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, 1998
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 (I.R.S. Employer Identification
incorporation 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 and non-voting common equity held
by non-affiliates of the registrant, computed by reference to the
average bid and asked prices as of March 16, 1999 on The New York Stock
Exchange was: $36,877,544
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 March 16, 1999:
Common Stock - Class A, $0.01 Par Value 9,786,162 shares
Common Stock - Class C, $0.01 Par Value 5,334,700 shares
Documents incorporated by reference:
Definitive Proxy Statement for the 1999 Annual Meeting of Shareholders
on June 15, 1999 -- 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, 1998 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 and (vii) 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.
General
The Company believes that it is one of the leading global manufacturers and
marketers of ethnic hair care products for people of color. 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 100 different products specifically formulated to address the unique
physiological characteristics of people of color under seventeen principal brand
names, including Dark & Lovely, Excelle, Beautiful Beginnings, Dark & Natural,
Magic, Let's Jam, Gentle Treatment, Ultra Sheeen, Sta-Sof-Fro, Posner, Ultra
Star, Moxie, Soft 'n Free, Classy Curl, Curly Perm, Afro Sheen, and Dermablend.
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, hair color, men's depilatory products and hair care maintenance products,
primarily for people of color. The Company's hair care products are specifically
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formulated to address the unique physiological characteristics of hair of
persons of African descent, which typically include curliness and dryness.
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 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 Limited
("Carson South Africa") sold 25% of its shares in an initial public offering on
the Johannesburg Stock Exchange.
The Company completed an initial public offering of 4,818,500 shares of its
common stock on the New York Stock Exchange on October 18, 1996. As of December
31, 1998 the Company's direct subsidiaries were Carson Products Company and
Carson Management Company. Active indirect subsidiaries of the Company were
Johnson Products Co., Inc., Carson Holdings Limited (South Africa), Carson
Products Do Brasil, Carson UK Ltd., Dermablend, Inc., Carson Products
(Proprietary) Limited (South Africa), Carson Products West Africa Limited
(Ghana) and Carson Products East Africa (Epz) Limited. Four of the Company's
indirect subsidiaries were inactive: Carson Botswana (PTY Limited), Johnson
Products Export Sales, Inc., IVAX Personal Care Products P.R., Inc. and Johnson
Products Co. (UK) Limited.
Recent Developments
Sale of South Africa Stock
In May 1998 the Company sold 29.1 million of its shares of Carson South Africa.
This sale generated net cash proceeds of $55.2 million and resulted in a gain of
$49.1 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 approximately $19.2 million. This transaction resulted in a gain to
the Company of $11.7 million which was recorded in paid-in-capital. As of
December 31, 1998 the Company owned approximately 52.8% of the stock of Carson
South Africa.
Acquisition of Johnson Products Co., Inc.
On July 14, 1998, the Company acquired all of the outstanding shares of Johnson
Products Co., Inc. ("Johnson Products"). Johnson Products is a major
manufacturer of personal care products for the ethnic market. The purchase price
approximated $84.7 million with $34.7
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million paid in cash. The Company entered into a senior secured term loan with
IVAX Corporation (the "Seller"), d/b/a IVX Bioscience, Inc., for the remaining
$50.0 million of the purchase price. This loan was replaced with longer-term
financing in December 1998 as discussed below.
The acquisition was accounted for under the purchase method of accounting. The
results of operations of Johnson Products are included in the Company's
consolidated financial statements since the date of acquisition. The allocation
of the assets and liabilities acquired are as follows (in thousands):
Current assets $ 15,495
Property, plant and equipment 10,135
Trademarks 22,199
Goodwill 48,433
Other assets 517
Liabilities assumed (62,118)
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$ 34,661
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The purchase price has been allocated to the identifiable assets and liabilities
based on the fair values at the acquisition date.
The Dermablend line of corrective cosmetics, which is sold in department and
specialty stores and has an ethnic consumer base of 40 - 50%, was purchased by
the Company as part of the Johnson Products acquisition. Dermablend was
incorporated as Dermablend, Inc. ("Dermablend"), a wholly-owned subsidiary of
Johnson Products at the time the Company acquired Johnson Products. Originally,
management intended to sell Dermablend within one year from the acquisition.
Therefore, in accordance with Emerging Issues Task Force No. 87-11, "Allocation
of Purchase Price to Assets to be Sold", the results of operations related to
Dermablend were initially excluded from the Company's consolidated statement of
operations. In December 1998, the Company decided to operate Dermablend on a
longer-term basis. Accordingly, the cumulative effect of the operating results
of Dermablend since the acquisition date of $890,000 has been included in the
Company's consolidated statement of operations for the year ended December 31,
1998. These operating results are summarized as follows:
Net sales $ 4,016
Cost of sales 766
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Gross profit 3,250
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Marketing and selling 1,576
General and administrative expenses 440
Amortization 344
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$ 890
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Debt Refinancing
In July 1998 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) for the write-off
of $1.6 million of debt issuance costs related to the credit facility.
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On December 8, 1998 the Company entered into loan agreements relating to a $75.0
million secured term loan (the "Secured Term Loan") and an $8.0 million
unsecured term loan (the "Unsecured Term Loan"). The cash proceeds were used
primarily to repay the $50.0 million secured term loan which financed the
Johnson Products acquisition and to purchase and retire $27.0 million of senior
subordinated notes for $23.0 million. The Company recorded an extraordinary net
gain of approximately $1.8 million resulting from the early retirement of the
$27.0 million of senior notes and the write-off of related debt issuance costs.
Of the remaining cash proceeds, approximately $4.3 million was used to pay
transaction fees and expenses, and $5.7 million was retained for working capital
purposes.
On December 10, 1998, the proceeds from the sale of Cutex (see discussion below)
were used to repay the $8.0 million Unsecured Term Loan and $14.7 million of the
Secured Term Loan. As a result of this repayment, the Company recorded an
extraordinary net loss of approximately $0.7 million (net of tax) related to the
write-off of debt issuance costs incurred for this debt. As discussed below,
$4.5 million of the cash proceeds from the sale of Cutex must be used to pay for
certain expenses related to the sale of Cutex. Any amounts not used for the
designated purposes by June 30, 2000 must be used to make an additional
prepayment on the Secured Term Loan.
The remaining $60.3 million of the Secured Term Loan bears interest at an annual
rate of 13% and matures on December 8, 2003. Interest is payable monthly. The
Company may, at its option, defer the monthly interest payment a maximum of
twelve times until December 8, 2000. In the event of deferral, interest will be
accrued at an annual rate of 16% for the month deferred and will be added to the
outstanding principal amount of the loan. The capital stock and assets of Carson
Products Company, the capital stock and assets of Johnson Products and the
capital stock and intellectual property of Dermablend are pledged as collateral
for the Secured Term Loan. The loan contains covenants with respect to, among
other things, (i) restrictions on the incurrence of additional liens or
indebtedness and (ii) restrictions on the payment of any cash dividends by the
Company or any subsidiary.
Sale of Cutex
On December 10, 1998 the Company sold substantially all of the assets of the
Cutex nail polish remover and nail implements business to The Cutex Company, an
unrelated corporation ("Cutex Company"). The Company realized net cash proceeds
of approximately $27.8 million ($4.5 million of which is restricted cash) and
recorded a loss on the sale of approximately $14.0 million.
Of the cash proceeds received for the sale of the Cutex remover business, $4.5
million (the "Holdback Amount") must be used by the Company solely to pay for
certain designated expenses related to the sale of Cutex. The remaining balance
of the Holdback Amount on June 30, 2000, if any, must be used by the Company to
make a prepayment of secured debt.
Industry Overview
Ethnic Hair Care Market
The United States retail ethnic hair care market, principally targeting the
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distinct hair care needs of African-Americans, was estimated, according to
Packaged Facts, an independent market research company (the "Packaged Facts
Report"), to be a $1.2 billion retail business in 1997. This segment is expected
to continue to show a modest annual growth rate of 4%, thus making it a $1.4
billion segment by the year 2001. According to 1997 United States Census Data
(Selected Social Characteristics of the Population,) published by the United
States Department of Commerce, the African-American population was approximately
34 million and represented 12.8% of the United States population. This segment
of the population is projected by the United States Department of Commerce to
grow at a rate twice that of the Caucasion population through the middle of the
next century. The personal income of African-Americans doubled from 1980 to 1990
and their combined purchasing power is expected to exceed $530 billion in 1999.
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 has
historically been a competitive and highly fragmented, but the last year has
seen major changes as large general market companies have entered or expanded
their presence in the ethnic arena: L'Oreal purchased Soft Sheen, and Revlon
purchased African Pride. The Company also significantly increased its market
share with the purchase of Johnson Products in the second half of 1998. Prior to
this acquisitive phase in the category, the top five companies garnered a 51%
collective market share or percent of sales, but as of December 31, 1998, the
top five companies now generate approximately 60% of industry sales. This
information is 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"). Of the
top five companies, only two are privately owned companies.
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. Although there is no independent market
data to support the size of the international market, the Company believes that
the international market is significant.
Competitive Strengths
The Company had the number one market position in the 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 1998 year, according to IRI. The acquisition of Johnson Products adds the
hair dress/conditioning and the combout/oil sheen categories to this list. 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
seventeen principal brand names. 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. The
acquisition of Johnson Products also brings two more well known brands
into the Carson family, namely Ultra Sheen and Gentle Treatment. The
Company believes that its brand strength is based upon product quality,
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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'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, Rite-Aid, CVS), 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.
Key Brands
The Company manufactures and markets a variety of products worldwide. The
following table sets forth the Company's principal products, as of December 31,
1998.
Brand Products
Dark & Lovely Relaxers
Hair Color
Hair Care Maintenance
Excelle Relaxers
Hair Care Maintenance
Beautiful Beginnings Relaxers
Hair Care Maintenance
Dark & Natural Texturizers
Hair Color
Moustache & Beard Color
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Magic Shaving Products
Let's Jam Hair Care Maintenance
Gentle Treatment Relaxers
Texturizers
Hair Care Maintenance
Ultra Sheen Relaxers
Hair Care Maintenance
Sta-Sof-Fro Relaxers
Texturizers
Hair Care Maintenance
Posner Hair Care Maintenance
Cosmetics
Ultra Star Hair Care Maintenance
Moxie Hair Care Maintenance
Soft 'n Free Relaxers
Hair Care Maintenance
Classy Curl Texturizers
Hair Care Maintenance
Curly Perm Hair Care Maintenance
Afro Sheen Hair Care Maintenance
Dermablend Skin Care
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 conducts market research, such as in-home
consumer product placements for new products, tracking studies, concept testing,
package testing and advertising testing aimed at improving its understanding of
and effectively targeting its consumer. The Company also maintains a toll-free
telephone number to answer consumer questions and to gather consumer feedback
used to focus the Company's marketing programs.
Over 12% of net sales in 1998 was allocated to advertising and consumer
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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 Wal-Mart, K-Mart and Target.
o Drug Chains. The Company's products are sold by drug chains, including
Walgreens, Rite-Aid and CVS.
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.
The Company's strong relationships with its customers in the various
distribution channels are enhanced by its direct sales force comprised of
national account persons, regional directors and sales merchandisers, covering
the Northeast, Mid-Atlantic, Mideast and Midwest regions in the Northern
Division and the Mid-South, Southeast, Southwest and Western regions in the
Southern Division. The sales force in each region markets the Company's products
to all of the distribution channels doing business in its geographic region.
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.
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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, represents the largest
R&D effort focused on the ethnic hair care market.
Manufacturing
The Company uses a batching process in its manufacturing operations for
virtually all of its products. The batching process begins with chemical
ingredients being mixed in kettles in batch sizes ranging from 2,000 lbs. to
21,000 lbs. The kettles heat, cool, homogenize and blend each batch of materials
according to standard operating procedures (SOPs). The SOPs for each product are
established by the Company's R&D and Quality Control staff and are periodically
reviewed and improved to ensure uniformity and batch-to-batch conformity with
the manufacturing specifications for the product.
The product is then transferred from the kettles into a holding tank or another
type of storage device until it is pumped into a filling machine that
volumetrically fills the liquid or cream into plastic jars, tubes, bottles or
packets. Each container (i.e., jar, tube, bottle or packet) is coded to identify
or track a specific batch. Hair care maintenance products are then packed in
shipping boxes and sent to the finished goods warehouse ready for shipment to
the Company's customers. Certain other products are filled, capped, labeled,
coded and stored temporarily until they are assembled as components in the
relaxer, texturizer or hair color kits.
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
regularly. 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
acquisition of Johnson Products Company in July 1998 significantly expanded the
Company's manufacturing capacity.
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Competition
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.
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, Magic, Let's Jam, Excelle, Beautiful Beginnings, Dark & Natural, Gentle
Treatment, Ultra Sheen, and Posner. The Company considers these and its other
marks and the name recognition associated with these to be valuable to its
business. 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 and patents 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.
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Employees
As of December 31, 1998, the Company employed approximately 349 persons in
Savannah, 172 in Chicago, Illinois, an additional 31 elsewhere in the United
States and 436 internationally. In the United States, 366 were hourly personnel
and 186 were salaried employees. The Company also utilizes temporary workers as
needed, primarily in manufacturing. An average of 101 such temporary workers
were utilized on a daily basis by the Company during the year ended December 31,
1998. The Company is non-union and believes that its relationship with employees
is good.
Environmental Matters
The Company is subject to various federal, state, local and foreign
environmental requirements, including those relating to discharges to air, water
and land, the handling and disposal of solid and hazardous waste and the cleanup
of properties affected by hazardous substances. Certain environmental laws, such
as the Comprehensive Environmental Response, Compensation, and Liability Act, as
amended ("CERCLA"), impose strict, retroactive, joint and several liability upon
persons responsible for releases of hazardous substances.
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 nine buildings on an 11.6-acre tract in Savannah.
The plant, warehouses and offices encompass approximately 225,000 sq. ft. on
seven acres of the property, with the remaining 4.6 acres undeveloped. Four of
the buildings are used primarily for warehousing and storage. The largest
building (more than 120,000 sq. ft.) houses the manufacturing equipment for
production, shipping, quality control, the R&D laboratories, customer research
and a professional hair salon which is used to test new products. The Company
has reconfigured its production lines to increase the capacity of the Savannah
facility. The Company leases approximately 112,000 square feet of additional
warehouse and office space under a five-year lease which expires in 2003. The
annual lease commitment is approximately $445,000.
In addition, the Company owns and occupies one building on a 14.4-acre tract in
Chicago, Illinois. The facility encompasses approximately 225,000 sq. ft., of
which 51,718 square feet consists of office and R&D laboratory space.
The Company believes that the capacity in the Savannah and Chicago facilities
combined with the additional leased warehouse space will be adequate for its
needs in the reasonably foreseeable future.
The Company's South African subsidiary owns and occupies two buildings on 9.0
acres in Midrand, South Africa, 15 miles north of Johannesburg in a developing
industrial park located on the major highway between Johannesburg and Pretoria.
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The buildings encompass approximately 162,000 sq. ft. and house 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 also operates a production facility in Ghana located near the
Ghanaian Coca-Cola bottling plant which enables the Company to service the 200
million people located in the region. The Company believes that the facilities
in Midrand and Ghana provide adequate production capacity for its needs in
Africa in the reasonably foreseeable future.
Item 3. Legal Proceedings
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.
12
<PAGE>
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
under the symbol "CIC". The Company's Class B Common Stock and Class C Common
Stock have no established public trading market. The high and low closing sales
prices for the Company's Class A Common Stock as reported by the New York Stock
Exchange for each quarter of the years ended December 31, 1998 and 1997 are as
follows:
Quarter Ended High Low
------------------- --------------- ---------------
03/31/98 $ 10.1250 $ 5.8750
06/30/98 10.7500 5.8750
09/30/98 7.8125 1.9375
12/31/98 4.8750 2.0000
03/31/97 $ 14.8750 $ 11.3750
06/30/97 11.6250 7.5000
09/30/97 13.0000 9.0000
12/31/97 11.6875 6.1250
At March 16, 1999, there were approximately 123 holders of record of the
Company's Class A Common Stock, and 17 holders of the Company's Class C Common
Stock. As of such date, all shares of the Company's Class B Common Stock had
been converted to Shares of Class A Common Stock. Since October 1996, 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's debt agreements restrict 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.
13
<PAGE>
<TABLE>
Item 6. Selected Consolidated Historical Financial Data
(Amounts in thousands except per share data)
Company (1) Full Fiscal Year Predecessor
------------------------------------------------- ---------------------------- ---------------
Company
Year Year Nine Months Predecessor August 23, Year
Ended Ended Ended April 1, 1995 1995 to Ended
December 31, December 31, December 31, to August 22, March 31, March 31,
1998 1997 1996 1995 1996(2) 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 150,706 $ 109,631 $ 59,938 $ 26,854 $ 41,465 $ 58,126
Income (loss) before
extraordinary item (36) 3,754 (3,256) 3,934 1,104 5,688
Basic and diluted
earnings (loss) per
share before
extraordinary item $ 0.00 $ 0.25 $ ( 0.25) ---- $ 0.09 ----
Weighted average
shares outstanding 14,986 15,003 12,715 ---- 11,871 ----
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Company (1) Predecessor
------------------------------------------------------------ -------------
December 31, December 31, December 31, March 31, March 31,
1998 1997 1996 1996 1995
- ------------------------------------------------------------------------------------------------ --------------
<S> <C> <C> <C> <C> <C>
Total assets $ 267,463 $ 201,424 $ 97,529 $ 87,980 $ 43,863
Long-term debt (including
current portion) 133,549 103,623 27,101 66,788 ----
Stockholders' equity 69,160 61,531 54,215 9,775 34,358
Working capital $ 54,774 $ 44,944 $ 15,852 $ 13,855 $ 15,140
- ------------------------------------------------------------------------------------------------ -------------
</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.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Company Overview
Carson, Inc. (the "Company" or "Carson") was established in May 1995 and until
August 1995 its operations were negligible. 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 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.
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. On July 3, 1996, the
Company's South African subsidiary, Carson Holdings Limited ("Carson South
Africa") sold 25.0% of its shares in an initial public offering on the
Johannesburg Stock Exchange.
The Company believes it is the number one manufacturer and marketer of hair care
and shaving products for people of color. 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, hair color, men's depilatory products and
hair care maintenance products.
In the years ended December 31, 1998 and 1997, 33.6% and 30.8%, respectively, 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 these
periods:
Year Ended % of Year Ended % of
December 31,1998 Total December 31,1997 Total
- --------------------------------------------------------------------------------
Net sales to:
United States $ 100,127 66.4% $ 75,834 69.2%
South Africa 39,183 26.0 21,662 19.8
Europe 5,715 3.8 4,611 4.2
Other International 5,681 3.8 7,524 6.8
- --------------------------------------------------------------------------------
Total $ 150,706 100.0% $ 109,631 100.0%
With the exception of sales by Carson South Africa to South Africa, Botswana,
Lesotho, Namibia and Swaziland, which are denominated in South African Rand, all
15
<PAGE>
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
Carson South Africa incurs most of its costs in rand. However, due to
fluctuations in the exchange rate , there is a potential for gains or losses on
the consolidated level. Assets and liabilities of Carson South Africa 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.
Fiscal 1998 - Significant Events
Sale of South Africa Stock
In May 1998 the Company sold 29.1 million of its shares of Carson South Africa.
This sale generated net cash proceeds of $55.2 million and resulted in a gain of
$49.1 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 approximately $19.2 million. This transaction resulted in a gain to
the Company of $11.7 million which was recorded in paid-in-capital. As of
December 31, 1998 the Company owned approximately 52.8% of the stock of Carson
South Africa.
Acquisition of Johnson Products Co., Inc.
On July 14, 1998, the Company acquired all of the outstanding shares of Johnson
Products Co., Inc. ("Johnson Products"). Johnson Products is a major
manufacturer of personal care products for the ethnic market. The purchase price
approximated $84.7 million with $34.7 million paid in cash. The Company entered
into a senior secured term loan with IVAX Corporation (the "Seller"), d/b/a IVX
Bioscience, Inc., for the remaining $50.0 million of the purchase price. The
IVAX loan was replaced with longer-term financing in December 1998 as discussed
below.
The acquisition was accounted for under the purchase method of accounting. The
results of operations of Johnson Products are included in the Company's
consolidated financial statements since the date of acquisition. The allocation
of the assets and liabilities acquired are as follows (in thousands):
Current assets $ 15,495
Property, plant and equipment 10,135
Trademarks 22,199
Goodwill 48,433
Other assets 517
Liabilities assumed (62,118)
--------------
$ 34,661
==============
The purchase price has been allocated to the identifiable assets and liabilities
based on the fair values at the acquisition date.
The Dermablend line of corrective cosmetics, which is sold in department and
16
<PAGE>
specialty stores and has an ethnic consumer base of 40 - 50%, was purchased by
the Company as part of the Johnson Products acquisition. Dermablend was
incorporated as Dermablend, Inc. ("Dermablend"), a wholly-owned subsidiary of
Johnson Products, at the time the Company acquired Johnson Products. Originally,
management intended to sell Dermablend within one year from the acquisition.
Therefore, in accordance with Emerging Issues Task Force No. 87-11, "Allocation
of Purchase Price to Assets to be Sold", the results of operations related to
Dermablend were initially excluded from the Company's consolidated statement of
operations. In December 1998, the Company decided to operate Dermablend on a
longer-term basis. Accordingly, the cumulative effect of the operating results
of Dermablend since the acquisition date of $890,000 has been included in the
Company's consolidated statement of operations for the year ended December 31,
1998. These operating results are summarized as follows:
Net sales $ 4,016
Cost of sales 766
-------------
Gross profit 3,250
-------------
Marketing and selling 1,576
General and administrative expenses 440
Amortization 344
-------------
$ 890
=============
Debt Refinancing
In July 1998 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) for the write-off
of $1.6 million of debt issuance costs related to the credit facility.
On December 8, 1998 the Company entered into loan agreements relating to a $75.0
million secured term loan (the "Secured Term Loan") and an $8.0 million
unsecured term loan (the "Unsecured Term Loan"). The cash proceeds were used
primarily to repay the $50.0 million secured term loan which financed the
Johnson Products acquisition and to purchase and retire $27.0 million of senior
subordinated notes for $23.0 million. The Company recorded an extraordinary net
gain of approximately $1.8 million resulting from the early retirement of the
$27.0 million of senior notes and the write-off of related debt issuance costs.
Of the remaining cash proceeds, approximately $4.3 million was used to pay
transaction fees and expenses, and $5.7 million was retained for working capital
purposes.
On December 10, 1998, the proceeds from the sale of Cutex (see discussion below)
were used to repay the $8.0 million Unsecured Term Loan and $14.7 million of the
Secured Term Loan. As a result of this repayment, the Company recorded an
extraordinary net loss of approximately $0.7 million (net of tax) related to the
write-off of debt issuance costs incurred for this debt. As discussed below,
$4.5 million of the cash proceeds from the sale of Cutex must be used to pay for
certain expenses related to the sale of Cutex. Any amounts not used for the
designated purposes by June 30, 2000 must be used to make an additional
prepayment on the Secured Term Loan.
The remaining $60.3 million of the Secured Term Loan bears interest at an annual
17
<PAGE>
rate of 13% and matures on December 8, 2003. Interest is payable monthly. The
Company may, at its option, defer the monthly interest payment a maximum of
twelve times until December 8, 2000. In the event of deferral, interest will be
accrued at an annual rate of 16% for the month deferred and will be added to the
outstanding principal amount of the loan. The capital stock and assets of Carson
Products Company, the capital stock and assets of Johnson Products and the
capital stock and intellectual property of Dermablend are pledged as collateral
for the Secured Term Loan. The loan contains covenants with respect to, among
other things, (i) restrictions on the incurrence of additional liens or
indebtedness and (ii) restrictions on the payment of any cash dividends by the
Company or any subsidiary.
Sale of Cutex
On December 10, 1998 the Company sold substantially all of the assets of the
Cutex nail polish remover and nail implements business to The Cutex Company, an
unrelated corporation ("Cutex Company"). The Company realized net cash proceeds
of approximately $27.8 million ($4.5 million of which is restricted cash) and
recorded a loss on the sale of approximately $14.0 million.
Of the cash proceeds received for the sale of the Cutex remover business, $4.5
million (the "Holdback Amount") must be used by the Company solely to pay for
certain designated expenses related to the sale of Cutex. The remaining balance
of the Holdback Amount on June 30, 2000, if any, must be used by the Company to
make a prepayment of secured debt.
Non-recurring Charges
During the year ended December 31, 1998, the Company recorded total
non-recurring pretax charges of $39.0 million (approximately $23.4 million net
of tax). These non-recurring charges by category of expenditure and
classification in the statement of operations were as follows (in thousands):
<TABLE>
Bad
Debts
Management Fixed and Sale of Write-off
Inventory Restructuring Assets Other Cutex of Total
Investment
<S> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------
Net sales $ -- $ -- $ -- $ -- $ 4,000 $ -- $ 4,000
--
Cost of goods sold 6,573 -- -- -- 1,300 -- 7,873
General and
administrative -- 1,416 228 2,000 -- -- 3,644
Loss on sale of
business -- -- -- -- 13,994 -- 13,994
Restructuring charges -- 2,638 2,879 234 -- -- 5,751
------------------------------------------------------------------------------------------------
Operating income 6,573 4,054 3,107 2,234 19,294 -- 35,262
Loss on write-off of
investment -- -- -- -- -- 3,768 3,768
------------------------------------------------------------------------------------------------
Total $ 6,573 $ 4,054 $ 3,107 $ 2,234 $ 19,294 $ 3,768 $ 39,030
================================================================================================
</TABLE>
18
<PAGE>
In 1998, the Company undertook a restructuring of its product lines and
management group. The Company revised its key management team, terminating
several senior managers and adding Gregory J. Andrews as Chief Executive
Officer. The Company announced a new strategic focus on its core business, the
worldwide ethnic hair care market. In connection with this new focus and the
Johnson Products acquisition, all of the combined products, brands and
facilities were reviewed for optimum use. Items identified as non-strategic or
redundant were written down.
The $6.6 million 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. Over 100 stock-keeping units were
eliminated. The management restructuring charges of $4.1 million included
employee severance costs and expenses related to the hiring of the Company's
chief executive officer. The fixed assets charges of $3.1 million related
primarily to fixed assets which were disposed of in connection with the
restructuring of product lines. The "Bad Debts and Other" charges included
primarily $2.0 million of additional reserves against accounts receivable for
customer deductions. The charges related to the sale of Cutex were for product
returns, inventory write-downs and the loss on the sale of the remover business.
The $3.8 million loss on write-off of investment was the 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.
Of the restructuring charges of $5.8 million, $1.4 million has been paid and
$2.9 million represents the write-off of fixed assets during the year ended
December 31, 1998.
On February 21, 1999, Gregory Andrews died causes while on a business trip in
South Africa. Malcolm R. Yesner was named President and Chief Executive Officer
of the Company to succeed Mr. Andrews. Mr. Yesner also serves as Chief Executive
Officer of Carson Holdings Limited and as President, International Operations,
for the Company.
Fiscal 1997- Significant Events
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). These acquisitions were 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 USA Co.'s Cutex line in
the United States and Puerto Rico approximated $18.2 million, excluding any
results from the sale of nail enamel or other products under license by Jean
Philippe Fragrances, Inc. ("Jean Phillipe"), for the twelve months ended
December 31, 1996. This acquisition was accounted for under the purchase
method of accounting.
19
<PAGE>
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 was 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
original purchase consideration payable for the acquisition was approximately
$9.5 million, subject to post closing adjustments, of which approximately $9.3
million was recorded as intangible assets; additional consideration was paid
based upon the after-tax profits of the business for the year ended December 31,
1998. 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).
Approximately $5.4 million of the purchase price was paid in January 1998, and
approximately $3.4 million was paid in January 1999. The amount paid in January
1999 was reduced from an original amount of $4.1 million due to significant
devaluation of the South African Rand in 1998. Based upon the after-tax profit
of A&J Cosmetics for the year ended December 31, 1998, Carson South Africa
recorded additional goodwill and additional consideration due of $3.0 million.
The additional consideration was paid in March 1999.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales. Consolidated net sales for the year ended December 31, 1998 were
$150.7 million, an increase of $41.1 million, or 37.5%, over net sales for the
year ended December 31, 1997 of $109.6 million. This increase is summarized as
follows (dollars are in thousands):
Year Ended Year Ended
December 31, 1998 December 31, 1997 % Change
--------------------------------------------------
Carson Products $ 71,092 $ 70,169 1.3
Johnson Products 25,244 -- N/A
Cutex 15,187 17,800 (14.7)
111,523 87,969 26.8
---------------------------------------
South Africa 39,183 21,662 80.9
---------------------------------------
Consolidated $150,706 $109,631 37.5
=======================================
The net sales above for Carson Products includes results for the domestic core
business, other domestic sales which are not part of Johnson Products or Cutex,
20
<PAGE>
and international sales excluding South Africa. Net sales of the Company's
domestic core business, ethnic hair care products, amounted to $57.8 million in
1998, a modest increase of $1.1 million, or 2.0%, compared to $56.7 million in
1997. In the first half of 1998, domestic core net sales were below the prior
year levels. To address the downward trend in the Company's domestic core net
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 improved in the second half of
the year. Significant gains were made in Europe in 1998. Net sales there
increased by 23.9% to $5.7 million from $4.6 million in 1997. Other
international net sales decreased by 24.5% to $5.7 million in 1998 from $7.5
million in 1997. The reduction in other international net sales occurred
primarily in the Caribbean.
The acquisition of Johnson Products in July 1998 added $25.2 million of net
sales in 1998. This amount included $1.4 million of net sales for items produced
for and sold to another ethnic hair care company under a contract which was
terminated at the end of 1998.
Net sales of Cutex in 1998 were 14.7% below 1997, although the brand was
purchased on April 30, 1997 and was included in the Company's results of
operations for only eight months of 1997. Cutex net sales were adversely
impacted in 1998 by the introduction in April 1998 of the new Cutex Ultra line
of nail polishes. This introduction resulted in heavy returns in the second and
third quarters of old product which the Cutex Ultra line replaced.
Net sales in South Africa grew significantly from the prior year. Net sales
there increased 80.9% to $39.2 million in 1998. Carson South Africa has extended
operations to key and fast-growing markets in West Africa and East Africa, in
addition to its growing base in Southern Africa.
Gross Profit. Gross profit was $66.2 million in 1998 compared to $59.1 million
in 1997, an increase of $7.1 million, or 12.0%. Gross margin was 43.9% in 1998
compared to 53.9% in 1997. The 1998 gross margin was adversely impacted by
significant non-recurring charges, including: $6.6 million charged to cost of
goods sold for inventory write-downs, $4.0 million charged to net sales for
Cutex polish returns and $1.3 million charged to cost of sales for write-down of
Cutex polish inventory. Other factors in the gross margin percentage decrease
were the addition of Johnson Products, which produced gross profit of $11.2
million and a gross margin of 44.5%, and the high returns of old Cutex nail
polish after introduction of the new Ultra line.
Decreased production volumes earlier in the year also contributed to the
reduction in gross margin. Production volume was curtailed in the second quarter
of 1998 to reduce inventories which had risen to levels in excess of current
needs. To lower inventory levels, the plant was shut down for two weeks and run
only four days per week for several more weeks during the second quarter of
1998. This action resulted in unabsorbed overhead in production which adversely
impacted gross margin.
Marketing and Selling Expenses. Marketing and selling expenses increased $15.7
million, or 58.1%, to $42.7 million in 1998 from $27.0 million in 1997. As a
percentage of net sales, these expenses increased to 28.3% during 1998 from
24.6% during 1997. This increase was due to expanded domestic programs to
promote the Company's core ethnic products, the addition of Johnson Products in
1998 and higher spending internationally to support the growth of Carson South
Africa. Marketing and selling expenses were also higher in 1998 for the Cutex
and Let's Jam brands, which were purchased in April 1997.
General and Administrative Expense. General and administrative expenses were
$31.2 million for 1998 compared to $18.3 million for 1997, an increase of $12.9
million, or 70.1%. As a percentage of net sales, general and administrative
21
<PAGE>
expenses increased to 20.7% during 1998 from 16.7% during 1997. The 1998 general
and administrative expenses were increased by significant non-recurring charges
discussed earlier, including: $1.4 million related to the restructuring of
senior management and $2.0 million to increase reserves against accounts
receivable. General and administrative expenses also increased $3.0 million in
1998 due to the addition of Johnson Products. General and administrative
expenses incurred by Carson South Africa increased $3.0 million in 1998 due to
the enhancement of infrastructure required to support the subsidiary's growth.
Loss on Sale of Business. As discussed previously, this $14.0 million loss
resulted from the sale of the Cutex business.
Restructuring. As discussed previously, restructuring charges in 1998 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 $28.4 million in 1998 from income of $12.2 million in 1997. The
1998 operating loss includes total non-recurring charges of $35.3 million.
Interest Expense. Interest expense increased significantly to $13.6 million in
1998 from $6.4 million in 1997. The increased interest expense was the result of
additional debt at higher rates, to finance the Johnson Products acquisition as
well as additional debt incurred in 1997 to finance the Cutex and Let's Jam
acquisitions.
Gain on Sale of Subsidiary Stock. As discussed previously, this $49.1 million
gain resulted from the sale of 29.1 million of the Company's shares of Carson
South Africa.
Minority Interest in Earnings of Subsidiary. Minority interest in earnings of
subsidiary increased to expense of $2.7 million in 1998 from expense of $1.0
million in 1997. This increase was due to the higher earnings of Carson South
Africa in 1998 compared to 1997 and to the higher minority ownership percentage
resulting from the sales of Carson South Africa stock.
Other Income. Other income increased to $3.4 million for 1998 from $0.8 million
for 1997, an increase of $2.6 million. The increase was primarily due to higher
interest income on cash balances in the United States and South Africa which
were generated by the sale of Carson South Africa stock in June 1998.
Loss on Write-off of Investment. As discussed previously, 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 $4.3 million, based on
an effective rate of 61.6% in 1998 compared to $2.8 million, based on an
effective rate of 37.1%, in 1997. The effective tax rate is unusually high due
to the valuation allowance recorded against deferred tax assets.
22
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Statement of Operations Data
(Dollars in thousands)
Year Ended Year Ended
December 31, 1997 December 31, 1996(a)
(Unaudited)
----------------------------------------
Net sales $ 109,631 $ 77,730
Cost of goods sold 50,510 34,923
----------------------------------------
Gross profit 59,121 42,807
Marketing and selling expenses 28,158 19,144
General and adminsitrative expenses 18,714 10,873
Incentive compensation ---- 7,123
----------------------------------------
Operating income $ 12,249 $ 5,667
----------------------------------------
Data as a percentage of net sales:
Net sales 100.0% 100.0%
Cost of goods sold 46.1% 44.9%
----------------------------------------
Gross profit 53.9% 55.1%
Marketing and selling expenses 25.7% 24.6%
General and administrative expenses 17.1% 14.0%
Incentive compensation ---- 9.2%
----------------------------------------
Operating income 11.1% 7.3%
----------------------------------------
(a) The unaudited statement of operations for the year 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.
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 was 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 Carson South Africa, 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.
Carson South Africa 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 was attributable in part to continuing drug chain
consolidation as well as consolidation in the distribution channel.
23
<PAGE>
During the second half of 1997, the Company introduced a new line of cosmetics
under the Dark & Lovely 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 was principally attributable to inefficiencies
in its manufacturing processes which resulted without a comparable increase in
production volume. The Company addressed 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.
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 was 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. Non-recurring severance benefits aggregating $430,000 were paid or
accrued and expensed in 1997 for these individuals.
Incentive Compensation. During 1996, a non-recurring 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 which will
result in increased interest expense in future years.
24
<PAGE>
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.
Statement of Operations Data
(Dollars in thousands)
Company Combined (a)
-------------------- --------------------
Nine-Month Period Nine-Month Period
Ended Ended
December 31, 1996 December 31, 1995
(Unaudited)
-----------------------------------------
Net sales $ 59,938 $ 50,527
Cost of goods sold 26,940 22,336
-----------------------------------------
Gross profit 32,998 28,191
Marketing and selling expenses 15,692 13,596
General and adminsitrative expenses 7,732 6,029
Incentive compensation 7,123 ----
-----------------------------------------
Operating income $ 2,451 $ 8,566
-----------------------------------------
Data as a percentage of net sales:
Net Sales 100.0% 100.0%
Cost of goods sold 44.9% 44.2%
----------------------------------------
Gross profit 55.1% 55.8%
Marketing and selling expenses 26.2% 26.9%
General and administrative expenses 12.9% 11.9%
Incentive compensation 11.9% ----
----------------------------------------
Operating income 4.1% 17.0%
----------------------------------------
25
<PAGE>
(a) 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.
Net Sales. Net sales increased from $50.5 million for the combined nine-month
period ended December 31, 1995 to $59.9 million for the 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
26
<PAGE>
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
In 1998 the Company's cash balance increased by $14.7 million, to $28.7 million
at December 31, 1998 from $14.0 million at December 31, 1997. Net cash flow used
in operations was $8.4 million. Net cash used in operating activities reflects
uses of cash of $7.4 million for an increase in accounts receivable and $2.6
million for a decrease in accounts payable and sources of cash of $6.8 million
for an increase in accrued expenses and $1.8 million for an increase in income
taxes payable.
27
<PAGE>
Net cash used in investing activities for 1998 totaled $21.7 million and
consisted of $34.7 million of cash paid for the acquisition of Johnson Products
Company, $23.3 million of net cash received for the sale of the Cutex remover
business and $10.3 million of non-acquisition related capital expenditures.
Net cash provided from financing activities totaled $48.5 million primarily as a
result of $74.4 million cash proceeds from the sale of Carson South Africa
stock, proceeds from long-term debt issuance of $93.5 million, repayment of
long-term debt of $59.5 million, repayment of the $50.0 million short-term note
used to finance the acquisition of Johnson Products Company, repayment of $5.4
million by Carson South Africa related to the 1997 purchase of A&J Cosmetics and
$4.6 million paid for debt issuance costs, primarily related to the new debt.
The cash balance was adversely impacted in 1998 by the significant devaluation
of the South African Rand. The rand devalued approximately 22.3%, from 4.89 rand
per dollar at December 31, 1997 to 5.98 rand per dollar at December 31, 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.
As discussed earlier, the Company terminated its senior secured credit facility
with Credit Agricole Indosuez in July 1998 and currently has no revolving credit
facility available. However, the Company retained approximately $16.0 million of
the proceeds from the Secured Term Loan and the sale of Cutex for working
capital purposes. The Secured Term Loan provides the Company the option of
deferring monthly interest payments a maximum of twelve times in the first
twenty-four months of the term in exchange for an increase in the normal 13%
annual interest rate to a 16% annual interest rate for the months deferred. This
option provides the Company flexibility in meeting its cash needs in the near
term. The Company believes that cash flow from operating activities and existing
cash balances 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 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.
28
<PAGE>
To replace the current systems and provide year 2000 compliance, management has
selected SAP, a single vendor, integrated business software package. SAP will
run on the Company's IBM AS/400 computer. A certification of year 2000
compliance will be obtained for the AS/400 from IBM. The cost of conversion to
SAP is estimated to be approximately $1.2 million, including hardware, software
and the Company's commitment of internal resources. As of March 27, 1999, the
Company has incurred approximately $0.7 million of the $1.2 million cost.
Implementation is in process. The initial phase has been completed, and testing
is underway. The core project will train the general user group in April 1999.
The Company expects the installation to be complete during the second quarter of
1999.
In the unlikely event that implementation of the new software 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.
Other items which include non-information technology systems are being tested
and upgraded as needed. Included in the non-information technology systems are
the Company's personal computers and applications, telephone systems,
manufacturing equipment, security systems and other non- crucial items.
The Company has a substantial amount of personal computers and software
applications. The Company will replace all non-compliant personal computers and
install the latest versions of year 2000 compliant applications available.
Specialized applications not used company-wide will be upgraded as necessary.
Other non-information technology systems such as telephone systems, security
systems and copiers are being assessed for year 2000 compliance. The Company is
contacting vendors of these items to determine their compliance status. No time
frame or estimated cost has been established to bring these non-essential items
year 2000 compliant.
The costs of major year 2000 projects have been included in the current
operating budget. The majority of these costs will be capitalized with the
exception of software data conversion costs and training costs. The funds to
finance these projects will come from the Company's operating cash flow. There
can be no assurance that the Company will not encounter unanticipated delays
with the implementations or that costs of such implementations will not exceed
management's current estimates.
The Company is considering issuing certification requests to all major vendors
and customers as well as to its main bank seeking assurance that they will be
year 2000 compliant and will continue to monitor the progress of these third
parties in becoming year 2000 compliant. At this time, the Company has no
contingency plans to address problems if third parties are not compliant.
29
<PAGE>
New Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133") was issued in June 1998 and is
effective for fiscal years beginning after June 15, 1999. The Company has not
yet completed its evaluation of the effect of this standard on its financial
statements. However, at this time the Company does not expect FAS 133 to have a
material effect on its financial position, results of operations, cash flows or
financial statement disclosures.
30
<PAGE>
Item 8. Financial Statements and Supplementary Data
CARSON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
Nine Months
Ended
Year Ended December 31, December 31,
=========================
1998 1997 1996
========== ========== ==========
<S> <C> <C> <C>
Net sales $ 150,706 $ 109,631 $ 59,938
Cost of sales 84,509 50,510 26,940
---------- ---------- ----------
Gross profit 66,197 59,121 32,998
---------- ---------- ----------
Marketing and selling expenses 42,692 27,007 15,692
AM Cosmetics sales commissions 1,452 1,151 --
General and administrative expenses 31,196 18,344 7,499
General and administrative - fees paid to Morningside 350 370 233
Loss on sale of business 13,994 -- --
Restructuring charges 5,751 -- --
Incentive compensation, directors and management -- -- 7,123
---------- ---------- ----------
Operating expenses 95,435 46,872 30,547
---------- ---------- ----------
Other operating income-cumulative effect of change
in accounting for subsidiary income 890 -- --
---------- ---------- ----------
Operating (loss) income (28,348) 12,249 2,451
Gain on sale of subsidiary stock 49,140 -- --
Interest expense (13,649) (6,444) (4,545)
Loss on write-off of investment (3,768) -- --
Other income, net 3,383 780 377
Other income, AM Cosmetics management fee and dividend 223 900 444
---------- ---------- ----------
Income (loss) before income taxes, minority interest and
extraordinary item 6,981 7,485 (1,273)
Provision for income taxes (4,299) (2,779) (1,727)
---------- ---------- ----------
Income (loss) before minority interest and extraordinary item 2,682 4,706 (3,000)
Minority interest in earnings of subsidiary (2,718) (952) (256)
---------- ---------- ----------
(Loss) income before extraordinary item (36) 3,754 (3,256)
Extraordinary item, net of income taxes 127 (2,086) (3,527)
---------- ---------- ----------
Net income (loss) $ 91 $ 1,668 $ (6,783)
========== ========== ==========
Basic and diluted income (loss) per common share:
Before extraordinary item $ 0.00 $ 0.25 $ (0.25)
Extraordinary item, net of income taxes 0.01 (0.14) (0.28)
---------- ---------- ----------
Net income (loss) $ 0.01 $ 0.11 $ (0.53)
========== ========== ==========
Weighted average common shares outstanding 14,986 15,003 12,715
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
31
<PAGE>
CARSON, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<S> <C> <C>
December 31, December 31,
ASSETS 1998 1997
========== ==========
CURRENT ASSETS:
Cash and cash equivalents $ 28,706 $ 14,043
Accounts receivable less allowances of $6,457 (1998) and $3,881 (1997) 38,953 28,148
Inventories 22,825 24,861
Restricted Cash 4,500 --
Other current assets 669 832
---------- ----------
Total current assets 95,653 67,884
PROPERTY, PLANT AND EQUIPMENT, net 35,765 22,202
INVESTMENT IN AM COSMETICS -- 3,587
INTANGIBLES, net of accumulated amortization of $6,174 (1998) and $3,737 (1997) 129,183 100,385
OTHER ASSETS 6,862 7,366
---------- ----------
TOTAL ASSETS $ 267,463 $ 201,424
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,584 $ 8,567
Due for A&J Cosmetics 6,355 5,416
Accrued expenses 19,306 7,413
Income taxes payable 2,508 1,544
Current maturities of long-term debt 126 --
---------- ----------
Total current liabilities 40,879 22,940
LONG-TERM DEBT 133,423 103,623
DUE FOR A&J COSMETICS -- 4,088
OTHER LIABILITIES 3,345 1,742
MINORITY INTEREST IN SUBSIDIARY 20,656 7,500
COMMITMENTS AND CONTINGENCIES (Notes 14 and 16) -- --
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, 7,926,485 and
5,033,248 shares issued as of December 31, 1998 and 1997, respectively 79 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, 5,334,700 and
8,127,937 shares issued as of December 31, 1998 and 1997, respectively 53 81
Paid-in capital 80,970 69,022
Accumulated deficit (3,920) (4,011)
Accumulated other comprehensive losses (6,495) (2,170)
Notes receivable from shareholders, net of discount (1,209) (1,353)
Treasury stock, 13,245 shares of Class A common stock as of December 31, 1998
and 1997 and 28,969 shares of Class C common stock as of December 31, 1998 (337) (107)
---------- ----------
Total stockholders' equity 69,160 61,531
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 267,463 $ 201,424
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
32
<PAGE>
<TABLE>
Carson, Inc.
Consolidated Statement of Stockholders' Equity
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Class A Class B Class C Total
------------------------------------------------------------------------ Share
Shares Amount Shares Amount Shares Amount Amount
------------------------------------------------------------------------------------
Balance, March 31, 1996 -- $ -- 1,860 $ 19 9,510 $ 95 $ 114
Comprehensive loss:
Net loss -- -- -- -- -- -- --
Foreign currency translation -- -- -- -- -- -- --
Total comprehensive loss
Gain on sale of South African stock, net -- -- -- -- -- -- --
Sale of common stock, net 3,113 31 -- -- -- -- 31
Conversion of Class C shares to Class A shares 1,884 19 -- -- (1,884) (19) --
Reduction of debt from shareholders -- -- -- -- -- -- --
Shareholder loans, less discount -- -- -- -- -- -- --
Incentive compensation and other -- -- -- -- 502 5 5
------------------------------------------------------------------------------------
Balance, December 31, 1996 4,997 50 1,860 19 8,128 81 150
Comprehensive income (loss):
Net income -- -- -- -- -- -- --
Foreign currency translation -- -- -- -- -- -- --
Total comprehensive income
Gain on sale of South African stock, net -- -- -- -- -- -- --
Restricted share awards 36 -- -- -- -- -- --
Change in shareholder loans -- -- -- -- -- -- --
Purchase of treasury stock -- -- -- -- -- -- --
------------------------------------------------------------------------------------
Balance, December 31, 1997 5,033 50 1,860 19 8,128 81 150
Comprehensive income (loss):
Net income -- -- -- -- -- -- --
Foreign currency translation -- -- -- -- -- -- --
Total comprehensive loss
Gain on sale of South African stock, net -- -- -- -- -- -- --
Restricted share awards, net of cancellations 100 1 -- -- -- -- 1
Conversion of Class C shares to Class A shares 2,793 28 -- -- (2,793) (28) --
Change in shareholder loans -- -- -- -- -- -- --
Purchase of treasury stock -- -- -- -- -- -- --
------------------------------------------------------------------------------------
Balance, December 31, 1998 7,926 $ 79 1,860 $ 19 5,335 $ 53 $ 151
====================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Retained Accumulated Notes
Earnings Other Receivable Total
Paid-in (Accumulated Comprehensive From Treasury Stockholders'
Capital Deficit) Losses Shareholders Stock Equity
-----------------------------------------------------------------------------
Balance, March 31, 1996 $ 8,557 $ 1,104 $ -- $ -- $ -- $ 9,775
Comprehensive loss:
Net loss -- (6,783) -- -- -- (6,783)
Foreign currency translation -- -- (1,309) -- -- (1,309)
------------
Total comprehensive loss (8,092)
Gain on sale of South African stock, net 2,808 -- -- -- -- 2,808
Sale of common stock, net 38,162 -- -- -- -- 38,193
Conversion of Class C shares to Class A shares -- -- -- -- -- --
Reduction of debt from shareholders 5,530 -- -- -- -- 5,530
Shareholder loans, less discount -- -- -- (1,365) -- (1,365)
Incentive compensation and other 7,361 -- -- -- -- 7,366
-----------------------------------------------------------------------------
Balance, December 31, 1996 62,418 (5,679) (1,309) (1,365) -- 54,215
Comprehensive income (loss):
Net income -- 1,668 -- -- -- 1,668
Foreign currency translation -- -- (861) -- -- (861)
------------
Total comprehensive income 807
Gain on sale of South African stock, net 6,360 -- -- -- -- 6,360
Restricted share awards 244 -- -- -- -- 244
Change in shareholder loans -- -- -- 12 -- 12
Purchase of treasury stock -- -- -- -- (107) (107)
-----------------------------------------------------------------------------
Balance, December 31, 1997 69,022 (4,011) (2,170) (1,353) (107) 61,531
Comprehensive income (loss):
Net income -- 91 -- -- -- 91
Foreign currency translation -- -- (4,325) -- -- (4,325)
------------
Total comprehensive loss (4,234)
Gain on sale of South African stock, net 11,713 -- -- -- -- 11,713
Restricted share awards, net of cancellations 235 -- -- -- -- 236
Conversion of Class C shares to Class A shares -- -- -- -- -- --
Change in shareholder loans -- -- -- (86) -- (86)
Purchase of treasury stock -- -- -- 230 (230) --
-----------------------------------------------------------------------------
Balance, December 31, 1998 $ 80,970 $ (3,920) $ (6,495) $ (1,209) $ (337) $ 69,160
=============================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
33
<PAGE>
<TABLE>
CARSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<S> <C> <C> <C>
Nine Months
Ended
Year Ended December 31, December 31,
1998 1997 1996
============ ============ ============
OPERATING ACTIVITIES:
Net income (loss) $ 91 $ 1,668 $ (6,783)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Gain on sale of subsidiary stock (49,140) -- --
Loss on sale of business 13,994 -- --
Non-cash charges - inventory and fixed assets 9,596 -- --
Loss on write-off of investment 3,768 -- --
Extraordinary item, net of income taxes (127) 2,086 3,527
Incentive compensation -- -- 6,163
Depreciation and amortization 6,626 3,793 1,896
Provision for doubtful accounts 2,935 935 112
Deferred income tax provision 790 (142) (957)
Minority interest in earnings of subsidiary 2,718 952 256
Other, net 104 (554) (1,619)
Prepayment penalty on long-term debt -- -- (1,328)
Changes in operating assets and liabilities, net of acquisitions
and disposals:
Accounts receivable (7,367) (13,078) (2,618)
Inventories (60) (11,589) (2,086)
Other current assets 47 1,711 1,748
Accounts payable (2,642) 6,852 3,465
Accrued liabilities 6,775 (9,912) 430
Income taxes payable 1,773 -- --
Other liabilities 1,688 -- --
------------ ------------ ------------
Total adjustments (8,522) (18,946) 8,989
------------ ------------ ------------
Net cash (used in) provided by operating activities (8,431) (17,278) 2,206
------------ ------------ ------------
INVESTING ACTIVITIES:
Acquisitions of business assets, net of cash acquired (34,661) (49,406) --
Additions to property, plant and equipment (10,340) (8,220) (3,805)
Net proceeds from sale of business 23,298 -- --
Purchases of long-term investments -- -- (3,000)
------------ ------------ ------------
Net cash used in investing activities (21,703) (57,626) (6,805)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 93,500 166,860 32,704
Proceeds from sale of subsidiary stock 74,446 9,032 4,216
Principal payments on long-term debt (59,537) (92,661) (67,876)
Repayment of short-term notes payable (50,000) -- --
Payment on A&J Cosmetics payable (5,416) -- --
Debt issuance costs (4,619) -- --
Proceeds from equity rights offering -- 1,525 --
Proceeds from sale of common stock -- -- 38,193
Other, net 106 -- --
------------ ------------ ------------
Net cash provided by financing activities 48,480 84,756 7,237
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES (3,683) -- --
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,663 9,852 2,638
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,043 4,191 1,553
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,706 $ 14,043 $ 4,191
============ ============ ============
Cash paid during the year for:
Interest $ 13,324 $ 6,683 $ 4,178
Income taxes $ 2,273 $ 2,764 $ 2,421
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
34
<PAGE>
Notes to Consolidated Financial Statements
Note 1. Organization and Business
Carson, Inc. (the "Company") believes that it is one of the leading global
manufacturers and marketers of ethnic hair care products for people of color.
The Company's more than 100 products are marketed under seventeen principal
brand names.
Certain of the Company's international activities are conducted by its South
African subsidiary, Carson Holdings Limited ("Carson South Africa"), which
through June 1996 was wholly-owned. In July 1996, 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 in April 1998, Carson South
Africa 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% in April 1999
and 4.0% in April 2000 until the termination of the agreement. The agreement
expires initially on April 1, 1999; however, the agreement may be altered or
renewed indefinitely thereafter until terminated by either party upon twelve
months written notice.
In May 1998 the Company sold 29.1 million of its shares of Carson South Africa.
This sale generated net cash proceeds of $55.2 million and resulted in a gain of
$49.1 million ($28.1 million net of tax). 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 approximately $19.2 million. This
transaction resulted in a gain to the Company of $11.7 million which was
recorded in paid-in-capital. As of December 31, 1998 the Company owned
approximately 52.8% of the stock of Carson South Africa.
The Company completed an initial public offering of 4,818,500 shares of its
Class A common stock in October 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.
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.
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.
35
<PAGE>
New Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133") was issued in June 1998 and is
effective for fiscal years beginning after June 15, 1999. The Company has not
yet completed its evaluation of the effect of this standard on its financial
statements. However, at this time the Company does not expect FAS 133 to have a
material effect on its financial position, results of operations, cash flows or
financial statement disclosures.
Cash and Cash Equivalents
Cash and investments with maturities of three months or less when purchased are
considered cash and cash equivalents.
Inventories
Inventories are valued at the lower of first-in, first-out (FIFO) cost or market
(see Note 6).
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 and trademarks.
Goodwill of $98.8 million and $90.2 million at December 31, 1998 and 1997,
respectively, is being amortized using the straight-line method over periods
ranging from 15 to 40 years. Trademarks of $30.1 million and $9.9 million at
December 31, 1998 and 1997, respectively, are being amortized using the
straight-line method over 17 to 25 years.
Long-lived Assets
The Company reviews long-lived assets, including fixed assets and intangible
assets, for impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. The company reviews
projected undiscounted cash flows of the underlying long-lived assets to
determine if the assets are impaired. If there is an indication of impairment,
the company records a valuation allowance against the applicable long-lived
asset for the amount that the projected discounted cash flows exceeds the asset
at net carrying value.
36
<PAGE>
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.
Foreign Currency Translation
Assets and liabilities of the Carson South Africa operations are translated from
South African Rand into U.S. Dollars at the rate of currency exchange at the end
of the fiscal period. Revenues and expenses are translated at average monthly
exchange rates prevailing during the period. Resulting translation differences
are recognized as a component of other comprehensive losses. Adjustments
resulting from foreign currency transactions are immaterial to the accompanying
financial statements.
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 except for the senior subordinated notes
(see Note 9).
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. The Company's R&D costs (principally for new products) for the years
ended December 31, 1998 and 1997 and the nine months ended December 31, 1996
were $610,000, $535,000 and $349,000, respectively. These costs are included in
general and administrative expenses in the accompanying statements of
operations.
Sale of Subsidiary Stock
The Company accounts for gains incurred on the sale of subsidiary stock sold by
the subsidiary as an increase in paid-in capital in stockholders' equity. Gains
incurred on sales of the Company's holdings of subsidiary stock are recognized
in the statement of operations.
Basic and Diluted Earnings (Loss) 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. Basic and diluted earnings per share have been
calculated and reported for all periods presented in the statement 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
37
<PAGE>
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.
Reclassification
Certain prior periods have been reclassified to conform with current year
presentation.
Note 3. Acquisitions
On July 14, 1998, the Company acquired all of the outstanding shares of Johnson
Products Co., Inc. ("Johnson Products"). Johnson Products is a major
manufacturer of personal care products for the ethnic market. The purchase price
approximated $84.7 million with $34.7 million paid in cash. The Company entered
into a senior secured term loan with IVAX Corporation,(the "Seller") d/b/a IVX
Bioscience, Inc., for the remaining $50.0 million of the purchase price. This
senior secured term loan carried an annual interest rate of 9% and was replaced
with longer-term financing in December 1998 (see Note 9).
The acquisition was accounted for under the purchase method of accounting. The
results of operations of Johnson Products are included in the Company's
consolidated financial statements since the date of acquisition. The allocation
of the assets and liabilities acquired are as follows (in thousands):
Current assets $ 15,495
Property, plant and equipment 10,135
Trademarks 22,199
Goodwill 48,433
Other assets 517
Liabilities assumed (62,118)
--------------
$ 34,661
==============
The purchase price has been allocated to the identifiable assets and liabilities
based on the fair values at the acquisition date.
The Dermablend line of corrective cosmetics, which is sold in department and
specialty stores and has an ethnic consumer base of 40 - 50%, was purchased by
the Company as part of the Johnson Products acquisition. Dermablend was
incorporated as Dermablend, Inc. ("Dermablend"), a wholly-owned subsidiary of
Johnson Products at the time the Company acquired Johnson Products. Originally,
management intended to sell Dermablend within one year from the acquisition.
Therefore, in accordance with Emerging Issues Task Force No. 87-11, "Allocation
of Purchase Price to Assets to be Sold", the results of operations related to
Dermablend were initially excluded from the Company's consolidated statement of
operations. In December 1998, the Company decided to operate Dermablend on a
longer-term basis. Accordingly, the cumulative effect of the operating results
of Dermablend since the acquisition date of $890,000 has been included in the
Company's consolidated statement of operations for the year ended December 31,
1998. These operating results are summarized as follows:
38
<PAGE>
Net sales $ 4,016
Cost of sales 766
-------------
Gross profit 3,250
Marketing and selling expenses 1,576
General and administrative expenses 784
$ 890
=============
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 from Chesebrough-Pond's USA Co. 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. The acquisition was accounted
for under the purchase method of accounting.
Also on April 30, 1997, the Company terminated its just acquired license
agreement with Jean Philippe Fragrances, Inc. 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 the results of operations
of the Company and the results of the Johnson Products acquisition (including
Dermablend) as if the acquisition had occurred at the beginning of each of the
years ended December 31, 1998 and 1997. The unaudited pro forma results for the
periods ended December 31, 1997 and 1996 include the results of the Cutex
business as if the Cutex acquisition had occurred as of the beginning of each of
these periods. Cutex operations are included in 1998 up to the date of its sale
in December 1998.
<TABLE>
<S> <C> <C> <C>
(Dollars in thousands except Year Ended Year Ended Nine Months Ended
per share amounts) December 31, 1998 December 31, 1997 December 31, 1996
(unaudited) (unaudited) (unaudited)
- -------------------------------------------------------------------------------------------------------
Net sales $ 187,997 $ 176,248 $ 74,781
Net income (loss) before extraordinary
item 1,500 5,913 (1,708)
Net income (loss) 1,627 3,827 (5,235)
Basic and diluted income (loss) per
share before extraordinary item $ 0.10 $ 0.39 $ (0.13)
Basic and diluted income (loss) per
share $ 0.11 $ 0.26 $ (0.41)
</TABLE>
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional goodwill amortization,
additional depreciation, additional interest expense on acquisition debt, an
adjustment to cost of goods sold per a manufacturing agreement between the
Company and Chesebrough-Pond's USA Co., and additional selling expenses related
to an agreement between the Company and AM Cosmetics, 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 and Cutex
acquisitions had been in effect as of the beginning of each period presented, or
of future results of operations of the Company.
During April 1997, the Company acquired the Let's Jam product line from New
39
<PAGE>
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. This acquisition was accounted for under the purchase
method of accounting.
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). These acquisitions were 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
original purchase consideration payable for the acquisition was approximately
$9.5 million, subject to post closing adjustments, of which approximately $9.3
million was recorded as intangible assets; additional consideration was paid
based upon the after-tax profits of the business for the year ended December 31,
1998. 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).
Approximately $5.4 million of the original purchase price was paid in January
1998 and approximately $3.4 million was paid in January 1999. The amount paid in
January 1999 was reduced from an original amount of $4.1 million due to
significant devaluation of the South African Rand in 1998. Based upon the after
tax profit of A&J Cosmetics for the year ended December 31, 1998, Carson South
Africa recorded additional goodwill and additional consideration due of $3.0
million. This additional consideration was paid in March 1999.
Note 4. Disposition
On December 9, 1998 the Company sold substantially all of the assets of the
Cutex nail polish remover and nail implements business to The Cutex Company, an
unrelated corporation ("Cutex Company"). The Company realized net cash proceeds
of approximately $27.8 million ($4.5 million of which is restricted cash) and
recorded a loss on the sale of approximately $14.0 million.
Of the cash proceeds received for the sale of the Cutex remover business, $4.5
million (the "Holdback Amount") must be used by the Company solely to pay for
certain designated expenses related to the sale of Cutex. The remaining balance
of the Holdback Amount on June 30, 2000, if any, must be used by the Company to
make a prepayment of secured debt (see Note 9).
Note 5. Non-recurring Charges
During the year ended December 31, 1998, the Company recorded non-recurring
pre-tax charges of $39.0 million (approximately $23.4 million net of tax). Such
charges by category of expenditure were as follows (in thousands):
40
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Bad
Debts
Management Fixed and Sale of Write-off of
Inventory Restructuring Assets Other Cutex Investment Total
------------ ------------- ------------ ------------ ------------ ------------ ------------
Net sales $ - $ -- $ -- $ -- $ 4,000 $ - $ 4,000
Cost of goods sold 6,573 -- -- -- 1,300 -- 7,873
General and
administrative -- 1,416 228 2,000 -- -- 3,644
Loss on sale of
business -- -- -- -- 13,994 -- 13,994
Restructuring charges -- 2,638 2,879 234 -- -- 5,751
------------ ------------- ------------ ------------ ------------ ------------ ------------
Operating income 6,573 4,054 3,107 2,234 19,294 -- 35,262
Loss on write-off of
investment -- -- -- -- -- 3,768 3,768
------------ ------------- ------------ ------------ ------------ ------------ ------------
Total $ 6,573 $ 4,054 $ 3,107 $ 2,234 $ 19,294 $ 3,768 $ 39,030
============ ============= ============ ============ ============ ============ ============
</TABLE>
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 of $4.1
million included employee severance costs and expenses related to the hiring of
the Company's chief executive officer. The fixed assets charges of $3.1 million
related primarily to fixed assets which were disposed of in connection with the
restructuring of product lines. The "Bad Debts and Other" charges included
primarily $2.0 million of additional reserves against accounts receivable for
customer deductions. The charges related to the sale of Cutex were for product
returns, inventory write-downs and the loss on the sale of the remover business
(see Note 4). The write-off of the related party investment is discussed further
in Note 16.
Of the restructuring charges of $5.8 million, $1.4 million has been paid and
$2.9 million of fixed assets were written off during the year ended December 31,
1998.
Note 6. Inventories
Inventories are summarized as follows (in thousands):
December 31, 1998 December 31,1997
- --------------------------------------------------------------------------------
Raw materials $ 9,979 $ 10,873
Work-in-process 1,938 1,651
Finished goods 10,908 12,337
- --------------------------------------------------------------------------------
Total $ 22,825 $ 24,861
41
<PAGE>
Note 7. Property, Plant and Equipment
Property, plant and equipment is summarized as follows (in thousands):
December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------
Land $ 1,345 $ 545
Buildings and equipment 16,661 7,706
Machinery and equipment 15,659 9,423
Furniture and fixtures 2,657 1,537
Construction-in-progress 3,371 5,242
- --------------------------------------------------------------------------------
39,693 24,453
Less: accumulated depreciation 3,928 2,251
- --------------------------------------------------------------------------------
Total $ 35,765 $ 22,202
- --------------------------------------------------------------------------------
Depreciation expense for the years ended December 31, 1998 and 1997 was $3.0
million and $1.3 million, respectively. For the nine months ended December 31,
1996, depreciation expense was $672,000.
The Company leases warehouse and office space under a non-cancelable operating
lease which expires in 2003 and contains renewal options. The Company pays
taxes, maintenance, insurance and certain other operating costs of the leased
property. The Company also leases certain equipment which, in the aggregate, is
not significant. Rent expense approximated $1.9 million, $0.6 million and $0.2
million in the years ended December 31, 1998 and 1997 and the nine months ended
December 31, 1996, respectively. At December 31, 1998, future minimum annual
rental commitments under non-cancelable operating leases are approximately
$446,000 per year in 1999 through 2002 and $260,000 in 2003.
Note 8. Other Assets
Other assets are summarized as follows (in thousands):
December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------
Debt issuance costs $ 6,534 $ 6,074
Deferred income taxes -- 1,156
Long-term notes receivable 767 251
- --------------------------------------------------------------------------------
7,301 7,481
Less: accumulated amortization 439 115
- --------------------------------------------------------------------------------
Total $ 6,862 $ 7,366
- --------------------------------------------------------------------------------
42
<PAGE>
Note 9. Long-Term Debt
Long-term debt is summarized as follows (in thousands):
December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------
103/8 % senior subordinated notes due 2007 $ 73,000 $ 100,000
13% secured term loan due 2003 60,324 ----
Revolving line of credit -- 3,000
Other 225 623
- --------------------------------------------------------------------------------
133,549 103,623
Less: current portion 126 --
- --------------------------------------------------------------------------------
$ 133,423 $ 103,623
- --------------------------------------------------------------------------------
Annual maturities of outstanding indebtedness at December 31, 1998 are as
follows (in thousands):
Year ended December 31,
- --------------------------------------------------------------------------------
1999 $ 126
2000 99
2001 ----
2002 ----
2003 60,324
Thereafter 73,000
- --------------------------------------------------------------------------------
$ 133,549
Term Loan
On December 8, 1998 the Company entered into loan agreements relating to a $75.0
million secured term loan (the "Secured Term Loan") and an $8.0 million
unsecured term loan (the "Unsecured Term Loan"). The cash proceeds were used
primarily to repay the $50.0 million secured term loan which financed the
Johnson Products acquisition in July 1998 (see Note 3) and to purchase and
retire $27.0 million of senior subordinated notes for $23.0 million. The Company
recorded an extraordinary net gain of approximately $1.8 million (net of tax)
resulting from the early retirement of the $27.0 million of senior notes and the
write-off of related debt issuance costs. Of the remaining cash proceeds,
approximately $4.3 million was used to pay transaction fees and expenses to
investment bankers and other professionals, and $5.7 million was retained for
working capital purposes.
On December 10, 1998, the proceeds from the sale of Cutex (see Note 4) were used
to repay the $8.0 million Unsecured Term Loan and $14.7 million of the Secured
Term Loan. As a result of this repayment, the Company recorded an extraordinary
net loss of approximately $0.7 million (net of tax) related to the write-off of
loan fees incurred for this debt.
The remaining $60.3 million of the Secured Term Loan bears interest at an annual
rate of 13% and matures on December 8, 2003. Interest is payable monthly. The
43
<PAGE>
Company may, at its option, defer the monthly interest payment a maximum of
twelve times until December 8, 2000. In the event of deferral, interest will be
accrued at an annual rate of 16% for the month deferred and will be added to the
outstanding principal amount of the loan. The capital stock and assets of Carson
Products Company, the capital stock and assets of Johnson Products and the
capital stock and intellectual property of Dermablend are pledged as collateral
for the Secured Term Loan. The loan contains covenants with respect to, among
other things, (i) restrictions on the incurrence of additional liens or
indebtedness and (ii) restrictions on the payment of any cash dividends by the
Company or any subsidiary.
Senior Subordinated Notes
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"). In December 1997, the notes were exchanged for $100.0
million aggregate principal amount of ten-year, fixed rate 10 3/8 % senior
subordinated notes which were registered under a Form S-4 Registration Statement
and are publicly traded. The notes are currently guaranteed by the Company's
wholly-owned subsidiaries, Carson Products Company, Johnson Products and
Dermablend. 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 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 an
extraordinary loss of $2.1 million (net of the related tax benefit of $1.2
million) in 1997 for debt-related charges and write-offs. The indenture with
respect to the notes contains covenants with respect to, among other things, (i)
restrictions on the incurrence of additional liens or indebtedness, and; (ii)
restrictions on the payment of any cash dividends by the Company or any
subsidiary.
The senior subordinated notes had a carrying value of $73.0 million and a fair
value of approximately $51.1 million at December 31, 1998. At December 31, 1997,
the carrying value of $100.0 million approximated fair value. Fair value was
determined by reference to quoted market prices.
Credit Facility
Concurrently with the consummation of the Company's initial public offering in
October 1996 (see Note 1), 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. During the nine months
ended December 31, 1996, the Company recorded an extraordinary loss of $3.5
million (net of tax benefits of $2.4 million) for debt-related charges and
write-offs related to these debt repayments. 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 with Credit Agricole
Indosuez to change the Company's then existing $40.0 million senior credit
44
<PAGE>
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 (see Note 3). 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 July 1998 the Company terminated its senior secured credit facility with
Credit Agricole Indosuez. As a result, the Company recognized an extraordinary
loss of $0.9 million (net of tax) for the write-off of $1.6 million of debt
financing costs related to the credit facility.
Note 10. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------
Compensation and benefits $ 4,359 $ 2,788
Accruals related to Cutex disposition 4,207 ----
Promotional expenses 2,093 839
Accruals related to restructuring 1,455 ----
Interest 1,262 1,592
Self insurance 1,159 766
Professional fees 985 306
Advertising 702 774
Property and sales taxes 697 66
Other 2,387 282
- --------------------------------------------------------------------------------
$ 19,306 $ 7,413
Note 11. 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>
<S> <C> <C> <C>
Year Ended Year Ended Nine Months Ended
December 31, 1998 December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------
Statutory rate 34.0 % 34.0 % (34.0)%
State income taxes, net of federal benefit 1.1 % 1.2 % (2.6)%
Foreign taxes (3.2)% ---- 33.8 %
Foreign tax credit ---- ---- (33.8)%
Loss on sale of management company
stock (see Note 12) (178.6)% ---- ----
Valuation allowance 179.6 % ---- ----
Gain on sale of Carson South Africa stock 23.5 % ---- ----
Goodwill 5.8 % 6.1 % 21.8 %
Incentive compensation ---- ---- 93.9 %
Other (0.6)% (4.2)% 56.6 %
- ------------------------------------------------------------------------------------------------------
Effective rate 61.6 % 37.1 % 135.7 %
</TABLE>
45
<PAGE>
Income tax expense (benefit) for the periods noted includes the following (in
thousands):
<TABLE>
<S> <C> <C> <C>
Year Ended Year Ended Nine Months Ended
December 31, 1998 December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------------------
Current:
Federal $ ---- $ ---- $ 1,685
State 120 ---- 405
Foreign 3,389 1,728 594
----------------------------------------------------------------
Total current provision 3,509 1,728 2,684
----------------------------------------------------------------
Deferred:
Federal 697 885 (749)
State 137 104 (269)
Foreign (44) 62 61
----------------------------------------------------------------
Total deferred provision 790 1,051 (957)
----------------------------------------------------------------
Total provision before extraordinary items 4,299 2,779 1,727
Extraordinary items 84 (1,201) (2,351)
----------------------------------------------------------------
Total income tax expense (benefit) $ 4,383 $ 1,578 $ (624)
</TABLE>
46
<PAGE>
The effects of temporary differences which gave rise to the deferred tax asset
and liability are as follows:
<TABLE>
December 31, 1998 December 31, 1997
------------------- -------------------
<S> <C> <C> <C> <C>
(in thousands) Current Long-term Current Long-term
Deferred domestic tax assets related to:
Inventories $ 6,036 $ ---- $ 897 $ ----
Loss on sale of Cutex ---- 5,625 ---- ----
NOL carryforward ---- 4,181 ---- 696
Accrued expenses 3,653 616 758 ----
Package design costs 383 ---- ---- 538
Allowance for doubtful accounts 924 ---- ---- ----
Foreign tax credit carryforward ---- 702 ---- 702
Deferred compensation ---- ---- ---- 622
State income tax credits and other 156 1,130 101 256
- ---------------------------------------------------------------------------------------------------------------
11,152 12,254 1,756 2,814
Deferred domestic tax liabilities related to:
Inventories (122) (3,967) (621) ----
Amortization ---- ( 2,869) ---- ----
Property, plant and equipment ---- (2,152) ---- (1,658)
Allowance for doubtful accounts ---- (219) (923) ----
Other (1,227) (313) (51) ----
- ---------------------------------------------------------------------------------------------------------------
(1,349) (9,520) (1,595) (1,658)
Deferred domestic tax asset $ 9,803 $ 2,734 $ 161 $ 1,156
Valuation allowance (9,803) (2,734) ---- ----
- ---------------------------------------------------------------------------------------------------------------
Net deferred domestic tax asset $ ---- $ ---- $ 161 $ 1,156
Deferred foreign tax liability $ ---- $ (325) $ ---- $ (143)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Management believes the recoverability of the Company's net domestic deferred
tax asset is uncertain due to the recent domestic losses and therefore provided
a valuation allowance against this asset in 1998.
Deferred income taxes were not provided on undistributed earnings of certain
foreign subsidiaries ($13.0 million at December 31, 1998 and $5.9 million at
December 31, 1997) because such undistributed earnings are expected to be
reinvested indefinitely overseas. If these amounts were not considered
permanently invested, additional deferred taxes of approximately $0.7 million
and $0.6 million would have been provided at December 31, 1998 and December 31,
1997, respectively. The foreign tax credit carryforward and the net operating
loss carryforward at December 31, 1998 expire in 2001 and 2018, respectively.
State income tax credits expire generally in the years 2005 through 2007.
47
<PAGE>
Note 12. 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 $350,000 to the plan in 1998, $262,500 in 1997 and $401,000 for the
nine months ended December 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 ($1.5 million at December 31, 1998 and $1.7 million at December 31,
1997) 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
$572,000 at December 31, 1998 and $548,000 at December 31, 1997. For measurement
purposes, the cost of providing medical benefits was assumed to increase by 8%
in the fiscal year ended December 31, 1998, 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. The weighted average discount rate used in determining the APBO was
5.4% at December 31, 1998 and 8% at December 31, 1997. Net periodic
postretirement benefit cost was $24,000 for 1998, $14,000 for 1997 and $18,000
for the nine months ended December 31, 1996.
In December 1998 the Company transferred the responsibility to provide medical
and dental insurance coverage for its employees to Carson Management Co.
("CMC"), a subsidiary of the Company. The Company remains liable for these
expenses if CMC is unable to satisfy the obligations. This responsibility was
transferred to CMC to provide focused, strategic management and reduce the
Company's health care costs. In order to facilitate the effective management of
these costs, the Company has entered into a strategic partnership with a
Savannah-based medical insurance consulting group (the "Consultant"). The
Consultant purchased an interest in the participating preferred stock of CMC.
This sale of preferred stock to the Consultant generated a taxable loss for the
Company which is not recorded for financial reporting purposes and which appears
as a reconciling item in the Company's income tax rate reconciliation (see Note
11).
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 stock purchase rights, on a complete
or partial basis, as agreed to by the Company and the awardee. The SARs entitled
the holder to a specified value (determined as a percentage of the Company's
equity value) over a fixed base value subject to five-year vesting requirements
(or earlier upon a public offering or sale of the Company). Upon amendment and
conversion, the SAR rights were 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.
48
<PAGE>
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 13. Stock Compensation Plans
The Company has two stock compensation plans, the "1996 Non-employee Directors
Equity Incentive Program" and the "1996 Long-Term Incentive Plan-for employees",
under which directors, officers and key employees may be granted options,
restricted shares and stock appreciation rights. A total of 1,750,000 of the
Company's Class A common shares are reserved for use in these plans. As of
December 31, 1998, only awards of options and restricted shares were
outstanding. Restricted shares were also granted to directors under the
"Non-employee Directors Equity Incentive Program" in lieu of cash as
compensation for serving on the board of directors and board committees. The
restricted shares vest one-third each year over a three-year period. The amount
of expense recorded in the statement of operations for the years ended December
31,1998 and 1997 was $200,000 and $40,000, respectively. There was no issuance
of restricted shares in the nine months ended December 31, 1996. Options issued
under these plans entitle the recipient to purchase the Company's common stock
at no less than 100% of the market price on the date the option is granted. Most
of the options granted under these plans expire after ten years and vest
one-third each year over a three-year period. A limited number vested after one
year.
The following summarizes stock option activity for 1998 and 1997:
Weighted Average
Number of Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 0 $ ----
Granted 477,000 10.74
Canceled or expired (35,500) 12.87
- -------------------------------------------------------------------------------
Outstanding at December 31, 1997 441,500 10.56
Granted 661,525 3.30
Canceled or expired (139,000) 12.32
- --------------------------------------------------------- ----------------------
Outstanding at December 31, 1998 964,025 $ 5.33
49
<PAGE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"). 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 1998
consistent with the provisions of FAS 123, the Company's net income and basic
and diluted earnings per share for the years ended December 31,1998 and 1997
would have been reduced to the unaudited pro forma amounts indicated below (in
thousands except per share amounts):
1998 1997
-----------------------
Net income, as reported $ 91 $ 1,668
Net income(loss), pro forma-unaudited (636) 1,243
Basic and diluted earnings per share, as reported 0.01 0.11
Basic and diluted earnings(loss) per share,
pro forma-unaudited (0.04) 0.08
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for those granted in 1998 and 1997, respectively: (i) dividend
yield of 0% and 0%, (ii) expected volatility of 54% and 57%, (iii) risk-free
interest rate of 4.7% and 6.5% and (iv) expected life of 6.0 years and 4.9
years. The weighted average fair value of the options granted during 1998 and
1997 was $1.89 and $4.74, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1998:
Exercise Number Outstanding Weighted Average Remaining Number Exercisable at
Price at December 31, 1998 Contractual Life December 31, 1998
- --------------------------------------------------------------------------------
$ 14.00 30,000 7.8 20,000
12.00 50,000 8.2 16,666
10.94 25,000 8.7 8,333
9.56 50,000 8.5 16,666
9.22 40,000 8.4 13,333
8.75 43,025 9.3 ----
8.29 40,000 9.4 ----
8.25 7,500 9.0 2,500
7.50 100,000 8.3 66,666
7.34 10,000 9.4 ----
2.47 568,500 9.9 ----
- --------------------------------------------------------------------------------
964,025 9.4 144,164
- --------------------------------------------------------------------------------
Note 14. 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, operations and cash flows
of the Company. Also see Note 16.
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 $4.6
million and $4.1 million in 1998 and 1997, respectively.
50
<PAGE>
Note 15. U.S. and Foreign Operations
The Company operates in one business segment, the manufacture and marketing of
ethnic personal care products for people of color. The Company's operations are
located primarily in the United States and South Africa. A sales subsidiary,
Carson UK Limited ("Carson UK") was incorporated in January 1998 and manages
sales in Europe for products which are manufactured in the United States.
Financial information by geographic area is as follows:
<TABLE>
<S> <C> <C> <C>
Year Ended Year Ended Nine Months Ended
December 31, 1998 December 31, 1997 December 31, 1996
- ------------------------ ------------------- ------------------ ------------------
Net Sales:
United States:
Domestic $ 100,127 $ 75,834 $ 42,855
Export 5,681 7,524 4,147
Europe 5,715 4,611 4,127
South Africa 39,183 21,662 8,809
- ------------------------ ------------------- ------------------ ------------------
$ 150,706 $ 109,631 $ 59,938
- ------------------------ ------------------- ------------------ ------------------
Net Sales sold under:
Carson label $ 71,092 $ 70,169 $ 51,129
Johnson label 25,244 ---- ----
Cutex label 15,187 17,800 ----
South Africa label 39,183 21,662 8,809
- ------------------------ ------------------- ------------------ ------------------
$ 150,706 $ 109,631 $ 59,938
- ------------------------ ------------------- ------------------ ------------------
Operating income (loss):
United States $ (37,671) $ 7,582 $ 723
Europe 2,290 ---- ----
South Africa 7,033 4,667 1,728
- ------------------------ ------------------- ------------------ ------------------
$ (28,348) $ 12,249 $ 2,451
- ------------------------ ------------------- ------------------ ------------------
Identifiable assets (at
end of period):
United States $ 256,369 $ 190,264 $ 95,283
Europe 2,751 ---- ----
South Africa 60,738 42,545 11,529
Eliminations (52,395) (31,385) (9,283)
- ------------------------ ------------------- ------------------ ------------------
$ 267,463 $ 201,424 $ 97,529
- ------------------------ ------------------- ------------------ ------------------
</TABLE>
Principal brands sold under the Carson label include: Dark & Lovely, Excelle,
Beautiful Beginnings Dark & Natural, Magic and Let's Jam. Principal brands sold
under the Johnson label include: Gentle Treatment, Ultra Sheen, Sta-Sof-Fro,
Posner, Ultra Star, Moxie, Soft'n Free, Classy Curl, Curly Perm and Afro Sheen.
Principal brands sold under the South African label include: Dark & Lovely,
Excelle, Gentle Treatment, Ultra Sheen, Beautiful Beginnings, Restore Plus, Dark
& Natural, Magic and Sadie.
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 the Caribbean and Africa. All product sold in Europe is
produced in the United States and shipped directly to European customers.
Intercompany profits have been eliminated in the schedule above.
51
<PAGE>
Note 16. 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) 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 was
August 23, 1998; however, the term of the agreement has been extended and shall
continue until terminated by not less than 30 days' advance notice by either
party. Under the Management Agreement, the Company paid Morningside
approximately $127,000, $40,000 and $25,000 in 1998, 1997 and the nine months
ended December 31, 1996, respectively, for reimbursement of out-of-pocket
expenses.
In connection with the Johnson Products 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. The
Company reimbursed Morningside for approximately $61,000 of out-of-pocket
expenses incurred in connection with the acquisition. In addition, the Company
reimbursed Morningside for approximately $94,000 of expenses related to the debt
refinancing and the sale of Cutex in 1998. Morningside received fees of $520,000
and $125,000 in 1997 for 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 Company's
senior subordinated notes. In 1996, Morningside received a fee of $100,000 for
arranging and negotiating the terms of the 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.
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 or have been key management and shareholders of AM
Cosmetics. AM Cosmetics sells several 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. During 1998, AM Cosmetics
experienced significant financial difficulties and management turnover.
The Company recorded a charge of $3.7 million to write off its investment in the
PIK Preferred Shares, as a result of what management believes is a permanent
52
<PAGE>
impairment in this asset.
Concurrent with its investment in AM Acquisition, Carson Products entered into a
Management Agreement (the "Carson - AM Management Agreement") with AM Cosmetics,
pursuant to which Carson Products agreed to manage the business operations of
and provide certain other services to AM Cosmetics. In return, Carson Products
was entitled to fees equal to 1% of AM Cosmetics' annual net sales subject to a
minimum of $500,000 for 1997. The contract was amended in 1997 to provide a
fixed fee of $250,000 for 1998 and thereafter. For the years ended December 31,
1998 and 1997, the Company received $42,000 and $500,000, respectively, in
management fees. The Company did not receive and therefore did not accrue
revenue for the entire $250,000 of fees in 1998 due to the financial
difficulties experienced by AM Cosmetics. In November 1998 AM Cosmetics served
written notice of termination of the Carson-AM Management Agreement.
Pursuant to the Carson-AM Management Agreement, the parties entered into a
manufacturing agreement in May 1997 which will expire on May 1, 1999 (the "AM
Manufacturing Agreement"). Under the AM Manufacturing Agreement, AM Cosmetics
manufactured 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 was entitled to a 25% profit
margin above all costs, including general and administrative costs, on the
cosmetics products it produced under the AM Manufacturing Agreement , except for
Cutex products for which the pricing was specified by SKU. The Company purchased
approximately $4.7 million and $2.0 million from AM Cosmetics in 1998 and 1997,
respectively, under the AM Manufacturing Agreement. Currently, no production is
being carried out pursuant to this contract.
Carson Products and AM Cosmetics 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, AM
Cosmetics was entitled to a 7.5% sales commission on its sales of all Cutex
products. Such sales commission was approximately $1.5 million and $1.2 million
in 1998 and 1997, respectively. In December 1998, the Company served written
notice of its intention to terminate the AM Sales/Marketing Agreement.
In December 1998 AM Cosmetics instituted an AAA arbitration proceeding in New
York against the Company. In its first claim, AM Cosmetics asserts that the
Company breached the Carson-AM Management Agreement by failing to provide
management level personnel, thus causing AM Cosmetics to hire its own management
team at its own cost and expense. In its second claim, AM Cosmetics asserts that
the Company breached the AM Manufacturing Agreement by failing to pay AM
Cosmetics for manufacturing certain goods and failing to reimburse it for
certain marketing and research costs. Arbitrators were recently selected, and an
initial conference with the arbitration panel is expected in the near future. AM
Cosmetics has not yet specified its damages or provided any calculation of
alleged losses. The Company disputes AM Cosmetics' claim for damages and is
vigorously defending the matter. At this time, the ultimate resolution of the
claim is unknown but is not expected to have a materially adverse effect on the
Company's financial position, results of operations or cash flows.
Dr. Leroy Keith, Chairman of the Company, and Vincent A. Wasik, a controlling
stockholder of the Company have ownership interests in AM Cosmetics. Dr.
Keith serves as a member of AM Cosmetics' Board of Directors. In addition,
53
<PAGE>
Lawrence E. Bathgate, II, a member of the Company's Board of Directors, serves
as a member of AM Cosmetics' Board of Directors and as chairman of its executive
committee.
Note 17. Subsequent Event
On February 21, 1999, the Company's President and Chief Executive Officer,
Gregory J. Andrews died while on a business trip in South Africa. Malcolm R.
Yesner was named President and Chief Executive Officer of the Company to succeed
Mr. Andrews. Mr. Yesner also serves as Chief Executive Officer of Carson
South Africa and as President, International Operations, for the Company.
Note 18. Quarterly Financial Information (Unaudited)
Unaudited quarterly financial information for the years ended December 31, 1998
and 1997 is as follows (in thousands except per share data):
<TABLE>
<S> <C> <C> <C> <C>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------------------
Year Ended December 31, 1998:
Net sales $ 31,797 $ 29,174 $ 44,563 $ 45,172
Gross profit 16,419 8,099 22,580 19,099
Income (loss) before extraordinary items (501) 17,716 (2,664) (14,587)
Net income (loss) $ (501) $ 17,716 $ (3,597) $ (13,527)
Basic and diluted income (loss) per
common share:
Income (loss) before extraordinary
items $ (0.03) $ 1.18 $ (0.18) $ (0.97)
Net income (loss) $ (0.03) $ 1.18 $ (0.24) $ (0.90)
Year Ended December 31, 1997:
Net sales $ 17,932 $ 30,234 $ 29,625 $ 31,840
Gross profit 10,052 16,238 16,070 16,761
Income (loss) before extraordinary items 682 2,266 1,493 (687)
Net income (loss) $ 682 $ 2,266 $ 1,493 $ (2,773)
Basic and diluted income (loss) per
common share:
Income (loss) before extraordinary
items $ 0.05 $ 0.15 $ 0.10 $ (0.05)
Net income (loss) $ 0.05 $ 0.15 $ 0.10 $ (0.19)
</TABLE>
54
<PAGE>
Note 19. 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, Johnson Products and
Dermablend. Carson Products is a direct wholly-owned subsidiary of Carson, Inc.
and Johnson Products and Dermablend are indirect wholly-owned subsidiaries of
Carson, Inc., which were purchased by Carson Products in 1998. The following
tables present condensed consolidating financial information for Carson, Inc.,
the guarantor subsidiaries, 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 guarantor subsidiaries
are not included and the guarantor subsidiaries are not filing separate reports
under the Securities Exchange Act of 1934, as amended, because the guarantor
subsidiaries have fully and unconditionally guaranteed the Notes, and separate
financial statements and other disclosures concerning the guarantor subsidiaries
are not deemed material to investors.
Non-guarantor subsidiaries in 1998 include Carson South Africa and Carson UK.
Carson UK was incorporated in 1998 and is an indirect wholly-owned subsidiary of
Carson, Inc. Since Carson UK was not incorporated in 1997, but was a division of
Carson Products, the results of sales to Europe for 1997 are included in the
guarantor subsidiaries information . 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. The financial information for these three non-guarantor
subsidiaries is included in the consolidated financial statements of Carson
South Africa. Carson, Inc. also has one inactive subsidiary (Carson Botswana
(PTY Limited)), which is inconsequential to the Company and separate financial
information for it has not been included in these tables. CMC is a direct
wholly-owned subsidiary of Carson, Inc.
55
<PAGE>
Consolidating Statement of Operations for the Year Ended December 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
-------------- -------------- -------------- -------------- --------------
Net sales $ ---- $ 105,808 $ 44,898 $ ---- $ 150,706
Cost of goods sold ---- 63,034 21,475 ---- 84,509
-------------- -------------- -------------- -------------- --------------
Gross profit ---- 42,774 23,423 ---- 66,197
Marketing and selling expenses ---- 35,534 8,610 ---- 44,144
General and administrative expenses ---- 26,056 5,490 ---- 31,546
Loss on sale of business ---- 13,994 ---- ---- 13,994
Restructuring expenses ---- 5,751 ---- ---- 5,751
-------------- -------------- -------------- -------------- --------------
Operating expenses ---- 81,335 14,100 ---- 95,435
-------------- -------------- -------------- -------------- --------------
Cumulative effect of change in accounting
for subsidiary ---- 890 ---- ---- 890
-------------- -------------- -------------- -------------- --------------
Operating (loss) income ---- (37,671) 9,323 ---- (28,348)
Other income, net ---- 33,154 2,175 ---- 35,329
Equity in subsidiary earnings (net of
taxes) 91 ---- ---- (91) ----
-------------- --------------- -------------- -------------- --------------
Income (loss) before income taxes,
minority interest and extraordinary item 91 (4,517) 11,498 (91) 6,981
Income taxes ---- (954) (3,345) ---- (4,299)
-------------- -------------- -------------- -------------- --------------
Income (loss) before minority
interest and extraordinary item 91 (5,471) 8,153 (91) 2,682
Minority interest ---- ---- (2,718) ---- (2,718)
-------------- -------------- -------------- -------------- --------------
Income (loss) before extraordinary item 91 (5,471) 5,435 (91) (36)
Extraordinary item, net of tax ---- 127 ---- ---- 127
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 91 $ (5,344) $ 5,435 $ (91) $ 91
============== ============== ============== ============== ==============
</TABLE>
56
<PAGE>
Consolidating Statement of Operations for the Year Ended December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
-------------- -------------- -------------- -------------- --------------
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 expenses ---- 40,605 6,267 ---- 46,872
-------------- -------------- -------------- -------------- --------------
Operating income(loss) ---- 7,582 4,667 ---- 12,249
Other income (expense) ---- (5,365) 601 ---- (4,764)
Equity in subsidiary earnings (net of
taxes) 1,668 ---- ---- (1,668) ----
-------------- -------------- -------------- -------------- --------------
Income before income taxes,
minority interest and
extraordinary item 1,668 2,217 5,268 (1,668) 7,485
Income taxes ---- 989 1,790 ---- 2,779
-------------- -------------- -------------- -------------- --------------
Income before minority interest and
extraordinary item 1,668 1,228 3,478 (1,668) 4,706
Minority interest ---- ---- (952) ---- (952)
-------------- -------------- -------------- -------------- --------------
Income before extraordinary item 1,668 1,228 2,526 (1,668) 3,754
Extraordinary item, net of tax ---- (2,086) ---- ---- (2,086)
-------------- -------------- -------------- -------------- --------------
Net income $ 1,668 $ (858) $ 2,526 $ (1,668) $ 1,668
============== ============== ============== ============== ==============
</TABLE>
57
<PAGE>
Consolidating Balance Sheet as of December 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
-------------- -------------- -------------- -------------- --------------
Assets
Current assets:
Cash $ ---- $ 12,320 $ 16,386 $ ---- $ 28,706
Accounts receivable, net 844 30,701 14,974 (7,566) 38,953
Inventories, net ---- 13,993 8,832 ---- 22,825
Restricted cash ---- 4,500 ---- ---- 4,500
Other current assets ---- 307 362 ---- 669
Property, plant and equipment, net ---- 26,130 9,671 (36) 35,765
Intangible assets, net and other assets ---- 124,997 11,048 ---- 136,045
Investment in subsidiary 68,316 43,421 ---- (111,737) ----
-------------- -------------- -------------- -------------- --------------
Total assets $ 69,160 $ 256,369 $ 61,273 $(119,339) $ 267,463
============== ============== ============== ============== ==============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ ---- $ 12,484 $ 7,702 $ (7,602) $ 12,584
Other current liabilities ---- 18,569 9,726 ---- 28,295
Long-term debt ---- 133,324 99 ---- 133,423
Other liabilities ---- 23,676 325 ---- 24,001
Common stock and paid in capital 81,121 28,470 39,320 (67,790) 81,121
Other equity accounts (8,041) (15,193) (8,910) 24,103 (8,041)
Retained earnings (Accumulated deficit) (3,920) 55,039 13,011 (68,050) (3,920)
-------------- -------------- -------------- -------------- --------------
Total liabilities and stockholders' equity $ 69,160 $ 256,369 $ 61,273 $(119,339) $ 267,463
============== ============== ============== ============== ==============
</TABLE>
58
<PAGE>
Consolidating Balance Sheet as of December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
-------------- -------------- -------------- -------------- --------------
Assets
Current assets:
Cash $ ---- $ 2,614 $ 11,420 $ 9 $ 14,043
Accounts receivable, net ---- 24,058 10,817 (6,727) 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 ---- 101,690 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
============== ============== ============== ============== ==============
Liabilities and stockholders' equity
Current liabilities:
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>
59
<PAGE>
Consolidating Statement of Cash Flows for the Year Ended December 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
-------------- -------------- -------------- -------------- --------------
Operating Activities:
Net income (loss) $ 91 $ (5,344) $ 5,435 $ (91) $ 91
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Gain on sale of subsidiary stock ---- (49,140) ---- ---- (49,140)
Loss on sale of business ---- 13,994 ---- ---- 13,994
Non-cash special charges ---- 11,596 ---- ---- 11,596
Loss on write-off of investment ---- 3,768 ---- ---- 3,768
Depreciation and amortization ---- 5,492 1,134 ---- 6,626
Extraordinary item, net of tax benefit ---- (127) ---- ---- (127)
Minority interest in earnings of
subsidiary ---- ---- 2,718 ---- 2,718
Other, net (91) 3,929 115 91 4,044
Changes in operating assets and
liabilities ---- 6,621 (8,613) (9) (2,001)
-------------- -------------- -------------- -------------- --------------
Total adjustments ---- (3,867) (4,646) (9) (8,522)
-------------- -------------- -------------- -------------- --------------
Net cash provided by (used in )
operating activities ---- (9,211) 789 (9) (8,431)
-------------- -------------- -------------- -------------- --------------
Investing Activities:
Additions to property, plant and
equipment ---- (4,797) (5,543) ---- (10,340)
Acquisitions of business assets, net of cash
acquired ---- (34,661) ---- ---- (34,661)
Net proceeds from sale of business ---- 23,298 ---- ---- 23,298
-------------- -------------- -------------- -------------- --------------
Net cash used in investing activities ---- (16,160) (5,543) ---- (21,703)
-------------- -------------- -------------- -------------- --------------
Financing Activities:
Proceeds from long-term borrowings ---- 93,500 ---- ---- 93,500
Principal payments on debt ---- (109,126) (5,827) ---- (114,953)
Proceeds from sale of subsidiary stock ---- 55,216 19,230 ---- 74,446
Other ---- (4,513) ---- ---- (4,513)
-------------- -------------- -------------- -------------- --------------
Net cash provided by financing activities ---- 35,077 13,403 ---- 48,480
-------------- -------------- -------------- -------------- --------------
Effect of Exchange Rate Changes ---- ---- (3,683) ---- (3,683)
-------------- -------------- -------------- -------------- --------------
Net increase in Cash and Cash Equivalents ---- 9,706 4,966 (9) 14,663
Cash and Cash Equivalents at Beginning of
Period ---- 2,614 11,420 9 14,043
-------------- -------------- -------------- -------------- --------------
Cash and Cash Equivalents at End of Period $ ---- $ 12,320 $ 16,386 $ ---- $ 28,706
============== ============== ============== ============== ==============
</TABLE>
60
<PAGE>
Consolidating Statement of Cash Flows for the Year Ended December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
-------------- -------------- -------------- -------------- --------------
Operating Activities:
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 (used in) provided by
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
acquired ---- (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>
61
<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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1998 and 1997 and the nine months ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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, 1998 and 1997, and the results of its operations
and its cash flows for the years ended December 31, 1998 and 1997 and the nine
months ended December 31, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 26, 1999
62
<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" in the Company's Proxy Statement to be filed
for its 1999 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 filed on a timely basis
the required Forms 3, 4 or 5 at the time such forms were due, except for Malcolm
Yesner, who inadvertently failed to file on a timely basis Form 3 and Form 4
with respect to six transactions.
Item 11. Executive Compensation
This information is incorporated herein by reference to "Compensation and Other
Transactions with Executive Officers and Directors - Executive Officer
Compensation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This information is incorporated herein by reference to "Principal Stockholders
and Management Ownership" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
This information is incorporated herein by reference to "Certain Relationships
and Related Transactions" in the Proxy Statement.
63
<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, 1998 and 1997, the related statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1998 and
1997 and the nine months ended December 31, and the related report of Deloitte
Touche LLP.
(b) The Company filed a report on Form 8-K on December 24,1998, which contained
the Asset Purchase Agreement between Carson Products Company and The Cutex
Company, dated as of December 9, 1998; the License Agreement dated as of
December 9, 1998; the Option Agreement between Carson Products Company and
the Cutex Company, dated as of December 9, 1998; the Secured Term Loan
Agreement between Carson Products Company, Carson Inc., the Lenders party
thereto and Norwest Bank Minnesota, N. A. as Collateral Agent, dated as of
December 8, 1998; Press Release dated December 10, 1998; and Press Release
dated December 11, 1998.
2. Exhibits incorporated by reference or filed with this report
- --------------------------------------------------------------------------------
Number Description
- --------------------------------------------------------------------------------
*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)
4.3 First Supplemental Indenture, dated as of July 14, 1998 among
Carson, Inc., Carson Products Company, Johnson Products Co. Inc.,
Dermablend, Inc. and Marine Midland Bank.
*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 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
64
<PAGE>
***10.9 Employment Agreement dated as of May 9, 1997, 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.
*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.
66
<PAGE>
*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.
+10.51 Asset Purchase Agreement dated as of 27 October, 1997 between Carson
Products (Proprietary) Limited and A & J Cosmetics (Proprietary)
Limited
****10.52 Employment Agreement dated as of July 1 1998, by and among Carson
Carson Products Company and Gregory Andrews
****10.53 Employment Agreement dated as of June 8, 1998 by and among Carson
Products Company and Aurelia Waldon
++10.54 Credit Agreement among Carson Products Company, Carson Inc., and
IVAX Corporation dated as of July 14, 1999
++10.55 Purchase Agreement by and between IVAX Corporationa and Carson, Inc.
dated as of June 16,1998
***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.
***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.
+++ Incorporated herein by reference to Carson Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 31,1997
+ Certain confidential portions of Exhibit 10.50 have been omitted from this
public filing and filed separately with the Securities and Exchange Commission
pursuant to rule 406 under the Securities Act of 1933, as amended.
67
<PAGE>
++ Incorporated herein by reference to Carson, Inc.'s Current Report on Form 8-K
as of July 29, 1998, as amended by Form 8-KA dated September 25, 1998
**** Incorporated herein by reference to Carson, Inc.'s Quarterly Report on Form
10-Q for the period ended June 30, 1998
68
<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, 1999 By:/s/ Dr. Leroy Keith
Chairman 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 and Robert W. Pierce 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, 1999 By:/s/ Dr. Leroy Keith
Chairman and Director
Date: March 30, 1999 By:/s/ Malcolm R. Yesner
President and Chief Executive
Officer and Director
Date: March 30, 1999 By:/s/ Lawrence E. Bathgate, II
Director
Date: March 30, 1999 By:/s/ Suzanne de Passe
Director
Date: March 30, 1999 By:/s/ Melvyn J. Estrin
Director
Date: March 30, 1999 By:/s/ John L. Sabre
Director
Date: March 30, 1999 By:/s/ Vincent A. Wasik
Director
Date: March 30, 1999 By:/s/ Robert W. Pierce
Executive Vice President, Chief
Financial Officer and Corporate
Secretary (Principal Accounting and
Financial Officer)
69
CARSON, INC.
as Issuer,
CARSON PRODUCTS COMPANY,
as the Initial Guarantor,
JOHNSON PRODUCTS CO., INC.,
as the First Additional Guarantor,
DERMABLEND, INC.,
as the Second Additional Guarantor
and
MARINE MIDLAND BANK,
as Trustee
FIRST SUPPLEMENTAL INDENTURE
Dated as of July 14, 1998
(Supplementing A Trust Indenture Dated as of November 6, 1997)
10% Senior Subordinated Notes due 2007
<PAGE>
THIS FIRST SUPPLEMENTAL INDENTURE dated as of the 14th day of
July 1998 (the "First Supplemental Indenture") among CARSON, INC., a Delaware
corporation (the "Company"), CARSON PRODUCTS COMPANY, a Delaware corporation
(the "Initial Guarantor"), JOHNSON PRODUCTS CO., INC., a Florida corporation
(the "First Additional Guarantor"), DERMABLEND, INC. (the "Second Additional
Guarantor" and, together with the First Additional Guarantor, the "Additional
Guarantors") and MARINE MIDLAND BANK, as trustee (the "Trustee").
RECITALS:
The Company, the Initial Guarantor and the Trustee are parties
to an Indenture dated as of November 6, 1997 (the "Indenture") relating to the
creation by the Company of an issue of $100,000,000 of its 10?% Senior
Subordinated Notes due 2007 (the "Securities");
The Initial Guarantor has issued a guarantee of the Securities
(the "Guarantee") pursuant to which the Initial Guarantor has guaranteed, in
accordance with Article Eleven of the Indenture, all Guaranteed Obligations (as
such term is defined in the Indenture); and
The Company, the Initial Guarantor, the Additional Guarantors
and the Trustee now desire to enter into this First Supplemental Indenture
pursuant to Section 10.01(iv) of the Indenture, without the consent of the
Holders, in order to add further Guarantees of the Securities under the
Indenture.
Capitalized terms used herein without definition shall have
the meanings given such terms in the Indenture.
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and for other good
and valuable consideration, it is covenanted and agreed, for the benefit of each
other and for the equal and proportionate benefit of the Holders of the
Securities issued under the Indenture, as follows:
ARTICLE ONE
JOINDER AND GUARANTEES OF THE
ADDITIONAL GUARANTORS
Section 101. The Additional Guarantors hereby absolutely,
unconditionally and irrevocably guarantee the Guaranteed Obligations to the
Holders and the Trustee to the same extent and according to the terms of the
Guarantee attached to the Notes and according to the forms of Guarantee attached
as Exhibit A and Exhibit B hereto pursuant to Section 11.05 of the Indenture, as
if such Additional Guarantors had been original signatories to the Guarantee.
Section 102. The Additional Guarantors hereby absolutely,
unconditionally and irrevocably agree to be parties to the Indenture according
to the terms of the Indenture, as if such Additional Guarantors had been
original signatories to the Indenture.
Section 103. As of the date hereof, all references to the
"Guarantors" in the Indenture, the Notes and the Guarantee shall be deemed to
refer collectively to the Initial Guarantor and the Additional Guarantors.
ARTICLE TWO
MISCELLANEOUS
Section 201. Governing Law. The laws of the State of New York
shall govern this First Supplemental Indenture and the Guarantees referred to
herein without regard to principles of conflicts of law.
Section 202. Counterpart Originals. The parties may sign any
number of copies of this First Supplemental Indenture and the Guarantees
referred to herein. Each signed copy shall be an original, but all of them
together represent the same agreement.
Section 203. Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this First Supplemental Indenture, the recitals contained herein or the
Guarantees referred to herein and it shall not be responsible for any statement
of the Company or the Additional Guarantors in this First Supplemental Indenture
or the Guarantees referred to herein.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed, all as of the day and year first
above written.
CARSON, INC.
By:
Name:
Title:
CARSON PRODUCTS COMPANY
By:
Name:
Title:
JOHNSON PRODUCTS CO., INC.
By:
Name:
Title:
DERMABLEND, INC.
By:
Name:
Title:
MARINE MIDLAND BANK,
as Trustee
By:
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF NOTATION ON SECURITY RELATING TO GUARANTEE]
SENIOR SUBORDINATED GUARANTEE
Johnson Products Co., Inc. (the "Additional Guarantor") has
unconditionally and irrevocably guaranteed on a senior subordinated basis (such
guarantee being referred to herein as the "Guarantee") (i) the due and punctual
payment of the principal of and interest or premium or Liquidated Damages, if
any, on the Securities, whether on the Maturity Date, by acceleration, call for
redemption, upon a Change of Control Offer, upon an Asset Sale Offer or
otherwise, the due and punctual payment of interest on the overdue principal and
interest, if any, on the Securities and expenses, indemnification or otherwise,
and the due and punctual performance of all other obligations of the Company to
the Holders or the Trustee all in accordance with the terms set forth in Article
Eleven and Article Twelve of the Indenture and (ii) in case of any extension of
time of payment or renewal of any Securities or any of such other obligations,
that the same will be promptly paid in full when due or performed in accordance
with the terms of the extension or renewal, whether at stated maturity, by
acceleration or otherwise.
The obligations of the Additional Guarantor to the Holders and
to the Trustee pursuant to the Guarantee and the Indenture are expressly set
forth and are expressly subordinated and subject in right of payment to the
prior payment in full of all Guarantor Senior Indebtedness of the Additional
Guarantor, to the extent and in the manner provided, in Article Eleven and
Article Twelve of the Indenture, and reference is hereby made to such Indenture
for the precise terms of the Guarantee therein made.
No past, present or future director, officer, incorporator,
employee or stockholder (or other person performing similar functions with
respect to a person who is not a corporation), as such, of the Additional
Guarantor shall have any liability under the Guarantee by reason of such
person's status as director, officer, incorporator, employee or stockholder (or
other person performing similar functions with respect to a person who is not a
corporation). Each holder of a Security by accepting a Security waives and
releases all such liability. The waiver and release are part of the
consideration for the issuance of the Guarantee.
The Guarantee shall not be valid or obligatory for any purpose
until the certificate of authentication on the Securities upon which the
Guarantee is noted shall have been executed by the Trustee under the Indenture
by the manual signature of one of its authorized officers.
JOHNSON PRODUCTS CO., INC.
By:
Name:
Title:
<PAGE>
EXHIBIT B
[FORM OF NOTATION ON SECURITY RELATING TO GUARANTEE]
SENIOR SUBORDINATED GUARANTEE
Dermablend, Inc. (the "Additional Guarantor") has
unconditionally and irrevocably guaranteed on a senior subordinated basis (such
guarantee being referred to herein as the "Guarantee") (i) the due and punctual
payment of the principal of and interest or premium or Liquidated Damages, if
any, on the Securities, whether on the Maturity Date, by acceleration, call for
redemption, upon a Change of Control Offer, upon an Asset Sale Offer or
otherwise, the due and punctual payment of interest on the overdue principal and
interest, if any, on the Securities and expenses, indemnification or otherwise,
and the due and punctual performance of all other obligations of the Company to
the Holders or the Trustee all in accordance with the terms set forth in Article
Eleven and Article Twelve of the Indenture and (ii) in case of any extension of
time of payment or renewal of any Securities or any of such other obligations,
that the same will be promptly paid in full when due or performed in accordance
with the terms of the extension or renewal, whether at stated maturity, by
acceleration or otherwise.
The obligations of the Additional Guarantor to the Holders and
to the Trustee pursuant to the Guarantee and the Indenture are expressly set
forth and are expressly subordinated and subject in right of payment to the
prior payment in full of all Guarantor Senior Indebtedness of the Additional
Guarantor, to the extent and in the manner provided, in Article Eleven and
Article Twelve of the Indenture, and reference is hereby made to such Indenture
for the precise terms of the Guarantee therein made.
No past, present or future director, officer, incorporator,
employee or stockholder (or other person performing similar functions with
respect to a person who is not a corporation), as such, of the Additional
Guarantor shall have any liability under the Guarantee by reason of such
person's status as director, officer, incorporator, employee or stockholder (or
other person performing similar functions with respect to a person who is not a
corporation). Each holder of a Security by accepting a Security waives and
releases all such liability. The waiver and release are part of the
consideration for the issuance of the Guarantee.
The Guarantee shall not be valid or obligatory for any purpose
until the certificate of authentication on the Securities upon which the
Guarantee is noted shall have been executed by the Trustee under the Indenture
by the manual signature of one of its authorized officers.
DERMABLEND, INC.
By:
Name:
Title:
Exhibit 21.1
Schedule of Subsidiaries
Carson Products Company (Delaware)
(Wholly-Owned Subsidiary of Carson, Inc.)
64 Ross Road
Savannah, GA 31405
Carson Management Co. (Georgia)
(Subsidiary of Carson Products Company)
c/o Carson Products Company
64 Ross Road
Savannah, GA 31405
Carson Holdings Limited (South Africa)
(52.8% owned by Carson Products Company)
427 15th Road
Randjiespark
Midrand
(Private Bag X103, Halfway House, 1685)
South Africa
Carson Products (Proprietary) Limited (South Africa)
(Wholly-Owned Subsidiary of Carson Holdings Limited)
427 15th Road
Randjiespark
Midrand
(Private Bag X103, Halfway House, 1685)
South Africa
Carson Botswana (PTY Limited) (Botswana)
(Wholly-Owned Subsidiary of Carson Products Company)
2nd Floor Finance House
Khama Crescent
Gabarone, Botswana
Carson Products West Africa Limited (Ghana)
(Wholly-Owned Subsidiary of Carson Holdings Limited)
Private Post Bag
Accra, Ghana
<PAGE>
Carson Products East Africa (Epz) Limited (Kenya)
(Wholly-Owned Subsidiary of Carson Holdings Limited)
c/o Kaplan & Stratton
P.O. Box 40111
Nairobi, Kenya
Carson UK, Limited (United Kingdom)
(Wholly-Owned Subsidiary of Carson Products Company)
43 Hagley Road
Stourbridge, West Midlands, DDY8 1QR
United Kingdom
Carson Products do Brasil (Brazil)
(Wholly-Owned Subsidiary of Carson Products Company)
c/o Araujo e Policastro
Av. Bridgadeiro Paria Lima, 2894
11th Floor
Sao Paulo, Brazil
Johnson Products Co., Inc. (Florida)
(Wholly-Owned Subsidiary of Carson Products Company)
8522 South Lafayette Avenue
Chicago, IL 60620
Johnson Products Export Sales, Inc. (inactive) (Illinois)
(Wholly-Owned Subsidiary of Johnson Products)
8522 South Lafayette Avenue
Chicago, IL 60620
IVAX Personal Care Products P.R., Inc. (inactive) (Puerto Rico)
(Wholly-Owned Subsidiary of Johnson Products)
8522 South Lafayette Avenue
Chicago, IL 60620
Johnson Products Co. (UK) Limited (inactive) (United Kingdom)
(Wholly-Owned Subsidiary of Johnson Products)
8522 South Lafayette Avenue
Chicago, IL 60620
Dermablend, Inc. (Delaware)
(Wholly-Owned Subsidiary of Johnson Products)
8522 South Lafayette Avenue
Chicago, IL 60620
INDEPENDENT AUDITORS' 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
February 26, 1999, appearing in this Annual Report on Form 10-K of Carson, Inc.
for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 31, 1999
<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, 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.0
<CASH> 28,706
<SECURITIES> 0
<RECEIVABLES> 45,410
<ALLOWANCES> 6,457
<INVENTORY> 22,825
<CURRENT-ASSETS> 95,653
<PP&E> 39,693
<DEPRECIATION> 3,928
<TOTAL-ASSETS> 267,463
<CURRENT-LIABILITIES> 40,879
<BONDS> 133,423
0
0
<COMMON> 151
<OTHER-SE> 69,009
<TOTAL-LIABILITY-AND-EQUITY> 267,463
<SALES> 150,706
<TOTAL-REVENUES> 150,706
<CGS> 84,509
<TOTAL-COSTS> 84,509
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,935
<INTEREST-EXPENSE> 13,649
<INCOME-PRETAX> 6,981
<INCOME-TAX> 4,299
<INCOME-CONTINUING> (36)
<DISCONTINUED> 0
<EXTRAORDINARY> 127
<CHANGES> 0
<NET-INCOME> 91
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
