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, 1999
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 31, 2000 on The New York Stock
Exchange was: $ 33,124,595
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 31, 2000:
Common Stock - Class A, $0.01 Par Value 10,083,485 shares
Common Stock - Class C, $0.01 Par Value 5,126,163 shares
<PAGE>
Part I.
Item 1. Business
Forward Looking Statements
This report on Form 10-K for the year ended December 31, 1999 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
as further described herein, (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, and
(f) failure to satisfy the conditions to the pending merger transaction prior to
the July 31, 2000 termination date. 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 business. 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 Sheen, Sta-Sof-Fro, Posner, Ultra
Star, 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.
1
<PAGE>
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, 1999 the Company's direct subsidiaries were Carson Products Company and
Carson Management Company. Active indirect subsidiaries of the Company were
Carson Holdings Limited (South Africa), Carson Products Do Brasil, Carson UK
Ltd., 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
Proposed Sale of Company
On February 25, 2000, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Cosmair, Inc. ("Cosmair") and its wholly-owned
subsidiary, Crayon Acquisition Corp. ("Purchaser"), pursuant to which Cosmair, a
Delaware corporation wholly-owned by L'Oreal, S.A. of Paris, France, will
acquire the Company in a two-step transaction.
To implement the Merger Agreement, Purchaser on March 8, 2000 commenced a cash
tender offer to acquire all the issued and outstanding shares of Class A Common
Stock, par value $.01per share, of the Company (the "Class A Common Stock") at a
price of $5.20 per share net to the seller in cash (the "Offer"). Purchaser's
obligation to purchase shares of Class A Common Stock tendered pursuant to the
Offer is subject to the satisfaction of customary conditions, including the
expiration or termination of the applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") and the
Competition Act of the Republic of South Africa (the "S.A. Competition Act") and
the valid tender of a majority of the outstanding shares of Company Common Stock
(as defined below) on a fully-diluted basis. On March 22, 2000, Cosmair and the
2
<PAGE>
Company received a request for additional information and documentary material
from the U. S. Department of Justice ("DOJ") related to the proposed merger. The
requested materials are being compiled and will be submitted to the DOJ. If DOJ
clearance is obtained and the other conditions to the Offer are satisfied, any
and all shares tendered in the Offer must be purchased by Cosmair. The Board of
Directors of the Company recommended that all stockholders accept the Offer and
tender their shares pursuant to the Offer. The Merger Agreement may be
terminated by either party if the Offer is not consummated on or prior to July
31, 2000.
If the Offer is successfully completed, Purchaser will be merged with and into
the Company (the "Merger"), with the Company becoming a wholly-owned subsidiary
of Cosmair. Consummation of the Merger is subject to the approval of the
Company's stockholders. Cosmair and Purchaser have agreed in the Merger
Agreement to vote all shares of Class A Common Stock purchased in the Offer in
favor of the Merger. The Majority Stockholders (as defined below) will also be
required to vote their shares of Class C Common Stock, par value $.01 per share
of the Company ("Class C Common Stock" and, together with the Class A Common
Stock, the "Company Common Stock"), in favor of the Merger in the event that
they are not required to convert their shares of Class C Common Stock into
shares of Class A Common Stock and tender their shares to Purchaser pursuant to
the Stockholders Agreement, as described below. Any shares of Company Common
Stock not purchased in the Offer will be converted into the right to receive
$5.20 per share in cash, without interest.
To induce Cosmair and Purchaser to enter into the Merger Agreement, certain
stockholders of the Company (the "Majority Stockholders") entered into a
Stockholders Agreement, dated February 25, 2000, with the Company, Cosmair and
Purchaser (the "Stockholders Agreement"). Collectively, the Majority
Stockholders own shares of Company Common Stock representing approximately 48%
of the outstanding shares of Company Common Stock on a fully-diluted basis and
approximately 88% of the voting power of all outstanding shares of Company
Common Stock. In the Stockholder Agreement, the Majority Stockholders agreed,
among other things, (i) subject to at least 565,857 shares of Class A Common
Stock being tendered in the Offer, to convert their shares of Class C Common
Stock into shares of Class A Common Stock and to tender all of their shares of
Company Common Stock in the Offer, and (ii) in the event that they are not
required to so convert their shares of Class C Common Stock, to vote their
shares of Class C Common Stock in favor of the Merger.
Cosmair conditioned its willingness to enter into the Merger Agreement on the
Company's settlement of all disputes with AM Cosmetics arising out of any
business relationships between them. The Company entered into a settlement
agreement with AM Cosmetics on February 25, 2000. See Note 18 to the
consolidated financial statements for terms of the settlement.
Industry Overview
Ethnic Hair Care Business
Sales of ethnic hair care, cosmetics and skincare at retail was estimated,
according to Packaged Facts, an independent market research company (the
"Packaged Facts Report"), to be $1.6 billion in 1999. The ethnic hair care
market comprises 75%, or $1.2 billion, of the overall retail ethnic product
business. According to 1997 United States Census Data (Selected Social
Characteristics of the Population,) published by the United States Department of
3
<PAGE>
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 Caucasian population through the middle of the next
century. The combined purchasing power of African-Americans was 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.
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 are no independent
market data to support the size of the international sales, the Company believes
that the international market is significant.
Company Strengths
The Company was a leading supplier of products in three of the five hair care
categories in which it competes (chemicals, hair color and men's depilatory
products) for the 1999 year, according to Information Resources, Inc. ("IRI").
Since the acquisition of Johnson Products, the Company also competes in the hair
dress/conditioning and the combout/oil sheen categories. The Company believes it
has a number of competitive strengths, including its strong brand names,
dedicated sales force, broad distribution, R&D capabilities and experienced
management team.
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 brought 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, properly targeted advertising,
package design, reputation for innovation and focused commitment
to the unique needs of its consumers.
Experienced Sales Force and Broad Distribution. The Company
believes it has the largest direct sales force in the United
States retail ethnic hair care business. 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), 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.
4
<PAGE>
Focused Research and Development. The Company believes that its
heritage of technological innovation and its focused R&D effort
are important to maintaining its 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,
1999.
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
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
5
<PAGE>
Posner Hair Care Maintenance
Cosmetics
Ultra Star 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.
Approximately 8% of net sales in 1999 was allocated to advertising and consumer
promotions. The Company regularly advertises in magazines aimed at consumers of
African descent, such as Essence, Ebony, Black Enterprise and Jet, and in
targeted spot advertising on television and cable channels such as Black
Entertainment Television (BET) and engages in promotional activities and
in-store displays to introduce new products or attract new consumers. The
Company also uses its kit packaging format to conduct sampling programs for new
products.
Distribution and Sales
The Company's products are sold through five principal distribution channels in
the United States retail personal care market, as follows:
Mass Merchandisers. The Company's products are sold by mass
merchandisers, including Wal-Mart, K-Mart and Target.
Drug Chains. The Company's products are sold by drug chains,
including Walgreens, Rite-Aid and CVS.
Food Chains. The Company's products are sold by food chains,
including Winn Dixie and Kroger.
6
<PAGE>
Discount Chains. The Company's products are sold by discount
chains, including Family Dollar and Dollar General.
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.
Research and Development and Quality Control
The Company believes that the strength of its position in the hair care industry
is attributable, in part, to its tradition of technological innovation and its
focused R&D effort. Three of the 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.
7
<PAGE>
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.
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.
8
<PAGE>
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, Posner and Dermablend. The Company considers these and
its other marks and the name recognition associated with them 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.
Employees
As of December 31, 1999, the Company employed approximately 334 persons in
Savannah, 165 in Chicago, Illinois, an additional 47 elsewhere in the United
States and 440 internationally. In the United States, 373 were hourly personnel
and 173 were salaried employees. The Company also utilizes temporary workers as
needed, primarily in manufacturing. An average of 110 such temporary workers
were utilized on a daily basis by the Company during the year ended December 31,
9
<PAGE>
1999. 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.
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.
10
<PAGE>
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.
11
<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, 1999 and 1998
are as follows:
Quarter Ended High Low
-------------------------------------------------------------
03/31/99 $ 4.8750 $ 2.9375
06/30/99 4.3125 2.6250
09/30/99 3.5000 2.5625
12/31/99 4.0000 2.6250
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
At March 31, 2000, there were approximately 125 holders of record of the
Company's Class A Common Stock and 14 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.
Item 6. Selected Consolidated Historical Financial Data
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
12
<PAGE>
Company. The following tables contain selected consolidated historical financial
data for the Company (amounts in thousands except per share data):
<TABLE>
<CAPTION>
Company (1) Full Fiscal Year
--------------------------------------------------------- ----------------------
Company
Year Year Year Nine Months Predecessor August 23,
Ended Ended Ended Ended April 1, 1995 1995 to
December 31, December 31, December 31, December 31, to August 22, March 31,
1999 1998 1997 1996(1) 1995 1996(2)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 169,355 $ 150,706 $ 109,631 $ 59,938 $ 26,854 $ 41,465
(Loss) income before
extraordinary item (14,288) (36) 3,754 (3,256) 3,934 1,104
Basic and diluted
earnings (loss) per
share before
extraordinary item $ ( 0.94) $ 0.00 $ 0.25 $ ( 0.25) ---- $ 0.09
Weighted average shares
outstanding 15,150 14,986 15,003 12,715 ---- 11,871
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31, December 31, March 31,
1999 1998 1997 1996 1996
- ------------------------------------ --------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Total assets $ 246,648 $ 267,463 $ 201,424 $ 97,529 $ 87,980
Long-term debt (including current
portion) 138,314 133,549 103,623 27,101 66,788
Stockholders' equity 53,869 69,160 61,531 54,215 9,775
Working capital $ 44,904 $ 54,774 $ 44,944 $ 15,852 $ 13,855
- ------------------------------------ --------------- --------------- --------------- --------------- --------------
</TABLE>
(1) Effective December 31, 1996, the Company changed its fiscal year-end from
March 31 to December 31.
(2) The acquisition of Aminco, Inc. (the Predecessor) was completed on August
23, 1995. The Company's financial statements include the operating results from
the acquisition date.
(3) The consolidated financial statements of the Company have been prepared
assuming the Company will continue as a going concern. However, there are
matters disclosed in Note 19 to the consolidated financial statements that raise
substantial doubt about the Company's ability to continue as a going concern.
These consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Company Overview
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.
In the years ended December 31, 1999 and 1998, 36.4% and 34.9%, 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 31,1999 Total December 31,1998 Total
- --------------------- -------------------- -------- ------------------- --------
Net sales to:
United States $ 107,744 63.6% $ 98,096 65.1%
South Africa 44,018 26.0 39,183 26.0
Europe 9,970 5.9 7,170 4.8
Other International 7,623 4.5 6,257 4.1
- --------------------- -------------------- -------- ------------------- --------
Total $ 169,355 100.0% $ 150,706 100.0%
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.
Subsequent Event - Sale of Company
On February 25, 2000, the Company entered into the Merger Agreement with Cosmair
and Purchaser, pursuant to which Cosmair, wholly-owned by L'Oreal, S.A. of
Paris, France, will acquire the Company in a two-step transaction.
To implement the Merger Agreement, Purchaser on March 8, 2000 commenced a cash
tender offer to acquire all the issued and outstanding shares of Class A Common
14
<PAGE>
Stock at a price of $5.20 per share in cash. Purchaser's obligation to purchase
shares of Class A Common Stock tendered pursuant to the Offer is subject to the
satisfaction of customary conditions, including the expiration or termination of
the applicable waiting periods under the HSR Act and the S.A. Competition Act
and the valid tender of a majority of the outstanding shares of Company Common
Stock on a fully-diluted basis. On March 22, 2000, Cosmair and the Company
received a request for additional information and documentary material from the
U. S. Department of Justice ("DOJ") related to the proposed merger. The
requested materials are being compiled and will be submitted to the DOJ. If DOJ
clearance is obtained and the other conditions to the Offer are satisfied, any
and all shares tendered in the Offer must be purchased by Cosmair. The Board of
Directors of the Company recommended that all stockholders accept the Offer and
tender their shares pursuant to the Offer. The Merger Agreement may be
terminated by either party if the Offer is not consummated on or prior to July
31, 2000.
If the Offer is successfully completed, Purchaser will be merged with and into
the Company, with the Company becoming a wholly-owned subsidiary of Cosmair.
Consummation of the Merger is subject to the approval of the Company's
stockholders. Cosmair and Purchaser have agreed in the Merger Agreement to vote
all shares of Class A Common Stock purchased in the Offer in favor of the
Merger. The Majority Stockholders will also be required to vote their shares of
Class C Common Stock in favor of the Merger in the event that they are not
required to convert their shares of Class C Common Stock into shares of Class A
Common Stock and tender their shares to Purchaser pursuant to the Stockholders
Agreement. Any shares of Company Common Stock not purchased in the Offer will be
converted into the right to receive $5.20 per share in cash, without interest.
To induce Cosmair and Purchaser to enter into the Merger Agreement, the Majority
Stockholders entered into a Stockholders Agreement. Collectively, the Majority
Stockholders own shares of Company Common Stock representing approximately 48%
of the outstanding shares of Company Common Stock on a fully-diluted basis and
approximately 88% of the voting power of all outstanding shares of Company
Common Stock. In the Stockholder Agreement, the Majority Stockholders agreed,
among other things, (i) subject to at least 565,857 shares of Class A Common
Stock being tendered in the Offer, to convert their shares of Class C Common
Stock into shares of Class A Common Stock and to tender all of their shares of
Company Common Stock in the Offer, and (ii) in the event that they are not
required to so convert their shares of Class C Common Stock, to vote their
shares of Class C Common Stock in favor of the Merger.
Cosmair conditioned its willingness to enter into the Merger Agreement on the
Company's settlement of all disputes with AM Cosmetics arising out of any
business relationships between them. The Company entered into a settlement
agreement with AM Cosmetics on February 25, 2000. See Note 18 to the
consolidated financial statements for terms of the settlement.
Fiscal 1999 - Significant Events
Restructuring and Other Charges
During the year ended December 31, 1999, the Company recorded restructuring and
15
<PAGE>
other charges of $11.3 million (of which $10.8 million was recorded in the
fourth quarter). Such charges by category of expenditure were as follows (in
thousands):
<TABLE>
<CAPTION>
Foreign
AM South Exchange
Product Cosmetics African Management Transaction
Returns Relaunches Settlement Write-offs Restructuring Losses Total
-------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 4,048 $ 300 $ -- $ -- $ -- $ -- $ 4,348
Cost of sales 175 400 -- 449 -- -- 1,024
Marketing and selling
expenses -- 1,699 -- -- -- -- 1,699
General and
administrative -- -- -- 947 -- -- 947
Charge for settlement
with AM Cosmetics -- -- 1,350 -- -- -- 1,350
Restructuring charges -- -- -- -- 600 -- 600
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Operating income 4,223 2,399 1,350 1,396 600 -- 9,968
Other income, net -- -- -- -- -- 1,301 1,301
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Total $ 4,223 $ 2,399 $ 1,350 $ 1,396 $ 600 $ 1,301 $ 11,269
============== ============== ============== ============== ============== ============== ==============
</TABLE>
In 1999 net sales included the following charges related to
product returns or dispositions: $2.1 million for Cutex polish,
$1.0 million for Diva hair colors and $0.9 million for Dark and
Lovely Cosmetics. The $2.1 million of Cutex charges included
customer deductions and other expenses related to the disposition
of the Cutex polish business, which was sold in 1998. The actual
Cutex polish disposition expenses exceeded the $4.0 million of
estimated expenses which were recorded in 1998. The Company
discovered that tube components in some of the Diva hair color
kits held by the Company and by customers were leaking and
required replacement. The Company recorded a $1.0 million charge
to net sales for returns of damaged inventory held by customers
and a $0.2 million charge to cost of sales for the write-off of
damaged inventory held by the Company. The $0.9 million charge for
Dark and Lovely Cosmetics was for the return or disposition of
inventory held by customers; the Company decided to discontinue
the manufacture and sale of Dark and Lovely Cosmetics in 1999.
The $2.4 million of new packaging costs related to a relaunch of
Dark and Lovely relaxers and hair colors scheduled for 2000. This
charge included $1.7 million for package design, $0.4 million for
write-off of excess old inventory and $0.3 million for price
reductions granted to customers for Diva inventory on hand.
The $1.4 million expensed for the AM Cosmetics settlement related
to a dispute between the Company and a related party and is
discussed further in Note 18 to the Company's financial
statements.
16
<PAGE>
The South Africa write-offs of $1.4 million consisted of charges
for inventory and trademarks, primarily of the Seasilk and Nu-Me
brands, determined to be unsaleable or impaired.
The restructuring charges of $0.6 million included employee
severance costs for personnel reductions the Company undertook to
cut costs and increase operating income. Seventeen employees,
mostly involved in administrative functions, were terminated.
Severance payments of $0.5 million were paid in 1999, and $0.1
million will be paid in 2000.
The foreign exchange transaction losses of $1.3 million resulted
from a significant devaluation of the Ghanian currency, the Cedi,
in the last quarter of 1999. The Cedi devalued approximately 50%,
from 2,340 cedi per dollar at December 31, 1998 to 3,500 cedi per
dollar at December 31, 1999.
Net sales and operating income (loss) for products discontinued or disposed of
by the Company for the years ended December 31, 1999, 1998 and 1997 were as
follows (in thousands):
1999 1998 1997
---------- ---------- ----------
Cutex
Net sales $ -- $ 15,187 $ 17,800
Operating (loss) income (2,098) (1,647) 6,684
Dark and Lovely Cosmetics
Net sales 163 1,677 1,229
Operating loss (1,040) (1,978) (923)
Nu-Me and Seasilk
Net sales -- 292 292
Operating (loss) income (1,396) 35 41
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.
Acquisition of Johnson Products Co., Inc.
In July 1998, the Company acquired all of the outstanding shares of Johnson
Products Co., Inc. ("Johnson Products"). Johnson Products is a manufacturer of
personal care products. 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, d/b/a IVX Bioscience, Inc., for the remaining $50.0 million of
17
<PAGE>
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 purchase
price was allocated to the identifiable assets and liabilities based on the fair
values at the acquisition date. The allocation of the assets and liabilities
acquired was 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 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 was included in the
Company's consolidated statement of operations for the year ended December 31,
1998. These operating results were 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
============
Beginning January 1, 1999, the operating results of Dermablend are included in
the Company's consolidated statement of operations.
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.
18
<PAGE>
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 were restricted to pay
for certain expenses related to the sale of Cutex.
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 is accrued at an annual rate of 16% for
the month deferred and added to the outstanding principal amount of the loan.
The Company elected to defer the monthly interest payment a total of six times
during 1999 and thereby added $5.0 million to the outstanding principal balance
in 1999. The Company elected to defer the monthly interest payment three
additional times in 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. The capital stock and assets of Carson Products Company, including the
assets used in the Johnson Products and Dermablend operations, 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
In December 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. The Company realized net cash proceeds of approximately
$27.8 million ($4.5 million of which was restricted cash at December 31, 1998)
and recorded a loss on the sale of approximately $14.0 million. The $4.5 million
restricted cash was used during 1999 to pay for certain designated expenses
related to the sale of Cutex.
19
<PAGE>
Restructuring and Other Charges
During the year ended December 31, 1998, the Company recorded total
restructuring and other significant charges of $39.0 million (of which $19.2
million was recorded in the fourth quarter). These charges by category of
expenditure and classification in the statement of operations were as follows
(in thousands):
<TABLE>
<CAPTION>
Bad
Debts Write-off
Management Fixed and Sale of of
Inventory Restructuring Assets Other Cutex Investment Total
-------------- -------------- -------------- -------------- -------------- -------------- --------------
<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>
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 $2.6
million of employee severance costs and $1.4 million of expenses related to the
hiring of the Company's chief executive officer. Thirty employees, including six
members of senior management and fourteen members of the sales department, were
terminated. Severance payments totaling $1.3 million were paid in 1998 and 1999.
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. These
fixed assets were written off in 1998. The "Bad Debts and Other" charges
included primarily $2.0 million of additional reserves against accounts
receivable for customer deductions. Miscellaneous restructuring charges included
in "Bad Debts and Other" above were paid $0.1 million in each of 1998 and 1999.
20
<PAGE>
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.
On February 21, 1999, Gregory 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 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, 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, 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 year ended December 31, 1996. This 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 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 business to the
Company's portfolio of brands. The purchase price was approximately $5.6 million
in cash, 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, of which approximately $9.3 million was recorded as intangible
assets. Additional consideration aggregating $3.0 million was paid in March 1999
based upon the after-tax profits of the business for the year ended December 31,
21
<PAGE>
1998 and was recorded as additional goodwill. 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.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Sales. Consolidated net sales for the year ended December 31, 1999 were
$169.4 million, an increase of $18.6 million, or 12.4%, over net sales for the
year ended December 31, 1998 of $150.7 million. This increase is summarized as
follows (dollars are in thousands):
Year Ended Year Ended
December 31, 1999 December 31, 1998 % Change
-------------------- -------------------- -------------
Domestic Hair Care $ 93,321 $ 79,645 17.2
Export 17,593 13,427 31.0
Dermablend Group 16,521 3,264 406.2
South Africa 44,018 39,183 12.3
-------------------- --------------------
Ethnic 171,453 135,519 26.5
Cutex (2,098) 15,187 (100.0)
-------------------- --------------------
Consolidated $169,355 $150,706 12.4
==================== ====================
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 hair care 1999 net sales increased from the prior year due to the
acquisition of Johnson Products Company in July 1998. Johnson brands contributed
$36.3 million to Domestic hair care net sales in 1999, an increase of $14.7
million over the $21.6 million contributed from July to December of 1998.
Domestic net sales of Carson brands decreased slightly to $57.0 million in 1999
from $58.0 million in 1999. Domestic sales of Carson relaxers were down in 1999
compared to 1998, while domestic sales of Carson hair colors were up from the
prior year. Domestic hair care net sales for 1999 includes the $1.3 million
charge for Diva hair color returns and price reductions discussed earlier.
Export 1999 net sales exceeded prior year levels due to the addition of Johnson
Products and higher sales of Carson hair care products in Europe. Net sales in
22
<PAGE>
Europe increased to $10.0 million in 1999 from $7.2 million in 1998. Other
international net sales increased to $7.6 million in 1999 from $6.2 million in
1998.
Dermablend group 1999 net sales were up from the prior year due to the
acquisition of Dermablend, Inc. and Johnson Products Company, Inc. in July 1998.
Net sales of Dermablend corrective cosmetics were $14.2 million in 1999. No net
sales for Dermablend were included in the 1998 net sales as the brand was held
for sale from its purchase in July 1998 until the end of 1998. Dermablend group
net sales for 1999 includes the $0.9 million charge to dispose of Dark and
Lovely Cosmetics inventory held by customers discussed earlier.
South Africa 1999 net sales were up 12.3% from the prior year. While gains were
made, this sales growth is smaller than in prior years due to economic factors
on the African continent. High interest rates in South Africa generally
depressed consumer spending there and necessitated heavy discounting and trade
promotional spending to grow market share. Sales in West and Southern Africa
were adversely impacted by declining local currencies, which increased the
relative cost of the Company's products.
As discussed earlier, net sales for 1999 included approximately $2.1 million for
deductions and other expenses related to the disposition of the Cutex polish
business, which was sold in 1998.
Gross Profit. Consolidated gross profit was $85.6 million in the year ended
December 31, 1999 compared to $66.2 million in the year ended December 31, 1998,
an increase of $19.4 million, or 29.3%. Gross margin was 50.6% for 1999 compared
to 43.9% for 1998. The 1999 gross margin was adversely impacted by $5.4 million
of unusual charges, including: $3.0 million charged to net sales for Cutex
polish and Dark and Lovely Cosmetics returns, $1.3 million charged to net sales
for Diva hair color returns and $1.0 million charged to cost of sales for
write-down of inventory. The 1998 gross margin was adversely impacted by $11.9
million of unusual 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. Excluding these special charges, gross profit was $91.0
million in 1999 and $78.1 million in 1998, and gross margin was 52.4% in 1999
and 50.5% in 1998. Excluding special charges, the increase in gross margin in
1999 was attributable in part to increased plant utilization in the Savannah
manufacturing facility, whereas in the first half of 1998 gross margins were
adversely impacted by reduced production volumes undertaken in order to lower
inventory balances at that time. The overall gross margin for 1998 was also
reduced by higher than anticipated returns of old Cutex nail polish after
introduction of the new Ultra line. Gross margins in 1999 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. Revised pricing terms for Johnson hair care products began to phase in
in the third quarter of 1999 and produced an improved gross margin for Johnson
brands in the fourth quarter of 1999.
Marketing and Selling Expenses. Marketing and selling expenses increased $6.0
million, or 14.0%, to $48.7 million in 1999 from $42.7 million in 1998. In 1999,
23
<PAGE>
marketing and selling expenses included $1.7 million of special charges related
to the relaunch of Dark and Lovely relaxers and hair colors in 2000. Excluding
these special charges, marketing and selling expenses were $47.0 million in 1999
compared to $42.7 million in 1998, an increase of $4.3 million or 10.1%. These
expenses increased $13.5 million from 1998 to 1999 due to the addition of
Dermablend and Johnson Products in July 1998 and higher spending at Carson South
Africa. Marketing and selling expenses increased at Carson South Africa due to
heavy trade promotional spending required to stimulate demand and increases in
distribution costs. The increased marketing and selling expense for Dermablend,
Johnson Products and Carson South Africa was largely offset by a decrease of
approximately $7.2 million from the elimination of spending on the Cutex, Dark
and Lovely Cosmetics and Salon Professional lines. Spending was also reduced in
1999 on the production of media advertising. As a percentage of net sales,
excluding special charges, marketing and selling expenses decreased to 27.1%
during 1999 from 27.6% during 1998.
General and Administrative Expense. General and administrative expenses were
$29.7 million in 1999 compared to $31.2 million in 1998, a decrease of $1.5
million or 4.8%. In 1999, general and administrative expense included $0.9
million of special charges for the write-off of trademarks at Carson South
Africa, and in 1998, general and administrative expense included $3.6 million of
special charges primarily related to the executive management restructuring and
additional accounts receivable reserves. Excluding these special charges,
general and administrative expenses were $28.8 million in 1999 compared to $27.6
million in 1998, an increase of $1.2 million or 4.4%. Increased spending for
Carson South Africa, Johnson Products and Dermablend was largely offset by the
elimination of general and administrative expenses, primarily amortization and
depreciation, related to Cutex and Dark and Lovely Cosmetics. As a percentage of
net sales, excluding special charges, general and administrative expenses
decreased to 16.6% during 1999 from 17.8% 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.
Restructuring Charges. In 1999 the Company recorded $0.6 million of
restructuring charges for severance payments related to personnel reductions.
These reductions were undertaken as a cost-cutting measure to improve the
Company's operating income. In 1998 the Company recorded restructuring charges
of $5.7 million related primarily to changes in the Company's top management
group and to the write-down of fixed assets which were disposed of as a result
of changes in product lines.
Operating Income. As a result of the above changes, operating income increased
to $4.9 million in 1999 compared to an operating loss of $28.3 million in 1998.
Interest Expense. Interest expense increased to $17.8 million in 1999 compared
to $13.6 million in 1998. The increased interest expense was the result of
additional debt, at higher rates, incurred in 1998 to finance the Johnson
Products acquisition.
Foreign Currency Transaction Losses. The loss of $1.3 million recorded in 1999
related to the devaluation of the Ghanian Cedi.
24
<PAGE>
Other Income, Net. Other income decreased to $2.0 million in 1999 compared to
$3.4 million in 1998. The decrease was primarily due to lower interest income in
South Africa. Gain on Sale of Subsidiary Stock. In May 1998 the Company sold
29.1 million of its shares of Carson South Africa, resulting in a pre-tax gain
to the Company of $49.1 million.
Loss on Write-off of Investment. In 1998, the Company recorded a pretax charge
of $3.8 million for the write-off of an investment in the preferred stock of AM
Cosmetics.
Provision for Income Taxes. The provision for income taxes decreased to $1.8,
million based on an effective rate of (15.0)%, in 1999 compared to $4.3 million,
based on an effective rate of 61.6%, in 1998. These effective tax rates are
unusual due to the valuation allowances recorded against domestic deferred tax
assets in both 1999 and 1998. For further discussion, see Note 13 to the
Company's financial statements.
Minority Interest in Earnings of Subsidiary. Minority interest in earnings of
subsidiary decreased to $0.4 million in 1999 compared to $2.7 million in 1998.
This decrease was due to the lower earnings of Carson South Africa in 1999
compared to 1998.
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
-------------------- -------------------- -------------
Domestic Hair Care $ 79,645 $ 56,803 40.2
Export 13,427 12,137 10.6
Dermablend Group 3,264 1,229 165.6
South Africa 39,183 21,662 80.9
-------------------- --------------------
Ethnic 135,519 91,831 47.6
Cutex 15,187 17,800 (14.7)
-------------------- --------------------
Consolidated $150,706 $109,631 37.5
==================== ====================
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, Afro Sheen and Curly Perm. Export includes
net sales of Carson and Johnson hair care products in Europe and other
international markets, excluding Africa. For the years presented above,
Dermablend group net sales includes sales of Posner cosmetics and Dark and
Lovely Cosmetics. Although the Dermablend line of corrective cosmetics was
25
<PAGE>
purchased in July 1998, no net sales for Dermablend were included in the 1998
net sales as the brand was held for sale from its purchase in July 1998 until
the end of 1998.
Domestic hair care 1998 net sales were up from the prior year due to the
acquisition of Johnson Products Company in July 1998. Johnson brands contributed
$21.6 million to Domestic hair net sales from July to December of 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.
Domestic net sales Carson brands amounted to $58.0 million in 1998, a modest
increase of $1.2 million, or 2.2%, compared to $56.8 million in 1997. In the
first half of 1998, domestic net sales of Carson brands were below the prior
year levels. To address this downward trend, 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 were $7.2 million
in 1998 compared to $4.6 million in 1997. This increase of $2.6 million, or 56.5
%, included $1.5 million of net sales of Johnson brands 1998. Net sales of
Carson brands in Europe increased $1.1 million, or 23.9% from 1998 to 1997.
Other international net sales decreased by 16.8% to $6.3 million in 1998 from
$7.5 million in 1997. The reduction in other international net sales occurred
primarily in the Caribbean.
Dermablend group net sales in 1998 included $1.6 million for net sales of the
Posner cosmetics line, which was purchased as part of Johnson Products in July
1998. The remaining Dermablend net sales in 1998 and 1997 consist of sales of
Dark and Lovely Cosmetics.
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.
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.
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
26
<PAGE>
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
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.
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
27
<PAGE>
were generated by the sale of Carson South Africa stock in June 1998.
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.
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 1998 effective tax rate is unusually high
due to the valuation allowance recorded against deferred tax assets.
Liquidity and Capital Resources
In 1999 the Company's cash balance decreased by $20.0 million, to $8.7 million
at December 31, 1999 from $28.7 million at December 31, 1998. Net cash flow used
in operations was $1.3 million. Cash was used primarily to increase inventories
and to decrease accrued liabilities and income taxes payable. Domestic
inventories were at lower than optimum levels at the end of 1998 and were
increased during 1999. Accrued liabilities decreased primarily due to payment of
expenses related to the disposition of Cutex and income taxes by the Company's
foreign subsidiaries. Cash was provided by the conversion of restricted cash
into available cash, which was used to pay the Cutex accrued liabilities. Cash
was also provided by a decrease in accounts receivable and an increase in
accounts payable. Accounts receivable decreased as domestic collections improved
after credit policy and staff changes were implemented during the second half of
1999. Accounts payable increased primarily due to the $1.4 million liability
payable to AM Cosmetics recorded in 1999 for settlement of the legal dispute
discussed earlier. Accounts payable was also up due to a delay in paying vendors
from the last two weeks of 1999 into the year 2000.
Net cash used in investing activities in 1999 was $11.8 million. Capital
expenditures totaled $5.6 million. Approximately $1.8 million of these additions
related to the Carson Products software upgrade and approximately $2.0 million
were additions by Carson South Africa. Carson South Africa invested $5.7 million
in redeemable cumulative preference shares of two investment companies. Carson
South Africa, through its subsidiary in Ghana, also issued a $1.0 million
long-term note receivable to the Company's distributor in Brazil to provide
working capital to the distributor and thereby assist in increasing the
Company's exports to Brazil.
Net cash used in financing activities totaled $6.4 million. Carson South Africa
paid $6.4 million of purchase consideration related to its 1997 acquisition of
28
<PAGE>
A&J Cosmetics. This amount included $3.4 million of original consideration that
was due in January 1999 and $3.0 million of additional consideration that was
paid in March 1999 based on the after tax profits of A&J Cosmetics for the year
ended December 31, 1998.
The cash balance was adversely impacted in 1999 by continued devaluation of the
South African Rand. The rand devalued approximately 3.0%, from 5.98 rand per
dollar at December 31, 1998 to 6.16 rand per dollar at December 31, 1999. Due to
this devaluation, the cash balances held in South Africa decreased by $0.5
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.
At the end of April 2000, the Company must pay 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. Management plans to meet these interest payments from cash flows
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.
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 generate
sufficient cash flows from operations to meets its debt repayment requirements,
the Company's ability to refinance its long-term debt if necessary, the
Company's ability to successfully implement its growth strategy, the nature and
29
<PAGE>
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.
New Accounting Standards
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.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company does not speculate on the future direction of interest rates. As of
March 31, 2000, none of the Company's debt bore interest at variable rates. The
Company believes that the effect, if any, of reasonably possible near term
changes in interest rates on its consolidated financial position, results of
operations or cash flows would not be significant.
The Company is exposed to foreign currency price risk because of its operations
in foreign countries. 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 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. In 1999 the Company incurred a $1.3
million foreign currency transaction loss related to a significant devaluation
of the Ghanian Cedi. This loss was included in the Company's consolidated
statement of operations for the year ended December 31, 1999.
30
<PAGE>
Item 8. Financial Statements and Supplementary Data
CARSON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
==========================================================
1999 1998 1997
================ ================ ================
<S> <C> <C> <C>
Net sales $ 169,355 $ 150,706 $ 109,631
Cost of sales 83,747 84,509 50,510
---------------- ---------------- ----------------
Gross profit 85,608 66,197 59,121
---------------- ---------------- ----------------
Marketing and selling expenses 48,688 42,692 27,007
General and administrative expenses 29,703 31,196 18,344
General and administrative - fees paid to MCG Global 350 350 370
Charge for settlement with AM Cosmetics 1,350 -- --
Restructuring charges 600 5,751 --
AM Cosmetics sales commissions -- 1,452 1,151
Loss on sale of business -- 13,994 --
---------------- ---------------- ----------------
Operating expenses 80,691 95,435 46,872
---------------- ---------------- ----------------
Other operating income - cumulative effect of change
in accounting for subsidiary -- 890 --
---------------- ---------------- ----------------
Operating income (loss) 4,917 (28,348) 12,249
Interest expense (17,757) (13,649) (6,444)
Foreign currency transaction (loss) gain (1,301) (7) 7
Other income, net 2,047 3,390 773
Gain on sale of subsidiary stock -- 49,140 --
Loss on write-off of investment -- (3,768) --
AM Cosmetics management fee and dividend -- 223 900
---------------- ---------------- ----------------
(Loss) income before income taxes, minority interest and
extraordinary items (12,094) 6,981 7,485
Provision for income taxes (1,816) (4,299) (2,779)
---------------- ---------------- ----------------
(Loss) income before minority interest and extraordinary items (13,910) 2,682 4,706
Minority interest in earnings of subsidiary (378) (2,718) (952)
---------------- ---------------- ----------------
(Loss) income before extraordinary items (14,288) (36) 3,754
Extraordinary items, net of income taxes -- 127 (2,086)
---------------- ---------------- ----------------
Net (loss) income $ (14,288) $ 91 $ 1,668
================ ================ ================
Basic and diluted (loss) income per common share:
Before extraordinary items $ (0.94) $ 0.00 $ 0.25
Extraordinary items, net of income taxes -- 0.01 (0.14)
---------------- ---------------- ----------------
Net (loss) income $ (0.94) $ 0.01 $ 0.11
================ ================ ================
Weighted average common shares outstanding 15,150 14,986 15,003
================ ================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
CARSON, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1999 1998
============== ==============
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,740 $ 28,706
Accounts receivable less allowances of $5,490 (1999) and $6,457 (1998) 35,459 38,953
Inventories 28,332 22,825
Restricted cash -- 4,500
Investments 2,435 --
Other current assets 507 669
-------------- --------------
Total current assets 75,473 95,653
PROPERTY, PLANT AND EQUIPMENT, net 37,190 35,765
INVESTMENTS 3,248 --
INTANGIBLES, net of accumulated amortization of $10,675 (1999) and $6,174 (1998) 124,285 129,183
OTHER ASSETS 6,452 6,862
-------------- --------------
TOTAL ASSETS $ 246,648 $ 267,463
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 14,373 $ 12,584
Accrued expenses 13,630 19,306
Payable to AM Cosmetics 2,000
Income taxes payable 566 2,508
Due for A&J Cosmetics -- 6,355
Current maturities of long-term debt -- 126
-------------- --------------
Total current liabilities 30,569 40,879
LONG-TERM DEBT 138,314 133,423
OTHER LIABILITIES 3,769 3,345
MINORITY INTEREST IN SUBSIDIARY 20,127 20,656
COMMITMENTS AND CONTINGENCIES (Notes 16 and 18) -- --
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 and
7,926,485 shares issued as of December 31, 1999 and 1998, respectively 101 79
Class B, nonvoting, $.01 par value, 2,000,000 shares authorized, 0 and
1,859,677 shares issued and outstanding as of December 31, 1999 and 1998, respectively -- 19
Class C, voting, $.01 par value, 13,000,000 shares authorized, 5,155,132 and
5,334,700 shares issued as of December 31, 1999 and 1998, respectively 52 53
Paid-in capital 81,500 80,970
Accumulated deficit (18,208) (3,920)
Accumulated other comprehensive losses (8,001) (6,495)
Notes receivable from shareholders, net of discount (1,238) (1,209)
Treasury stock, 13,245 shares of Class A common stock as of December 31, 1999
and 1998 and 28,969 shares of Class C common stock as of December 31, 1999 and 1998 (337) (337)
-------------- --------------
Total stockholders' equity 53,869 69,160
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 246,648 $ 267,463
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE>
Carson, Inc.
Consolidated Statement of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Class A Class B Class C
-------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 4,997 $ 50 1,860 $ 19 8,128 $ 81
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
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 -- -- -- --
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
Comprehensive loss:
Net loss -- -- -- -- -- --
Foreign currency translation -- -- -- -- -- --
Total comprehensive loss
Conversion of Class B shares to Class A shares 1,860 19 (1,860) (19) -- --
Conversion of Class C shares to Class A shares 180 1 -- -- (180) (1)
Restricted share awards 131 2 -- -- -- --
Gain on sale of South African stock, net -- -- -- -- -- --
Change in shareholder loans -- -- -- -- -- --
-------------------------------------------------------------------------------
Balance, December 31, 1999 10,097 $ 101 -- $ -- 5,155 $ 52
===============================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
<CAPTION>
Accumulated Notes
Other Receivable Total
Paid-in Accumulated Comprehensive From Treasury Stockholders'
Capital Deficit Losses Shareholders Stock Equity
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Comprehensive loss:
Net loss -- (14,288) -- -- -- (14,288)
Foreign currency translation -- -- (1,506) -- -- (1,506)
Total comprehensive loss --------------
(15,794)
Conversion of Class B shares to Class A shares -- -- -- -- -- --
Conversion of Class C shares to Class A shares -- -- -- -- -- --
Restricted share awards 384 -- -- -- -- 386
Gain on sale of South African stock, net 146 -- -- -- -- 146
Change in shareholder loans -- -- -- (29) -- (29)
-------------------------------------------------------------------------------
Balance, December 31, 1999 $ 81,500 $ (18,208) $ (8,001) $ (1,238) $ (337) $ 53,869
===============================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
CARSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
====================================================
1999 1998 1997
============= ============= =============
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (14,288) $ 91 $ 1,668
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 7,386 6,626 3,793
Interest deferred on secured term loan 4,990 -- --
Non-cash charges - inventory, intangibles and fixed assets 1,971 9,596 --
Provision for doubtful accounts 1,673 2,935 935
Foreign currency transaction loss (gain) 1,301 7 (7)
Deferred income tax provision 323 790 (142)
Minority interest in earnings of subsidiary 378 2,718 952
Gain on sale of subsidiary stock -- (49,140) --
Loss on sale of business -- 13,994 --
Loss on write-off of investment -- 3,768 --
Extraordinary item, net of income taxes -- (127) 2,086
Other, net 140 97 (547)
Changes in operating assets and liabilities, net of acquisitions
and disposals:
Accounts receivable 1,475 (7,367) (13,078)
Inventories (7,660) (60) (11,589)
Restricted cash 4,500 -- --
Other current assets 152 47 1,711
Accounts payable 3,874 (2,642) 6,852
Accrued liabilities (5,654) 6,775 (9,912)
Income taxes payable (1,880) 1,773 --
Other liabilities -- 1,688 --
------------- ------------- -------------
Total adjustments 12,969 (8,522) (18,946)
------------- ------------- -------------
Net cash used in operating activities (1,319) (8,431) (17,278)
------------- ------------- -------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,605) (10,340) (8,220)
Purchase of investments (5,683) -- --
Issuance of long-term note receivable (1,000) -- --
Collection of long-term note receivable 517 -- --
Acquisitions of business assets, net of cash acquired -- (34,661) (49,406)
Net proceeds from sale of business -- 23,298 --
------------- -------------- -------------
Net cash used in investing activities (11,771) (21,703) (57,626)
------------- -------------- -------------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings -- 93,500 166,860
Payment on A&J Cosmetics payable (6,355) (5,416) --
Proceeds from sale of subsidiary stock 281 74,446 9,032
Principal payments on long-term debt (225) (59,537) (92,661)
Repayment of short-term notes payable -- (50,000) --
Debt issuance costs -- (4,619) --
Proceeds from equity rights offering -- -- 1,525
Other, net (123) 106 --
------------- ------------- -------------
Net cash (used in) provided by financing activities (6,422) 48,480 84,756
------------- ------------- -------------
EFFECT OF EXCHANGE RATE CHANGES (454) (3,683) --
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (19,966) 14,663 9,852
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 28,706 14,043 4,191
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,740 $ 28,706 $ 14,043
============= ============= =============
Cash paid during the year for:
Interest $ 11,780 $ 13,324 $ 6,683
Income taxes $ 3,242 $ 2,273 $ 2,764
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
Notes to Consolidated Financial Statements
Note 1. Organization and Business
The Company is engaged in the production and marketing of hair care products.
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
majority-owned South African subsidiary, Carson Holdings Limited ("Carson South
Africa"), shares of which are traded on the Johannesburg Stock Exchange. As of
December 31, 1999 the Company owned approximately 52.5% of the stock of Carson
South Africa. A license agreement between the Company and Carson South Africa
commenced in April 1998 and provides that Carson South Africa pay the Company a
royalty in the amount of 3.0% of the net sales price of all licensed products.
The agreement may be altered or renewed indefinitely until terminated by either
party upon twelve months written notice. The agreement was altered in 1999 to
suspend the payment of royalties during 1999 in exchange for Carson South Africa
providing a $1.0 million loan to the Company's distributor in Brazil. See
further discussion of this loan in Note 10. The royalty payments were reinstated
at 3.5% on January 1, 2000 and will increase to 4% on April 1, 2000.
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.
Note 2. Significant Accounting Policies
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.
New Accounting Standards
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.
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 7).
35
<PAGE>
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 $96.1 million and $98.8 million at December 31, 1999 and 1998,
respectively, is being amortized using the straight-line method over periods
ranging from 15 to 40 years. Trademarks of $27.9 million and $30.1 million at
December 31, 1999 and 1998, respectively, are being amortized using the
straight-line method over 10 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 would write the long-lived assets down to fair value.
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. Valuation allowances are provided when recoverability of
deferred tax assets is uncertain.
Foreign Currency Translation/Transaction
Assets and liabilities of Carson South Africa 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. Gains and losses from foreign
36
<PAGE>
currency transactions are included in the consolidated statements of operations.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable,
inventories, investments, accounts payable and accrued liabilities approximate
fair values due to the short-term maturities of the instruments. The carrying
value of long-term debt is discussed in Note 11.
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. Such costs for the years ended December 31, 1999, 1998 and 1997 of
$863,000, $610,000 and $535,000, respectively, 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. For the year ended December 31, 1999 options to
purchase 1,487,025 shares of the Company's common stock were not included in the
computation of diluted earnings per share because the effect would have been
anti-dilutive. For the year ended December 31, 1998 options to purchase 568,500
shares were included in the computation of diluted earnings per share, resulting
in an increase of 334,367 weighted average shares outstanding but no change from
basic earnings per share. For the years ended December 31, 1998 and December
31, 1997 options to purchase 395,525 shares and 441,500 shares respectively were
not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
37
<PAGE>
Reclassification
Certain prior periods have been reclassified to conform with current year
presentation.
Note 3. Subsequent Event - Sale of Company
On February 25, 2000, the Company entered into the Merger Agreement with Cosmair
and Purchaser, pursuant to which Cosmair, wholly-owned by L'Oreal, S.A. of
Paris, France, will acquire the Company in a two-step transaction.
To implement the Merger Agreement, Purchaser on March 8, 2000 commenced a cash
tender offer to acquire all the issued and outstanding shares of Class A Common
Stock at a price of $5.20 per share in cash. Purchaser's obligation to purchase
shares of Class A Common Stock tendered pursuant to the Offer is subject to the
satisfaction of customary conditions, including the expiration or termination of
the applicable waiting periods under the HSR Act and the S.A. Competition Act
and the valid tender of a majority of the outstanding shares of Company Common
Stock on a fully-diluted basis. On March 22, 2000, Cosmair and the Company
received a request for additional information and documentary material from the
U. S. Department of Justice ("DOJ") related to the proposed merger. The
requested materials are being compiled and will be submitted to the DOJ. If DOJ
clearance is obtained and the other conditions to the Offer are satisfied, any
and all shares tendered in the Offer must be purchased by Cosmair. The Board of
Directors of the Company recommended that all stockholders accept the Offer and
tender their shares pursuant to the Offer. The Merger Agreement may be
terminated by either party if the Offer is not consummated on or prior to July
31, 2000.
If the Offer is successfully completed, Purchaser will be merged with and into
the Company, with the Company becoming a wholly-owned subsidiary of Cosmair.
Consummation of the Merger is subject to the approval of the Company's
stockholders. Cosmair and Purchaser have agreed in the Merger Agreement to vote
all shares of Class A Common Stock purchased in the Offer in favor of the
Merger. The Majority Stockholders will also be required to vote their shares of
Class C Common Stock in favor of the Merger in the event that they are not
required to convert their shares of Class C Common Stock into shares of Class A
Common Stock and tender their shares to Purchaser pursuant to the Stockholders
Agreement. Any shares of Company Common Stock not purchased in the Offer will be
converted into the right to receive $5.20 per share in cash, without interest.
To induce Cosmair and Purchaser to enter into the Merger Agreement, the Majority
Stockholders entered into a Stockholders Agreement. Collectively, the Majority
Stockholders own shares of Company Common Stock representing approximately 48%
of the outstanding shares of Company Common Stock on a fully-diluted basis and
approximately 88% of the voting power of all outstanding shares of Company
Common Stock. In the Stockholder Agreement, the Majority Stockholders agreed,
among other things, (i) subject to at least 565,857 shares of Class A Common
Stock being tendered in the Offer, to convert their shares of Class C Common
Stock into shares of Class A Common Stock and to tender all of their shares of
Company Common Stock in the Offer, and (ii) in the event that they are not
required to so convert their shares of Class C Common Stock, to vote their
shares of Class C Common Stock in favor of the Merger.
38
<PAGE>
Cosmair conditioned its willingness to enter into the Merger Agreement on the
Company's settlement of all disputes with AM Cosmetics arising out of any
business relationships between them. The Company entered into a settlement
agreement with AM Cosmetics on February 25, 2000. See Note 18 to the
consolidated financial statements for terms of the settlement.
Note 4. Restructuring and Other Charges
During the year ended December 31, 1999, the Company recorded restructuring and
other charges of $11.3 million (of which $10.8 million was recorded in the
fourth quarter). Such charges by category of expenditure were as follows (in
thousands):
<TABLE>
<CAPTION>
Foreign
AM South Exchange
Product Cosmetics African Management Transaction
Returns Relaunches Settlement Write-offs Restructuring Losses Total
-------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 4,048 $ 300 $ -- $ -- $ -- $ -- $ 4,348
Cost of sales 175 400 -- 449 -- -- 1,024
Marketing and selling
expenses -- 1,699 -- -- -- -- 1,699
General and
administrative -- -- -- 947 -- -- 947
Charge for settlement
with AM Cosmetics -- -- 1,350 -- -- -- 1,350
Restructuring charges -- -- -- -- 600 -- 600
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Operating income 4,223 2,399 1,350 1,396 600 -- 9,968
Other income, net -- -- -- -- -- 1,301 1,301
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Total $ 4,223 $ 2,399 $ 1,350 $ 1,396 $ 600 $ 1,301 $ 11,269
============== ============== ============== ============== ============== ============== ==============
</TABLE>
In 1999 net sales included the following charges related to product
returns or dispositions: $2.1 million for Cutex polish, $1.0 million for
Diva hair colors and $0.9 million for Dark and Lovely Cosmetics. The $2.1
million of Cutex charges included customer deductions and other expenses
related to the disposition of the Cutex polish business, which was sold in
1998. The actual Cutex polish disposition expenses exceeded the $4.0
million of estimated expenses which were recorded in 1998. The Company
discovered that tube components in some of the Diva hair color kits held by
the Company and by customers were leaking and required replacement. The
Company recorded a $1.0 million charge to net sales for returns of damaged
inventory held by customers and a $0.2 million charge to cost of sales for
the write-off of damaged inventory held by the Company. The $0.9 million
charge for Dark and Lovely Cosmetics was for the return or disposition of
inventory held by customers; the Company decided to discontinue the
manufacture and sale of Dark and Lovely Cosmetics in 1999.
The $2.4 million of new packaging costs related to a relaunch of Dark and
Lovely relaxers and hair colors scheduled for 2000. This charge included
39
<PAGE>
$1.7 million for package design, $0.4 million for write-off of excess old
inventory and $0.3 million for price reductions granted to customers for
Diva inventory on hand.
The $1.4 million expensed for the AM Cosmetics settlement related to a
dispute between the Company and a related party and is discussed further in
Note 18.
The South Africa write-offs of $1.4 million consisted of charges for
inventory and trademarks, primarily of the Seasilk and Nu-Me brands,
determined to be unsaleable or impaired.
The restructuring charges of $0.6 million included employee severance
costs for personnel reductions the Company undertook to cut costs and
increase operating income. Seventeen employees, mostly involved in
administrative functions, were terminated. Severance payments totaling $0.5
million were paid in 1999, and $0.1 million will be paid in 2000.
The foreign exchange transaction losses of $1.3 million resulted from a
significant devaluation of the Ghanian currency, the Cedi, in the last
quarter of 1999. The Cedi devalued approximately 50%, from 2,340 cedi per
dollar at December 31, 1998 to 3,500 cedi per dollar at December 31, 1999.
Net sales and operating income (loss) for products discontinued or disposed of
by the Company for the years ended December 31, 1999, 1998 and 1997 were as
follows (in thousands):
1999 1998 1997
------------ ------------ ------------
Cutex
Net sales $ -- $15,187 $17,800
Operating income (loss) (2,098) (1,647) 6,684
Dark and Lovely Cosmetics
Net sales 163 1,677 1,229
Operating loss (1,040) (1,978) (923)
Nu-Me and Seasilk
Net sales -- 292 292
Operating income (loss) (1,396) 35 41
40
<PAGE>
During the year ended December 31, 1998, the Company recorded restructuring and
other charges of $39.0 million (of which $19.2 million was recorded in the
fourth quarter). Such charges by category of expenditure were as follows (in
thousands):
<TABLE>
<CAPTION>
Bad
Debts Write-off
Management Fixed and Sale of of
Inventory Restructuring Assets Other Cutex Investment Total
-------------- -------------- -------------- -------------- -------------- -------------- --------------
<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>
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 $2.6 million of employee severance costs and $1.4 million of
expenses related to the hiring of the Company's chief executive officer. Thirty
employees, including six members of senior management and fourteen members of
the sales department, were terminated. Severance payments totaling $1.3 million
were paid in 1998 and 1999. 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. These fixed assets were written off in 1998. The
"Bad Debts and Other" charges included primarily $2.0 million of additional
reserves against accounts receivable for customer deductions. Miscellaneous
restructuring charges included in "Bad Debts and Other" above were paid $0.1
million in each of 1998 and 1999. 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 6). The write-off of the related party investment is
discussed further in Note 18.
Note 5. Acquisitions
In July 1998, the Company acquired all of the outstanding shares of Johnson
Products Co., Inc. ("Johnson Products"). Johnson Products is a manufacturer of
personal care products. 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 11).
41
<PAGE>
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 purchase
price was allocated to the identifiable assets and liabilities based on the fair
values at the acquisition date. The allocation of the assets and liabilities
acquired was 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 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 was 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 expenses 1,576
General and administrative expenses 784
------------
$ 890
============
Beginning January 1, 1999, the operating results of Dermablend are included in
the Company's consolidated statement of operations.
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, 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
42
<PAGE>
under the Cutex trademark in the United States and Puerto Rico.
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
year ended December 31, 1997 include the results of the Cutex business as if the
Cutex acquisition had occurred as of the beginning of the year. Cutex operations
are included in 1998 up to the date of its sale in December 1998.
Year Ended Year Ended
(Dollars in thousands except per share December 31, 1998 December 31, 1997
amounts) (unaudited) (unaudited)
- -------------------------------------------------------------------------------
Net sales $ 187,997 $ 176,248
Net income before extraordinary item 1,500 5,913
Net income 1,627 3,827
Basic and diluted income per share before
extraordinary item $ 0.10 $ 0.39
Basic and diluted income per share $ 0.11 $ 0.26
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
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. 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, 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, of which approximately $9.3 million was recorded as intangible
assets. Additional consideration aggregating $3.0 million was paid in March 1999
43
<PAGE>
based upon the after-tax profits of the business for the year ended December 31,
1998 and was recorded as additional goodwill. 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.
Note 6. Disposition
In December 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. The Company realized net cash proceeds of approximately
$27.8 million ($4.5 million of which was restricted cash at December 31, 1998)
and recorded a loss on the sale of approximately $14.0 million. The $4.5 million
restricted cash was used during 1999 to pay for certain designated expenses
related to the sale of Cutex.
Note 7. Inventories
Inventories are summarized as follows (in thousands):
December 31, 1999 December 31,1998
- --------------------------------------------------------------------------------
Raw materials $ 12,658 $ 9,979
Work-in-process 3,048 1,938
Finished goods 12,626 10,908
- --------------------------------------------------------------------------------
Total $ 28,332 $ 22,825
Note 8. Investments
Current investments aggregating $2.4 million at December 31, 1999 consist of
redeemable cumulative "A" preference shares in the share capital of Cerisier
Investments (Pty) Limited held by Carson South Africa. The shares pay cumulative
dividends of 64% of the prime lending rate of interest per annum charged by The
Standard Bank of South Africa Limited. During 1999, the rate earned on this
investment averaged 9.92% per annum. The dividends were paid on December 31,
1999, the original redemption date of the investment. Upon maturity, the
investment was extended another six months and are redeemable on June 30, 2000.
Long-term investments aggregating $3.2 million at December 31, 1999 consist of
redeemable cumulative non-participating preference shares in the share capital
of AEL Investment Holdings (Pty) Limited held by Carson South Africa. The shares
pay semi-annual cumulative dividends of 66% of the prime lending rate of
interest per annum. During 1999, the rate earned on this investment averaged
10.23% per annum. The shares are redeemable in January 2002.
These investments are being held to maturity by the Company.
44
Note 9. Property, Plant and Equipment
Property, plant and equipment is summarized as follows (in thousands):
December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
Land $ 1,345 $ 1,345
Buildings and equipment 17,133 16,661
Machinery and equipment 16,556 15,659
Furniture and fixtures 5,910 2,657
Construction-in-progress 2,711 3,371
- --------------------------------------------------------------------------------
43,655 39,693
Less: accumulated depreciation 6,465 3,928
- --------------------------------------------------------------------------------
Total $ 37,190 $ 35,765
- --------------------------------------------------------------------------------
Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was
$2.8 million, $3.0 million and $1.3 million, respectively.
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 $1.2 million, $1.9 million, and $0.6
million in the years ended December 31, 1999, 1998 and 1997, respectively. At
December 31, 1999, future minimum annual rental commitments under non-cancelable
operating leases are approximately $446,000 per year in 2000 through 2002 and
$260,000 in 2003.
Note 10. Other Assets
Other assets are summarized as follows (in thousands):
December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
Debt issuance costs $ 6,628 $ 6,534
Long-term notes receivable 1,250 767
- --------------------------------------------------------------------------------
7,878 7,301
Less: accumulated amortization of
debt issuance costs 1,426 439
- --------------------------------------------------------------------------------
Total $ 6,452 $ 6,862
- --------------------------------------------------------------------------------
Long-term notes receivable at December 31, 1999 includes a $1.0 million loan
from Carson Products West Africa Limited ("Carson Ghana"), a wholly-owned
subsidiary of Carson South Africa, to Layff Kosmetic, Ltda. ("Layff"), the
45
<PAGE>
distributor of the Company's products in Brazil. The loan was made to provide
Layff with working capital and thereby assist in developing the Company's sales
in Brazil. The term of the loan is two years; all principal is due in September
2001. Interest accrues at 10% per annum and is payable semi-annually. The loan
is denominated in US dollars and is secured by a mortgage on certain real
property owned by Layff.
Note 11. Long-Term Debt
Long-term debt is summarized as follows (in thousands):
December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
10 % senior subordinated notes due $ 73,000 $ 73,000
2007
13% secured term loan due 2003 65,314 60,324
Other -- 225
- --------------------------------------------------------------------------------
138,314 133,549
Less: current portion -- 126
- --------------------------------------------------------------------------------
$ 138,314 $ 133,423
- --------------------------------------------------------------------------------
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 5) 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 6) 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 Secured Term Loan bears interest at an annual rate of 13% and is due in full
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 is accrued at an annual
rate of 16% for the month deferred and is added to the outstanding principal
amount of the loan. The Company elected to defer the monthly interest payment a
total of six times during 1999 and thereby added $5.0 million to the outstanding
principal balance in 1999. The Company elected to defer the monthly interest
payment three additional times in 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. The capital stock and assets of Carson Products
46
<PAGE>
Company, including the assets used in the Johnson Products and Dermablend
operations, 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.
The Secured Term Loan had a carrying value of $65.3 million and a fair value of
approximately $62.0 million at December 31, 1999. At December 31, 1998, the
carrying value of $60.3 million approximated fair value. Fair value was
determined by reference to quoted market prices.
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 % senior subordinated
notes (the "offering"). In December 1997, the notes were exchanged for $100.0
million aggregate principal amount of fixed rate 10 % senior subordinated notes
due in full in 2007 and which were registered and are publicly traded. 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 notes are currently guaranteed by
the Company's wholly-owned subsidiary, Carson Products Company. Johnson Products
and Dermablend, formerly indirect wholly-owned subsidiaries of the Company, were
also guarantor subsidiaries of the Notes until they were merged into Carson
Products during 1999. 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 $57.7 million at December 31, 1999. At December 31, 1998,
the carrying value was $73.0 million compared to a fair value of approximately
$51.1 million. Fair value was determined by reference to quoted market prices.
Credit Facility
In April 1997, the Company amended a credit facility with Credit Agricole
Indosuez to change the Company's then existing $40.0 million senior credit
facility to a $100.0 million senior credit facility consisting of $25.0 million
of Term A loans, $50.0 million of Term B loans and a $25.0 million revolving
loan commitment. The proceeds of the new term loans were used in part to finance
the Cutex acquisition (see Note 5). In connection with the refinancing, the
Company incurred debt issuance costs of approximately $2.6 million, including
$520,000 paid to MCG Global, LLC (see Note 18).
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.
47
<PAGE>
Note 12. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
Compensation and benefits $ 4,568 $ 4,359
Diva returns and price reductions 1,300 --
Promotional expenses 1,280 2,093
Interest 1,262 1,262
Self insurance 1,050 1,159
Advertising 868 702
Property and sales taxes 481 697
Professional fees 404 985
Accruals related to restructuring 147 1,455
Accruals related to Cutex disposition -- 4,207
Other 2,270 2,387
- --------------------------------------------------------------------------------
$ 13,630 $ 19,306
================================================================================
Note 13. 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 years
noted:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate (34.0)% 34.0 % 34.0 %
State income taxes, net of federal benefit 0.9 % 1.1 % 1.2 %
Foreign taxes 13.6 % (3.2)% ----
Valuation allowance 33.5 % 179.6 % ----
Goodwill 3.2 % 5.8 % 6.1 %
Foreign tax credit (2.8)% ---- ----
Loss on sale of management company
stock (see Note 14) ---- (178.6)% ----
Gain on sale of Carson South Africa stock ---- 23.5 % ----
Other 0.6 % (0.6)% (4.2)%
- ------------------------------------------------------------------------------------------------------------
Effective rate 15.0 % 61.6 % 37.1 %
============================================================================================================
</TABLE>
48
<PAGE>
Income tax expense (benefit) for the years noted includes the following (in
thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
- ------------------------------------------------ --------------------- --------------------- --------------------
<S> <C> <C> <C>
Current:
Federal $ ---- $ ---- $ ----
State 182 120 ----
Foreign 1,311 3,389 1,728
--------------------- --------------------- --------------------
Total current provision 1,493 3,509 1,728
--------------------- --------------------- --------------------
Deferred:
Federal ---- 697 885
State ---- 137 104
Foreign 323 (44) 62
--------------------- --------------------- --------------------
Total deferred provision 323 790 1,051
--------------------- --------------------- --------------------
Total provision before extraordinary items 1,816 4,299 2,779
Extraordinary items ---- 84 (1,201)
--------------------- --------------------- --------------------
Total income tax expense $ 1,816 $ 4,383 $ 1,578
================================================ ====================== ===================== ====================
</TABLE>
The effects of temporary differences which gave rise to the deferred tax asset
and liability are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------- ---------------------------
(in thousands) Current Long-term Current Long-term
- ------------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Deferred domestic tax assets related to:
Inventories $ 4,282 $ ---- $ 6,036 $ ----
Loss on sale of Cutex 3,511 ---- ---- 5,625
NOL carryforward ---- 9,845 ---- 4,181
Accrued expenses 400 1,198 3,653 616
Package design costs 999 ---- 383 ----
Allowance for doubtful accounts 1,236 ---- 924 ----
Foreign tax credit carryforward ---- 1,064 ---- 702
State income tax credits and other 398 839 156 1,130
- ------------------------------------------------------- ------------- ------------- ------------- -------------
10,826 12,946 11,152 12,254
Deferred domestic tax liabilities related to:
Inventories (514) ---- (122) (3,967)
Amortization ---- (2,634) ---- (2,869)
Property, plant and equipment ---- (2,918) ---- (2,152)
Allowance for doubtful accounts ---- ---- ---- (219)
Other ---- ---- (1,227) (313)
- ------------------------------------------------------- ------------- ------------- ------------- -------------
(514) (5,552) (1,349) (9,520)
- ------------------------------------------------------- ------------- ------------- ------------- -------------
Deferred domestic tax asset $ 10,312 $ 7,394 $ 9,803 $ 2,734
Valuation allowance (10,312) (7,394) (9,803) (2,734)
- ------------------------------------------------------- ------------- ------------- ------------- -------------
Net deferred domestic tax asset $ ---- $ ---- $ ---- $ ----
======================================================= ============= ============= ============= =============
Deferred foreign tax liability $ ---- $ (698) $ ---- $ (325)
======================================================= ============= ============= ============= =============
</TABLE>
49
<PAGE>
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 1999 and 1998.
Deferred income taxes were not provided on undistributed earnings of certain
foreign subsidiaries ($13.0 million at December 31, 1999 and 1998) because such
undistributed earnings are expected to be reinvested indefinitely overseas. If
these amounts were not considered permanently invested, additional deferred
taxes of approximately $0.3 million and $0.7 million would have been provided at
December 31, 1999 and December 31, 1998, respectively. The foreign tax credit
carryforward and the net operating loss carryforward at December 31, 1999 expire
in 2004 and 2019, respectively. State income tax credits expire generally in the
years 2004 through 2010.
Note 14. 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 1999 and 1998 and $262,500 in 1997.
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 ($1.47 million at December 31, 1999 and $1.53 million at December 31,
1998) is classified in other liabilities in the accompanying balance sheets.
The Company provides postretirement health care benefits to a limited number of
key executives and retired employees. The accumulated postretirement benefit
obligation ("APBO") was $405,000 at December 31, 1999 and $572,000 at December
31, 1998. For measurement purposes, the cost of providing medical benefits was
assumed to increase by 8% in the fiscal year ended December 31, 1999, 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 6.7% at December 31, 1999 and 5.4% at December 31,
1998.
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
13).
50
<PAGE>
Note 15. 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, 1999, only awards of options and restricted shares were
outstanding. 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.
Restricted shares were also granted to directors under the "1996 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. Restricted share expense for the
years ended December 31, 1999, 1998 and 1997 was $384,000, $200,000 and $40,000,
respectively.
The following summarizes stock option activity for 1999, 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
Granted 918,000 3.27
Canceled or expired (395,000) 4.11
---------------------------------------------------------------------------
Outstanding at December 31, 1999 1,487,025 $ 4.38
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 consistent with
the provisions of FAS 123, the Company's net income and basic and diluted
earnings per share for the years ended December 31,1999, 1998 and 1997 would
have been reduced to the pro forma amounts indicated below (in thousands except
per share amounts):
51
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net (loss) income, as reported $ (14,288) $ 91 $ 1,668
Net (loss) income, pro forma (15,245) (636) 1,243
Basic and diluted (loss) earnings per share, as reported (0.94) 0.01 0.11
Basic and diluted earnings (loss) per share, pro forma (1.01) (0.04) 0.08
</TABLE>
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 1999, 1998 and 1997, respectively: (i)
dividend yield of 0%, 0% and 0%, (ii) expected volatility of 61%, 54% and 57%,
(iii) risk-free interest rate of 5.5%, 4.7% and 6.5% and (iv) expected life of
6.0 years, 6.0 years and 4.9 years. The weighted average fair value of the
options granted during 1999, 1998 and 1997 was $2.04, $1.89 and $4.74,
respectively.
The following table summarizes information about stock options outstanding at
December 31, 1999:
- --------------------------------------------------------------------------------
Exercise Number Outstanding Weighted Average Remaining Number Exercisable
Price at December 31, 1999 Contractual Life at December 31, 1999
- --------------------------------------------------------------------------------
$ 14.00 19,000 6.8 19,000
10.94 25,000 7.7 16,667
9.56 50,000 7.5 33,333
9.22 40,000 7.4 26,667
8.75 42,525 8.3 14,175
8.29 40,000 8.4 13,333
7.50 100,000 7.3 83,333
7.34 10,000 8.4 3,333
4.13 200,000 9.2 ----
3.19 373,000 9.3 ----
2.88 300,000 9.8 ----
2.81 45,000 9.5 ----
2.47 242,500 8.9 80,834
- --------------------------------------------------------------------------------
1,487,025 9.0 290,675
- --------------------------------------------------------------------------------
Note 16. 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 18.
52
<PAGE>
Note 17. U.S. and Foreign Operations
The Company operates in one business segment, the manufacture and marketing of
personal care products. 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>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
- --------------------------------------- ---------------------- ---------------------- ------------------------
<S> <C> <C> <C>
Net Sales:
United States:
Domestic $ 107,744 $ 98,096 $ 75,834
Export 7,623 6,257 7,524
Europe 9,970 7,170 4,611
South Africa 44,018 39,183 21,662
- --------------------------------------- ---------------------- ---------------------- ------------------------
$ 169,355 $ 150,706 $ 109,631
- --------------------------------------- ---------------------- ---------------------- ------------------------
Net Sales Sold Under:
Carson and Johnson labels:
Domestic $ 93,321 $ 79,645 $ 56,805
Export 7,623 6,257 7,524
Europe 9,970 7,170 4,611
Dermablend label 16,521 3,264 1,229
Cutex label (2,098) 15,187 17,800
South Africa label 44,018 39,183 21,662
- --------------------------------------- ---------------------- ---------------------- ------------------------
$ 169,355 $ 150,706 $ 109,631
- --------------------------------------- ---------------------- ---------------------- ------------------------
Operating income (loss):
United States $ (265) $ (37,671) $ 7,582
Europe 3,562 2,290 ----
South Africa 1,620 7,033 4,667
- --------------------------------------- ---------------------- ---------------------- ------------------------
$ 4,917 $ (28,348) $ 12,249
- --------------------------------------- ---------------------- ---------------------- ------------------------
Identifiable assets (at end of
period):
United States $ 250,193 $ 256,369 $ 190,264
Europe 2,478 2,751 ----
South Africa 51,532 60,738 42,545
Eliminations (57,555) (52,395) (31,385)
- --------------------------------------- ---------------------- ---------------------- ------------------------
$ 246,648 $ 267,463 $ 201,424
- --------------------------------------- ---------------------- ---------------------- ------------------------
</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,
Ultra Star, Classy Curl and Curly Perm. Principal brands sold under the
Dermablend label include: Dermablend, Posner and Dark and Lovely Cosmetics.
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.
53
<PAGE>
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, South America, Canada and other
international areas, excluding Europe 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.
Note 18. Certain Relationships and Related Transactions
MCG Global, LLC and Morningside Capital Group, L.L.C.
On September 1, 1999, the Management Assistance Agreement by and between Carson
Products and Morningside Capital Group, L.L.C. ("Morningside"), dated August 23,
1995 (as amended, the "Morningside Management Agreement"), was terminated by
mutual consent of the parties thereto. Following termination of the Morningside
Management Agreement, Carson Products entered into a substantially similar
Management Assistance Agreement with MCG Global, LLC ("MCG") on September 1,
1999 (the "MCG Management Agreement"). The principal members of MCG are the
former principal members of Morningside. Pursuant to the MCG Management
Agreement, MCG agrees to supply the services of a principal member of MCG 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 plus
reimbursement for out-of-pocket expenses. The termination date of the MCG
Management Agreement is August 23, 2003; however, the term of the agreement
shall continue after such termination date until terminated by not less than 30
days' advance notice by either party. Notwithstanding the foregoing, the MCG
Assistance Agreement will terminate upon consummation of the merger.
In connection with the 1998 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. From time to time MCG may provide
financial advisory services to the Company, for which MCG will receive usual and
customary compensation.
AM Cosmetics
AM Products Company, formerly known as Morningside AM Acquisition Corp. ("AMP"),
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 "AMP PIK Preferred Shares") issued by AMP, at a price of $10,000 per share.
The AMP PIK Preferred Shares were substantially exchanged by Carson Products for
an equal number of shares of cumulative payment-in-kind Preferred Shares of AM
Cosmetics, the parent corporation of AMP (the "PIK Preferred Shares"). AM
Cosmetics and AMP were formed by Morningside on behalf of an investor group to
acquire the assets of Arthur Matney Co., Inc. AM Cosmetics sells several brands
54
<PAGE>
of budget cosmetics, one of which is targeted at the African-American consumer.
Certain key management personnel and shareholders of the Company are or have
been key management and shareholders of AM Cosmetics. Dr. Leroy Keith, Chairman
of the Company, and Vincent A. Wasik, a controlling stockholder of the Company
have ownership interests in AM Cosmetics. Lawrence E. Bathgate, II, a member of
the Company's Board of Directors, serves as a member of AM Cosmetics' Board of
Directors.
The PIK Preferred Shares were non-voting and were entitled to cumulative
dividends payable quarterly in additional PIK Preferred Shares at a rate of 12%
per annum. Additionally, the PIK Preferred Shares were subject to redemption in
whole at the option of Carson Products on or after July 1, 2005, at the stated
value of $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 management turnover and serious financial difficulties
which continued throughout 1999. The Company recorded a charge of $3.7 million
in 1998 to write off its investment in the PIK Preferred Shares, as a result of
what management believed was a permanent 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,
1999, 1998 and 1997, the Company received $0, $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 1999 and 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 (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 $0.2 million, $4.7 million and $2.0
million, from AM Cosmetics in 1999, 1998 and 1997, respectively, under the AM
Manufacturing Agreement. The AM Manufacturing Agreement expired on May 1, 1999.
Carson Products and AM Cosmetics also entered into a sales and marketing
agreement in 1997 (the "AM Sales/Marketing Agreement") in accordance with the
Carson-AM Management Agreement. 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 aggregated $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 (the "Arbitration"). In its first claim, AM Cosmetics
asserted that the Company breached the Carson-AM Management Agreement by failing
55
<PAGE>
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
asserted 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. In 1999, the Company filed a lawsuit
against AM Cosmetics in Georgia (the "Lawsuit") and also filed a Verified
Complaint for Declaratory Judgment against AM Cosmetics in New Jersey (the "New
Jersey Action").
On February 25, 2000, the Company entered into a settlement agreement (the
"Settlement Agreement") with mutual releases with AM Cosmetics to resolve the
Arbitration, the Lawsuit and the New Jersey Action. Pursuant to the Settlement
Agreement, the Company agreed to pay AM Cosmetics $2.0 million and surrender its
PIK Preferred Shares. The Company paid AM Cosmetics $1.0 million upon execution
of the Settlement Agreement and paid the remaining $1.0 million on March 30,
2000. The PIK Preferred Shares were surrendered to AM Cosmetics, and appropriate
filings were made terminating with prejudice each of the Arbitration, the
Lawsuit and the New Jersey Action. In connection with the Settlement
Agreement, six directors of the Company had caused Grandbank, a Maryland state
chartered bank, to issue an irrevocable letter of credit (the "Letter of
Credit") in the amount of $690,000 to secure a portion of the second $1.0
million payment (the "Second Payment"). Because the Second Payment was made
prior to March 31, 2000, no draw down on the Letter of Credit was necessary and
the Letter of Credit was subsequently canceled.
As a result of this settlement, the Company recorded a non-recurring charge of
$1.35 million in 1999 and had a payable to AM Cosmetics of $2.0 million at
December 31, 1999. Approximately $0.65 million of the $2.0 million settlement
had been expensed but not paid prior to 1999 in connection with the AM
Manufacturing Agreement and the AM Sales/Marketing Agreement discussed above.
Note 19. Going Concern
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has reported a net
loss of $14.3 million for the year ended December 31, 1999. The Company elected
to defer the monthly interest payment on its secured term loan six times in 1999
and thereby added $5.0 million to the outstanding principal balance, which
totaled $65.3 million at December 31, 1999 (See Note 11). The Company elected to
defer the monthly interest payment three additional times in 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.
At the end of April 2000, the Company must pay 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. Management plans to meet 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
56
<PAGE>
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
a going concern. These consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Note 20. Quarterly Financial Information (Unaudited)
Unaudited quarterly financial information for the years ended December 31, 1999
and 1998 is as follows (in thousands except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1999:
Net sales $ 41,653 $ 41,067 $ 48,010 $ 38,625
Gross profit 21,768 21,579 25,098 17,163
Net income (loss) $ 180 $ (2,636) $ 1,060 $ (12,892)
Basic and diluted net income (loss) per common
share $ 0.01 $ (0.17) $ 0.07 $ (0.85)
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)
</TABLE>
57
<PAGE>
Note 21. 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 the quarters ended June 30, 1999 and September 30, 1999,
respectively. 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. 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 52.5%-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.
58
<PAGE>
Consolidating Statement of Operations for the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiary subsidiaries Eliminations Carson, Inc.
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales $ ---- $ 115,367 $ 53,988 $ ---- $ 169,355
Cost of goods sold ---- 55,401 28,346 ---- 83,747
-------------- -------------- -------------- -------------- --------------
Gross profit ---- 59,966 25,642 ---- 85,608
Marketing and selling expenses ---- 35,246 13,442 ---- 48,688
General and administrative expenses ---- 24,386 7,017 ---- 31,403
Restructuring expenses ---- 600 ---- ---- 600
-------------- -------------- -------------- -------------- --------------
Operating expenses ---- 60,232 20,459 ---- 80,691
-------------- ------------- --------------- -------------- --------------
Operating (loss) income ---- (266) 5,183 ---- 4,917
Other income (expense) ---- (16,213) (798) ---- (17,011)
Equity in subsidiary earnings (net of
taxes) (14,288) ---- ---- 14,288 ----
--------------- -------------- -------------- --------------- -------------
Income (loss) before income taxes and
minority interest (14,288) (16,479) 4,385 14,288 (12,094)
Income taxes ---- (182) (1,634) ---- (1,816)
-------------- -------------- -------------- -------------- --------------
Income (loss) before minority
interest (14,288) (16,661) 2,751 14,288 (13,910)
Minority interest ---- ---- (378) ---- (378)
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ (14,288) $ (16,661) $ 2,373 $ 14,288 $ (14,288)
============== ============== ============== ============= ==============
</TABLE>
59
<PAGE>
Consolidating Statement of Operations for the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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>
60
<PAGE>
Consolidating Statement of Operations for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ ---- $ 87,969 $ 21,662 $ ---- $ 109,631
Cost of goods sold ---- 39,782 10,728 ---- 50,510
------------- ------------- ------------- ------------- -------------
Gross profit ---- 48,187 10,934 ---- 59,121
Marketing and selling expenses ---- 24,036 4,122 ---- 28,158
General and administrative expenses ---- 16,569 2,145 ---- 18,714
------------- ------------- ------------- ------------- -------------
Operating 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>
61
<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 $ 234,076 $ 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 $ 234,076 $ 54,020 $ (99,069) $ 246,648
============= ============= ============= ============= =============
</TABLE>
62
<PAGE>
Consolidating Balance Sheet as of December 31, 1998
<TABLE>
<CAPTION>
Carson, Inc. Guarantor Non-guarantor Consolidated
(parent) subsidiaries subsidiaries Eliminations Carson, Inc.
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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>
63
<PAGE>
Consolidating Statement of Cash Flows for the Year Ended December 31, 1999
<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) $ (14,288) $ (16,661) $ 2,373 $ 14,288 $ (14,288)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization ---- 6,017 1,369 ---- 7,386
Interest deferred on secured term loan ---- 4,990 ---- ---- 4,990
Non-cash special charges ---- 575 1,396 ---- 1,971
Foreign currency transaction loss ---- ---- 1,301 ---- 1,301
Minority interest in earnings of
subsidiary ---- ---- 378 ---- 378
Other, net 14,288 1,248 888 (14,288) 2,136
Changes in operating assets and
liabilities ---- (4,596) (597) ---- (5,193)
------------- ------------- -------------- -------------- --------------
Total adjustments 14,288 8,234 4,735 (14,288) 12,969
------------- ------------- -------------- -------------- --------------
Net cash provided by (used in )
operating activities ---- (8,427) 7,108 ---- (1,319)
------------- ------------- -------------- -------------- --------------
Investing Activities:
Additions to property, plant and
equipment ---- (3,656) (1,949) ---- (5,605)
Purchase of investments ---- ---- (5,683) ---- (5,683)
Issuance of long-term note receivable ---- ---- (1,000) ---- (1,000)
Collection of long-term note receivable ---- 517 ---- ---- 517
------------- ------------- -------------- -------------- --------------
Net cash used in investing activities ---- (3,139) (8,632) ---- (11,771)
------------- ------------- -------------- -------------- --------------
Financing Activities:
Payments on A&J Cosmetics payable ---- ---- (6,355) ---- (6,355)
Proceeds from sale of subsidiary stock ---- ---- 281 ---- 281
Principal payments on debt ---- ---- (225) ---- (225)
Other ---- 2,641 (2,764) ---- (123)
------------- ------------- -------------- -------------- --------------
Net cash used in financing activities ---- 2,641 (9,063) ---- (6,422)
------------- ------------- -------------- -------------- --------------
Effect of Exchange Rate Changes ---- ---- (454) ---- (454)
------------- ------------- -------------- -------------- --------------
Net decrease in Cash and Cash Equivalents ---- (8,925) (11,041) ---- (19,966)
Cash and Cash Equivalents at Beginning of
Year ---- 12,320 16,386 ---- 28,706
------------- ------------- -------------- -------------- --------------
Cash and Cash Equivalents at End of Year $ ---- $ 3,395 $ 5,345 $ ---- $ 8,740
============= ============= ============== ============== ==============
</TABLE>
64
<PAGE>
Consolidating Statement of Cash Flows for the Year Ended December 31, 1998
<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) $ 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 ---- (127) ---- ---- (127)
benefit
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 (91) (3,867) (4,646) 82 (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>
65
<PAGE>
Consolidating Statement of Cash Flows for the Year Ended December 31, 1997
<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) $ 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>
66
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the 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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1999, 1998 and 1997. 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 did not audit
the financial statements of Carson Holdings Limited (a consolidated subsidiary),
which statements reflect total assets constituting 20.9% and 22.7%,
respectively, of consolidated total assets as of December 31, 1999 and 1998, and
total revenues constituting 26.0% of consolidated total revenues for the years
then ended. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Carson Holdings Limited, is based solely on the report of such
other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such consolidated financial statements present fairly, in all material respects,
the financial position of Carson, Inc. and its subsidiaries as of December 31,
1999 and 1998, and the results of their operations and their cash flows for the
years ended December 31, 1999, 1998 and 1997 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial statements, on
February 25, 2000 the Company entered into an Agreement and Plan of Merger with
Cosmair, Inc.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 19
to the consolidated financial statements, the Company has incurred a net loss of
$14.3 million for the year ended December 31, 1999. As further discussed in Note
11, the Company has also elected to defer the monthly interest payment on its
secured term loan six times in 1999 (and thereby added $5.0 million to the
outstanding principal balance) and elected to defer the monthly interest payment
three additional times aggregating $2.6 million in 2000; the outstanding
principal balance of the secured term loan totaled $68.0 million at March 31,
2000. At the end of April 2000, the Company must pay 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
67
<PAGE>
term loan. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 19. These consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
April 10, 2000
68
<PAGE>
Report of the independent auditors to the Directors of Carson Holdings Limited
We have audited the accompanying consolidated balance sheets of Carson Holdings
Limited and its subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, cash flows, and changes in stockholders'
equity for each of the years in the two-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in South Africa, the local standards applicable to Carson Holdings Limited, that
are substantially equivalent to auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance as to 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Carson Holdings
Limited and its subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and cash flows for each of the years in the two-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles in South Africa.
Accounting principles generally accepted in South Africa vary in certain
significant respects from accounting principles generally accepted in the United
States. Application of accounting principles generally accepted in the United
States would have affected results of operations for each of the years in the
two-year period ended December 31, 1999 and stockholders' equity as of December
31, 1999 and 1998, to the extent summarized in the footnote to the consolidated
financial statements.
KPMG Inc.
Registered Accountants & Auditors
/s/ Per Mark Hoffman
Partner
10 April 2000
69
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the information contained in the Information Statement,
filed with the Securities Exchange Commission on March 8, 2000, pursuant to
Section 14(f) of the Securities Exchange Act of 1934 and Rule 14F-1 thereunder,
which is attached as Exhibit 99 hereto and is incorporated herein by reference.
Item 11. Executive Compensation
Reference is made to the information contained in the Information Statement,
filed with the Securities Exchange Commission on March 8, 2000, pursuant to
Section 14(f) of the Securities Exchange Act of 1934 and Rule 14F-1 thereunder,
which is attached as Exhibit 99 hereto and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information contained in the Information Statement,
filed with the Securities Exchange Commission on March 8, 2000, pursuant to
Section 14(f) of the Securities Exchange Act of 1934 and Rule 14F-1 thereunder,
which is attached as Exhibit 99 hereto and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the information contained in the Information Statement,
filed with the Securities Exchange Commission on March 8, 2000, pursuant to
Section 14(f) of the Securities Exchange Act of 1934 and Rule 14F-1 thereunder,
which is attached as Exhibit 99 hereto and is incorporated herein by reference.
70
<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, 1999 and 1998, the related statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1999, 1998
and 1997, and the related report of Deloitte Touche LLP.
(b) The Company filed a report on Form 8-K on March 2, 2000, which contained
the Agreement and Plan of Merger, dated as of February 25, 2000, by and among
Cosmair, Inc., Crayon Acquisition Corp. and Carson, Inc.; the Stockholders
Agreement, dated as of February 25, 2000, among Cosmair, Inc., Crayon
Acquisition Corp., Carson, Inc. and the stockholders of the Company signatory
thereto; the Settlement Agreement, dated as of February 25, 2000, among Carson
Products Company, AM Cosmetics Corp. and AM Products Company; the Release,
dated as of February 25, 2000, by Carson Products Company in favor of AM
Cosmetics Corp. And AM Products Company; the Release, dated as of February 25,
2000, by AM Cosmetics Corp. and AM Products Company in favor of Carson Products
Company; the Letter Agreement, dated as of February 25, 2000, among Carson, Inc.
and certain directors of the Company; and the Carson, Inc. Press Release, dated
February 28, 2000.
The Company filed a report on Form 8-K on April 7, 2000, which noted a change
in the certifying accountant of Carson Holdings Ltd., the Company's
majority-owned South African subsidiary.
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 10 % Senior Subordinated Note due 2007, Series B (included as
Exhibit B to Exhibit 4.1)
- --------- ----------------------------------------------------------------------
71
<PAGE>
- --------- ----------------------------------------------------------------------
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 Roch'e
- --------- ----------------------------------------------------------------------
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 Mule'y
- --------- ----------------------------------------------------------------------
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, 1996 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
- --------- ----------------------------------------------------------------------
72
<PAGE>
- --------- ----------------------------------------------------------------------
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 Roch'e and Carson, Inc.
- --------- ----------------------------------------------------------------------
10.27* Promissory note between John P. Brown and Carson, Inc.
- --------- ----------------------------------------------------------------------
10.28* Promissory note between Dennis Smith and Carson, Inc.
- --------- ----------------------------------------------------------------------
10.33* Pledge Agreement dated August 13, 1996 between John P. Brown and
Carson, Inc.
- --------- ----------------------------------------------------------------------
10.34* Pledge Agreement dated August 13, 1996 between Miriam Mule'y and
Carson, Inc.
- --------- ----------------------------------------------------------------------
10.35* Pledge Agreement dated August 13, 1996 between Joyce Roch'e 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
- --------- ----------------------------------------------------------------------
73
<PAGE>
- --------- ----------------------------------------------------------------------
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 Mule'y 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
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, 1998
- --------- ----------------------------------------------------------------------
10.56++++ Secured Term Loan Agreement between Carson Products Company, Carson
Inc., Quantum Partners LDC and Norwest Bank Minnesota, N.A., as
collateral agent.
- --------- ----------------------------------------------------------------------
12.1*** Statement re Computation of Ratio of Earnings to Fixed Charges
- --------- ----------------------------------------------------------------------
16* Letter regarding Change in Certifying Accountant from Price Waterhouse
LLP
- --------- ----------------------------------------------------------------------
18*** Letter re Change in Accounting Principles, dated August 11, 1997 from
Deloitte & Touche LLP to Carson, Inc., incorporated herein by
reference to Carson, Inc.'s Quarterly Report on Form 10-Q of the
quarter ended June 30, 1997, as amended
- --------- ----------------------------------------------------------------------
21.1 Subsidiaries of Carson, Inc.
- --------- ----------------------------------------------------------------------
23.2 Consent of Deloitte & Touche LLP
- --------- ----------------------------------------------------------------------
23.3 Consent of KPMG Inc.
- --------- ----------------------------------------------------------------------
24.1*** Powers of Attorney (included on signature pages of this Annual Report
on Form 10-K)
- --------- ----------------------------------------------------------------------
27 Financial Data Schedule
- --------- ----------------------------------------------------------------------
99 Information Statement, filed with the Securities Exchange Commission
on March 8, 2000, pursuant to Section 14(f) of the Securities Exchange
Act of 1934 and Rule 14F-1.
- --------- ----------------------------------------------------------------------
74
<PAGE>
- --------- ----------------------------------------------------------------------
* 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 Quarterly Report
on Form 10-Q for the period ended June 30, 1998.
- --------- ----------------------------------------------------------------------
+ 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.
- --------- ----------------------------------------------------------------------
++ 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 Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
- --------- ----------------------------------------------------------------------
++++ Incorporated herein by reference to Carson, Inc.'s Current Report on
Form 8-K dated December 24, 1998.
- --------- ----------------------------------------------------------------------
75
<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: April 14, 2000 By: /s/Dr. Leroy Keith
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:April 14, 2000 By: /s/Dr.Leroy Keith
Dr. Leroy Keith
Chairman and Director
Date: April 14, 2000 By: /s/Malcolm R. Yesner
Malcolm R. Yesner
President and Chief Executive Officer and
Director
Date: April 14, 2000 By: /s/Lawrence E. Bathgate, II
Lawrence E. Bathgate, II
Director
76
<PAGE>
Date: April 14, 2000 By: /s/Melvyn J. Estrin
Melvyn J. Estrin
Director
Date: April 14, 2000 By: /s/John L. Sabre
John L. Sabre
Director
Date: April 14, 2000 By: /s/Vincent A. Wasik
Vincent A. Wasik
Director
Date: April 14, 2000 By: /s/Abbey J. Butler
Abbey J. Butler
Director
Date: April 14, 2000 By: /s/Jack F. Kemp
Jack F. Kemp
Director
Date: April 14, 2000 By: /s/Robert W. Pierce
Robert W. Pierce
Executive Vice President, Finance
Chief Financial Officer and
Corporate Secretary
(Principal Accounting and Financial
Officer)
77
<PAGE>
Exhibit-23.2
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 April
10, 2000, (which report expresses an unqualified opinion and includes
explanatory paragraphs relating to the Agreement and Plan of Merger between the
Company and Cosmair, Inc. and the uncertainty of the Company's ability to
continue as a going concern) appearing in this Annual Report on Form 10-K of
Carson, Inc. for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
April 10, 2000
78
<PAGE>
Exhibit-23.3
INDEPENDENT AUDITORS' CONSENT
We consent to incorporation by reference in the registration statements (No.
333-21141 and No. 333-37663) on Form S-8 of Carson Inc. of our report dated
April 10, 2000, relating to the consolidated balance sheets of Carson Holdings
Limited and its subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, changes in stockholders' equity, and cash
flows for the years then ended, which report appears in the December 31, 1999,
annual report on Form 10-K of Carson Inc.
KPMG Inc.
Registered Accountants and Auditors
/s/ KPMG Inc.
Johannesburg, South Africa
10 April 2000
79
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
SCHEDULE 14D-9
(RULE 14D-101)
SOLICITATION/RECOMMENDATION STATEMENT
UNDER SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
-------------------
CARSON, INC.
(NAME OF SUBJECT COMPANY)
-------------------
CARSON, INC.
(NAME OF PERSON(S) FILING STATEMENT)
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS OF SECURITIES)
-------------------
14584510
(CUSIP NUMBER OF CLASS OF SECURITIES)
-------------------
MALCOLM R. YESNER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CARSON, INC.
64 ROSS ROAD, SAVANNAH INDUSTRIAL PARK
SAVANNAH, GEORGIA 31405
TELEPHONE: (912) 651-3400
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON
AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS
ON BEHALF OF THE PERSON(S) FILING STATEMENT)
-------------------
COPIES TO:
LAWRENCE LEDERMAN, ESQ.
ROBERT S. REDER, ESQ.
MILBANK, TWEED, HADLEY & MCCLOY LLP
ONE CHASE MANHATTAN PLAZA
NEW YORK, NEW YORK 10005
(212) 530-5000
[ ] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
- --------------------------------------------------------------------------------
<PAGE>
ITEM 1. SUBJECT COMPANY INFORMATION.
(a) Name and Address. The name of the subject company is Carson, Inc., a
Delaware corporation (the 'Company'). The address of its principal executive
offices is 64 Ross Road, Savannah Industrial Park, Savannah, Georgia 31405 and
the telephone number is (912) 651-3400.
(b) Securities. The title of the class of equity securities to which this
statement relates is Class A Common Stock, par value $.01 per share, of the
Company (the 'Class A Common Stock' or the 'Shares'). As of February 25, 2000,
10,083,485 shares of Class A Common Stock were issued and outstanding. In
addition, as of that date, 5,126,163 shares of Class C Common Stock, par value
$.01 per share, of the Company (the 'Class C Common Stock' and, together with
the Class A Common Stock, the 'Company Common Stock') were issued and
outstanding. Each share of Class C Common Stock is convertible into one share of
Class A Common Stock.
ITEM 2. IDENTITY AND BACKGROUND OF THE FILING PERSON.
(a) Name and Address. The name, business address and business telephone of
the Company, which is the person filing this statement, are set forth in Item
1(a) above, which information is incorporated herein by reference.
(b) Tender Offer. This statement relates to the tender offer by Crayon
Acquisition Corp. ('Purchaser'), a Delaware corporation and a wholly-owned
subsidiary of Cosmair, Inc., a Delaware corporation ('Parent'), disclosed in a
Tender Offer Statement on Schedule TO (the 'Schedule TO'), dated March 8, 2000,
offering to purchase all of the outstanding Shares at a price of $5.20 per
share, net to the seller in cash (the 'Offer Price'), upon the terms and subject
to the conditions set forth in the Offer to Purchase dated March 8, 2000, and
any supplement thereto (the 'Offer to Purchase'), and the related Letter of
Transmittal, and any supplement thereto (which, together with the Offer to
Purchase, constitute the 'Offer').
The Offer is being made pursuant to an Agreement and Plan of Merger, dated
as of February 25, 2000 (the 'Merger Agreement'), by and among Parent, Purchaser
and the Company. The Merger Agreement provides, among other things, that
following satisfaction or waiver of the conditions set forth in the Merger
Agreement, Purchaser will be merged with and into the Company (the 'Merger'),
the separate corporate existence of Purchaser will cease and the Company will
continue as the surviving corporation (the 'Surviving Corporation'). In the
Merger, each outstanding share of Company Common Stock (other than shares held
in the treasury of the Company, or by Parent, Purchaser or any other
wholly-owned subsidiary of Parent, which shares will be cancelled, and other
than Shares, if any, held by stockholders who perfect any appraisal rights they
may have under the Delaware General Corporation Law (the 'DGCL')) remaining
outstanding, will, by virtue of the Merger and without any action by the holder
thereof, be converted into the right to receive the Offer Price in cash.
According to the Schedule TO, the principal executive offices of Parent and
Purchaser are located at 575 Fifth Avenue, New York, NY 10017.
ITEM 3. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.
Except as described or referred to in the Information Statement attached as
Schedule I hereto or as set forth below, to the knowledge of the Company, there
are no material contracts, agreements, arrangements and understandings and no
actual or potential conflicts of interests between the Company and its
affiliates and (i) the Company, its executive officers and directors or
affiliates or (ii) Parent or Purchaser or any of their respective executive
officers, directors or affiliates.
CONFIDENTIALITY AGREEMENT.
On July 24, 1997, Parent and the Company entered into a confidentiality
agreement which was reaffirmed on March 10, 1999 (the 'Confidentiality
Agreement'). Pursuant to the Confidentiality Agreement, Parent agreed to use the
Evaluation Material (as defined in the Confidentiality
1
<PAGE>
Agreement) furnished to it by the Company solely for the purpose of evaluating a
possible negotiated transaction between Parent and the Company and further
agreed to keep such material confidential. In addition, Parent agreed in the
Confidentiality Agreement that, for a period of two years, it would refrain from
acquiring, seeking or proposing to acquire the Company or any of its securities
or to engage in the solicitation of proxies for the Company's securities or
otherwise from seeking or proposing to control the Company Board (as defined
herein). The Confidentiality Agreement, a copy of which has been filed as
Exhibit (e)(1) hereto, is more fully summarized in the Offer to Purchase under
the heading 'PURPOSE OF THE OFFER AND THE MERGER; PLANS FOR THE COMPANY; MERGER
AGREEMENT; STOCKHOLDERS AGREEMENT AND OTHER AGREEMENTS; OTHER MATTERS --
CONFIDENTIALITY AGREEMENT' and is incorporated herein by reference.
EXCLUSIVITY AGREEMENT.
On February 3, 2000, Parent and the Company entered into an exclusivity
agreement (the 'Exclusivity Agreement'). Pursuant to the Exclusivity Agreement,
the Company, subject to certain exceptions, agreed to negotiate exclusively with
Parent with respect to a possible acquisition of the Company until February 14,
2000, and to afford Parent and its affiliates reasonable access to complete
their due diligence review of the Company. The Company's largest stockholder,
DNL Partners Limited Partnership ('DNL'), which controls a majority of the
voting power of the Company Common Stock through its ownership of 3,015,463
shares of Class C Common Stock, also agreed to be bound by the terms of the
exclusivity arrangement contained in the Exclusivity Agreement. The Exclusivity
Agreement, a copy of which has been filed as Exhibit (e)(2), is incorporated
herein by reference.
MERGER AGREEMENT.
Parent, Purchaser and the Company have entered into the Merger Agreement, a
copy of which is filed as Exhibit (e)(3) hereto. The description of the terms of
the Merger Agreement contained in the Offer to Purchase under the heading
'PURPOSE OF THE OFFER AND THE MERGER; PLANS FOR THE COMPANY; MERGER AGREEMENT;
STOCKHOLDERS AGREEMENT AND OTHER AGREEMENTS; OTHER MATTERS -- THE MERGER
AGREEMENT' is incorporated herein by reference.
STOCKHOLDERS AGREEMENT.
In connection with, and as a condition to the execution and delivery by
Parent of, the Merger Agreement, Parent, Purchaser, the Company and DNL and
certain other stockholders of the Company owning in the aggregate approximately
88% of the total voting power of all outstanding shares of Company Common Stock
entered into a Stockholders Agreement, dated as of February 25, 2000 (the
'Stockholders Agreement'), pursuant to which each of these stockholders has,
among other things, (i) subject to the fulfillment of certain conditions, agreed
to convert such stockholder's shares of Class C Common Stock into shares of
Class A Common Stock and to tender all of such stockholder's Shares in the
Offer, (ii) agreed to vote such stockholder's shares of Company Common Stock in
favor of the Merger and the Merger Agreement and against various matters that
could reasonably be expected to impede, interfere with, delay, postpone or
adversely affect the Merger and the transactions contemplated by the Merger
Agreement and the Stockholders Agreement and (iii) granted to Parent a proxy
with respect to the foregoing voting arrangements. The Stockholders Agreement, a
copy of which has been filed as Exhibit (e)(4), is more fully summarized in the
Offer to Purchase under the heading 'PURPOSE OF THE OFFER AND THE MERGER; PLANS
FOR THE COMPANY; MERGER AGREEMENT; STOCKHOLDERS AGREEMENT AND OTHER AGREEMENTS;
OTHER MATTERS -- THE STOCKHOLDERS AGREEMENT' and is incorporated herein by
reference.
2
<PAGE>
YESNER EMPLOYMENT AGREEMENT.
On February 25, 2000, in connection with, and as a condition to the
execution and delivery by Parent of, the Merger Agreement, Malcolm Yesner ('Mr.
Yesner'), the President and Chief Executive Officer of the Company, entered into
an employment agreement with Parent (the 'Yesner Employment Agreement') pursuant
to which Mr. Yesner will serve as the President of Carson Products Company, the
Company's wholly-owned subsidiary ('Carson Products'), and as an officer of
Parent. The Yesner Employment Agreement has an initial term of 24 months
commencing upon the earlier to occur of the completion of the Offer or the
effective date of the Merger (the 'Initial Term'). At the end of the Initial
Term, the Yesner Employment Agreement will remain in effect for additional
one-year terms unless either party has given written notice to the other party
90 days prior to the expiration. Mr. Yesner will receive an annual base salary
of $375,000 through December 31, 2000, $420,000 for the period January 1, 2001
through December 31, 2001 and not less than $420,000 for the period from January
1, 2002 through the remainder of the Initial Term. This base salary may be
increased, but not decreased, by Parent at any time.
Mr. Yesner will receive a guaranteed bonus of $150,000 for Parent's 2000
fiscal year and for the remainder of the term of employment will be eligible to
receive, in the sole discretion of Parent, an annual bonus of up to 30% of Mr.
Yesner's base salary at such time. Mr. Yesner is also entitled to the payment of
a retention bonus of $2,250,000 (the 'Retention Bonus') following the earliest
to occur of (i) the expiration of the Initial Term (provided Mr. Yesner is
employed by Parent on the last day thereof), (ii) Mr. Yesner's death or
disability and (iii) the termination of Mr. Yesner's employment without 'Cause'
or for 'Good Reason' (each as defined in the Yesner Employment Agreement).
Mr. Yesner will participate in Parent's Stock Incentive Plan maintained for
the benefit of the senior executives of Parent (the 'Stock Incentive Plan').
Parent will credit $100,000 to Mr. Yesner's phantom stock account for the 2000
fiscal year and for each successive completed fiscal year of employment Parent
will credit Mr. Yesner's account with an amount equal to Mr. Yesner's annual
bonus actually awarded in such year.
The Yesner Employment Agreement provides that if Mr. Yesner is terminated
without 'Cause' or resigns for 'Good Reason' Mr. Yesner will receive the
following: (i) the sum of his remaining base salary, (ii) any bonus payment Mr.
Yesner would have received had he worked the balance of the Initial Term or, if
applicable, during the balance of any renewal term, (iii) the Retention Bonus if
the Yesner Employment Agreement is terminated within the Initial Term, (iv)
continuation of certain health and welfare benefits, and (v) any other
compensation and benefits as may be provided in accordance with any applicable
plans, programs or agreements of Parent. The Yesner Employment Agreement also
provides that if Mr. Yesner is terminated for 'Cause' or resigns without 'Good
Reason', Mr. Yesner will not be entitled to any additional compensation, except
for any compensation or benefits as may be provided in accordance with any
applicable plans, programs or agreements of Parent.
The Yesner Employment Agreement provides that Mr. Yesner will not compete,
directly or indirectly, within any geographic area in which Parent or its
affiliates are doing business for a period of three years following the date of
Mr. Yesner's termination for any reason (the 'Restriction Period'). In
consideration of such restriction, Mr. Yesner will receive the following: (i)
during the first two years of the Restriction Period a payment of $500,000 per
year and (ii) during the last year of the Restriction Period a payment of
$400,000. If Mr. Yesner voluntarily terminates his employment (other than due to
disability or for 'Good Reason') during the Initial Term, Purchaser may elect to
waive the non-compete provisions in the Yesner Employment Agreement, in which
case, Parent would not be liable to pay any amounts during the Restriction
Period.
Upon the commencement of the Initial Term, the Yesner Employment Agreement
will supersede Mr. Yesner's current employment arrangements with the Company,
which are described in the Information Statement attached as Schedule I hereto.
3
<PAGE>
A copy of the Yesner Employment Agreement is attached as Exhibit (e)(5)
hereto and is incorporated herein by reference.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) Recommendation of the Company Board. On February 18, 2000, the Board of
Directors of the Company (the 'Company Board') unanimously (with three directors
abstaining as described below under ' -- Background') (i) determined that the
Merger Agreement and the transactions contemplated thereby, including the Offer
and the Merger, taken together, are fair to, and in the best interests of, the
holders of shares of Company Common Stock, (ii) approved and adopted the Merger
Agreement, the Offer, the Merger and the other transactions contemplated thereby
(including, without limitation, for purposes of Section 203 of the DGCL) and
(iii) recommended that the holders of shares of Company Common Stock accept the
Offer and, if required by the DGCL, approve and adopt the Merger Agreement and
the transactions contemplated thereby. ACCORDINGLY, THE COMPANY BOARD RECOMMENDS
THAT THE STOCKHOLDERS OF THE COMPANY TENDER THEIR SHARES PURSUANT TO THE OFFER.
Copies of a press release announcing the Merger Agreement and the transactions
contemplated thereby and of a letter to the stockholders of the Company
communicating the Company Board's recommendation are filed herewith as Exhibits
(a)(3) and (a)(4), respectively, and are incorporated herein by reference.
(b)(1) Background.
Parent first contacted the Company through their respective financial
advisors in July 1997 concerning a possible acquisition of the Company. On July
24, 1997, Parent and the Company entered into the Confidentiality Agreement and
the Company provided certain information to Parent. A meeting was held between
representatives of the two companies, Parent's financial advisor, Lazard Freres
& Co. LLC ('Lazard'), and the Company's former financial advisor. Thereafter,
Lazard advised the Company's former financial advisor that Parent was not
interested in pursuing an acquisition of the Company.
In September 1998, the Company was contacted by two other potential
strategic buyers interested in discussing a possible acquisition of the Company.
In light of this contact, on September 24, 1998, the Company formally engaged
PaineWebber Incorporated ('PaineWebber') to act as its exclusive financial
advisor to help the Company consider its strategic alternatives. In addition,
the Company engaged Milbank, Tweed, Hadley & McCloy LLP ('Milbank, Tweed') to
assist the Company in connection with any proposed sale transaction.
Between November 1998 and February 1999, PaineWebber contacted five
potential strategic buyers, including Parent, on behalf of the Company. In
February and March 1999, the Company entered into confidentiality agreements
with four of these potential buyers. On March 10, Parent reaffirmed its
obligations to the Company under the Confidentiality Agreement. In addition,
management presentations were made to the potential buyers, who then conducted
certain follow-up due diligence. Although representatives of the Company held
preliminary discussions with certain of the potential buyers, none of them,
including Parent, was willing to make an offer at that time.
In August 1999, the Company publicly announced that it would begin to
explore alternative strategies for the Company's stake in its South African
subsidiary. Thereafter, a South African-based investment banking firm was
retained to solicit bids. Although the Company received two bids as a result of
this process, the Company was not satisfied with the bids and the sales process
was put on hold.
Following the public announcement of a potential sale of the Company's South
African holdings, the Company received inquiries as to whether the Company would
again entertain offers for a transaction involving the entire Company.
Thereafter, between August and November 1999, at the Company's request,
PaineWebber contacted four of the original potential strategic buyers, including
Parent, and seven additional potential buyers, including three financial buyers,
to see if they had any interest in discussing an acquisition of the Company.
From late October through December 1999, Parent and the two other potential
strategic buyers who indicated their interest in
4
<PAGE>
proceeding further in the process were allowed to conduct in-depth due
diligence, including discussions with members of senior management.
On January 4, 2000, PaineWebber sent letters to four potential bidders,
including Parent, requesting non-binding indications of interest for the
acquisition of the Company. The Company's legal counsel also forwarded a draft
of the Merger Agreement to Parent and one of the other potential bidders,
together with a draft of the Stockholders Agreement indicating that holders of a
portion of the shares of Class C Common Stock representing a majority of the
voting power of the Company Common Stock would agree to support the transaction.
Initially, Parent informed PaineWebber that it was chiefly interested in
acquiring the Company's international operations. PaineWebber responded that the
Company's strong preference was to sell the entire Company. Thereafter, the
Company received three non-binding indications of interest for the sale of the
Company: one was delivered orally to two of the Directors bidding the market
price of the Shares (which at the time was approximately $3.00), and two were
delivered on January 14, 1999 in written form, including one from Parent, each
bidding $5.00 per Share. At the time Parent submitted its bid, Parent advised
PaineWebber that it would seek to renegotiate the employment arrangements of the
Company's President and Chief Executive Officer, Malcolm Yesner, in order to
receive a commitment of continued employment from Mr. Yesner. The Company,
PaineWebber and Milbank, Tweed discussed the relative values of the offers
received. Following clarification from Parent that its $5.00 bid was subject to
reduction to reflect the estimated cost, above 101% of principal amount (the put
price for bondholders upon a change of control of the Company), of retiring the
Company's public senior subordinated bonds, PaineWebber and the Company
concluded that Parent's offer should be valued at approximately $4.40 per Share.
On January 21, 2000, PaineWebber sent follow-up letters to Parent and the
other potential buyer who had submitted a non-binding indication of interest at
the $5.00 level requesting final offers for the Company. On January 27, 2000,
Lazard orally communicated to PaineWebber that Parent reaffirmed its $5.00 per
Share bid but dropped the condition relating to retirement of the Company's
public senior subordinated bonds discussed above which had previously led
PaineWebber and the Company to discount the offer to approximately $4.40. On or
about the same date, the other potential buyer advised PaineWebber that it had
decided not to pursue a transaction with the Company and withdrew its previous
bid.
On February 1, 2000, following further price discussions between PaineWebber
and Parent and its financial advisor, Lazard, Parent informed PaineWebber that,
before proceeding further with any price negotiations, Parent required that the
Company enter into an agreement providing for an exclusivity period, during
which period the Company would agree not to solicit offers from or conduct
negotiations with any other potential bidder and Parent would endeavor to
complete its due diligence review of the Company. Parent also advised the
Company through its legal counsel that Parent's bid was conditioned on all
owners of Class C Common Stock, entering into the Stockholders Agreement with
Parent simultaneously with the execution and delivery of the Merger Agreement
with the Company, thereby assuring stockholder approval of the transaction and
enhancing Parent's ability to complete a short-form merger. Parent also
reaffirmed its need to enter into new employment arrangements with Mr. Yesner
providing for a two-year commitment.
Later on February 1, 2000, a special meeting of the Company Board was held
for the purpose of updating the directors with respect to the history, content
and status of discussions concerning the potential sale of the Company.
Presentations were made by representatives of PaineWebber and Milbank, Tweed as
well as by certain members of the Company Board's Executive Committee who had
been a party to discussions with various of the potential bidders. In
particular, the Company Board was apprised of Parent's offer to acquire the
Company, the issues raised by Parent with respect to the Merger Agreement and
the Stockholders Agreement and of Parent's request that the Company enter into
the Exclusivity Agreement. The Company Board discussed Parent's offer, reviewed
the possible alternatives to the offer, including the likelihood that any other
offers would be forthcoming and continuing to operate as an independent public
company. Following a discussion of the various alternatives available to the
Company, the Company Board instructed PaineWebber to seek an offer of $5.25 per
share from Parent and authorized the
5
<PAGE>
Company to enter into the Exclusivity Agreement if such an offer was received in
order to encourage Parent to conclude its due diligence in a timely manner.
PaineWebber relayed the Company Board's position to Lazard and, on February
2, 2000, Parent raised its offer to $5.25 per share, subject to satisfactory
completion of its due diligence investigation, expansion of the definition of
'material adverse change' contained in the Merger Agreement and a two-week
exclusivity period. The Company and DNL entered into the Exclusivity Agreement
with Parent on February 3, 2000. The exclusivity period was scheduled to
terminate at midnight on February 14, 2000.
From February 3 to February 14, 2000, the Company and Parent and their
respective legal and financial advisors negotiated the final terms of the Merger
Agreement and the Stockholders Agreement and related documents. Concurrently,
Parent continued its due diligence investigation. During this investigation,
Parent became aware of certain litigation (the 'AM Lawsuits') between the
Company and AM Cosmetics Corp. ('AMC') and its wholly-owned subsidiary, AM
Products Company ('AMP', and together with AMC, the 'AM Companies') and the
terms of a proposed settlement. Parent informed the Company that its offer was
contingent upon a settlement of the AM Lawsuits satisfactory to Parent. For a
more detailed description of the AM Lawsuits see Schedule I attached hereto
under the heading 'CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- AM
COSMETICS.' In addition, during this period, Parent and Mr. Yesner reached
agreement on revised employment terms to take effect upon consummation of the
Merger. See, 'YESNER EMPLOYMENT AGREEMENT.'
In the afternoon of February 15, 2000, the Company Board held a special
meeting to receive an update on the status of discussions and negotiations with
Parent. At this meeting, representatives of PaineWebber reviewed with the
Company Board its financial analysis of Parent's proposed acquisition price, and
delivered its oral opinion that, as of such date, the $5.25 per share cash
consideration to be received by the stockholders was fair to such stockholders
from a financial point of view. Milbank, Tweed reported on the status of
discussions with respect to the Merger Agreement, the Stockholders Agreement and
related documents (copies of which, together with an executive summary, had been
forwarded to the directors prior to the meeting). In addition, Company officers
and special litigation counsel reported on the status of settlement negotiations
with the AM Companies. The Company Board was advised that the Company and the AM
Companies had agreed in principle to a settlement of the AM Lawsuits pursuant to
which the Company would pay $650,000 to the AM Companies and would surrender
shares of preferred stock of the AM Companies previously purchased by the
Company. Because certain of the directors of the Company were present or former
directors, officers and/or stockholders of the AM Companies, the Company Board
appointed an independent litigation committee of Malcolm Yesner and Jack Kemp to
advise the Company Board as to the fairness and appropriateness of the proposed
settlement. The independent litigation committee approved the settlement
described above, subject to negotiation of a settlement agreement and
appropriate releases for the Company and its current and former officers and
directors.
The Company Board adjourned the meeting in the evening of February 15, 2000,
but reconvened each day for several hours, either in person or telephonically,
from February 16 through February 18, 2000. Each day, the Company's officers and
financial and legal advisors updated the Company Board on the status of the
settlement negotiations and discussions with Parent. During the course of the
week, it became apparent that the AM Companies were not willing to agree to
releases for certain officers and directors of the Company who had been officers
and directors of the AM Companies that were satisfactory either to the Company
Board or to Parent in light of the Company's continuing indemnity obligations to
these officers and directors.
On February 18, the Company Board was informed that the AM Companies
required the Company to increase the settlement amount to $2 million in order to
grant a release to the Company and all of its current and former directors and
officers that was acceptable to each of the Company and Parent in form and
scope. In view of the proposed $1.35 million increase in the settlement cost,
the Company Board recognized that, to the extent the Company bore the
6
<PAGE>
increased settlement cost, Parent's acquisition cost would be effectively
increased by such amount. The Company Board also recognized, based on the
previous negotiations, that Parent would be unwilling to bear such increase. In
order to induce Parent to proceed with the transaction, DNL advised the Company
Board that it would directly contribute a portion of the settlement increase,
provided that the transaction with Parent was consummated. On this basis, the
Company, Parent and DNL agreed that DNL would fund $531,492 of the increased
settlement cost and Parent's offer would be reduced by $.05 per Share to $5.20
per Share, which is equal to $818,508 and which corresponds to the remaining
portion of the increased settlement cost not being directly funded by DNL
(although DNL would effectively bear approximately $150,773 of this portion of
the increased settlement cost by virtue of its 18.4% ownership interest of the
Company Common Stock). Based on the foregoing developments, the independent
litigation committee reviewed the revised terms for the settlement and
recommended that the Company Board approve a settlement payment totaling $2
million (plus surrender of the preferred stock) to the AM Companies and that a
settlement agreement and satisfactory releases be negotiated as expeditiously as
possible. The Company Board discussed the Company's options with respect to the
settlement negotiations and considered the effect that an extended settlement
negotiation would have on the Company, in particular with respect to Parent's
willingness to proceed with the proposed transaction. The Company Board
unanimously approved the proposed settlement on that date, with three directors
(two of whom were also directors of the AM Companies and the other of whom was
one of the principal beneficiaries of the releases received from the AM
Companies as a result of the increased settlement payment) abstaining.
Thereafter, at the February 18 meeting, PaineWebber advised the Company
Board that the reduction of the proposed merger consideration to $5.20 per Share
in light of the proposed settlement of the AM Lawsuits did not change its
overall conclusions with respect to the fairness of the consideration being
offered by Parent, as reviewed with the Company Board on February 15, 2000.
Accordingly, PaineWebber rendered to the Company Board its oral opinion (which
was confirmed by delivery of a written opinion dated February 18, 2000) as to
the fairness, from a financial point of view, of the $5.20 per Share cash
consideration to be received by Company stockholders in the Offer and the
Merger.
Following PaineWebber's presentation and further discussions among the
directors and the Company's financial and legal advisors and consideration of
the factors discussed below under 'Reasons for the Recommendation,' the Company
Board unanimously, with the three directors who abstained from the vote on the
Settlement Agreement as described above abstaining, (i) determined that the
Merger Agreement and the transactions contemplated thereby, including the Offer
and the Merger, taken together, are fair to, and in the best interests of, the
stockholders of the Company, (ii) approved and adopted the Merger Agreement, the
Offer, the Merger and the other transactions contemplated thereby and (iii)
recommended that the stockholders of the Company accept the Offer and, if
required by the DGCL, approve and adopt the Merger and the Merger Agreement and
the transactions contemplated thereby. The Company Board recognized that
completion of negotiations with Parent depended on satisfactory documentation of
the settlement with the AM Companies and the release of the Company from certain
indemnity obligations to certain officers and directors of the Company who had
been officers and directors of the AM Companies. Agreement on the forms of these
releases (the 'Indemnity Releases') was reached on February 18, 2000.
Between February 18 and February 25, 2000, representatives of the Company
and the AM Companies continued to negotiate the terms of a settlement agreement
and the related releases. While the Company was ultimately willing to pay half
of the proposed $2 million settlement upon signing the settlement agreement, the
Company sought to defer payment of the remaining $1 million (the 'Second
Payment'). Parent insisted that the Second Payment not be due until the earlier
of the consummation of the Merger or July 31, 2000, the scheduled termination
date of the Merger Agreement; however, the AM Companies initially were not
prepared to accept deferral of the Second Payment beyond March 31, 2000. In
order to bridge this gap, six directors of the Company (Messrs. Bathgate,
Butler, Estrin, Sabre, Wasik and Yesner) arranged for GrandBank, Inc., a
Maryland state chartered bank, to issue an irrevocable letter of credit (the
'Letter of
7
<PAGE>
Credit') in the amount of $690,000 for the benefit of the AM Companies to secure
a portion of the Second Payment. The AM Companies are entitled to make a draw
down under the Letter of Credit to the extent that the Second Payment has not
been made on or prior to March 31, 2000. Both Parent and the AM Companies agreed
to this arrangement. Pursuant to a letter agreement among the Company and such
directors (the 'Reimbursement Agreement'), the Company agreed to reimburse such
directors for the full amount of any draw downs under the Letter of Credit in
circumstances in which the Merger is not consummated, together with interest
thereon at the rate of 12% per annum from the date of the draw down to the date
of reimbursement. In circumstances in which the Merger is consummated, the
Company is required to reimburse such directors only for any amounts drawn down
under the Letter of Credit in excess of $531,492 (the first $531,492 of
reimbursement in such circumstance being the responsibility of DNL), together
with interest thereon at the rate of 12% per annum from the date of the draw
down to the date of reimbursement. After review and recommendation by an
independent committee consisting of Leroy Keith, Suzanne de Passe, James Hudson
and Jack Kemp, the reimbursement arrangements embodied in the Reimbursement
Agreement were approved by unanimous written consent of the Company Board.
Copies of the Settlement Agreement, the mutual releases delivered by Carson
Products and the AM Companies and the Reimbursement Agreement are attached as
Exhibits (e)(6), (e)(7), (e)(8) and (e)(9) hereto and are incorporated herein by
reference.
The Company and the AM Companies concluded the settlement negotiations and
entered into a settlement agreement with mutual releases and related
documentation on February 25, 2000 (the 'Settlement Agreement'). In addition,
Parent indicated on that date that it was prepared to enter into the Merger
Agreement in the form negotiated by the parties and their counsel, calling for
an Offer and Merger price of $5.20 per share of Company Common Stock. DNL and
each of the other holders of Class C Common Stock, together with the Company's
directors and certain officers (including those who had abstained from the vote
on the Merger Agreement), indicated their willingness to sign the Stockholders
Agreement. Accordingly, on February 25, 2000, Parent, Purchaser and the Company
signed the Merger Agreement, the Stockholders Agreement and related documents,
each of the Stockholders signed the Stockholders Agreement and granted Parent
the proxy contemplated by the Stockholders Agreement and the Indemnity Releases
were executed and delivered. In addition, on that date Parent and Mr. Yesner
entered into the Yesner Employment Agreement discussed above.
Parent and the Company issued separate press releases announcing the Merger
on February 28, 2000.
(b)(2) Reasons for the Recommendation.
In making the determinations and recommendations set forth in Item 4(a)
above, the Company Board considered a number of factors including, without
limitation, the following:
(i) The historical and recent market prices of the Shares, the lack of
liquidity, trading volume and analyst coverage of the Shares due to the
Company's relatively small market capitalization and the fact that the cash
offer price of $5.20 per share of Company Common Stock provided for in the
Merger Agreement represented a premium of approximately 40% over the closing
trading price of the Shares on the last trading day prior to the
announcement of the Merger.
(ii) The advice and presentation of PaineWebber, including the opinion
of PaineWebber delivered on February 18, 2000 that, as of such date and
based upon its review and analysis and subject to the limitations set forth
therein, the $5.20 per Share cash consideration to be received by the
holders of shares of Company Common Stock in the Offer and the Merger, taken
together, is fair to such holders from a financial point of view. A copy of
the written opinion dated February 18, 2000 of PaineWebber, which sets forth
the procedures followed, matters considered, assumptions made and
limitations of the review undertaken by PaineWebber in rendering its
opinion, is attached as Exhibit (a)(6) hereto and is incorporated herein by
reference. STOCKHOLDERS ARE URGED TO READ CAREFULLY THE OPINION OF
PAINEWEBBER IN ITS ENTIRETY.
8
<PAGE>
(iii) The terms and conditions of the Merger Agreement and, in
particular, the facts that the transaction is structured as a two-step
transaction and the Offer provides Company stockholders with an opportunity,
assuming no regulatory delays, to receive their cash payment on an
accelerated basis, and that Parent has the ability to terminate the Offer
and the Merger Agreement only in a limited number of circumstances.
(iv) The inherent risks in continuing to operate as an independent
public company given the competitive business environment in which the
Company operates and the increasing difficulty that the Company faces,
because of its relatively small size, limited resources and significant
debt, in its ability to achieve increased sales of its products and
services.
(v) The Company Board's familiarity with the Company's business,
prospects, financial condition, results of operations and current business
strategy and the significant challenges that the Company would face if it
did not proceed with the proposed transaction with Parent, including the
need for funds to achieve future plans, the need to refinance the Company's
long term debt in the near future, near and long term business risks and
recent turnovers in Company management.
(vi) The absence of other strategic alternatives given the fact that no
firm offers to acquire the Company -- other than Parent's -- were obtained
by PaineWebber despite its contacting numerous potential strategic and
financial purchasers on behalf of the Company over an extended period of
time.
(vii) The high likelihood that the transactions contemplated by the
Merger Agreement would be consummated, particularly in light of Parent's
reputation and ability to finance the acquisition and the absence of any
financing condition in the Merger Agreement.
(viii) The fact that DNL and other stockholders controlling
approximately 88% of the voting power of the outstanding shares of Company
Common Stock and approximately 48% of the number of outstanding shares of
Company Common Stock on a fully-diluted basis were in favor of the
transaction with Parent and were willing to sign the Stockholders Agreement.
In view of the variety of factors considered in connection with its
evaluation of the Merger Agreement, the Company Board did not find it
practicable to, and did not, quantify or otherwise assign relative weights to
the specific factors considered in reaching its determination. In addition,
individual members of the Company Board may have given different weights to
different factors.
(c) Intent to Tender. Pursuant to the Stockholders Agreement, the
Stockholders have agreed (1) upon receipt of written notice from Parent or
Purchaser that at least 565,857 shares of Class A Common Stock have been
tendered, to convert all of their shares of Class C Common Stock into shares of
Class A Common Stock and tender all shares of Company Common Stock owned by them
pursuant to the Offer, (ii) vote their shares of Company Common Stock in favor
of the Merger and (iii) vote against any action or agreement (other than the
Merger Agreement or the transactions contemplated thereby) that would impede,
interfere with, delay, postpone or attempt to discourage the Merger or the
Offer. The shares of Company Common Stock that are the subject of the
Stockholders Agreement represent, in the aggregate, approximately 48% of the
outstanding shares of Company Common Stock on a fully diluted basis. See
'Stockholders Agreement' under Item 3 above.
To the best of the Company's knowledge, each of its directors and executive
officers, including those who are party to the Stockholders Agreement, presently
intend to tender his or her Shares pursuant to the Offer.
ITEM 5. PERSONS/ASSETS RETAINED, EMPLOYED, COMPENSATED OR USED.
On September 24, 1998, the Company formally engaged PaineWebber to act as
the Company's exclusive financial advisor in connection with any proposed sale
transaction (a 'Sale') involving the Company and another business entity (the
'Financial Advisor Agreement'). Pursuant to the Financial Advisor Agreement,
PaineWebber agreed, upon the Company's reasonable request, to
9
<PAGE>
perform certain customary financial advisory and investment banking services,
including the rendering of a fairness opinion to the Company Board in connection
with a Sale.
Pursuant to the Financial Advisor Agreement, the Company agreed to pay
PaineWebber cash fees for its services in the following amounts: (i) a retention
fee of $50,000, (ii) $500,000 for rendering an opinion as to the fairness, from
a financial point of view, of the consideration to be received by the Company
and its stockholders in connection with a Sale and (iii) a transaction fee of
.95% of the purchase price upon consummation of a Sale (as defined therein),
less the fees described in clauses (i) and (ii) above.
In addition, the Company has agreed in the Financial Advisor Agreement to
reimburse PaineWebber for its reasonable out-of-pocket expenses, including
reasonable fees of counsel. In a separate letter agreement also executed on
September 24, 1998, the Company has agreed to indemnify PaineWebber and certain
related persons against certain liabilities in connection with PaineWebber's
engagement under the Financial Advisor Agreement.
ITEM 6. SECURITIES TRANSACTIONS.
There have been no transactions in Shares which were effected during the
past sixty (60) days by the Company or, to the best of the Company's knowledge,
any executive officer, director or affiliate of the Company.
ITEM 7. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS.
(a) Except as set forth in Items 3 and 4 above, the Company is not engaged
in any negotiation in response to the Offer which relates to or would result in
(i) a tender offer or other acquisition of securities by or of the Company; (ii)
an extraordinary transaction, such as a merger, reorganization or liquidation,
involving the Company; (iii) a purchase, sale or transfer of a material amount
of assets by the Company; or (iv) any material change in the present dividend
rate or policy, or indebtedness, or capitalization of the Company.
(b) Except as described in Item 3 above, there are no transactions, board
resolutions, agreements in principle or signed contracts in response to the
Offer which relates to one or more of the matters referred to in Item 1006(d)(1)
of Regulation M-A.
ITEM 8. ADDITIONAL INFORMATION.
Reference is hereby made to the Offer to Purchase and the related Letter of
Transmittal, which are attached as Exhibits (a)(1) and (a)(2) hereto,
respectively, and are incorporated by reference herein in their entirety.
10
<PAGE>
ITEM 9. EXHIBITS.
<TABLE>
<CAPTION>
<C> <S>
*(a)(1) -- Offer to Purchase dated March 8, 2000.
*(a)(2) -- Letter of Transmittal with respect to Shares.
**(a)(3) -- Text of press release issued by Carson, Inc. dated
February 28, 2000.
(a)(4) -- Letter to stockholders of Carson, Inc. dated March 8,
2000.
*(a)(5) -- Form of Summary Advertisement dated March 8, 2000.
(a)(6) -- Fairness Opinion of PaineWebber Incorporated dated
February 18, 2000.
*(e)(1) -- Confidentiality Agreement, dated July 24, 1997, as
amended from time to time, by and between Carson, Inc. and
Cosmair, Inc.
*(e)(2) -- Exclusivity Agreement, dated as of February 3, 2000, by
and between Carson, Inc. and Cosmair, Inc. and agreed to
by DNL Partners Limited Partnership.
*(e)(3) -- Agreement and Plan of Merger, dated as of February 25,
2000, by and among Cosmair, Inc., Crayon Acquisition Corp.
and Carson, Inc.
*(e)(4) -- Stockholders Agreement, dated as of February 25, 2000, by
and among Cosmair, Inc., Crayon Acquisition Corp., Carson,
Inc. and the stockholders signatory thereto.
*(e)(5) -- Employment Agreement, dated as of February 25, 2000, by
and between Cosmair, Inc. and Malcolm R. Yesner.
**(e)(6) -- Settlement Agreement, dated as of February 25, 2000,
among Carson Products Company, AM Cosmetics Corp. and AM
Products Company.
**(e)(7) -- Release, dated as of February 25, 2000, by Carson
Products Company in favor of AM Cosmetics Corp. and AM
Products Company.
**(e)(8) -- Release, dated as of February 25, 2000, by AM Cosmetics
Corp. and AM Products Company in favor of Carson Products
Company.
**(e)(9) -- Letter Agreement, dated as of February 25, 2000, among
Carson, Inc. and certain directors of the Company.
***(e)(10) -- Letter Agreement, dated as of February 25, 2000, among
DNL Partners Limited Partnership and Cosmair, Inc.
***(e)(11) -- Form of Indemnity Release between certain officers and
directors of Carson, Inc. and Cosmair, Inc.
(g) -- [not applicable]
</TABLE>
- ---------
* Filed as an exhibit to Purchaser's Tender Offer Statement on Schedule TO
dated March 8, 2000 and incorporated herein by reference.
** Incorporated by reference to the Company's Current Report on Form 8-K filed
on March 1, 2000.
*** To be filed by amendment.
11
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
CARSON, INC.
By: /s/ ROBERT W. PIERCE
.........................
Name: Robert W. Pierce
Title: Executive Vice President
and Chief Financial Officer
Dated: March 8, 2000
12
<PAGE>
SCHEDULE I
CARSON, INC.
64 ROSS ROAD, SAVANNAH INDUSTRIAL PARK
SAVANNAH, GEORGIA 31405
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES EXCHANGE ACT OF 1934
AND RULE 14F-1 THEREUNDER
This Information Statement is being mailed on or about March 8, 2000 as part
of the Solicitation/ Recommendation Statement on Schedule 14D-9 (the 'Schedule
14D-9') of Carson, Inc. (the 'Company') to the holders of record of shares of
Class A Common Stock, par value $.01 per share, of the Company (the 'Class A
Common Stock'). You are receiving this Information Statement in connection with
the possible election of persons designated by Cosmair, Inc., a Delaware
corporation ('Parent'), to at least a majority of the seats on the Board of
Directors of the Company (the 'Board').
On February 25, 2000, the Company, Parent and Crayon Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of Parent ('Purchaser'),
entered into an Agreement and Plan of Merger (the 'Merger Agreement') in
accordance with the terms and subject to the conditions of which (i) Purchaser
will commence a tender offer (the 'Offer') for all of the issued and outstanding
shares of Class A Common Stock at a price of $5.20 per share (or any greater
amount paid per share pursuant to the Offer), net to the seller in cash, and
(ii) following the consummation of the Offer and the satisfaction or waiver of
other conditions set forth in the Merger Agreement, Purchaser will be merged
with and into the Company (the 'Merger'). As a result of the Offer and the
Merger, the Company will become a wholly-owned subsidiary of Parent.
The Merger Agreement requires that the Company use its best efforts, at
Parent's request, to cause Parent's designees to be elected or appointed to the
Board under the circumstances described in Section 1.03 of the Merger Agreement.
See 'BOARD OF DIRECTORS AND EXECUTIVE OFFICERS -- Right to Designate Directors;
Parent's Designees' below.
You are urged to read this Information Statement carefully. You are not,
however, required to take any action. Capitalized terms used herein and not
otherwise defined herein shall have the meaning set forth in the Schedule 14D-9.
In accordance with the Merger Agreement, Purchaser will commence the Offer
on Wednesday, March 8, 2000. The Offer is scheduled to expire at 12:00 midnight,
New York City time, on March 8, 2000 unless the Offer is extended or is
terminated under the terms of the Merger Agreement.
The information contained in this Information Statement concerning Parent,
Purchaser and Parent's Designees (as hereinafter defined) has been furnished to
the Company by Parent and Purchaser, and the Company assumes no responsibility
for the accuracy or completeness of such information.
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
GENERAL
Pursuant to the Company's Certificate of Incorporation, each stockholder is
entitled to (i) one vote for each share of Class A Common Stock and (ii) ten
votes for each share of Class C Common Stock, par value $.01 per share, of the
Company (the 'Class C Common Stock' and, together with the Class A Common Stock,
the 'Company Common Stock'). At the close of business on February 25, 2000,
there were 10,083,485 shares of Class A Common Stock outstanding and 5,126,163
shares of Class C Common Stock outstanding.
The Board currently consists of ten (10) members and is divided into three
classes, designated as Class I, Class II and Class III, with each Director being
elected to a three-year term. The
I-1
<PAGE>
number of Directors may consist of such number of members, not less than ten
(10) and not more than fifteen (15), as shall be determined from time to time by
resolution of the Board. Vacancies in the Board may be filled by a majority vote
of the remaining Board though less than a quorum of the Board, and any Director
chosen to fill a vacancy will hold office until the expiration of the term of
his or her predecessor in office.
PARENT'S RIGHT TO DESIGNATE DIRECTORS
The Merger Agreement provides that, subject to compliance with applicable
law and the Company's Certificate of Incorporation, promptly upon the purchase
by Parent of shares of Class A Common Stock pursuant to the Offer, and from time
to time thereafter, Parent shall be entitled to designate such number of
Directors ('Parent's Designees'), rounded up to the next whole number, as shall
give Parent representation on the Board equal to the product of the total number
of Directors on the Board (giving effect to the Directors elected pursuant to
this sentence) multiplied by the percentage that the aggregate voting power of
such number of shares of Class A Common Stock beneficially owned by Parent or
any affiliate of Parent following such purchase bears to the total voting power
of all shares of Company Common Stock then outstanding, and the Company shall,
at such time, promptly take all actions necessary to cause Parent's Designees to
be elected as Directors of the Company, including increasing the size of the
Board or securing the resignations of incumbent Directors or both.
It is expected that Parent's Designees may assume office at any time
following the purchase by Purchaser of shares of Class A Common Stock pursuant
to the Offer, which purchase may not be earlier than April 4, 2000, and that,
upon assuming office, Parent's Designees will thereafter constitute at least a
majority of the Board.
PARENT'S DESIGNEES
Any director or executive officer of Parent or Purchaser listed in Schedule
I to the Offer to Purchase filed as exhibit (a)(1)(A) to the Tender Offer
Statement on Schedule TO of Parent and Purchaser, dated March 8, 2000 ('Schedule
TO'), filed with the Securities and Exchange Commission may be designated by
Parent as a Parent's Designee. The information contained in said Schedule I with
respect to the potential Parent's Designees has been furnished by Parent for
inclusion herein and is incorporated herein by reference.
DIRECTORS OF THE COMPANY
Set forth below is certain information regarding each current Director of
the Company as of March 8, 2000:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITIONS SINCE
---- --- --------- -----
<S> <C> <C> <C>
Lawrence E. Bathgate, II.............. 60 Director 1995
Abbey J. Butler....................... 62 Director 1996
Suzanne de Passe...................... 52 Director 1996
Melvyn J. Estrin...................... 57 Director 1996
James L. Hudson....................... 60 Director 1996
Leroy Keith........................... 61 Chairman of the Board and Director 1995
Jack Kemp............................. 63 Director 1996
John L. Sabre......................... 42 Director 1996
Vincent A. Wasik...................... 55 Director 1995
Malcolm R. Yesner..................... 42 President and Chief Executive Officer 1998
and Director
</TABLE>
Lawrence E. Bathgate, II became a Director of the Company upon its inception
in May 1995 and of Carson Products Company, the Company's wholly-owned
subsidiary ('Carson Products'), in August 1995. He served as Secretary of the
Company from May 1995 to August 1996. He also serves as President and Chief
Executive Officer of Bathgate, Wegener & Wolf, P.A., a law firm
I-2
<PAGE>
with which he has been affiliated since 1970. Mr. Bathgate is a founder and
principal of MCG Global, L.L.C., a Delaware limited liability company and
affiliate of the Company ('MCG Global'). Additionally, he has served as a
director of AM Cosmetics Corp., a Delaware corporation ('AM Cosmetics'), since
June 1996. He also serves on the Board of Trustees of Villanova University and
the Board of Regents of Seton Hall University and served as Finance Chairman of
the Republican National Committee from 1988 to 1992.
Abbey J. Butler became a Director of the Company in August 1996 and of
Carson Products in June 1996. Mr. Butler currently serves in the following
capacities for the following companies and organizations: Avatex (formerly
FoxMeyer Health Corporation), Director from 1990, Co-Chairman of the Board of
Directors from 1990, Co-Chief Executive Officer from 1990; NII Health Care
Corporation, Co-Chairman of the Board of Directors, Co-Chief Executive Officer;
Ben Franklin Retail Stores, Inc., Director from November 1991 to March 1997 and
Co-Chairman of the Board of Directors from 1994 to March 1997; C.B. Equities
Capital Corp., President from 1982 and Director from 1982; GrandBank Inc.,
Director from 1994; CST Entertainment Inc., Director from 1994; Imagyn Medical
Technology, Inc., Director from 1995; Cyclone Fence Corp., Director from 1995;
Phar-Mor, Inc., Director from 1995, Chairman and Chief Executive Officer from
1997; The American University, Trustee from 1986; Starlight Foundation, Director
from 1990; Executive Council of the National Committee for the Performing Arts
of the John F. Kennedy Center, Director from 1989; and President's Advisory
Committee on the Arts, Member from 1992. Mr. Butler is the former Co-Chief
Executive Officer of FoxMeyer Drug Company which, along with FoxMeyer Health
Corporation and certain other of its subsidiaries and affiliates, including Ben
Franklin Retail Stores, Inc., filed for protection under Chapter 11 of the U.S.
Bankruptcy Code on August 27, 1996.
Suzanne de Passe became a Director of the Company in August 1996 and of
Carson Products in June 1996. Ms. de Passe has served as Chief Executive Officer
of de Passe Entertainment since 1991. She currently serves on the Board of
Directors of The American Film Institute and the Los Angeles Opera.
Melvyn J. Estrin became a Director of the Company in August 1996 and of
Carson Products in June 1996. Mr. Estrin currently serves in the following
capacities for the following companies: Avatex (formerly FoxMeyer Health
Corporation), Director since 1990, Co-Chairman of the Board of Directors from
March 1991, Co-Chief Executive Officer from October 1991; NII Health Care
Corporation, Co-Chairman of the Board of Directors, Co-Chief Executive Officer;
Washington Gas Light Company, Director from October 1991; GrandBank Inc.,
Director from August 1993; UroHealth Systems, Inc., Director from July 1995;
Phar-Mor, Inc., Director from September 1995; Centaur Partners, L.P., Managing
Partner from 1990; University Research Corporation, Chief Executive Officer
since 1978; and Estrin International, Chairman and Chief Executive Officer since
1983. Mr. Estrin has also served in the following capacities for the following
companies and organizations: Ben Franklin Retail Stores, Inc., Co-Chairman of
the Board of Directors from November 1991 to March 1997, Co-Chief Executive
Officer from 1994 to March 1997, Director from 1991 to March 1997; University of
Pennsylvania, Trustee from 1990 to 1995; and Commissioner of the National
Capital Planning Commission, appointed by the President, from 1993 to 1995. Mr.
Estrin is the former Co-Chief Executive Officer of FoxMeyer Drug Company which,
along with FoxMeyer Health Corporation and certain other of its subsidiaries and
affiliates, including Ben Franklin Retail Stores, Inc., filed for protection
under Chapter 11 of the U.S. Bankruptcy Code on August 27, 1996.
James L. Hudson became a Director of the Company in August 1996 and of
Carson Products in June 1996. Mr. Hudson has served as Chairman of JAH
Development Company since 1985. Mr. Hudson has served as Chairman of the Board
of Trustees of Morehouse College and as a member of the Board of the
Metropolitan Washington Airports Authority.
Leroy Keith currently serves as Chairman of the Board of the Company. He
became a Director of the Company upon its inception in May 1995, and served as
Vice President until August 1996, when he became Chairman and Chief Executive
Officer. Dr. Keith became Chairman and Chief Executive Officer of Carson
Products in August 1995. Mr. Keith resigned from his
I-3
<PAGE>
positions as Chief Executive Officer of the Company and Carson Products in June,
1998 but continued as non-executive Chairman of the Board. Prior to his service
with the Company and Carson Products, Mr. Keith served as President of Morehouse
College from 1987 to 1994. Dr. Keith is a member of the Board of Directors of
Evergreen Keystone Investment Services, the Mutual Funds Board of Phoenix Home
Life Insurance Company, One to One/The National Mentoring Partnership, Inc. and
the National Committee for the Performing Arts of the John F. Kennedy Center.
Additionally, he served as a director of AM Cosmetics from June 1996 through
June 1999.
Jack Kemp became a Director of the Company and Carson Products in December
1996. He previously served as a Director of the Company and Carson Products from
February 1996 to August 1996, when he resigned to accept the Republican
nomination for Vice President of the United States. Mr. Kemp served as Secretary
of Housing and Urban Development for the U.S. Government from 1989 to 1992. Mr.
Kemp is also a member of the Board of Directors of Landair, Cyrix Corp., Oracle
Corp., Columbus Trust Realty, American Bankers Insurance Corp., and Worldcorp
and has served as Co-Director of Empower America since 1993.
John L. Sabre became a Director of the Company in August 1996 and of Carson
Products in August 1995. He currently serves as Senior Managing Director at
First Dominion Capital. He was previously employed as Managing Director of
Indosuez Capital, a position he held from April 1992 to August 1997. Prior to
that, Mr. Sabre was a Vice President at Kidder, Peabody & Co. from March 1990 to
April 1992. Additionally, he has served as a director of AM Cosmetics since June
1996.
Vincent A. Wasik became Chairman of the Board of Directors and President of
the Company upon its inception in May 1995 and served as such until August 1996.
Mr. Wasik continues to serve as a Director of the Company and has been a
Director of Carson Products since August 1995. He served as Acting Chief
Executive Officer of the Company and of Carson Products during June 1998. He is
also a founder and serves as President of MCG Global. From 1985 to 1995, Mr.
Wasik served as President of Fidelco Capital Group. He was also President of
Wondercamp Entertainment Company from 1994 to 1995. He is also currently a
member of the Board of Directors of One to One/The National Mentoring
Partnership, Inc., the National Committee for the Performing Arts of the John F.
Kennedy Center and the Board of Trustees for Boston College.
Malcolm R. Yesner became President and Chief Executive Officer of the
Company in March 1999 and has served as a Director of the Company since October
1998. He also served as President of International Operations of the Company and
Chief Executive Officer of Carson Holdings Limited (South Africa) since April
1998. From 1992 to 1998, he held the position of Managing Director of Carson
Holdings Ltd. ('Carson South Africa'). Prior to joining Carson South Africa, Mr.
Yesner held senior management positions with Procter & Gamble in Australia and
Bristol Meyers Squibb Limited in South Africa.
MEETINGS OF THE BOARD AND COMMITTEES
BOARD MEETINGS
During the twelve months ended December 31, 1999, there were 4 meetings held
by the Board. During 1999, 1 meeting of the Audit Committee, 1 meeting of the
Compensation Committee and 12 telephonic meetings of the Executive Committee
were held. In 1999, all of the directors, except for Suzanne de Passe, James L.
Hudson, John L. Sabre and Malcolm R. Yesner, participated in at least 75% of the
meetings of the Board and the committees of the Board on which they served.
BOARD COMMITTEES
The Board has three committees -- the Audit Committee, the Compensation
Committee and the Executive Committee.
I-4
<PAGE>
The Audit Committee members are Abbey J. Butler, John L. Sabre and Leroy
Keith. Mr. Butler is the Chairman of the Audit Committee. The Audit Committee,
among other things, makes recommendations to the Board regarding the independent
auditors to be nominated for ratification by stockholders, reviews the services
rendered by such auditors and the related fees charged, reviews with such
auditors the scope of the annual audit and the results thereof, and makes
recommendations to the Board regarding the same, assists the Board in fulfilling
its responsibilities relating to the Company's accounting, financial reporting
and internal auditing policies and procedures, and assists the Board and makes
recommendations with respect to the Company's budgets and long-range financial
planning.
The Compensation Committee members are Melvyn J. Estrin, James L. Hudson and
Jack Kemp. Mr. Estrin is the Chairman of the Compensation Committee. The
Compensation Committee is responsible for all aspects of the Company's executive
compensation policies.
The Executive Committee members are Leroy Keith, Lawrence E. Bathgate, Abbey
J. Butler and Vincent A. Wasik. Mr. Wasik is the Chairman of the Executive
Committee. The Executive Committee has the authority to exercise all the powers
of the full Board with respect to the management of the business of the Company,
except as limited by the General Corporation Law of the State of Delaware.
EXECUTIVE OFFICERS OF THE COMPANY WHO ARE NOT DIRECTORS
Set forth below is certain information regarding each Executive Officer of
the Company who is not also a Director as of March 8, 2000.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
AND BUSINESS EXPERIENCE
NAME AGE FOR THE PAST FIVE YEARS
---- --- -----------------------
<S> <C> <C>
Robert W. Pierce.......................... 57 Executive Vice President and Chief
Financial Officer of the Company since May
1997; Executive Vice President, Chief
Financial Officer and Treasurer of
Maybelline, Inc. from 1990 to May 1996.
Donald N. Riley........................... 50 Executive Vice President of Operations of
the Company since January 1999; Senior
Vice President of Operations, Carson
Products since August 1997; Director of
Engineering, Maybelline from January 1997
to August 1997; Regional Operations
Director/Plant Manager, Suzhou China,
Maybelline from 1995 to 1997; Director of
Quality Assurance-Worldwide, Maybelline
from 1992 to 1995.
Aurelia T. Waldon......................... 54 Executive Vice President, Sales of the
Company since August, 1999; Vice
President, Sales since June, 1998;
District Manager and Divisional Director
of Sales from 1994 to June 1998.
Shawn K. Tollerson........................ 36 Vice President, Marketing of the Company
since August, 1999; Marketing Director
from March, 1998 To August, 1999; Branch
Manager from October, 1997 to March, 1998.
</TABLE>
I-5
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Class A Common Stock and Class C Common Stock outstanding as of
February 25, 2000 by (i) each person known by the Company to beneficially own
more than 5% of the outstanding shares of Class A Common Stock or Class C Common
Stock, (ii) each of the Company's Directors, (iii) each of the Executive
Officers whose name appears in the summary compensation table and (iv) all
Directors and Executive Officers as a group. Unless otherwise noted in the
footnotes to the table, the persons named in the table have sole voting and
dispositive power with respect to all shares of Company Common Stock indicated
as being beneficially owned by them. All individuals and entities listed in the
following table, other than Indosuez CM II Inc., Donald N. Riley, Shawn K.
Tollerson and Aurelia T. Waldon, entered into the Stockholders Agreement, dated
as of February 25, 2000, with Parent, Purchaser and the Company, as described in
Item 3 of the Schedule 14D-9.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK (a) CLASS C COMMON STOCK (a)
NAME AND ADDRESS OF -------------------------- --------------------------
BENEFICIAL OWNERS NUMBER % OF CLASS NUMBER % OF CLASS
----------------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C>
DNL Partners Limited Partnership (b) ....... 0 0 3,015,463 58.8%
c/o MCG Global, L.L.C.
One Morningside Drive, North
Suite 200
Westport, CT 06880
Morgan Guaranty Trust Company (c) .......... 0 0 1,187,482 23.2%
c/o J.P. Morgan Investment Management
522 Fifth Avenue
New York, NY 10036
M&A Investments, Inc. (d) .................. 1,731,690 17.2% 0 0
NII Health Care Corporation
5910 North Central Expressway, Suite 1780
Dallas, TX 75206
Indosuez CM II Inc. (e) .................... 258,213 2.6% 0 0
c/o Indosuez Capital
1211 Avenue of the Americas
7th Floor
New York, NY 10036-8701
Lawrence E. Bathgate, II (f)(g)............. 42,835 * 0 0
Abbey J. Butler (d)(h)...................... 728,335 7.2% 11,540 *
Suzanne de Passe (i)........................ 32,835 * 11,540 *
Melvyn J. Estrin (d)(j)..................... 36,335 * 11,540 *
James L. Hudson (f)(k)...................... 46,135 * 0 *
Jack Kemp (l)............................... 36,335 * 46,139 *
Leroy Keith (m)............................. 23,500 * 341,100 6.7%
John L. Sabre (n)........................... 48,336 * 23,069 *
Vincent A. Wasik (b)(o)..................... 62,170 * 3,015,463 58.8%
Malcolm Yesner (p).......................... 899,467 8.3% 0 0
Robert W. Pierce (q)........................ 141,334 0 0
Donald N. Riley (r)......................... 35,901 * 0 0
Shawn K. Tollerson (s)...................... 24,500 * 0 0
Aurelia T. Waldon (t)....................... 30,000 * 0 0
All Directors and Executive Officers as a 2,195,518 19.7% 3,460,391 67.5%
Group (15 persons) (u)....................
</TABLE>
- ---------
* Less than 1%.
(a) Based on 10,083,485 and 5,126,163 outstanding shares of Class A Common
Stock and Class C Common Stock, respectively. All of the Company's Class B
Common Stock (which was non-voting stock convertible into voting stock upon
transfer in certain circumstances) was converted
(footnotes continued on next page)
I-6
<PAGE>
(footnotes continued from previous page)
into shares of Class A Common Stock on January 15, 1999. Each share of
Class C Common Stock is convertible at any time, at the option of the
holder, into one share of Class A Common Stock, and is automatically
converted into one share of Class A Common Stock upon transfer to an
unaffiliated third party. Stockholders are entitled to one vote for each
share of Class A Common Stock and ten votes for each share of Class C
Common Stock. Calculation of percentage of beneficial ownership assumes the
exercise of all options and warrants exercisable within 60 days of the date
hereof only by the respective named stockholder.
(b) Mr. Wasik has a 50.1% ownership interest in the general partner of DNL
Partners, DNL Group L.L.C., and therefore is deemed to have voting and
dispositive control as to the shares held by DNL Partners. Messrs. Wasik,
Bathgate and Hudson, who serve as Directors of the Company, are, or have
interests in, limited partners of DNL Partners, including in the case of
Messrs. Wasik and Bathgate, ownership interests in MCG Global, LLC., one of
the limited partners in DNL Partners.
(c) As reported on Schedule 13G/A dated February 2, 2000 filed by J.P. Morgan &
Co., Incorporated, as parent holding company. Includes Morgan Guaranty
Trust Company of New York; J.P. Morgan Investment Management, as Investment
Advisor and J.P. Morgan Florida Federal Savings Bank, as Investment
Advisor.
(d) Includes 1,359,690 shares held by M&A Investments, Inc. ('M&A') and 372,000
shares held by NII Health Care Corporation ('NIIHC'). Each of M&A and NIIHC
is a wholly-owned subsidiary of Avatex Corporation. Messrs. Butler and
Estrin, Directors of the Company, are co-Chairmen and co-Chief Executive
Officers of Avatex.
(e) As of November 4, 1999 as reported by First Union National Bank ('First
Union'), transfer agent to the Company.
(f) These directors are, or have direct or indirect interests in, limited
partners of DNL Partners. See Note (b).
(g) Includes 10,000 shares of Class A Common Stock underlying stock options
exercisable within 60 days. Also includes 25,988 restricted shares of Class
A Common Stock awarded under the 1996 Non-Employee Director Equity
Incentive Program (the 'Outside Directors Program'). Under the Outside
Directors Program, Outside Directors are permitted to vote restricted
shares which have not yet vested.
(h) Includes 10,000 shares of Class A Common Stock underlying stock options
exercisable within 60 days. Also includes 34,154 restricted shares of Class
A Common Stock awarded under the Outside Directors Program which have not
yet vested. Includes 575,000 shares owned by C.B. Equities Capital Corp.
LLC, Oxford Capital Management LLC and C.B. Equities Retirement Trust, for
whom Mr. Butler is Portfolio Manager. Does not include shares owned by M&A
and NIIHC described in footnote (d) above.
(i) Includes 10,000 shares of Class A Common Stock underlying stock options
exercisable within 60 days. Also includes 17,654 restricted shares of Class
A Common Stock awarded under the Outside Directors Program which have not
yet vested.
(j) Includes 10,000 shares of Class A Common Stock underlying stock options
exercisable within 60 days. Also includes 21,154 restricted shares of Class
A Common Stock awarded under the Outside Directors Program which have not
yet vested. Does not include shares owned by M&A and NIIHC described in
footnote (d) above.
(k) Includes 10,000 shares of Class A Common Stock underlying stock options
exercisable within 60 days. Also includes 21,154 restricted shares of Class
A Common Stock awarded under the Outside Directors Program which have not
yet vested.
(footnotes continued on next page)
I-7
<PAGE>
(footnotes continued from previous page)
(l) Includes 10,000 shares of Class A Common Stock underlying stock options
exercisable within 60 days. Also includes 21,154 restricted shares of Class
A Common Stock awarded under the Outside Directors Program which have not
yet vested.
(m) Includes 18,500 restricted shares of Class A Common Stock awarded under the
Outside Directors Program which have not yet vested.
(n) Includes 10,000 shares of Class A Common Stock underlying stock options
exercisable within 60 days. Also includes 29,154 restricted shares of Class
A Common Stock awarded under the Outside Directors Program which have not
yet vested.
(o) Includes 10,000 shares of Class A Common Stock underlying stock options
exercisable within 60 days. Also includes 25,988 restricted shares of Class
A Common Stock awarded under the Outside Directors Program which have not
yet vested.
(p) Includes 750,000 shares of Class A Common Stock underlying stock options
exercisable within 60 days.
(q) Includes 123,334 shares of Class A Common Stock underlying stock options
exercisable within 60 days.
(r) Includes 35,001 shares of Class A Common Stock underlying stock options
exercisable within 60 days.
(s) Includes 1,833 shares of Class A Common Stock underlying stock options
exercisable within 60 days.
(t) Includes 5,000 shares of Class A Common Stock underlying stock options
exercisable within 60 days.
(u) Includes 1,049,335 shares of Class A Common Stock underlying stock options
exercisable within 60 days. Also includes 214,900 restricted shares of
Class A Common Stock awarded under the Outside Directors Program which have
not yet vested. Does not include shares owned by M&A and NIIHC described in
footnote (d) above.
I-8
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of all compensation awarded or paid
to or earned by the former Chief Executive Officer, the current Chief Executive
Officer, the four other most highly compensated current of the Company (the
'named executive officers' for services rendered in all capacities to the
Company (including its subsidiaries) for the fiscal year ended December 31,
1999, for the fiscal year ended December 31, 1998 and for the fiscal year ended
December 31, 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------------------------------------- --------------------------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS
NAME AND PRINCIPAL POSITION FISCAL PERIOD SALARY($) BONUS($) COMPENSATION (d) AWARDS (#) OF SHARES
--------------------------- ------------- --------- -------- ---------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Gregory J. Andrews(a) ........ 1/1/99-2/11/99 69,231 450,000 17,412 300,000
Former President and Chief 6/30/98-12/31/98 144,231 34,470
Executive Officer
Malcolm R. Yesner(b) ......... 1/01/99-12/31/99 375,000 75,000 20,656 700,000
President, Chief Executive 1/01/98-12/31/98 228,000 100,000 0 79,000
Officer 1/01/97-12/31/97 137,000 100,000
Robert W. Pierce(c) .......... 1/01/99-12/31/99 250,000 100,000 8,905 0
Executive Vice President, 1/01/98-12/31/98 250,000 50,000 10,515 60,000
and Chief Financial 1/01/97-12/31/97 165,384 50,000 1,233 100,000
Officer
Donald N. Riley .............. 1/01/99-12/31/99 182,000 38,000 6,000 20,000
Executive Vice President, 1/01/98-12/31/98 142,308 30,000 27,568 52,500
Operations 1/01/97-12/31/97 38,462 10,000 2,178 25,000
Aurelia T. Waldon ............ 1/1/99-12/31/99 138,077 25,000 6,525
Executive Vice President,
Sales
Shawn K. Tollerson ........... 1/1/99-12/31/99 102,308 40,000 1,173
Vice President, Marketing
</TABLE>
- ---------
(a) Mr. Andrews became President and Chief Executive Officer of Carson Products
and the Company on June 30, 1998. Mr. Andrews passed away on February 21,
1999.
(b) Mr. Yesner became President and Chief Executive Officer of the Company on
March 2, 1999. Since April 1998, he has also served as
President -- International Operations of the Company. From 1992 to 1998,
Mr. Yesner served as Managing Director of Carson South Africa.
(c) Mr. Pierce became an executive officer of Carson Products and the Company
on May 9, 1997.
(d) Except where otherwise noted, all other compensation for 1999 includes Long
Term Disability in the amount of $87.50 for Mr. Andrews, $393.75 for Mr.
Yesner, $525.00 for Mr. Pierce, Mr. Riley and Ms. Waldon, and $173.00 for
Ms. Tollerson. It also includes a car allowance of $17,324.82 for Mr.
Andrews, $14,137.00 for Mr. Yesner, $8,380 for Mr. Pierce, $6,000 for Mr.
Riley and Ms. Waldon and $1,000 for Ms. Tollerson. Also included is Excess
Life Insurance of $6,125.00 for Mr. Yesner.
I-9
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the grant of options
to purchase stock to each of the named executive officers during the fiscal year
ended December 31, 1999:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ANNUAL
RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
------------------------------------------------------------------------------- ----------------------
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE OR
GRANTED (#) (a) FISCAL YEAR BASE PRICE ($/SH) EXPIRATION DATE 5% ($) 10% ($)
--------------- ----------- ----------------- --------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
NAME
Gregory J. Andrews..... 0 0 0 0 0 0
Malcolm R. Yesner...... 250,000(a) 80.2% $3.1875 2/21/09 501,150 1,270,014
200,000(a) $4.1250 3/15/09 518,838 1,314,838
250,000(a) $2.8750 10/18/09 452,018 1,145,502
Robert W. Pierce....... 0 0 0 0 0 0
Donald N. Riley........ 20,000(b) 2.3% $3.1875 6/28/09 40,092 101,601
Shawn K. Tollerson..... 10,000(c) 2.3% $3.1875 6/28/09 20,046 50,801
10,000(c) $2.8750 10/18/09 18,081 45,820
Aurelia T. Waldon...... 8,000(d) 1.7% $3.1875 6/28/09 16,037 40,640
7,000(d) $2.8750 10/18/09 12,657 32,074
</TABLE>
- ---------
(a) Options to purchase 250,000 shares of Class A Common Stock to vest in
thirds on each of February 21, 2000, February 21, 2001 and February 21,
2002; options to purchase 200,000 shares to vest in thirds on each of March
15, 2000, March 15, 2001 and March 15, 2002; options to purchase 250,000
shares to vest in thirds on each of October 18, 2000, October 18, 2001 and
October 18, 2002. However, all options accelerate and vest upon
consummation of the Merger.
(b) Options to purchase 20,000 shares of Class A Common Stock to vest in thirds
on each of June 28, 2000, June 28, 2001 and June 28, 2002.
(c) Options to purchase 10,000 shares of Class A Common Stock to vest in thirds
on each of June 28, 2000, June 28, 2001 and June 28, 2002; options to
purchase 10,000 shares to vest in thirds on October 18, 2000, October 18,
2001 and October 18, 2002. However, all options accelerate and vest upon
consummation of the Merger.
(d) Options to purchase 8,000 shares of Class A Common Stock to vest in thirds
on each of June 28, 2000, June 28, 2001 and June 28, 2002; options to
purchase 7,000 shares to vest in thirds on October 18, 2000, October 18,
2001 and October 18, 2002. However, all options accelerate and vest upon
consummation of the Merger.
OPTION/SAR EXERCISES AND HOLDINGS
The options listed in the table above were outstanding at December 31, 1999
and no options or stock appreciation rights (SARs) were exercised by the named
executive officers during the fiscal year ended December 31, 1999. The total
number of exercisable and unexercisable options held by the named executive
officers at December 31, 1999 was as follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
TOTAL NUMBER OF EXERCISABLE UNEXERCISABLE
SECURITIES UNDERLYING SECURITIES SECURITIES
OPTIONS GRANTED (#) UNDERLYING UNDERLYING
(1) OPTIONS GRANTED OPTIONS GRANTED
--- --------------- ---------------
<S> <C> <C> <C>
NAME
Gregory J. Andrews................... 0 0 0
Malcolm R. Yesner.................... 779,000 112,333 666,667
Robert W. Pierce..................... 160,000 103,333 56,667
Donald N. Riley...................... 97,500 113,333 54,167
Shawn K. Tollerson................... 23,500 1,833 21,667
Aurelia T. Waldon.................... 30,000 5,000 25,000
</TABLE>
(footnote on next page)
I-10
<PAGE>
(footnote from previous page)
(1) Of these options, 29,000 for Mr. Yesner, 110,000 for Mr. Pierce, 27,500 for
Mr. Riley, 1,000 for Ms. Tollerson and 10,000 for Ms. Waldon have option
exercise prices in excess of $5.20 and therefore, will not be exercised upon
consummation of the Merger.
LONG TERM INCENTIVE PLANS
The options listed in the tables above were granted pursuant to the
Company's 1996 Long-Term Incentive Plan (the '1996 LTIP'). No other long-term
incentive awards were granted to the named executive officers during the fiscal
year ended December 31, 1999.
EMPLOYMENT AGREEMENTS
Parent entered into a written employment agreement with Malcolm R. Yesner,
dated as of February 25, 2000, which is described in Item 3 of Schedule 14D-9.
Upon the effective time of the Merger, this new employment agreement will
supersede his existing employment agreement with the Company described below.
During 1998, Carson Products entered into an employment agreement with Mr.
Andrews and remained a party to existing employment agreements with Mr. Pierce
and Mr. Riley. Also in 1998, the Company entered into an employment agreement
with Mr. Yesner as President -- International Operations. In 1999, in connection
with the death of Mr. Andrews (as discussed below), the Company entered into an
amended and restated employment agreement with Mr. Yesner which incorporated all
previous amendments and reflected his promotion to President and Chief Executive
Officer of the Company and Carson Products. These agreements contain the terms
discussed below (the 'Employment Agreements'). Mr. Andrews' term of employment
was to expire on December 31, 2000. In respect of his agreement to provide
services as President -- International Operations of the Company, Mr. Yesner's
term of employment expires on December 31, 2001. The agreement entered into with
Mr. Yesner in 1999 is terminable at the will of either the Company or Carson
Products. The Employment Agreements for Mr. Pierce and Mr. Riley provide for a
term of employment expiring on May 9, 2000 and September 8, 2000, respectively.
Under the Employment Agreements, the annual base salary amounts for Mr.
Andrews, Mr. Yesner, Mr. Pierce and Mr. Riley are $300,000, $375,000 (both
agreements), $250,000, and $182,000, respectively. Pursuant to the Employment
Agreements, Mr. Pierce and Mr. Riley are entitled to annual bonuses determined
under a formula based on specified net revenue growth, net income, earnings per
share and/or stock price growth. Mr. Yesner is entitled to a target annual
bonus, determined in the sole discretion of the Board, of up to 40% of his base
salary, in respect of his services as President -- International Operations, and
a further discretionary annual bonus, determined in the sole discretion of the
Board of Directors of Carson Products, in respect of his services as President
and Chief Executive Officer of the Company and Carson Products. In addition to
such base salary and annual bonuses, the Employment Agreements provide for
eligibility in any pension and welfare benefit plans (other than certain profit
sharing plans) maintained by Carson Products (the Company in the case of Mr.
Yesner), a monthly automobile allowance for Mr. Pierce and Mr. Riley equal to
$500 and $500, respectively, and such other fringe benefits generally provided
by Carson Products (the Company in the case of Mr. Yesner), to its employees.
The Employment Agreements provide for certain benefits to each individual
upon a termination of his employment during the term of his Employment
Agreement. If the employment of any of the above named executive officers is
terminated for 'Cause' (as defined in the Employment Agreements) or if such
individual voluntarily terminates employment without 'Good Reason' (as defined
in the Employment Agreements), such officers will only be entitled to any unpaid
base salary amounts through and including the date of termination and any prior
year's annual bonus which has been awarded, but not yet paid as of such date of
termination.
I-11
<PAGE>
If Carson Products terminates the employment of Mr. Riley without Cause,
such officer will be entitled to receive a lump sum severance payment equal to
150% of his base annual salary within 15 days of the date of such termination.
If the Company terminates the employment of Mr. Yesner without Cause, he shall
be entitled to base salary continuation at the rate in effect on the date of
termination, for an 18-month period commencing on such date of termination. If
Mr. Pierce's employment is terminated without Cause, Carson Products shall pay
him a lump sum payment equal to any unpaid base salary through and including the
date of his termination without Cause.
In the event of the termination of employment of Mr. Pierce or Mr. Riley
upon death or 'Disability,' as defined in the Employment Agreements, the
respective individual will be entitled to receive 150% of his annual base salary
(payable in one lump sum). In the event of Mr. Yesner's termination of
employment upon his death or Disability, Mr. Yesner will be entitled to base
salary continuation for a one month period commencing on the date of such
termination.
Mr. Yesner, Mr. Pierce and Mr. Riley are also entitled to termination
benefits if their employment is terminated by Carson Products (the Company in
the case of Mr. Yesner) without Cause or by such individual with Good Reason
following a 'Change in Control' (as defined in the Employment Agreements). Upon
such a termination following a Change in Control, Mr. Yesner shall be entitled
to a lump sum payment equal to three times the sum of (i) the highest base
salary paid or payable to Mr. Yesner during the twelve month period immediately
preceding the month in which the Change in Control occurs, and (ii) an amount
equal to Mr. Yesner's base salary for the year in which a Change in Control
occurs. Upon such a termination of Mr. Pierce or Mr. Riley following a Change in
Control, Mr. Pierce or Mr. Riley shall be entitled to a lump sum payment equal
to one and one-half times the sum of (i) the highest base salary paid or payable
to such individual during the twelve month period immediately preceding the
month in which the Change in Control occurs, and (ii) an amount equal to 50% of
such individual's base salary for the year in which a Change in Control occurs.
In addition, Mr. Yesner may voluntarily terminate his employment on, or within
one year after, the occurrence of a Change in Control and upon such voluntary
termination, shall be entitled to a lump sum equal to three times the sum of (i)
the highest base salary paid or payable to Mr. Yesner during the twelve month
period immediately preceding the month in which the Change in Control occurs,
and (ii) an amount equal to Mr. Yesner's base salary for the year in which the
Change of Control occurs.
The Employment Agreements also provide that Mr. Pierce and Mr. Riley, while
employed by Carson Products and during the period in which Mr. Pierce or Mr.
Riley, respectively, is receiving payments of Base Salary (as defined in the
Employment Agreements) from Carson Products (regardless as to whether Mr. Pierce
or Mr. Riley, respectively, is employed by Carson Products), may not directly or
indirectly (i) own, operate, represent, promote, consult for, control or
participate in the ownership, operation, acquisition or management of any
business manufacturing and/or distributing ethnic hair care products or
cosmetics within a 500-mile radius of Carson Products' headquarters, (ii)
solicit (other than on behalf of Carson Products or any of its affiliates),
divert or take away the business of any customers of Carson Products or any of
its affiliates, or any prospective customers of Carson Products or any of its
affiliates whose business Carson Products or any of its affiliates actively
solicits during such officer's employment with Carson Products, or (iii) solicit
or induce any employee of Carson Products or any of its affiliates to terminate
such employee's employment with Carson Products or such affiliates.
In October, 1999, Mr. Yesner entered into a non-competition agreement with
the Company which provides that upon the occurrence of a Triggering Event (as
defined below), Mr. Yesner, without the express prior written consent of the
Company, is prohibited from engaging in any Competitive Business (as defined
therein) or any other competitive activity. The restrictions are imposed for a
five-year period commencing upon Mr. Yesner's termination of employment.
'Triggering Event' means the noncompetition and nonsolicitation restrictions
only become effective if, prior to January 1, 2002, either: (i) Mr. Yesner's
employment is terminated under circumstances in which he is entitled to
severance under his employment agreement (i.e., upon his termination without
'Cause' or his voluntary resignation within one year after the occurrence of a
change of control), in which case the restrictions automatically become
effective, or (ii) Mr. Yesner's
I-12
<PAGE>
employment is terminated under circumstances in which he is not entitled to
severance under his employment agreement (i.e., upon his termination for 'Cause
or his voluntary resignation prior to the occurrence of a change of control), in
which case the restrictions become effective only if the Company elects to have
such provisions apply. If the restrictions become effective under either of the
circumstances described above, the Company shall pay to Mr. Yesner a total of
$2.5 million over the five year duration of the restrictions ($200,000 per year
with respect to the United States and $300,000 per year with respect to the rest
of the world) payable in annual installments in arrears.
Mr. Andrews passed away on February 21, 1999. The Employment Agreement
between Carson Products and Mr. Andrews provides for certain benefits upon a
termination of Mr. Andrews' employment upon his death. Specifically, Mr.
Andrews' Employment Agreement provides for base salary continuation for a one
month period commencing on the date of such termination. In addition, Mr.
Andrews' Employment Agreement entitled him to life insurance coverage at the
expense of Carson Products, with a death benefit equal to $5,000,000.
As an inducement to Mr. Andrews' agreement to serve as CEO of Carson
Products, Carson Products recognized that its compensation of Mr. Andrews had to
take into account the value of Mr. Andrews' option rights to acquire common
stock of Colgate-Palmolive and shares of restricted stock of Colgate-Palmolive,
which Mr. Andrews forfeited as a result of his leaving Colgate-Palmolive to join
Carson Products. Concurrently with the execution of Mr. Andrews' Employment
Agreement, Carson Products entered into a Stock Appreciation Units and Phantom
Stock Agreement with Mr. Andrews (the 'SAR Agreement'). Pursuant to the SAR
Agreement, Carson Products granted to Mr. Andrews stock appreciation right units
(the 'Units') and phantom stock (the 'Phantom Shares'). When exercisable, each
Unit entitles Mr. Andrews (or his estate) to an amount equal to the current
market price per share of Colgate-Palmolive common stock on the date such Unit
is exercised, less the base value of the Unit, as noted in the SAR Agreement.
Upon settlement and redemption, a Phantom Share entitles Mr. Andrews (or his
estate) to an amount equal to the then current value of one share of
Colgate-Palmolive common stock. The Units and Phantom Shares were to vest and
become exercisable over Mr. Andrews' term of employment with Carson Products.
Mr. Andrews was initially granted a total of 11,534 Units. Under the terms of
the SAR Agreement, 2,000 Units with a base value of $34.3438 per unit, 2,467
Units with a base value of $40.625 per unit and 1,533 Units with a base value of
$62.1563 per unit were exercisable at the time of Mr. Andrews' death. Because
Mr. Andrews died prior to the earliest settlement date associated with the
Phantom Shares, his estate forfeited any and all Phantom Share rights granted to
him. In November, the Company and Mr. Andrews' estate signed an agreement
whereby the estate relinquished Mr. Andrews' right to exercise his option to
acquire 300,000 shares of Class A Common Stock in return for a cash payment from
the Company of $135,000, less such taxes required to be withheld pursuant to any
applicable law and relinquished Mr. Andrews' right with respect to all Units
granted to Mr. Andrews under the SAR Agreement in return for a cash payment of
$395,804.92, less such taxes required to be withheld pursuant to any applicable
law.
COMPENSATION OF DIRECTORS
In 1999, Leroy Keith received cash compensation in the amount of $500,000 in
compensation for his services to the Company as the non-executive Chairman of
the Board of Directors. No other Directors received any cash compensation for
the services as members of the Board.
During November 1998, the Board amended and restated the 1996 Non-Employee
Directors Equity Incentive Program (the 'Outside Directors Program'). The
Outside Directors Program was initially approved by the Board in 1996. The
Outside Directors Program is designed to attract, retain and motivate
individuals who the Company believes are capable of making significant
contributions to the Board and the Company generally, and to align their
interests with those of the shareholders.
The Outside Directors Program authorizes the issuance of up to 400,000
shares of the Class A Common Stock, subject to adjustment in certain
circumstances. Prior to the amendment and restatement of the Outside Directors
Program, each non-employee director received, immediately
I-13
<PAGE>
following each annual meeting of the Company's stockholders (i) a number of
shares, subject to certain forfeiture restrictions, of the Class A Common Stock
(the 'Outside Director Restricted Shares') equal to the quotient resulting when
$25,000 is divided by the average fair market value of the Class A Common Stock
for the five trading days preceding such annual meeting (the 'Trading Period')
and (ii) an option to acquire 5,000 shares of the Class A Common Stock with an
exercise price equal to the average fair market value of the Class A Common
Stock for the Trading Period (the 'Outside Director Options').
The amended and restated Outside Directors Program is effective for 1998 and
thereafter. Pursuant to the Outside Directors Program, as amended and restated,
the Board has sole discretion to grant options to non-employee directors in such
amounts and subject to such restrictions, terms and conditions as it shall deem
appropriate. In addition, immediately following each annual meeting of the
Company's stockholders occurring after January 1, 1999 each non-employee
director serving on the Audit, Compensation and/or Executive Committees of the
Board shall automatically be granted Outside Director Restricted Shares. Each
non-employee director serving on the Audit Committee shall receive an award of
3,500 Outside Director Restricted Shares. Each non-employee director serving on
the Compensation Committee shall receive an award of 3,500 Outside Director
Restricted Shares. Each non-employee director serving on the Executive Committee
shall receive 5,000 Outside Director Restricted Shares. A non-employee director
serving on more than one Committee of the Board shall receive an award of
Outside Director Restricted Shares with respect to his service on each such
Committee. In addition, the Board shall have discretion to grant additional
Outside Director Restricted Shares to non-employee directors, subject to such
restrictions, terms and conditions as the Board shall deem appropriate.
The Outside Director Restricted Shares vest and become non-forfeitable as to
one-third of the aggregate shares granted on each of the next succeeding three
anniversaries of the date of grant of such Restricted Shares. If a non-employee
director resigns voluntarily from the Board or is removed therefrom with 'cause'
(as defined in the Outside Directors Program), the unvested Outside Director
Restricted Shares held by such non-employee director will be immediately
forfeited and automatically cancelled by the Company.
The Outside Director Options become exercisable on the first anniversary of
the date of grant of any such option and expire on the tenth anniversary of such
date (if any such option is not exercised prior thereto by the non-employee
director grantee). If a non-employee director resigns voluntarily from the Board
or is removed therefrom for cause, the Outside Director Options held by such
director, if then unexercisable, will be immediately forfeited by such director
and automatically cancelled by the Company or, if then exercisable, must be
exercised by such non-employee director within 90 days after any such
resignation or removal.
The Outside Directors Program is administered by the Board of Directors. The
Board has the full and final authority to interpret the Outside Directors
Program and to adopt and amend such rules and regulations for the administration
of the Outside Directors Program as the committee may deem desirable. In
addition, the Board has the right to amend or terminate the Outside Directors
Program, subject to certain restrictions set forth therein.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Melvyn J. Estrin
(Chairman), James L. Hudson and Jack Kemp, each of whom is an outside,
non-employee member of the Company's Board. The Compensation Committee is
responsible for all aspects of the Company's executive compensation policies,
including the administration of the Company's 1996 LTIP. None of the members of
the Compensation Committee has or any time been an officer or employee of the
Company or of any of its subsidiaries.
I-14
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation program has as its foundation the
following objectives:
Maintaining a total compensation program consisting of base salary,
performance incentives and benefits designed to support the corporate goal
of providing superior value to our stockholders and customers;
Providing compensatory programs which serve to facilitate the recruitment,
retention and motivation of qualified executives; and
Rewarding key executives for achieving financial, operating and individual
objectives that produce a corresponding and direct return to the Company's
stockholders in both the long-term and the short-term.
PHILOSOPHY AND OBJECTIVES
The Company's compensation philosophy and programs are structured to tie
executives' total compensation to the overall performance of the Company. A
secondary objective of the Company's compensation philosophy is to provide an
incentive for executives, and to motivate them to strive for sustainable growth
in earnings, market share, operating profits (or EBITDA), industry leadership,
global expansion and shareholder value. In addition, the Company's compensation
packages for its executives are designed to attract and retain highly talented
managers and leaders for the positions that the Board has deemed essential to
the Company's long-term success-defined as five years or longer.
Each year, the Compensation Committee will conduct a comprehensive review of
the Company's executive compensation programs. The Compensation Committee may be
assisted in these efforts by an independent consultant and/or by the Company's
internal staff, who provide the Compensation Committee with relevant information
and recommendations regarding compensation policies, programs and specific
compensation practices. This review is designed to ensure proper programs are in
place to enable the Company to achieve its strategic and operating objectives,
provide superior value to its stockholders and customers, and to document the
Company's relative competitive position.
To maintain competitive, comprehensive compensation, the Compensation
Committee will review a comparison of the Company's compensation program with
those offered by comparable companies within relevant industries. For each
component of compensation (as well as total compensation), the Compensation
Committee may seek to ensure that the Company's level of compensation for
expected levels of performance approximates the average for executive officers
in similar positions at comparable companies. Performance above or below
expected levels may be reflected in a corresponding increase or reduction in
certain portions of the Company's overall compensation program.
In accordance with the philosophy described in the preceding paragraphs, the
Compensation Committee has determined that each executive should receive a
portion of her/his compensation in a base salary and a portion should be awarded
on the basis of achievements as measured against the targets presented above. In
setting and adjusting both base salaries and incentive awards, the Compensation
Committee may take into consideration comparability indices for executives both
within the Company's industrial sector and the prevailing responsibilities for
business executives having similar roles and responsibilities in an expanded
context.
The Compensation Committee is mindful that, while every effort will be made
to recognize and evaluate the performance of the Company's senior management,
this process cannot be determined by the exclusive use of a predetermined
formula. The Compensation Committee, therefore, believes that it must also use
judgment and discretion in recognizing and rewarding specific persons whose
individual talents and contributions have benefited the Company and its
shareholders outside of, or in addition, to the Company's financial performance.
The Company's executive compensation program includes several components
serving long and short-term objectives and taking advantage of several federal
income tax incentives which are not
I-15
<PAGE>
directly performance-based. In addition, the Company maintains for each of its
executive officers a package of benefits under its pension and welfare benefit
plans that is generally provided to all employees, including a group health
insurance plan.
LONG-TERM INCENTIVE STOCK OPTIONS
The Compensation Committee rewards long-term performance with awards made
pursuant to the 1996 LTIP. The Compensation Committee selects the form and
amount of long-term awards based upon its evaluation of which vehicles are best
positioned to serve as effective incentives for long-term performance. Grants of
stock options under the 1996 LTIP are intended to motivate the Company's
executives to focus on increasing the stock price over a period greater than one
year. The Compensation Committee is mindful that the Company's historical record
as a publicly traded company is limited by virtue of the relatively brief period
in which it has been listed on the New York Stock Exchange; nonetheless, in the
absence of a five-year historical base, the long-term incentive stock options
should, for the immediate future (defined as the twelve-month period ending
December 31, 1999), be tied to specific share price increases.
TAX CONSIDERATIONS
Section 162(m) of the Internal Revenue Code, as amended, generally limits
the Company's federal income tax deduction for compensation paid in any taxable
year to any one of the five highest paid executive officers named in the
Company's Proxy Statement to $1.0 million. The limit does not apply to specified
types of exempt compensation, including payments that are not included in the
employee's gross income, payments made to or from a tax-qualified plan and
compensation that qualifies as performance-based compensation. Under the tax
law, the amount of a performance-based award must be based entirely on an
objective formula, without any subjective consideration of individual
performance.
The Compensation Committee has carefully considered the impact of this law.
At this time, the Compensation Committee believes it is in the Company's and
stockholders' best interests to retain the subjective determination of
individual performance and compensation levels. Consequently, some payments to
the Company's named executive officers could be subject to the limitation
imposed by the Code section 162(m). Options granted under the 1996 LTIP are
designed to qualify as exempt performance-based compensation.
RATIONALE FOR CEO COMPENSATION
In 1999, Mr. Yesner's compensation was determined as described above.
Compensation Committee
Melvyn J. Estrin, Chairman
James L. Hudson
Jack Kemp
I-16
<PAGE>
PERFORMANCE GRAPH
The following graph compares (i) the cumulative total stockholder return on
the Class A Common Stock with (ii) the cumulative return of the Russell 2000
Stock Index ('Russell 2000') and a peer group consisting of companies in the
cosmetics and grooming industry (the 'Peer Group'). The graph assumes that the
value of an investment in the Common Stock and in each index was $100 on October
15, 1996, and that all dividends were reinvested.
The Russell 2000 and the Peer Group are market-capitalization weighted. The
Peer Group is comprised of 24 consumer product manufacturers, including the
following publicly traded companies: Adrien Arpel, Inc., Advantage Life
Products, Inc., Alberto-Culver Company, Inc., Applewoods, Inc., Avon Products,
Inc., Beauticontrol Cosmetics, Inc., Carson, Inc., CCA Industries, Inc.,
Chromatics Color Sciences International Inc., Del Laboratories Inc., Dial
Corporation New, French Fragrances Inc., Gillette Company, Guest Supply, Inc.,
Human Peromone Sciences, Inc., Inter Parfums Inc., Estee Lauder Cosmetics, Inc.,
Nutramax Products, Inc., Parlux Fragrances Inc., Revlon, Inc., Stephan Co.,
Styling Technology Corp., Tristar Corporation, Zegarelli Group International,
Inc.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
--------------------------------------------
10/15/96 12/96 12/97 12/98 12/99
-------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Carson, Inc......................................... 100.00 90.98 43.85 26.23 21.31
Peer Group.......................................... 100.00 106.16 133.05 139.93 122.35
Russell 2000........................................ 100.00 108.95 143.58 134.31 132.31
</TABLE>
I-17
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MORNINGSIDE AND MCG
On September 1, 1999, the Management Assistance Agreement by and between
Carson Products and Morningside Capital Group, L.L.C. ('Morningside'), dated
August 23, 1995 (as amended, the 'Morningside Management Agreement'), was
terminated by mutual consent of the parties thereto. Following termination of
the Morningside Management Agreement, Carson Products entered into a
substantially similar Management Assistance Agreement with MCG Global, LLC
('MCG') on September 1, 1999 (the 'MCG Management Agreement'). The principal
members of MCG are the former principal members of Morningside. Pursuant to the
MCG Management Agreement, MCG agrees to supply the services of Vincent A. Wasik
(a principal member of MCG) to provide advice and assistance with respect to (i)
the formulation of a 'strategic direction'; (ii) the formulation of business
plans, capital budgets and financial strategies; (iii) the formulation of
marketing, sales and operational plans; (iv) the evaluation of investment and
acquisition opportunities; and (v) dealings with banks and other lending
institutions. 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
MCG Management Agreement provides that Carson Products will indemnify MCG, its
members, employees and agents, including Mr. Wasik, for all actions, claims,
damages and liabilities based upon or arising from the acceptance of or
performance of the obligations of MCG under the MCG Management Agreement (other
than actions resulting from gross negligence, willful misconduct or a material
breach of the MCG Management Agreement by MCG or Mr. Wasik). The termination
date of the MCG Management Agreement is August 23, 2003; however, the term of
the agreement shall continue after such termination date until terminated by not
less than 30 days' advance notice by either party. Notwithstanding the
foregoing, the MCG Assistance Agreement will terminate upon consummation of the
Offer.
Additionally, for the term of the MCG Management Agreement, MCG has agreed
that neither it nor Mr. Wasik shall directly or indirectly (i) own (other than
through the ownership of five percent (5%) or less of any class of securities
registered under the Exchange Act), manage, operate, represent, promote, consult
for, control or participate in the ownership, operation, acquisition or
management of any business manufacturing and/or distributing ethnic hair care
products or cosmetics within a 500-mile radius of Carson Products' headquarters,
or (ii) solicit (other than on behalf of Carson Products or any of its
affiliates), divert or take away the business of any customers of Carson
Products or any of its affiliates or any prospective customers of Carson
Products or any of its affiliates.
AM COSMETICS
AM Products Company, formerly known as Morningside AM Acquisition Corp.
('AMP'), 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 'AMP PIK Preferred Shares') issued by AMP, at a price of $10,000 per share.
The AMP PIK Preferred Shares were subsequently exchanged by Carson Products for
an equal number of shares of cumulative payment-in-kind Preferred Shares of AM
Cosmetics, the parent corporation of AMP (the 'PIK Preferred Shares'). AM
Cosmetics and AMP were formed by Morningside on behalf of an investor group to
acquire the assets of Arthur Matney Co., Inc. Certain directors and shareholders
of the Company are or have been key management, directors and shareholders of AM
Cosmetics. AM Cosmetics sells several brands of budget cosmetics, one of which
is targeted at the African-American consumer.
Concurrent with its investment in AMP, 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 November
1998, AM Cosmetics served written notice of termination of the Carson-AM
Management Agreement.
I-18
<PAGE>
Pursuant to the Carson-AM Management Agreement, the parties entered into a
manufacturing agreement in May 1997, which expired on May 1, 1999 (the 'AM
Manufacturing Agreement'). In addition, Carson Products and AM Cosmetics entered
into a sales and marketing agreement (the 'AM Sales/Marketing Agreement') in
accordance with the Carson-AM Management Agreement in 1997. 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 (the 'Arbitration'). AM Cosmetics asserted that the
Company breached (i) 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, and (ii) the Manufacturing Agreement by
failing to pay AM Cosmetics for manufacturing certain goods and failing to
reimburse it for certain marketing and research costs. The Company filed a
counterclaim against AM Cosmetics claiming that AM Cosmetics failed to
manufacture products in accordance with the appropriate specifications, which
resulted in the manufacture of defective merchandise.
In addition, on April 29, 1999, the Company instituted a civil suit in
Georgia (the 'Georgia Litigation') alleging that AM Cosmetics breached the AM
Sales/Marketing and also filed a suit in the Superior Court of New Jersey,
Bergen County, seeking a declaratory judgment with respect to AM Cosmetics'
restructuring and its impact upon the PIK Preferred Shares (the 'New Jersey
Litigation'). The New Jersey Litigation was dismissed without prejudice for lack
of prosecution.
Subsequently, in February 2000, AM Cosmetics filed a counterclaim in the
Georgia Litigation alleging that from approximately June 1996 through June 1998,
the Company and AM Cosmetics were controlled and majority-owned, through other
entities, by Morningside, which was controlled and majority-owned by Vincent A.
Wasik. AM Cosmetics alleged that in order to enhance the value of the Company's
stock, Mr. Wasik caused the Company and AM Cosmetics to be operated in a way
that enhanced the Company's business at AM Cosmetics' expense. Specifically, AM
Cosmetics alleged that Wasik caused AM Cosmetics to enter into contracts with
the Company that were commercially unreasonable and/or unprofitable for AM
Cosmetics.
On February 25, 2000, Carson Products entered into a settlement agreement
(the 'Settlement Agreement') with mutual releases with AM Cosmetics and AMP to
resolve each of the Arbitration, the Georgia Litigation and the New Jersey
Litigation and all other disputes between the parties. In addition, the Company
obtained a release, in favor of the Company, from certain indemnity obligations
to certain officers and directors of the Company who had been officers and
directors of AM Cosmetics. Pursuant to the Settlement Agreement, Carson Products
agreed to make a settlement payment totaling $2,000,000 to AM Cosmetics. Carson
Products paid AMP $1,000,000 on February 25, 2000 upon execution of the
Settlement Agreement, and agreed to make the remaining $1,000,000 settlement
payment on the earlier of July 31, 2000 or the closing of the Merger (the
'Second Payment'). In addition, the PIK Preferred Shares were surrendered to AM
Cosmetics and appropriate filings were made to terminate with prejudice each of
the Arbitration, the Georgia Litigation and the New Jersey Litigation.
In connection with the settlement, six Directors of the Company (Messrs.
Bathgate, Butler, Estrin, Sabre, Wasik and Yesner) arranged for caused GrandBank
Inc., a Maryland state chartered bank, to issue an irrevocable letter of credit
(the 'Letter of Credit') in the amount of $690,000 for the benefit of AMP to
secure a portion of the Second Payment. AMP is entitled to make a draw down
under the Letter of Credit to the extent that the Second Payment has not been
made on or prior to March 31, 2000. The Company is required to reimburse such
Directors pursuant to a letter agreement among the Company and such Directors,
for any amounts drawn down under the Letter of Credit in circumstances in which
the Merger is not consummated, together with interest thereon at the rate of 12%
per annum from the date of the draw down to the date of reimbursement. In
circumstances in which the Merger is consummated, the Company is required to
reimburse such Directors only for any amounts drawn down under the Letter of
Credit in excess of $531,492 (the first $531,492 of reimbursement in such
circumstance being the responsibility of the Company's largest stockholder, DNL
Partners Limited Partnership), together with interest
I-19
<PAGE>
thereon at the rate of 12% per annum from the date of the draw down to the date
of reimbursement. These arrangements were approved by an independent committee
of the Board.
Parent conditioned its willingness to enter into the Merger Agreement on the
satisfactory settlement by the Company of all disputes with AMP and AM Cosmetics
arising out of any business relationships between them. The Company believes
that it was in the Company's best interest to settle the controversies between
the parties and the financial terms of the settlement will not have a material
adverse effect on the Company.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 (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 AS FOLLOWS: MALCOLM YESNER, FORM 4 WITH RESPECT TO
ONE TRANSACTION NOT FILED ON A TIMELY BASIS; AND LAWRENCE E. BATHGATE, II,
SUZANNE DE PASSE AND JOHN L. SABRE, FORMS 5 NOT FILED ON A TIMELY BASIS.
I-20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------ ----------- ----
<C> <S> <C>
*(a)(1) -- Offer to Purchase dated March 8, 2000....................
*(a)(2) -- Letter of Transmittal with respect to Shares.............
**(a)(3) -- Text of press release issued by Carson, Inc. dated
February 28, 2000.........................................
(a)(4) -- Letter to stockholders of Carson, Inc. dated March 8,
2000......................................................
*(a)(5) -- Form of Summary Advertisement dated March 8, 2000........
(a)(6) -- Fairness Opinion of PaineWebber Incorporated dated
February 18, 2000.........................................
*(e)(1) -- Confidentiality Agreement, dated July 24, 1997, as
amended from time to time, by and between Carson, Inc. and
Cosmair, Inc..............................................
*(e)(2) -- Exclusivity Agreement, dated as of February 3, 2000, by
and between Carson, Inc. and Cosmair, Inc. and agreed to
by DNL Partners Limited Partnership.......................
*(e)(3) -- Agreement and Plan of Merger, dated as of February 25,
2000, by and among Cosmair, Inc., Crayon Acquisition Corp.
and Carson, Inc...........................................
*(e)(4) -- Stockholders Agreement, dated as of February 25, 2000, by
and among Cosmair,
Inc., Crayon Acquisition Corp., Carson, Inc. and the
stockholders signatory thereto............................
*(e)(5) -- Employment Agreement, dated as of February 25, 2000, by
and between Cosmair, Inc. and Malcolm R. Yesner...........
**(e)(6) -- Settlement Agreement, dated as of February 25, 2000,
among Carson Products Company, AM Cosmetics Corp. and AM
Products Company..........................................
**(e)(7) -- Release, dated as of February 25, 2000, by Carson
Products Company in favor of AM Cosmetics Corp. and AM
Products Company..........................................
**(e)(8) -- Release, dated as of February 25, 2000, by AM Cosmetics
Corp. and AM Products Company in favor of Carson Products
Company...................................................
**(e)(9) -- Letter Agreement, dated as of February 25, 2000, among
Carson, Inc. and certain directors of the Company.........
***(e)(10) -- Letter Agreement, dated as of February 25, 2000, among DNL
Partners Limited Partnership and Cosmair, Inc.........
***(e)(11) -- Form of Indemnity Release between certain officers and
directors of Carson, Inc. and Cosmair, Inc................
</TABLE>
- ---------
* Filed as an exhibit to Purchaser's Tender Offer Statement on Schedule TO
date March 8, 2000 and incorporated herein by reference.
** Incorporated by reference to the Company's Current Report on Form 8-K filed
on March 1, 2000.
*** To be filed by amendment.
<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, 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.0
<CASH> 8,740
<SECURITIES> 0
<RECEIVABLES> 40,949
<ALLOWANCES> 5,490
<INVENTORY> 28,332
<CURRENT-ASSETS> 75,473
<PP&E> 43,655
<DEPRECIATION> 6,465
<TOTAL-ASSETS> 246,648
<CURRENT-LIABILITIES> 30,569
<BONDS> 138,314
0
0
<COMMON> 153
<OTHER-SE> 53,716
<TOTAL-LIABILITY-AND-EQUITY> 246,648
<SALES> 169,355
<TOTAL-REVENUES> 169,355
<CGS> 83,747
<TOTAL-COSTS> 83,747
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,673
<INTEREST-EXPENSE> 17,757
<INCOME-PRETAX> (12,094)
<INCOME-TAX> 1,816
<INCOME-CONTINUING> (14,288)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,288)
<EPS-BASIC> (0.94)
<EPS-DILUTED> (0.94)
</TABLE>
