of the date of this Note (the "Maturity Date"). Capitalized terms
used but not otherwise defined herein have the respective meanings given to such
terms in Article 4 hereof.
ARTICLE 1
PRINCIPAL AND INTEREST
Section 1.1 Principal. The entire unpaid principal amount of this Note shall be
paid on the Maturity Date (or on such earlier date as this Note shall become due
as hereinafter provided). Promptly following the payment in full of this Note,
the Payee shall surrender this Note to the Payor for cancellation.
Section 1.2 Interest. No interest shall accrue on the daily unpaid principal
amount of this Note.
ARTICLE 2
PAYMENTS AND PREPAYMENTS
Section 2.1 Payments Generally. All payments of principal to be made by the
Payor under this Note shall be made in Dollars, by personal, certified or
official bank check payable to the order of the Payee, not later than 11:00 a.m.
Savannah, Georgia time on the date on which such payment shall become due (each
such payment made after such time on such due date to be deemed to have been
made on the next succeeding Business Day). If the due date of any payment under
this Note would otherwise fall on a day that is not a Business Day. All amounts
payable under this Note shall be paid free and clear of. and without reduction
by reason of, any deduction, set-off or counterclaim.
ARTICLE 3
EVENTS OF DEFAULT
Section 3.1 Events of Defaults. The occurrence of one or ore of the
following events shall constitute an "Event of Default" for the purposes of this
Note:
(a) the Payor fails to pay any amount owing under this Note when due
(whether at stated maturity, by acceleration, or otherwise);
(b) the Payor shall default in the performance of, or shall breach, any
covenant or warranty of the Payor under or in respect of this Note;
(c) the Payor shall terminate employment with Carson Products Company for
any reason;
(d) the Payor shall (i) apply for or consent to the appointment of, or the
taking of possession by, a receiver, custodian, trustee, examiner or liquidator
of the Payor or of its assets or property, (ii) make a general assignment for
the benefit of its creditors, (iii) commence a voluntary cause under the Federal
Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law
relating to bankruptcy, insolvency, reorganization, liquidation, dissolution,
arrangement or winding-up, or composition or readjustment of debts, (v) fail to
controvert in a timely and appropriate manner, or acquiesce in writing to, any
petition filed against it in an involuntary case under the Federal Bankruptcy
Code or (vi) take any action for the purpose of effecting any of the foregoing;
or
(e) a proceeding or case shall be commenced, without the application or
consent of the Payor, in any court of competent jurisdiction, seeking (i) its
reorganization, liquidation or arrangement, or the composition or readjustment
of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner,
liquidator or the like of the Payor or of its property, or (iii) similar relief
in respect of the Payor under any law relating to bankruptcy, insolvency,
reorganization, or composition or adjustment of debts, and such proceeding or
case shall continue undismissed, or an order, judgment or decree approving or
ordering any of the foregoing shall be entered and continue unstayed and in
effect, for a period of 60 or more days; or an order for relief against the
Payor shall be entered in an involuntary case under the Federal Bankruptcy Code.
Section 3.2 Acceleration of Maturity Rescission and Annulment. If any Event
of Default occurs and is continuing, then and in every such case the Payee may
declare the unpaid principal of this Note to be due and payable immediately, by
a notice to the Payor, and upon any such declaration such principal shall become
due and payable immediately, without presentment, demand, protest or other
formalities of any kind, all of which are hereby expressly waived by the Payor.
Notwithstanding any of the foregoing, at any time after such a declaration of
acceleration has been made and before a judgment or decree for payment of the
money due has been obtained, the Payee may rescind and annul such declaration
and its consequences if it so notifies the Payor of its desire to do so. No such
rescission and annulment shall affect any subsequent default or impair any right
consequent thereon. The Payor agrees to pay or reimburse the Payee for paying:
(a) all costs and expenses of the Payee (including, without limitation,
reasonable counsels' fees) in connection with any default and any enforcement or
collection proceedings resulting therefrom; and (b) all transfer, stamp,
documentary or other similar taxes, assessments or charges levied by any
governmental or revenue authority in respect of this Note or any other document
referred to herein.
ARTICLE 4
DEFINITIONS
Section 4.1 Definitions. The following terms shall have the meanings set
forth below: "Business Day" means any day (other than a day which is a Saturday,
Sunday or legal holiday in the State of Georgia) on which banks are open for
business in Savannah, Georgia. "Dollars" and "$" means lawful money of the
United States of America. "Note" means this Promissory Note, as modified and
supplemented and in effect from time to time. "Person" means any individual,
corporation, partnership, joint venue, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
ARTICLE 5
WAIVER AND AMENDMENT
Section 5.1 Amendment. No amendment of this Note shall be effective unless
in writing and signed by the Payee and the Payor.
Section 5.2 Waiver. No waiver of any provision of this Note shall be
effective unless in writing and signed by the Payee.
Section 5.3 Restoration of Rights and Remedies. If the Payee has instituted
any proceeding to enforce any right or remedy under this Note and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Payee, then and in every such case the Payor and the
Payee shall, subject to any determination in such proceeding, be restored
severally and respectively to their former positions hereunder, and thereafter
all rights and remedies of the Payee shall continue as though no such proceeding
had been instituted.
Section 5.4 Rights and Remedies Cumulative. No right or remedy herein
conferred upon or reserved to the Payee is intended to be exclusive of any other
right or remedy, and every right and remedy shall, to the extent permitted by
law, be cumulative and in addition to every other right and remedy given
hereunder or now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or otherwise, shall
not prevent the concurrent assertion or employment of any other appropriate
right or remedy.
Section 5.5 Delay or Omission Not Waiver. No delay or omission of the Payee
to exercise any right or remedy accruing upon any Event of Default shall impair
any such right or remedy or constitute a waiver of any such Event of Default or
an acquiescence therein.
Section 5.6 Waiver of Past Defaults. The Payee may waive any past default
hereunder and its consequences. Upon and to the extent of any such waiver, such
default shall cease to exist, and any Event of Default arising therefrom shall
be deemed to have been cured for every purpose of this Note, but no such waiver
shall extend to any subsequent or other default or impair any right consequent
thereon.
ARTICLE 6
MISCELLANEOUS
Section 6.1 Notice. All notices and other communications in respect of this
Note (including, without limitation, any modifications of, or requests, waivers
or consents under, this Note) shall be given or made in writing (including,
without limitation, by telecopy) to the Payor at the "Address for Notices"
specified below its name on the signature page hereof and to the Payee at 64
Ross Road, Savannah Industrial Park, Savannah, Georgia 31405; or at such other
address as shall be designated by any such party in a notice to the other party.
Except as otherwise provided in this Note, all such communications shall be
deemed to have been duly given when transmitted by telecopier or personally
delivered or, in the case of a mailed notice, upon receipt, in each case given
or addressed as aforesaid.
Section 6.2 Governing Law; Submission to Jurisdiction; Venue. This Note
shall be governed by, and construed in accordance with, the law of the State of
Georgia without regard to the conflicts of laws provisions thereof. The Payor
hereby submits to the nonexclusive jurisdiction of the United States District
Court for the Southern District of Georgia and of any Georgia State court
sitting in Chatham County, Georgia for the purposes of all legal proceedings
arising out of or relating to this Note. The Payor irrevocably waives, to the
fullest extent permitted by applicable law, any objection which it may now or
hereafter have to the laying of the venue of any such proceeding brought in such
a court and any claim that any such proceeding brought in such a court has been
brought in an inconvenient forum.
Section 6.3 Successors. All agreements of the Payor in this Note shall bind
its successors and assigns.
Section 6.4 Severability. In case any provision in this Note shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 6.5 Headings, Etc. The headings of the Articles and Sections of
this Note have been inserted for convenience of reference only, are not to be
considered a part hereof, and shall in no way modify or restrict any of the
terms or provisions hereof.
Section 6.6 Waiver of Jury Trial. THE PAYOR HEREBY IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
PAYOR
__/s/ Miriam Muley
Name: Miriam Muley
Address for Notices:
c/o Carson Products Company
71A Ross Road
Savannah, Georgia 31405
INDEPENDENT AUDITORD' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-21141 and 333-37663 of Carson, Inc. on Form S-8 of our report dated March
18, 1998, appearing in this Annual Report of Form 10-K of Carson, Inc. for the
year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 30, 1998
<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 December
31, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.0
<CASH> 14,043,000
<SECURITIES> 0
<RECEIVABLES> 32,029,000
<ALLOWANCES> 3,881,000
<INVENTORY> 24,861,000
<CURRENT-ASSETS> 67,884,000
<PP&E> 24,453,000
<DEPRECIATION> 2,251,000
<TOTAL-ASSETS> 201,424,000
<CURRENT-LIABILITIES> 22,940,000
<BONDS> 103,623,000
0
0
<COMMON> 150,000
<OTHER-SE> 61,381,000
<TOTAL-LIABILITY-AND-EQUITY> 201,424,000
<SALES> 109,631,000
<TOTAL-REVENUES> 109,631,000
<CGS> 50,510,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 935,000
<INTEREST-EXPENSE> 6,444,000
<INCOME-PRETAX> 6,533,000
<INCOME-TAX> 2,779,000
<INCOME-CONTINUING> 3,754,000
<DISCONTINUED> 0
<EXTRAORDINARY> 2,086,000
<CHANGES> 0
<NET-INCOME> 1,668,000
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
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