SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______ to _______
Commission file number 1-12271
CARSON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1428605
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization)Number)
64 Ross Road, Savannah Industrial Park
Savannah, Georgia 31405
(Address, including zip code, of principal executive offices)
Registrant's telephone number, including area code:(912) 651-3400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
At November 1, 1998, 5,000,170 shares of the registrant's Class A Common Stock,
par value $0.01 per share, 1,859,677 shares of the registrant's Class B Common
Stock, par value $0.01 per share, and 8,127,937 shares of the registrant's Class
C Common Stock, par value $0.01 per share were outstanding.
<PAGE>
CARSON, INC.
INDEX
Part I. Financial Information Page
Item 1.
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997............................ 3
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1998 and 1997...... 4
Condensed Consolidated Statements of Cash Flow
Nine Months Ended September 30, 1998 and 1997........................ 5
Notes to Condensed Consolidated Financial Statements.............. 6-14
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 15-22
Part II. Other Information....................................................23
Item 6.
(a) Exhibits ........................................................23
(b) Reports on Form 8-K..............................................23
Signatures...........................................................24
2
<PAGE>
CARSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(In thousands)
<TABLE>
<S> <C> <C>
September 30, December 31,
ASSETS 1998 1997
(Unaudited)
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 21,509 $ 14,043
Accounts receivable (less allowance for doubtful accounts
and returns of $11,651 and $3,881 at September 30, 1998
and December 31, 1997, respectively) 35,907 28,148
Inventories, net 31,704 24,861
Other current assets 4,048 832
------------- -------------
Total current assets 93,168 67,884
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation 34,282 22,202
INVESTMENT IN AM COSMETICS -- 3,587
INTANGIBLES, net 167,236 100,385
OTHER ASSETS 6,176 7,366
------------- -------------
TOTAL ASSETS $ 300,862 $ 201,424
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 50,000 $ --
Accounts payable 12,168 8,567
Due for A&J Cosmetics 3,275 5,416
Accrued expenses 19,847 7,413
Income taxes payable 10,940 1,544
------------- -------------
Total current liabilities 96,230 22,940
LONG-TERM DEBT 100,377 103,623
DUE FOR A&J COSMETICS -- 4,088
DEFERRED INCOME TAXES AND OTHER LIABILITIES 1,655 1,742
MINORITY INTEREST IN SUBSIDIARY 19,547 7,500
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,
5,042,384 and 5,033,248 shares issued as of September 30,
1998 and December 31, 1997, respectively 50 50
Class B, nonvoting, $.01 par value, 2,000,000 shares authorized
and 1,859,677 shares issued and outstanding 19 19
Class C, voting, $.01 par value, 13,000,000 shares authorized
and 8,127,937 shares issued and outstanding 81 81
Paid-in capital 80,650 69,022
Retained earnings (accumulated deficit) 9,607 (4,011)
Accumulated other comprehensive losses (6,301) (2,170)
Note receivable from employee shareholders, net of discount (716) (1,353)
Treasury stock, Class A common stock, 42,214 shares at September 30, 1998
and 13,245 shares at December 31, 1997, respectively (337) (107)
------------- -------------
Total stockholders' equity 83,053 61,531
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 300,862 $ 201,424
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
CARSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales $ 44,563 $ 29,625 $ 105,534 $ 77,791
Cost of goods sold 21,983 13,555 58,436 35,431
---------- ---------- ---------- ----------
Gross profit 22,580 16,070 47,098 42,360
Expenses:
Marketing and selling 12,708 7,325 30,225 19,602
General and administrative 6,428 4,544 22,404 11,691
Restructuring charges 914 -- 5,751 --
---------- ---------- ---------- ----------
20,050 11,869 58,380 31,293
---------- ---------- ---------- ----------
Operating income (loss) 2,530 4,201 (11,282) 11,067
Interest expense (3,786) (1,809) (9,633) (3,924)
Gain on sale of subsidiary stock -- -- 49,140 --
Loss on write-off of investment (3,768) -- (3,768) --
Other income, net 1,057 400 2,761 1,116
---------- ---------- ---------- ----------
(Loss) income before income taxes, minority interest
and extraordinary item (3,967) 2,792 27,218 8,259
Benefit from (provision for) income taxes 2,011 (1,113) (11,015) (3,310)
---------- ---------- ---------- ----------
(Loss) income before minority interest and extraordinary item (1,956) 1,679 16,203 4,949
Minority interest in earnings of subsidiary (708) (186) (1,652) (508)
---------- ---------- ---------- ----------
(Loss) income before extraordinary item (2,664) 1,493 14,551 4,441
Extraordinary item, net of tax benefit (933) -- (933) --
---------- ---------- ---------- ----------
Net (loss) income $ (3,597) $ 1,493 $ 13,618 $ 4,441
========== ========== ========== ==========
Basic and diluted net (loss) income per common share:
Before extraordinary item $ (0.18) $ 0.10 $ 0.97 $ 0.30
Extraordinary item, net of tax benefit (0.06) -- (0.06) --
---------- ---------- ---------- ----------
Net (loss) income $ (0.24) $ 0.10 $ 0.91 $ 0.30
========== ========== ========== ==========
Weighted average common shares outstanding 14,988 15,021 14,990 15,005
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
CARSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands)
<TABLE>
<S> <C> <C>
Nine Months Ended September 30,
1998 1997
================ ================
OPERATING ACTIVITIES:
Net income $ 13,618 $ 4,441
Adjustments to reconcile net income to
net cash used in operating activities:
Gain on sale of subsidiary stock (49,140) --
Non-cash special charges 14,695 --
Depreciation and amortization 4,776 2,686
Provision for doubtful accounts 634 287
Extraordinary item, net of tax benefit 933 --
Loss on write-off of investment 3,768 --
Other, net 2,251 (952)
Changes in operating assets and liabilities,
net of acquisitions in 1997:
Accounts receivable (3,956) (10,317)
Inventories (5,396) (5,897)
Other current assets (3,171) (1,547)
Accounts payable (3,058) 261
Accrued liabilities 2,350 2,577
Income taxes payable 10,385 1,501
---------------- ----------------
Total adjustments (24,929) (11,401)
---------------- ----------------
Net cash used in operating activities (11,311) (6,960)
---------------- ----------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (8,242) (5,108)
Acquisitions of business assets, net of cash acquired (35,000) (49,406)
---------------- ----------------
Net cash used in investing activities (43,242) (54,514)
---------------- ----------------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 9,500 62,979
Principal payments on long-term debt (12,633) (2,162)
Payment on A&J Cosmetics payable (5,416) --
Proceeds from equity rights offering -- 1,525
Proceeds from sale of subsidiary stock 74,450 --
Other, net (197) (72)
---------------- ----------------
Net cash provided by financing activities 65,704 62,270
---------------- ----------------
EFFECT OF EXCHANGE RATE CHANGES (3,685) --
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,466 796
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,043 4,191
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,509 $ 4,987
================ ================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
CARSON, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated interim financial statements of
Carson, Inc. (the "Company") presented herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted from these consolidated
financial statements pursuant to applicable rules and regulations of the
Securities and Exchange Commission. These financial statements should be read in
conjunction with the audited Consolidated Financial Statements and the notes
thereto of the Company's 1997 Annual Report on Form 10-K. In the opinion of
management, the accompanying unaudited financial statements contain all normal
recurring adjustments necessary to present fairly the Company's financial
position, results of operations and cash flows at the dates and for the periods
presented. Interim results of operations are not necessarily indicative of the
results to be expected for a full year. Certain prior period amounts have been
reclassified to conform with the current period presentation.
2. Acquisition
On July 14, 1998, the Company acquired all of the outstanding shares of
Johnson Products Co., Inc. ("Johnson Products"), a Florida corporation. Johnson
Products is a major manufacturer of personal care products for the ethnic
market. The purchase price approximated $85.0 million with $35.0 million paid
in cash. The Company entered into a Credit Agreement with IVAX Corporation,
d/b/a IVX Bioscience, Inc., for the remaining $50.0 million purchase price. The
senior secured term loan provided by IVAX and subsequently assigned to other
lenders matures on December 15, 1998 and bears interest at 9.0% per annum,
payable monthly. Any overdue principal and interest bear interest at 12.0% per
annum and are payable upon demand.
In conjunction with the IVAX Credit Agreement, the Company terminated
its senior secured credit facility with Credit Agricole Indosuez. During the
third quarter of 1998, the Company recognized an extraordinary loss of $0.9
million (net of tax, or $0.06 per basic and diluted share) for the write-off
of $1.6 million of debt financing costs related to this credit facility.
The acquisition is being accounted for under the purchase method of
accounting. The results of operations of Johnson Products are included in the
Company's condensed consolidated financial statements since the date of
acquisition. The acquisition costs of the assets and liabilities acquired are
as follows (in thousands):
Accounts receivable, net of reserves of $5,952...........................$ 7,890
Inventories, net ....................................................... 8,813
Other current assets..................................................... 63
Property, plant & equipment.............................................. 10,135
Goodwill ....................................................... 71,853
Other assets ....................................................... 517
Assets acquired ....................................................... 99,271
Accounts payable ........................................................(6,830)
Accrued expenses.........................................................(7,441)
Purchase price..................................................$85,000
The fair market value of property, plant and equipment was determined
by independent appraisal. The carrying values of other assets and liabilities
have been estimated to approximate fair market value. Final allocations will be
made on the basis of continuing valuations giving effect to economic and market
factors. Accordingly, the purchase price allocation is currently preliminary.
Any purchase price adjustments will be made within one year from the acquisition
date and are not expected to be material to the financial statements taken as a
whole.
6
<PAGE>
Immediately prior to the Company's acquisition of Johnson Products,
Johnson Products sold one of its subsidiaries, Flori Roberts, Inc., to an
outside third party. The Dermablend line of corrective cosmetics(part of the
Flori Roberts business) was purchased by the Company at the time of the Johnson
Products acquisition, but management intends to sell this business within one
year from such acquisition. Until the sale occurs, the assets and liabilities
related to Dermablend are included in the consolidated balance sheet. However,
since Dermablend was purchased with the intent to be sold within a year, the
results of operations related to Dermablend are excluded from the Company's
consolidated statement of operations.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the results of the Johnson
Products acquisition as if the acquisition had occurred as of the beginning
of each period presented. The results of operations related to Flori Roberts,
Inc., and Dermablend have been excluded from the pro forma statements of
operations.
(Dollars in thousands except per share amounts)
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
Net sales $132,293 $115,180
Income before extraordinary item 15,213 4,657
Net income 14,280 4,657
Basic and diluted income per share before 1.01 0.31
extraordinary item
Basic and diluted net income per share $0.95 $0.31
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional goodwill amortization,
additional depreciation and additional interest expense on acquisition debt,
among others. These unaudited pro forma results are not necessarily indicative
of what the actual results of operations might have been if the Johnson Products
acquisition had been in effect as of the beginning of each period presented, or
of future results of operations of the consolidated Company. For additional
information on the assumptions used in preparing the pro forma results, refer to
to the Company's Form 8-K/A filed on September 28,1998.
3. Special and Non-recurring Charges
During the quarter ended June 30, 1998, the Company recorded charges of
$15.1 million ($8.7 million net of tax) related primarily to the restructuring
of product lines and management at the Company's Savannah operation.
During the quarter ended September 30 ,1998, the Company recorded
additional pretax charges of $0.9 million ($0.5 million net of tax) related to
the restructuring and a pretax charge of $3.8 million ($2.2 million net of tax)
for the write-off of an investment in the preferred stock of related party.
During the nine months ended September 30, 1998, the Company recorded
pre-tax charges of $19.8 million(11.4 million net of tax). Such special and
non-recurring charges by category of expenditure were as follows:
Included In
<TABLE>
<S> <C> <C> <C> <C> <C>
Cost of Goods General and Restructuring Loss on Write-off
Sold Administrative Charges of Investment Total
------------------ ------------------ ------------------ ------------------ ------------------
Inventories $6.6 $6.6
Management restructuring $1.5 * $2.6 * 4.1
Fixed assets 0.2 * 2.9 3.1
Other 2.0 0.2 * $3.8 6.0
------------------ ------------------ ------------------ ------------------ ------------------
$6.6 $3.7 $5.7 $3.8 $19.8
================== ================== ================== ================== ==================
</TABLE>
7
<PAGE>
The inventory charge related primarily to write-down of inventory which
was determined to be non-strategic and to reserves for obsolete inventory and
inventory in excess of usage plans. The management restructuring charges
included employee severance costs and expenses related to the hiring of the
Company's new chief executive officer. The fixed assets charges related
primarily to fixed assets which will be disposed of in connection with the
restructuring of product lines. The other charges included $2.0 million of
additional reserves against accounts receivable for customer deductions and $3.8
million for the write-off of a preferred stock investment in AM Cosmetics (a
related company which provides contract manufacturing services to the Company)
which management has determined to be unrealizable.
Of the $19.8 million of special charges recorded in the nine months
ended September 30,1998, a total of $5.4 million (those denoted by "*" above)
were recorded as accrued liabilities. Cash payments for these expenses
totaled approximately $2.9 million resulting in a liability balance at
September 30, 1998 of $2.5 million.
4. Sale of Subsidiary Stock
During the three months ended June 30, 1998, the Company recorded a
one-time pretax gain of $49.1 million ($28.1 million net of tax) related to its
sale of 29.1 million shares of its South African subsidiary, Carson Holdings
Limited ("Carson South Africa"), the shares of which are traded on the
Johannesburg Stock Exchange. This sale generated cash proceeds of $55.2 million
and resulted in an increase in minority interest of $6.0 million which
represents the Company's cost basis in the shares sold.
Concurrent with the sale of the Company's shares, Carson South Africa
issued an additional 10.25 million shares for which it received cash proceeds of
$19.2 million. This transaction resulted in a gain to the Company of $11.7
million which was recorded as paid in capital. The transaction also increased
minority interest by $7.6 million.
As a result of these combined sales and certain other transactions, as
of November 1, 1998 the Company owned approximately 52.8% of the stock of Carson
South Africa.
5. Inventories
Inventories are summarized as follows (in thousands):
September 30, 1998 December 31, 1997
----------------------- -------------------------
Raw materials $11,459 $10,873
Work-in-process 1,805 1,651
Finished goods 18,440 12,337
------------------------ ------------------------
$31,704 $24,861
======================== ========================
8
<PAGE>
6. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") is effective and has been adopted for the
Company's fiscal year ending December 31, 1998. SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements.
The components of comprehensive income (loss) were as follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
Net income (loss) $(3,597) $1,493 $13,618 $4,441
Other comprehensive (loss)
income:
Change in equity due to foreign
currency translation adjustments 144 (788) (4,131) (164)
--------------- --------------- --------------- ---------------
Comprehensive income (loss) $(3,453) $705 $9,487 $4,277
=============== =============== =============== ===============
</TABLE>
The loss in equity due to foreign currency translation adjustments during the
nine months ended September 30, 1998, was due to the significant devaluation of
the South African Rand during the second quarter of 1998. The Rand devalued
approximately 20.0%, from 4.9970 Rand per dollar at March 31, 1998 to 5.9950
Rand per dollar at June 30, 1998. At September 30, 1998, the conversion was
5.9800 Rand per dollar. During the prior year, no such significant fluctuation
of the Rand occurred.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131") is also
effective for the Company's fiscal year ending December 31, 1998. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This statement does not
significantly alter the segment disclosures the Company provides.
7. 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 are
guaranteed on a senior subordinated basis by Carson Products Company and Johnson
Products Company (the "subsidiary guarantors"). Carson Products Company is a
direct wholly-owned subsdidiary of Carson, Inc. Johnson Products Company is an
indirect wholly-owned subsidiary of Carson, Inc., which was purchased by Carson
Products Company in 1998. The following tables present condensed consolidating
financial information for Carson, Inc., the subsidiary guarantors, 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 guarantors are not included and the
subsidiary guarantors are not filing separate reports under the Securities
Exchange Act of 1934, as amended, because the subsidiary guarantors have fully
and unconditionally guaranteed the Notes, and separate financial statements and
other disclosures concerning the subsidiary guarantors are not deemed material
to investors.
Non-guarantor subsidiaries in 1998 include Carson Holdings Limited
("Carson South Africa") and Carson UK, Limited ("Carson UK"). Carson UK was
incorporated in 1998 and is an indirect wholly-owned subsidiary of Carson, Inc.
Carson South Africa, an indirect 52.8%-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. 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
these tables.
9
<PAGE>
Carson, Inc.
Consolidating Balance Sheet as of September 30, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc. Subsidiary Non-guarantor Consolidated
(parent) guarantors subsidiaries Eliminations Carson, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cauivalents $ -- $ 6,970 $ 14,529 $ 10 $ 21,509
Accounts receivable, net -- 26,328 9,579 -- 35,907
Inventories, net -- 21,843 9,861 -- 31,704
Other current assets -- 524 3,524 -- 4,048
Property, plant and equipment, net -- 25,793 8,525 (36) 34,282
Intangible assets, net, and other assets 165,636 7,776 -- 173,412
Investment in subsidiary 83,053 41,206 -- (124,259) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 83,053 $ 288,300 $ 53,794 $ (124,285) $ 300,862
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ -- $ 9,666 $ 2,502 $ -- $ 12,168
Other current liabilities -- 77,989 6,068 5 84,062
Long-term debt -- 100,000 377 -- 100,377
Other liabilities -- 21,092 110 -- 21,202
Intercompany (receivables)/payables -- (3,500) 3,531 (31) --
Common stock and paid in capital 80,800 28,437 39,259 (67,696) 80,800
Other equity accounts (7,354) (14,509) (8,831) 23,340 (7,354)
Retained earnings 9,607 69,125 10,778 (79,903) 9,607
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 83,053 $ 288,300 $ 53,794 $ (124,285) $ 300,862
</TABLE>
Carson, Inc.
Consolidating Balance Sheet as of December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson
Products
Company
Carson, Inc. (subsidiary Non-guarantor Consolidated
(parent) guarantor) subsidiaries Eliminations Carson, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ -- $ 2,614 $ 11,420 $ 9 $ 14,043
Accounts receivable, net -- 20,160 7,988 -- 28,148
Inventories, net -- 20,438 4,423 -- 24,861
Other current assets -- 730 102 -- 832
Property, plant and equipment, net -- 16,216 6,021 (35) 22,202
Intangible assets, net, and other assets 101,576 9,762 -- 111,338
Investment in subsidiary 61,531 24,518 -- (86,049) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 61,531 $ 186,252 $ 39,716 $ (86,075) $ 201,424
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ -- $ 7,625 $ 942 $ -- $ 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
Intercompany (receivables)/payables -- (1,038) 1,069 (31) --
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 $ 186,252 $ 39,716 $ (86,075) $ 201,424
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc.
Consolidating Statement of Operations for the Nine Months Ended September 30, 1998
Carson, Inc. Subsidiary Non-guarantor Consolidated
(parent) guarantors subsidiaries Eliminations Carson, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 75,172 $ 30,362 $ -- $ 105,534
Cost of goods sold -- 43,214 16,065 (843) 58,436
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit -- 31,958 14,297 843 47,098
Marketing and selling expenses -- 24,727 5,498 -- 30,225
General and administrative expenses -- 18,767 3,637 -- 22,404
Restructuring expenses -- 5,751 -- -- 5,751
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) -- (17,287) 5,162 843 (11,282)
Other income (expense) -- 37,718 1,625 (843) 38,500
Equity in subsidiary earnings (net of taxes) 13,618 -- -- (13,618) --
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, minority
interest and extraordinary item 13,618 20,431 6,787 (13,618) 27,218
Provision for income taxes -- (9,398) (1,617) -- (11,015)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before minority interest and
extraordinary item 13,618 11,033 5,170 (13,618) 16,203
Minority interest -- -- (1,652) -- (1,652)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 13,618 11,033 3,518 (13,618) 14,551
Extraordinary item, net of tax -- (933) -- -- (933)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 13,618 $ 10,100 $ 3,518 $ (13,618) $ 13,618
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc.
Consolidating Statement of Operations for the Nine Months Ended September 30, 1997
Carson
Products
Company
Carson, Inc. (subsidiary Non-guarantor Consolidated
(parent) guarantor) subsidiaries Eliminations Carson, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 66,162 $ 12,947 $ (1,318) $ 77,791
Cost of goods sold -- 30,437 6,312 (1,318) 35,431
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit -- 35,725 6,635 -- 42,360
Marketing and selling expenses -- 16,861 2,741 -- 19,602
General and administrative expenses -- 10,340 1,351 -- 11,691
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income -- 8,524 2,543 -- 11,067
Other income (expense) -- (3,172) 364 -- (2,808)
Equity in subsidiary earnings (net of taxes) 4,441 -- -- (4,441) --
- ------------------------------------------------------------------------------------------------------------------------------------
Income before minority interest and income taxes 4,441 5,352 2,907 (4,441) 8,259
Provision for income taxes -- (2,569) (741) -- (3,310)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before minority interest 4,441 2,783 2,166 (4,441) 4,949
Minority interest -- -- (508) -- (508)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,441 $ 2,783 $ 1,658 $ (4,441) $ 4,441
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc.
Consolidating Statement of Operations for the Three Months Ended September 30, 1998
Carson, Inc. Subsidiary Non-guarantor Consolidated
(parent) guarantors subsidiaries Eliminations Carson, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 34,464 $ 10,099 $ -- $ 44,563
Cost of goods sold -- 16,934 5,309 (260) 21,983
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit -- 17,530 4,790 260 22,580
Marketing and selling expenses -- 10,871 1,837 -- 12,708
General and administrative expenses -- 5,249 1,179 -- 6,428
Restructuring expenses -- 914 -- -- 914
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income -- 496 1,774 260 2,530
Other income (expense) -- (6,903) 666 (260) (6,497)
Equity in subsidiary earnings (net of taxes) (3,597) -- -- 3,597 --
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, minority
interest and extraordinary item (3,597) (6,407) 2,440 3,597 (3,967)
Provision for income taxes -- 2,531 (520) -- 2,011
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest and
extraordinary item (3,597) (3,876) 1,920 3,597 (1,956)
Minority interest -- -- (708) -- (708)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (3,597) (3,876) 1,212 3,597 (2,664)
Extraordinary item, net of tax -- (933) -- -- (933)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (3,597) $ (4,809) $ 1,212 $ 3,597 $ (3,597)
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc.
Consolidating Statement of Operations for the Three Months Ended September 30, 1997
Carson
Products
Company
Carson, Inc. (subsidiary Non-guarantor Consolidated
(parent) guarantor) subsidiaries Eliminations Carson, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 24,423 $ 5,554 $ (352) $ 29,625
Cost of goods sold -- 11,200 2,707 (352) 13,555
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit -- 13,223 2,847 -- 16,070
Marketing and selling expenses -- 6,020 1,305 -- 7,325
General and administrative expenses -- 3,968 576 -- 4,544
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) -- 3,235 966 -- 4,201
Other income (expense) -- (1,579) 170 -- (1,409)
Equity in subsidiary earnings (net of taxes) 1,493 -- -- (1,493) --
- ------------------------------------------------------------------------------------------------------------------------------------
Income before minority interest and income taxes 1,493 1,656 1,136 (1,493) 2,792
Provision for income taxes -- (849) (264) -- (1,113)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before minority interest 1,493 807 872 (1,493) 1,679
Minority interest (186) (186)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,493 $ 807 $ 686 $ (1,493) $ 1,493
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc.
Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 1998
Carson, Inc. Subsidiary Non-guarantor Consolidated
(parent) guarantors subsidiaries Eliminations Carson, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 13,618 $ 10,100 $ 3,518 $ (13,618) $ 13,618
Adjustment to reconcile net income to net
cash used in operating activities:
Gain on sale of subsidiary stock -- (49,140) -- -- (49,140)
Non-cash special charges -- 14,695 -- -- 14,695
Depreciation and amortization -- 3,962 814 -- 4,776
Extraordinary item, net of tax benefi -- 933 -- -- 933
Write-off of AM stock -- 3,768 -- -- 3,768
Other, net (13,618) 2,876 9 13,618 2,885
Changes in operating assets and
liabilities -- 4,130 (6,976) -- (2,846)
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustments (13,618) (18,776) (6,153) 13,618 (24,929)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities -- (8,676) (2,635) -- (11,311)
- ------------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Additions to property, plant and equipment -- (4,092) (4,150) -- (8,242)
Acquisitions of business assets, net of cash
acquired -- (35,000) -- -- (35,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities -- (39,092) (4,150) -- (43,242)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from long-term borrowings -- 9,500 -- -- 9,500
Principal payments on long-term debt -- (12,500) (133) -- (12,633)
Payment on A&J Cosmetics payable -- -- (5,416) -- (5,416)
Proceeds from sale of subsidiary stock -- 55,250 19,200 74,450
Other -- (125) (72) -- (197)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities -- 52,125 13,579 -- 65,704
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes -- -- (3,685) -- (3,685)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in Cash and Cash Equivalents -- 4,357 3,109 -- 7,466
Cash and Cash Equivalents at Beginning of Period -- 2,614 11,420 -- 14,043
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ -- $ 6,971 $ 14,529 $ -- $ 21,509
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc.
Consolidating Statement of Cash Flows for the Nine Months Ending September 30, 1997
Carson
Products
Company
Carson, Inc. (subsidiary Non-guarantor Consolidated
(parent) guarantor) subsidiaries Eliminations Carson, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 4,441 $ 2,783 $ 1,658 $ (4,441) $ 4,441
Adjustment to reconcile net income to
net cash used in operating activities:
Depreciation and amortization -- 2,418 268 -- 2,686
Other, net (4,441) 221 (886) 4,441 (665)
Changes in operating assets and
liabilities -- (14,657) (3,283) 4,518 (13,422)
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustments (4,441) (12,018) (3,901) 8,959 (11,401)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities -- (9,235) (2,243) 4,518 (6,960)
- ------------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Additions to property, plant and equipment -- (2,271) (2,837) -- (5,108)
Acquisitions of business assets, net of cash
acquired -- (49,513) 107 -- (49,406)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities -- (51,784) (2,730) -- (54,514)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from long-term borrowings -- 62,979 -- -- 62,979
Principal payments on long-term debt -- (1,856) (306) -- (2,162)
Proceeds from sale of subsidiary stock -- -- 6,043 (4,518) 1,525
Other -- (93) 21 -- (72)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities -- 61,030 5,758 (4,518) 62,270
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in Cash and Cash Equivalents -- 11 785 -- 796
Cash and Cash Equivalents at Beginning of Period -- 1,572 2,609 10 4,191
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ -- $ 1,583 $ 3,394 $ 10 $ 4,987
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Management's Discussion and Analysis of
Results of Operations and Financial Condition
OVERVIEW
Forward-looking Statements
This report on Form 10-Q as well as other public documents of the
Company contain forward-looking statements which involve risks and
uncertainties, including (I) the Company's plans to introduce new products and
product enhancements, (ii) the Company's plans to make selective acquisitions,
(iii) the Company's marketing, distribution and manufacturing expansion plans,
(iv) future financial performance, (v) cash flows from operations, (vi) capital
expenditures, (vii) the availability of funds from 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", "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, the Company's exchange offer prospectus dated
December 19, 1997 and the Company's 1997 Annual Report on Form 10-K), actual
results could differ materially from those expressed in any forward-looking
statements made by the Company. Such risks, uncertainties and factors include,
but are not limited to, foreign business risks, industry cyclicality,
fluctuations in customer demand and order pattern, the seasonal nature of the
business, changes in pricing, the identification of suitable acquisition
candidates, changes in the implementation of the Company's acquisition plans,
the availability of financing, and general economic conditions, as well as other
risks detailed in the Company's filings with the Securities and Exchange
Commission. Additional risk factors include, but are not limited to, the
following: (a) the Company's success in implementing its growth strategy,
including its success in obtaining financing where required, (b) difficulties or
delays in developing and introducing new products or the failure of consumers to
accept new product offerings, (c) changes in consumer preferences, including
reduced consumer demand for the Company's current products, (d) the nature and
extent of future competition in the Company's principal marketing areas, and (e)
political, economic and demographic developments in the United States, Africa,
Brazil, the Caribbean, Europe and other countries where the Company now does or
in the future may do business.
General
The Company is a leading manufacturer and marketer in the 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
sells products specially formulated to address the unique physiological
characteristics of persons of African descent, until recently under six
principal brand names, including Dark & Lovely, Excelle, Beautiful Beginnings,
Dark & Natural, Magic, and Let's Jam. With the acquisition of Johnson Products
Company in July 1998, the Company added the brand names Gentle Treatment,
Ultrasheen, Precise, Bantu and AfroSheen to its portfolio of ethnic hair care
products as well as Posner cosmetics. 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 is expanding its product offerings to other segments of the ethnic
personal care market, including cosmetics and skin care products. In addition,
the Company is a leading marketer of nail care products to the United States
mass market under the Cutex brand name. The Company is currently seeking to
divest the Cutex business in order to focus on the worldwide ethnic personal
care business.
15
<PAGE>
In the nine months ended September 30, 1998, approximately 32.8% of the
net sales of the Company were to customers outside the United States as compared
to 28.2 % in the first nine months of the prior fiscal year. The following table
presents the Company's net sales by geographic region for these periods (dollars
are in thousands):
Net sales to: 1998 % 1997 %
------------ ------------ ------------ ------------
United States $70,853 67.2% $55,895 71.8%
Africa 25,900 24.5 13,360 17.2
Other 8,781 8.3 8,536 11.0
Total $105,534 100.0% 77,791 100.0%
============ ============= ============= ============
With the exception of sales in South Africa, Botswana, Lesotho,
Namibia and Swaziland, which are denominated in South African Rand, all of the
Company's sales are recorded in U.S. Dollars. The Company does not view the
exposure to Rand exchange rate fluctuations as significant because Carson South
Africa incurs substantially all of its costs in Rand. Assets and liabilities of
Carson South Africa are translated for consolidation purposes from South African
Rand into U.S. Dollars at the rate of currency exchange at the end of the fiscal
period. Revenues and expenses are translated at average monthly prevailing
exchange rates. Resulting translation differences are recognized as a component
of stockholders' equity.
Acquisition
On July 14, 1998 the Company acquired all of the outstanding shares of
Johnson Products Co., Inc., a Florida corporation. Johnson Products is a major
manufacturer of personal care products for the ethnic market. Hair care products
manufactured by Johnson Products include brand names such as Gentle Treatment,
UltraSheen, Precise, Bantu and AfroSheen. Johnson Products also sells cosmetics
under the Posner brand name. Also included in the acquisition was the Dermablend
corrective cosmetics line, which the Company intends to divest within one year
from the date of acquisition. The acquisition was accounted for as a purchase.
The purchase price, including the Dermablend line, was approximately $85.0
million with $35.0 million paid in cash. The Company entered into a Credit
Agreement with IVAX Corporation, d/b/a IVX Boscience, Inc., for the remaining
$50.0 million purchase price. The senior secured loan provided by IVAX
Corporation and subsequently assingned to other lenders(the "IVAX loan")matures
on December 15, 1998 and bears interest at 9.0% per annum, payable monthly.
Any overdue principal and interest bear interest at 12.0% per annum and are
payable upon demand.
In conjunction with the IVAX Credit Agreement, the Company terminated
its senior secured credit facility with Credit Agricole Indosuez. During the
third quarter of 1998, the Company recognized an extraordinary loss of $0.9
million(net of tax, or $0.06 per share) for the write-off of $1.6 million of
debt financing costs related to this credit facility.
Special Items
During the quarter ended September 30 ,1998, the Company recorded
pretax charges of $0.9 million ($0.5 million net of tax) related to the
management restructuring in the previous quarter and a pretax charge of $3.8
million ($2.2 million net of tax) for the write-off of an investment in the
preferred stock of AM Cosmetics,Inc., (AM Cosmetics"), a related company which
provides contract manufacturing services to the company.
For the nine months ended September 30, 1998, the Company recorded
one-time pretax charges of $19.8 million ($11.4 million net of tax) related
primarily to the restructuring of management and product lines at the Company's
Savannah operation. The Company revised its key management team, including the
termination of several senior managers and the addition of Gregory J. Andrews as
Chief Executive Officer, and announced a new strategic focus on its core
business, the worldwide ethnic hair care market. In connection with this new
focus and the Johnson acquisition, all of the combined products, brands and
facilities were reviewed for optimum use. Items identified as non-strategic or
redundant were written down.
16
<PAGE>
Of the pretax charges, $6.6 million was recorded as cost of goods sold
for obsolete or excess inventory and the elimination of over 100 stock keeping
units (SKUs), $3.7 million was recorded as general and administrative expenses
and $5.7 million was recorded as restructuring charges. The general and
administrative expenses included $1.5 million related to the management
restructuring, $0.2 million for the write-down of fixed assets and $2.0 million
for additional reserves against accounts receivable for customer deductions.
Restructuring charges included $2.6 million related to the management
restructuring, $2.9 million for the write-down of fixed assets and $0.2 million
of other charges. See Note 3 to the condensed consolidated financial statements
included herein.
The one-time pretax gain recorded in the nine months ended September
30, 1998 of $49.1 million ($28.1 million net of tax) related to the sale of 29.1
million shares of Carson South Africa, the shares of which are traded on the
Johannesburg Stock Exchange. This sale generated net cash proceeds of $55.2
million and resulted in an increase in minority interest of $6.0 million.
Concurrent with the sale of the Company's shares, Carson South Africa issued an
additional 10.25 million shares for which it received net cash proceeds of $19.2
million. This transaction resulted in a gain to the Company of $11.7 million
which was recorded in paid in capital. The transaction also increased
minority interest by $7.6 million. As a result of these combined sales, as
of November 1, 1998, the Company currently owns approximately 52.8% of the stock
of Carson South Africa.
The $3.8 million loss on write-off of investment recorded during the
quarter ended September 30, 1998 was a result of management's determination that
the Company's preferred stock investment in AM Cosmetics was not realizable due
to the financial condition of AM Cosmetics.
Results of Operations
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
Net Sales. Consolidated net sales for the quarter ended September 30, 1998 of
$44.6 million increased $14.9 million, or 50.4%, from the quarter ended
September 30, 1997. This increase is summarized as follows (dollars are in
thousands):
Quarter Ended Quarter Ended
September 30, September 30, % Change
1998 1997
-------------- -------------- -------------
Domestic core $17,161 $12,847 33.6
Johnson Products 10,633 -- N/A
Cutex 4,754 7,329 (35.1)
Salon Professional and Cosmetics 584 822 (29.1)
Total Domestic 33,132 20,998 57.8
-------------- -------------- -------------
South Africa 8,752 5,554 57.6
Other International, including U.S.
export 2,679 3,073 (12.9)
Total International 11,431 8,627 32.5
-------------- -------------- -------------
Consolidated $44,563 $29,625 50.4
-------------- -------------- -------------
17
<PAGE>
Sales of the Company's domestic core business, ethnic hair care products,
amounted to $17.2 million in the quarter ended September 30, 1998, an increase
of $4.3 million, or 33.6%, compared to the quarter ended September 30, 1997.
The Company revised certain sales, distribution and marketing practices
to better meet customer and distributor needs and stimulate interest at
the consumer level. Management believes that the Company is beginning to reap
the benefits of these changes in higher sales. Net sales of relaxers and hair
colors were up 31.3% and 35.3%, respectively, over the quarter ended September
30, 1997.
The addition of Johnson Products increased net sales $10.6 million over
the quarter ended September 30, 1997. This amount included $0.7 million of net
sales for items produced for and sold to another ethnic hair care company under
a contract which management expects to be terminated at the end of 1998.
Net sales of Cutex decreased significantly from the prior year third
quarter. Cutex product shipments for the quarter ended September 30, 1998 were
actually higher than the reported net sales indicate due to unusually high
levels of returned product which continued from the quarter second into the
third quarter of 1998. Introduction of the new Ultra line of nail polishes in
April 1998 resulted in high returns of old product which it replaced. Most of
the third quarter returns of Cutex came early in the quarter.
Total international sales continued to grow from the prior year.
International net sales were $11.4 million in the quarter ended September 30,
1998, an increase of $2.8 million, or 32.5 %, compared to the quarter ended
September 30, 1997. All of the growth was in Africa, which increased $3.2
million compared to the corresponding quarter of 1997.
Gross Profit. Gross profit was $22.6 million for the quarter ended September 30,
1998 compared to $16.1 million for the quarter ended September 30, 1997. Gross
margin decreased to 50.7% for the quarter ended September 30, 1998 from 54.2%
for the quarter ended September 30, 1997. A significant factor in the gross
margin decrease was the addition of Johnson Products, which produced gross
profit of $4.8 million and a gross margin of 45.5%. Gross margin of the
domestic core business increased during the third quarter to 56.9% for the
quarter ended September 30, 1998 from 54.2 % for the quarter ended September 30,
1997.
Gross margin was also lowered as Carson South Africa's net sales grew as a
percentage of consolidated net sales. Sales in Africa typically provide a lower
gross margin than domestic sales and was 47.4% for the quarter ended September
30, 1998. However, marketing and selling expenses are also lower on these
international sales, and the operating margin on these sales is typically higher
than on domestic sales.
Gross margin was further negatively impacted during the quarter by the high
returns of Cutex product discussed above.
Marketing and Selling Expenses. Marketing and selling expenses increased to
$12.7 million in the quarter ended September 30, 1998 from $7.3 million in the
quarter ended September 30, 1997, an increase of 73.5%. This increase was due to
greater promotional activity to increase sales of the Company's core ethnic
products, higher promotional expenses for Cutex and the addition of Johnson
Products. As a percentage of net sales, these expenses increased to 28.5%
during this period from 24.7% during the comparable period in 1997.
General and Administrative Expense. General and administrative expenses
increased $1.9 million to $6.4 million for the quarter ended September 30, 1998
from $4.5 million for the quarter ended September 30, 1997. As a percentage of
net sales, general and administrative expenses decreased to 14.4% during this
period from 15.3% during the comparable period in 1997. The addition of Johnson
Products was responsible for $1.1 million of additional expense in the quarter
ended September 30, 1998. The remainder of the increase was primarily due to
higher spending at Carson South Africa to support the subsidiary's growth.
Restructuring. As discussed above, restructuring charges, included $0.9
million related to the management restructuring.
Operating Income. As a result of the above changes, operating income decreased
to $2.5 million in the quarter ended September 30, 1998 from $4.2 million in the
quarter ended September 30, 1997. Excluding the $0.9 million of special charges,
operating income decreased to $3.4 million in the quarter ended September 30,
1998 from income of $4.2 million in the quarter ended September 30, 1997.
Interest Expense. Interest expense increased significantly to $3.8 million in
the quarter ended September 30, 1998 from $1.8 million in the quarter ended
September 30, 1997. Approximately $0.9 million of this increase was due to
interest on the debt incurred to purchase Johnson Products. The remainder of the
increase was the result of additional debt incurred in 1997 to finance
18
<PAGE>
acquisitions, which was subsequently refinanced with the proceeds from the sale
of $100 million aggregate principal amount of the Company's 10-year 10 3/8%
Senior Subordinated Notes.
Minority Interest in Earnings of Subsidiary. Minority interest in earnings of
subsidiary increased to expense of $0.7 million in the quarter ended September
30, 1998 from expense of $0.2 million in the quarter ended September 30, 1997.
This increase is due to higher earnings of Carson South Africa in the current
year quarter over the prior year quarter and also to the higher minority
ownership percentage resulting from the sales of subsidiary stock.
Other Income. Other income increased to $1.1 million for the quarter ended
September 30, 1998 from $0.4 million for the same quarter of 1997 primarily due
to interest income on cash balances in the United States and South Africa which
were generated by the sale of subsidiary stock.
Loss on Write-off of Investment. This loss is related to the write-off of the
Company's preferred stock investment in AM Cosmetics.
Provision for Taxes. The provision for taxes decreased to a benefit of $2.0
million, based on an effective rate of 43.0%, in the quarter ended September 30,
1998 from a provision of $1.1 million, based on an effective rate of 42.6%, in
the quarter ended September 30, 1997. Excluding the special charges of $4.7
million, the income before tax was $3,000 and the provision for taxes decreased
to zero for the quarter ended September 30, 1998.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Net Sales. Consolidated net sales for the nine months ended September 30, 1998
of $105.5 million increased $27.7 million, or 35.7%, over the nine months ended
September 30, 1997. This increase is summarized as follows (dollars are in
thousands):
Nine Months Ended Nine Months Ended
September 30, September 30,
1998 1997 % Change
----------------- ----------------- ---------
Domestic core $42,055 $42,950 (2.1)
Johnson Products 10,632 -- N/A
Cutex 16,514 12,091 36.6
Salon Professional and Cosmetics 1,652 855 93.2
Total Domestic 70,853 55,895 26.8
----------------- ----------------- ---------
South Africa 25,900 13,360 93.9
Other International 8,781 8,536 3.0
Total International 34,681 21,896 58.4
----------------- ----------------- ---------
Consolidated $105,534 $77,791 35.7
------------------ ----------------- ---------
Net sales of the Company's domestic core business, ethnic hair care
products, amounted to $42.1 million in the nine months ended September 30,
1998, a decrease of $0.9 million, or 2.1%, compared to the nine months ended
September 30, 1997. Until the current quarter, domestic core net sales in 1998
had been below the prior year levels. To address the downward trend in the
Company's domestic core sales, management was restructured and certain sales,
distribution and marketing practices were revised to better meet customer and
distributor needs and stimulate interest at the consumer level. Sales began to
improve in the quarter ended September 30, 1998, and the gap between current and
prior year domestic core sales was narrowed.
The acquisition of Johnson Products added $10.6 million of net sales for
the nine months ended September 30, 1998. This amount included $0.7 million of
net sales for items produced for and sold to another ethnic hair care company
19
<PAGE>
under a contract which management expects to be terminated at the end of 1998.
Net sales of Cutex increased significantly from the prior year nine months.
The brand was purchased in April of 1997 and was included in the Company's
results of operations for only five of the nine months ended September 30, 1997.
International net sales continued to grow significantly from the prior year.
International net sales were $34.7 million in the nine months ended September
30, 1998, an increase of $12.8 million, or 58.4 %, compared to the nine months
ended September 30, 1997. Most of the growth was in Africa with a 93.9%
increase, but significant gains were also made in Europe, which increased net
sales by 14.5%.
Gross Profit. Gross profit was $47.1 million for the nine months ended September
30, 1998 compared to $42.4 million for the nine months ended September 30, 1997.
Excluding the $6.6 million of special charges included in cost of goods sold,
gross profit increased to $53.7 million in the nine months ended September 30,
1998 from $42.4 million in the nine months ended September 30, 1997, and gross
margin decreased to 50.9% for the nine months ended September 30, 1998 from
54.5% for the same nine months in 1997. A significant factor in the gross margin
decrease was the addition of Johnson Products, which produced gross profit
of $4.8 million and a gross margin of 45.5%.
The decrease in gross margin was also due to decreased production volumes
earlier in the year and to geographic and product shifts in the sales mix.
Production volume was curtailed in the second quarter of 1998 to reduce
inventories which had risen to levels in excess of current needs. Inventories
were built up at the end of the prior fiscal year due to manufacturing
inefficiencies which necessitated carrying higher inventory levels to meet
customer needs. Inventories were further built up in the first part of fiscal
1998 to meet sales forecasts which proved to be too high. To lower inventory
levels, the plant was shut down for two weeks and run only four days for several
more weeks during the second quarter of 1998. This action resulted in unabsorbed
overhead in production which adversely impacted gross margin.
Gross margin was lowered as Carson South Africa's net sales grew as a
percentage of consolidated net sales. Sales in Africa typically provide a lower
gross margin (47.4%) than domestic sales.However, marketing and selling expenses
are also lower on these international sales, and the operating margin on these
sales is typically higher than on domestic sales.
Marketing and Selling Expenses. Marketing and selling expenses increased to
$30.2 million in the nine months ended September 30, 1998 from $19.6 million in
the nine months ended September 30, 1997, an increase of 54.2%. This increase
was primarily due to the additions of Johnson Products in the current year and
Cutex and Let's Jam in the second quarter of the prior year. Marketing and
selling expenses were also higher due to greater promotional activity to
increase sales of the Company's core ethnic products and due to expanded
marketing to support the growth of South Africa. As a percentage of net sales,
these expenses increased to 28.6% during this period from 25.2% during the
comparable period in 1997.
General and Administrative Expense. General and administrative expenses were
$22.4 million for the nine months ended September 30, 1998 compared to $11.7
million for the nine months ended September 30, 1997. Excluding the $3.7 million
of special charges included in general and administrative expenses, these
expenses increased to $18.7 million in the nine months ended September 30, 1998
from $11.7 million in the nine months ended September 30, 1997, an increase of
59.9%. As a percentage of net sales, general and administrative expenses
increased to 17.7% during this period from 15.0% during the comparable period in
1997. These expenses increased $1.1 million due to the addition of Johnson
Products. The remainder of the increase was due in part to increased personnel,
professional and miscellaneous expenses associated with enhancement of
infrastructure needed to support the Company's anticipated growth, combined with
higher amortization of intangibles related to acquisitions and higher warehouse
costs related to high inventory levels earlier in the year.
Restructuring. As discussed above, restructuring charges included $2.6 million
related to the management restructuring, $2.9 million for the write-down of
fixed assets and $0.2 million of other miscellaneous charges.
Operating Income. As a result of the above changes, operating income decreased
to a loss of $11.3 million in the nine months ended September 30, 1998 from
income of $11.1 million in the nine months ended September 30, 1997. Excluding
the special charges of $16.0 million, operating income decreased to income of
$4.7 million in the nine months ended September 30, 1998 from income of $11.1
million in the nine months ended September 30, 1997.
Interest Expense. Interest expense increased significantly to $9.6 million
in the nine months ended September 30, 1998 from $3.9 million in the nine months
ended September 30, 1997. The increased interest expense was the result of the
20
<PAGE>
Johnson Products acquisition debt as well as additional debt incurred in 1997
to finance acquisitions, which was subsequently refinanced with the proceeds
from the sale of $100 million aggregate principal amount of the Company's
10-year 10 3/8% Senior Subordinated Notes.
Gain on Sale of Subsidiary Stock. As discussed above, this gain resulted from
the sale of 29.1 million shares of Carson South Africa.
Minority Interest in Earnings of Subsidiary. Minority interest in earnings of
subsidiary increased to expense of $1.7 million in the nine months ended
September 30, 1998 from expense of $0.5 million in the nine months ended
September 30, 1997. This increase was due to higher earnings of Carson South
Africa in the current year nine months over the prior year nine months and also
to the higher minority ownership percentage resulting from the sales of
subsidiary stock.
Other Income. Other income increased to $2.8 million for the nine months ended
September 30, 1998 from $1.1 million for the same nine months of 1997 primarily
due to interest income on cash balances in the United States and South Africa
which were generated by the sale of subsidiary stock.
Loss on Write-off of Investment. As discussed above, this loss resulted from the
write-off of the Company's investment in preferred stock of AM Cosmetics.
Provision for Taxes. The provision for taxes increased to $11.0 million, based
on an effective rate of 43.1%, in the nine months ended September 30, 1998 from
$3.3 million, based on an effective rate of 42.7%, in the nine months ended
September 30, 1997. Excluding the special charges and gain, the provision for
taxes decreased to a benefit of $1.5 million, based on an effective rate of
40.1%, in the nine months ended September 30, 1998. This effective tax rate has
decreased from 1997 due to the larger impact of the earnings of Carson South
Africa, which are taxed at lower rates than the earnings in the United States.
Liquidity and Capital Resources
In the nine months ended September 30, 1998, net cash used in operations
was $11.3 million. Excluding the effects of the Johnson Products acquisition,
cash was used to increase accounts receivable, inventories and other current
assets and to reduce accounts payable. The increases in accounts receivable
and inventories occurred primarily in South Africa. The increase in other
current assets represents an advance payment by Carson South Africa for
packaging supplies to be used in the fourth quarter of 1998. The decrease in
accounts payable resulted from payment of liabilities assumed in the Johnson
Products purchase and a decrease in accounts payable not related to Johnson
Products. These were offset by increased accounts payable at Carson South
Africa.
Net cash used in investing activities for the nine months ended September
30, 1998 consisted of capital expenditures of $8.2 million and primarily for the
acquisition of Johnson Products for $35.0 million.
Net cash provided by financing activities for the nine months ended
September 30, 1998 totaled $65.7 million. Cash inflows included $55.2 million
received domestically from the sale of Carson South Africa stock by the Company
and $19.2 million received in South Africa for the issuance of new shares of
Carson South Africa stock. Significant financing cash outflows included the
scheduled payment of $5.4 million for the purchase of A&J Cosmetics and a net
$3.0 million reduction in the Company's outstanding revolver balance.
The cash balance was also adversely impacted by the significant devaluation
of the South African Rand during the nine months ended September 30, 1998. The
Rand devalued approximately 19.7%, from 4.9970 Rand per dollar at March 31, 1998
to 5.9800 Rand per dollar at September 30, 1998. Due to this devaluation, the
cash balances held in South Africa fell $3.7 million when converted to U.S.
dollars. During the prior year, no such significant devaluation of the Rand
occurred.
The Company believes that cash flow from operating activities, existing
cash balances and anticipated proceeds from the planned divestitures of the
Cutex and Dermablend brands will be sufficient to fund working capital
requirements, capital expenditures and debt service requirements in the
immediate future. However, if the Cutex and Dermablend brands are not divested
prior to the maturity date of the IVAX loan, or if net proceeds from such
divestitures are insufficient to satisfy cash requirements, the Company expects
to employ alternative means to satisfy cash requirements and, for this purpose,
has hired the investment banking firm of Donaldson, Lufkin and Jenrette to
assist the Company in seeking alternative financing solutions. If the IVAX loan
is not repaid by December 15, 1998, principal and interest will be payable on
demand and will bear interest at 12% per annum, and other indebtness of the
Company could be subject to acceleration.
21
<PAGE>
Year 2000 Computer 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.
To replace the current systems and provide year 2000 compliance, management has
selected a single vendor, integrated business software package. The cost of
conversion to the new system is estimated to be approximately $1.0 million. The
implementation process has begun, and the new system is expected to be
functional by the end of the second quarter of 1999.
In the unlikely event that implementation of the selected software package
fails, the Company would immediately begin working with another software vendor
to achieve year 2000 compliance as quickly as possible. The risk associated with
not having systems that are compliant by the year 2000 is that the Company would
have to implement manual procedures which would lead to a reduction in
efficiency. The Company could continue to operate, but at a reduced level of
productivity.
22
<PAGE>
CARSON, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to lawsuits incidental to its business. Management
believes that the ultimate resolution of these matters will not have a material
adverse impact on the business or financial condition and operations of the
Company.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits --
27 Financial data schedule.
(b) Reports on Form 8-K --
On September 28, 1998, the Company filed a Form 8-K/A that included the
Financial Statements of Johnson Products Co., Inc., and Subsidiaries (Personal
Care Products Subsidiary of IVAX Corporation), Pro Forma Financial Information,
and related exhibits.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CARSON, INC.
/s/ Robert W. Pierce Date: November 16, 1998
Robert W. Pierce
Executive Vice President, Chief Financial Officer and Secretary
(Principal Financial Officer)
24
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of the Company for the period ended September
30, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1.0
<CASH> 21,509
<SECURITIES> 0
<RECEIVABLES> 47,558
<ALLOWANCES> 11,651
<INVENTORY> 31,704
<CURRENT-ASSETS> 93,168
<PP&E> 39,787
<DEPRECIATION> 5,505
<TOTAL-ASSETS> 300,862
<CURRENT-LIABILITIES> 96,230
<BONDS> 100,377
0
0
<COMMON> 150
<OTHER-SE> 82,903
<TOTAL-LIABILITY-AND-EQUITY> 300,862
<SALES> 105,534
<TOTAL-REVENUES> 105,534
<CGS> 58,436
<TOTAL-COSTS> 58,436
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 634
<INTEREST-EXPENSE> 9,633
<INCOME-PRETAX> 27,218
<INCOME-TAX> (11,015)
<INCOME-CONTINUING> 14,551
<DISCONTINUED> 0
<EXTRAORDINARY> (933)
<CHANGES> 0
<NET-INCOME> 13,618
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
</TABLE>
