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, 2000
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 March 31, 2000, 10,083,485 shares of the registrant's Class A Common
Stock, par value $0.01 per share, and 5,126,163 shares of the registrant's
Class C Common Stock, par value $0.01 per share were outstanding.
1
<PAGE>
CARSON, INC.
INDEX
Part I. Financial Information Page
Item 1.
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999................................ 3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2000 and 1999.......................... 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999........................... 5
Notes to Condensed Consolidated Financial Statements.............. 6-14
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 15-19
Part II. Other Information.................................................. 20
Item 6.
(a) Exhibits ....................................................... 20
(b) Reports on Form 8-K............................................. 20
Signatures.......................................................... 21
2
<PAGE>
CARSON, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
============== ==============
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,968 $ 8,740
Accounts receivable less allowances of $6,441 at March 31, 2000 and $5,490
at December 31, 1999 31,086 35,459
Inventories 26,515 28,332
Investments 2,290 2,435
Other current assets 543 507
-------------- --------------
Total current assets 65,402 75,473
PROPERTY, PLANT AND EQUIPMENT, net 36,682 37,190
INVESTMENTS 3,054 3,248
INTANGIBLES, net 122,784 124,285
OTHER ASSETS 6,205 6,452
-------------- --------------
TOTAL ASSETS $ 234,127 $ 246,648
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,580 $ 14,373
Accrued expenses 13,520 13,630
Payable to AM Cosmetics -- 2,000
Income taxes payable 486 566
-------------- --------------
Total current liabilities 21,586 30,569
LONG-TERM DEBT 140,962 138,314
OTHER LIABILITIES 3,704 3,769
MINORITY INTEREST IN SUBSIDIARY 18,973 20,127
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, 10,096,730 shares issued 101 101
Class B, nonvoting, $.01 par value, 2,000,000 shares authorized, 0 shares issued
and outstanding -- --
Class C, voting, $.01 par value, 13,000,000 shares authorized, 5,155,132 shares issued 52 52
Paid-in capital 81,500 81,500
Accumulated deficit (21,772) (18,208)
Accumulated other comprehensive losses (9,404) (8,001)
Notes receivable from shareholders, net of discount (1,238) (1,238)
Treasury stock, 13,245 shares of Class A common stock and 28,969 shares
of Class C common stock (337) (337)
-------------- --------------
Total stockholders' equity 48,902 53,869
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 234,127 $ 246,648
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
CARSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
===================================================
2000 1999
==================== ===================
<S> <C> <C>
Net sales $ 37,931 $ 41,653
Cost of goods sold 19,213 19,885
-------------------- -------------------
Gross profit 18,718 21,768
-------------------- -------------------
Marketing and selling expenses 10,216 10,324
General and administrative expenses 7,489 7,227
-------------------- -------------------
Operating expenses 17,705 17,551
-------------------- -------------------
Operating income 1,013 4,217
Interest expense (4,833) (4,277)
Other income, net 272 890
-------------------- -------------------
(Loss) income before income taxes and minority interest (3,548) 830
Provision for income taxes (60) (110)
-------------------- -------------------
(Loss) income before minority interest (3,608) 720
Minority interest in loss (earnings) of subsidiary 44 (540)
-------------------- -------------------
Net (loss) income $ (3,564) $ 180
==================== ===================
Basic and diluted net (loss) income per common share $ (0.23) $ 0.01
==================== ===================
Weighted average common shares outstanding 15,210 15,079
==================== ===================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
CARSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
=================== ===================
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (3,564) $ 180
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation and amortization 1,993 1,759
Interest deferred on secured term loan 2,648 897
Provision for doubtful accounts 388 334
Minority interest in (loss) earnings of subsidiary (44) 540
Other, net 77 364
Changes in operating assets and liabilities:
Accounts receivable 3,255 (2,252)
Inventories 1,291 341
Restricted cash -- 499
Other current assets (50) (283)
Accounts payable (8,581) (3,595)
Accrued liabilities 62 73
Income taxes payable (87) (604)
------------------- -------------------
Total adjustments 952 (1,927)
------------------- -------------------
Net cash used in operating activities (2,612) (1,747)
------------------- -------------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (882) (2,064)
------------------- -------------------
Net cash used in investing activities (882) (2,064)
------------------- -------------------
FINANCING ACTIVITIES:
Payment on A&J Cosmetics payable -- (6,171)
Principal payments on long-term debt -- (45)
Other, net -- (58)
------------------- -------------------
Net cash used in financing activities -- (6,274)
------------------- -------------------
EFFECT OF EXCHANGE RATE CHANGES (278) (743)
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,772) (10,828)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,740 28,706
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,968 $ 17,878
=================== ===================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
CARSON, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated interim financial statements of
Carson, Inc. (the "Company") presented herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted from these consolidated
financial statements pursuant to applicable rules and regulations of the
Securities and Exchange Commission. These financial statements should be read in
conjunction with the audited Consolidated Financial Statements and the notes
thereto of the Company's 1999 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, 2000 December 31, 1999
-------------------- --------------------
Raw materials $ 12,054 $ 12,658
Work-in-process 3,062 3,048
Finished goods 11,400 12,626
-------------------- --------------------
$ 26,515 $ 28,332
==================== ====================
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<PAGE>
3. Comprehensive Loss
The components of comprehensive loss are summarized as follows (in thousands):
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
---------------- ----------------
Net (loss) income $ (3,564) $ 180
Other comprehensive loss:
Change in equity due to foreign
currency translation adjustments (1,403) (1,230)
---------------- ----------------
Comprehensive loss $ (4,967) $ (1,050)
================ ================
4. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), as amended, will be required to
be adopted by the Company effective with the quarter ending March 31, 2001. The
Company has not yet completed its evaluation of the effect of this standard on
its financial statements.
5. Going Concern
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company reported a net loss of
$14.3 million for the year ended December 31, 1999 and a net loss of $3.6
million for the quarter ended March 31, 2000. The Company elected to defer the
monthly interest payment on its secured term loan six times in 1999 and three
times in 2000 and thereby added $7.6 million to the outstanding principal
balance, which totaled $65.3 million at December 31, 1999 and $68.0 million at
March 31, 2000.
On May 1, 2000, the Company paid approximately $4.5 million of interest,
including a $3.8 million semi-annual interest payment on the subordinated notes
and a $0.7 million monthly interest payment on the secured term loan. The
Company paid these interest payments from cash provided by operations.
Current operating budgets and cash flow projections indicate that the Company
will build cash throughout the second half of 2000. However, these earnings and
cash flow projections are based upon the successful launches of new,
reformulated or repackaged products and the achievement of net sales levels
substantially higher than historical net sales levels. As a result, management
cannot be certain it will have sufficient cash resources to meet its long-term
debt repayment requirements. Failure to meet debt repayment requirements would
result in the Company being in default of its loan covenants, in which case the
Company's long-term debt would become immediately due and payable.
These matters raise substantial doubt about the Company's ability to continue as
7
<PAGE>
a going concern. These consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
6. 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 %
Senior Subordinated Notes due 2007 (the "Notes"). The Notes are currently
guaranteed on a senior subordinated basis by Carson Products Company ("Carson
Products"), a direct wholly-owned subsidiary of the Company. Johnson Products
Co., Inc. ("Johnson Products"), and Dermablend, Inc. ("Dermablend"), formerly
indirect wholly-owned subsidiaries of the Company, were merged into Carson
Products during 1999. The following tables present condensed consolidating
financial information for the Company, the guarantor subsidiary, the
non-guarantor subsidiaries of the Company (other than inconsequential
non-guarantor subsidiaries) and the eliminations necessary to arrive at the
consolidated financial statements of the Company and its subsidiaries. Separate
financial statements for the guarantor subsidiary are not included and the
guarantor subsidiary is not filing separate reports under the Securities
Exchange Act of 1934, as amended, because the guarantor subsidiary has fully and
unconditionally guaranteed the Notes, and separate financial statements and
other disclosures concerning the guarantor subsidiary are not deemed material to
investors.
Non-guarantor subsidiaries include Carson Holdings, Limited ("Carson South
Africa"), Carson UK Limited ("Carson UK") and Carson Management Company. Carson
UK is an indirect wholly-owned subsidiary of the Company. Carson South Africa,
an indirect 52.5%-owned non-guarantor subsidiary of the Company, 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 Management Company is a direct majority-owned
subsidiary of the Company.
8
<PAGE>
Consolidating Statement of Operations for the Three Months Ended March 31, 2000
<TABLE>
<CAPTION>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiary subsidiaries Eliminations Carson, Inc.
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 27,420 $ 10,511 $ -- $ 37,931
Cost of goods sold -- 13,509 5,704 -- 19,213
--------------------------------------------------------------------------------
Gross profit -- 13,911 4,807 -- 18,718
Marketing and selling expenses -- 7,130 3,086 -- 10,216
General and administrative expenses -- 5,792 1,697 -- 7,489
--------------------------------------------------------------------------------
Operating income -- 989 24 -- 1,013
Other income (expense) -- (4,665) 104 -- (4,561)
Equity in subsidiary earnings (net of taxes) (3,564) -- -- 3,564 --
--------------------------------------------------------------------------------
Income (loss)before income taxes and
minority interest (3,564) (3,676) 128 3,564 (3,548)
Income taxes -- -- (60) -- (60)
--------------------------------------------------------------------------------
Income (loss) before minority interest (3,564) (3,676) 68 3,564 (3,608)
Minority interest -- -- 44 -- 44
--------------------------------------------------------------------------------
Net income (loss) $ (3,564) $ (3,676) $ 112 $ 3,564 $ (3,564)
================================================================================
</TABLE>
9
<PAGE>
Consolidating Statement of Operations for the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 income -- 2,413 1,804 -- 4,217
Other income (expense) -- (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>
10
<PAGE>
Consolidating Balance Sheet as of March 31, 2000
<TABLE>
<CAPTION>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiary subsidiaries Eliminations Carson, Inc.
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash $ ---- $ ---- $ 4,968 $ ---- $ 4,968
Accounts receivable, net 646 21,236 13,212 (4,008) 31,086
Inventories, net ---- 18,923 7,592 ---- 26,515
Investments ---- ---- 2,290 ---- 2,290
Other current assets ---- 348 195 ---- 543
Property, plant and equipment, net ---- 28,208 8,509 (35) 36,682
Investments ---- ---- 3,054 ---- 3,054
Intangible assets, net and other assets ---- 118,895 10,094 ---- 128,989
Investment in subsidiary 48,306 38,864 ---- (87,170) ----
---------------------------------------------------------------------
Total assets $ 48,952 $ 226,474 $ 49,914 $ (91,213) $ 234,127
=====================================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ ---- $ 4,511 $ 7,077 $ (4,008) $ 7,580
Other current liabilities ---- 11,305 2,701 ---- 14,006
Long-term debt ---- 140,962 ---- ---- 140,962
Other liabilities 50 21,984 643 ---- 22,677
Common stock and paid in capital 81,653 28,616 42,831 (71,447) 81,653
Other equity accounts (10,979) (18,127) (13,394) 31,521 (10,979)
Retained earnings (Accumulated deficit) (21,772) 37,223 10,056 (47,279) (21,772)
---------------------------------------------------------------------
Total liabilities and stockholders' equity $ 48,952 $ 226,474 $ 49,914 $ (91,213) $ 234,127
=====================================================================
</TABLE>
11
<PAGE>
Consolidating Balance Sheet as of December 31, 1999
<TABLE>
<CAPTION>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiary subsidiaries Eliminations Carson, Inc.
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash $ ---- $ 3,395 $ 5,345 $ ---- $ 8,740
Accounts receivable, net 646 25,171 13,990 (4,348) 35,459
Inventories, net ---- 19,433 8,899 ---- 28,332
Investments ---- ---- 2,435 ---- 2,435
Other current assets ---- 268 239 ---- 507
Property, plant and equipment, net ---- 27,933 9,292 (35) 37,190
Investments ---- ---- 3,248 ---- 3,248
Intangible assets, net and other assets ---- 120,165 10,572 ---- 130,737
Investment in subsidiary 53,273 41,413 ---- (94,686) ----
---------------------------------------------------------------------
Total assets $ 53,919 $ 237,778 $ 54,020 $ (99,069) $ 246,648
=====================================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ ---- $ 12,794 $ 7,927 $ (4,348) $ 16,373
Other current liabilities ---- 10,857 3,339 ---- 14,196
Long-term debt ---- 138,314 ---- ---- 138,314
Other liabilities 50 23,148 698 ---- 23,896
Common stock and paid in capital 81,653 28,616 42,831 (71,447) 81,653
Other equity accounts (9,576) (16,728) (11,075) 27,803 (9,576)
Retained earnings (Accumulated deficit) (18,208) 40,777 10,300 (51,077) (18,208)
---------------------------------------------------------------------
Total liabilities and stockholders' equity $ 53,919 $ 237,778 $ 54,020 $ (99,069) $ 246,648
=====================================================================
</TABLE>
12
<PAGE>
Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2000
<TABLE>
<CAPTION>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiary subsidiaries Eliminations Carson, Inc.
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss) $ (3,564) $ (3,676) $ 112 $ 3,564 $ (3,564)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization ---- 1,635 358 ---- 1,993
Interest deferred on secured term loan ---- 2,648 ---- ---- 2,648
Minority interest in earnings of
subsidiary ---- ---- (44) ---- (44)
Other, net 3,564 281 184 (3,564) 465
Changes in operating assets and
liabilities ---- (3,728) (382) ---- (4,110)
----------------------------------------------------------------------------
Total adjustments 3,564 836 116 (3,564) 952
----------------------------------------------------------------------------
Net cash provided by (used in )
operating activities ---- (2,840) 228 ---- (2,612)
----------------------------------------------------------------------------
Investing Activities:
Additions to property, plant and
equipment ---- (855) (27) ---- (882)
----------------------------------------------------------------------------
Net cash used in investing activities ---- (855) (27) ---- (882)
----------------------------------------------------------------------------
Financing Activities:
Intercompany dividends ---- 300 (300) ---- ----
----------------------------------------------------------------------------
Net cash provided by financing activities ---- 300 (300) ---- ----
----------------------------------------------------------------------------
Effect of Exchange Rate Changes ---- ---- (278) ---- (278)
----------------------------------------------------------------------------
Net decrease in Cash and Cash Equivalents ---- (3,395) (377) ---- (3,772)
Cash and Cash Equivalents at Beginning of
Period ---- 3,405 5,335 ---- 8,740
----------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ ---- $ 10 $ 4,958 $ ---- $ 4,968
============================================================================
</TABLE>
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<PAGE>
Consolidating Statement of Cash Flows for the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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>
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<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, 2000 as well as other
public documents of the Company contain forward-looking statements which involve
risks and uncertainties, including (i) the proposed acquisition of the Company,
set forth in an Agreement and Plan of Merger among the Company, Cosmair, Inc.
("Cosmair") and its wholly-owned subsidiary, Crayon Acquisition Corp., pursuant
to which Cosmair, will acquire the Company in a two-step transaction, (ii) the
Company's plans to introduce new products and product enhancements, (iii) the
Company's marketing, distribution and manufacturing expansion plans, (iv) future
financial performance, (v) cash flows from operations and (vi) capital
expenditures. 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, 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, (f) failure to satisfy the conditions to the
pending merger transaction prior to the July 31, 2000 termination date, and (g)
the factors giving rise to the statements contained in the Independent Auditors'
Report on the Company's financial statements for the year ended December 31,
1999 included in the Company's Annual Report on Form 10-K, which was filed with
the SEC on April 14, 2000 (as further described herein). The Company assumes no
responsibility to update forward-looking information contained herein.
General
The Company is a manufacturer and marketer of hair care and shaving products.
The majority of the Company's net sales are derived from five categories of the
health and beauty aids market: chemicals (hair relaxers and texturizers), hair
color, men's depilatory products, hair dress/conditioning and combout/oil sheen
products.
15
<PAGE>
In the quarters ended March 31, 2000 and 1999, 31.7% and 29.5%, 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 $ 25,906 68.3% $ 28,968 69.5%
South Africa 8,864 23.4 8,608 20.7
Europe 1,647 4.3 2,360 5.7
Other International 1,514 4.0 1,717 4.1
---------------------------------------------------------------------------
Total $ 37,931 100.0% $ 41,653 100.0%
Most of the Company's sales are recorded in United States Dollars. However,
sales by Carson South Africa to South Africa, Botswana, Lesotho, Namibia and
Swaziland are denominated in South African Rand, and sales by Carson South
Africa's subsidiary in Ghana ("Carson Ghana") are denominated in Ghanian Cedis.
The Company is therefore exposed to foreign currency price risk as the exchange
rates of the rand and the cedi fluctuate, and there is a potential for gains or
losses on the consolidated level. 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. 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. Gains and losses from foreign currency transactions are
included in other income in the consolidated statement of operations.
Results of Operations
Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 1999
Net Sales. Consolidated net sales for the quarter ended March 31, 2000 were
$37.9 million, a decrease of $3.7 million, or 8.9%, from net sales for the
quarter ended March 31, 1999 of $41.7 million. This decrease is summarized as
follows (dollars are in thousands):
Quarter Ended Quarter Ended
March 31, 2000 March 31, 1999 % Change
---------------------------------------------------
Domestic Hair Care $ 20,476 $ 24,921 (17.8)
Export 3,161 4,078 (22.5)
Dermablend Group 5,430 4,046 34.2
South Africa 8,864 8,608 3.0
-------------------------------------
Consolidated $ 37,931 $ 41,653 (8.9)
=====================================
16
<PAGE>
Domestic hair care net sales above include domestic sales of Carson and Johnson
hair care products. Carson products include the principal brands Dark & Lovely,
Excelle, Beautiful Beginnings, Dark & Natural, Magic and Let's Jam. Johnson
products include the principal brands Gentle Treatment, Ultra Sheen,
Sta-Sof-Fro, Ultra Star, Classy Curl and Curly Perm. Export includes net sales
of Carson and Johnson hair care products in Europe and other international
markets, excluding Africa. Dermablend Group net sales includes sales of
Dermablend corrective cosmetics, Posner cosmetics and Dark and Lovely Cosmetics.
Domestic net sales of Carson brands decreased to $11.0 million in the first
quarter of 2000 from $15.3 million in the first quarter of 1999. Domestic net
sales of Carson relaxers, hair colors, maintenance products and shaving products
were down compared to the first quarter of 1999. The decrease in relaxers and
hair colors includes a charge of $1.6 million to net sales in 2000 for
anticipated returns of Dark and Lovely relaxers and hair colors resulting from
the relaunch of these products.
Domestic net sales of Johnson brands decreased to $9.4 million in the first
quarter of 2000 from $9.7 million in the first quarter of 1999. Net sales of
Johnson relaxers were down slightly while net sales of Johnson hair colors and
maintenance products were up.
Export net sales were down in the first quarter of 2000 compared to the first
quarter of 1999 primarily due to decreased sales of Carson brands in Europe.
Net sales of the Dermablend Group increased 34.2% to $5.4 million in the first
quarter of 2000 compared to $4.0 million in the first quarter of 1999 due to
higher net sales of Dermablend and Posner cosmetics.
Net sales in South Africa increased 3.0% to $8.9 million in the first quarter of
2000 compared to the first quarter of 1999.
Gross Profit. Consolidated gross profit was $18.7 million in the quarter ended
March 31, 2000 compared to $21.8 million in the quarter ended March 31, 1999, a
decrease of $3.1 million, or 14.0%. Gross margin was 49.4% in 2000 compared to
52.3% in 1999. This decrease was primarily attributable to the $1.6 million
charge to net sales recorded in 2000 for anticipated returns of relaxer and hair
color products resulting from the relaunch. In addition, gross margins were
somewhat lower in South Africa and the Dermablend Group, due primarily to higher
product costs.
Marketing and Selling Expenses. Marketing and selling expenses decreased
slightly $10.2 million in the quarter ended March 31, 2000 from $10.3 million in
the quarter ended March 31, 1999. This change consists of reduced spending on
domestic hair care products offset by higher spending in South Africa and the
Dermablend Group. As a percentage of net sales, marketing and selling expenses
increased to 26.9% during 2000 from 24.8% during 1999.
General and Administrative Expense. General and administrative expenses were
$7.5 million for the first quarter of 2000 compared to $7.2 million for the
first quarter of 1999, an increase of $0.3 million, or 3.6%. The increase
resulted primarily from higher depreciation and computer expenses and also $0.1
million of fees associated with the proposed acquisition of the Company by
L'Oreal. As a percentage of net sales, general and administrative expenses
17
<PAGE>
increased to 40.0% during 2000 from 17.4% during 1999. This percentage increase
is primarily due to the $1.6 million charged to net sales in 2000 for Dark and
Lovely relaxer and hair color returns as well as overall reduced net sales in
2000 of Carson products.
Operating Income. As a result of the above changes, operating income decreased
to $1.0 million in the quarter ended March 31, 2000 from $4.2 million in the
quarter ended March 31, 1999.
Interest Expense. Interest expense increased to $4.8 million in the quarter
ended March 31, 2000 from $4.3 million in the quarter ended March 31, 1999. The
increased interest expense was the result of increased debt and higher interest
rates in the first quarter of 2000 compared to the first quarter of 1999. The
Company deferred interest payments on its secured term loan in January, February
and March of 2000 and therefore paid an annual interest rate of 16% for these
months compared to an annual rate of 13% for the first quarter of 1999, when all
interest was paid in cash monthly. In addition, throughout 1999 the Company
deferred the monthly interest payment on this debt six times, thereby adding
$5.0 million to the outstanding principal balance.
Other Income. Other income decreased to $0.3 million for the quarter ended March
31, 2000 from $0.9 million for the quarter ended March 31, 1999. The decrease
was primarily due to lower interest income on cash balances in South Africa.
Provision for Taxes. The provision for income taxes decreased to $60,000 in the
quarter ended March 31, 2000 compared to $110,000 in the quarter ended March 31,
1999. These tax provisions were calculated on the earnings of the Company's
foreign subsidiaries. The Company did not record tax benefits, or the related
deferred tax assets, on losses incurred by its domestic subsidiaries.
Liquidity and Capital Resources
In the first quarter of 2000 the Company's cash balance decreased by $3.8
million, to $5.0 million at March 31, 2000 from $8.7 million at December 31,
1999. Net cash flow used in operations was $2.6 million. Cash was used primarily
to decrease accounts payable, including a $2.0 million payment to settle a
dispute with AM Cosmetics. Cash was provided by collections of accounts
receivable and reductions of inventories.
Net cash used in investing activities in the first quarter of 2000 consisted of
capital expenditures of $0.9 million. These capital expenditures related
primarily to improvements at the Company's production facilities in Chicago and
Savannah.
The cash balance was adversely impacted in 2000 by continued devaluation of the
South African Rand. The rand devalued approximately 6.3%, from 6.16 rand per
dollar at December 31, 1999 to 6.55 rand per dollar at March 31, 2000. Due to
this devaluation, the cash balances held in South Africa decreased by $0.3
million when converted to U.S. dollars.
As discussed earlier, the Company deferred the monthly interest payment on its
Secured Term Loan six times in 1999 and thereby added $5.0 million to the
principal balance. The Company deferred the monthly interest payment three
additional times in 2000 (and can defer such monthly interest payments up to
three more times during the remainder of 2000) and added another $2.6 million to
the outstanding principal balance of the Secured Term Loan, which totaled $68.0
million at March 31, 2000.
18
<PAGE>
On May 1, 2000, the Company paid approximately $4.5 million of interest,
including a $3.8 million semi-annual interest payment on the subordinated notes
and a $0.7 million monthly interest payment on the Secured Term Loan. The
Company paid these interest payments from cash provided by operations.
Current operating budgets and cash flow projections indicate that the Company
will build cash throughout the second half of 2000. However, these earnings and
cash flow projections are based upon the successful launches of new,
reformulated or repackaged products and the achievement of sales levels
substantially higher than historical sales levels. As a result, management
cannot be certain it will have sufficient cash resources to meet its long-term
debt repayment requirements. Failure to meet debt repayment requirements would
result in the Company being in default of its loan covenants, in which case the
Company's long-term debt would become immediately due and payable.
The Independent Auditors' Report on the Company's financial statements for the
year ended December 31, 1999 included in the Company's Annual Report on Form
10-K, which was filed with the SEC on April 14, 2000, contained a paragraph
which indicated substantial doubt about the Company's ability to continue as a
going concern.
19
<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.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CARSON, INC.
/s/ Robert W. Pierce Date: May 15 , 2000
Robert W. Pierce
Executive Vice President, Finance
Chief Financial Officer and Corporate Secretary
(Principal Accounting and Financial Officer)
21
<PAGE>
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of the Company for the period ended March 31,
2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 4,968
<SECURITIES> 0
<RECEIVABLES> 37,527
<ALLOWANCES> 6,441
<INVENTORY> 26,515
<CURRENT-ASSETS> 65,402
<PP&E> 44,079
<DEPRECIATION> 7,397
<TOTAL-ASSETS> 234,127
<CURRENT-LIABILITIES> 21,586
<BONDS> 140,962
0
0
<COMMON> 153
<OTHER-SE> 48,749
<TOTAL-LIABILITY-AND-EQUITY> 234,127
<SALES> 37,931
<TOTAL-REVENUES> 37,931
<CGS> 19,213
<TOTAL-COSTS> 19,213
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 388
<INTEREST-EXPENSE> 4,833
<INCOME-PRETAX> (3,548)
<INCOME-TAX> (60)
<INCOME-CONTINUING> (3,564)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,564)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
