SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______ to _______
Commission file number 1-12271
CARSON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1428605
(State or other jurisdiction of (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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
At April 15, 1999, 9,816,162 shares of the registrant's Class A Common Stock,
par value $0.01 per share, and 5,304,700 shares of the registrant's Class
C Common Stock, par value $0.01 per share were outstanding.
<PAGE>
CARSON, INC.
INDEX
Part I. Financial Information Page
Item 1.
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998..................................3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998............................4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998............................5
Notes to Condensed Consolidated Financial Statements...............6-12
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................13-16
Part II. Other Information...................................................17
Item 6.
(a) Exhibits ........................................................17
(b) Reports on Form 8-K..............................................17
Signatures...........................................................18
2
<PAGE>
CARSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(In thousands, except share and per share data)
<TABLE>
<S> <C> <C>
March 31, December 31,
ASSETS 1999 1998
============ ============
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 17,878 $ 28,706
Accounts receivable less allowances of $6,268 and $6,457 at March 31, 1999 and
December 31, 1998, respectively 40,305 38,953
Inventories 22,065 22,825
Restricted cash 4,001 4,500
Other current assets 935 669
------------ ------------
Total current assets 85,184 95,653
PROPERTY, PLANT AND EQUIPMENT, net 36,729 35,765
INTANGIBLES, net 127,530 129,183
OTHER ASSETS 6,472 6,862
------------ ------------
TOTAL ASSETS $ 255,915 $ 267,463
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,850 $ 12,584
Due for A&J Cosmetics -- 6,355
Accrued expenses 19,343 19,306
Income taxes payable 1,803 2,508
Current maturities of long-term debt -- 126
------------ ------------
Total current liabilities 29,996 40,879
LONG-TERM DEBT 134,270 133,423
OTHER LIABILITIES 3,315 3,345
MINORITY INTEREST IN SUBSIDIARY 20,241 20,656
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, 9,816,162 and
7,926,485 shares issued as of March 31, 1999 and December 31, 1998, respectively 98 79
Class B, nonvoting, $.01 par value, 2,000,000 shares authorized, 0 and 1,859,677 shares
issued and outstanding as of March 31, 1999 and December 31, 1998, respectively -- 19
Class C, voting, $.01 par value, 13,000,000 shares authorized, 5,334,700 and 5,304,700
shares issued as of March 31, 1999 and December 31, 1998, respectively 53 53
Paid-in capital 80,970 80,970
Accumulated deficit (3,740) (3,920)
Accumulated other comprehensive losses (7,725) (6,495)
Notes receivable from shareholders, net of discount (1,226) (1,209)
Treasury stock, 13,245 shares of Class A common stock and 28,969 shares of Class C
common stock (337) (337)
------------ ------------
Total stockholders' equity 68,093 69,160
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 255,915 $ 267,463
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
CARSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands, except per share data)
<TABLE>
<S> <C> <C>
Three Months Ended March 31,
==============================
1999 1998
============ ============
Net sales $ 41,653 $ 31,797
Cost of goods sold 19,885 15,378
------------ ------------
Gross profit 21,768 16,419
------------ ------------
Marketing and selling expenses 10,324 8,691
General and administrative expenses 7,227 5,948
------------ ------------
Operating expenses 17,551 14,639
------------ ------------
Operating income 4,217 1,780
Interest expense (4,277) (2,837)
Other income, net 890 539
------------ ------------
Income (loss) before income taxes and minority interest 830 (518)
(Provision for) benefit from income taxes (110) 335
------------ ------------
Income (loss) before minority interest 720 (183)
Minority interest in earnings of subsidiary (540) (318)
------------ ------------
Net income (loss) $ 180 $ (501)
============ ============
Basic and diluted net income (loss) per common share $ 0.01 $ (0.03)
============ ============
Weighted average common shares outstanding 15,079 14,993
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
CARSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands)
<TABLE>
<S> <C> <C>
Three Months Ended March 31,
1999 1998
============ ============
OPERATING ACTIVITIES:
Net income (loss) $ 180 $ (501)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 1,759 1,608
Provision for doubtful accounts 334 103
Minority interest in earnings of subsidiary 540 318
Other, net 364 (298)
Changes in operating assets and liabilities:
Accounts receivable (2,252) (2,066)
Inventories 341 (4,075)
Restricted cash 499 --
Other current assets (283) (7)
Accounts payable (3,595) 1,585
Accrued liabilities 73 2,013
Income taxes payable (604) 383
------------ ------------
Total adjustments (2,824) (436)
------------ ------------
Net cash used in operating activities (2,644) (937)
------------ ------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,064) (1,090)
------------ ------------
Net cash used in investing activities (2,064) (1,090)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 897 2,000
Principal payments on long-term debt (45) (3,089)
Payment on A&J Cosmetics payable (6,171) (5,416)
Other, net (58) (327)
------------ ------------
Net cash used in financing activities (5,377) (6,832)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES (743) --
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,828) (8,859)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28,706 14,043
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,878 $ 5,184
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
CARSON, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated interim financial statements of
Carson, Inc. (the "Company") presented herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted from these consolidated
financial statements pursuant to applicable rules and regulations of the
Securities and Exchange Commission. These financial statements should be read in
conjunction with the audited Consolidated Financial Statements and the notes
thereto of the Company's 1998 Annual Report on Form 10-K. In the opinion of
management, the accompanying unaudited financial statements contain all normal
recurring adjustments necessary to present fairly the Company's financial
position, results of operations and cash flows at the dates and for the periods
presented. Interim results of operations are not necessarily indicative of the
results to be expected for a full year. Certain prior period amounts have been
reclassified to conform with the current period presentation.
2. Inventories
Inventories are summarized as follows (in thousands):
March 31, 1999 December 31, 1998
----------------------- -----------------------
Raw materials $ 9,751 $ 9,979
Work-in-process 2,144 1,938
Finished goods 10,170 10,908
----------------------- -----------------------
$ 22,065 $ 22,825
======================= =======================
3. Comprehensive Income (Loss)
The components of comprehensive income (loss) are summarized as follows (in
thousands):
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
---------------- ----------------
Net income (loss) $ 180 $ (501)
Other comprehensive loss:
Change in equity due to foreign currency
translation adjustments (1,230) (138)
---------------- ----------------
Comprehensive loss $ (1,050) $ (639)
================ ================
6
<PAGE>
4. New Accounting Pronouncements
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.
5. 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 include Carson Holdings Limited ("Carson South
Africa") and Carson UK Limited ("Carson UK"). Carson UK is an indirect
wholly-owned subsidiary of Carson, Inc. Carson South Africa, an indirect
52.6%-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. Carson Management
Company is a direct majority-owned subsidiary of Carson, Inc.
7
<PAGE>
Consolidating Statement of Operations for the Three Months Ended March 31, 1999
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
-------------- -------------- -------------- -------------- --------------
Net sales $ ---- $ 30,684 $ 10,969 $ ----- $ 41,653
Cost of goods sold ---- 14,441 5,444 ---- 19,885
-------------- -------------- -------------- -------------- --------------
Gross profit ---- 16,243 5,525 ---- 21,768
Marketing and selling expenses ---- 8,153 2,171 ---- 10,324
General and administrative expenses ---- 5,677 1,550 ---- 7,227
-------------- -------------- -------------- -------------- --------------
Operating (loss) income ---- 2,413 1,804 ---- 4,217
Other income, net ---- (4,062) 675 ---- (3,387)
Equity in subsidiary earnings (net of taxes) 180 ---- ---- (180) ----
-------------- -------------- -------------- -------------- --------------
Income (loss) before income taxes and
minority interest 180 (1,649) 2,479 (180) 830
Income taxes ---- 611 (721) ---- (110)
-------------- -------------- -------------- -------------- --------------
Income (loss) before minority interest 180 (1,038) 1,758 (180) 720
Minority interest ---- ---- (540) ---- (540)
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 180 $ (1,038) $ 1,218 $ (180) $ 180
============== ============== ============== ============== ==============
</TABLE>
Consolidating Statement of Operations for the Three Months Ended March 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
-------------- -------------- -------------- -------------- --------------
Net sales $ ---- $ 22,221 $ 9,576 $ ---- $ 31,797
Cost of goods sold ---- 10,267 5,111 ---- 15,378
-------------- -------------- -------------- -------------- --------------
Gross profit ---- 11,954 4,465 ---- 16,419
Marketing and selling expenses ---- 7,261 1,430 ---- 8,691
General and administrative expenses ---- 4,842 1,106 ---- 5,948
-------------- -------------- -------------- -------------- --------------
Operating (loss) income ---- (149) 1,929 ---- 1,780
Other income, net ---- (2,620) 322 ---- (2,298)
Equity in subsidiary earnings (net of taxes) (501) ---- ---- 501 ----
-------------- -------------- -------------- -------------- --------------
Income (loss) before income taxes and
minority interest (501) (2,769) 2,251 501 (518)
Income taxes ---- 1,071 (736) ---- 335
-------------- -------------- -------------- -------------- --------------
Income (loss) before minority interest (501) (1,698) 1,515 501 (183)
Minority interest ---- ---- (318) ---- (318)
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ (501) $ (1,698) $ 1,197 $ 501 $ (501)
============== ============== ============== ============== ==============
</TABLE>
8
<PAGE>
Consolidating Balance Sheet as of March 31, 1999
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
-------------- -------------- -------------- -------------- --------------
Assets
Current assets:
Cash $ ---- $ 8,044 $ 9,834 $ ---- $ 17,878
Accounts receivable, net 827 29,711 13,235 (3,468) 40,305
Inventories, net ---- 13,677 8,388 ---- 22,065
Restricted cash ---- 4,001 ---- ---- 4,001
Other current assets ---- 464 471 ---- 935
Property, plant and equipment, net ---- 26,963 9,802 (36) 36,729
Intangible assets, net and other assets ---- 123,560 10,442 ---- 134,002
Investment in subsidiary 67,266 42,753 ---- (110,019) ----
-------------- -------------- -------------- -------------- --------------
Total assets $ 68,093 $249,173 $ 52,172 $(113,523) $255,915
============== ============== ============== ============== ==============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ ---- $ 6,799 $ 5,525 $ (3,474) $ 8,850
Other current liabilities ---- 17,703 3,443 ---- 21,146
Long-term debt ---- 134,129 141 ---- 134,270
Other liabilities ---- 23,246 310 ---- 23,556
Common stock and paid in capital 81,121 28,470 39,320 (67,790) 81,121
Other equity accounts (9,288) (16,436) (10,937) 27,373 (9,288)
Retained earnings (Accumulated deficit) (3,740) 55,262 14,370 (69,632) (3,740)
-------------- -------------- -------------- -------------- --------------
Total liabilities and stockholders' equity $ 68,093 $249,173 $ 52,172 $(113,523) $255,915
============== ============== ============== ============== ==============
</TABLE>
9
<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>
10
<PAGE>
Consolidating Statement of Cash Flows for the Three Months Ended March 31, 1999
<TABLE>
<S> <C> <C> <C> <C> <C>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
-------------- -------------- -------------- -------------- --------------
Operating Activities:
Net income (loss) $ 180 $ (1,039) $ 1,219 $ (180) $ 180
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization ---- 1,439 320 ---- 1,759
Minority interest in earnings of
subsidiary ---- ---- 540 ---- 540
Other, net (180) 561 137 180 698
Changes in operating assets and
liabilities ---- (5,247) (574) ---- (5,821)
-------------- -------------- -------------- -------------- --------------
Total adjustments (180) (3,247) 423 180 (2,824)
-------------- -------------- -------------- -------------- --------------
Net cash provided by (used in )
operating activities ---- (4,286) 1,642 ---- (2,644)
-------------- -------------- -------------- -------------- --------------
Investing Activities:
Additions to property, plant and
equipment ---- (1,237) (827) ---- (2,064)
-------------- -------------- -------------- -------------- --------------
Net cash used in investing activities ---- (1,237) (827) ---- (2,064)
-------------- -------------- -------------- -------------- --------------
Financing Activities:
Proceeds from long-term borrowings ---- 805 92 ---- 897
Principal payments on debt ---- ---- (6,216) ---- (6,216)
Other ---- 441 (499) ---- (58)
-------------- -------------- -------------- -------------- --------------
Net cash provided by financing activities ---- 1,246 (6,623) ---- (5,377)
-------------- -------------- -------------- -------------- --------------
Effect of Exchange Rate Changes ---- ---- (743) ---- (743)
-------------- -------------- -------------- -------------- --------------
Net increase in Cash and Cash Equivalents ---- (4,277) (6,551) ---- (10,828)
Cash and Cash Equivalents at Beginning of
Period ---- 12,320 16,386 ---- 28,706
-------------- -------------- -------------- -------------- --------------
Cash and Cash Equivalents at End of Period $ ---- $ 8,043 $ 9,835 $ ---- $ 17,878
============== ============== ============== ============== ==============
</TABLE>
11
<PAGE>
Consolidating Statement of Cash Flows for the Three Months Ended March 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) $ (501) $ (1,698) $ 1,197 $ 501 $ (501)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization ---- 1,293 315 ---- 1,608
Minority interest in earnings of
subsidiary ---- ---- 318 ---- 318
Other, net 501 332 (527) (501) (195)
Changes in operating assets and
liabilities ---- (276) (1,891) ---- (2,167)
-------------- -------------- -------------- -------------- --------------
Total adjustments 501 1,349 (1,785) (501) (436)
-------------- -------------- -------------- -------------- --------------
Net cash (used in) provided by
operating activities ---- (349) (588) ---- (937)
-------------- -------------- -------------- -------------- --------------
Investing Activities:
Additions to property, plant and
equipment ---- (847) (243) ---- (1,090)
-------------- -------------- -------------- -------------- --------------
Net cash (used in) provided by investing
activities ---- (847) (243) ---- (1,090)
-------------- -------------- -------------- -------------- --------------
Financing Activities:
Proceeds from long-term borrowings ---- 2,000 ---- ---- 2,000
Principal payments on long-term debt ---- (2,915) (5,590) ---- (8,505)
Other ---- (324) (3) ---- (327)
-------------- -------------- -------------- -------------- --------------
Net cash provided by (used in) financing
activities ---- (1,239) (5,593) ---- (6,832)
-------------- -------------- -------------- -------------- --------------
Net increase in Cash and Cash Equivalents ---- (2,435) (6,424) ---- (8,859)
-------------- -------------- -------------- -------------- --------------
Cash and Cash Equivalents at Beginning of
Period ---- 2,623 11,420 14,043
-------------- -------------- -------------- -------------- --------------
Cash and Cash Equivalents at End of Period $ ---- $ 188 $ 4,996 $ ---- $ 5,184
============== ============== ============== ============== ==============
</TABLE>
12
<PAGE>
Management's Discussion and Analysis of
Results of Operations and Financial Condition
OVERVIEW
Forward-looking Statements
This report on Form 10-Q for the quarter ended March 31, 1999 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 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 five categories of the ethnic health and beauty aids
market: hair relaxers and texturizers, hair color, men's depilatory products,
hair care maintenance products and combout/oil sheens.
13
<PAGE>
In the quarters ended March 31, 1999 and 1998, 29.5% and 35.1%, 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:
Quarter Ended % of Quarter Ended % of
March 31,1999 Total March 31,1998 Total
- --------------------------------------------------------------------------------
Net sales to:
United States $ 29,364 70.5% $ 20,650 64.9%
South Africa 8,608 20.7 7,805 24.6
Europe 2,360 5.6 1,771 5.6
Other International 1,321 3.2 1,571 4.9
- --------------------------------------------------------------------------------
Total $ 41,653 100.0 % $ 31,797 100.0%
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
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.
Results of Operations
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998
Net Sales. Consolidated net sales for the quarter ended March 31, 1999 were
$41.7 million, an increase of $9.9 million, or 31.0%, over net sales for the
quarter ended March 31, 1998 of $31.8 million. This increase is summarized as
follows (dollars are in thousands):
Quarter Ended Quarter Ended
March 31, 1999 March 31, 1998 % Change
------------------ ------------------ ------------------
Carson Products $ 18,428 $ 18,511 0.0
Johnson Products 14,617 -- N/A
------------------ ------------------
US Ethnic 33,045 18,511 78.5
------------------ ------------------
South Africa 8,608 7,805 10.3
------------------ ------------------
Carson Ethnic 41,653 26,316 58.3
------------------ ------------------
Cutex -- 5,481 (100.0)
------------------ ------------------
Consolidated $ 41,653 $ 31,797 31.0
================== ==================
14
<PAGE>
The US Ethnic net sales above includes domestic sales and sales exported from
the U.S. of hair care and other ethnic products. For Carson Products, domestic
net sales of hair care products increased $0.8 million, or approximately 5.0%,
from the prior year quarter while export sales decreased $0.3 million, or
approximately 9.1%. Most of the increase in domestic hair care products was
in sales of hair color and shaving products.
The Johnson Products net sales above includes: $10.1 million of domestic sales
of hair care products, $0.6 million of net sales of cosmetics, $0.6 million of
export net sales and $3.3 million of net sales of Dermablend corrective
cosmetics.
Net sales in South Africa increased 10.3% to $8.6 million in the first quarter
of 1999 compared to the first quarter of 1998.
There were no net sales in 1999 of Cutex, which was sold in December 1998.
Gross Profit. Consolidated gross profit was $21.8 million in the quarter ended
March 31, 1999 compared to $16.4 million in the quarter ended March 31, 1998, an
increase of $5.3 million, or 32.6%. Gross margin was 52.3% in 1999 compared to
51.6% in 1998. This increase was attributable in part to increased plant
utilization in the Savannah manufacturing facility, where as in 1998 gross
margins were adversely impacted by reduced production volumes to lower inventory
balances at that time. Gross margins in 1999 also benefited from high margins
(typically in excess of 75%) of the Dermablend business, offset somewhat by
lower Johnson Products hair care margins resulting from discounted sales
pricing. Management intends to improve the Johnson Products gross margins in the
second half of 1999 by revising sales pricing terms. Carson South Africa
produced a gross profit of $4.3 million and a gross margin percentage of 49.9%
in the first quarter of 1999 compared to a gross profit of $3.6 million and a
gross margin percentage of 45.5% in the first quarter of 1998.
Marketing and Selling Expenses. Marketing and selling expenses increased $1.6
million, or 18.8%, to $10.3 million in the quarter ended March 31, 1999 from
$8.7 million in the quarter ended March 31, 1998. This increase consists of
higher spending resulting from the addition of Johnson Products and higher
spending at Carson South Africa offset by reduced spending on the Cutex, Dark
and Lovely Cosmetics and Salon Professional lines, all of which were being
promoted in the first quarter of 1998. As a percentage of net sales, marketing
and selling expenses decreased to 24.8% during 1999 from 27.3% during 1998.
General and Administrative Expense. General and administrative expenses were
$7.2 million for the first quarter of 1999 compared to $5.9 million for the
first quarter of 1998, an increase of $1.3 million, or 21.5%. The increase
resulted primarily from the addition of Johnson Products and consisted of
increases in amortization, salaries and fringe benefits, bad debt expense,
telephone expense, professional fees and insurance and taxes. As a percentage
of net sales, general and administrative expenses decreased to 17.4% during 1999
from 18.7% during 1998. This percentage decrease is primarily due to the
incremental net sales provided by the addition of Johnson Products without a pro
rata increase in overall general and administrative expenses.
Operating Income. As a result of the above changes, operating income increased
to $4.2 million in the quarter ended March 31, 1999 from $1.8 million in the
quarter ended March 31, 1998.
Interest Expense. Interest expense increased to $4.3 million in the quarter
ended March 31, 1999 from $2.8 million in the quarter ended March 31, 1998.
15
<PAGE>
The increased interest expense was the result of additional debt incurred
in 1998 to finance the Johnson Products acquisition.
Other Income. Other income increased to $0.9 million for the quarter ended March
31, 1999 from $0.5 million for the quarter ended March 31, 1998. The increase
was primarily due to higher interest income on cash balances in South Africa.
Provision for Taxes. The provision for income taxes increased to $0.1 million,
based on an effective rate of 13.3% in the quarter ended March 31, 1999 compared
to a benefit of $0.3 million, based on an effective rate of 64.7%, in the
quarter ended March 31, 1998.
Liquidity and Capital Resources
The Company has a Secured Term Loan outstanding, which 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. This option provides the Company
flexibility in meeting its cash needs in the near term. 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 (including stock in Carson
South Africa representing a 52.6% majority stake) 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 of any subsidiary.
In the three months ended March 31, 1999, the Company's cash balance decreased
by $10.8 million, to $17.9 million. Net cash flow used in operations was $2.6
million. Cash was used primarily to increase accounts receivable and to reduce
accounts payable.
Net cash used in investing activities in the three months ended March 31, 1999
consisted of capital expenditures of $2.1 million.
Net cash used in financing activities in the three months ended March 31, 1999
consisted primarily of $6.2 million of additional consideration paid by Carson
South Africa related to the 1997 purchase of A&J Cosmetics. Proceeds from
long-term borrowings of $897,000 includes $805,000 for capitalization of
interest on the Company's Secured Term Loan in lieu of cash payment. 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.
Year 2000 Computer Issue
The Company currently utilizes two computer information systems. The JD Edwards
financial package is used to support several financial applications. In its
distribution and manufacturing operations, the Company uses a software package
known as PRISM developed by MARCAM. The JD Edwards and PRISM packages run on an
IBM AS/400 computer and are currently not year 2000 compliant.
To replace the current systems and provide year 2000 compliance, management has
selected SAP, a single vendor, integrated business software package. SAP will
run on the Company's IBM AS/400 computer. The cost of conversion to SAP is
estimated to be approximately $1.7 million, including hardware, software and the
Company's commitment of internal resources. As of April 30, 1999, the Company
had incurred approximately $0.8 million of the total cost. Implementation is in
process. The initial phase, testing and training of the general user group have
been completed. The Company expects the installation to be completed during the
second quarter of 1999.
16
<PAGE>
CARSON, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to lawsuits incidental to its business. Management
believes that the ultimate resolution of these matters will not have a material
adverse impact on the business or financial condition and operations of the
Company.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits --
27 Financial data schedule.
(b) Reports on Form 8-K --
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CARSON, INC.
Date: May 17, 1999
/s/Robert W. Pierce
Executive Vice President, Finance
Chief Financial Officer and Corporate Secretary
(Principal Accounting and Financial Officer)
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of the Company for the period ended March 31,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 17,878
<SECURITIES> 0
<RECEIVABLES> 46,573
<ALLOWANCES> 6,268
<INVENTORY> 22,065
<CURRENT-ASSETS> 85,184
<PP&E> 41,243
<DEPRECIATION> 4,514
<TOTAL-ASSETS> 255,915
<CURRENT-LIABILITIES> 29,996
<BONDS> 134,270
0
0
<COMMON> 151
<OTHER-SE> 67,942
<TOTAL-LIABILITY-AND-EQUITY> 255,915
<SALES> 41,653
<TOTAL-REVENUES> 41,653
<CGS> 19,885
<TOTAL-COSTS> 19,885
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 334
<INTEREST-EXPENSE> 4,277
<INCOME-PRETAX> 830
<INCOME-TAX> 110
<INCOME-CONTINUING> 180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
