AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 19, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CARSON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2844 06-142-8605
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
64 ROSS ROAD
SAVANNAH, GEORGIA 31405
(912) 651-3400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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CARSON PRODUCTS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 2844 51-032-5487
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
64 ROSS ROAD
SAVANNAH, GEORGIA 31405
(912) 651-3400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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DR. LEROY KEITH
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
CARSON, INC.
64 ROSS ROAD
SAVANNAH, GEORGIA 31405
(912) 651-3400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
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COPY TO:
ARNOLD B. PEINADO III, ESQ.
MILBANK, TWEED, HADLEY & MCCLOY
ONE CHASE MANHATTAN PLAZA
NEW YORK, NEW YORK 10005
(212) 530-5732
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
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10 3/8% Senior Subordinated Notes due
2007..................................... $100,000,000 100% $100,000,000 $29,500
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Guarantees of 10 3/8% Senior Subordinated
Notes due 2007........................... $100,000,000 (2) (2) (3)
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(1) Estimated pursuant to Rule 457(f) solely for purposes of calculating the
registration fee.
(2) No separate consideration will be received for the Guarantees.
(3) Pursuant to Rule 457(n), no separate fee is payable for the Guarantees.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 19, 1997
PROSPECTUS
CARSON, INC.
OFFER TO EXCHANGE
10 3/8% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
($100,000,000 PRINCIPAL AMOUNT) FOR
10 3/8% SENIOR SUBORDINATED NOTES DUE 2007, SERIES A
($100,000,000 PRINCIPAL AMOUNT OUTSTANDING)
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED
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Carson, Inc., a Delaware corporation (the "Company"), hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus (the
"Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal"; together with the Prospectus, the "Exchange Offer"), to exchange
up to an aggregate principal amount of $100,000,000 of its 10 3/8% Senior
Subordinated Notes Due 2007, Series B (the "Exchange Notes") for up to an
aggregate principal amount of $100,000,000 of its outstanding 10 3/8% Senior
Subordinated Notes Due 2007, Series A (the "Existing Notes"). The Exchange
Notes and the Existing Notes are hereinafter collectively referred to as the
"Notes." The terms of the Exchange Notes are identical in all material respects
to those of the Existing Notes, except for certain transfer restrictions and
registration rights relating to the Existing Notes. The Exchange Notes will be
issued pursuant to, and be entitled to the benefits of, the Indenture (as
defined) governing the Existing Notes.
The Exchange Notes will bear interest at the rate of 10 3/8% per annum,
payable semi-annually on May 1 and November 1 of each year, commencing on May
1, 1998. The Exchange Notes will mature on November 1, 2007. Interest on the
Exchange Notes will accrue from the last interest payment date on which
interest was paid on the Existing Notes surrendered in exchange therefor or, if
no such interest has been paid on the Existing Notes, from the date of original
issue of the Existing Notes. Interest on the Existing Notes accepted for
exchange will cease to accrue upon issuance of the Exchange Notes in exchange
therefor.
On or after November 1, 2002, the Company may redeem the Exchange Notes, in
whole or in part, at the redemption prices set forth herein, plus accrued and
unpaid interest and Liquidated Damages (as defined), if any, to the date of
redemption. Notwithstanding the foregoing, at any time prior to November 1,
2000, the Company may redeem up to 35% of the aggregate principal amount of the
Notes originally issued with the net proceeds of one or more Equity Offerings
(as defined) at a redemption price equal to 110.375% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to
the date of redemption; provided that at least 65% in aggregate principal
amount of the Notes originally issued remains outstanding after each such
redemption and that any such redemption occurs within 90 days of such Equity
Offering. Upon the occurrence of a Change of Control (as defined), the Company
will be required to make an offer to purchase all of the outstanding Notes at a
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of repurchase. See "Risk
Factors--Possible Inability to Make A Change of Control Offer" and "Description
of the Exchange Notes--Change of Control." In addition, prior to a specified
reorganization of the Company, the Company will be required to make an offer to
purchase all of the outstanding Exchange Notes at a purchase price equal to
100% of the principal amount thereof plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase plus the Applicable Premium
(as defined). See "Description of the Exchange Notes--Merger or Consolidation"
and "Risk Factors--Ability to Reorganize as a Foreign Corporation."
The Exchange Notes will be guaranteed (the "Guarantees") on a senior
subordinated basis by Carson Products Company, a Delaware subsidiary of the
Company, and certain other Restricted Subsidiaries (as defined) of the Company
(collectively, the "Guarantors"). The Exchange Notes and the Guarantees will be
general unsecured obligations of the Company and the Guarantors, respectively.
The Exchange Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness (as defined) of the Company, including indebtedness
under the New Credit Facility (as defined), and pari passu or senior in right
of payment to any existing and future Subordinated Indebtedness (as defined) of
the Company. The Guarantees will be subordinated in right of payment to all
existing and future Senior Indebtedness of the Guarantors, including
indebtedness under the New Credit Facility, and pari passu or senior in right
of payment to any existing and future Subordinated Indebtedness of the
Guarantors. As of September 30, 1997, on a pro forma basis after giving effect
to the sale of the Existing Notes, the aggregate principal amount of Senior
Indebtedness of the Company and the Restricted Subsidiaries to which the Notes
and the Guarantees would have been subordinated would have been approximately
$0.6 million. After giving effect to the New Credit Facility, the Company and
the Restricted Subsidiaries would have had additional borrowing availability of
approximately $75.0 million as of September 30, 1997, subject to certain
(Continued on next page)
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SEE "RISK FACTORS", WHICH BEGINS AT PAGE 14, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
The date of this Prospectus is , 1998.
(Continued from cover)
borrowing base and other limitations. The Indenture will permit the Company
and its subsidiaries to incur additional indebtedness, including Senior
Indebtedness, subject to certain limitations. See "Description of the Exchange
Notes" and "Description of the New Credit Facility."
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company and the Guarantors contained in the Registration
Rights Agreement dated November 6, 1997 (the "Registration Rights Agreement")
by and among the Company, Carson Products Company, Donaldson, Lufkin &
Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as the Initial Purchasers (the "Initial Purchasers"), with
respect to the initial sale of the Existing Notes.
The Company will accept for exchange any and all Existing Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York City
time, on , 1998, unless extended by the Company in its sole discretion (the
"Expiration Date"). The Expiration Date will not in any event be extended to a
date later than , 1998. Tenders of Existing Notes may be withdrawn at any
time prior to 5:00 p.m. New York City time, on the Expiration Date. In the
event the Company terminates the Exchange Offer, and does not accept for
exchange any Existing Notes with respect to the Exchange Offer, the Company
will promptly return the Existing Notes to the holders thereof. The Exchange
Offer is not conditioned upon any minimum principal amount of Existing Notes
being tendered for exchange, but is otherwise subject to certain customary
conditions. The Existing Notes may be tendered only in integral multiples of
$1,000.
The Company is offering the Exchange Notes in reliance on certain
interpretive letters issued by the staff of the Securities and Exchange
Commission (the "Commission") to third parties in unrelated transactions.
Based upon such interpretive letters, the Company is of the view that holders
of Existing Notes (other than any holder who is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act of 1933, as amended
(the "Securities Act")) who exchange their Existing Notes for Exchange Notes
pursuant to the Exchange Offer generally may offer such Exchange Notes for
resale, resell such Exchange Notes and otherwise transfer such Exchange Notes
without compliance with the registration and prospectus delivery provisions of
the Securities Act; provided that the Exchange Notes are acquired in the
ordinary course of such holder's business and such holder has no arrangement
with any person to participate in the distribution of such Exchange Notes and
is not engaged in and does not intend to engage in a distribution of the
Exchange Notes. Each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of the Exchange Notes received in exchange for Existing Notes if
such Exchange Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. See "Plan of Distribution." If
a holder of Existing Notes does not exchange such Existing Notes for Exchange
Notes pursuant to the Exchange Offer, such Existing Notes will continue to be
subject to the restrictions on transfer contained in the legend thereon. In
general, the Existing Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. Holders of Existing Notes do not have any appraisal or dissenters'
rights under the Delaware General Corporation Law in connection with the
Exchange Offer. See "The Exchange Offer--Consequences of Failure to Exchange;
Resales of Exchange Notes."
Prior to the Exchange Offer, there has been no public market for the
Existing Notes. There can be no assurance as to the liquidity of any markets
that may develop for the Exchange Notes, the ability of holders to sell the
Exchange Notes, or the price at which holders would be able to sell the
Exchange Notes. If a market for the Exchange Notes should develop, such
Exchange Notes could trade at a discount from their principal amount. The
Initial Purchasers have advised the Company that they currently intend to make
a market for the Exchange Notes. However, the Initial Purchasers are not
obligated to do so and any market making may be discontinued at any time
without notice.
The Company will not receive any proceeds from the Exchange Offer. Pursuant
to the Registration Rights Agreement, the Company or the Guarantors will pay
all the expenses incident to the Exchange Offer. See "The Exchange Offer."
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-4 (the "Registration Statement") under the Securities Act, with respect to
the Exchange Notes. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement as permitted by the rules and
regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such
reference. For further information with respect to the Company or the Exchange
Notes offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, which may be inspected without charge at the
public reference facility maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of which may be obtained from the
Commission at prescribed rates.
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements, and other information
with the Commission. Such reports, proxy statements, and other information may
be inspected and copied at the Public Reference Room of the Commission, 450
Fifth Street, N.W., Washington, DC 20549; and at the Commission's regional
offices in Chicago (Northwest Atrium Center, Suite 1400, 500 West Madison
Street, Chicago, IL 60661-2511), and in New York (7 World Trade Center, 13th
Floor, New York, NY 10048). Copies of such material may be obtained from the
Public Reference Section of the Commission 450 Fifth Street, N.W., Washington,
DC 20549 at prescribed rates or through the Commission's web site
(http://www.sec.gov).
i
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the related notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated or
the context otherwise requires, all references herein to the "Company" or
"Carson" refer to Carson, Inc. (the parent holding company of Carson Products
Company), Aminco, Inc. (the "Predecessor") and their direct and indirect
subsidiaries. Unless otherwise indicated, industry data and market-related data
regarding the Company's products in this Prospectus are based on sales
information collected from store register scanners at a sampling of food store
chains, drug store chains and mass merchandisers in the United States and
published by Information Resources Inc. ("IRI"). In addition, IRI does not
track sales of products at beauty and barber supply stores ("B&Bs"), a
significant distribution channel for the Company's ethnic hair care products.
Therefore, the IRI information is limited in scope with respect to the
Company's ethnic personal care products. While the Company believes this
information to be reliable, the Company has not independently verified the data
contained therein. All references herein to statement of operations data on a
pro forma basis give effect to the Cutex Acquisition (as defined) as if such
acquisition had occurred at the beginning of the period presented. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Overview."
THE COMPANY
GENERAL
The Company is a leading manufacturer and marketer in the United States of
selected personal care products for both the ethnic market and the mass market.
The Company believes that it is one of the leading global manufacturers and
marketers of ethnic hair care products for persons of African descent. The
Company's flagship brand, Dark & Lovely, is the most widely recognized ethnic
brand name in the U.S. retail ethnic hair care market. The Company has the
number one retail market position in three of the four ethnic hair care
segments in the United States in which it currently competes, according to IRI.
The Company currently sells over 70 different products specifically formulated
to address the unique physiological characteristics of persons of African
descent under six principal brand names: Dark & Lovely, Excelle, Beautiful
Beginnings, Dark & Natural, Magic and Let's Jam. The majority of the Company's
net sales have historically been derived from hair relaxers and texturizers,
which are used to chemically treat and straighten hair (constituting
approximately 42.1% of the Company's net sales in the twelve months ended
September 30, 1997), hair color, men's depilatory products and hair care
maintenance products, primarily for persons of African descent. In addition,
the Company is expanding its product offerings to other segments of the ethnic
personal care market, including cosmetics and skin care products.
The Company is also a leading marketer of nail care products to the U.S. mass
market under the Cutex brand name. Cutex is the leading brand of nail polish
remover, with an estimated 31.8% market share in the twelve months ended June
1997, according to IRI. Other products marketed under the Cutex brand name
include nail enamel, nail care treatments and the newly introduced women's
depilatory product, Naturally Soft Body Creme. Carson acquired the rights to
use the Cutex brand name in the United States and Puerto Rico in April 1997
(the "Cutex Acquisition"). The Cutex Acquisition is expected to create an
entree into the U.S. mass market for products developed by Carson and increase
the Company's overall distribution strength.
During the twelve months ended September 30, 1997, the Company generated, on
a pro forma basis, net sales of $109.1 million and earnings before interest,
taxes, depreciation and amortization, excluding nonrecurring incentive
compensation charges ("Adjusted EBITDA") of $21.4 million. International net
sales represented 28.2% of total historical net sales for the twelve months
ended September 30, 1997. International net sales grew 51.5% in the twelve
months ended September 30, 1997 compared to the twelve months ended September
30, 1996. Since the fiscal year ended March 31, 1996 (the year in which the
Predecessor was acquired) through September 30, 1997, the Company experienced
net sales and Adjusted EBITDA compound annual growth of 28.1% and 15.3%,
respectively. See "The Company--Background." The Company's Class A common stock
is
1
listed on the New York Stock Exchange (the "NYSE") and the shares of the
Company's South African subsidiary, Carson Holdings Limited ("Carson South
Africa"), are listed on the Johannesburg Stock Exchange.
COMPETITIVE STRENGTHS
The Company had the number one U.S. retail market position in three of the
four ethnic hair care categories in which it competes (hair relaxers and
texturizers, hair color and men's depilatory products) for the twelve months
ended June 1997, according to IRI. The acquisition of the Let's Jam brand name
in April 1997 added one of the leading brands in the fourth category, ethnic
hair care maintenance products. According to IRI, the Cutex brand name had the
number one market position in the United States in nail polish remover in the
same period. The Company attributes its leading market positions to a number of
competitive strengths, including its strong brand names, dedicated sales force,
broad distribution, research and development capabilities and experienced
management team.
. Strong Brands. The Company currently sells its products under seven
principal brand names: Dark & Lovely, Excelle, Beautiful Beginnings,
Dark & Natural, Magic, Let's Jam and Cutex. The Company's flagship
brand, Dark & Lovely, is the most widely recognized ethnic brand name in
the U.S. retail ethnic hair care market for African-Americans and Cutex
is the leading brand name for nail polish removers in the U.S. mass
market. The Company believes that the strength of its brands is based
upon product quality and value, 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
that it has the largest direct sales force serving the U.S. retail
ethnic hair care market. The Company also utilizes the experienced sales
force of AM Cosmetics, Inc., an affiliate of the Company ("AM
Cosmetics"), in the U.S. mass market. Both of these sales forces enhance
the Company's ability to further penetrate its markets with current and
new products. In the United States, the Company benefits from having its
extensive product line distributed broadly through several principal
channels including mass merchandisers, major food and drug chains,
discount chains and B&Bs (e.g., Alberto-Culver Company's Sally's Beauty
Supply stores and members of the National Beauty Supply Dealers
Association).
. Focused Research and Development. The Company believes that its
tradition of technological innovation and its focused research and
development ("R&D") effort are important to maintaining its market
leadership position. Three of the ethnic hair care industry's most
significant innovations were introduced by the Company: the first hair
color developed exclusively for hair of persons of African descent
(1972), the first no-lye relaxer (1978), which provided a safe relaxer
product for home use and the Fail Safe technology for no-lye relaxers
(1993), 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. In addition, Carson has recently
introduced a women's depilatory product, Cutex Naturally Soft Body
Creme, which the Company believes eliminates many of the negative
features usually associated with women's hair removers. The Company,
through its affiliation with AM Cosmetics, also recently developed Dark
& Lovely Cosmetics, which the Company believes is the first
hypoallergenic, premium quality ethnic cosmetics line.
. Experienced Management Team. Since 1995, a team of seasoned senior
executives with extensive experience in the ethnic market and consumer
products industry has been recruited to build on the Company's strong
position in the global ethnic hair care market. As Chairman and Chief
Executive Officer, Dr. Leroy Keith, former President of Morehouse
College, entrepreneur and prominent member of the African-American
community, provides the Company with leadership and vision. Joyce M.
Roche, President and Chief Operating Officer, has over 20 years of
experience in the health and beauty aids industry, including positions
as Senior Vice President of Marketing and Vice President of Global
Marketing at Avon Products, Inc. ("Avon") and Director of Marketing at
Revlon, Inc. ("Revlon"). Robert W. Pierce, Executive Vice President of
Finance and Chief Financial Officer, has over 20 years
2
of experience in the health and beauty aids industry, most recently as
chief financial officer of Maybelline, Inc.
GROWTH STRATEGY
By adhering to the following strategies, the Company believes that it is
well positioned to grow both internally and through acquisitions, in order to
enhance its market positions in both the ethnic and mass markets for personal
care products:
. Increase Share of Existing Markets. The Company seeks to increase its
market share in existing markets through product innovation and ongoing
upgrading of existing products. The Company has been on an aggressive
schedule of new product introductions or existing product upgrades with
19 stock-keeping units ("SKUs") having been introduced from January 1,
1996 through June 30, 1997 and an additional five SKUs expected to be
introduced during the remainder of 1997, in addition to Let's Jam
products, Dark & Lovely Cosmetics and Carson Compositions professional
hair care products.
. Leverage Brands into Cosmetics and Other New Product Categories. The
Company believes that its flagship Dark & Lovely brand name is
transferable to other ethnic health and beauty aids categories,
including cosmetics and skin care products. The Company recently
introduced a new line of cosmetics targeted to women of color under its
Dark & Lovely brand name which it began to ship in June 1997. Similarly,
the Company used the Cutex brand name to introduce its new women's
depilatory product, Naturally Soft Body Creme, which began to ship in
October 1997.
. Continue International Expansion. The Company believes it is poised for
continued growth in its international markets, particularly Africa,
Brazil and the Caribbean, each of which has a significant concentration
of consumers of African descent. The Company's key strategic initiatives
to achieve this international growth include, depending on the market,
local manufacturing and distribution, introduction of new products and
new product categories and selected acquisitions to increase market
presence. The Company currently markets its entire product line
(excluding Cutex products) in over 60 countries worldwide under the same
brand names as it uses in the United States. International sales in the
twelve months ended September 30, 1997 of $28.0 million represented
28.2% of the Company's net sales for such period and increased 51.5%
compared to the twelve months ended September 30, 1996.
. Enter the U.S. Professional Salon Market. The Company has developed a
new professional ethnic hair care product line under the Carson
Compositions brand name that will offer certain technological advantages
compared to ethnic hair care products currently offered in salons, as
well as a complementary line of hair care maintenance products for
exclusive purchase in salons. The Carson Compositions line will be
comprised of 54 SKUs in the relaxer, hair color and maintenance
categories. The Company estimates that there are in excess of 28,000
African-American hair care salons in the United States comprising an
approximately $2.1 billion market in 1995, according to Salon
Information Systems, Inc. The Company is engaged in market research and
expects to enter the U.S. salon market in the fourth quarter of 1997.
. Capitalize on Selective Acquisition Opportunities. In addition to
internally generated growth, the Company continually considers the
selective acquisition of related brands and businesses which would
increase the Company's market share or expand and complement its product
lines. In 1997, the Company acquired the right to use the Cutex brand
name and certain related assets in the United States and Puerto Rico,
the Let's Jam hair styling products brand name and certain related
assets, the Nu-Me cosmetics and skin care brand name and certain related
assets, the Restore Plus hair care brand name and certain related assets
and the Seasilk toiletries brand name and certain related assets. See
"Unaudited Pro Forma Consolidated Financial Data." There can be no
assurance that additional
3
suitable acquisition or joint venture candidates can be identified, or
if an acquisition is completed, that the operations will be successfully
integrated or otherwise not have an adverse effect on the Company.
BACKGROUND AND ACQUISITIONS
The Company is a publicly-traded Delaware corporation listed on the NYSE. On
August 23, 1995, DNL Savannah Acquisition Corp. ("Acquisition Corp."), a
Delaware corporation and a wholly-owned subsidiary of the Company, acquired
all of the stock of the Predecessor (the "Aminco Acquisition"). Acquisition
Corp. was formed by Morningside Capital Group, L.L.C., a Connecticut limited
liability company ("Morningside"), as financial sponsor, on behalf of an
investor group consisting of DNL Partners, Limited Partnership ("DNL
Partners"), a partnership formed by Dr. Leroy Keith, the principals of
Morningside and the lenders providing the acquisition financing. The
Predecessor was acquired for a purchase price of approximately $95 million
(inclusive of transaction costs), funded primarily with Company debt. The
principal shareholder of the Predecessor, Mr. A. Minis, Jr., owned and
controlled the Predecessor since 1951 when he purchased it from its original
founders and owners who had started the business in 1901 with a single
product--Magic men's depilatory powder. Concurrent with the Aminco
Acquisition, Acquisition Corp. merged into the Company's subsidiary, Carson
Products Company ("Carson Products").
On April 8, 1997, the Company acquired the complete Let's Jam product line
from New Image Laboratories, Inc. in a cash transaction valued at $5.6
million. Let's Jam Shining and Conditioning Gel, one of the leading styling
products in the ethnic hair styling category in the United States, is used to
treat the unique hair care needs of persons of African descent. Other Let's
Jam products include conditioners, shampoo and spritzes, also for persons of
African descent. From the time of the acquisition through September 30, 1997,
the Company recorded an aggregate of $1.2 million of net sales from the total
Let's Jam product line.
On April 30, 1997, the Company consummated the Cutex Acquisition. Through an
Asset Purchase Agreement with Conopco, Inc. d/b/a Chesebrough-Pond's USA Co.
("Chesebrough-Pond's USA"), the Company acquired the rights to sell,
distribute, package, manufacture and market in the United States and Puerto
Rico (i) Cutex nail polish remover and (ii) Cutex nail enamel, nail care
treatment products and nail care implements, which had been marketed under
license by Jean Philippe Fragrances, Inc. ("Jean Philippe"). The aggregate
purchase price was approximately $41.4 million, with funds provided by
additional long-term debt. Net product sales of the Cutex nail polish remover
line approximated $18.2 million, excluding any results from the sale of nail
enamel or other products sold under license by Jean Philippe, for the twelve
months ended December 31, 1996. From the time of the acquisition through
September 30, 1997, the Company recorded an aggregate of $12.1 million of net
sales from Cutex nail polish remover, nail enamel, nail care treatment
products and nail care implements.
In the first half of 1997, Carson South Africa, through its wholly-owned
subsidiary, 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.
Carson South Africa announced on November 13, 1997 that it had completed the
acquisition of A&J Cosmetics, a toiletries company. A&J Cosmetics manufactures
and owns the Sadie brand of toiletry products, which has been selling in the
ethnic market for over 20 years and competes primarily in the roll-on
deodorant market. Carson South Africa will fund the acquisition with the
issuance of shares of its common stock. The purchase consideration payable for
the acquisition is approximately $10.3 million, with an additional purchase
price contingency of up to $2.4 million based upon the after tax profit of the
business for the year ended December 31, 1998. Approximately $5.9 million of
the purchase price is payable on January 31, 1998, approximately $4.4 million
is payable on or before January 3, 1999 and the remainder (subject to
adjustment) is payable by no later than March 31, 1999.
4
THE EXCHANGE OFFER
Securities Offered...... $100,000,000 aggregate principal amount of 10 3/8%
Senior Subordinated Notes due 2007, Series B. The
terms of the Exchange Notes and the Existing Notes
are identical in all material respects, except for
certain transfer restrictions and registration rights
relating to the Existing Notes.
Registration Rights The Company, Carson Products and the Initial
Agreement.............. Purchasers entered into a Registration Rights
Agreement which grants the holders of the Existing
Notes certain exchange and registration rights. The
Exchange Offer is intended to satisfy such exchange
rights which terminate upon the consummation of the
Exchange Offer.
The Exchange Offer...... The Company is offering to exchange up to
$100,000,000 aggregate principal amount of 10 3/8%
Senior Subordinated Notes due 2007, Series B (the
"Exchange Notes") for up to $100,000,000 aggregate
principal amount of its outstanding 10 3/8% Senior
Subordinated Notes due 2007, Series A (the "Existing
Notes"). Existing Notes may be exchanged only in
integral multiples of $1,000.
Expiration Date;
Withdrawal of The Exchange Offer will expire at 5:00 p.m., New York
Tenders................ City time, on , 1998, or such later date and
time to which it may be extended by the Company. The
tender of Existing Notes pursuant to the Exchange
Offer may be withdrawn at any time prior to the
Expiration Date. Any Existing Notes not accepted for
exchange for any reason will be returned without
expense to the tendering holder thereof as promptly
as practicable after the expiration or termination of
the Exchange Offer.
Certain Conditions to
the Exchange Offer..... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer--Certain Conditions to the
Exchange Offer."
Procedures for
Tendering Existing Each holder of Existing Notes wishing to accept the
Notes.................. Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with such
Existing Notes and any other required documentation
to the Exchange Agent (as defined) at the address set
forth herein. By executing the Letter of Transmittal,
each holder will represent to the Company that, among
other things, (i) any Exchange Notes to be received
by it will be acquired in the ordinary course of its
business, (ii) it has no arrangement or understanding
with any person to participate in the distribution of
the Exchange Notes and (iii) it is not an
"affiliate," as defined in Rule 405 of the Securities
Act, of the Company or, if it is an affiliate, it
will comply with the registration and prospectus
delivery requirements of the Securities Act to the
extent applicable.
5
Guaranteed Delivery Holders of Notes who wish to tender their Existing
Procedures............. Notes and whose Existing Notes are not immediately
available or who cannot deliver their Existing Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the Exchange
Agent prior to the Expiration Date, must tender their
Existing Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
Registration The Company has agreed to use its best efforts to
Requirements........... consummate by , 1998 the registered Exchange
Offer pursuant to which holders of the Existing Notes
will be offered an opportunity to exchange their
Existing Notes for the Exchange Notes which will be
issued without legends restricting the transfer
thereof. In the event the applicable interpretations
of the staff of the Commission do not permit the
Company to effect the Exchange Offer or in certain
other circumstances, the Company has agreed to file a
Shelf Registration Statement covering resales of the
Existing Notes and to use its best efforts to cause
such Shelf Registration Statement to be declared
effective under the Securities Act and, subject to
certain exceptions, keep such Shelf Registration
Statement effective until two years after the
effective date thereof.
Certain Federal Income
Tax Considerations..... The exchange of Notes pursuant to the Exchange Offer
should not be a taxable event for federal income tax
purposes. See "Certain Federal Income Tax
Considerations."
Use of Proceeds......... The Company will not receive any proceeds from the
Exchange Offer.
Exchange Agent.......... Marine Midland Bank will act as Exchange Agent in
connection with the Exchange Offer (the "Exchange
Agent"). The address and telephone number of the
Exchange Agent are set forth in "The Exchange Offer--
Exchange Agent."
The Existing Notes are currently eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market.
Following commencement of the Exchange Offer but prior to its consummation, the
Existing Notes may continue to be traded in the PORTAL market. Following
consummation of the Exchange Offer, the Exchange Notes will not be eligible for
PORTAL trading.
TERMS OF THE EXCHANGE NOTES
The terms of the Exchange Notes and the Existing Notes are identical in all
material respects, except for certain transfer restrictions and registration
rights relating to the Existing Notes.
Principal Amount........ $100,000,000.
Maturity Date........... November 1, 2007.
6
Interest Payment Interest on the Exchange Notes will accrue at the
Dates.................. rate of 10 3/8% per annum, payable semi-annually in
cash in arrears on May 1 and November 1 of each year,
commencing May 1, 1998. Holders of the Exchange Notes
will also receive accrued interest from the last
interest payment date on which interest was paid on
the Existing Notes surrendered in exchange therefor
or, if no such interest has been paid on the Existing
Notes, from the date of original issue of the
Existing Notes. Interest on the Existing Notes
accepted for exchange will cease to accrue upon
issuance of the Exchange Notes.
Optional Redemption..... On or after November 1, 2002, the Company may redeem
the Exchange Notes, at the redemption prices set
forth herein, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
redemption. Notwithstanding the foregoing, at any
time prior to November 1, 2000, the Company may
redeem up to 35% of the aggregate principal amount of
the Notes with the net proceeds of one or more Equity
Offerings at a redemption price equal to 110.375% of
the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the date
of redemption; provided that at least 65% in
aggregate principal amount of the Notes originally
issued remains outstanding after each such
redemption. See "Description of the Exchange Notes--
Redemption of Notes--Optional Redemption."
Ranking................. The Exchange Notes will be general unsecured
obligations of the Company, subordinated in right of
payment to all existing and future Senior
Indebtedness of the Company, including indebtedness
under the New Credit Facility, and pari passu or
senior in right of payment to any future subordinated
indebtedness of the Company. As of September 30,
1997, on a pro forma basis after giving effect to the
sale of the Existing Notes, the aggregate principal
amount of Senior Indebtedness of the Company and the
Restricted Subsidiaries to which the Exchange Notes
and the Guarantees would have been subordinated would
have been approximately $0.8 million. After giving
effect to the New Credit Facility, the Company and
the Restricted Subsidiaries would have had additional
borrowing availability of approximately $75.0 million
as of September 30, 1997, subject to certain
borrowing base and other limitations. The Indenture
permits the Company and its subsidiaries to incur
additional indebtedness, including Senior
Indebtedness, subject to certain limitations. See
"Description of the Exchange Notes--Certain
Covenants" and "Description of the New Credit
Facility."
Guarantees.............. The Exchange Notes will be guaranteed (the
"Guarantees") on an unsecured, senior subordinated
basis by Carson Products and certain of the Company's
other Restricted Subsidiaries (collectively, the
"Guarantors"). The Guarantees will be subordinated in
right of payment to all existing and future Senior
Indebtedness of the Guarantors to the same extent
that the Exchange Notes are subordinated to Senior
Indebtedness of the Company.
7
Certain Offers to Upon a Change of Control, the Company will be
Purchase............... required to make an offer to purchase all of the
outstanding Exchange Notes at a price equal to 101%
of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, to
the date of purchase. See "Description of the
Exchange Notes--Change of Control." In addition,
prior to certain specified reorganizations of the
Company, the Company will be required to make an
offer to purchase all of the outstanding Exchange
Notes at a purchase price equal to 100% of the
principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, to the date
of purchase plus the Applicable Premium. See
"Description of the Exchange Notes--Merger or
Consolidation" and "Risk Factors--Ability to
Reorganize as a Foreign Corporation."
Certain Covenants....... The Indenture contains certain covenants that, among
other things, limit the ability of the Company and
its Restricted Subsidiaries to: (i) incur additional
indebtedness; (ii) repay certain other indebtedness;
(iii) pay dividends or make certain other
distributions; (iv) repurchase equity interests; (v)
consummate certain asset sales; (vi) enter into
certain transactions with affiliates; (vii) enter
into sale and leaseback transactions; (viii) incur
liens; (ix) merge or consolidate with any other
person; (x) enter into certain guarantees of
indebtedness; or (xi) sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially
all of the assets of the Company or a Restricted
Subsidiary. In addition, under certain circumstances,
the Company will be required to make an offer to
purchase the Exchange Notes at a price equal to 100%
of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, to
the date of purchase, with the proceeds of certain
Asset Sales (as defined). See "Description of the
Exchange Notes."
RISK FACTORS
An investment in the Exchange Notes involves certain risks associated with
the Company's business and the industry in which it competes, including (i)
risks relating to substantial leverage and debt service; (ii) the subordination
of the Exchange Notes and the Guarantees and risks relating to the Company's
holding company structure; (iii) risks inherent in the Company's growth
strategy; (iv) quarterly fluctuation of operating results; (v) the Company's
reliance on certain third party manufacturers; (vi) the Company's reliance on
certain of its suppliers; (vii) the Company's dependence on its trademarks in
its current and future markets; (viii) the increased risk of disruption of the
business because of the concentration of the Company's manufacturing operations
in Savannah, Georgia; (ix) social, political and economic risks that may affect
the Company's foreign operations or cause foreign currency fluctuations; (x)
competition; (xi) changes in distribution channels; (xii) the effect on the
Company of compliance with consumer laws and government regulation; (xiii)
reliance on key managers; (xiv) control of the Company by certain existing
stockholders; (xv) the uncertainty of forward-looking information; (xvi) risks
relating to the cost of future compliance with environmental requirements;
(xvii) risks related to the mandatory offer to repurchase the Exchange Notes
upon a Change of Control; (xviii) risks relating to the Company's ability to
reorganize as a foreign corporation; (xix) fraudulent transfer considerations;
and (xx) the absence of a public market for the Exchange Notes. Failure to
exchange Existing Notes for Exchange Notes also involves certain risks. For a
more detailed discussion of these and certain other risks, see "Risk Factors."
8
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT FOOTNOTES)
Set forth below are summary consolidated historical and pro forma financial
data of the Predecessor and the Company as of the dates and for the periods
shown. Effective December 31, 1996, the Company changed the end of its fiscal
year from March 31 to December 31. References herein to the "Transition Period"
refer to the nine months ended December 31, 1996. The summary consolidated
historical financial data of the Predecessor as of March 31, 1993 and 1994 and
for the fiscal years ended March 31, 1993 and 1994 were derived from audited
consolidated historical financial statements of the Predecessor not included in
this Prospectus. The summary consolidated historical financial data of the
Predecessor as of March 31, 1995 and for the fiscal year ended March 31, 1995
were derived from the audited consolidated balance sheet not included in this
Prospectus and the audited historical statements of income and of cash flows of
the Predecessor for such periods appearing elsewhere in this Prospectus. The
summary consolidated historical financial data for the fiscal year ended March
31, 1996 were derived from the audited consolidated historical financial
statements of the Predecessor for the period from April 1, 1995 to August 22,
1995 and from the audited consolidated historical financial statements of the
Company for the period from August 23, 1995 through March 31, 1996, each
appearing elsewhere in this Prospectus. The summary consolidated historical
financial data of the Company as of December 31, 1996 and for the Transition
Period were derived from the audited consolidated historical financial
statements of the Company appearing elsewhere in this Prospectus. The summary
consolidated historical financial data of the Company as of and for the nine
months ended September 30, 1996 and 1997 were derived from the unaudited
consolidated historical financial statements of the Company appearing elsewhere
in this Prospectus. The summary pro forma consolidated financial data for the
nine months ended December 31, 1996 and the nine months and twelve months ended
September 30, 1997 were derived from the Unaudited Pro Forma Consolidated
Financial Data of the Company, together with the notes thereto. The summary
consolidated historical data of the Company as of and for the nine months ended
September 30, 1996 and 1997 are unaudited; however, in the opinion of
management, all such unaudited data include all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of the
information included therein. The results of operations for the nine months
ended September 30, 1996 and 1997 are not necessarily indicative of the results
for the entire fiscal year or any other interim period. Because of the
revaluation of the assets and liabilities and related impact to the statement
of operations, the financial statements of the Predecessor for the periods
prior to August 23, 1995 are not strictly comparable to those of the Company
subsequent to that date. The summary consolidated historical financial data
should be read in conjunction with "Unaudited Pro Forma Consolidated Financial
Data," "Selected Consolidated Historical Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Predecessor and the Company and
accompanying notes thereto appearing elsewhere in this Prospectus.
9
PREDECESSOR(A) COMBINED(A) COMPANY(A)
-------------------------- ----------- -----------------------------
TRANSITION
PERIOD
FROM
APRIL 1, NINE MONTHS
1996 TO ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ------------ ----------------
1993 1994 1995 1996 1996 1996 1997
------- ------- ------- ----------- ------------ ------- -------
STATEMENT OF OPERATIONS
DATA:
Net sales............... $49,335 $50,108 $58,126 $68,319 $59,938 $56,488 $77,791
Cost of goods sold(b)... 21,585 24,222 25,692 30,319 26,940 24,853 35,431
------- ------- ------- ------- ------- ------- -------
Gross profit............ 27,750 25,886 32,434 38,000 32,998 31,635 42,360
Marketing and selling
expense................ 14,863 14,639 17,888 17,048 15,692 13,283 19,602
General and administra-
tive expense........... 5,453 6,834 5,246 7,337 5,836 6,658 9,005
Incentive
compensation(c)........ -- -- -- -- 7,123 7,123 --
Depreciation and amorti-
zation................. 695 828 1,085 1,833 1,896 1,830 2,686
------- ------- ------- ------- ------- ------- -------
Operating income........ 6,739 3,585 8,215 11,782 2,451 2,741 11,067
Interest expense........ (115) (97) (136) (4,543) (4,545) (5,523) (3,924)
Net income (loss)....... 4,586 1,511 5,438 5,038 (6,783) (4,093) 4,441
OTHER DATA:
Adjusted EBITDA(d)...... $ 7,434 $ 4,521 $ 9,450 $13,800 $11,533 $11,875 $13,644
Non-acquisition related
capital expenditures... 1,330 1,515 974 1,845 3,805 3,895 5,108
Net sales growth(e)..... (1.2)% 1.6% 16.0% 17.5% 18.6% 13.3% 37.7%
Adjusted EBITDA
growth(e).............. (14.1) (39.2) 109.0 46.0 17.2 36.7 14.9
Gross profit as a per-
centage of net sales... 56.2 51.7 55.8 55.6 55.1 56.0 54.5
Adjusted EBITDA as a
percentage of net
sales.................. 15.1 9.0 16.3 20.2 19.2 21.0 17.5
PRO FORMA(F) (G)
----------------------------------------------------------
NINE MONTHS NINE MONTHS TWELVE MONTHS
ENDED DECEMBER 31, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1997 1997
------------------ ------------------- -------------------
STATEMENT OF OPERATIONS
DATA:
Net sales............... $74,781 $82,997 $109,100(g)
Cost of goods sold(b)... 33,286 37,738 49,884
------- ------- --------
Gross profit............ 41,495 45,259 59,216(g)
Marketing and selling
expense................ 17,958 20,449 27,081
General and administra-
tive expense........... 5,836 9,005 10,768
Incentive
compensation(c)........ 7,123 -- --
Depreciation and amorti-
zation................. 2,721 3,273 4,149
------- ------- --------
Operating income........ 7,857 12,532 17,218
Interest expense........ (7,840) (7,830) (10,467)
(Loss) income from con-
tinuing operations..... (1,947) 3,043 4,310
OTHER DATA:
Adjusted EBITDA(d)...... $17,701 $15,696 $ 21,367(g)
Non-acquisition related
capital expenditures
("CAPEX").............. 3,805 5,108 5,879
Net sales growth(e)..... 48.0% 46.9% 50.6%
Adjusted EBITDA
growth(e).............. 79.9 32.2 46.8
Gross profit as a per-
centage of net sales... 55.5 54.5 53.4
Adjusted EBITDA as a
percentage of net
sales.................. 23.7 18.9 19.8
Ratio of Adjusted EBITDA
to interest expense.... 2.0x(g)
Ratio of Adjusted EBITDA
less CAPEX to interest
expense................ 1.5(g)
Ratio of net debt to Ad-
justed EBITDA(h)....... 4.2(g)
SEPTEMBER 30, 1997
-----------------------
ACTUAL AS ADJUSTED(I)
-------- --------------
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 4,987 11,130
Working capital......................................... 28,976 39,838
Total assets............................................ 170,849 179,924
Total debt (including current maturities)............... 87,918 100,642
Stockholders' equity.................................... 58,905 56,975
10
- --------
(a) The fiscal year ended March 31, 1996 reflects data of the Company and its
subsidiaries and of the Predecessor, all of the stock of which was acquired
by the Company on August 23, 1995. The periods prior to and including
August 22, 1995 reflect data of the Predecessor exclusively. See "The
Company--Background." Because of the revaluation of the assets and
liabilities acquired and the related impact to the statement of operations,
the financial statements of the Predecessor for the periods prior to August
23, 1995 are not strictly comparable to those of the Company subsequent to
that date. The combined presentation is not in conformity with generally
accepted accounting principles but is included for comparative purposes.
(b) During the second quarter of 1997, the Company changed its method of
valuing inventories in the United States from the lower of last-in, first-
out (LIFO) cost or market to the lower of first-in, first-out (FIFO) cost
or market. To the extent material, the effect of this change has been
reflected in all periods presented in these financial statements. See Note
15 of Notes to Consolidated Financial Statements of the Company appearing
elsewhere in this Prospectus.
(c) The Company recognized $7.1 million of non-recurring incentive compensation
charges during the nine-month period ended December 31, 1996 relating to
costs under certain long-term incentive compensation agreements and the
purchase of shares prior to its initial public offering by several outside
directors and certain members of senior management and for the shares of
Carson South Africa awarded to certain members of its management.
Approximately $6.3 million of these charges were incurred in the six months
ended December 31, 1996.
(d) EBITDA represents earnings before interest, taxes, depreciation and
amortization, and Adjusted EBITDA represents EBITDA before nonrecurring
incentive compensation charges. While Adjusted EBITDA should not be
construed as a substitute for net income or a better indicator of liquidity
than cash flow from operating activities, which are determined in
accordance with generally accepted accounting principles, it is included
herein to provide additional information with respect to the ability of the
Company to meet its future debt service, capital expenditure and working
capital requirements. Adjusted EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs.
(e) Current pro forma period versus the year earlier actual comparable prior
period.
(f) The pro forma consolidated data gives effect to the Cutex Acquisition, the
sale of the Existing Notes, the application of the net proceeds therefrom
and the refinancing of the Existing Bank Credit Facility with the New
Credit Facility.
(g) The pro forma consolidated data presented excludes all pre-acquisition
results of Let's Jam hair styling products (acquired by the Company during
April 1997) and Jean Philippe (which produced under license Cutex branded
nail enamel and related products). In the five month period ended September
30, 1997 since the acquisitions, the Company generated net sales of $4.3
million, gross profit of $2.2 million and EBITDA of $1.7 million from Let's
Jam products and Cutex products previously sold by Jean Philippe. There is
no assurance that the Company will continue to achieve the same rate of
performance.
(h) Represents the ratio of total debt (including current portion) less cash
and cash equivalents to Adjusted EBITDA.
(i) Adjustments include the repayment of all borrowings outstanding under the
Existing Bank Credit Facility of $87.3 million. Additional proceeds from
the sale of the Existing Notes, net of expenses related to the New Credit
Facility and the sale of the Existing Notes, are included in cash. See "Use
of Proceeds."
11
RISK FACTORS
Holders of Existing Notes should consider carefully all of the information
set forth in this Prospectus and, in particular, should evaluate the following
risks before deciding to accept the Exchange Offer.
LEVERAGE AND DEBT SERVICE
After the sale of the Existing Notes and application of the proceeds
therefrom, the Company has substantial indebtedness and debt service
obligations. At September 30, 1997, on a pro forma basis after giving effect
to the sale of the Existing Notes and the use of proceeds described herein,
the Company's total long-term indebtedness, on a consolidated basis, would
have been approximately $100.6 million. After giving effect to the New Credit
Facility, the Company and the Restricted Subsidiaries would have had
additional borrowing availability of approximately $75.0 million as of
September 30, 1997, subject to certain borrowing base and other limitations.
See "Description of the New Credit Facility." In addition, subject to the
restrictions under the New Credit Facility and the Indenture, the Company may
incur additional indebtedness, including Senior Indebtedness, from time to
time. See "Description of the Exchange Notes--Certain Covenants--Limitation on
Incurrence of Indebtedness."
The level of the Company's leverage may have important consequences for the
Company, including: (i) the ability of the Company to obtain additional
financing for acquisitions, working capital, capital expenditures or other
purposes may be impaired or such financing may not be on terms favorable to
the Company; (ii) a portion of the Company's cash flow will be used to pay the
Company's interest expense and under certain conditions to repay indebtedness,
which will reduce the funds that would otherwise be available to the Company
for its operations and future business opportunities; (iii) a substantial
decrease in net operating cash flows or an increase in expenses of the Company
could make it difficult for the Company to meet its debt service requirements
and force it to modify its operations; (iv) the Company may be more highly
leveraged than its competitors, which may place it at a competitive
disadvantage; and (v) the Company's leverage may limit its flexibility to
react to changes in its operating environment or economic conditions, making
it more vulnerable to a downturn in its business or the economy generally. Any
inability of the Company to service its indebtedness or obtain additional
financing, as needed, would have a material adverse effect on the Company.
The Company's ability to pay principal of, and interest and Liquidated
Damages, if any, on the Exchange Notes and to satisfy its other debt
obligations will depend upon the future operating performance of its
subsidiaries, which may be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond its
control. The Company anticipates that its operating cash flow, together with
borrowings under the New Credit Facility, will be sufficient to meet its
operating expenses and to service its debt requirements as they become due.
However, if the Company is unable to service its indebtedness, it will be
forced to take actions such as reducing or delaying capital expenditures,
selling assets, restructuring or refinancing its indebtedness, or seeking
additional equity capital. There can be no assurance that any of these
remedies can be effected on satisfactory terms, if at all.
The New Credit Facility contains restrictive covenants, including
limitations on the incurrence of additional liens or indebtedness, which may
limit the Company's operating flexibility. The New Credit Facility also
requires the Company to satisfy certain financial condition tests, including
total interest coverage ratios, fixed charge coverage ratios and leverage
ratios. The Company's ability to meet those tests can be affected by events
beyond its control, and there can be no assurance that the Company will meet
those tests. A breach of any of these covenants could result in a default
under the New Credit Facility and the Indenture. Upon the occurrence of an
event of default under the New Credit Facility, the lenders thereunder could
elect to declare all amounts outstanding under the New Credit Facility,
together with accrued interest, to be immediately due and payable. If the
Company were unable to repay those amounts, such lenders could proceed against
the collateral granted to them to secure that indebtedness. Any indebtedness
outstanding under the New Credit Facility is secured by liens on all accounts
receivable, inventory, property, plant and equipment and other personal,
intellectual and real property of the Company and certain of the Company's
subsidiaries and is guaranteed by the Company and
12
certain of its present and future subsidiaries. If the New Credit Facility and
the Exchange Notes were to be accelerated, there can be no assurance that the
assets of the Company would be sufficient to repay in full the Exchange Notes.
See "Description of the New Credit Facility."
SUBORDINATION OF THE EXCHANGE NOTES AND THE GUARANTEES; HOLDING COMPANY
STRUCTURE
The Exchange Notes and the Guarantees will be subordinated in right of
payment to all existing and future Senior Indebtedness of the Company and the
Guarantors, respectively, including all obligations under the New Credit
Facility. In the event of a bankruptcy, liquidation or reorganization of the
Company or a Guarantor or in the event of acceleration of any indebtedness of
the Company or a Guarantor upon the occurrence of any event of default, the
assets of the Company or such Guarantor, as the case may be, would be
available to pay obligations on the Exchange Notes and the Guarantees only
after the Senior Indebtedness of the Company and the Guarantors, respectively,
has been paid in full. The Indenture limits, but does not prohibit, the
incurrence by the Company and its Restricted Subsidiaries of additional Senior
Indebtedness. At September 30, 1997, after giving pro forma effect to the sale
of the Existing Notes, the Company and the Restricted Subsidiaries, on a
consolidated basis, would have had approximately $0.6 million in principal
amount of Senior Indebtedness outstanding and would have had additional
borrowing availability under the New Credit Facility of approximately $75.0
million, subject to the certain borrowing base and other limitations.
The Company is structured as a holding company which owns, directly or
indirectly, the stock of its operating subsidiaries. As a holding company, the
Company's cash flow and ability to service its debt obligations, including its
obligations under the Exchange Notes, are dependent on the earnings of its
subsidiaries and the distribution of those earnings to the Company in the form
of dividends, loans, advances or other intercompany transfers of funds. Under
the terms of the Indenture, the Company's subsidiaries may incur certain
indebtedness pursuant to agreements that may restrict the ability of such
subsidiaries to make such dividends or other intercompany transfers necessary
to service the Company's obligations, including its obligations under the
Exchange Notes, the Indenture and the Registration Rights Agreement. Any
failure by the Company to satisfy its obligations with respect to the Exchange
Notes upon maturity (with respect to payments of principal) or prior thereto
(with respect to payments of interest or required repurchases) would
constitute a default under the Indenture and the New Credit Facility and could
cause a default under agreements governing other indebtedness of the Company
and its subsidiaries. See "Description of the Exchange Notes--Certain
Covenants" and "Description of the Exchange Notes--Events of Default and
Remedies."
RISK OF INABILITY TO SUCCESSFULLY IMPLEMENT GROWTH STRATEGY
The Company's growth strategy is to (i) increase its share of existing
markets, (ii) leverage brands into new product categories, (iii) continue
international expansion, (iv) enter the U.S. professional salon market and (v)
continue to capitalize on selective acquisition opportunities. The Company's
continued ability to implement its growth strategy successfully will be
dependent on business, financial and other factors beyond the Company's
control, including prevailing economic conditions, changes in consumer
preferences and changes in the competitive environment. There can be no
assurance that the Company will continue to be successful in the
implementation of its growth strategy. See "Selected Consolidated Historical
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company appearing elsewhere herein.
The Company's ability to anticipate changes in market and industry trends
and to successfully develop and introduce new and enhanced products on a
timely basis will be a critical factor in its ability to grow and remain
competitive. There can be no assurance that new products and product
enhancements will be completed on a timely basis or will enjoy market
acceptance following their introduction. In addition, the anticipated
development schedules for new or improved products are inherently difficult to
predict and are subject to delay or change as a result of component part
manufacturing delay, longer than anticipated R&D or market research, shifting
priorities in response to customers' requirements and competitors' new product
introductions. Moreover, the Company expects that it will devote substantial
resources to R&D efforts, including quality control, and
13
marketing to raise consumer awareness of new products. The costs of such
efforts are likely to be expensed as they are incurred, notwithstanding that
the benefits, if any, from such efforts (in the form of increased revenues or
decreased product costs) may not be reflected until subsequent periods. See
"Business--Research and Development and Quality Control."
The Company's growth will be partially dependent upon its ability to
increase its manufacturing capacity. The Company is currently operating at
near capacity in its Savannah facility and at capacity in its South Africa
facility. However, the Company is in the process of reconfiguring its
production lines, as well as outsourcing the manufacture of certain of its
products, in Savannah and expanding its physical space in South Africa in
order to increase the capacity of such facilities. While the Company believes
its sources of financing are adequate to fund its current level of operations,
the Company will need to seek additional debt or equity financing if it makes
significant expansions or acquisitions. Future growth will be dependent, in
part, upon the capital resources available to the Company from time to time.
There can be no assurance that such additional financing, if required, will be
available in amounts and on terms satisfactory to the Company, if at all. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Another element of the Company's growth strategy is to continue to
capitalize on selective acquisition opportunities. However, there can be no
assurance that suitable acquisition or joint venture candidates can be
identified, or that, if identified, adequate financing sources will be
available on terms satisfactory to the Company. There can be no assurance that
the operations of the Company's recent or future acquisitions will be
successfully integrated with those of the Company or that such acquisitions
will not otherwise have an adverse effect on the Company.
If the Company is unable to increase its share of existing and international
markets, leverage brands into new product categories, penetrate the U.S.
professional salon market or continue to capitalize on selective acquisition
opportunities, such failure could have a material adverse effect on the
Company's business, results of operations and financial condition.
OPERATING RESULTS MAY FLUCTUATE QUARTERLY
The Company's operating results historically have varied, and in the future
may vary, significantly from quarter to quarter, in part because of changes in
the Company's product mix, buying patterns of ethnic product distributors, the
timing of, and costs related to, acquisitions, aggressive competition, and
timing of promotions. Historically, the Company has typically experienced its
slowest quarter in the three months ending December 31. The Company's
operating results for any particular quarter are not necessarily indicative of
any future results. The uncertainties associated with new or improved product
introductions and market trends may limit management's ability to accurately
forecast short-term results of operations.
RELIANCE ON THIRD PARTY MANUFACTURERS
The Company relies on a limited number of contractors to manufacture its
products to the Company's specifications. For example, the Company currently
relies on AM Cosmetics to manufacture the Dark & Lovely line of cosmetics and
Cutex nail enamels, Chesebrough-Pond's USA to manufacture the Cutex nail
polish remover products and Cosmetics Essence, Inc. ("CEI") to manufacture the
Company's shampoos and conditioners as well as the Let's Jam line. In the
event that any of the Company's subcontractors were to experience financial,
operational, production, supply or quality assurance difficulties which could
result in a reduction or interruption in supply to the Company or would
otherwise fail to meet the Company's manufacturing requirements, the Company's
business, financial condition and results of operations could be materially
adversely affected. There can be no assurance that the Company's current or
alternative third party manufacturers will be able to meet the Company's
future requirements or that such manufacturing services will continue to be
available to the Company on favorable terms, or at all. To the extent the
Company would be required to find replacements for AM Cosmetics, Chesebrough-
Pond's, CEI or its other manufacturers, a change in manufacturers could result
in cost increases and time delays in deliveries of finished assemblies, which
could
14
have a material adverse effect on the Company's business, results of
operations and financial condition, and possibly on its relationships with
customers. See "Business--Manufacturing."
RELIANCE ON SUPPLIERS
The Company purchases raw materials from third-party suppliers for use in
its manufacturing operations. The Company does not have any long-term written
contracts with suppliers. Although the Company believes that other suppliers
are available who can produce similar materials and products, there can be no
guarantee that such materials would be available to the Company on an
immediate basis if needed, or at prices similar to those now paid by the
Company. From time to time, the Company has experienced delays in shipments
from suppliers in the ordinary course of operations, but none of such delays
has had a material adverse effect on the Company's business, results of
operations or financial condition. Guanidine carbonate is an essential raw
material used in the manufacturing of no-lye relaxer products and has been
purchased by the Company for over 15 years from the one principal supplier to
all manufacturers of no-lye relaxers, located in Austria. The Company
maintains a stock of guanidine carbonate at its Savannah facility which could
satisfy its requirements for approximately four to six months of future
production. The Company has begun to source smaller amounts of guanidine
carbonate of comparable quality from other suppliers. In the event that the
Company is unable to obtain sufficient guanidine carbonate from its current
principal supplier, the Company believes that sufficient quantities of
guanidine carbonate could be obtained from these alternative suppliers on
comparable terms before its reserves run out. However, the failure to timely
secure an alternative source of guanidine carbonate in sufficient quantities
and at a price satisfactory to the Company would have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Manufacturing."
DEPENDENCE ON TRADEMARKS FOR CURRENT AND FUTURE MARKETS
The market for the Company's products is significantly dependent upon the
goodwill engendered by its trademarks and trade names. Trademark protection is
therefore material to the Company's business. Although the Company's material
trademarks and trade names are registered or in the process of being
registered in the United States and, other than Cutex, in the principal
foreign countries in which the Company sells its products, there can be no
assurance that the Company will be successful in asserting trademark or trade
name protection for its significant marks and names in the United States or
other markets, and the costs to the Company of such efforts may be
substantial. See "Business--Trademarks and Patents."
CONCENTRATED MANUFACTURING OPERATIONS INCREASE RISK OF DISRUPTION
The Company manufactures its products domestically at its facility in
Savannah, Georgia, and internationally at its facilities in Midrand, South
Africa and Accra, Ghana (the Accra facility began production in June 1997).
Any prolonged disruption to the operations of any such facility, whether due
to labor difficulties, destruction of or damage to the facility, severe
weather conditions or other reasons, could have a material adverse effect on
the Company's business, results of operations and financial condition. For
example, hurricanes caused the evacuation of the City of Savannah for two days
during September 1996, resulting in shortfalls in production at the Company's
Savannah facility. The Company maintains business interruption insurance in an
amount which it deems reasonable to cover the occurrence of such events;
however, there can be no assurance that the proceeds of any such insurance
would be sufficient to meet the Company's needs if such an event were to
occur. See "Business--Facilities."
SOCIAL, POLITICAL AND ECONOMIC RISKS AFFECTING FOREIGN OPERATIONS AND EFFECTS
OF FOREIGN CURRENCY FLUCTUATIONS
The Company's products are sold in more than 60 countries and territories
outside the United States and the Company has a manufacturing facility in
Midrand, South Africa as well as in Savannah, Georgia and Accra, Ghana. For
the twelve months ended September 30, 1997, approximately 28.2% of the
Company's net sales and approximately 43.0% of the Company's operating income
were derived from outside the United States, including domestic exports and
sales by the Company's South African operations. All of the Company's sales
are in dollars
15
with the exception of sales to South Africa, Botswana, Lesotho, Namibia and
Swaziland which are denominated in South African Rand. A significant component
of the Company's business strategy is to expand its international operations.
The Company is exposed to the risk of changes in social, political and
economic conditions inherent in foreign operations, including changes in the
laws and policies that govern foreign investment in countries where it has
operations as well as, to a lesser extent, changes in U.S. laws and
regulations relating to foreign trade and investment. In addition, the
Company's results of operations and the value of its foreign assets are
affected by fluctuations in foreign currency exchange rates, which may
favorably or adversely affect reported earnings and accordingly, the
comparability of period-to-period results of operations. The Company does not
currently engage in hedging activities to minimize its exposure to such
fluctuations. Changes in currency exchange rates may affect the relative
prices at which the Company and foreign competitors sell their products in the
same market. There can be no assurance as to the future effect of any such
changes in social, political and economic conditions on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"The Company--Corporate Structure."
COMPETITION
The U.S. ethnic hair care market for African-Americans is competitive and
highly fragmented with a number of market participants that focus specifically
on this market. The five largest companies generated approximately 49.1% of
industry sales in the U.S. retail ethnic hair care market in the twelve months
ended June 1997 with the remainder being generated by a number of smaller
companies, according to IRI. In the U.S. retail market segments for nail
enamel/treatments and for nail polish remover, the five largest companies
generated approximately 69.0% and 59.5%, respectively, of industry sales for
the twelve months ended June 1997, according to IRI. In the U.S. retail market
for cosmetics, including the ethnic cosmetics market, the five largest
companies generated approximately 75.4% of industry sales for the twelve
months ended June 1997, according to IRI. In the U.S. retail market for
women's depilatory products, the five largest companies generated
approximately 78.7% of industry sales for the twelve months ended June 1997,
according to IRI.
Some of the Company's competitors are mass market companies which are larger
and have substantially greater financial and other resources than the Company.
Competitive market conditions could materially and adversely affect the
Company's business, results of operations and financial condition if the
Company were required to reduce product prices to remain competitive or
experienced decreased sales volume. The Company plans to increase sales
internationally. Expanding the Company's share of international markets will
require the Company to address competitive factors similar to those it faces
in the United States, as well as comply with any local regulatory
requirements. See "Business--Competition."
CHANGES IN DISTRIBUTION CHANNELS
The Company relies upon five principal distribution channels in the U.S.
retail personal care market to sell its products, including mass
merchandisers, major food and drug chains, discount chains and B&Bs. Chain
stores and distributors in the United States and in foreign markets have
periodically experienced consolidation and other ownership changes and may in
the future consolidate, undergo restructurings or realign their affiliations
which could decrease the number of stores that sell the Company's products or
increase the ownership concentration within the retail industry. A significant
portion of the Company's products sold by chain stores is purchased through
ethnic product distributors. Some of these distributors may be thinly
capitalized and unable to withstand changes in business conditions. If a
significant distributor of the Company's products performs poorly and is
unable to pay for purchased products, or reorganizes or liquidates and is
unable to continue selling the Company's products, the Company's business,
results of operations and financial condition could be materially adversely
affected. While such changes in distribution channels to date have not had a
material adverse effect on the Company's business, results of operations and
financial condition, there can be no assurance as to the future effect of any
such changes. See "Business--Distribution and Sales."
16
COMPLIANCE WITH CONSUMER LAWS AND GOVERNMENT REGULATIONS
The Company is subject to the U.S. Food, Drug and Cosmetics Act, the U.S.
Consumer Product Safety Act, the U.S. Federal Hazardous Substance Act and to
the jurisdiction of the U.S. Consumer Product Safety Commission as well as
product safety laws in foreign jurisdictions. Such regulations subject the
Company to the possibility of requirements to repurchase or recall products
found to be defective and the possibility of fines or penalties. The U.S. Food
and Drug Administration ("FDA") has promulgated certain regulations concerning
product ingredients, product labeling and product claims. In addition, the
U.S. Federal Trade Commission ("FTC") regulates product claims. The Company is
subject to consumer laws in foreign countries where its products are sold.
Existing and future FDA, FTC and foreign regulations could impact distribution
and sales of certain of the Company's products. See "Business--Consumer Laws,
Government and Industry Regulations."
RELIANCE ON KEY MANAGEMENT
The Company's executive officers have extensive experience serving the
consumer products industry and the ethnic market. If, for any reason, key
members of senior management, including Dr. Leroy Keith, Joyce M. Roche,
Dennis E. Smith, Miriam Muley and Robert W. Pierce (see "Management"), do not
continue to be active in management, the Company's business, results of
operations or financial condition could be adversely affected. All of these
key senior management employees have employment contracts, which generally
contain non-compete clauses, with the Company as described in "Management--
Compensation of Executive Officers-Employment Agreements," but there can be no
assurance that such individuals will remain with the Company.
CONTROL BY CERTAIN EXISTING STOCKHOLDERS
DNL Partners beneficially owns approximately 46.1% of the total shares of
Common Stock of the Company and has 75.8% of the combined voting power of the
outstanding Common Stock of the Company. Accordingly, DNL Partners has
sufficient voting power to elect the Company's Board of Directors and to
control the vote on all matters submitted to a vote of stockholders, including
extraordinary transactions such as mergers, sales of all or substantially all
of the Company's assets or going private transactions. Such concentration of
ownership may have the effect of delaying or preventing certain types of
transactions involving an actual or potential change in control of the
Company. See "Principal Stockholders and Management Ownership."
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements contained in this Prospectus, including in the sections
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" may contain forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
materially from those discussed in such forward-looking statements. Such
statements include, without limitation, (i) the Company's plans to introduce
new products and product enhancements, (ii) the Company's plans to expand its
international operations, (iii) the Company's plans to penetrate the ethnic
cosmetics product category, (iv) the Company's plans to enter the U.S.
professional salon market for ethnic hair care products, (v) the Company's
plans to make selective acquisitions, (vi) the Company's marketing,
distribution and manufacturing expansion plans and (vii) the Company's
expectation and estimates as to future financial performance, including growth
in net sales, cash flows from operations, improved results from acquisitions
and capital expenditures. Readers are urged to consider statements which use
the terms "believes," "no reason to believe," "expects," "plans," "intends,"
"estimates," "anticipated" or "anticipates" to be uncertain and forward-
looking. 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 factors that may be described in this "Risk
Factors" section and elsewhere in this Prospectus and in the Company's
Commission filings, the following factors, among others, could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statements made by the Company: (a) the Company's success in
implementing its growth strategy, including its success in arranging financing
where required, (b) the nature and extent of future competition in the
Company's principal marketing areas, and (c) political, economic and
demographic developments in the United States,
17
Africa, Brazil, the Caribbean, Europe and other countries where the Company
now does business or in the future may do business.
COST OF FUTURE COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS MAY BE MATERIAL
The Company is subject to 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 and joint and several
liability upon persons responsible for releases of hazardous substances.
Based upon its experience to date, 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 or
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. See "Business--
Environmental Matters."
POSSIBLE INABILITY TO MAKE A CHANGE OF CONTROL OFFER
In the event of a Change of Control (as defined in the Indenture), the
Company will be required to offer (a "Change of Control Offer") to purchase
all of the outstanding Notes at 101% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the
date of repurchase. However, the Company expects that prepayment of the Notes
following a Change of Control would constitute a default under the New Credit
Facility. The exercise by the holders of the Notes of their right to require
the Company to purchase the Notes upon a Change of Control could also cause a
default under other indebtedness of the Company, even if the Change of Control
itself does not, because of the financial effect of such purchase on the
Company. The Company's ability to pay cash to the holders of the Notes upon a
repurchase may be limited by the Company's then existing financial resources.
There can be no assurance that in the event of a Change of Control, the
Company will have, or will have access to, sufficient funds or will be
contractually permitted under the terms of outstanding indebtedness to pay the
required purchase price for all the Notes tendered by holders upon a Change of
Control. In the event that a Change of Control occurs, the Company would
likely be required to refinance any indebtedness outstanding under the New
Credit Facility and the Notes. There can be no assurance that the Company
would be able to refinance such indebtedness or, if such refinancing were to
occur, that such refinancing would be on terms favorable to the Company. See
"Description of the Exchange Notes--Change of Control."
ABILITY TO REORGANIZE AS A FOREIGN CORPORATION
The Indenture permits the Company to consolidate with, merge into or
otherwise dispose of all or substantially all of its assets to Carson South
Africa. If the Company were to consummate such a disposition, the Exchange
Notes would become obligations of Carson South Africa, a South African company
approximately 28% of whose shares are traded on the Johannesburg Stock
Exchange. Prior to any such disposition the Company will be required to make
an offer to purchase all of the outstanding Notes at a specified price and
comply with certain other conditions. See "Description of the Exchange Notes--
Merger or Consolidation."
FRAUDULENT TRANSFER CONSIDERATIONS
The Company's obligations on the Exchange Notes will be guaranteed on a
joint and several basis by the Guarantors. The Company and the initial
Guarantor believe that the Guarantees, when incurred, will be incurred for
proper purposes and in good faith. Notwithstanding the Company's and the
Guarantor's beliefs, however, under fraudulent transfer law, if a court were
to find, in a lawsuit by an unpaid creditor or representative of creditors of
the Company or a Guarantor, that the Company or such Guarantor received less
than fair
18
consideration or reasonable equivalent value for incurring the indebtedness
represented by the Exchange Notes and the Guarantees, respectively, and, at
the time of such incurrence, the Company or such Guarantor (i) was insolvent
or was rendered insolvent by reason of such incurrence, (ii) was engaged or
about to engage in a business or transaction for which its remaining property
constituted unreasonably small capital, (iii) intended to incur, or believed
it would incur, debts beyond its ability to pay as such debts mature, or (iv)
intended to hinder, delay or defraud its creditors, and that the indebtedness
was incurred for less than reasonably equivalent value, such court could,
among other things, (a) void all or a portion of the Company's or such
Guarantor's obligations to the holders of the Exchange Notes and the
Guarantees and/or (b) subordinate the Company's obligations to the holders of
the Exchange Notes and the Guarantees to other existing and future
indebtedness of the Company or such Guarantor, the effect of which would be to
entitle such other creditors to be paid in full before any payment could be
made on the Exchange Notes and the Guarantees. The measure of insolvency for
purposes of determining whether a transfer is voidable as a fraudulent
transfer varies depending upon the law of the jurisdiction which is being
applied. Generally, however, a debtor would be considered insolvent if the sum
of all of its liabilities were greater than the value of all of its property
at a fair valuation, or if the present fair saleable value of the debtor's
assets were less than the amount required to repay its probable liability on
its debts as they become absolute and mature. There can be no assurance as to
what standard a court would apply in order to determine solvency. To the
extent that proceeds from the sale of the Existing Notes were used to repay
existing indebtedness of a Guarantor, a court may find that the Company did
not receive fair consideration or reasonably equivalent value for the
incurrence of the indebtedness represented thereby.
On the basis of its historical financial information, its recent operating
history as discussed in "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and other factors, the Company believes
that, after giving effect to the sale of the Existing Notes and the issuance
of the Exchange Notes, the Company and the initial Guarantor were and will be
solvent, did and will have sufficient capital for the business in which they
are engaged and did not and will not have incurred debts beyond their ability
to pay such debts as they mature. There can be no assurance, however, that a
court would necessarily agree with these conclusions.
ABSENCE OF A PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes generally will be freely transferable (subject to the
restrictions discussed elsewhere herein) but will be new securities for which
there is currently no public market. The Company does not intend to list the
Exchange Notes on any national securities exchange or to seek the admission
thereof to trading in the NASDAQ National Market. The Initial Purchasers have
advised the Company that they currently intend to make a market in the
Exchange Notes, but they are not obligated to do so and, if commenced, may
discontinue such market making at any time. There can be no assurance as to
the development of any market or liquidity of any market that may develop for
the Exchange Notes. If the Exchange Notes are traded after their initial
issuance, they may trade at a discount from their initial offering price,
depending on prevailing interest rates, the market for similar securities and
other factors, including general economic conditions and the financial
condition and performance of the Company. Prospective investors in the
Exchange Notes should be aware that they may be required to bear the financial
risks of such investment for an indefinite period of time. See "Description of
the Exchange Notes--Existing Notes; Registration Rights; Liquidated Damages".
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Existing Notes who do not exchange their Existing Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Existing Notes as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Existing Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register the
Existing Notes under the Securities Act. No holder of Existing Notes will be
entitled to receive any Liquidated Damages with respect to such Existing
19
Notes, if a holder of such Existing Notes was, at any time while the Exchange
Offer is pending, eligible to exchange, and did not validly tender, such
Existing Notes for Exchange Notes in the Exchange Offer. The Company expects
that substantially all of the Existing Notes will be exchanged for Exchange
Notes pursuant to the Exchange Offer, which will negatively affect the market
for the Existing Notes. Based on interpretations by the staff of the
Commission, Exchange Notes issued pursuant to the Exchange Offer may be
offered for resale, resold or otherwise transferred by holders thereof (other
than any such holder which is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act provided that such
Exchange Notes are acquired in the ordinary course of such holders' business
and such holders have no arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer. Any holder who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes (i) could not rely on
the applicable interpretations of the staff of the Commission and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. The Company
has agreed, pursuant to the Registration Rights Agreement and subject to
certain specified limitations therein, to register or qualify the Exchange
Notes for offer or sale under the securities or blue sky laws of such
jurisdictions as any holder of the Exchange Notes reasonably requests in
writing. See "The Exchange Offer" and "Description of the Exchange Notes--
Existing Notes; Registration Rights; Liquidated Damages."
20
THE COMPANY
GENERAL
The Company is a leading manufacturer and marketer in the United States of
selected personal care products for both the ethnic market and the mass
market. The Company believes that it is one of the leading global
manufacturers and marketers of ethnic hair care products for persons of
African descent. The Company's flagship brand, Dark & Lovely, is the most
widely recognized ethnic brand name in the U.S. retail ethnic hair care
market. The Company has the number one retail market position in three of the
four ethnic hair care segments in the United States in which it currently
competes, according to IRI. The Company currently sells over 70 products
specifically formulated to address the unique physiological characteristics of
persons of African descent under six principal brand names: Dark & Lovely,
Excelle, Beautiful Beginnings, Dark & Natural, Magic and Let's Jam. The
majority of the Company's net sales have historically been derived from hair
relaxers and texturizers, which are used to chemically treat and straighten
hair (constituting approximately 42.1% of the Company's net sales in the
twelve months ended September 30, 1997), hair color, men's depilatory products
and hair care maintenance products, primarily for persons of African descent.
In addition, the Company is expanding its product offerings to other segments
of the ethnic personal care market, including cosmetics and skin care
products.
The Company is also a leading marketer of nail care products to the U.S.
mass market under the Cutex brand name. Cutex is the leading brand of nail
polish remover products, with an estimated 31.8% market share in the twelve
months ended June 1997, according to IRI. Other products marketed under the
Cutex brand name include nail enamel, nail care treatments and the newly
introduced women's depilatory product, Naturally Soft Body Creme. Carson
acquired the rights to use the Cutex brand name in the United States and
Puerto Rico in April 1997. The Cutex Acquisition is expected to create an
entree into the U.S. mass market for products developed by Carson and increase
the Company's overall distribution strength.
The Company markets its products in the United States with its own
experienced direct sales force. The Company also currently markets its
products in more than 60 countries outside of the United States, primarily
through local distributors. International net sales represented 28.2% of the
Company's net sales for the twelve months ended September 30, 1997.
BACKGROUND
The Company is a publicly-traded Delaware corporation listed on the NYSE.
The Company (formerly DNL Savannah Holding Corp.) was established in May 1995.
On August 23, 1995, Acquisition Corp., a wholly-owned subsidiary of the
Company, acquired all of the stock of the Predecessor. Acquisition Corp. was
formed by Morningside, as financial sponsor, on behalf of an investor group
consisting of DNL Partners, Dr. Leroy Keith and the lenders providing the
acquisition financing.
CORPORATE STRUCTURE
The following chart sets forth the corporate structure of the Company.
Except as noted below, each of the Company's direct and indirect subsidiaries
are wholly-owned.*
[CHART]
--------------------------
CARSON, INC. (NYSE/CIC)
(the "Company")
--------------------------
--------------------------
CARSON PRODUCTS COMPANY
("Carson Products")
--------------------------
--------------------------
CARSON HOLDINGS LIMITED
("Carson South Africa")
(Johannesburg Exchange/CHL)
(72.22% owned)
--------------------------
- ------------------------- ----------------------- ------------------------
CARSON PRODUCTS CARSON PRODUCTS CARSON PRODUCTS
WEST AFRICA LIMITED EAST AFRICA (EPZ) (PROPRIETY)LIMITED
(Ghana) LIMITED ("Carson Products S.A.")
- ------------------------- (Kenya) (South Africa)
----------------------- -------------------------
- --------
* Does not include inactive subsidiaries.
21
Carson Holdings Limited, a South African company incorporated on February
14, 1996, is currently 72.22% owned by Carson Products. Carson Products
(Proprietary) Limited ("Carson Products S.A."), a South African registered
company, which is wholly-owned by Carson South Africa, serves as the operating
company for the Company's South African operations. On July 3, 1996, Carson
South Africa sold 25% of its shares to the public in an initial public
offering on the Johannesburg Stock Exchange, which raised approximately $4.2
million in net proceeds. At the same time an additional 1.875% of Carson South
Africa shares were issued to certain employees, directors and officers of the
Company involved in the South Africa operations. The net proceeds were used by
Carson South Africa to purchase a manufacturing facility and related equipment
as well as to provide funds for the Company's strategic initiatives in Africa.
In June 1997, Carson South Africa completed a rights offering of its shares to
its existing shareholders (including Carson Products), which generated cash
proceeds of $1.5 million (net of $4.2 million invested by Carson Products in
order to maintain its ownership percentage at approximately the same level).
Carson Products West Africa Limited is a wholly-owned subsidiary of Carson
South Africa and is a Ghana registered company incorporated on October 9,
1996. Carson Products East Africa (EPZ) Limited is also a wholly-owned
subsidiary of Carson South Africa and is a Kenya registered company
incorporated on July 8, 1997.
Carson Products S.A. has been in operation for the past four years and
manufactures and distributes ethnic hair care products under license from
Carson Products. In-house manufacturing of products, previously carried out
through a contract manufacturer, began in March 1996. Pursuant to a
distribution agreement with Carson Products dated May 14, 1996, Carson
Products S.A. has the exclusive right to distribute and sell the Company's
entire product line (other than Cutex products) throughout the African
continent and has the right to supply the Company's products to the European
market in an amount up to 20% of the Company's budgeted European sales. The
initial term of the agreement expires on April 1, 2001; however, the agreement
continues indefinitely thereafter until terminated by either party upon 12
months written notice. Carson Products S.A. has a license agreement with
Carson Products dated April 7, 1994 whereby Carson Products S.A. has licensed
certain of the products of the Company (currently totalling over 60 products).
In conjunction with the South African initial public offering, the license
agreement was amended to provide that, commencing on April 1, 1998, Carson
Products S.A. will pay to Carson Products a royalty in the amount of 3.0% of
the net sales price of all licensed products sold. The amount of the royalty
increases to 3.5% on April 1, 1999 and 4.0% on April 1, 2000 until the
termination of the agreement. The initial term of the agreement expires on
April 1, 1999; however, the agreement continues indefinitely thereafter until
terminated by either party upon twelve months written notice. This agreement
is being amended to reflect the Company's expanded product line.
The Company's principal executive offices are located at 64 Ross Road,
Savannah Industrial Park, Savannah, GA 31405, and its telephone number is
(912) 651-3400.
USE OF PROCEEDS OF THE EXCHANGE NOTES
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive, in exchange, Existing Notes in like
principal amount. The form and terms of the Exchange Notes are identical in
all material respects to the form and terms of the Existing Notes, except as
otherwise described herein under "The Exchange Offer--Terms of the Exchange
Offer." The Existing Notes surrendered in exchange for the Exchange Notes will
be retired and cancelled and cannot be reissued. Accordingly, issuance of the
Exchange Notes will not result in any increase in the outstanding debt of the
Company. The net proceeds from the sale of the Existing Notes, after
underwriting discounts and commissions and expenses related to the Offering,
were approximately $96.5 million. The Company used a portion of such net
proceeds (i) to repay in full the debt outstanding under its then existing
senior bank credit facility (the "Existing Bank Credit Facility")
(approximately $87.3 million as of September 30, 1997), plus accrued and
unpaid interest thereon, and (ii) to pay transaction fees and expenses related
to the New Credit Facility. The remaining net proceeds will be used for
working capital and general corporate purposes, including acquisitions. The
Company does not currently have any outstanding agreements or commitments to
make any acquisitions or enter into any joint ventures.
22
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement, the Company and Carson
Products have agreed (i) to file an Exchange Offer Registration Statement with
the Commission on or prior to 45 days after November 6, 1997 (the "Issue
Date"), (ii) that the Company will use its reasonable best efforts to have the
Exchange Offer Registration Statement (as defined) declared effective by the
Commission on or prior to 180 days after the Issue Date, (iii) that unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its reasonable best
efforts to issue on or prior to 30 business days after the date on which the
Exchange Offer Registration Statement was declared effective by the
Commission, Exchange Notes in exchange for all Notes tendered prior thereto in
the Exchange Offer and (iv) that if obligated to file a Shelf Registration
Statement, the Company will use its reasonable best efforts to file the Shelf
Registration Statement with the Commission on or prior to 45 days after such
filing obligation arises and to cause the Shelf Registration to be declared
effective by the Commission on or prior to 180 days after such obligation
arises. See "Description of the Exchange Notes--Existing Notes; Registration
Rights; Liquidated Damages."
If (a) the Company and Carson Products fail to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statements is not
declared effective by the Commission on or prior to the date specified for
such effectiveness (the "Effectiveness Target Date"), (c) the Company and the
Guarantors fail to consummate the Exchange Offer within 30 business days of
the Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the Registration Rights Agreement
(each such event referred to in clauses (a) through (d) above a "Registration
Default"), then the Company will be obligated to pay Liquidated Damages, if
any, to each Holder of Notes constituting Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of
such Registration Default in an amount equal to $.05 per week per $1,000
principal amount of Notes constituting Notes held by such Holder. The amount
of the Liquidated Damages, if any, will increase by an additional $.05 per
week per $1,000 principal amount of Notes constituting Transfer Restricted
Securities with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages, if any, of $.50 per week per $1,000 principal amount of such Notes.
All accrued Liquidated Damages, if any, will be paid by the Company on each
Damages Payment Date (as defined in the Registration Rights Agreement) to the
Global Note Holder by wire transfer of immediately available funds or by
federal funds check and to Holders of Certificated Securities by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages, if any, will cease.
See "Description of Exchange Notes--Existing Notes; Registration Rights;
Liquidated Damages."
RESALE OF EXCHANGE NOTES
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that, except as
described below, Exchange Notes issued pursuant to the Exchange Offer in
exchange for Existing Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than a holder which is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holder's business and such holder does not intend to
participate and has no arrangement or understanding with any person to
participate in the distribution of such Exchange Notes. Any holder who tenders
in the Exchange Offer with the intention or for the purpose of participating
in a distribution of the Exchange Notes cannot rely on such interpretation by
the staff of the Commission and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. Unless an exemption from registration is
otherwise available,
23
any such resale transaction should be covered by an effective registration
statement containing the selling security holders information required by Item
507 of Regulation S-K under the Securities Act. This Prospectus may be used
for an offer to resell, resale or other retransfer of Exchange Notes only as
specifically set forth herein. Each broker-dealer that receives Exchange Notes
for its own account in exchange for Existing Notes, where such Existing Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes. See "Plan of
Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange any and
all Existing Notes properly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. The Company will issue $1,000
principal amount of Exchange Notes in exchange for each $1,000 principal
amount of outstanding Existing Notes surrendered pursuant to the Exchange
Offer. Existing Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes will be the same as the form and
terms of the Existing Notes except the Exchange Notes will be registered under
the Securities Act and hence will not bear legends restricting the transfer
thereof. The Exchange Notes will evidence the same debt as the Existing Notes.
The Exchange Notes will be issued under and entitled to the benefits of the
Indenture, which also authorized the issuance of the Existing Notes, such that
both series will be treated as a single class of debt securities under the
Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Existing Notes being tendered for exchange.
As of the date of this Prospectus, $100.0 million aggregate principal amount
of the Existing Notes is outstanding. This Prospectus, together with the
Letter of Transmittal, is being sent to all registered holders of Existing
Notes. There will be no fixed record date for determining registered holders
of Existing Notes entitled to participate in the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder. Existing Notes which are not tendered for exchange in
the Exchange Offer will remain outstanding and continue to accrue interest and
will be entitled to the rights and benefits such holders have under the
Indenture and the Registration Rights Agreement. Notwithstanding the
foregoing, no holder of Existing Notes will be entitled to receive any
Liquidated Damages with respect to such Existing Notes, if a holder of such
Existing Notes was, at any time while the Exchange Offer is pending, eligible
to exchange, and did not validly tender, such Existing Notes for Exchange
Notes in the Exchange Offer.
The Company will be deemed to have accepted for exchange properly tendered
Existing Notes when, as and if the Company gives oral or written notice
thereof to the Exchange Agent and complies with the provisions of Section 6 of
the Registration Rights Agreement. The Exchange Agent will act as agent for
the tendering holders for the purposes of receiving the Exchange Notes from
the Company. The Company expressly reserves the right to amend or terminate
the Exchange Offer, and not to accept for exchange any Existing Notes not
theretofore accepted for exchange, upon the occurrence of any of the
conditions specified below under "--Certain Conditions to the Exchange Offer."
Holders who tender Existing Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Existing
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
24
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time on ,
1998, unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the term "Expiration Date" will mean the latest date and time to
which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders of Existing Notes an announcement thereof, each prior to
9:00 a.m., New York City time, on the next business day after the then
Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting for exchange any Existing Notes, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth below under
"--Certain Conditions to the Exchange Offer" has not been satisfied, by giving
oral or written notice of such delay, extension or termination to the Exchange
Agent or (ii) to amend the terms of the Exchange Offer in any manner. Any such
delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the registered
holders of Existing Notes. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders, and the Company will extend the
Exchange Offer, depending upon the significance of the amendment and the
manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate of 10 3/8% per annum,
payable semi-annually on each May 1 and November 1 of each year, commencing
May 1, 1998. Holders of Exchange Notes will receive accrued interest from the
last interest payment date on which interest was paid on the Existing Notes
surrendered in exchange therefor or, if no such interest has been paid on the
Existing Notes, from the date of original issuance of the Existing Notes.
Interest on the Existing Notes accepted for exchange will cease to accrue upon
issuance of the Exchange Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any Exchange Notes for, any
Existing Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of any Existing Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the Company's sole judgment, might materially impair the ability
of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or enacted,
or any existing law, statute, rule or regulation is interpreted by the
staff of the Commission, which, in the Company's sole judgment, might
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(c) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation of
the Exchange Offer as contemplated hereby.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Existing Notes, by giving oral or
written notice of such extension to the holders thereof. During any such
extensions, all Existing Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Existing
Notes not accepted for exchange for any reason will be returned without
expense to the tendering holder thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Existing Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions
25
of the Exchange Offer specified above under "--Certain Conditions to the
Exchange Offer." The Company will give oral or written notice of any
extension, amendment, non-acceptance or termination to the holders of the
Existing Notes as promptly as practicable, such notice in the case of any
extension to be issued no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights will not be deemed a waiver
of any such right and each such right will be deemed an ongoing right which
may be asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Existing Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Existing Notes, if at such time any stop order is threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act").
PROCEDURES FOR TENDERING
Only a holder of Existing Notes may tender such Existing Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or facsimile thereof, have the signature
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. In
addition, either (i) Existing Notes must be received by the Exchange Agent
along with the Letter of Transmittal, or (ii) a timely confirmation of book-
entry transfer (a "Book-Entry Confirmation") of such Exchange Notes, if such
procedure is available, into the Exchange Agent's account at The Depository
Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure
for book-entry transfer described below must be received by the Exchange Agent
prior to the Expiration Date, or (iii) the holder must comply with the
guaranteed delivery procedures described below. To be tendered effectively,
the Letter of Transmittal and other required documents must be received by the
Exchange Agent at the address set forth below under""--Exchange Agent" prior
to 5:00 p.m., New York City time, on the Expiration Date.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF EXISTING NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR EXISTING NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Existing Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder of Existing Notes to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender on such owner's own behalf,
such owner must, prior to completing and executing the Letter of Transmittal
and delivering such owner's Existing Notes, either make appropriate
arrangements to register ownership of the Existing Notes in such owner's name
or obtain a properly completed bond power from the registered holder of
Existing Notes. The transfer of registered ownership may take considerable
time and may not be able to be completed prior to the Expiration Date.
26
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case be, must be guaranteed by an Eligible Institution (as
defined below) unless the Existing Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the
Letter of Transmittal or (ii) for the account of an Eligible Institution. In
the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantor
must be a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act which is a member of one of the recognized signature guarantee programs
identified in the Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Existing Notes listed therein, such Existing Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Existing
Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Existing Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Existing Notes and withdrawal of tendered
Existing Notes will be determined by the Company in its sole discretion, which
determination will be final and binding on all parties. The Company reserves
the absolute right to reject any and all Existing Notes not properly tendered
or any Existing Notes the Company's acceptance of which would, in the opinion
of counsel for the Company, be unlawful. The Company also reserves the right
to waive any defects, irregularities or conditions of tender as to particular
Existing Notes. The Company's interpretation of the terms and conditions of
the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Existing Notes must be cured
within such time as the Company shall determine. Although the Company intends
to notify holders of defects or irregularities with respect to tenders of
Existing Notes, neither the Company, the Exchange Agent, the Trustee, nor any
other person will incur any liability for failure to give such notification.
Tenders of Existing Notes will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Existing Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
by the Exchange Agent to the tendering holders, unless otherwise provided in
the Letter of Transmittal, as soon as practicable following the Expiration
Date.
In all cases, issuance of Exchange Notes for Existing Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of Notes or a timely Book-Entry
Confirmation of such Existing Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Existing Notes
are not accepted for exchange for any reason set forth in the terms and
conditions of the Exchange offer or if Existing Notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted
or non-exchanged Existing Notes will be returned without expense to the
tendering holder thereof (or, in the case of Existing Notes tendered by book-
entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry transfer procedures described below, such
non-exchanged Notes will be credited to an account maintained with such Book-
Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Existing Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this
27
Prospectus, and any financial institution that is a participant in the Book-
Entry Transfer Facility's system may make book-entry delivery of Existing
Notes by causing the Book-Entry Transfer Facility to transfer such Existing
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with such Book-Entry Transfer Facility's procedures for transfer.
However, although delivery of the Existing Notes may be effected through book-
entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal
or facsimile thereof, with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received by the
Exchange Agent at the address set forth below under "--Exchange Agent" on or
prior to the Expiration Date or, if the guaranteed delivery procedures
described below are to be complied with, within the time period provided under
such procedures. Delivery of documents to the Book-Entry Transfer Facility
does not constitute delivery to the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Existing Notes and (i) whose Existing Notes
are not immediately available or (ii) who cannot deliver their Existing Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
of such Existing Notes and the principal amount of Existing Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the Existing
Notes or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three New York Stock Exchange trading days after the
Expiration Date.
Upon request to the Exchange Agent, a form of Notice of Guaranteed Delivery
will be sent to holders who wish to tender their Existing Notes according to
the guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Existing Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Existing Notes to be withdrawn, identify the
Existing Notes to be withdrawn (including the principal amount of such
Existing Notes), and (where certificates for Existing Notes have been
transmitted) specify the name in which such Existing Notes were registered, if
different from that of the withdrawing holder. If certificates for Existing
Notes have been delivered or otherwise identified to the Exchange Agent, then,
prior to the release of such certificates the withdrawing holder must also
submit the serial numbers of the particular certificates to be withdrawn and a
signed notice of withdrawal with signatures guaranteed by an Eligible
Institution unless such holder is an Eligible Institution. If Existing Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the
account at the Book-Entry Transfer Facility to be credited with the withdrawn
Existing Notes and otherwise comply with the procedures of such facility. All
questions as to the validity, form and eligibility (including time of receipt)
of such withdrawal notices will be determined by the Company, whose
determination will be final and binding on all parties. Any Existing Notes so
withdrawn will
28
be deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Existing Notes which have been tendered for exchange but
which are not exchanged for any reason will be returned to the holder thereof
without cost to such holder (or, in the case of Existing Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry transfer procedures described
above, such Existing Notes will be credited to an account maintained with such
Book-Entry Transfer Facility for the Existing Notes) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Existing Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering" above at any time on
or prior to the Expiration Date.
EXCHANGE AGENT
Marine Midland Bank has been appointed as Exchange Agent of the Exchange
Offer. Questions and request for assistance, request for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
MARINE MIDLAND BANK
By Mail, By Overnight By Facsimile:
Courier or By Hand:
(For Eligible Institutions Only)
Marine Midland Bank (212) 658-2292
140 Broadway, Level A Confirm by Telephone:
New York, New York 10005-1180 (212) 658-5931
Attention: Corporate Trust
Operations
For Information Call:
(800) 662-9844
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker-dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include registration fees, fees and
expenses of the Exchange Agent and Trustee, accounting and legal fees and
printing costs, and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, certificates
representing Existing Notes for principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be issued in the name of, any
person other than the registered holder of Notes tendered, or if tendered
Notes are registered in the name of any person other than the person signing
the Letter of Transmittal, or if a transfer tax is imposed for any reason
other than the exchange of Notes pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
29
TRANSFER TAXES
Holders who tender their Existing Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith, except that holders who
instruct the Company to register Exchange Notes in the name of, or request
that Existing Notes not tendered or not accepted in the Exchange Offer be
returned to, a person other than the registered tendering holder will be
responsible for the payment of any applicable transfer tax thereon.
30
CAPITALIZATION
(DOLLARS IN THOUSANDS, EXCEPT FOOTNOTES)
The following table sets forth the cash, short-term debt and the
consolidated capitalization of the Company at September 30, 1997 and as
adjusted to give effect to the sale of the Existing Notes, the application of
the net proceeds therefrom and the replacement of the Existing Bank Credit
Facility with the New Credit Facility. This table should be read in
conjunction with the Consolidated Financial Statements of the Company and
accompanying notes thereto appearing elsewhere in this Prospectus. See "Use of
Proceeds" and "Selected Consolidated Historical Financial Data."
SEPTEMBER 30, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
Cash.................................................... $ 4,987 $ 11,130(a)
======== ========
Current portion of long-term debt....................... $ 3,000 $ --
======== ========
Long-term debt:
Existing Bank Credit Facility:
A Term loans.......................................... $ 21,250 $ --
B Term loans.......................................... 49,250 --
Revolving line of credit.............................. 13,776 --
New Credit Facility(b):
Term loans............................................ --
Revolving line of credit.............................. --
Senior Subordinated Notes............................... -- 100,000
Other................................................... 642 642
-------- --------
Total long-term debt................................ 84,918 100,642
-------- --------
Stockholders' equity:
Common stock, Class A, B and C par value $.01 per
share (165,000,000 shares authorized, 14,984,182
shares issued and outstanding)....................... 150 150
Paid-in capital......................................... 62,899 62,899
Retained earnings (deficit)(c).......................... (1,234) (3,164)
Foreign currency translation adjustment................. (1,473) (1,473)
Notes receivable, net of discount....................... (1,437) (1,437)
-------- --------
Total stockholders' equity.......................... 58,905 56,975
-------- --------
Total capitalization................................ $143,823 $157,617
======== ========
- --------
(a) Estimated based on cash remaining after repayment of amounts outstanding
under the Existing Bank Credit Facility as of September 30, 1997. Such
amount will be reduced to the extent cash is used in operations or
additional indebtedness is incurred by the Company after September 30,
1997.
(b) Concurrently with the consummation of the sale of the Existing Notes, the
Company entered into the New Credit Facility. The New Credit Facility
includes a $25.0 million revolving credit facility subject to borrowing
base limitations and a $50.0 million acquisition term loan. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operation--Liquidity and Capital Resources" and "Description of the New
Credit Facility."
(c) Debt issuance costs with respect to the Existing Bank Credit Facility of
approximately $2.0 million, net of related tax benefits, were written off
due to the retirement of such debt with a portion of the net proceeds from
the sale of the Existing Notes. See "Use of Proceeds."
31
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT FOOTNOTES)
The unaudited pro forma consolidated financial data are based on the
historical consolidated financial statements for the Predecessor and the
Company and the assumptions and adjustments described in the accompanying
notes. The unaudited pro forma consolidated statements of operations are
presented as if the Cutex Acquisition, the sale of the Existing Notes and the
application of the proceeds thereof had occurred as of the beginning of each
period presented. The unaudited pro forma consolidated statements of operations
do not purport to be representative of the Company's actual results of
operations had the events described above occurred as of the dates indicated or
what such results will be for any future periods. The unaudited pro forma
consolidated financial data are based upon assumptions that the Company
believes are reasonable and should be read in conjunction with the Consolidated
Financial Statements and accompanying notes thereto appearing elsewhere in this
Prospectus.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
COMPANY CUTEX ACQUISITION OFFERING
HISTORICAL HISTORICAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- -------- ----------- ---------
Net sales............... $59,938 $15,313 $ (470)(1) $74,781 $ -- $74,781
Cost of goods sold...... 26,940 7,732 (1,386)(2) 33,286 33,286
------- ------- ------- ------- ------ -------
Gross profit............ 32,998 7,581 916 41,495 41,495
------- ------- ------- ------- ------ -------
Marketing and selling
expense................ 15,692 655 1,113 (3) 17,460 17,460
498 (4) 498 498
General and administra-
tive expense........... 5,836 5,836 5,836
Incentive compensation.. 7,123 7,123 7,123
Depreciation and amorti-
zation................. 1,896 766 (5) 2,662 (337)(9) 2,325
276 (6) 276 (115)(10) (115)
(276)(11) 0
190 (12) 190
321 (13) 321
------- ------- ------- ------- ------ -------
Operating income........ 2,451 6,926 (1,737) 7,640 217 7,857
------- ------- ------- ------- ------ -------
Interest expense, net... (4,545) (2,692)(7) (7,237) 7,178 (14) (59)
(7,781)(15) (7,781)
Other income, net....... 565 565 565
------- ------- ------- ------- ------ -------
(Loss) income before in-
come tax............... (1,529) 6,926 (4,429) 968 (386) 582
Provision for income
tax.................... 1,727 949 (8) 2,676 (147)(16) 2,529
------- ------- ------- ------- ------ -------
Net (loss) income from
continuing operations.. $(3,256) $ 6,926 $(5,378) $(1,708) $ (239) $(1,947)
======= ======= ======= ======= ====== =======
Earnings (loss) per com-
mon share from continu-
ing operations......... $ (0.25) $ (0.13) $ (0.15)
Weighted average common
shares outstanding..... 12,715 12,715 12,715
Other Data:
Adjusted EBITDA......... $11,533 $ 6,926 $17,701 $17,701
Non-acquisition related
capital expenditures... 3,805 3,805 3,805
Gross profit as a per-
centage of net sales... 55.1% 49.5% 55.5% 55.5%
Adjusted EBITDA as a
percentage of net
sales.................. 19.2 45.2 23.7 23.7
See accompanying pro forma footnotes.
32
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
CUTEX
HISTORICAL
FOR THE
FOUR MONTHS
COMPANY ENDED ACQUISITION OFFERING
HISTORICAL APRIL 30, 1997 ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA
---------- -------------- ----------- -------- ----------- ---------
Net sales............... $77,791 $5,387 $ (181)(1) $82,997 $ -- $82,997
Cost of goods sold...... 35,431 2,834 (527)(2) 37,738 37,738
------- ------ ------- ------- ------- -------
Gross profit............ 42,360 2,553 346 45,259 45,259
------- ------ ------- ------- ------- -------
Marketing and selling
expense................ 19,602 224 390 (3) 20,216 20,216
233 (4) 233 233
General and administra-
tive expense........... 9,005 9,005 9,005
Depreciation and amorti-
zation................. 2,686 340 (5) 3,026 (111)(9) 2,915
123 (6) 123 (276)(11) (153)
190 (12) 190
321 (13) 321
------- ------ ------- ------- ------- -------
Operating income........ 11,067 2,329 (740) 12,656 (124) 12,532
------- ------ ------- ------- ------- -------
Interest expense, net... (3,924) (1,191)(7) (5,115) 5,066 (14) (49)
(7,781)(15) (7,781)
Other income, net....... 608 608 608
------- ------ ------- ------- ------- -------
Income before income
tax.................... 7,751 2,329 (1,931) 8,149 (2,839) 5,310
Provision for income
tax.................... 3,310 170 (8) 3,480 (1,213)(16) 2,267
------- ------ ------- ------- ------- -------
Net income from continu-
ing operations......... $ 4,441 $2,329 $(2,101) $ 4,669 $(1,626) $ 3,043
======= ====== ======= ======= ======= =======
Earnings per common
share from continuing
operations.............. $ 0.30 $ 0.31 $ 0.20
Weighted average common
shares outstanding..... 15,005 15,005 15,005
Other Data:
Adjusted EBITDA......... $13,644 $2,329 $ (277) $15,696 $15,696
Non-acquisition related
capital expenditures... 5,108 5,108 5,108
Gross profit as a per-
centage of net sales... 54.5% 47.4% 54.5% 54.5%
Adjusted EBITDA as a
percentage of net
sales.................. 17.5 43.2 18.9% 18.9%
See accompanying pro forma footnotes.
33
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1997
CUTEX
HISTORICAL
FOR THE SEVEN
COMPANY MONTHS ENDED ACQUISITION OFFERING
HISTORICAL APRIL 30, 1997 ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA
---------- -------------- ----------- -------- ----------- ---------
Net sales............... $99,033 $10,308 $ (241)(1) $109,100 $ -- $109,100
Cost of goods sold...... 45,501 5,416 (1,033)(2) 49,884 49,884
------- ------- ------- -------- -------- --------
Gross profit............ 53,532 4,892 792 59,216 59,216
------- ------- ------- -------- -------- --------
Marketing and selling
expense................ 25,463 430 754 (3) 26,647 26,647
434 (4) 434 434
General and administra-
tive expense........... 10,768 10,768 10,768
Incentive compensation.. -- -- --
Depreciation and amorti-
zation................. 3,308 596 (5) 3,904 (168)(9) 3,736
(115)(10) (115)
215 (6) 215 (368)(11) (153)
253 (12) 253
428 (13) 428
------- ------- ------- -------- -------- --------
Operating income........ 13,993 4,462 (1,207) 17,248 (30) 17,218
------- ------- ------- -------- -------- --------
Interest expense, net... (4,740) 0 (2,097)(7) (6,837) 6,744 (14) (93)
(10,374)(15) (10,374)
Other income, net....... 770 0 770 770
------- ------- ------- -------- -------- --------
Income before income
tax.................... 10,023 4,462 (3,304) 11,181 (3,660) 7,521
Provision for income
tax.................... 3,979 0 795 (8) 4,774 (1,563)(16) 3,211
------- ------- ------- -------- -------- --------
Net (loss) income from
continuing operations.. $ 6,044 $ 4,462 $(4,099) $ 6,407 $ (2,097) $ 4,310
======= ======= ======= ======== ======== ========
Earnings (loss) per
common share from
continuing operations.. $ 0.40 $ 0.43 $ 0.29
Weighted average common
shares outstanding..... 15,012 15,012 15,012
Other Data:
Adjusted EBITDA......... $17,301 $ 4,462 $ (396) $ 21,367 $ 21,367
Non-acquisition related
capital expenditures
("CAPEX").............. 5,879 5,879 5,879
Gross profit as a per-
centage of net sales... 54.3% 47.5% 54.3% 54.3%
Adjusted EBITDA as a
percentage of net
sales.................. 19.8 43.3 19.8 19.8
Ratio of Adjusted EBITDA
to interest expense.... 2.0x
Ratio of Adjusted EBITDA
less CAPEX to
interest............... 1.5
Ratio of net debt to Ad-
justed EBITDA.......... 4.2
See accompanying pro forma footnotes.
34
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 30, 1997
----------------------------------
OFFERING PRO
ACTUAL ADJUSTMENTS FORMA
-------- ----------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 4,987 $ 6,143 (17) $ 11,130
Accounts receivable..................... 26,259 26,259
Inventories............................. 18,413 18,413
Other current assets.................... 723 723
-------- -------- --------
Total current assets.................. 50,382 6,143 56,525
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation................. 19,314 19,314
INVESTMENTS............................... 3,483 3,483
INTANGIBLE ASSETS, net.................... 91,473 91,473
OTHER ASSETS.............................. 6,197 2,025 (12) 8,222
4,275 (13) 4,275
(3,368)(18) (3,368)
-------- -------- --------
TOTAL ASSETS.............................. $170,849 $ 9,075 $179,924
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................ $ 8,382 $ -- $ 8,382
Accrued expenses........................ 10,024 (1,719)(18) 8,305
Current maturities of long-term debt.... 3,000 (3,000)(18) --
-------- -------- --------
Total current liabilities............. 21,406 (4,719) 16,687
LONG-TERM DEBT:
Existing Bank Credit Facility
Term A loan............................. 21,250 (21,250)(19) --
Term B loan............................. 49,250 (49,250)(19) --
Revolving credit agreement.............. 13,776 (13,776)(19) --
Other................................... 642 642
New Credit Facility
Term loans.............................. -- -- --
Revolving credit agreement.............. -- -- --
Senior Subordinated Notes............... -- 100,000 (18) 100,000
-------- -------- --------
Total long-term debt.................. 84,918 15,724 100,642
DEFERRED INCOME TAXES AND OTHER LIABILI-
TIES..................................... 1,701 1,701
MINORITY INTEREST IN SUBSIDIARY........... 3,919 3,919
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock......................... -- --
Common stock............................ 150 150
Paid-in capital......................... 62,899 62,899
Note receivable, net of discount........ (1,437) (1,437)
(Accumulated deficit) retained earn-
ings................................... (1,234) (1,930)(18) (3,164)
Foreign currency translation adjust-
ment................................... (1,473) (1,473)
-------- -------- --------
Total stockholders' equity............ 58,905 (1,930) 56,975
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUI-
TY....................................... $170,849 $ 9,075 $179,924
======== ======== ========
See accompanying pro forma footnotes.
35
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL DATA (UNAUDITED)
Background and Basis of Presentation
During March 1997, the Company entered into an Asset Purchase Agreement with
Conopco, Inc. d/b/a Chesebrough-Pond's USA Co. in order to acquire the rights
to 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 purchase price approximated $41.4 million including amounts paid to
Chesebrough-Pond's USA of $37.5 million, inventory acquired from Chesebrough-
Pond's USA of $600,000 and inventory acquired from Jean Philippe of $3.3
million. In addition, the Company incurred debt-related acquisition costs of
approximately $2.6 million and other direct acquisition fees and expenses of
$1.4 million. This acquisition is accounted for under the purchase method of
accounting. Funds were provided by additional long-term debt and the
transaction was completed on April 30, 1997.
During March 1997, the Company entered into an Asset Repurchase Agreement
with Jean Philippe, the entity that previously held the license 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. In connection with the termination on April 30, 1997 of the
license agreement between Conopco, Inc. and Jean Philippe by Carson as
successor in interest to Conopco, Inc., Carson acquired certain assets of Jean
Philippe used in connection with the Cutex license agreement.
On April 8, 1997, the Company acquired the complete Let's Jam product line
from New Image Laboratories, Inc. in a cash transaction valued at $5.6
million. The pro forma consolidated data presented excludes all pre-
acquisition results of Let's Jam hair styling products due to immateriality
and excludes all pre-acquisition results of Jean Philippe. In the five month
period ended September 30, 1997 since the acquisitions, the Company generated
net sales of $4.3 million, gross profit of $2.2 million and EBITDA of $1.7
million from Let's Jam products and the Cutex products previously sold by Jean
Philippe. There is no assurance that the Company will continue to achieve the
same rate of performance.
EBITDA represents earnings before interest, taxes, depreciation and
amortization and Adjusted EBITDA represents EBITDA before nonrecurring
incentive compensation charges. While EBITDA and Adjusted EBITDA should not be
construed as substitutes for operating earnings (loss) or net income (loss)
(as determined in accordance with generally accepted accounting principles) as
measures of the Company's performance or to net cash provided by operating,
investing and financing activities (as determined in accordance with generally
accepted accounting principles) as measures of the Company's ability to meet
cash needs, the Company believes that EBITDA and Adjusted EBITDA are measures
commonly reported and widely used by investors and other interested parties as
measures of a company's operating performance and debt service ability because
they assist in comparing performance on consistent basis without regard to
depreciation and amortization, which can vary significantly depending upon
accounting methods (particularly when acquisitions are involved) or non-
operating factors (such as historical cost). Accordingly, this information has
been disclosed in this Prospectus to permit a more complete comparative
analysis of the Company's operating performance relative to other companies
and of the Company's debt servicing ability. However, EBITDA and Adjusted
EBITDA may not be comparable in all instances to other similar types of
measures used. No historical information with respect to depreciation and
amortization is available for Cutex; accordingly, Adjusted EBITDA for Cutex
equals operating income.
The historical financial information has been derived from the Company's
Consolidated Financial Statements appearing elsewhere in this Prospectus.
Acquisition Adjustments
(1) As a result of the termination of the Jean Philippe license agreement
upon the Cutex Acquisition, the Company has recorded a pro forma reduction in
net sales equal to the royalty fee paid to Chesebrough-Pond's USA by Jean
Philippe, in accordance with the license agreement. Jean Philippe manufactured
and marketed
36
Cutex branded nail enamel, nail care implements and lipsticks under a
licensing agreement with Chesebrough-Pond's USA. All financial results of Jean
Philippe have been excluded from the Company's pro forma results, including
the payment of royalties to Chesebrough-Pond's USA. Concurrent with the Cutex
Acquisition, the Company began to directly market and distribute the Cutex
branded nail enamel, nail care implements and lipsticks previously sold by
Jean Philippe.
(2) The Company entered into a manufacturing agreement with Chesebrough-
Pond's USA to manufacture nail polish remover at standard contractual costs
and manufacturing overhead rates. As a result, a pro forma adjustment has been
included to lower cost of goods sold to equal the total cost of units sold
using these new contractual rates.
(3) The Company entered into an agreement with AM Cosmetics, a related
party, to sell products under the Cutex brand name. See "Relationships and
Related Transactions--AM Cosmetics." As a result, a pro forma adjustment has
been included to increase selling expense by the contractual rate of 7.5% of
net sales of Cutex products.
(4) The Company entered into a transitional services agreement for
accounting services, order processing and similar services with Chesebrough-
Pond's USA. As a result, a pro forma adjustment has been included to increase
selling expense in accordance with this agreement.
(5) Goodwill of approximately $40.9 million was recorded as a result of the
Cutex Acquisition and is being amortized over a period of 40 years. The
Company is currently performing a valuation of the Cutex assets acquired. As a
result, the amount assigned to goodwill and the amortization of intangibles
may change based upon the results of this valuation.
(6) Debt issue costs associated with the Cutex Acquisition of $2.6 million
are being amortized over the life of the debt of seven years.
(7) A pro forma adjustment has been included to record incremental interest
expense at the Company's actual borrowing rates on $44.3 million of debt used
to finance the Cutex Acquisition.
(8) The net effect of the Cutex Acquisition and the related pro forma
adjustments has been taxed at the Company's historical marginal tax rate.
Offering Adjustments
(9) Amortization of debt issue costs recorded on the Existing Bank Credit
Facility has been reversed. These debt issue costs were written off and
reported as an extraordinary loss upon issuance of the Existing Notes.
(10) Amortization of the discount on the senior subordinated notes, PIK
subordinated notes and junior subordinated notes issued in connection with the
Aminco Acquisition has been reversed. These notes were repaid using the
proceeds of the Company's initial public offering in October 1996.
(11) Amortization of debt issue costs recorded as a result of the Cutex
Acquisition has been reversed. These debt issue costs were written off and
reported as an extraordinary loss upon issuance of the Existing Notes.
(12) Concurrently with the consummation of the sale of the Existing Notes,
Carson Products and the Company entered into a New Credit Facility with Credit
Agricole Indosuez, as agent and a lender, which include (i) a $50.0 million
acquisition term loan (the "Term Loan Facility") and (ii) a $25.0 million
revolving credit facility (the "Revolving Credit Facility"). The final
maturity date for each of the Term Loan Facility and the Revolving Credit
Facility is October 2006 and 2003, respectively. Borrowings under the Term
Loan Facility and
37
the Revolving Credit Facility will generally bear interest at the Base Rate
(as defined in the Credit Agreement relating to the New Credit Facility) plus
1.0% and the Base Rate plus 0.5%, respectively, or at Carson Products' option,
the Eurodollar Rate (as defined in the Credit Agreement) plus 2.5% and the
Eurodollar Rate plus 2.0%, respectively. Debt issue costs related to the New
Credit Facility of $2.0 million have been recorded and are being amortized
over the estimated life of the debt.
(13) Debt issue costs associated with the sale of the Existing Notes were
approximately $4.3 million and are being amortized over the ten year life of
the Existing Notes.
(14) Interest expense recorded on the Existing Bank Credit Facility has been
reversed.
(15) Interest expense associated with the Existing Notes has been recorded
at the rate of 10 3/8%.
(16) The effect of the adjustments related to the sale of the Existing Notes
has been taxed at the Company's historical marginal tax rate.
(17) Represents cash proceeds, net of expenses related to the sale of the
Existing Notes and the New Credit Facility, received from the Existing Notes.
(18) Represents the issuance of the Existing Notes. Debt issuance costs with
respect to the Existing Bank Credit Facility of approximately $2.0 million,
net of related tax benefits, was written off due to the retirement of such
debt with a portion of the net proceeds from the sale of the Existing Notes.
(19) Represents repayment of existing indebtedness with a portion of the
sale of the Existing Notes and debt issue costs associated with the sale of
the Existing Notes and the New Credit Facility of $4.3 million and $2.0
million, respectively. Debt repayment includes the following:
Current maturities.................................................. $ 3,000
Term A loan......................................................... 21,250
Term B loan......................................................... 49,250
Revolving credit agreement.......................................... 13,776
-------
Total repayment of existing indebtedness.......................... $87,276
=======
38
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT FOOTNOTES)
Set forth below are selected consolidated historical financial data of the
Predecessor and the Company as of the dates and for the periods shown.
Effective December 31, 1996, the Company changed the end of its fiscal year
from March 31 to December 31. References herein to the "Transition Period"
refer to the nine months ended December 31, 1996. The selected consolidated
historical financial data of the Predecessor as of March 31, 1993 and 1994 and
for the fiscal years ended March 31, 1993 and 1994 were derived from audited
consolidated historical financial statements of the Predecessor not included
in this Prospectus. The selected consolidated historical financial data of the
Predecessor as of March 31, 1995 and for the fiscal year ended March 31, 1995
and for the period from April 1, 1995 through August 22, 1995 were derived
from the audited consolidated historical balance sheet not included in this
Prospectus and the audited historical statements of income and of cash flows
of the Predecessor for such periods appearing elsewhere in this Prospectus.
The selected consolidated historical financial data of the Company as of March
31, 1996 and for the period from August 23, 1995 through March 31, 1996 and
for the Transition Period were derived from the audited consolidated
historical financial statements of the Company for such periods appearing
elsewhere in this Prospectus. The selected consolidated historical data of the
Company as of December 31, 1996 were derived from the audited financial
statements of the Company appearing elsewhere in this Prospectus. The selected
consolidated historical financial data of the Company as of and for the nine
months ended September 30, 1996 and 1997 were derived from the unaudited
consolidated historical financial statements of the Company appearing
elsewhere in this Prospectus. The selected consolidated historical financial
data of the Company for the nine months ended September 30, 1996 and 1997 are
unaudited; however, in the opinion of management such unaudited data include
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the information included therein. The results of
operations for the nine months ended September 30, 1996 and 1997 are not
necessarily indicative of the results for the entire fiscal year or any other
interim period. Because of the revaluation of the assets and liabilities and
related impact to the statement of operations, the financial statements of the
Predecessor for the periods prior to August 22, 1995 are not strictly
comparable to those of the Company subsequent to that date. The selected
consolidated historical financial data should be read in conjunction with
"Unaudited Pro Forma Consolidated Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Predecessor and the Company and
accompanying notes thereto appearing elsewhere in this Prospectus.
PREDECESSOR(A) COMPANY(A)
-------------------------------------------- ----------------------------------------
NINE MONTHS
TRANSITION ENDED
FISCAL YEAR ENDED MARCH 31, FULL FISCAL YEAR 1996 PERIOD SEPTEMBER 30,
------------------------------- ---------------------- FROM ----------------
AUGUST 23 APRIL 1,
APRIL 1 TO 1995 TO 1996 TO
AUGUST 22, MARCH 31, DECEMBER 31,
DECEMBER 31, 1996 1993 1994 1995 1995 1996 1996 1996 1997
- ----------------- --------- --------- --------- ----------- ---------- ------------ ------- -------
Statement of Operations
Data:
Net sales............... $ 49,335 $ 50,108 $ 58,126 $26,854 $41,465 $59,938 $56,488 $77,791
Cost of goods sold(b)... 21,585 24,222 25,692 11,513 18,806 26,940 24,853 35,431
--------- --------- --------- ------- ------- ------- ------- -------
Gross profit............ 27,750 25,886 32,434 15,341 22,659 32,998 31,635 42,360
Marketing and selling
expense................ 14,863 14,639 17,888 7,467 9,581 15,692 13,283 19,602
General and administra-
tive expense........... 5,453 6,834 5,246 2,276 5,061 5,836 6,658 9,005
Incentive
compensation(c)........ -- -- -- -- -- 7,123 7,123 --
Depreciation and amorti-
zation................. 695 828 1,085 502 1,331 1,896 1,830 2,686
--------- --------- --------- ------- ------- ------- ------- -------
Operating income........ 6,739 3,585 8,215 5,096 6,686 2,451 2,741 11,067
Interest expense........ (115) (97) (136) (56) (4,487) (4,545) (5,523) (3,924)
Net income (loss)....... 4,586 1,511 5,438 3,934 1,104 (6,783) (4,093) 4,441
39
PREDECESSOR(A) COMPANY(A)
------------------------------------ ---------------------------------------
NINE MONTHS
FISCAL YEAR ENDED TRANSITION ENDED
MARCH 31, FULL FISCAL YEAR 1996 PERIOD SEPTEMBER 30,
----------------------- ---------------------- FROM ---------------
AUGUST 23 APRIL 1,
APRIL 1 TO 1995 TO 1996 TO
AUGUST 22, MARCH 31, DECEMBER 31,
DECEMBER 31, 1996 1993 1994 1995 1995 1996 1996 1996 1997
- ----------------- ------ ------ ------ ----------- ---------- ------------ ------- -------
OTHER DATA:
Adjusted EBITDA(d)...... $7,434 $4,521 $9,450 $5,601 $8,199 $11,533 $11,875 $13,644
Non-acquisition related
capital expenditures... 1,330 1,515 974 375 1,470 3,805 3,895 5,108
Net sales growth(e)..... (1.2)% 1.6% 16.0% N/A N/A 18.6% 13.3 37.7
Adjusted EBITDA
growth(e).............. (14.1) (39.2) 109.0 N/A N/A 17.2 36.7 14.9
Ratio of earnings to
fixed charges(f)....... 66.6 44.2 66.2 111.3 1.5 0.7 0.7 2.8
PREDECESSOR COMPANY
----------------------- -------------------------------------
MARCH 31,
----------------------- MARCH 31, DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1996 1996 1997
------- ------- ------- ---------- ------------ -------------
BALANCE SHEET DATA:
Working capital......... $14,256 $11,267 $15,140 $13,855 $15,852 $ 28,976
Total assets............ 37,572 38,609 43,863 87,980 97,529 170,849
Total debt (including
current maturities).... 288 -- -- 66,788 27,101 87,918
Stockholders' equity.... 30,473 29,313 34,358 9,775 54,215 58,905
- --------
(a) The period beginning August 23, 1995 reflects data of the Company and its
subsidiaries. The periods prior to and including August 22, 1995 reflect
data of the Predecessor, all of the stock of which was acquired by the
Company on August 23, 1995. See "The Company--Background." Because of the
revaluation of the assets and liabilities acquired and the related impact
to the statement of operations, the financial statements of the
Predecessor for the periods prior to August 23, 1995 are not strictly
comparable to those of the Company subsequent to that date.
(b) During the second quarter of 1997, the Company changed its method of
valuing inventories in the United States from the lower of last-in, first-
out (LIFO) cost or market to the lower of first-in, first-out (FIFO) cost
or market. To the extent material, the effect of this change has been
reflected in all periods presented in these financial statements. See Note
15 of Notes to Consolidated Financial Statements of the Company appearing
elsewhere in this Prospectus.
(c) The Company recognized $7.1 million of non-recurring incentive
compensation charges during the nine-month period ended December 31, 1996
relating to costs under certain long-term incentive compensation
agreements and the purchase of shares prior to its initial public offering
by several outside directors and certain members of senior management and
for the shares of Carson South Africa awarded to certain members of its
management. Approximately $6.3 million of these charges were incurred in
the six months ended December 31, 1996.
(d) EBITDA represents earnings before interest, taxes, depreciation and
amortization, and Adjusted EBITDA represents EBITDA before nonrecurring
incentive compensation charges. While Adjusted EBITDA should not be
construed as a substitute for net income or a better indicator of
liquidity than cash flow from operating activities, which are determined
in accordance with generally accepted accounting principles, it is
included herein to provide additional information with respect to the
ability of the Company to meet its future debt service, capital
expenditure and working capital requirements. Adjusted EBITDA is not
necessarily a measure of the Company's ability to fund its cash needs.
(e) Current period versus the year earlier comparable prior period.
(f) Earnings represents pre-tax income from continuing operations plus
interest expense and amortization of debt issuance costs. Fixed charges
represents interest expense or capitalized interest and amortization of
debt issuance costs.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading manufacturer and marketer in the United States of
selected personal care products for both the ethnic market and the mass
market. The Company currently sells over 70 different products specifically
formulated to address the unique physiological characteristics of persons of
African descent in the United States and more than 60 other countries under
six principal brand names. The majority of the Company's net sales have
historically been derived from four categories of the ethnic health and beauty
aids market: hair relaxers and texturizers (which constituted approximately
42.1% of the Company's net sales in the twelve months ended September 30,
1997), hair color, men's depilatory products and hair care maintenance
products. The Company is also a leading marketer of nail care products to the
U.S. mass market under the Cutex brand name.
In the nine months ended September 30, 1997, 28.2% of the net sales of the
Company were to customers outside the United States. The following table
presents the Company net sales by geographic region for such period:
NET SALES TO: (IN THOUSANDS) % OF TOTAL
------------- -------------- ----------
United States................................... $55,895 71.8
Africa.......................................... 13,360 17.2
Other........................................... 8,536 11.0
------- ----
Total......................................... $77,791 100%
======= ====
With the exception of sales by Carson Products S.A. to South Africa,
Botswana, Lesotho, Namibia and Swaziland which are denominated in South
African Rand, all of the Company's sales are made in U.S. Dollars. The Company
does not view the exposure to Rand exchange rate fluctuations as significant
because the South African subsidiary incurs all of its costs in Rand. Assets
and liabilities of the Company's South African operations are translated for
consolidation purposes from South African Rand into U.S. Dollars at the rate
of currency exchange at the end of the fiscal period. Revenues and expenses
are translated at average monthly prevailing exchange rates. Resulting
translation differences are recognized as a component of stockholders' equity.
Adjustments resulting from translations have historically been immaterial to
the Company's financial statements.
In the first half of 1997, Carson South Africa consummated, through Carson
Products, S.A., 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. These
acquisitions are accounted for under the purchase method of accounting.
During March 1997, the Company entered into an Asset Purchase Agreement with
Conopco, Inc. d/b/a Chesebrough-Pond's USA Co. in order to acquire 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 purchase price was approximately $41.4
million, with funds provided by additional long-term debt, and the transaction
was completed on April 30, 1997. Net product sales of Chesebrough-Pond's USA
Cutex line approximated $18.2 million, excluding any results from the sale of
nail enamel or other products under license by Jean Philippe, for the twelve
months ended December 31, 1996. This acquisition is accounted for under the
purchase method of accounting.
During March 1997, the Company entered into an Asset Repurchase Agreement
with Jean Philippe. In connection with the termination of the license
agreement between Conopco, Inc. and Jean Philippe by Carson as successor in
interest to Conopco, Inc., Carson acquired certain assets of Jean Philippe
used to package, distribute and sell nail enamel and nail care treatment
products, nail care implements and lipstick under the Cutex
41
trademark in the United States and Puerto Rico on April 30, 1997. Immediately
upon consummation of the Jean Philippe Repurchase Agreement on April 30, 1997,
the license agreement with Jean Philippe was terminated. In the five months
ended September 1997, the Company generated net sales of approximately $3.1
million and operating profit of approximately $669,000 from the product
previously distributed by Jean Philippe.
During April 1997, the Company completed the acquisition of the Let's Jam
product line from New Image Laboratories, Inc. This acquisition added one of
the leading hair care maintenance brands in the ethnic retail market to the
Company's portfolio of brands. The purchase price was approximately $5.6
million in cash, subject to post-closing adjustments, funded primarily by
additional long-term debt. This acquisition is accounted for under the
purchase method of accounting.
Carson South Africa announced on November 13, 1997 that it had completed the
acquisition of A&J Cosmetics, a toiletries company. A&J Cosmetics manufactures
and owns the Sadie brand of toiletry products, which has been selling in the
ethnic market for over 20 years and competes primarily in the roll-on
deodorant market. Carson South Africa will fund the acquisition with the
issuance of shares of its common stock. The purchase consideration payable for
the acquisition is approximately $10.3 million, with an additional purchase
price contingency of up to $2.4 million based upon the after tax profit of the
business for the year ended December 31, 1998. Approximately $5.9 million of
the purchase price is payable on January 31, 1998, approximately $4.4 million
is payable on or before January 3, 1999 and the remainder (subject to
adjustment) is payable by no later than March 31, 1999.
EFFECT OF RECENT ACQUISITIONS ON RESULTS OF OPERATIONS
The consummation of recent acquisitions affected the Company's results of
operations in certain significant respects. The Cutex Acquisition and the
other recent acquisitions have been reflected using purchase accounting, with
the excess of the purchase price over the fair value of the identifiable net
assets being classified as goodwill. Therefore, depreciation and amortization
expense increased for periods following each such acquisition, and interest
expense also increased following the Cutex Acquisition due to increased debt
used to finance the Cutex Acquisition. Similarly, the Aminco Acquisition was
reflected using purchase accounting with the purchase price being allocated to
the Company's identifiable assets and liabilities based on fair values at the
date of acquisition, which was August 23, 1995. The excess of the purchase
price over the fair value of the Company's identifiable net assets has been
classified as goodwill. The depreciation and amortization expense of the
Company are significantly higher than the corresponding amounts for the
Predecessor. Additionally, interest expense increased due to debt used to
finance the Aminco Acquisition. Due to these increased expenses, the financial
statements of the Predecessor are not strictly comparable to those of the
Company for subsequent periods. However, the following table combines
historical fiscal 1996 data for the Predecessor and the Company in order to
facilitate discussion of financial results.
42
RESULTS OF OPERATIONS
STATEMENT OF OPERATIONS DATA
PREDECESSOR (A) COMBINED (A) COMPANY (A)
--------------- ---------------------- --------------------------------
FISCAL FISCAL NINE NINE NINE NINE
YEAR YEAR MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, SEPT. 30, SEPT. 30,
1995 1996 1995 1996 1996 1997
--------------- --------- ------------ ------------ --------- ---------
Data As a Percentage of
Net Sales:
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold(b)... 44.2 44.4 44.2 44.9 44.0 45.5
----- ----- ----- ----- ----- -----
Gross profit............ 55.8 55.6 55.8 55.1 56.0 54.5
Marketing and selling
expense................ 30.8 25.0 26.9 26.2 23.5 25.2
General and
administrative
expense................ 9.0 10.7 9.4 9.7 11.8 11.6
Incentive
compensation(c)........ -- -- -- 11.9 12.6 --
Depreciation and
amortization........... 1.9 2.7 2.5 3.2 3.2 3.5
----- ----- ----- ----- ----- -----
Operating income........ 14.1% 17.2% 17.0% 4.1% 4.9 14.2
EBITDA(d)............... 16.3 20.2 19.5 7.4 8.4 17.5
Adjusted EBITDA(d)...... 16.3 20.2 19.5 19.2 21.0 17.5
- --------
(a) The statement of operations of the Predecessor for the period from April
1, 1995 to August 22, 1995 is combined with the statement of operations of
the Company for the period August 23, 1995 to March 31, 1996. The
statement of operations of the Predecessor for the period from April 1,
1995 to August 22, 1995 is combined with the statement of operations of
the Company for the period August 23, 1995 to December 31, 1995. The
combined presentation is not in conformity with generally accepted
accounting principles but is included for comparative purposes.
(b) During the second quarter of 1997, the Company changed its method of
valuing inventories in the United States from the lower of last-in, first-
out (LIFO) cost or market to the lower of first-in, first-out (FIFO) cost
or market. To the extent material, the effect of this change has been
reflected in all periods presented in these financial statements. See Note
15 of Notes to Consolidated Financial Statements of the Company appearing
elsewhere in this Prospectus.
(c) The Company recognized $7.1 million of non-recurring incentive
compensation charges during the nine-month period ended December 31, 1996
relating to costs under certain long-term incentive compensation
agreements and the purchase of shares prior to its initial public offering
by several outside directors and certain members of senior management and
for the shares of Carson South Africa awarded to certain members of its
management. Approximately $6.3 million of these charges were incurred in
the six months ended December 31, 1996.
(d) EBITDA represents earnings before interest, taxes, depreciation and
amortization, and Adjusted EBITDA represents EBITDA before nonrecurring
incentive compensation charges. While EBITDA and Adjusted EBITDA should
not be construed as substitutes for net income or better indicators of
liquidity than cash flow from operating activities, which are determined
in accordance with generally accepted accounting principles, they are
included herein to provide additional information with respect to the
ability of the Company to meet its future debt service, capital
expenditure and working capital requirements. EBITDA and Adjusted EBITDA
are not necessarily measures of the Company's ability to fund its cash
needs.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Net Sales. Consolidated net sales increased 37.7% to $77.8 million in the
nine months ended September 30, 1997 from $56.5 million in the comparable
period in 1996. This increase is primarily a result of incremental net sales
related to the Cutex and Let's Jam acquisitions of $12.1 million and $1.2
million, respectively. Dark & Lovely Cosmetics generated year to date net
sales of $854,000. Sales of the Company's domestic core business, ethnic hair
care products, amounted to $41.7 million, a decrease of approximately 0.9% for
the nine months ended September 30, 1997 compared to the same period in 1996,
reflecting industry softness due in part to drug chain consolidation.
International sales including South Africa increased by 52.5% for the nine
months ended September 30, 1997. Carson South Africa continued to demonstrate
strong results with an increase in net sales
43
of 104.2% to $12.9 million in the nine months ended September 30, 1997 from
$6.3 million in the comparable period of 1996.
Gross Profit. Gross profit increased to $42.4 million in the nine months
ended September 30, 1997 from $31.6 million in the nine months ended September
30, 1996. Gross profit margin decreased to 54.4% from 56.0% for the nine
months ended September 30, 1997 compared to the same period in 1996. Gross
margin continues to be affected by inefficiencies in the logistics and
manufacturing processes, due in part to complexities associated with the rapid
growth in number of stock keeping units, multiple inventory locations and
difficulties in coordination with new outsource manufacturers. During the
third quarter the Company hired a Senior Vice President, with extensive
experience in consumer products manufacturing and logistics, who has assumed
responsibility for all operations at the Savannah plant. Additionally, in
October, the Company hired an experienced director of materials management who
will have full responsibility for procurement and warehousing of inventories.
Management believes it is taking the appropriate steps to address the
operational inefficiencies and to improve related customer service
performance.
Marketing and Selling Expenses. Marketing and selling expenses increased to
$19.6 million in the nine months ended September 30, 1997 from $13.3 million
in the nine months ended September 30, 1996, an increase of 47.6%. As a
percentage of net sales, these expenses increased to 25.2% from 23.5% during
this period. This increased spending is a result of increased advertising and
promotional spending as well as higher selling expenses associated with Cutex.
Advertising spending in 1997 is higher in part because the Company changed
advertising agencies early in 1996, and had ceased most advertising during
first and second quarters while awaiting new creative material.
General and Administrative Expenses. Excluding a nonrecurring incentive
compensation charge of $7.1 million recorded in the nine months ended
September 30, 1997, general and administrative expenses increased to $11.7
million in 1997 from $8.5 million in 1996, an increase of 37.7%. This increase
is due in part to increased amortization related to recent acquisitions
combined with increased professional fees and personnel costs associated with
the enhancement of infrastructure needed to support the Company's growth. As a
percentage of net sales, general and administrative expenses were level at
15.0% during this period.
Operating Income. As a result of the above changes, operating income
increased to $11.1 million in the nine months ended September 30, 1997 from
$2.7 million in the nine months ended September 30, 1996.
Interest Expense. Interest expense decreased to $3.9 million in the nine
months ended September 30, 1997 from $5.5 million in the nine months ended
September 30, 1996. The decreased interest expense is a result of the use of
the proceeds from the Company's initial public offering to retire certain
debt, offset in part by interest on the additional borrowings used to finance
the Cutex acquisition.
Other Income. Other income increased in the nine months ended September 30,
1997 compared to the same period in 1996 primarily as a result of the
management contract entered into in June 1996 with AM Cosmetics. Under the
terms of the investment and the management agreement, the Company is entitled
to a 12% paid-in-kind dividend on its $3.0 million preferred stock investment
in AM Cosmetics. In addition, as a result of the management contract, the
Company receives a minimum annual management fee of $500,000. Other income
includes the effects of these transactions since June 1996.
Provision for Income Taxes. The provision for income taxes increased to $3.3
million from $1.8 million during this period. The effective tax rate was 42.7%
for the nine months ended September 30, 1997. This rate is not comparable to
the 1996 rate due to nonrecurring incentive compensation charges recorded in
the second and third quarters of 1996 which were not fully deductible for tax
purposes.
Company Nine Months Ended December 31, 1996 Compared to Combined Nine Months
Ended December 31, 1995
The Company is comparing its actual historical results of operations for the
nine months ended December 31, 1996 to a Predecessor period of April 1, 1995
to August 22, 1995 combined with a Company period of
44
August 23, 1995 to December 31, 1995. This combined presentation is not in
conformity with generally accepted accounting principles but is included for
comparative purposes only.
Net Sales. Net sales increased from $50.5 million for the combined nine-
month period ended December 31, 1995 to $59.9 million for the nine-month
period ended December 31, 1996, an increase of 18.6%. In the United States,
relaxers and texturizers, hair color and hair care maintenance products each
generated net sales increases. Carson South Africa continued to demonstrate
strong results with an increase in net sales of 69.2% from $5.2 million for
the combined nine-month period ended December 31, 1995 to $8.8 million for the
nine-month period ended December 31, 1996.
Gross Profit. Gross profit increased from $28.2 million for the combined
nine-month period ended December 31, 1995 to $33.0 million for the nine-month
period ended December 31, 1996, an increase of 17.0%. This increase was almost
entirely due to the increase in net sales. Gross margin decreased from 55.8%
for the combined nine-month period ended December 31, 1995 to 55.1% for the
nine-month period ended December 31, 1996, primarily due to an inventory
adjustment related to repackaging and reformulation of several product lines.
Marketing and Selling Expenses. Marketing and selling expenses increased
from $13.6 million for the combined nine-month period ended December 31, 1995
to $15.7 million for the nine-month period ended December 31, 1996, an
increase of 15.4%. The increase in marketing and selling expenses was almost
entirely a result of the increase in net sales. As a percentage of net sales,
marketing and selling expenses decreased from 26.9% to 26.2% during this
period, primarily as a result of the timing of advertising and promotional
expenses.
General and Administrative Expenses. General and administrative expenses
increased from $4.8 million for the combined nine-month period ended December
31, 1995 to $5.8 million for the nine-month period ended December 31, 1996, an
increase of 20.8%. As a percentage of net sales, general and administrative
expenses increased from 9.4% to 9.7% during this period. This increase in
general and administrative expenses as a percentage of net sales was a
function of several factors relating to the Aminco Acquisition and the new
management structure. First, the new management team included the addition of
several new senior executives and the promotion of certain key executives that
increased personnel costs which management believed was necessary to support
the future growth of the Company. Second, the Company entered into a
management agreement with Morningside which provides strategic consulting
advice to the Company for a fee of $0.4 million per annum. Third, travel
expenses increased significantly due to the new management's focus on
international markets which required extensive travel. Finally bank fees and
professional fees increased due to the new credit agreements relating to the
debt incurred to finance the Aminco Acquisition.
Incentive Compensation Expenses. The Company recognized $7.1 million of
incentive compensation expenses during the nine-month period ended December
31, 1996 relating to costs under certain long-term incentive compensation
agreements and the purchase of shares prior to the initial public offering by
several outside directors and certain members of senior management and for the
shares of Carson South Africa awarded to certain members of its management. No
similar costs were previously recorded.
Depreciation and Amortization. Depreciation and amortization expense
increased from $1.3 million for the combined nine-month period ended December
31, 1995 to $1.9 million for the nine-month period ended December 31, 1996. As
a percentage of net sales, depreciation and amortization expense increased
from 2.5% to 3.2% during this period. This increase was primarily due to
goodwill amortization which resulted from the application of purchase
accounting. The increase in amortization due to the Aminco Acquisition was
partially offset by a change in the way the Company accounts for package
design costs. Prior to the Aminco Acquisition, the Predecessor capitalized
package design costs and amortized them over a four year period. Since the
Aminco Acquisition, the Company has expensed package design costs as incurred.
45
Operating Income and EBITDA. As a result of the above changes, operating
income decreased from $8.6 million for the combined nine-month period ended
December 31, 1995 to $2.5 million for the nine-month period ended December 31,
1996. EBITDA decreased from $9.8 million to $4.4 million during this period.
Interest Expense. Interest expense increased substantially from $2.7 million
for the combined nine-month period ended December 31, 1995 to $4.5 million for
the nine-month period ended December 31, 1996, as a result of the new debt
incurred to finance the acquisition.
Other Income. Other income decreased as a result of the elimination of
royalty income associated with the Caribbean. The Company now handles
Caribbean sales through its in-house sales organization. Investment income
decreased because most of the Predecessor's investments were liquidated in
conjunction with the acquisition. Additionally, in June of 1996, the Company
made an investment and entered into a management contract with AM Cosmetics.
Under the terms of the investment and the management agreement, the Company is
entitled to a 12% paid in kind dividend on its $3.0 million investment and an
annual management fee of the greater of $0.5 million or 1% of net sales.
Provision for Taxes. The provision for taxes decreased from $2.8 million to
$1.7 million during this period. The effective tax rate is not proportionate
to the statutory rates as a result of the majority of the incentive
compensation charge not being deductible for income tax purposes.
Combined Twelve Months Ended March 31, 1996 Compared to Predecessor Fiscal
Year Ended March 31, 1995
The Company is comparing the Predecessor's actual historical results of
operations for the year ended March 31, 1995 to a Predecessor period of April
1, 1995 to August 22, 1995 combined with a Company period of August 23, 1995
to March 31, 1996. This combined presentation is not in conformity with
generally accepted accounting principles but is included for comparative
purposes only.
The Company changed its method of accounting for inventories from LIFO to
FIFO. See Note 15 of Notes to Consolidated Financial Statements included
elsewhere in this offering memorandum.
Net Sales. Net sales increased from $58.1 million for fiscal 1995 to $68.3
million for fiscal 1996, an increase of 17.6%, as a result of positive market
acceptance of new product formulation and new packaging and the efforts of the
Company's in-house sales organization, which was established in April 1995. In
the United States, relaxers and texturizers, hair color, men's depilatory
products and hair care maintenance products all generated net sales increases.
Carson South Africa continued to show strong growth with an increase in net
sales of 80.4% from $3.6 million recorded for fiscal 1995 to $6.6 million for
fiscal 1996, a function of both the rapid expansion of the African market and
increasing market share. International sales excluding sales by Carson South
Africa also increased, primarily due to European sales where the Company
increased its sales representation.
Gross Profit. Gross profit increased from $32.4 million for fiscal 1995 to
$38.0 million for fiscal 1996, an increase of 17.2%. This increase was almost
entirely due to the increase in net sales. Gross margin decreased slightly
from 55.8% to 55.6% during this period.
Marketing and Selling Expenses. Marketing and selling expenses decreased
from $17.9 million for fiscal 1995 to $17.0 million for fiscal 1996, a
decrease of 4.7% despite an increase in net sales of 17.6%. As a percentage of
net sales, marketing and selling expenses decreased from 30.8% to 25.0% during
this period. This decrease was due to the Company's decision to establish an
in-house sales organization and terminate the majority of its sales broker
relationships. In fiscal 1995, brokers were paid a commission which averaged
slightly above 5%. The commission expense was almost entirely eliminated in
fiscal 1996. This savings was offset in part by an increase in sales salaries
and other payroll costs related to the new sales employees.
46
General and Administrative Expenses. General and administrative expenses
increased from $5.2 million for fiscal 1995 to $7.3 million for fiscal 1996,
an increase of 39.9%. As a percentage of net sales, general and administrative
expenses increased from 9.0% to 10.7% during this period. This increase in
general and administrative expenses as a percentage of net sales was a
function of several factors relating to the Aminco Acquisition and the new
management structure. First, the new management team included the addition of
several new senior executives and the promotion of certain key executives that
increased personnel costs which management believed were necessary to support
the future growth of the Company. Second, the Company entered into a
management agreement with Morningside which provides strategic consulting
advice to the Company for a fee of $0.4 million per annum. Third, travel
expenses increased significantly due to the new management's focus on
international markets which required extensive travel. Finally, bank fees and
professional fees increased due to the new credit agreements relating to the
debt incurred to finance the Aminco Acquisition.
Depreciation and Amortization. Depreciation and amortization expense
increased from $1.1 million for fiscal 1995 to $1.8 million for fiscal 1996.
As a percentage of net sales, depreciation and amortization expense increased
from 1.9% to 2.7% during this period. This increase was due to goodwill
amortization which resulted from the application of purchase accounting. The
increase in amortization due to the acquisition was partially offset by a
change in the way the Company accounts for package design costs. Prior to the
Aminco Acquisition, the Predecessor capitalized package design costs and
amortized them over a four year period. Since the Aminco Acquisition, the
Company has expensed package design costs as incurred. The application of
purchase accounting related to the Aminco Acquisition did not have a material
impact on the Company's depreciation expense.
Operating Income and EBITDA. As a result of the above changes, operating
income increased from approximately $8.2 million for fiscal 1995 to $11.8
million for fiscal 1996, an increase of 43.4%. As a percentage of net sales,
operating income increased from 14.1% to 17.2% during this period. EBITDA
increased from approximately $9.5 million to $13.8 million, an increase of
46.0% during this period.
Interest Expense. Interest expense increased substantially from $0.1 million
for fiscal 1995 to $4.5 million for fiscal 1996 as a result of the new debt
incurred to finance the Aminco Acquisition.
Other Income. Other income remained approximately the same for fiscal 1996
as compared to fiscal 1995. Investment income increased from $0.6 million for
fiscal 1995 to $1.1 million for fiscal 1996 as the Predecessor realized gains
on the liquidation of certain investment securities.
Provision for Taxes. The provision for income taxes increased from $3.2
million for fiscal 1995 to $3.5 million for fiscal 1996, an increase of 10.9%.
This increase occurred despite pre-tax income decreasing from $8.9 million in
fiscal 1995 to $8.6 million for fiscal 1996 as a result of goodwill
amortization of $0.7 million for fiscal 1996 that was not deductible for tax
purposes. Accordingly, the effective tax rate increased from 35.8% to 41.1%
during this period.
LIQUIDITY AND CAPITAL RESOURCES
On June 26, 1996, Carson Products invested $3.0 million in Morningside AM
Acquisition Corp., the parent of AM Cosmetics, a leading low-cost manufacturer
of cosmetics. The investment was made through the purchase of $3.0 million of
12% cumulative, payment-in-kind preferred stock. The Company's consolidated
statement of operations for periods subsequent to June 26, 1996 include the
dividend income from this investment, although dividends are anticipated to be
paid through the issuance of additional preferred stock. Therefore, it is
anticipated that no cash will be generated from this investment in the near
future. In connection with the investment, Carson Products entered into a
management agreement and certain related sales agreements and manufacturing
agreements with AM Cosmetics. See "Certain Relationships and Related
Transactions--AM Cosmetics."
The Company completed the offering of 4,818,500 shares of Class A common
stock on the NYSE on October 18, 1996 at a price of $14.00 per share. Of these
shares, 3,113,000 were sold by the Company with the
47
balance sold by selling stockholders, none of which included any members of
management or the principal investors. The Company used the net proceeds of
such offering to repay certain indebtedness of Carson Products used to finance
the Aminco Acquisition.
Concurrent with the sale of the Existing Notes, the Company entered into the
New Credit Facility which includes (i) a $50.0 million term loan to be used
solely for the purpose of making acquisitions (the "Term Loan Facility") and
(ii) a $25.0 million revolving credit facility (the "Revolving Credit
Facility"). The final maturity date for each of the Term Loan Facility and the
Revolving Credit Facility is October 2006 and 2003, respectively. Borrowings
under the Term Loan Facility and the Revolving Credit Facility will generally
bear interest at the Base Rate (as defined in the Credit Agreement evidencing
the New Credit Facility) plus 1.0% and the Base Rate plus 0.5%, respectively,
or at Carson Products' option, the Eurodollar Rate (as defined in the Credit
Agreement) plus 2.5% and the Eurodollar Rate plus 2.0%, respectively. The
obligations of Carson Products under the New Credit Facility are secured by
security interests in all accounts receivable, inventory, property, plant and
equipment and other personal, intellectual and real property of the Company
and its domestic subsidiaries, as well as by a pledge of the capital stock of
Carson Products and its subsidiaries. The New Credit Facility is guaranteed by
the Company and each present and future subsidiary of the Company (excluding
Carson Products, which is the primary borrower, and certain foreign
subsidiaries). The Credit Agreement contains customary covenants relating to,
among other things, (i) maintenance by the Company of certain total interest
coverage ratios, fixed charge coverage ratios and leverage ratios and (ii)
restrictions on the incurrence of additional liens or indebtedness. The Credit
Agreement also contains events of default customary for credit agreements of
this type. See "Risk Factors--Leverage and Debt Service" and "Risk Factors--
Subordination of the Notes and the Guarantees; Holding Company Structure."
The Revolving Credit Facility is available for working capital and other
general corporate purposes. The Term Loan Facility is to be used to consummate
permitted acquisitions, and will be available until November 6, 1998. The
Company used a portion of the net proceeds received from the sale of the
Existing Notes to repay all of the outstanding borrowings under the Existing
Bank Credit Facility. See "Use of Proceeds" and "Capitalization."
In the nine months ended September 30, 1997, net cash flow used in
operations was $7.0 million largely as a result of a $5.9 million increase in
inventory and a $10.0 million increase in accounts receivable offset in part
by a $4.3 million increase in current liabilities. The increase in accounts
receivable is primarily a result of collections through September 1997 of $5.7
million on total Cutex sales of $12.1 million. The Company believes that the
slow collections on Cutex sales is a temporary phenomenon related to the
transition of order entry, invoicing and cash collection by third parties on
behalf of the Company. The majority of the increase in inventory is in
finished goods and is in part attributable to increases in domestic core
products finished goods inventory necessary to improve customer service
performance.
Net cash used in investing activities for the nine months ended September
30, 1997 totaled $54.5 million which consisted primarily of cash paid for
acquisitions of business assets of $49.4 million and capital expenditures of
$5.1 million.
Net cash provided from financing activities for the nine months ended
September 30, 1997 totaled $62.3 million primarily as a result of additional
borrowings related to acquisitions. Additionally, the Company's South African
subsidiary completed an equity rights offering which generated $1.5 million of
cash, net of $4.2 million which was invested indirectly by the Company.
Carson South Africa consummated a rights offering of additional shares of
its common stock to its existing shareholders in June 1997 in order to raise
capital to fund the physical expansion of the Midland, South Africa plant,
complete the factory in Accra, Ghana, accelerate the development of recently
acquired brands and provide additional working capital. The Company
participated in the rights offering indirectly by having Carson Products
subscribe for additional shares in the amount of approximately $19.0 million
(approximately R4.2 million), and
48
therefore its ownership percentage remained approximately the same. The rights
offering raised approximately R25.9 million (approximately $5.7 million),
including amounts paid by Carson Products.
The Company's non-acquisition related capital expenditures for the nine
months ended September 30, 1997, the Transition Period and the combined fiscal
year ended March 31, 1996 were $5.1 million, $3.8 million and $1.8 million,
respectively. The Company anticipates that such capital expenditures for the
three months ended December 31, 1997 will be approximately $1.5 million.
The Company believes that cash flow from operating activities, existing cash
balances and available borrowings under its New Credit Facility will be
sufficient to fund working capital requirements, capital expenditures and debt
service requirements in the foreseeable future.
49
BUSINESS
GENERAL
The Company is a leading manufacturer and marketer in the United States of
selected personal care products for the both the ethnic market and the mass
market. The Company believes that it is one of the leading global
manufacturers and marketers of ethnic hair care products for persons of
African descent. The Company's flagship brand, Dark & Lovely, is the most
widely recognized ethnic brand name in the U.S. retail ethnic hair care
market. The Company has the number one retail market position in three of the
four ethnic hair care segments in the United States in which it currently
competes, according to IRI. The Company currently sells over 70 different
products specifically formulated to address the unique physiological
characteristics of persons of African descent under six principal brand names:
Dark & Lovely, Excelle, Beautiful Beginnings, Dark & Natural, Magic and Let's
Jam. The majority of the Company's net sales have historically been derived
from hair relaxers and texturizers, which are used to chemically treat and
straighten hair (constituting approximately 42.1% of the Company's net sales
in the twelve months ended September, 1997), hair color, men's depilatory
products and hair care maintenance products, primarily for persons of African
descent. The Company's hair care products are specifically formulated to
address the unique physiological characteristics of hair of persons of African
descent, which typically include curliness and dryness. In addition, the
Company is expanding its product offerings to other segments of the ethnic
personal care market, including cosmetics and skin care products.
The Company is also a leading marketer of nail care products to the U.S.
mass market under the Cutex brand name. Cutex is the leading brand of nail
polish remover, with an estimated 31.8% market share in the twelve months
ended June 1997, according to IRI. Other products marketed under the Cutex
brand name include nail enamel, nail care treatments and the newly introduced
women's depilatory product, Naturally Soft Body Creme. Carson acquired the
rights to use the Cutex brand name in the United States and Puerto Rico in
April 1997. The Company believes that the Cutex product line complements its
existing hair care and cosmetics product lines. The Cutex Acquisition is
expected to create an entree into the U.S. mass market for products developed
by Carson and increase the Company's overall distribution strength. The
Company has contracted with AM Cosmetics to manufacture, market and distribute
certain Cutex products to capitalize on AM Cosmetics's expertise in cosmetics
and to limit operating and financial risk. Management believes that AM
Cosmetics, an affiliate of the Company, is the largest manufacturer and
distributor of nail enamel in the United States.
In order to capitalize on new growth opportunities, the Company has
assembled a team of seasoned senior executives with extensive experience
serving the ethnic market and consumer products industry. As Chairman and
Chief Executive Officer, Dr. Leroy Keith, former President of Morehouse
College, entrepreneur and prominent member of the African-American community,
provides the Company with leadership and vision. Joyce M. Roche, President and
Chief Operating Officer, has over 20 years of experience in the health and
beauty aids industry, including positions as Senior Vice President of
Marketing and Vice President of Global Marketing at Avon and Director of
Marketing at Revlon. Robert W. Pierce, Executive Vice President of Finance and
Chief Financial Officer, has over 20 years of experience in the health and
beauty aids industry, most recently as chief financial officer of Maybelline,
Inc. Dennis Smith, Executive Vice President of Sales, has over 20 years of
experience in the ethnic hair care industry, including senior management
positions with a competitor and 14 years with the Company. Miriam Muley,
Executive Vice President of Marketing, has over 17 years of consumer products
industry experience, having held marketing positions at Avon, Bristol-Myers
Squibb Company's Clairol division and Johnson & Johnson, and as a Vice
President at Uniworld Group, a leading advertising agency targeting the
African-American market segment.
The Company has undertaken several important initiatives to enhance its
position in the ethnic hair care marketplace. In 1996, the Company's R&D
department finalized the development of several product innovations, including
the Fail Safe and DL 2000 hair relaxer technologies and a full line of hair
care maintenance products. The introduction of new and attractive product
packaging for many of the Company's products was also completed in 1996. The
in-house sales force formed in April 1995 was further expanded in 1996 with
the addition of several experienced senior sales executives. In addition, the
Company established its own
50
manufacturing plant in South Africa by acquiring a former Pfizer facility,
which began operations in early 1996, and recently completed a new
manufacturing facility in Ghana. The Company established a distribution
network, began training stylists through a strategic alliance with Servico
Nacional de Aprendizagem (SENAC), a national professional services training
organization, received governmental approvals for the sale of its complete
line of hair care products and, in the first quarter of 1997, began shipping
product to Brazil. The Company intends to use Brazil as a base for expanding
to other South American and Central American countries.
During the twelve months ended September 30, 1997, the Company generated, on
a pro forma basis, net sales of $109.1 million and Adjusted EBITDA of $21.4
million. The Company also currently markets its products in 60 countries
outside of the United States, primarily through local distributors.
International net sales represented 28.2% of total historical net sales for
the twelve months ended September 30, 1997. International net sales grew 51.5%
in the twelve months ended September 30, 1997 versus the twelve months ended
September 30, 1996. Over the approximate two-year period from the Aminco
Acquisition on August 23, 1995 through September 30, 1997, the Company has
experienced annualized net sales and Adjusted EBITDA growth of 28.1% and
15.3%, respectively.
INDUSTRY OVERVIEW
Ethnic Hair Care Market
The U.S. retail ethnic hair care market, principally targeting the distinct
hair care needs of African-Americans, was estimated, according to a July 1995
report published by Packaged Facts, an independent market research company
(the "Packaged Facts Report") to be a $1.2 billion retail business in 1995.
According to 1995 U.S. Census Data ("Census Data") published by the U.S.
Department of Commerce, the African-American population was approximately 34
million and represented 12.7% of the U.S. population. This segment of the U.S.
population is projected by the U.S. Department of Commerce to grow
significantly faster than the general population through the middle of the
next century. The personal income of African-Americans doubled from 1980 to
1990 and their combined purchasing power was estimated to be approximately
$260 billion in 1990, according to the Census Data. Moreover, the Packaged
Facts Report 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. According to IRI, sales in the domestic market for
ethnic hair care in the categories tracked by IRI declined by approximately
2.0% in the twelve months ended September 1997 compared to the twelve months
ended September 1996.
The U.S. retail ethnic hair care market for African-Americans is competitive
and highly fragmented, with a number of market participants that focus
specifically on this market. The five largest companies generated
approximately 49.1% of industry sales for the twelve months ended September
1997 with the remainder being generated by a number of smaller companies,
according to IRI. Most of the larger competitors in the ethnic hair care
market are privately owned and compete only in this market. A few general
market health and beauty aids companies produce a limited line of ethnic
products.
In addition to the retail segment of the U.S. ethnic hair care market, there
are also professional ethnic hair care salons which the Company estimates to
exceed 28,000 in the United States. According to market research studies
commissioned by the Company in 1990, which have been updated annually through
focus groups and other internal research conducted by the Company
(collectively, "Company Market Research"), approximately 40% of African-
American women patronize salons exclusively, 40% maintain their hair at home
exclusively and 20% switch between salons and home hair care. The professional
segment of the U.S. ethnic hair care market is also highly fragmented, with
the leading competitor being a general market health and beauty aids company.
The Company is engaged in market research and expects to enter the U.S. salon
market in the fourth quarter of 1997. See "--Growth Strategy."
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,
51
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. The
Company's experience in developing regions, such as South Africa, the
Caribbean and Brazil, indicates the percentage of women who patronize salons
is dramatically higher in these developing markets than in developed markets
such as the United States. These women tend to patronize salons because
relaxer products are generally unavailable on a retail basis, professionals
have the expertise, as well as ready access to hot water, which is necessary
for effective use of relaxer products, and the local salon is often a social
gathering place for its patrons. Although there is no independent market data
to support the size of the international market, the Company believes that the
international market is significant. For example, the Company estimates that
in Southern Africa, with a Black population of approximately 100 million,
manufacturers of ethnic hair care products generated approximately $40 million
in sales in 1995. Southern Africa refers to Angola, Botswana, Lesotho, Malawi,
Mozambique, Namibia, South Africa, Swaziland, Zambia and Zimbabwe.
The major segments of the ethnic hair care market in which the Company
competes are described below:
. Hair Relaxers and Texturizers. Chemical hair relaxing is the process of
permanently straightening curly hair. Texturizers generally work in a
similar manner as relaxers to loosen curly hair, but do not straighten
the hair completely. The amount of curl in any type of hair is
determined by the abundance of disulfide bonds as well as the shape of
the hair follicle from which the hair emerges, either straight, slightly
curved or curly. Relaxed hair serves as the foundation for and
facilitator of daily hair styling. Consequently, its popularity is not
significantly related to current fashion trends. For the person with
relaxed hair, relaxers represent a basic personal care product, similar
to shampoos and conditioners for the general market. Further, the
continual need for "touch-ups" approximately every six weeks requires
the relaxer user to frequently purchase relaxers and related products.
According to the Packaged Facts Report, over 50% of African-American
women use chemical relaxers in their hair. For persons of African
descent, chemical relaxation became popular in the 1940's with the
introduction of sodium hydroxide or "lye" relaxer which was the sole
product available until the Company invented and patented "no-lye," or
guanidine carbonate hydroxide relaxers in 1978. In the retail market,
no-lye relaxers are generally sold in kits which include a cream base
component and a chemical activator component, which are mixed together
to create the requisite chemical reaction. One of the most significant
sources of consumer complaints in the industry is inconsistent results
caused by mixing errors. Fail Safe technology, developed by the Company,
eliminates such mixing problems. Although lye relaxers do not require
mixing and tend to work faster than no-lye relaxers, they have a much
higher risk of hair damage and skin irritation than no-lye relaxers.
Until the Company invented no-lye relaxers, relaxing hair was relegated
primarily to salons where it was applied by trained technicians for
safety reasons. The introduction of Dark & Lovely no-lye relaxers by the
Company offered an effective and less expensive in-home alternative
which significantly changed the industry.
As of June 1997, the U.S. retail ethnic women's and children's relaxer
and texturizer segment was the largest category of U.S. retail ethnic
hair care products, representing approximately 29.2% of the U.S. retail
ethnic hair care market, according to IRI. The relaxer and texturizer
market is highly fragmented with almost 50 brands available; however,
according to IRI, the top five brands generated more than half of the
sales volume in 1996, with the Company's Dark & Lovely brand having the
largest share of the women's relaxer market with approximately 18.0% of
the total sales in this segment, and all of Carson's relaxer products
having an aggregate share of approximately 20.2% of total segment sales,
according to IRI.
. Hair Color. Hair coloring involves the addition of chemical coloring
agents to the natural pigment of hair, or a lightening or "lifting" of
the natural pigment followed by the addition of color to brighten hair.
The hair of individuals of African descent has more pigment in the hair
cortex than Caucasian hair. This type of hair also has a lower sulfur
content, a slightly lower lipid content and possesses sulfur-containing
bonds that have a different configuration than Caucasian hair. As a
consequence of
52
these characteristics, the pigment in hair of individuals of African
descent reacts to coloring agents differently than Caucasian hair and
chemically relaxed hair will react more quickly to lightening which can
result in a brassy appearance. All of the Company's Dark & Lovely hair
colors are formulated to react appropriately to the hair of individuals
of African descent to ensure the delivery of the intended color without
brassiness.
The three major categories of hair color are: temporary, semi-permanent
and permanent. Temporary hair colors are generally removed from the hair
in the first or second shampooing. Temporary color is only deposited on
the hair surface and for the most part, no chemical reactions take
place, so it is safe to use immediately after relaxing. Temporary color
can only deposit pigment, it cannot lighten the hair color. Semi-
permanent hair colors are more resistant to removal and are formulated
to last from four to six shampoos. They are applied without peroxide, so
they do not change the basic structure of the hair and are also safe to
use immediately after relaxing. Semi-permanent colors are only designed
to add color to the hair. Permanent hair colors produce the most
effective and durable coloration. Due to dye penetration of the cortex
of the hair as well as the addition of peroxide, these colors can both
lighten hair and deposit color. Therefore, permanent color offers the
greatest range of shades. According to the Packaged Facts Report,
approximately one quarter of all African-American women color their
hair, with approximately one half of this group coloring their hair at
home.
As of June 1997, the U.S. retail ethnic hair color segment represented
approximately 6.5% of the U.S. retail ethnic hair care market, according
to IRI. For the twelve months ended June 1997, according to IRI, Dark &
Lovely and Dark & Natural hair colors had a combined market share of
approximately 84.9% of this segment. The Company believes that it has
the leading market share in this segment. Three ethnic and two general
market health and beauty aids companies produce hair color product lines
specifically targeted to consumers of African descent.
. Hair Care Maintenance Products. The physiological differences between
the hair of individuals of African descent and Caucasian hair create the
need for a variety of products to treat or "maintain" the hair and
scalp. Hair is lubricated by the sebaceous gland which excretes oil that
flows down and lubricates the hair shaft. While this generally happens
in straight hair and in wavy hair, it is very difficult for oils to
follow the curves and undulations of curly or kinky hair. The lack of
oil causes curly or kinky hair to become very dry and brittle, leaving
the hair with a matte, almost dull finish. This condition is the major
reason that hair care maintenance products such as oil sheens, hair
dress conditioners, comb-outs/detanglers and wave products are popular
among individuals of African descent.
Women, children and men of African descent use a variety of products in
order to permanently change the structure of their hair. In most
instances, chemical processes (e.g., relaxing and color treating hair)
leave the hair more dry and brittle than it would be otherwise and can
significantly damage hair if used improperly. Thus there is an even
greater need to condition, replenish and protect hair before, after and
in between treatments. In order to protect the hair, strengthen it and
return it to a soft, shiny condition with a healthy-looking appearance,
the consumer in this market has an even greater need for hair care
maintenance products than her or his general market counterpart.
Numerous ethnic hair care companies and several general market health and
beauty aids companies sell hair care maintenance products to consumers
of African descent. For the twelve months ended June 1997, according to
IRI, Let's Jam recorded an approximately 4.7% market share in the highly
fragmented hair dress category, which is the second largest category,
representing approximately 18.5% of the U.S. ethnic hair care market.
. Men's Depilatory Products. "Razor bumps," known medically as
Pseudofolliculitis Barbae (PFB), is a condition which primarily affects
men of African descent. Razor bumps are both caused and aggravated by
shaving due to the way curly facial hairs grow on some men, because as
their beards
53
grow back after shaving with a razor, the sharp tip of each hair will
continue curling until it grows back into the skin. Razor bumps may lead
to an unpleasant appearance or even permanent disfigurement and can
cause great discomfort during the shaving process. The incidence of men
of African descent who suffer from some degree of razor bumps is
estimated to range from 35% to 40% and, of this group, an estimated 50%
seek some sort of relief, according to reports published in 1995 by the
National Medical Association, a group of predominantly African-American
physicians. The primary alternative to shaving is using a depilatory
such as the Company's Magic product line. The advantage of depilatories
is that they remove hair chemically by weakening and dissolving the hair
so that it can be easily removed give a smooth, close, razorless shave.
Because depilatories do not leave sharp tips on the ends of hair, they
reduce the probability that hair will grow back into the skin.
Two companies specializing in men's depilatories compete in this market
in the United States, but the Company leads this segment with an
approximately 73.7% market share for the twelve months ended June 1997,
according to IRI.
Ethnic Cosmetics Market
The physiological differences between the skin of women of African descent
and Caucasian women create the need for a variety of products specifically
manufactured for women of African descent. The differences between the two
groups stem from the wide variety of skin tones that are representative of
women of African descent versus Caucasian women. First, the skin tones of
women of African descent are captured in 33 distinct shades versus seven
distinct shades for Caucasian women. This variety of skin tones makes it
important for an ethnic cosmetics line to have a wide variety of shades to
appeal to the broader range of consumers. Second, hyperpigmentation and
hypopigmentation--or uneven skin tone--makes cosmetic selection more complex
for women of color. Uneven skin tone is a problem experienced by many African-
American women. Products that provide ample coverage are important to blend
away uneven skin tone color and provide a smooth, even palette. Third, certain
ingredients that are widely used in general market brands produce unacceptable
results for women of African descent. These ingredients include titanium
dioxide and zinc oxide, which produce a graying or whitening effect on darker
skin tone; oil-based formulas, which tend to clog skin pores of women of
African descent who have a greater tendency to have oily skin; and lanolin-
based formulas which are not conducive to the skin condition of African-
American women.
In 1995, the Packaged Facts Report projected that the U.S. retail cosmetics
segment would include approximately $251.0 million in sales of ethnic
cosmetics products. Sales of ethnic cosmetics products were forecasted to grow
at an annual rate of 15% in future years according to the same source.
Personal Care Market
. Nail Care Market. Nail care has been a rapidly growing segment in the
cosmetics market, with an increase in sales volume of approximately
12.8% over the twelve months ended September 1997, according to IRI.
Three segments, namely nail enamel/treatments and cuticle treatments,
artificial nail products and nail polish removers (including dryers and
thinners), make up the nail care market. According to IRI, for the
twelve months ended June 1997 Cutex had a market share of approximately
31.8% and 3.9% of the nail polish remover and nail enamel/treatments
segments, respectively.
. Women's Depilatory Market. Current methods of removing unwanted hair
include shaving with a razor (approximately 60%), waxing, and using a
creme or lotion depilatory (approximately 15%). Shaving, while fast,
easy and inexpensive, can cause nicks, cuts, razor burns and bumps.
Shaving with a razor must be performed more often to maintain smooth
skin. Waxing, while longer lasting, can be very painful and expensive if
done in a salon on a regular basis. Depilatories offer longer lasting
smoothness, and are safer and less likely to cause burns or bumps.
Current depilatory products often contain an unpleasant odor and are not
completely effective in removing unwanted hair.
54
For the twelve months ended June 1997, the U.S. retail women's depilatory
category was estimated at approximately $73.3 million in sales by IRI.
Nair (with approximately 28.0% market share), Sally Hansen (with
approximately 26.8% market share) and Neet (with approximately 7.5%
market share) represent the principal brands, according to IRI,
targeting women aged 18-44 years. Carson, with its almost century-old
expertise in men's depilatories, is introducing its first women's
depilatory product under the Cutex Naturally Soft Body Creme brand name.
The Company believes it has an opportunity to penetrate this market with
a product that delivers smooth, soft skin in less time than existing
brands. In addition, the Company believes that the pleasant scent and
ease of use of the brand should give it a competitive advantage.
COMPETITIVE STRENGTHS
The Company had the number one U.S. retail market position in three of the
four ethnic hair care categories in which it competes (hair relaxers and
texturizers, hair color and men's depilatory products) for the twelve months
ended June 1997, according to IRI. The acquisition of the Let's Jam brand name
adds one of the leading brands in the fourth category, ethnic hair care
maintenance products. According to the same source, the Cutex brand name had
the number one market position in the United States in nail polish remover
during the same period. The Company attributes its leading market positions to
a number of competitive strengths, including its strong brand names, dedicated
sales force, broad distribution, R&D capabilities and experienced management
team.
. Strong Brands. The Company currently sells its products under seven
principal brand names: Dark & Lovely, Excelle, Beautiful Beginnings,
Dark & Natural, Magic, Let's Jam and Cutex. The Company's flagship
brand, Dark & Lovely, is the most widely recognized ethnic brand name in
the U.S. retail ethnic hair care market for African-Americans and Cutex
is the leading brand name for nail polish removers in the U.S. mass
market. The Company believes that the strength of its brands is based
upon product quality and value, 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
that it has the largest direct sales force serving the U.S. retail
ethnic hair care market. The Company also utilizes the experienced sales
force of AM Cosmetics, an affiliate of the Company, in the U.S. mass
market. Both of these sales forces enhance the Company's ability to
further penetrate its markets with current and new products. 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 several
principal channels: mass merchandisers (e.g., WalMart, K-Mart), major
drug chains (e.g., Walgreens, Eckerd's, CVS/Revco), food chains (e.g.,
Winn Dixie, Kroger), discount chains (e.g., Family Dollar, Dollar
General), and B&Bs (e.g., Alberto-Culver Company's Sally's Beauty Supply
stores and members of the National Beauty Supply Dealers Association).
See "--Distribution and Sales." The Company believes that the Cutex
Acquisition enhances the Company's overall distribution network.
. Focused Research and Development. The Company believes that its
tradition of technological innovation and its focused R&D effort are
important to maintaining its market leadership position. Three of the
ethnic hair care industry's most significant innovations were introduced
by the Company: the first hair color developed exclusively for hair of
persons of African descent (1972), the first no-lye relaxer (1978),
which provided a safe relaxer product for home use, and the Fail Safe
technology for no-lye relaxers (1993), 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. In addition, Carson has recently introduced a women's
depilatory product, Cutex Naturally Soft Body Creme, which the Company
believes eliminates many of the negative features usually associated
with women's hair removers. The Company, through its affiliation with AM
Cosmetics, also developed Dark
55
& Lovely Cosmetics, which the Company believes is the first
hypoallergenic, premium quality ethnic cosmetics line, to be marketed
through Carson's existing distribution channels.
. Experienced Management Team. Since the Aminco Acquisition, a team of
seasoned senior executives with extensive experience in the ethnic
market and consumer products industry has been recruited to build on the
Company's strong position in the global ethnic hair care market. As
Chairman and Chief Executive Officer, Dr. Leroy Keith, former President
of Morehouse College, entrepreneur and prominent member of the African-
American community, provides the Company with leadership and vision.
Joyce M. Roche, President and Chief Operating Officer, has over 20 years
of experience in the health and beauty aids industry, including
positions as Senior Vice President of Marketing and Vice President of
Global Marketing at Avon and Director of Marketing at Revlon. Robert W.
Pierce, Executive Vice President of Finance and Chief Financial Officer,
has had 20 years of experience in the health and beauty aids industry,
most recently as chief financial officer of Maybelline, Inc. Dennis
Smith, Executive Vice President of Sales, has over 20 years of
experience in the ethnic hair care industry, including senior management
positions with a competitor and 14 years with the Company. Miriam Muley,
Executive Vice President of Marketing, has over 17 years of consumer
products industry experience, having held marketing positions at Avon,
Bristol-Myers Squibb Company's Clairol division and Johnson & Johnson,
and as a Vice President at Uniworld Group, a leading advertising agency
targeting the African-American market segment. See "Management."
GROWTH STRATEGY
By adhering to the following strategies, the Company believes that it is
well positioned to grow both internally and through acquisitions, in order to
enhance its market positions in both the ethnic and mass markets for personal
care products:
. Increase Share of Existing Markets. The Company seeks to increase its
market share in existing markets through product innovation and ongoing
upgrading of existing products. The Company recently incorporated into
all of its relaxer products its latest innovation in relaxer technology,
called Fail Safe, which eliminates the problem of mixing errors which
occur with the in-home use of no-lye relaxers. The Company also is in
the process of updating the Cutex product line which it expects to re-
launch in the first quarter of 1998. The Company has been on an
aggressive schedule of new product introductions or existing product
upgrades with 19 SKUs having been introduced from January 1, 1996
through June 30, 1997 and an additional five SKUs expected to be
introduced during the remainder of 1997, in addition to Let's Jam
products, Dark & Lovely cosmetics and Carson Compositions professional
hair care products, including the following:
-- Improved Dark & Lovely Relaxer: The Company's flagship line was
upgraded to include its innovative Fail Safe technology.
Simultaneously, conditioning benefits (ultra-conditioning relaxer
base and shampoo) were added to every step of the relaxer system and
the packaging was updated. Company research indicates that the new
product out-performs both the competition and the former Dark &
Lovely product in five key areas: straightening, manageability,
softness, health and shine.
-- Improved Excelle Relaxer: The improved Excelle relaxer brand uses
Fail Safe technology as well as increased moisturizing benefits to
deliver more body and a finished, salon look.
-- Excelle Hair Care: An Excelle hair care moisturizing line was added
at the same time as the Excelle relaxer relaunch. Three "after-care"
products were added, highlighting the Excelle relaxer product and
providing necessary hair care maintenance items. The newest addition
to the Excelle maintenance line is Excelle Moisture Beads, a light
conditioning pomade formulated with botanicals.
-- Dark & Lovely Color Care Shampoo and Conditioner: Traditional
shampoos and conditioners can strip or dull the hair of individuals
of African descent that has been color treated. The
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Company has introduced a shampoo and conditioner especially designed
to add body and shine to color-treated hair to complement the
Company's hair color products.
-- Dark & Lovely Permanent Hair Color: The Company is introducing a new
color shade, Mocha Brown, to the Dark & Lovely hair color line,
raising the total number of permanent hair color shades to 16 SKUs.
-- Beautiful Beginnings: The Company is extending its children's brand
name into a pre-teen girls' relaxer product, Straight and Healthy,
as well as a new bubble bath product for boys and girls aged four to
eight years. Both products are targeted to mothers seeking mild and
gentle products for their children. The bubble bath is intended to
be the first product in a line of personal care products for
children of African descent.
-- Magic Mild Cream Formula: The Company has developed a mild cream
formula which is in a no-mix, easy-to-use form and is targeted to
younger users. The traditional Magic powder product line is sold
primarily to older men of African descent.
-- Magic Smooth: The Company has developed a men's mild depilatory
cream product especially formulated for use on the scalp, in
response to the growing number of African-American men who wear
their heads shaved for the athletic bald look.
. Leverage Brands into Cosmetics and Other New Product Categories. The
Company believes that its flagship Dark & Lovely brand name is
transferable to other ethnic health and beauty aids categories,
including cosmetics and skin care products. According to the Packaged
Facts Report, the cosmetics segment of the U.S. retail ethnic health and
beauty aids market was projected to be approximately $251 million in
retail sales in 1995, and is forecasted to grow at 15% per year through
1999. The Company recently introduced a new line of cosmetics targeted
to women of color under its Dark & Lovely brand name, which it began to
ship in June 1997. The Company intends to take advantage of (i) the
strong positive brand recognition of the Dark & Lovely name, (ii) its
ability to introduce its consumers to the Dark & Lovely cosmetics line
through inserts in Dark & Lovely relaxer and hair color kits (sales of
which total 11 million units annually), (iii) its strong relationships
with its current customers which will enable it to distribute new
cosmetics products efficiently through the same ethnic and general
market channels as the Company currently services and (iv) its contract
manufacturing arrangement with AM Cosmetics, a leading low-cost
manufacturer of cosmetics. Similarly, the Company used the Cutex brand
name to introduce its new women's depilatory product, Naturally Soft
Body Creme, which began to ship in October 1997.
. Continue International Expansion. The Company believes it is poised for
continued growth in its international markets, particularly Africa,
Brazil and the Caribbean, each of which has a significant concentration
of consumers of African descent. The Company's key strategic initiatives
to achieve this international growth include, depending on the market,
local manufacturing and distribution, introduction of new products and
new product categories and selected acquisitions to increase market
presence. The Company currently markets its entire product line
(excluding Cutex products) in over 60 countries worldwide under the same
brand names as it uses in the United States. International sales in the
twelve months ended September 30, 1997 of $28.0 million represented
28.2% of the Company's net sales for such period and increased 51.5%
compared to the twelve months ended September 30, 1996.
-- Africa: The Company currently sells to 17 of the 53 African
countries, with net sales for the twelve months ended September 30,
1997 of approximately $17.6 million, a 86.8% increase over the
twelve months ended September 30, 1996. In Southern Africa the
current customer base, which consists primarily of professional
salon owners and stylists, is serviced through regional distributors
and specialty cash-and-carry wholesale outlets. The Company
currently offers professional training through salons and seminars
in order to educate the professional salon owner or stylist as well
as to differentiate itself from its competitors in South Africa.
Retail product distribution is currently being expanded to mass
merchandisers and other large retail
57
chains in South Africa. The Company commenced its own manufacturing
operations in South Africa in March 1996 to support its African
strategic initiatives and is currently doubling its manufacturing
and warehousing capacity in South Africa. The Company expects to
benefit from the cost and quality advantages of in-house production
going forward. The Company recently completed a new manufacturing
facility in Ghana to support sales in West Africa. The Company's key
strategic initiatives to achieve growth throughout the African
continent are to: (i) continue market penetration and expansion of
the core Southern African and recently initiated West African
operations; (ii) establish and develop a distribution and/or
manufacturing facility in East Africa; (iii) extend existing product
lines to include related product categories such as cosmetics with
the introduction of Dark & Lovely cosmetics; and (iv) continue to
identify selected strategic acquisitions, such as the 1997 purchases
of the Nu-Me cosmetics and skin care brand, the Restore Plus relaxer
brand, and the Seasilk toiletries brand. In July 1996, Carson South
Africa sold 25% of its shares in an initial public offering on the
Johannesburg Stock Exchange. The proceeds of such offering were used
to purchase the manufacturing facility and related equipment as well
as to fund the Company's African strategic initiatives. Carson South
Africa consummated a rights offering in June 1997, the proceeds of
which will be used, among other things, to fund the expansion of its
manufacturing capacity and acceleration of the development of its
recently acquired brands.
-- Brazil and South America: Brazil has a population of approximately
100 million people of African descent, almost three times the number
of people of African descent as the United States. Moreover, the
Company believes that the ethnic hair care industry in Brazil is
underdeveloped and that the country's improving economy and
demographic trends make this market attractive for the introduction
of the Company's products. The Company established a distribution
network, began training stylists through a strategic alliance with
Servico Nacional de Aprendizagem (SENAC), a national professional
services training organization, received governmental approvals for
the sale of its complete line of hair care products and, in the
first quarter of 1997, began shipping product to Brazil. The Company
intends to use Brazil as a base for expanding its products and
facilities to other Central and South American countries.
-- Caribbean: In order to increase sales penetration in the Caribbean
region, the Company appointed a Caribbean Sales Manager position and
is investigating whether to establish a factory in the region which
would enable the Company to produce in a Caribbean Community and
Common Market (CARICOM) nation, thereby substantially reducing taxes
and tariffs. The Company has sold products into the Caribbean on an
export basis through brokers since before 1975. Carson's more
focused local marketing presence is reflected in net sales of $3.9
million for the twelve months ended September 30, 1997, a 119.9%
increase over the twelve months ended September 30, 1996.
. Enter the U.S. Professional Salon Market. The Company believes that its
R&D expertise and tradition as the technological innovator in the ethnic
hair care market will facilitate its entry into the U.S. professional
salon market. The Company has developed a new professional ethnic hair
care product line under the Carson Compositions brand name that will
offer certain technological advantages compared to ethnic hair care
products currently offered in salons, as well as a complementary line of
hair care maintenance products for exclusive purchase in salons. The
Carson Compositions line will be comprised of 54 SKUs in the relaxer,
hair color and maintenance categories. The Company estimates that there
are in excess of 28,000 African-American hair care salons in the United
States comprising an approximately $2.1 billion market in 1995,
according to Salon Information Systems, Inc. Company market research
indicates that African-American women are twice as likely as their
Caucasian counterparts to patronize salons and that of the total number
of African-American women who relax their hair, 40% are exclusive salon
users, 40% are exclusive at-home users, and 20% switch between salon and
at-home care. Of the approximately 40% of all African-American women who
color treat their hair, approximately one half treat their hair at
salons.
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The Company believes that it is well positioned to deliver products to
the U.S. professional salon market, in significant part because many
stylists purchase their ethnic hair care supplies at B&Bs, a
distribution channel in which the Company is well established.
Additionally, the Company has successfully entered the international
professional salon market through its South African subsidiary and is
implementing this strategy in other parts of Africa as well as in
Brazil. The Company is engaged in market research and entered the U.S.
salon market in the fourth quarter of 1997.
. Capitalize on Selective Acquisition Opportunities. In addition to
internally generated growth, the Company continually considers the
selective acquisition of related brands and businesses which would
increase the Company's market share or expand and complement its product
lines. In 1997, the Company acquired the right to use the Cutex brand
name and certain related assets in the United States and Puerto Rico,
the Let's Jam hair styling products brand name and certain related
assets, the Nu-Me cosmetics and skin care brand name and certain related
assets, the Restore Plus hair care brand name and certain related
assets, and the Seasilk toiletries brand name and certain related
assets. The Company believes that the Cutex Acquisition complements the
Company's existing product lines and will enable the Company to increase
its market share for existing products by expanding the number of stores
served by the Company. There can be no assurance that additional
suitable acquisition or joint venture candidates can be identified, or
if an acquisition is completed, that the operations will be successfully
integrated or otherwise not have an adverse effect on the Company.
PRODUCTS
The Company manufactures and markets a variety of products worldwide. The
following table sets forth the Company's principal products, by brand, as of
September 30, 1997 (with an asterisk indicating products expected to be
launched in the remainder of 1997 and first half of 1998.)
BRAND PRODUCTS
Relaxers: Creme Relaxer, Regular Strength; Creme Relaxer Plus,
Dark & Lovely Super Strength
Hair Care Maintenance Products: Corrective Leave-in Condition
Therapy; Pro Therapy Protein Intensive Conditioner; Rich &
Natural Hair Dress Conditioner; Silky Set Conditioning Set &
Wrap Lotion; Quik Freeze Super Shine Spritz; 3-N-1 Plus
Detangling/Conditioning Shampoo; Deep Conditioning Treatment;
Restore & Repair Reconstructive Hair Therapy; Quick Styling
Gel--Regular Hold; Quick Styling Gel--Super Hold; Ultra
Cholesterol Super Strengthening/Conditioning Treatment; 24-hr.
Therapy Moisture & Shine Replenisher; Ultra Strengthener Herbal
& Vitamin Hair Therapy; Restorer Super Strengthening Hot Oil;
Healthy Shine Oil Sheen Spray; Color Care Shampoo; Color Care
Conditioner
Hair Color: Permanent: Jet Black; Natural Black; Brown Sable;
Rich Auburn; Sunset Auburn; Autumn Red; Light Brown; Honey
Blonde; Golden Bronze; Chestnut Blonde; Spicy Cinnamon; Midnight
Blue; Black Ruby; Light Golden Blonde; Deep Copper; Mocha Brown
Reviving Colors Hair Color: Semi-Permanent: Radiant Black; Ebone
Brown; Spiced Auburn; Passion Plum; Natural Black; Brown
Cinnamon
Cosmetics: Easy-Blend Creme-to-Powder Foundations; Oil-Free
Liquid Foundations; Translucent Oil-Absorbing Loose Powders;
Oil-Controlling Pressed Powders; Oil-Free Powder Blushes; Color
Enhancing Eye Shadow Coordinates; Moisturizing Long-Wear Lip
Colors; Long-Wear Nail Enamels
Relaxers: Creme Relaxer, Regular Strength; Creme Relaxer Plus,
Excelle Super Strength
Hair Care Maintenance Products: Silky Sensation Shampoo; 5-
Minute Reconstructer; Leave-In Conditioning Mist; Moisture
Beads*
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Relaxers: Children's Relaxer; Straight and Healthy Pre-
Beautiful Beginnings Teen Relaxer
Hair Care Maintenance Products: Conditioning Shampoo Plus
Detangler; Leave-In Conditioner Plus Detangler; Natural
Oil Moisturizer Plus Detangler; Scalp Conditioner and
Hair Dress
Personal Care Products: Bubble Bath*
Dark & Natural Texturizers: Texture Enhancer, Regular Strength; Texture
Enhancer, Extra Strength; Texture Enhancer for Short Hair
and Fades
Hair Care Maintenance Products: Moisturizing Shampoo; Dry
Hair & Scalp Moisturizer Conditioner; Wave Lotion; Wave &
Style Gel
Hair Color: Jet Black; Natural Black; Darkest Brown
Moustache & Beard Color: Jet Black; Natural Black
Magic Men's Depilatory Products: Men's Shaving Powder: Gold,
Platinum, Blue and Red; Pre-shave/after-shave lotion;
Cream Shave: Regular and Mild; Smooth Creme for the
Scalp*
Let's Jam Hair Care Maintenance Products: Shining & Conditioning
Gel; Oil-Free Shine; Pudding; Set & Hold Gel; Pomade;
LiquaJam; Moisture Jam; Braid & Shine Mist; Alcohol Free
Spritz; Super Hold Spritz.
Cutex Nail Polish Removers: Quick & Gentle Removers--Protein-
Enriched Non-Acetone, Nourishing or Strengthening
Formulas
Nail Enamels: Ultra One-Coat*; Strong Nail Color; Color
Quick; Salon Set
Nail Treatments: Ultra One-Coat*; Strong Nail; Salon Set
Women's Depilatory Products: Naturally Soft Body Creme*
. Dark & Lovely. The Dark & Lovely relaxer was introduced in 1978 and
effectively changed the way African-American women could relax their
hair. The introduction of the no-lye technology by the Company
significantly reduced the possibility of hair damage and skin irritation
frequently caused by sodium-based (lye) relaxers. The Dark & Lovely
brand is positioned to appeal to the younger African-American woman who
is looking for a "straight" look.
For more than 20 years, Dark & Lovely Hair Color--the first hair color
formulated specifically for the distinct hair needs of women of African
descent--has been the market leader in ethnic hair color. Introduced in
1972, Dark & Lovely Hair Color targets consumers of African descent who
are interested in changing and enhancing the appearance of their hair
color. The brand is supported with a complete line of hair care
maintenance products for daily care. In addition, Reviving Colors by
Dark & Lovely offers women of African descent a range of semi-permanent
shades to choose from for a subtle change in color. Two new shades were
introduced in late 1996, offering a total of six shades. A line of hair
care products, Color Care, was launched in autumn of 1996 to address the
need to maintain and refresh hair that has been color-treated.
Dark & Lovely Cosmetics is an all new line of makeup designed
specifically for women of color. Dark & Lovely Cosmetics feature a
comprehensive line of makeup for eight product categories, created in
shades that match and compliment the diverse complexions of women of
color. The innovative Easy-Blend Creme-to-Powder Foundation is the first
of its kind for women of color, with each compact containing two
foundation shades for exact-to-match custom blending. The new line,
which has been dermatologist tested and is hypoallergenic, oil free,
non-comedogenic (does not clog pores) and non-acnegenic (does not cause
inflammation of the skin) became available through drug and mass retail
chains in August 1997.
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. Excelle. This is the Company's premier brand targeted to the more mature
fashion conscious African-American woman concerned with the appearance
and health of her hair who is trying to achieve a finished salon look at
home. Introduced in 1984, Excelle Salon Performance relaxer was
relaunched in 1996 with the aim of offering its target audience
healthier looking hair with luxurious body and sheen. The new Excelle
formula has improved relaxing capabilities and natural ingredients such
as aloe vera, vitamin E and protein. The Company believes that upgraded
packaging, a new hair care maintenance product line and increased
advertising helps to communicate the brand's upscale image to consumers.
. Beautiful Beginnings. This brand, targeted to parents of girls aged 5 to
12 years old, achieved the number three position in sales among
children's relaxers within three years of its introduction in 1993.
Beautiful Beginnings is an advanced conditioning Fail Safe relaxer
system for children with an exclusive Comfort Plus pretreatment that
protects sensitive young hair and scalp without inhibiting the relaxing
process. The Company believes Beautiful Beginnings is one of the safest
and gentlest children's relaxer systems available. The brand is
complemented with a complete line of hair care maintenance products. The
Company is introducing a line of personal care products for children of
African descent under this brand, beginning with a bubble bath product.
. Dark & Natural. This brand is targeted to men of African descent. The
Dark and Natural texturizer product delivers rich, natural-looking
waves. DL 2000 technology, a tension activated process in the Dark &
Natural product line, allows the user to control the amount of
relaxation in his hair through combing. Dark & Natural Hair Color for
men was introduced in 1992 and represents the first hair color targeted
to and developed exclusively for the African-American male. Dark &
Natural hair color products are designed to recapture the natural color
of hair that is dull or graying and produce a richer, deeper and
healthier looking color. The easy-to-mix formula contains no ammonia and
therefore is gentle to men's hair.
. Magic. This brand of men's depilatory products is the top-selling men's
depilatory product in the United States and globally among Black men. On
the market since 1901, Magic men's depilatory products are the only
depilatory products endorsed by the National Medical Association for the
treatment and prevention of "razor bumps". A no-mix cream targeted to
younger African-American men was introduced in the autumn of 1996. The
Company has also introduced Magic Smooth, a men's mild depilatory cream
product formulated for use on the scalp, targeted to African-American
men who wear their heads shaved for the athletic bald look.
. Let's Jam. This brand, introduced in 1989 and acquired by the Company in
1997, is a line of hair care products that caters to young and fashion-
conscious consumers in the ethnic market. New Image Laboratories, Inc.,
the original founder of Let's Jam, developed its product line
specializing in shining gels, but also including conditioners,
moisturizers, pomades and spritzes. The Let's Jam Shining & Conditioning
Gel is a leading product in the ethnic hair care maintenance category.
. Cutex. The Cutex brand name is known for premium nail care products and
has had an image of products that promote healthy and beautifully
manicured nails for nearly a century. Introduced as a cuticle care
product shortly after the turn of the century, the Cutex name received
wide-spread recognition with the creation of the industry-acclaimed Knox
Gelatin formula for Strong Nails enamel.
Cutex Quick and Gentle Removers are the number one nail polish removers
in the U.S. mass market, according to IRI and Cutex has been a market
leader in nail polish removers since its introduction in 1907. For the
twelve months ended June 1997, according to IRI data, the Cutex remover
has an estimated 31.8% share of the market with the closest brand
competitor having a 11.4% market share.
The Company will continue to offer the Cutex Strong Nail color enamel
with the most extensive collection of colors provided by Cutex in the
last seven years. The Cutex Strong Nail treatments will
61
continue to offer a product that fortifies and rejuvenates nails and
cuticles through vitamin enriched formulations.
The Company plans to introduce a premium line of one-coat nail enamels
and one-coat nail treatments in the first half of 1998. Cutex Ultra One-
Coat Nail Enamel will be offered in a large array of shades and will
provide consumers with a high quality, reasonably priced nail enamel.
The Cutex Ultra Treatments for nails and cuticles will offer the latest
technology in alpha-hydroxy acid, vitamin and botanical formulas to
nourish, enrich and protect nails and cuticles.
The Company also plans to introduce a line of nail enamels and treatments
under the Cutex name for the salon user, with color enduring nail
enamels and treatment therapy products which assist in promoting healthy
and strong nails. The salon line of products is also expected to be
launched in the first half of 1998.
The Company began to ship in October 1997 an advanced formula depilatory
for women, Naturally Soft Body Creme, under the Cutex brand name. This
formula is a thick emulsion that does not run, works fast, and
moisturizes, giving skin a lasting, smooth finish without the odor of
existing depilatories.
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 spent an average of approximately
1% of net sales for each of the fiscal years ended March 31, 1995 and 1996 and
the twelve months ended September 30, 1997 on market research, such as in-home
consumer product placements for new products, tracking studies, concept
testing, package testing and advertising testing aimed at improving its
understanding of, and effectively targeting, its consumer. The Company also
maintains a toll-free telephone number to answer consumer questions and to
gather consumer feedback used to focus the Company's marketing programs.
Over 15.9% of net sales in the twelve months ended September 30, 1997 was
allocated to advertising and consumer promotions. The Company believes that it
is the leading advertiser in the ethnic hair care market, with most of its
emphasis on television and print. The Company regularly advertises in U.S.
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.
In January 1996, the Company's advertising account for ethnic products was
awarded to Don Coleman & Associates, Inc., considered by the Company to be in
the forefront of ethnic advertising. The previous agency had been in place for
over 20 years. A new campaign for the Company's flagship brand, Dark & Lovely,
including television, print, and radio advertising was launched in 1996.
Marketing for the Company's Dark & Lovely cosmetics line and the complete
line of Cutex products (other than the depilatory) will be provided by AM
Cosmetics through its agreements with Carson Products, allowing the Company to
capitalize on AM Cosmetics's expertise in cosmetics. See "Certain
Relationships and Related Transactions--AM Cosmetics."
The Company is actively involved in numerous public relations and community
relationship events. In 1996, the Company was involved in the Olympics both in
Savannah and Atlanta. In Atlanta, the Company was one of the sponsors of La
Maison Olympique Africaine, The African Olympic House, providing the Company
with an opportunity to highlight its presence in the global African business
community. The Company's commitment to the African-American community is
demonstrated through several support programs including sponsorship of the
Black Family Reunion Program and a Safe Shelter Program for homeless women and
children and the
62
establishment of the Carson Scholarship Program at historically Black
universities such as Dillard, Hampton and Fisk Universities. From October to
December 1996, the Company, in conjunction with several leading African-
American women's organizations and the Celebrating Life Foundation,
participated in a campaign to promote awareness of breast cancer among
African-American women. The Company donated $150,000 from sales of Dark &
Lovely relaxer and hair color units during that period to the Celebrating Life
Foundation to help provide education on breast cancer and make screening
available to African-American women unable to afford the examination.
The Company is establishing an 800 number for its Cutex Research Center
which, with the assistance of AM Cosmetics, will be staffed by specialists to
provide consumers with assistance in nail and skin care. The Company believes
that its R&D effort provides the basis for setting high standards of quality
and technology in developing new high-performance beauty products. The Company
is also introducing the Cutex Research Center Seal of Approval which will be
on every Cutex product beginning in 1998 to signify the Company's commitment
to such standards.
DISTRIBUTION AND SALES
The Company's products are sold through five principal distribution channels
in the U.S. retail personal care market, as follows:
Mass Merchandisers. The Company's products are sold by mass merchandisers,
including WalMart and K-Mart. The Company's share of the ethnic hair care
products among mass merchandisers was 14.0% for the twelve months ended June
1997, according to IRI. The Cutex brand's share of nail polish removers among
mass merchandisers was 27.1% during the same period, according to the same
source.
Drug Chains. The Company's products are sold by drug chains, including
Walgreens, Eckerd's and CVS/Revco. The Company's share of the ethnic hair care
products among drug chains was estimated to be 13.6% for the twelve months
ended September 1997, according to the limited IRI data available for this
channel. The Cutex brand's share of nail polish removers among drug chains was
28.8% during the same period, according to the same source.
Food Chains. The Company's products are sold by food chains, including Winn
Dixie and Kroger. The Company's share of the ethnic hair care products market
among food chains was estimated to be 14.7% for the twelve months ended
September 1997, according to the limited IRI data available for this channel.
The Cutex brand's share of nail polish removers among food chains was 42.6%
during the same period, according to the same source.
Discount Chains. The Company's products are sold by discount chains,
including Family Dollar and Dollar General. Market share data for discount
chains is included by IRI in the mass merchandisers category.
Beauty & Barber Supply Stores. The Company's products are sold by Beauty &
Barber Supply Stores ("B&Bs"), which 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 Company
believes that it is a leading supplier of ethnic hair care products to B&Bs
and expects to be able to sell cosmetics and nail care products through this
channel as well. However, no third party market share data is available.
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. No single Company
customer accounted for more than approximately 5.7% of the Company's
consolidated net sales in the twelve months ended September 1997.
63
The Company's strong relationships with its customers in the various
distribution channels are enhanced by its direct sales force comprised of
divisional managers, regional managers 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 various distribution channels doing business in its geographic region.
The Company distributes its cosmetics and nail care products through AM
Cosmetics' dedicated sales force and broker network. See "Certain
Relationships and Related Transactions--AM Cosmetics."
The Company has established distributor relationships in various countries
in international markets. In Africa, the Company focuses its direct sales
efforts 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 competitive position in the
ethnic hair care industry is attributable, in part, to its tradition of
technological innovation and its focused R&D effort. Three of the ethnic hair
care industry's most significant innovations were introduced by the Company:
the first hair color developed exclusively for African-American hair (1972),
the first no-lye relaxer (1978), which provided a safe relaxer product for
home use, and the Fail Safe technology for no-lye relaxers (1993), 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, led by two industry
experienced chemists with Ph.D.s and including nine other researchers and
technicians, represents the largest R&D effort focused on the ethnic hair care
market. In 1996, the Company's R&D department finalized the development of
several product innovations, including the Fail Safe and DL 2000 hair relaxer
technologies, as well as a full line of hair care maintenance products.
The R&D department pursues an aggressive product development schedule and
intends to maintain its leadership in product innovations and technological
improvements. In particular, the R&D department intends to: (i) facilitate the
Company's expected entry in the fourth quarter of 1997 into the U.S.
professional salon market with a line of specially formulated products; (ii)
expand the line of Dark & Natural products; (iii) develop new and innovative
hair care maintenance products; (iv) strengthen the Company's hair color
products; and (v) develop more effective, milder depilatories for both men and
women, including the Cutex Naturally Soft Body Creme women's depilatory which
began to ship in October 1997, and Magic Smooth, a men's scalp depilatory
which is expected to be introduced in the fourth quarter of 1997. The R&D
department's agenda also includes the continued review and evaluation of
various packaging alternatives to ensure that the Company's products are
delivered in safe, secure and cost-effective containers. The Company's R&D
costs (principally for new products) for the fiscal years ended March 31, 1995
and 1996 was $0.3 million and $0.4 million, respectively, and was $0.5 million
for the twelve months ended September 30, 1997. The Company's estimated budget
for R&D costs for the twelve months ended December 31, 1997 is $0.6 million.
These amounts do not include amounts spent on quality control, analytical
chemistry, microbiology, package testing and consumer products testing.
The R&D department also supervises the Quality Control staff and performs
extensive safety and quality tests on the Company's products, including
analytical chemistry, microbiology and package testing. The Company tests its
new products with the aid of four in-house cosmetology technicians at its on-
site salon. The Company also benefits from its affiliation with AM Cosmetics,
whose R&D department has extensive experience in formulating and developing a
broad range of cosmetics. With the assistance of AM Cosmetics, the Company is
introducing the Cutex Research Center to signify its commitment to setting
high standards of quality and technology in developing new high-performance
beauty products.
MANUFACTURING
The Company uses a batching process in its manufacturing operations for
virtually all of its ethnic hair care products. The batching process begins
with chemical ingredients being mixed in kettles in batch sizes ranging
64
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.
Except as described below, the Company believes that alternate sources of
supplies exist and does not anticipate any significant shortages of, or
material difficulty in obtaining, such supplies.
Guanidine carbonate is an essential raw material used in the manufacturing
of no-lye relaxer products and has been purchased by the Company for over 15
years from the one principal supplier to all manufacturers of no-lye relaxers,
located in Austria. The Company maintains a stock of guanidine carbonate at
its Savannah facility which could satisfy its requirements for approximately
four to six months of future production. However, the Company has begun to
source smaller amounts of guanidine carbonate of comparable quality from other
suppliers. In the event that the Company is unable to obtain sufficient
guanidine carbonate from its current principal supplier, the Company believes
that it could obtain sufficient quantities of guanidine carbonate on
comparable terms from these alternative suppliers on comparable terms before
its reserves run out. See "Risk Factors--Reliance on Suppliers."
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 color
products. The Company relies on a limited number of contractors to manufacture
its products to the Company's specifications. For example, the Company
currently relies on AM Cosmetics to manufacture the Dark & Lovely line of
cosmetics and Cutex nail enamels, Chesebrough-Pond's USA to manufacture the
Cutex nail polish remover products and CEI to manufacture the Company's
shampoos and conditioners as well as the Let's Jam line. See "Risk Factors--
Reliance on Third Party Manufacturers" and "Certain Relationships and Related
Transactions--AM Cosmetics."
FACILITIES
The Company owns and occupies six 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 substantially all of the Company's products,
shipping, quality control, the R&D laboratories, customer research and a
professional hair salon which tests new products. The manufacturing and
warehousing space has been expanded seven times since it was originally built
in 1954. The Company is in the process of reconfiguring its production lines
and expanding its physical space in order to increase the productivity of the
Savannah facility. Following the planned reconfigurations, the Company
65
believes that the capacity in the Savannah facility will be adequate for its
needs in the reasonably foreseeable future. The Company leases an additional
50,000 square feet of warehouse space in Savannah.
Carson South Africa owns and occupies one building on 4.5 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 property
was previously occupied by Pfizer as a manufacturing facility and was easily
converted to suit the Company's needs. The building encompasses approximately
40,000 sq. ft. and houses the manufacturing equipment for all products,
shipping and receiving, raw material and finished goods storage, an R&D
laboratory and executive office space. The Company is currently doubling its
manufacturing and warehousing capacity at this facility, at an estimated cost
of $1.0 million funded primarily by a rights offering by Carson South Africa.
The Company believes that following this expansion, capacity in the South
African facility will be adequate for its needs in the reasonably foreseeable
future.
The Company recently completed a manufacturing facility in Accra, Ghana,
which began production in June 1997. The cost of this facility is
approximately $1.0 million, funded primarily by the Carson South Africa rights
offering.
COMPETITION
The U.S. ethnic hair care market for African-Americans is competitive and
highly fragmented with a number of market participants that focus specifically
on this market. The five largest companies generated approximately 49.1% of
industry sales in the U.S. retail ethnic hair care market in the twelve months
ended June 1997 with the remainder being generated by a number of smaller
companies, according to IRI. In the U.S. retail market segments for nail
enamel/treatments and nail polish remover, the five largest companies
generated approximately 69.0% and 59.5%, respectively, of industry sales for
the twelve months ended June 1997. In the U.S. retail market for cosmetics,
including the ethnic cosmetics market, the five largest companies generated
approximately 75.4% of industry sales for the twelve months ended June 1997.
In the U.S. retail market for women's depilatory products, the five largest
companies generated approximately 78.7% of industry sales for the twelve
months ended June 1997.
The Company primarily competes on the basis of brand recognition, product
quality, performance and price. Advertising, promotions, merchandising,
packaging and the timing of new product introductions and line extensions also
have a significant impact on buying decisions and the structure and quality of
the sales force affect product reception, in-store position, display space and
inventory levels in retail outlets.
Some of the Company's competitors are general market companies which are
larger and have substantially greater financial and other resources than the
Company.
TRADEMARKS AND PATENTS
The Company owns all of the trademark rights used in connection with its
principal brands both in the United States and in the other countries in which
its products are principally sold (other than Cutex outside of the United
States and Puerto Rico). Significant trademarks include: Dark & Lovely, Cutex,
Magic, Let's Jam, Dark & Lovely Excelle, Beautiful Beginnings, and Dark &
Natural. 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 would not have a material adverse effect on the
business, results of operations or financial condition of the Company. See
"Risk Factors--Dependence on Trademarks for Current and Future Markets."
CONSUMER LAWS, GOVERNMENT AND INDUSTRY REGULATIONS
The Company is subject to the U.S. Food, Drug and Cosmetics Act, the U.S.
Consumer Product Safety Act, the U.S. Federal Hazardous Substance Act and to
the jurisdiction of the U.S. 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
66
or penalties. The 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 September 30, 1997, the Company employed approximately 330 persons in
Savannah, an additional 38 elsewhere in the United States and 203
internationally. In the United States, 249 were hourly personnel and 119 were
salaried employees. The Company also utilizes temporary workers as needed,
primarily in manufacturing. An average of 30 such domestic temporary and 49
international temporary workers were utilized on a daily basis by the Company
during the nine months ended September 30, 1997. The Company is non-union and
believes that its relationship with employees is good.
LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings incident to the
ordinary course of its 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.
ENVIRONMENTAL MATTERS
The Company is subject to 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 and joint and several
liability upon persons responsible for releases of hazardous substances.
Based upon its experience to date, 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.
67
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
September 30, 1997 are as follows:
NAME AGE POSITION
- ---- --- --------
Dr. Leroy Keith......... 58 Chairman of the Board of Directors and Chief Executive Officer
Joyce M. Roche.......... 50 President, Chief Operating Officer, Director
Robert W. Pierce........ 54 Executive Vice President of Finance and Chief Financial Officer
Dennis E. Smith......... 50 Executive Vice President of Sales, Director
Miriam Muley............ 42 Executive Vice President of Marketing
Lawrence E. Bathgate,
II..................... 58 Director
Abbey J. Butler......... 59 Director
Suzanne de Passe........ 50 Director
Melvyn J. Estrin........ 54 Director
James L. Hudson......... 57 Director
Jack Kemp............... 61 Director
John L. Sabre........... 40 Director
Vincent A. Wasik........ 52 Director
Dr. Keith 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 concurrent with the Aminco Acquisition in August 1995. He
has served as Chairman of the Board of Directors of AM Cosmetics since June
1996. He served on the Board of Directors of the Predecessor from June 1994 to
August 1995. Prior to that, he 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.
Ms. Roche became President, Chief Operating Officer and a Director of the
Company in August 1996. Prior to that, she held the position of Executive Vice
President of Global Marketing of the Company from August 1995 until July 1996.
Ms. Roche has served as President and Chief Operating Officer of Carson
Products since July 1996. Before joining the Company in August 1995, Ms. Roche
was employed with Avon for 19 years where she held the titles of Senior Vice
President of Marketing from 1991 to 1993 and Vice President of Global
Marketing from 1993 to 1994. Ms. Roche was previously employed by Revlon,
where she held the title of Director of Marketing from 1979 to 1981.
Mr. Pierce became Executive Vice President and Chief Financial Officer of
the Company in May 1997. Prior to May 1997, he held the positions of Executive
Vice President, Chief Financial Officer and Treasurer of Maybelline, Inc.,
where he had been employed since 1990. Prior to that, he was employed by
Noxell Corporation, a manufacturer of cosmetics and toiletries, for 15 years
where he held the titles of Vice President of Finance from 1986 to 1988 and
Senior Vice President of Administration and Finance from 1988 to 1990.
Mr. Smith became a Director of the Company in December 1995, and Executive
Vice President of Sales of the Company in August 1996. Mr. Smith became
Executive Vice President of Sales of Carson Products concurrent with the
Aminco Acquisition in August 1995. Prior to August 1995, he held the position
of Vice President of Sales of Carson Products from 1990 to 1995.
Ms. Muley became Executive Vice President of Marketing of the Company in
August 1996 and of Carson Products in July 1996. She served as Vice President,
Marketing from the time she joined Carson Products in April 1996 until July
1996. She was previously employed by Avon from 1992 to 1996 as General
Manager, African-American Business Unit and by Bristol-Myers Squibb's Clairol
division as Product Manager from 1990 to 1992.
68
Mr. Bathgate became a Director of the Company upon its inception in May 1995
and of 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 with which he has been
affiliated since 1970. Mr. Bathgate is a founder and principal of Morningside,
and has served on the Board of Directors of AM Cosmetics since June 1996. He
also serves on the Board of Trustees of Villanova University, the Board of
Regents of Seton Hall University and served as Finance Chairman of the
Republican National Committee from 1988 to 1992.
Mr. 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; 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; Grand Banc Inc., Director from 1994; CST
Entertainment Inc., Director from 1994; UroHealth Systems, Inc., Director from
1995; Cyclone Fence Corp., Director from 1995; Phar-Mor, Inc., Director from
1995; 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.
Ms. 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.
Mr. 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; Washington Gas Light Company,
Director from October 1991; Grand Banc Inc., Director from August 1993;
UroHealth Systems, Inc., Director from July 1995; Phar-Mor, Inc., Director
from September 1995; and 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.
Mr. 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 served as Chairman of the Board of Trustees of
Morehouse College, and as a member of the Board of the Metropolitan Washington
Airports Authority.
Mr. Kemp became a Director of the Company in December, 1996, and served as a
Director of 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.
69
Mr. Sabre became a Director of the Company in August 1996 and of Carson
Products concurrent with the Aminco Acquisition in August 1995. He currently
serves as a partner at Capital Management Partners. 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.
Mr. 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 became a member of the Board
of Directors of AM Cosmetics in June 1996 and currently serves as President.
He is also a founder and serves as President of Morningside. 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 served as
Chairman and Chief Executive Officer of National Car Rental Systems, Inc. from
December 1986 to January 1992. He is also currently a member of the Board of
Directors of the 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.
COMPENSATION OF EXECUTIVE OFFICERS
Summary of Cash and Certain Other Compensation. The following table sets
forth in summary form information concerning the compensation for all services
rendered in all capacities to the Company for Dr. Keith, and the four other
most highly compensated executive officers of the Company for services
rendered in all capacities to the Company (including its subsidiaries) for the
period from April 1, 1996 to December 31, 1996 and the fiscal years ending
March 31, 1996 and March 31, 1995. Effective December 31, 1996, the Company
changed its fiscal year end from March 31 to December 31.
SUMMARY COMPENSATION TABLE(A)
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- ------------------------
SECURITIES
RESTRICTED UNDERLYING
STOCK OPTIONS/SARS
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS AWARDS (#) OF SHARES
- --------------------------- ---------------- ------------------- ---------- -------------
Leroy Keith(b).......... 4/01/96-12/31/96 $ 274,449 $ 56,875
Chairman of the Board 4/01/95-03/31/96 190,816 215,000
and Chief Executive
Officer
Joyce M. Roche(b)....... 4/01/96-12/31/96 $ 179,670 $ --
President and Chief Op- 4/01/95-03/31/96 117,692 35,000 (c)
erating Officer
Bradford N. 4/01/96-12/31/96 $ 192,143 $ 43,750
Creswell(b)............ 4/01/95-03/31/96 146,681 --
Executive Vice Presi-
dent-Finance and Chief
Financial Officer
Dennis E. Smith......... 4/01/96-12/31/96 $ 146,136 $ 83,900 (c)
Executive Vice Presi- 4/01/95-03/31/96 150,405 75,870
dent 4/01/94-03/31/95 99,312 19,813
--Sales
Miriam Muley............ 4/01/96-12/31/96 $ 109,136 $ --
Executive Vice Presi-
dent-Marketing
- --------
(a) The summary compensation table does not include the value of perquisites
and other personal benefits made available by the Company. However, no
named executive officer received such compensation in any fiscal year
valued in excess of the lesser of $50,000 or 10% of such officer's total
salary and bonus reported for such fiscal year.
70
(b) Dr. Keith, Ms. Roche and Mr. Creswell became executive officers of Carson
Products on August 23, 1995 and of the Company on August 14, 1996. Mr.
Creswell resigned from his position at the Company in May 1997.
(c) The securities underlying the SARs were shares of the former Class A
common stock of the Company. In August 1996, Ms. Roche surrendered her
SAR, and Mr. Smith surrendered one-half of his SAR, in exchange for the
right to subscribe for 118,713 shares and 59,357 shares of Class C common
stock of the Company, respectively.
Stock Options and Stock Appreciation Rights. No options to purchase stock
were granted during the twelve months ended December 31, 1996. The following
table sets forth information concerning the grant of stock appreciation rights
("SARs") to each of the named executive officers during the twelve months
ended December 31, 1996.
OPTION/SAR GRANTS IN 1996
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
------------------------------------------------------------ -------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING SARS GRANTED TO
SARS EMPLOYEES EXERCISE OR EXPIRATION
NAME GRANTED (#)(A) IN FISCAL YEAR BASE PRICE ($/SH) DATE 5% ($) 10% ($)
- ---- -------------- ---------------- ----------------- ---------- -------- --------
Dr. Leroy Keith......... -- -- -- -- -- --
Joyce M. Roche.......... (b) 23.53% (b) 8/23/05 -- --
Dennis E. Smith......... (b) 23.53% (b) 8/23/05 -- --
- --------
(a) The securities underlying the SARs are shares of the former Class A common
stock of the Company.
(b) In August 1996, Ms. Roche surrendered her SAR, and Mr. Smith surrendered
one-half of his SAR, in exchange for the right to subscribe for 118,713
shares and 59,357 shares of Class C common stock of the Company,
respectively. Both Ms. Roche and Mr. Smith have exercised such rights. See
"Management--Compensation of Executive Officers--Employment Agreements"
for a discussion of the exercise of such rights and the treatment of Mr.
Smith's remaining SAR.
Option/SAR Exercises and Holdings. No options to purchase common stock were
outstanding and no SARs were exercised by the named executive officers during
the fiscal period ended 1996.
Long-Term Incentive Plans. No long term incentive plan awards were granted
to the named executive officers during the period from April 1, 1996 to
December 31, 1996.
Employment Agreements. Carson Products has entered into employment
agreements with Dr. Keith, Ms. Roche, Mr. Smith, Ms. Muley and Mr. Pierce,
which agreements provide for the terms discussed below (the "Employment
Agreements"). The Employment Agreements for Dr. Keith, Ms. Roche, Mr. Smith
and Ms. Muley provide for a term of employment expiring on October 18, 1999.
The Employment Agreement for Mr. Pierce provides for a term of employment
expiring on May 9, 2000. Under the Employment Agreements, the annual base
salary amounts for Dr. Keith, Ms. Roche, Mr. Smith, Ms. Muley and Mr. Pierce
are $385,000, $260,000, $200,000, $155,000 and $250,000 respectively. In
addition to such base salary, the Employment Agreements provide for, among
other things: an annual bonus determined under a formula based on specified
net revenue growth, net income, earnings per share and/or stock price growth;
eligibility in any pension and welfare benefit plans (other than certain
profit sharing plans) maintained by Carson Products; a monthly automobile
allowance for Dr. Keith, Ms. Roche, Mr. Smith and Mr. Pierce equal to $1,000,
$750, $500 and $500,
71
respectively; reimbursement for specified relocation expenses, including
without limitation general relocation payments to Dr. Keith, Ms. Muley and Ms.
Roche, equal to $50,000, $10,000 and $10,000, respectively; and such other
fringe benefits generally provided by Carson Products to its employees.
Carson Products retains the right to terminate the employment of Dr. Keith,
Ms. Roche, Mr. Smith, Ms. Muley and Mr. Pierce, and each such executive
officer retains the right to resign, at any time for any reason. If Carson
Products terminates the employment of any of the executive officers named
above for "cause" (as defined in the Employment Agreements) or with "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. If Carson Products terminates the employment of Dr. Keith, Ms.
Roche, Mr. Smith or Ms. Muley without cause, such officer will be entitled to
receive severance pay equal to 150% of the officer's base annual salary (200%,
in the case of Mr. Smith). If such officer (other than Mr. Smith and Ms.
Muley) terminates his or her employment with Carson Products for good reason,
the officer will be entitled to receive severance pay equal to 200% of the
officer's annual base salary (payable in one lump sum). In the event of
"disability," as defined in the Employment Agreements, Carson Products may
terminate the employment of Dr. Keith, Ms. Roche, Mr. Smith, Ms. Muley or Mr.
Pierce and the officer will thereupon be entitled to receive 150% (200%, in
the case of Mr. Smith) of the officer's annual base salary (payable in one
lump sum).
Pursuant to the Employment Agreements, Ms. Roche, Mr. Smith and Ms. Muley
have purchased 118,713, 59,357 and 59,357 shares, respectively, of the Class C
common stock of the Company (the "Class C Common Stock") at a price per share
equal to $4.21. The aggregate purchase price for the shares acquired by each
officer was paid in the form of a non-interest bearing long-term full recourse
promissory note. In connection with such purchase, each officer pledged the
shares he or she acquired to the Company to secure payment of the principal
amount of the promissory notes. The principal amount of the notes will be due
and payable on the earlier to occur of the sale of the shares acquired,
termination of employment or the third anniversary of the date of purchase.
The officer may prepay the principal amount of his or her promissory note at
any time and from time to time.
Pursuant to Dr. Keith's agreement, the Company has issued him 341,100 shares
of the Class C Common Stock, which represented at the time of issuance 3% of
the Company's then outstanding common stock. These shares were issued in
consideration for securing the Acquisition. These shares were transferred
immediately after issuance to DNL Partners, as trustee under a certain voting
trust agreement, dated August 23, 1995, by and among DNL Partners, Dr. Keith
and certain other stockholders.
The Employment Agreements also provide that Dr. Keith, Ms. Roche, Mr. Smith,
Ms. Muley and Mr. Pierce, while employed by Carson Products and in the case of
Mr. Smith, Ms. Muley and Mr. Pierce, during the period in which Mr. Smith, Ms.
Muley or Mr. Pierce, respectively, is receiving Base Salary (as defined in the
Employment Agreements) payments from Carson Products (regardless as to whether
Mr. Smith, Ms. Muley or Mr. Pierce, 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.
Management Agreement. Carson Products has entered into a management
agreement with Morningside regarding the services of Mr. Wasik. See "Certain
Relationships and Related Transactions--Morningside."
1996 Long-Term Incentive Plan. The Company adopted the 1996 Long-Term
Incentive Plan (the "1996 Plan"), which is administered by a committee of the
Board comprised of non-employee directors (the
72
"Committee"). The purpose of the 1996 Plan is to attract, retain and motivate
executives and other key individuals who will make significant contributions
to the growth and overall success of the Company and its subsidiaries and to
align the interests of such executives and individuals with those of the
Company's shareholders.
All salaried employees and consultants of the Company and its subsidiaries
are eligible to participate in the 1996 Plan. The 1996 Plan authorizes the
grant of (i) options to acquire shares of the Class A common stock of the
Company ("Class A Common Stock") intended to qualify as "incentive stock
options" under Section 422 of the Code ("ISOs"), (ii) options to acquire the
same that do not, or are not intended to, so qualify, (iii) restricted shares
of the Class A Common Stock, subject to specified forfeiture risks (the
"Restricted Shares"), (iv) stock appreciation rights ("SARs") based on the
Class A Common Stock and payable in cash or in shares of the new Class A
Common Stock, and (v) performance-based awards, payable in cash or in shares
of the Class A Common Stock.
The 1996 Plan authorizes 600,000 shares of the Class A Common Stock (equal
to approximately 4.2% of the aggregate outstanding shares of Common Stock) for
issuance, subject to adjustment in certain circumstances. No awards may be
granted under the 1996 Plan after December 31, 2006.
Pursuant to the regulations under Section 16(b) of the Exchange Act, so long
as certain conditions are met, an officer receiving an option award may be
able to exercise options that are then exercisable and sell the underlying
shares of the Class A Common Stock on the same day without incurring liability
under such Section 16(b). The ability to exercise options and concurrently
sell the Class A Common Stock obtained upon exercise means that officers face
no investment risk with respect to the shares subject to options, since they
will generally only exercise an option if the market value of the Class A
Common Stock is greater than the exercise price of the option.
ISOs granted to any person who is the beneficial owner of more than 10% of
the total combined voting of all classes of stock of the Company or the
Company will contain special limitation provisions required by Section 422 of
the Code. Unless otherwise determined by the Committee, no stock option
granted in connection with the 1996 Plan will be exercisable more than ninety
days after the date on which the optionee ceases to perform services for the
Company, except that in the event of death, disability or retirement or a
termination after a change of control, options may be exercised for up to one
year after such event. If, however, an optionee ceases to perform services for
the Company, any ISO exercised more than three months following the date the
optionee ceases to perform services will be treated as a non-statutory stock
option.
The Committee generally is empowered to interpret the 1996 Plan, prescribe
rules and regulations relating thereto, determine the terms of awards and
other agreements, amend them (in certain cases only with the consent of the
optionee), determine the individuals to whom awards are to be granted,
determine the number of shares subject to each award and the exercise price
thereto, and take all actions in connection with the Plan and the awards
thereunder as the Committee, in its sole discretion, deems necessary or
desirable. In general, the Board may modify, suspend, or terminate the Plan at
any time; provided, however, that any change in the 1996 Plan that may
adversely affect an award previously granted under the Plan requires the
consent of the adversely affected awardee.
BOARD OF DIRECTORS
The Company has three classes of directors, which are elected for staggered
terms of three years. The terms of each class expire at the annual meeting of
stockholders in 1998 (Class II) and 1999 (Class III) and 2000 (Class I),
respectively. Joyce M. Roche, Abbey J. Butler and Melvyn J. Estrin are Class
II directors, Dr. Leroy Keith, Lawrence E. Bathgate, II, John L. Sabre and
Vincent A. Wasik are Class III directors and Dennis E. Smith, Suzanne de Passe
and James Hudson are Class I directors. Each director holds office until his
or her successor is duly elected and qualified or until his or her resignation
or removal, if earlier.
73
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has an Audit Committee, a Compensation Committee, a Stock Plan
Committee and an Executive Committee. The Audit Committee is comprised of
Messrs. Butler and Sabre and is charged with reviewing the Company's annual
audit and meeting with the Company's independent accountants to review the
Company's internal controls and financial management practices. The
Compensation Committee is comprised of Messrs. Butler and Sabre, both of whom
are outside, non-employee members of the Board. The Stock Plan Committee is
comprised of Messrs. Butler and Estrin and Ms. de Passe, non-employee members
of the Board. The Executive Committee is comprised of Dr. Keith and Messrs.
Bathgate, Butler, Sabre and Wasik and has the authority to act on behalf of
the full Board with respect to all matters.
COMPENSATION OF BOARD OF DIRECTORS
1996 Non-Employee Directors Equity Incentive Program. During October 1996,
the Board established and approved, and the Company adopted, the 1996 Non-
Employee Directors Equity Incentive Program (the "Outside Directors Program").
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. Under the Outside Directors Program, each non-employee director
of the Company received an option to acquire 1,500 shares of the Class A
Common Stock upon the closing of the initial public offering of the Class A
Common Stock. The exercise price per share for these options is equal to the
initial public offering price paid by the public for the Class A Common Stock
($14.00). Each such option is exercisable upon grant and will expire on the
first anniversary of the closing of the initial public offering (if such
option is not exercised prior thereto by the non-employee director grantee).
In addition, pursuant to the Outside Directors Program, each non-employee
director will receive, immediately 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 Outside Director Restricted Shares will 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 canceled by the Company.
The Outside Director Options will become exercisable on the first
anniversary of the date of grant of any such option and will 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 Option held by such director, if then unexercisable, will be
immediately forfeited by such director and automatically canceled 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. 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 Board or such 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.
74
PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of the Company's Class A Common Stock and Class C Common Stock
outstanding as of September 30, 1997 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 and
nominees for director, (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 Common Stock indicated as being beneficially owned by them.
CLASS A CLASS C
COMMON STOCK COMMON STOCK(A)
---------------- -------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER % NUMBER %
- ------------------------------------- ---------------- -------------------
(IN THOUSANDS, EXCEPT FOOTNOTES)
DNL Partners Limited Partnership(b)..... 0 0 6,617 81.4%
c/o Morningside Capital Group L.L.C.
One Morningside Drive, North
Suite 200
Westport, CT 06880
Morgan Guaranty Trust Company(c)........ 24 * 1,187 14.6%
c/o J.P. Morgan Investment Management
522 Fifth Avenue
New York, NY 10036
Massachusetts Financial Services........ 617 12.3% 0 0
500 Boylston Street, 15th Floor
Boston, MA 02116
Dresdner Bank AG(d)..................... 798 15.9% 0 0
Jurgen-Ponto-Platz 1
60301
Frankfurt, Germany
Capital Guardian Trust Company(e)....... 430 8.6% 0 0
33 Hope Street, 52nd Floor
Los Angeles, CA 90071
Westfield Capital Management............ 257 5.1% 0 0
One Financial Center, 23rd Floor
Boston, MA 02111
Warburg, Pincus Counsellors, Inc.(f).... 464 9.3% 0 0
466 Lexington Avenue
New York, NY 10017-3147
Leroy Keith(g).......................... 0 0 0 0
Joyce M. Roche.......................... 1 * 119 1.5%
Dennis E. Smith......................... 60 1.2% 0 0
Robert W. Pierce(h)..................... 50 1.0% 0 0
Miriam Muley............................ 0 0 59 *
Lawrence E. Bathgate, II(i)(j).......... 5 * 0 0
Jack Kemp............................... 3 * 46 *
75
CLASS A CLASS C
COMMON STOCK COMMON STOCK (A)
----------------- -------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER % NUMBER %
- ------------------------------------- --------- ------- -------------------
(IN THOUSANDS, EXCEPT FOOTNOTES)
John L. Sabre(j)....................... 5 * 23 *
Vincent A. Wasik(b)(j)................. 7 * 6,617 81.4%
Melvyn J. Estrin(i)(j)................. 5 * 12 *
Abbey J. Butler(i)(j).................. 5 * 12 *
James L. Hudson(i)(j).................. 5 * 12 *
Suzanne de Passe(j).................... 5 * 12 *
All Directors and Officers as a Group 171 3.4% 6,899 85.4%
(14 persons)..........................
- --------
* Less than 1%.
(a) Based on 5,033,248 and 8,127,937 outstanding shares of Class A Common
Stock and Class C Common Stock, respectively. Ownership of Class B Common
Stock (which is non-voting stock convertible into voting stock upon
transfer in certain circumstances) is not reflected. 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. 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) Amounts shown represent the aggregate number of shares beneficially owned
by DNL Partners, including 818,640 shares subject to a Voting Trust
Agreement dated August 23, 1995. Pursuant to the Voting Trust Agreement,
DNL Partners was granted full power and authorization to vote the shares
of the members of the DNL Partners Limited Partnership Voting Trust (the
"Voting Trust"), including Dr. Keith and Northwest Capital, Inc., on all
matters. Mr. Wasik has a 99% 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 and the Voting
Trust. Messrs. Wasik, Bathgate, Butler, Estrin 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 Morningside, one of the limited partners in DNL
Partners.
(c) As reported on Schedule 13G/A dated March 31, 1997 filed by J.P. Morgan &
Co., Incorporated, as parent holding company. Includes Morgan Guaranty
Trust Company, as Trustee of a Commingled Pension Fund-Multi-Market
Special Investment Fund II, Multi-Market Special Investment Trust Fund of
Morgan Guaranty Company of New York and Morgan Guaranty Trust Company New
York as Investment Manager and Agent for the Alfred P. Sloan Foundation
Multi-Market Account.
(d) As reported on Schedule 13G/A dated June 9, 1997 filed by Dresdner Bank,
AG as parent holding company, and as reported on a Schedule 13G dated June
9, 1997 filed by RCM Capital Management, L.L.C. ("RCM Capital"), RCM
Limited L.P. and RCM General Corporation collectively. Includes 748,500
shares acquired by RCM Capital Management, L.L.C., a wholly owned
subsidiary of Dresdner Bank AG, on behalf of client discretionary
investment advisory accounts as to which RCM Capital has sole dispositive
power (and as to 575,500 of which it has sole voting power).
(e) As reported on Schedule 13G dated February 12, 1997 filed jointly by The
Capital Group Companies, Inc., and Capital Guardian Trust Company. Capital
Guardian Trust Company, a wholly-owned subsidiary of The Capital Group
Companies, Inc., hold 430,000 shares on behalf of various institutional
accounts (and has sole voting power of 340,000 shares).
(f) Warburg, Pincus Counsellors, Inc. has sole dispositive power as to 463,800
shares.
(g) Excludes 341,100 shares held by the Voting Trust. See Note (b). In
addition, Dr. Keith owns 100 shares of Class A Common Stock.
76
(h) Includes 50,000 shares of Class A Common Stock underlying currently
exercisable stock options. Excludes 2,000 shares of Class A Common Stock
held by Mr. Pierce's children to which Mr. Pierce disclaims beneficial
ownership.
(i) These directors are, or have direct or indirect interests in, limited
partners of DNL Partners. See Note (b). Excludes 1,000 shares of Class A
Common Stock held by Mr. Bathgate's children to which Mr. Bathgate
disclaims beneficial ownership.
(j) Includes 1,500 shares of Class A Common Stock underlying currently
exercisable options granted to seven non-employee directors in connection
with the Company's initial public offering on October 18, 1996.
77
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MORNINGSIDE
Carson Products and Morningside entered into a Management Assistance
Agreement dated August 23, 1995 (as amended, the "Morningside Management
Agreement"), pursuant to which Morningside agreed to supply the services of
Vincent A. Wasik (a principal member of Morningside) 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 Morningside Management Agreement
provides that Carson Products will indemnify Morningside, 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 Morningside under the Morningside Management Agreement
(other than actions resulting from gross negligence, willful misconduct or a
material breach of the Morningside Management Agreement by Morningside or
Mr. Wasik). The termination date of the Morningside 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.
Additionally, for the term of the Morningside Management Agreement,
Morningside 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 Securities Exchange Act
of 1934, as amended (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.
In connection with the Aminco Acquisition, Morningside received fees of
$500,000 from the Company for arranging and negotiating the financing for the
Aminco Acquisition and performing other consulting and financing advisory
services and was reimbursed by the Company for certain related expenses. In
addition, Morningside received fees of $520,000 and $125,000 for similar
services and expenses relating to the Cutex Acquisition and the acquisition of
the Let's Jam brand, respectively. Under the Morningside Management Agreement,
the Company paid Morningside approximately $25,000 in fiscal 1996 for
reimbursement of out-of-pocket expenses. Morningside received a fee of
$100,000 in October 1996 for arranging and negotiating the terms of a new
senior bank facility that includes (i) a $15.0 million term A loan, (ii) a
$10.0 million term B loan and (iii) a $15.0 million revolving credit facility
and performing other consulting and financial advisory services. In addition,
the Company reimbursed Morningside for approximately $35,000 of out-of-pocket
expenses incurred in connection with its initial public offering on October
18, 1996.
Morningside received fees of $250,000 in connection with the New Credit
Facility and the sale of the Existing Notes. From time to time Morningside may
provide additional financial advisory services to the Company, for which
Morningside will receive usual and customary compensation.
BATHGATE, WEGENER & WOLF, P.A.
Bathgate, Wegener & Wolf, P.A., a law firm for which Lawrence E. Bathgate,
II serves as President and Chief Executive Officer, was paid approximately
$690,000 for services rendered in arranging the equity investment in the
Company in connection with the Aminco Acquisition and $175,000 in connection
with the Cutex Acquisition.
CREDIT AGRICOLE INDOSUEZ
Credit Agricole Indosuez, an affiliate of certain stockholders of the
Company, received fees and reimbursement of out-of-pocket expenses totalling
approximately $1.78 million in connection with the Aminco
78
Acquisition. Credit Agricole Indosuez received $1.75 million in fees for the
April 30, 1996 Amended and Restated Credit Agreement. Credit Agricole Indosuez
also received $150,000 in fees in connection with the acquisition of Let's
Jam. In connection with the New Credit Facility, Credit Agricole Indosuez is
acting as agent and a lender and received approximately $1.6 million in fees
and as well as reimbursement of expenses in connection with its services as
agent.
Indosuez Capital, a division of Credit Agricole Indosuez, acted as financial
advisor to the Company in connection with the sale of the Existing Notes and
received an advisory fee of $450,000 in connection therewith.
AM COSMETICS
Morningside AM Acquisition Corp. entered into a Subscription Agreement dated
as of June 26, 1996 (the "Subscription Agreement") with Carson Products,
providing for the purchase by Carson Products of 300 shares of cumulative
Payment in Kind Preferred Shares (the "PIK Preferred Shares") issued by AM
Acquisition, at a price of $10,000 per share. AM Acquisition was formed by
Morningside on behalf of an investor group to acquire the assets of Arthur
Matney Co., Inc. ("Matney"). AM Acquisition created a wholly-owned operating
subsidiary, AM Cosmetics, to hold such assets and to continue the operations
of Matney as a low-cost manufacturer of cosmetics. AM Cosmetics primarily
sells color cosmetics including nail enamel, two of which, Tropez and Black
Radiance, are targeted at the African-American consumer. The PIK Preferred
Shares are non-voting and are entitled to cumulative dividends payable
quarterly in additional PIK Preferred Shares at a rate of 12% per annum.
Additionally, the PIK Preferred Shares are subject to redemption in whole at
the option of Carson Products on or after July 1, 2005, at the stated value
per share (which is $10,000 per share) plus an amount in cash equal to all
accrued and unpaid dividends on the PIK Preferred Shares (the "Redemption
Price"), and are subject to redemption in whole at any time (or in part from
time to time if all dividends accrued and unpaid have been paid for all past
dividend periods and full dividends have been paid or declared and the amount
set apart for payment for the current dividend period) at the option of AM
Acquisition at the same redemption price.
Pursuant to the Subscription Agreement, AM Acquisition agreed on behalf of
itself and its wholly-owned subsidiary, AM Cosmetics, that for a period of
five years commencing on July 1, 1996, (i) AM Cosmetics would not "contract
manufacture" for any other ethnic cosmetics line, (ii) AM Cosmetics will agree
to produce a cosmetics line for Carson Products as designed and directed by
Carson Products, at AM Cosmetics' cost plus a maximum 25% markup, and (iii) AM
Cosmetics will agree to provide the necessary research and development for
formulations for the ethnic cosmetic product line(s) as determined by Carson
Products, at no additional cost to Carson Products.
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. Under the
Carson-AM Management Agreement, Carson Products is required to supervise the
production of a detailed business plan and budget for AM Cosmetics each year.
Once the business plan is approved by AM Cosmetics' Board of Directors, Carson
Products will supervise and administer AM Cosmetics within the confines of the
business plan, with the approval of AM Cosmetics' board for any material
deviations. Currently, in return for the management and other services it
provides, Carson Products is entitled to fees equal to 1% of AM Cosmetics'
annual base business net sales (excluding acquisitions) subject to a minimum
of $500,000 per annum. For the twelve months ended September 30, 1997, the
Company received $500,000 in management fees. As of January 1, 1998, this
management fee will be reduced to a fixed $250,000 annual fee. The Carson-AM
Management Agreement expires on June 26, 2004 unless terminated earlier, or
renewed for an additional three-year period at AM Cosmetics' option by giving
Carson Products written notice thereof at least 180 days prior to the
expiration date. Either party may terminate the AM Management Agreement by
providing the other party with written notice, at least 360 days in advance if
terminated by Carson Products and 60 days in advance if terminated by AM
Cosmetics. Certain members of senior management of the Company devote a
portion of their time to assisting the management of AM Cosmetics.
Pursuant to the Carson-AM Management Agreement, the parties have entered
into a manufacturing agreement expiring on May 1, 1999 (the "AM Manufacturing
Agreement"). Under the AM Manufacturing
79
Agreement, AM Cosmetics manufactures 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 is entitled to a
25% profit margin above all costs, including general administrative costs, on
the cosmetics products it produces under the AM Manufacturing Agreement,
except for the Cutex products for which the pricing is specified by SKU.
Carson Products is also liable to AM Cosmetics for costs relating to
marketing, research and development of the products covered by the AM
Manufacturing Agreement. Carson Products is entitled to reduce or discontinue
purchase of a product from AM Cosmetics covered by the AM Manufacturing
Agreement, but must compensate AM Cosmetics for all costs and expenses for
such reduced or discontinued shipments and reduce or discontinue purchasing
the same product from other suppliers in the same proportion. AM Cosmetics may
terminate the AM Manufacturing Agreement if Carson Products fails to make
payments to it as specified in the AM Manufacturing Agreement and either party
may terminate the AM Manufacturing Agreement if the other party remains in
default under the AM Manufacturing Agreement's terms 20 days after receiving
notice from the non-defaulting party. The AM Manufacturing Agreement does not
contain volume requirements for either party and does not provide any options
for renewal. See "Business--Manufacturing."
Carson Products and AM Cosmetics have also entered into a sales and
marketing agreement (the "AM Sales/Marketing Agreement") in accordance with
the Carson-AM Management Agreement. Under the AM Sales/Marketing Agreement,
which expires on September 19, 1999, AM Cosmetics is entitled to a 7.5 percent
sales commission on its sales of all Cutex products.
Dr. Leroy Keith has an ownership interest in AM Cosmetics and Vincent A.
Wasik, a principal stockholder of the Company, indirectly owns a controlling
ownership interest in AM Cosmetics. In addition, Dr. Keith serves as a member
of AM Cosmetics' Board of Directors, Mr. Wasik serves as President of AM
Cosmetics and Lawrence E. Bathgate, II also serves as a member of its Board of
Directors and chairman of its executive committee.
80
DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued, and the Existing Notes were issued,
pursuant to the Indenture, dated November 6, 1997, among the Company, Carson
Products and Marine Midland Bank, as trustee (the "Trustee"). The terms of the
Exchange Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act, as in effect on the
date of original issuance of the Exchange Notes. The Notes are subject to all
such terms, and holders of the Notes are referred to the Indenture and the
Trust Indenture Act for a statement thereof. The following summary of the
material provisions of the Indenture does not purport to be complete and is
qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. As used in this "Description
of the Exchange Notes" section, the "Company" means Carson, Inc. and not any
of its Subsidiaries. Capitalized terms used herein and not otherwise defined
have the meanings set forth below under the caption "--Certain Definitions."
The Indenture provides for the issuance of the $100.0 million principal
amount of Exchange Notes offered hereby and additional series of notes in
aggregate principal amounts of not less than $25.0 million per series, subject
to compliance with the covenant described below under the caption "--Certain
Covenants--Limitation on Incurrence of Indebtedness"; provided that no Default
or Event of Default exists under the Indenture at the time of issuance or
would result therefrom and that the aggregate principal amount of notes issued
under the Indenture does not exceed $150.0 million. All Notes will be
substantially identical in all material respects other than issuance dates.
The Company's obligations under the Indenture are, and the Exchange Notes
will be, guaranteed (the "Guarantees") on a senior subordinated basis as of
the date of the Indenture by Carson Products and, pursuant to the terms of the
Indenture, in the future may be jointly and severally guaranteed by certain
other Subsidiaries of the Company. See "--Certain Covenants--Subsidiary
Guarantees." As of the date of the Indenture, all of the Company's domestic
and foreign Subsidiaries are Restricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate one or more of its
existing Subsidiaries, Subsidiaries formed by the Company or Subsidiaries
acquired by the Company after the original issuance of the Notes as
Unrestricted Subsidiaries. Unrestricted Subsidiaries are not subject to many
of the restrictive covenants set forth in the Indenture.
The Notes are limited to $150.0 million in aggregate principal amount, of
which $100.0 million in aggregate principal amount is being offered hereby.
The Exchange Notes will mature on November 1, 2007. The Exchange Notes will
bear interest at the rate set forth on the front cover of this Prospectus.
Interest on the Notes is payable semi-annually in cash in arrears on May 1 and
November 1 in each year, commencing May 1, 1998, to holders of record of Notes
at the close of business on the April 15 or October 15 immediately preceding
such interest payment date. Interest on the Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of original issuance. Interest will be computed on the basis of
a 360-day year of twelve 30-day months. Holders of the Exchange Notes will
also receive accrued interest from the last interest payment date on which
interest was paid on the Existing Notes surrendered in exchange therefor or,
if no such interest has been paid on the Existing Notes, from the date of
original issue of the Existing Notes. Interest on the Existing Notes accepted
for exchange will cease to accrue upon issuance of the Exchange Notes. The
Exchange Notes will be issued in denominations of $1,000 and integral
multiples thereof.
Principal of, premium, if any, interest and Liquidated Damages, if any, on
the Notes will be payable, and the Notes may be presented for registration of
transfer or exchange, at the office of the Paying Agent and Registrar in New
York, New York. Holders of Notes must surrender their Notes to the Paying
Agent to collect principal payments, and the Company may pay principal and
interest by check and may mail checks to a holder's registered address;
provided that all payments with respect to Global Notes and Certificated
Notes, the holders of which have given wire transfer instructions to the
Company, will be required to be made by wire transfer of immediately available
funds to the accounts specified by the holders thereof. The Registrar may
require payment
81
of a sum sufficient to cover any transfer tax or similar governmental charge
payable in connection with certain transfers or exchanges. See "--Transfer and
Exchange." The Trustee will initially act as Paying Agent and Registrar. The
Company may change the Paying Agent or Registrar without prior notice to
holders of Notes, and the Company or any of its Subsidiaries may act as Paying
Agent or Registrar.
SUBORDINATION
The payment of principal of and premium, interest and Liquidated Damages, if
any, on the Notes will be subordinated in right of payment, as set forth in
the Indenture, to the prior payment in full in cash or Marketable Securities
of all Senior Indebtedness, whether outstanding on the date of the Indenture
or thereafter incurred. The Indenture permits the incurrence of additional
Senior Indebtedness in the future.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full in cash or Marketable Securities of all Obligations
due in respect of such Senior Indebtedness (including interest after the
commencement of any such proceeding at the rate specified in the applicable
Senior Indebtedness) before the holders of Notes will be entitled to receive
any payment with respect to the Notes, and until all Obligations with respect
to Senior Indebtedness are paid in full in cash or Marketable Securities, any
distribution to which the holders of Notes would be entitled shall be made to
the holders of Senior Indebtedness (except that holders of Notes may receive
Permitted Junior Securities and payments made from the trust described under
"--Satisfaction and Discharge of the Indenture").
The Company also may not make any payment upon or in respect of the Notes
(except in Permitted Junior Securities or from the trust described under "--
Satisfaction and Discharge of the Indenture") if (i) a default in the payment
of the principal of or premium, if any, or interest on Designated Senior
Indebtedness occurs and is continuing beyond any applicable period of grace or
(ii) any other default occurs and is continuing with respect to Designated
Senior Indebtedness that permits holders of the Designated Senior Indebtedness
as to which such default relates to accelerate its maturity and the Trustee
receives a written notice (with a copy to the Company) of such other default
(a "Payment Blockage Notice") from the Company or the holders of any
Designated Senior Indebtedness. Payments on the Notes may and shall be resumed
(a) in the case of a payment default, upon the date on which such default is
cured or waived and (b) in case of a nonpayment default, the earlier of the
date on which such nonpayment default is cured or waived or 179 days after the
date on which the applicable Payment Blockage Notice is received by the
Trustee, unless the maturity of any Designated Senior Indebtedness has been
accelerated. No new period of payment blockage may be commenced unless and
until (i) 360 days have elapsed since the date of receipt by the Trustee of
the immediately prior Payment Blockage Notice and (ii) all scheduled payments
of principal, premium, if any, and interest on the Notes that have come due
have been paid in cash. No nonpayment default that existed or was continuing
on the date of delivery of any Payment Blockage Notice to the Trustee shall
be, or be made, the basis for a subsequent Payment Blockage Notice (it being
understood that any subsequent action, or any breach of any covenant for a
period commencing after the date of receipt by the Trustee of such Payment
Blockage Notice, that, in either case, would give rise to such a default
pursuant to any provisions under which a default previously existed or was
continuing shall constitute a new default for this purpose).
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, holders of Notes may recover less ratably than
creditors of the Company and the Guarantors who are holders of Senior
Indebtedness. On a pro forma basis, after giving effect to the sale of the
Existing Notes and the use of proceeds described herein, the aggregate
principal amount of Senior Indebtedness of the Company on a consolidated basis
outstanding at September 30, 1997 would have been approximately $0.6 million
and, subject to compliance with certain financial ratios, the Company would
have had unused availability under the New
82
Credit Facility of $75.0 million. The Indenture and the New Credit Facility
limit, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Indebtedness, that the Company and its
subsidiaries can incur. See "--Certain Covenants--Limitation on Incurrence of
Indebtedness."
GUARANTEES
The Company's obligations under the Indenture are and under the Exchange
Notes will be guaranteed on a senior subordinated basis by Carson Products and
in the future may be jointly and severally guaranteed by certain other
Subsidiaries (other than (i) Foreign Subsidiaries that are not guarantors
under the New Credit Facility and (ii) Unrestricted Subsidiaries) of the
Company in accordance with the covenant described below under the caption "--
Certain Covenants--Subsidiary Guarantees" (each such entity a "Guarantor" and,
collectively, the "Guarantors"). In addition, the Company may cause any
Foreign Subsidiary not otherwise required to guarantee the Notes to guarantee
the Notes on a senior subordinated basis, in which case such Foreign
Subsidiary will be a Guarantor for purposes of the Indenture. The Guarantees
will be subordinated to the prior payment in full in cash or Marketable
Securities of all Senior Indebtedness of each Guarantor (including such
Guarantor's Obligations under the New Credit Facility) to the same extent that
the Notes are subordinated to Senior Indebtedness of the Company. The
obligations of any Guarantor under its Guarantee is limited so as not to
constitute a fraudulent conveyance under applicable law.
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving person), another
corporation, person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Guarantee of such Guarantor and the Indenture; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists; and (iii) the Company would be permitted by virtue of the
Company's pro forma Cash Flow Coverage Ratio, immediately after giving effect
to such transaction, to issue at least $1.00 of additional Indebtedness
pursuant to the Cash Flow Coverage Ratio test set forth in the first sentence
of the covenant described below under the caption "--Certain Covenants--
Limitation on Incurrence of Indebtedness." The requirements of clause (iii) of
this paragraph will not apply in the case of a consolidation with or merger
with or into the Company or another Guarantor.
The Indenture provides that in the event (a) of a sale, exchange, transfer
or other disposition of all or substantially all of the assets of any
Guarantor, by way of merger, consolidation or otherwise, or a sale, exchange,
transfer or other disposition of all of the Capital Stock of any Guarantor,
(b) the designation by the Company of a Guarantor to be an Unrestricted
Subsidiary, or (c) the release of the guarantee of any Guarantor with respect
to the New Credit Facility or any Other Company Indebtedness (as defined)
which caused such Guarantor to deliver a Guarantee of the Notes in accordance
with clause (i) or clause (ii) of the covenant described below under the
caption "--Certain Covenants--Subsidiary Guarantees," then such Guarantor (in
the event of a sale, exchange, transfer or other disposition, by way of such a
merger, consolidation or otherwise, of all of the Capital Stock of such
Guarantor or any such designation or any such release) or each of the
corporation acquiring the property of such Guarantor and such Guarantor (in
the event of a sale, exchange, transfer or other disposition of all or
substantially all of the assets of such Guarantor) will be automatically
released and relieved of any obligations under the Guarantee of such
Guarantor, provided that the Net Proceeds of a sale, exchange, transfer or
other disposition described in clause (a) are applied in accordance with the
requirements of the applicable provisions of the Indenture. See "--Certain
Covenants--Limitation on Asset Sales."
REDEMPTION OF NOTES
Optional Redemption. The Notes may not be redeemed at the option of the
Company prior to November 1, 2002. During the 12-month period beginning on
November 1 of the years indicated below, the Notes will be redeemable, at the
option of the Company, in whole or in part, on at least 30 but not more than
60 days' notice
83
to each holder of Notes to be redeemed, at the redemption prices (expressed as
percentages of the principal amount) set forth below, plus any accrued and
unpaid interest and Liquidated Damages, if any, to the redemption date:
YEAR PERCENTAGE
---- ----------
2002.............................................................. 105.188%
2003.............................................................. 103.458%
2004.............................................................. 101.729%
2005 and thereafter............................................... 100.000%
Notwithstanding the foregoing, prior to November 1, 2000, the Company may
(but shall not have the obligation to) redeem up to 35% of the original
aggregate principal amount of the Notes at a redemption price of 110.375% of
the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the redemption date, with the net proceeds of one or more
Equity Offerings of the Company; provided that at least 65% of the aggregate
principal amount of Notes originally issued remain outstanding immediately
after the occurrence of any such redemption; and provided, further, that any
such redemption shall occur within 90 days of the date of the closing of any
such Equity Offering. The restrictions on optional redemptions contained in
the Indenture do not limit the Company's right to make open market, privately
negotiated or other purchases of Notes from time to time.
Mandatory Redemption. Except as described below under the captions "--Change
of Control," "--Certain Covenants--Limitation on Asset Sales" and "--Merger or
Consolidation," the Company is not required to make any mandatory redemption,
purchase or sinking fund payments with respect to the Notes.
Selection and Notice. In the event of a redemption of less than all of the
Notes, the Notes to be redeemed will be chosen by the Trustee pro rata, by lot
or by any other method that the Trustee considers fair and appropriate and, if
the Notes are listed on any securities exchange, by a method that complies
with the requirements of such exchange; provided that, if less than all of a
holder's Notes are to be redeemed, only principal amounts of $1,000 or
multiples thereof may be selected for redemption or accepted for payment. On
and after any redemption date, interest shall cease to accrue on the Notes or
portions thereof called for redemption. Notice of any redemption will be
mailed at least 30 days but not more than 60 days before the redemption date
to each holder of Notes to be redeemed at such holder's registered address.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (such date being the "Change of
Control Trigger Date"), each holder of Notes shall have the right to require
the Company to purchase all or any part (equal to $1,000 or an integral
multiple thereof) of such holder's Notes pursuant to a Change of Control Offer
(as defined) at a purchase price in cash equal to 101% of the aggregate
principal amount thereof, plus any accrued and unpaid interest to the date of
purchase. The Company shall furnish to the Trustee, at least two Business Days
before notice of a Change of Control Offer is mailed to all holders of Notes
pursuant to the procedures described below under the caption "--Change of
Control--Procedures for Change of Control Offer," notice that the Change of
Control Offer is being made. Transactions constituting a Change of Control are
not limited to hostile takeover transactions not approved by the current
management of the Company. Except as described in this section, the Indenture
does not contain provisions that permit the holders of Notes to require the
Company to purchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring, including an issuer
recapitalization or similar transaction with management. Consequently, the
Change of Control provisions will not afford any protection in a highly
leveraged transaction, including such a transaction initiated by the Company,
management of the Company or an affiliate of the Company, if such transaction
does not result in a Change of Control. The Change of Control provisions may
not be waived by the Board of Directors of the Company or the Trustee without
the consent of holders of at least a majority in principal amount of the
Notes. See "--Amendment, Supplement and Waiver."
84
"Change of Control" means the occurrence of any of the following: (i) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act), excluding the Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a person shall be deemed to have "beneficial ownership" of all securities
that such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 50% of the total Voting Stock of the Company; or (ii) the Company
consolidates with, or merges with or into, another person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all
of the assets of the Company and its Subsidiaries, taken as a whole, to any
person, or any person consolidates with, or merges with or into, the Company,
in any such event pursuant to a transaction in which the outstanding Voting
Stock of the Company is converted into or exchanged for cash, securities or
other property, other than any such transaction where (A) the outstanding
Voting Stock of the Company is converted into or exchanged for (1) Voting
Stock (other than Disqualified Stock) of the surviving or transferee
corporation or (2) cash, securities and other property in an amount which
could be paid by the Company as a Restricted Payment under the Indenture and
(B) immediately after such transaction no "person" or "group" (as such terms
are used in Sections 13(d) and 14(d) of the Exchange Act), excluding the
Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act, except that a person shall be deemed to have
"beneficial ownership" of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 50% of the total Voting
Stock of the surviving or transferee corporation; or (iii) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the stockholders of the Company was approved by a vote of a
majority of the directors then still in office who are entitled to vote to
elect such new directors and were either directors at the beginning of such
period or persons whose election as directors or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office. Notwithstanding the
foregoing, a Change of Control shall not be deemed to result from a
Disposition (as defined) described below in clause (a)(i)(B) under the caption
"--Merger or Consolidation."
The definition of Change of Control includes a phrase relating to the sale,
assignment, lease, transfer, conveyance or other disposition of "all or
substantially all" of the Company's assets. Although there is a developing
body of case law interpreting the phrase "substantially all," there is no
precise established definition of the phrase under applicable law.
Accordingly, the ability of a holder of Notes to require the Company to
repurchase such Notes as a result of a sale, assignment, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries to another person may be uncertain.
The Company expects that prepayment of the Notes following a Change of
Control would constitute a default under the New Credit Facility. In addition,
because the obligations of the Company with respect to the Notes are
effectively subordinated to all secured indebtedness of the Company and all
obligations of the Company's subsidiaries, existing or future secured
indebtedness of the Company or obligations of the Company's subsidiaries may
prohibit the Company from repurchasing the Notes upon a Change of Control. Any
future credit agreements or other agreements relating to Senior Indebtedness
to which the Company becomes a party may contain similar restrictions and
provisions. In the event a Change of Control occurs at a time when the Company
is prohibited from purchasing or redeeming Notes, the Company could seek the
consent of its lenders to the purchase of Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Company does not obtain
such a consent or repay such borrowings, the Company would remain prohibited
from purchasing Notes. In such case, the Company's failure to purchase
tendered Notes would constitute an Event of Default under the Indenture which
would, in turn, constitute a default under the New Credit Facility. In such
circumstances, the subordination provisions in the Indenture would likely
restrict payments to the holders of Notes. In addition, the Company's ability
to pay cash to the holders of Notes upon an offer to purchase may be limited
by the Company's then existing financial resources. There can be no assurance
that sufficient funds will be available at the time of any Change of Control
to make any required purchases.
85
Procedures for Change of Control Offers. Within 30 days following any Change
of Control Trigger Date, subject to the provisions of the Indenture, the
Company shall mail a notice to each holder of Notes at such holder's
registered address stating: (a) that a change of control offer (a "Change of
Control Offer") is being made and setting forth in reasonable detail the
events giving rise to a Change of Control and the length of time the Change of
Control Offer shall remain open, (b) the purchase price, the amount of accrued
and unpaid interest as of the purchase date, and the purchase date (which
shall be no earlier than 30 days and no later than 60 days from the date such
notice is mailed (the "Change of Control Purchase Date")), and (c) such other
information required or authorized by the Indenture and applicable law and
regulations.
On the Purchase Date for any Change of Control Offer, the Company will, to
the extent required by the Indenture and such Change of Control Offer, (1)
accept for payment all Notes or portions thereof tendered pursuant to such
Change of Control Offer, (2) deposit with the Paying Agent the aggregate
purchase price of all Notes or portions thereof accepted for payment and any
accrued and unpaid interest on such Notes as of the Purchase Date, and (3)
deliver or cause to be delivered to the Trustee all Notes tendered pursuant to
the Change of Control Offer. The Paying Agent shall promptly mail to each
holder of Notes or portions thereof accepted for payment an amount equal to
the purchase price for such Notes plus any accrued and unpaid interest
thereon, and the Trustee shall promptly authenticate and mail (or cause to be
transferred by book-entry) to any such holder of Notes accepted for payment in
part a new Note equal in principal amount to any unpurchased portion of the
Notes and any Note not accepted for payment in whole or in part shall be
promptly returned to the holder thereof. The Company will publicly announce
the results of the Change of Control Offer as soon as practicable after the
Change of Control Purchase Date.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, in connection with an
offer required to be made by the Company to repurchase the Notes as a result
of a Change of Control. To the extent that the provisions of any securities
laws or regulations conflict with provisions of the Indenture, the Company
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under the Indenture by virtue
thereof.
Selection and Notice. In the event of a purchase of less than all of the
Notes, the Notes to be purchased will be chosen by the Trustee pro rata, by
lot or by any other method that the Trustee considers fair and appropriate
and, if the Notes are listed on any securities exchange, by a method that
complies with the requirements of such exchange; provided that, if less than
all of a holder's Notes are to be accepted for payment, only principal amounts
of $1,000 or multiples thereof may be accepted for payment. On and after any
purchase date, interest shall cease to accrue on the Notes or portions thereof
tendered for purchase or accepted for payment. Notice of any offer to purchase
will be mailed at least 30 days but not more than 60 days before the purchase
date to each holder of Notes to be purchased at such holder's registered
address.
CERTAIN COVENANTS
The Indenture contains, among other things, the following covenants:
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, (i) declare or pay any dividend or make any distribution on
account of the Company's or such Restricted Subsidiary's Capital Stock or
other Equity Interests (other than dividends or distributions payable in
Capital Stock or other Equity Interests (other than Disqualified Stock) of the
Company and/or any Restricted Subsidiary and dividends or distributions
payable by a Restricted Subsidiary to a Restricted Subsidiary or to the
Company, and if such Restricted Subsidiary has shareholders other than the
Company or other Restricted Subsidiaries, to the other shareholders of such
Restricted Subsidiary on a pro rata basis or on a basis that results in the
receipt by the Company or other Restricted Subsidiaries of dividends or
distributions of equal or greater value); (ii) purchase, redeem or otherwise
acquire or retire for value any Capital Stock or other Equity Interests of the
Company or any of its Restricted Subsidiaries held by persons other than the
Company or any Restricted Subsidiary of the Company; (iii) make any payment on
or with respect to, or
86
purchase, redeem, defease or otherwise acquire or retire for value, any
Subordinated Indebtedness of the Company or any Subsidiaries, whether any such
Subordinated Indebtedness is outstanding on, or issued after, the date of
original issuance of the Notes, except a payment, purchase, redemption,
defeasance or other acquisition in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due within
one year of the date of acquisition; (iv) make any payment under the
Morningside Management Agreement or any amendment thereto; or (v) make any
Restricted Investment (all such dividends, distributions, purchases,
redemptions, acquisitions, retirements, payments and Restricted Investments
being collectively referred to as "Restricted Payments"), if, at the time of
such Restricted Payment:
(a) a Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence thereof; or
(b) immediately after such Restricted Payment and after giving effect
thereto on a Pro Forma Basis, the Company shall not be able to issue $1.00
of additional Indebtedness pursuant to the first sentence of the covenant
described below under the caption "--Certain Covenants--Limitation on
Incurrence of Indebtedness"; or
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made after the Issue Date, without duplication, exceeds
the sum of (1) 50% of the cumulative Consolidated Net Income (including,
for this purpose, gains or losses from Asset Sales and, to the extent not
included in Consolidated Net Income, any gain or loss from a sale or
disposition of a Restricted Investment) of the Company (or, in case such
cumulative Consolidated Net Income is a loss, 100% of such loss) for the
period (taken as one accounting period) from the beginning of the fiscal
quarter commencing October 1, 1997 and ended as of the Company's most
recently ended fiscal quarter at the time of such Restricted Payment; plus
(2) 100% of the aggregate net cash proceeds and the fair market value of
any property or securities (as determined by the Board of Directors in good
faith) received by the Company or any Wholly Owned Restricted Subsidiary
from the issue or sale of Capital Stock or other Equity Interests of the
Company or any Restricted Subsidiary subsequent to the Issue Date (other
than (x) Capital Stock or other Equity Interests issued or sold to a
Restricted Subsidiary and (y) the issuance or sale of Disqualified Stock);
plus (3) the amount by which the principal amount of and any accrued
interest on or the redemption or repurchase price in respect thereof and
accrued dividends on, as the case may be, either (A) Indebtedness of the
Company or (B) any Indebtedness of any Restricted Subsidiary is reduced on
the Company's consolidated balance sheet upon the conversion or exchange,
pursuant to the terms of such Indebtedness, other than by a Restricted
Subsidiary, subsequent to the Issue Date of any Indebtedness of the Company
or any Restricted Subsidiary (not held by the Company or any Restricted
Subsidiary) for Capital Stock or other Equity Interests (other than
Disqualified Stock) of the Company (less the amount of any cash, or the
fair market value of any other property or securities (as determined by the
Board of Directors in good faith), distributed by the Company or any
Restricted Subsidiary (to persons other than the Company or any other
Restricted Subsidiary) upon such scheduled conversion or exchange); plus
(4) to the extent that any Restricted Investment that was made after the
Issue Date is sold or otherwise liquidated or repaid or any Unrestricted
Subsidiary which is designated as an Unrestricted Subsidiary after the
Issue Date is sold or otherwise liquidated, the return of capital with
respect to such Restricted Investment (less the cost of disposition, if
any) up to such amount as does not exceed the original amount of such
Restricted Investment; plus (5) any dividends or distributions actually
received in cash by the Company or a Restricted Subsidiary after the Issue
Date from an Unrestricted Subsidiary, to the extent that such dividends or
distributions were not otherwise included in the Consolidated Net Income of
the Company for such period; plus (6) if any Unrestricted Subsidiary is
redesignated as a Restricted Subsidiary, the value of the Restricted
Payment that would result if such Subsidiary were redesignated as a
Unrestricted Subsidiary at such time, as determined in accordance with the
second and third sentences of the covenant described below under "--Certain
Covenants--Designation of Restricted and Unrestricted Subsidiaries";
provided, however, that for purposes of this clause (6), the value of any
redesignated Unrestricted Subsidiary shall be reduced by the amount that
any such redesignation replenishes or increases the amount of Restricted
Investments permitted to be made pursuant to clause (xv) of the definition
of "Restricted Investment"; plus (7) $5.0 million.
87
Notwithstanding the foregoing, clauses (b) and (c) shall not prohibit as
Restricted Payments:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration, such payment would
comply with all covenants of such Indenture (including, but not limited to,
this "Limitation on Restricted Payments" covenant);
(ii) the repurchase, redemption, retirement or acquisition of Equity
Interests of the Company or a Subsidiary from employees or directors of the
Company or a Subsidiary upon such employees' or directors' death,
retirement or termination of employment or otherwise in accordance with any
employment agreement, employee or director stock option plan or agreement
or employee or director equity subscription agreement, in an aggregate
amount not to exceed $1.0 million in any calendar year, plus the aggregate
cash proceeds received by the Company during such calendar year from any
issuance of such Equity Interests to employees or directors of the Company
or any Restricted Subsidiary, plus the portion of such $1.0 million which
remains unused at the end of the prior calendar year, but in no event to
exceed $2.0 million in any calendar year, provided, that the cancellation
of Indebtedness owing to the Company or a Restricted Subsidiary from
employees or directors in connection with a repurchase of Equity Interests
of the Company or a Restricted Subsidiary will not be deemed to constitute
a Restricted Payment;
(iii) the redemption, repurchase, retirement or other acquisition of any
Capital Stock or other Equity Interests of the Company or any Restricted
Subsidiary in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of other
Capital Stock or other Equity Interests (other than Disqualified Stock) of
the Company or the redemption, repurchase, retirement or other acquisition
of any Capital Stock or other Equity Interests (other than Disqualified
Stock) of any Restricted Subsidiary in exchange for, or out of the proceeds
of, the substantially concurrent sale (other than to the Company or a
Subsidiary of the Company) of other Capital Stock or other Equity Interests
(other than Disqualified Stock) of such Restricted Subsidiary; provided
that, in each case, any net cash proceeds that are utilized for any such
redemption, repurchase, retirement or other acquisition, and any Net Income
resulting therefrom, shall be excluded from clauses (c)(1) and (c)(2) of
the preceding paragraph;
(iv) the redemption, repurchase, retirement, defeasance or other
acquisition of any Subordinated Indebtedness of the Company or any
Restricted Subsidiary in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Subsidiary of the Company)
of Capital Stock or other Equity Interests (other than Disqualified Stock)
of the Company or the redemption, repurchase, retirement, defeasance or
other acquisition of any Subordinated Indebtedness of any Restricted
Subsidiary in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to the Company or a Subsidiary of the Company)
of Capital Stock or other Equity Interests (other than Disqualified Stock)
of such Restricted Subsidiary; provided that, in each case, any net cash
proceeds that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition, and any Net Income resulting therefrom,
shall be excluded from clauses (c)(1) and (c)(2) of the preceding
paragraph;
(v) the redemption, repurchase, retirement, defeasance or other
acquisition of any Subordinated Indebtedness of the Company or any
Restricted Subsidiary in exchange for, or out of the proceeds of, any
Refinancing Indebtedness relating to such Subordinated Indebtedness;
(vi) the redemption, repurchase or other acquisition of Notes or Exchange
Notes;
(vii) payments required pursuant to any indenture or agreement governing
Subordinated Indebtedness of the Company or any Restricted Subsidiary in
respect of any Change of Control or Asset Sale, provided that payment has
theretofore been made with respect to all Notes tendered in response to a
Change of Control Offer or Asset Sale Offer, as applicable; and
(viii) the payment of (a) management, consulting and financial advisory
fees pursuant to the Morningside Management Agreement or any amendment
thereto in an aggregate amount not to exceed (A) $500,000 in any fiscal
year, if the Company's Cash Flow Coverage Ratio for the four full fiscal
quarters next preceding the date such Restricted Payment is made was less
than 3.0 to 1, or (B) $750,000 in any fiscal year otherwise and (b)
expenses and indemnities pursuant to the Morningside Management Agreement
or any amendment thereto.
88
The net proceeds from the issuance of shares of Capital Stock upon
conversion of Indebtedness will be deemed to be an amount equal to (i) the
accreted value of such Indebtedness on the date of such conversion and (ii)
the additional consideration, if any, received by the Company upon such
conversion thereof, less any cash payment on account of fractional shares. The
amount of all Restricted Payments (other than cash) will be the fair market
value (as determined by and set forth in a resolution of the Board of
Directors in good faith) on the date of the Restricted Payment of the asset(s)
proposed to be transferred by the Company or a Restricted Subsidiary, as the
case may be, pursuant to the Restricted Payment.
Limitation on Incurrence of Indebtedness. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, issue any
Indebtedness (other than the Indebtedness represented by the Notes and the
Guarantees), except that the Company and any Restricted Subsidiaries may issue
additional Indebtedness if the Company's Cash Flow Coverage Ratio for its four
full fiscal quarters next preceding the date such additional Indebtedness is
issued would have been at least 2.00 to 1 on or prior to the second
anniversary of the Issue Date and 2.25 to 1 thereafter determined on a Pro
Forma Basis (including, for this purpose, any other Indebtedness issued and
any acquisition or sale consummated, since the end of the applicable four
quarter period) as if such additional Indebtedness and any other Indebtedness
issued since the end of such four quarter period had been issued at the
beginning of such four quarter period.
The foregoing limitations will not apply to the issuance of:
(i) Indebtedness of the Company and the Restricted Subsidiaries under the
New Credit Facility in an aggregate principal amount at any one time
outstanding not to exceed the greater of (x) $75.0 million or (y) the sum
of (i) 85% of the book value of the accounts receivable of the Company and
the Restricted Subsidiaries taken as a whole and (ii) 50% of the book value
of the inventory of the Company and the Restricted Subsidiaries taken as a
whole;
(ii) Indebtedness of Foreign Subsidiaries, including Carson South Africa,
in an aggregate principal amount at any one time outstanding not to exceed
the greater of (x) $10.0 million or (y) an aggregate amount equal to the
sum of, with respect to each Foreign Subsidiary, (A) 85% of the book value
of the accounts receivable of such Foreign Subsidiary and (B) 50% of the
book value of the inventory of such Foreign Subsidiary; provided, that such
indebtedness is issued for working capital purposes;
(iii) Indebtedness of the Company and its Restricted Subsidiaries issued
in connection with capital leases, purchase money obligations or similar
financing transactions relating to its properties, assets and rights as of
the date of original issuance of the Notes up to $10.0 million in aggregate
principal amount at any one time outstanding;
(iv) additional Indebtedness of the Company and the Restricted
Subsidiaries in an aggregate principal amount up to $10.0 million at any
one time outstanding; and
(v) Other Permitted Indebtedness.
Notwithstanding the foregoing, no Restricted Subsidiary shall under any
circumstances issue a guarantee of any Indebtedness of the Company except for
guarantees issued by Restricted Subsidiaries pursuant to the covenant
described below under the caption "--Certain Covenants--Subsidiary
Guarantees", provided, however, that the foregoing will not limit or restrict
guarantees issued by Guarantors in respect of Indebtedness of other Guarantors
or of the Company.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the types of
Indebtedness which the Company and any Restricted Subsidiary are permitted to
issue, the Company and such Restricted Subsidiary, as the case may be, will
have the right, in the Company's sole discretion, to classify such item of
Indebtedness at the time of its issuance and will only be required to include
the amount and type of such Indebtedness under the clause permitting the
Indebtedness as so classified. Neither the accrual of interest nor the
issuance of additional Indebtedness in the form of additional promissory notes
or otherwise in lieu of the payment of interest nor the accretion of accreted
value will be deemed to be an issuance of Indebtedness for purposes of this
covenant.
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No Senior Subordinated Indebtedness. The Indenture provides that (i) the
Company will not issue any Indebtedness that is subordinate or junior in right
of payment to any Senior Indebtedness and senior in any respect in right of
payment to the Notes, and (ii) no Guarantor will issue any Indebtedness that
is subordinate or junior in right of payment to any Senior Indebtedness and
senior in any respect in right of payment to the Guarantees.
Sale and Leaseback Transactions. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, enter
into any sale and leaseback transaction; provided that the Company and its
Restricted Subsidiaries may enter into a sale and leaseback transaction if (i)
the Company and its Restricted Subsidiaries could have issued Indebtedness in
an amount equal to the Attributable Debt relating to such sale and leaseback
transaction pursuant to the Company's Cash Flow Coverage Ratio test set forth
in the first sentence of the covenant described above under the caption "--
Certain Covenants--Limitation on Incurrence of Indebtedness" (ii) the cash
proceeds of such sale and leaseback transaction are at least equal to the fair
market value (as determined in good faith by the Board of Directors and set
forth in an Officers' Certificate delivered to the Trustee) of the property
that is the subject of such sale and leaseback transaction and (iii) to the
extent such sale and leaseback transaction is an Asset Sale, the proceeds of
such transaction are applied in compliance with, the covenant described below
under the caption "--Certain Covenants--Limitation on Asset Sales."
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any of its Restricted Subsidiaries to, create, incur, assume
or suffer to exist any Liens of any kind against or upon any of its property
or assets, or any proceeds therefrom, unless (x) in the case of Liens securing
Subordinated Indebtedness, the Notes are secured by a Lien on such property,
assets or proceeds that is senior in priority to such Liens and (y) in all
other cases, the Notes are equally and ratably secured, except for (a) Liens
existing as of the Issue Date and securing any extensions, refinancings,
renewals, replacements, substitutions or refundings of the Obligations secured
thereby, provided such Liens do not extend to or cover any property or assets
of the Company or any of its Restricted Subsidiaries not securing Indebtedness
as of the Issue Date; (b) Liens securing the Notes and the Exchange Notes and
Liens in favor of the Trustee and any Lien granted, in respect of amounts owed
to such trustee or similar institution, to any trustee or similar institution
under any indenture for Indebtedness permitted by the terms of the Indenture;
(c) Liens on assets of the Company and its Subsidiaries securing Senior
Indebtedness; (d) Liens in favor of the Company or any Restricted Subsidiary;
(e) Liens securing Indebtedness which is incurred to refinance Indebtedness
which has been secured by a Lien permitted under the Indenture and which has
been incurred in accordance with the provisions of the Indenture, provided,
however, that such Liens do not extend to or cover any property or assets of
the Company or any of its Restricted Subsidiaries not securing the
Indebtedness so refinanced; and (f) Permitted Liens.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective, any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to: (a)
pay dividends or make any other distributions on its Capital Stock or any
other interest or participation in, or measured by, its profits, owned by the
Company or any Restricted Subsidiary, or pay any Indebtedness owed to, the
Company or any Restricted Subsidiary, (b) make loans or advances to the
Company, or (c) transfer any of its properties or assets to the Company,
except for such encumbrances or restrictions existing under or by reason of:
(i) applicable law or regulations;
(ii) customary provisions restricting subletting or assignment of any
lease or license of the Company or any Restricted Subsidiary;
(iii) any instrument governing Indebtedness or any other encumbrance or
restriction of a person affecting such person or its property or assets
acquired by the Company or any Restricted Subsidiary at the time of such
acquisition (provided that such Indebtedness or other encumbrance or
restriction was not issued in contemplation of the acquisition), which
encumbrance or restriction is not applicable to any person, or
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the properties or assets of any person, other than the person, or the
property or assets of the person, so acquired;
(iv) the New Credit Facility;
(v) any other agreement or instrument evidencing Indebtedness of a
Foreign Subsidiary permitted under the Indenture;
(vi) any other agreement or instrument in effect as of or entered into on
the Issue Date or imposed by the Indenture, the Guarantees, the Notes, the
Exchange Notes or the guarantees thereon (or similar limitations pursuant
to other notes issued by the Company or other indentures relating thereto
that are substantially similar to those set forth in the Indenture);
(vii) any Refinancing Indebtedness permitted under the covenant described
above under the caption "--Certain Covenants--Limitation on Incurrence of
Indebtedness"; provided that the encumbrances and restrictions created in
connection with such Refinancing Indebtedness are no more restrictive in
any material respect with regard to the interests of the holders of Notes
than the encumbrances and restrictions in the refinanced Indebtedness (as
determined by the Board of Directors in good faith);
(viii) the terms of purchase money obligations, but only to the extent
such purchase money obligations restrict or prohibit the transfer of the
property so acquired;
(ix) any other agreement or instrument evidencing or relating to secured
Indebtedness of the Company or any Restricted Subsidiary otherwise
permitted to be issued pursuant to the provisions of the covenants
described under the captions "--Certain Covenants--Limitation on Incurrence
of Indebtedness" and "--Certain Covenants--Limitation on Liens" that limit
the right of the debtor to dispose of the property or assets securing such
Indebtedness;
(x) customary net worth provisions contained in leases and other
agreements entered into in the ordinary course of business;
(xi) the terms of agreements with respect to the sale of assets of the
Company or a Subsidiary of the Company otherwise permitted by the
Indenture, provided that such restriction terminates if such transaction is
not consummated;
(xii) the terms of agreements that have been entered into for the sale of
all or substantially all of the Capital Stock, business, assets or
properties of a Restricted Subsidiary, provided that such restriction
terminates if such transaction is not consummated;
(xiii) with respect to a Restricted Subsidiary that is not a Restricted
Subsidiary on the Issue Date, instruments in existence at the time such
Person becomes a Restricted Subsidiary and not entered into in connection
with, or in contemplation of, such Person becoming a Restricted Subsidiary;
(xiv) customary provisions in joint venture agreements and other similar
agreements with respect to dividends and other similar distributions to the
parties to such joint venture, the disposition or distribution of assets or
property of such joint venture, or transactions between or among the joint
venture and the parties to such joint venture; or
(xv) any Permitted Lien, with respect to restrictions on the sale or
other disposition of the assets or property subject to such Permitted Lien.
Limitation on Transactions with Affiliates. The Indenture provides that
neither the Company nor any of its Restricted Subsidiaries may enter into any
transaction with an Affiliate, including, without limitation, any loan,
advance, guarantee or capital contribution to, or for the benefit of, or sell,
lease, transfer or dispose of any properties or assets to, or for the benefit
of, or purchase or lease any property or assets from, or enter into or amend
any contract, agreement or understanding with, or for the benefit of, an
Affiliate (each such transaction or series of related transactions with such
Affiliate that are part of a common plan are referred to as an "Affiliate
Transaction"), except in good faith and on terms that are determined by the
Board of Directors, or, if applicable, a committee comprising the Independent
Directors of the Board of Directors, and, in the case of any Affiliate
Transaction involving aggregate payments or other transfers by the Company
and/or its Restricted Subsidiaries
91
in excess of $1.0 million (including cash and non-cash payments and benefits
valued at their fair market value by the Board of Directors in good faith),
set forth in a resolution adopted by such committee, to be no less favorable
to the Company or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction on an arm's length basis from
an unrelated person.
The Indenture further provides that the Company will not, and will not
permit any Restricted Subsidiary to, engage in any Affiliate Transaction
involving aggregate payments or other transfers by the Company and/or its
Restricted Subsidiaries in excess of $7.5 million (including cash and non-cash
payments and benefits valued at their fair market value by the Board of
Directors in good faith) unless the Company delivers to the Trustee:
(i) a resolution of the Board of Directors, or, if applicable, a
committee comprising the Independent Directors of the Board of Directors,
stating that a majority of such directors has, in good faith, determined
such Affiliate Transaction to be no less favorable to the Company or the
relevant Restricted Subsidiary than those that would have been obtained in
a comparable transaction on an arm's length basis from an unrelated person
and otherwise complies with the provisions of the Indenture; and
(ii)(A) with respect to any Affiliate Transaction involving the
incurrence of Indebtedness, a written opinion of a nationally recognized
investment banking or accounting firm experienced in the review of similar
types of transactions, (B) with respect to any Affiliate Transaction
involving the transfer of real property, fixed assets or equipment, either
directly or by a transfer of 50% or more of the Capital Stock of a
Restricted Subsidiary which holds any such real property, fixed assets or
equipment, a written appraisal from a nationally recognized appraiser,
experienced in the review of similar types of transactions or (C) with
respect to any Affiliate Transaction not otherwise described in (A) and (B)
above, a written certification from a nationally recognized professional or
firm experienced in evaluating similar types of transactions, in each case,
stating that the terms of such transaction are fair to the Company or such
Restricted Subsidiary, as the case may be, from a financial point of view.
Notwithstanding the foregoing, this Affiliate Transactions covenant will not
apply to:
(1) transactions between or among the Company and any Restricted
Subsidiaries;
(2) transactions permitted by the covenant described above under the
caption "--Certain Covenants--Limitation on Restricted Payments";
(3) fees and compensation paid to, and indemnity provided on behalf of,
directors, officers or employees of the Company or any Subsidiary as
determined in good faith by the Board of Directors;
(4) any issuance, award or grant of securities or payment in cash or
otherwise made as compensation for services rendered pursuant to the terms
of any Incentive Arrangement, as determined in good faith by the Board of
Directors;
(5) loans or advances to employees or directors of the Company or any
Restricted Subsidiary in the ordinary course and in an aggregate amount not
to exceed $1.0 million at any one time outstanding; or
(6) any transaction pursuant to an Existing Affiliate Agreement,
including any amendments thereto entered into after the Issue Date,
provided that the terms of any such amendment are not less favorable to the
Company than the terms of the relevant agreement in effect prior to any
such amendment as determined in good faith by the Board of Directors.
As used in the immediately preceding clause (6), "Existing Affiliate
Agreement" means the Morningside Management Agreement, the Carson-AM
Management Agreement, the AM Cosmetics Broker Agreement, the AM Manufacturing
Agreement, the Distribution Agreement and the License Agreement.
In addition, notwithstanding the foregoing, any Affiliate Transaction
between the Company and an Affiliate of the Company relating to the provision
to the Company or a Restricted Subsidiary of research and development,
manufacturing, sales and/or distribution services in the ordinary course of
business shall not be subject to clause (ii) of the second paragraph of this
covenant.
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Limitation on Asset Sales. The Indenture provides that the Company may not,
and may not permit any Restricted Subsidiary to, directly or indirectly,
consummate an Asset Sale (including the sale of any of the Capital Stock of
any Restricted Subsidiary but excluding the sale of any interests in
Unrestricted Subsidiaries) providing for Net Proceeds in excess of $1.0
million unless the Net Proceeds from such Asset Sale are applied (in any
manner otherwise permitted by the Indenture) to one or more of the following
purposes in such combination as the Company or the applicable Restricted
Subsidiary, as the case may be, shall elect: (a) an investment in another
asset or business in the same line of business as, or a line of business
similar, ancillary, complementary or reasonably related to that of, a line of
business or businesses of the Company and its Restricted Subsidiaries at the
time of the Asset Sale; provided that such investment occurs on or prior to
the 270th day following the date of such Asset Sale (the "Asset Sale
Disposition Date"), (b) the reimbursement of the Company or its Restricted
Subsidiaries for expenditures made, and costs incurred, to repair, rebuild,
replace or restore property subject to loss, damage or taking to the extent
that the Net Proceeds consist of insurance proceeds received on account of
such loss, damage or taking, (c) the purchase, redemption or other prepayment
or repayment of outstanding Senior Indebtedness of the Company or its
Restricted Subsidiaries on or prior to the 270th day following the Asset Sale
Disposition Date and permanent reduction of the amount of such Indebtedness or
(d) the cash collateralization of letters of credit or bankers acceptances
designed to facilitate the purchase of goods and services provided that any
cash collateral released to the Company or its Restricted Subsidiaries upon
the expiration of such letters of credit, bankers acceptances or other
instruments or arrangements shall again be deemed to be Net Proceeds received
on the date of such release. The Indenture also provides that the Company may
not, and may not permit any Restricted Subsidiary to, directly or indirectly,
consummate an Asset Sale unless at least 75% of the consideration thereof
received by the Company or such Restricted Subsidiary is in the form of cash,
cash equivalents or Marketable Securities; provided that, solely for purposes
of calculating such 75% of the consideration, the amount of (x) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet or in the notes thereto, excluding contingent liabilities
and trade payables) of the Company or any Restricted Subsidiary (other than
liabilities that are by their terms subordinated to the Notes) that are
assumed by the transferee of any such assets and (y) any notes or other
obligations received by the Company or any such Restricted Subsidiary from
such transferee that are promptly, but in no event more than 45 days after
receipt, converted by the Company or such Restricted Subsidiary into cash (to
the extent of the cash received), shall be deemed to be cash and cash
equivalents for purposes of this provision. Any Net Proceeds from any Asset
Sale that are not applied or invested as provided in the first sentence of
this paragraph shall constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds (net of Foreign Proceeds, as
defined below) exceeds $10.0 million (such date being an "Asset Sale Trigger
Date"), the Company shall make an offer to purchase on a pro rata basis the
maximum principal amount of the Notes and pari passu Indebtedness of the
Company or any Restricted Subsidiary, if any, that requires, pursuant to its
terms, such an offer, then outstanding that may be purchased out of Excess
Proceeds (an "Asset Sale Offer"), at an offer price in cash in an amount equal
to 100% of the principal amount thereof plus any accrued and unpaid interest
to the Asset Sale Purchase Date in accordance with the procedures set forth in
the Indenture. Notwithstanding the foregoing, to the extent that any or all of
the Net Proceeds of an Asset Sale is prohibited or delayed by applicable local
law from being repatriated to the United States or such repatriation would be
expected to result in material tax liability to the Company or any Restricted
Subsidiary, as determined in good faith by the Board of Directors (such Net
Proceeds, the "Foreign Proceeds"), the Company shall not be required to make
an Asset Sale Offer with respect to such proceeds. Foreign Proceeds shall be
applied, in such combination as the Company shall select, in accordance with
clause (a), (b), (c) or (d) of the preceding paragraph, or, at the option of
the Company, may be retained as cash or Marketable Securities for so long, but
only for so long, as the applicable local law prohibits or delays repatriation
to the United States or would result in material tax liability as described
above.
To the extent that any Excess Proceeds (other than Foreign Proceeds) remain
after completion of an Asset Sale Offer, the Company may use such remaining
amount for general corporate purposes, including repayment of Subordinated
Indebtedness. If the aggregate principal amount of Notes surrendered by
holders thereof exceeds the amount of Excess Proceeds, the Trustee shall
select the Notes to be purchased pro rata, by lot or by any
93
other method that the Trustee considers fair and appropriate. Upon completion
of an Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero
plus the amount, if any, of cash or Marketable Securities attributable to
Foreign Proceeds.
Although the New Credit Facility permits dividends from the Company's
Subsidiaries to the Company for the purpose of paying interest on the Notes,
dividends for other purposes, such as repurchases of Notes by the Company upon
an Asset Sale, are not permitted under the terms of the New Credit Facility.
Accordingly, the Company would need to seek the consent of its lenders under
the New Credit Facility in order to repurchase Notes with the Net Proceeds of
an Asset Sale. See "Risk Factors--Leverage and Debt Service."
Procedures for Offers. Within 30 days following any Asset Sale Trigger Date,
subject to the provisions of the Indenture, the Company shall mail a notice to
each holder of Notes at such holder's registered address a notice stating: (a)
that an Asset Sale Offer is being made, the length of time the Asset Sale
Offer shall remain open and the maximum principal amount of Notes that will be
accepted for payment pursuant to such Asset Sale Offer, (b) the purchase
price, the amount of accrued and unpaid interest as of the purchase date, and
the purchase date (which shall be no earlier than 30 days and no later than 60
days from the date such notice is mailed (the "Asset Sale Purchase Date")),
and (c) such other information required by the Indenture and applicable law
and regulations.
On the Asset Sale Purchase Date for any Asset Sale Offer, the Company will,
to the extent required by the Indenture and such Asset Sale Offer, (1) accept
for payment the maximum principal amount of Notes or portions thereof tendered
pursuant to such Asset Sale Offer that can be purchased out of Excess
Proceeds, (2) deposit with the Paying Agent the aggregate purchase price of
all Notes or portions thereof accepted for payment and any accrued and unpaid
interest on such Notes as of the Asset Sale Purchase Date, and (3) deliver or
cause to be delivered to the Trustee all Notes tendered pursuant to the Asset
Sale Offer. The Paying Agent shall promptly mail to each holder of Notes or
portions thereof accepted for payment an amount equal to the purchase price
for such Notes plus any accrued and unpaid interest thereon, and the Trustee
shall promptly authenticate and mail (or cause to be transferred by book-
entry) to any holder of Notes accepted for payment in part a new Note equal in
principal amount to any unpurchased portion of the Notes and any Note not
accepted for payment in whole or in part shall be promptly returned to the
holder thereof. The Company will publicly announce the results of the Asset
Offer as soon as practicable after the Asset Purchase Date.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, in connection with an
offer required to be made by the Company to repurchase the Notes as a result
of an Asset Sale. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the Indenture, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under the Indenture by virtue thereof.
Selection and Notice. In the event of a purchase of less than all of the
Notes, the Notes to be purchased will be chosen by the Trustee pro rata, by
lot or by any other method that the Trustee considers fair and appropriate
and, if the Notes are listed on any securities exchange, by a method that
complies with the requirements of such exchange; provided that, if less than
all of a holder's Notes are to be accepted for payment, only principal amounts
of $1,000 or multiples thereof may be accepted for payment. On and after any
purchase date, interest shall cease to accrue on the Notes or portions thereof
accepted for payment. Notice of any offer to purchase will be mailed at least
30 days but not more than 60 days before the purchase date to each holder of
Notes to be purchased at such holder's registered address.
Subsidiary Guarantees. The Indenture provides that if (i) any Restricted
Subsidiary shall become a guarantor under the New Credit Facility, (ii) any
Restricted Subsidiary shall become a guarantor under any Indebtedness ("Other
Company Indebtedness") of the Company or a Restricted Subsidiary, other than
the Notes, the New Credit Facility or Indebtedness of a Foreign Subsidiary or
(iii) the Company or any of its Restricted Subsidiaries shall acquire or
create another Subsidiary after the date of the Indenture, then such
Restricted Subsidiary or newly acquired or created Subsidiary, as the case may
be, shall execute a Guarantee and deliver an
94
opinion of counsel in accordance with the terms of the Indenture; provided,
however, that (A) any guarantee pursuant to clause (ii) of this paragraph
shall be limited to such portion of the aggregate principal amount of
outstanding Notes as equals the principal amount of such Other Company
Indebtedness that is guaranteed by such Restricted Subsidiary, (B) if the
Other Company Indebtedness guaranteed by such Restricted Subsidiary is (1)
Senior Indebtedness, the guarantee for the Notes shall be subordinated in
right of payment with the Other Company Indebtedness guarantee and (2)
Subordinated Indebtedness, the guarantee for the Notes shall be pari passu or
senior in right of payment to the Other Company Indebtedness guarantee and (C)
clause (iii) of this covenant shall not apply (x) to any Subsidiary of the
Company during such period as such Subsidiary is inactive, has assets of less
than $50,000 and has less than $1,000 of outstanding Indebtedness owed to any
person other than the Company or a Restricted Subsidiary or (y) to any newly
acquired or created Subsidiary that is also a Foreign Subsidiary. The
foregoing covenant shall not apply to any newly acquired or created Subsidiary
that has been properly designated as an Unrestricted Subsidiary in accordance
with the Indenture for so long as it continues to be an Unrestricted
Subsidiary.
Designation of Restricted and Unrestricted Subsidiaries. The Board of
Directors of the Company may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at
the time of such designation and will reduce the amount available for
Restricted Payments under clause (c) of the first paragraph of the covenant
described above under the caption "--Certain Covenants--Limitation on
Restricted Payments." All such outstanding Investments will be deemed to
constitute Investments in an amount equal to the fair market value of such
Investments at the time of such designation. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
Limitations as to Unrestricted Subsidiaries. The Indenture provides that the
Company will not permit any Unrestricted Subsidiary to issue Indebtedness
except Non-Recourse Debt. The Company and its Restricted Subsidiaries will not
designate, create or purchase any Unrestricted Subsidiary, unless the Board of
Directors of the Company shall have made a determination (as set forth in the
resolution approving such designation, creation or purchase) that the
designation, creation and operation of the Unrestricted Subsidiary is not
reasonably expected to materially and adversely affect the financial
condition, business, or operations of the Company and its Restricted
Subsidiaries taken together as a whole (which resolution shall be conclusive
evidence of compliance with this provision).
Payments for Consent. The Indenture provides that the Company will not and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
pay or cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any holder of any Notes for or as an inducement or any consent,
waiver or amendment of any of the terms or provisions of the Indenture or the
Notes or the Guarantees, unless such consideration is offered to be paid or
agreed to be paid to all holders of the Notes that consent, waive or agree to
amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or agreement.
Limitation on Lines of Business. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, engage in or
conduct any business other than the manufacture, distribution and/or sale of
health and beauty aids, cosmetics and/or other personal care products, and
businesses ancillary, complementary or reasonably related thereto, and
reasonable extensions thereof.
MERGER OR CONSOLIDATION
(a) The Indenture provides that the Company shall not consolidate or merge
with or into, or sell, lease, convey or otherwise dispose of all or
substantially all of its assets to, any corporation, person or entity (any
such consolidation, merger or sale being a "Disposition") unless: (i) the
successor person of such Disposition or the person to which such Disposition
shall have been made (A) is a corporation organized or existing under the laws
of the United States of America, any state thereof or the District of Columbia
or (B) is Carson South Africa;
95
(ii) in the case of clause (i)(B), the Company, prior to any such transaction,
shall have complied with the second paragraph of this covenant; (iii) the
successor corporation of such Disposition or the corporation to which such
Disposition shall have been made expressly assumes the Obligations of the
Company under the Indenture and the Notes, pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee (which supplemental
indenture, in the case of clause (i)(B), shall provide that such successor
shall irrevocably submit to the exclusive jurisdiction of the Supreme Court of
the State of New York, New York County and to the jurisdiction of the United
States District Court for the Southern District of New York for the purposes
of any proceeding relating to the Notes or the Indenture); (iv) immediately
after such Disposition, no Default or Event of Default shall exist; and (v)
the corporation formed by or surviving any such Disposition, or the
corporation to which such Disposition shall have been made, shall be permitted
immediately after the Disposition by the terms of the Indenture to issue at
least $1.00 of additional Indebtedness pursuant to the first sentence of the
covenant described above under the caption "--Certain Covenants--Limitation on
Incurrence of Indebtedness" determined on a Pro Forma Basis; provided,
however, that a Disposition effected solely for the purpose of changing the
Company's jurisdiction of incorporation pursuant to clause (i)(A) need not
comply with the foregoing clauses (iv) and (v).
(b) Prior to any Disposition pursuant to the foregoing clause (a)(i)(B) the
Company shall make on at least 30 but not more than 60 days notice, an offer
to purchase all of the Notes then outstanding, at a purchase price in cash
equal to the sum of (i) the principal amount thereof plus (ii) accrued and
unpaid interest and Liquidated Damages, if any, to the date of purchase plus
(iii) the Applicable Premium.
"Applicable Premium" means, with respect to a Note, the greater of (i) 1.0%
of the then outstanding principal amount of such Note and (ii) the excess of
(A) the present value of all remaining required interest and principal
payments due on such Note, computed using a discount rate equal to the yield
to maturity at the time of computation of United States Treasury securities
with a constant maturity most nearly equal to the then remaining average life
to stated maturity of the Notes (the "Treasury Rate"), plus 50 basis points,
over (B) the then outstanding principal amount of such Note. If the average
life to stated maturity of the Notes is not equal to the constant maturity of
a United States Treasury security for which a weekly average yield is given,
the Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given. The Treasury Rate shall
be determined by reference to the yields published in the most recent Federal
Reserve Statistical Release H.15(519) which has become publicly available at
least two business days prior to the date fixed for purchase of the Notes
following a Disposition pursuant to the foregoing clause (a)(i)(B), or if such
Statistical Release is no longer published, any publicly available source of
similar market data.
Procedures for Offer to Purchase upon a Certain Disposition. At least 30 but
not more than 60 days prior to the proposed effective date of a Disposition
pursuant to the foregoing clause (a)(i)(B), the Company shall mail a notice to
each holder of Notes at such holder's registered address stating: (a) that the
Company intends to effect a Disposition pursuant to which Carson South Africa
will be the successor and that an offer is being made to purchase all of the
Notes then outstanding and setting forth in reasonable detail the proposed
transaction, the proposed effective date of the Disposition and the length of
time the offer shall remain open, (b) the purchase price, the amount of
accrued and unpaid interest as of the purchase date, and the purchase date
(which shall be no earlier than 30 days and no later than 60 days from the
date such notice is mailed), and (c) such other information required by the
Indenture and applicable law and regulations.
On the purchase date (which shall be the effective date of the Disposition)
for any such offer, the Company will (1) accept for payment all Notes or
portions thereof tendered pursuant to such offer, (2) deposit with the Paying
Agent the aggregate purchase price of all Notes or portions thereof accepted
for payment and any accrued and unpaid interest on such Notes as of the
purchase date, and (3) deliver or cause to be delivered to the Trustee all
Notes tendered pursuant to such offer. The Paying Agent shall promptly mail to
each holder of Notes or portions thereof accepted for payment an amount equal
to the purchase price for such Notes plus any accrued and unpaid interest
thereon, and the Trustee shall promptly authenticate and mail (or cause to be
transferred by
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book-entry) to any such holder of Notes accepted for payment in part a new
Note equal in principal amount to any unpurchased portion of the Notes and any
Note not accepted for payment in whole or in part shall be promptly returned
to the holder thereof. The Company will publicly announce the results of the
offer as soon as practicable after the purchase date.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, in connection with an
offer required to be made by the Company to repurchase the Notes in
contemplation of such Disposition. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the Indenture, the
Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the Indenture by
virtue thereof.
(c) Prior to the consummation of any proposed Disposition, the Company shall
deliver to the Trustee an Officers' Certificate to the foregoing effect and an
opinion of counsel stating that the proposed Disposition and such supplemental
indenture comply with the Indenture. The limitations in the Indenture on the
Company's ability to make a Disposition do not restrict the Company's ability
to sell less than all or substantially all of its assets, such sales being
governed by the provisions of the covenant described above under the caption
"--Certain Covenants--Limitation on Asset Sales."
PROVISION OF FINANCIAL INFORMATION TO HOLDERS OF NOTES
So long as the Notes are outstanding, whether or not the Company or the
Guarantors are subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act, the Company and the Guarantors shall submit for filing with
the Commission (unless the Commission will not accept such filings) the annual
reports, quarterly reports and other documents relating to the Company and the
Guarantors that the Company and the Guarantors would have been required to
file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act
if the Company and the Guarantors were subject to such reporting requirements.
The Company and the Guarantors will also provide to all holders of Notes and
file with the Trustee copies of such annual reports, quarterly reports and
other documents required to be furnished to securityholders generally under
Sections 13 and 15(d) of the Exchange Act. In addition, for so long as any
Notes remain outstanding and prior to the later of the consummation of the
Exchange Offer and the filing of the Initial Shelf Registration Statement, if
required, the Company will furnish to the Holders and prospective investors,
upon their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that an Event of Default is: (a) a default for 30
days in payment of interest on the Notes; (b) a default in payment when due of
principal or premium, if any, with respect to the Notes; (c) the failure of
the Company to comply with the provisions described above under the caption
"--Change of Control," clauses (i), (ii) and (iii) of the first paragraph
described above under the caption "--Certain Covenants--Limitation on
Restricted Payments" or the provisions described above under the caption "--
Merger or Consolidation"; (d) the failure of the Company to comply with any of
its other agreements or covenants in, or provisions of, such Indenture or the
Notes outstanding under such Indenture and the Default continues for the
period, if applicable, and after the notice specified in the next paragraph;
(e) a default by the Company or any Restricted Subsidiary under any mortgage,
indenture or instrument under which there is issued or by which there is
secured or evidenced any Indebtedness for money borrowed by the Company or any
Restricted Subsidiary (or the payment of which is guaranteed by the Company or
any Restricted Subsidiary), whether such Indebtedness or guarantee now exists
or shall be created hereafter, if (1) either (A) such default results from the
failure to pay principal of or interest on any such Indebtedness (after giving
effect to any extensions thereof) or (B) as a result of such default the
maturity of such Indebtedness has been accelerated prior to its expressed
maturity and (2) the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to pay
principal or interest thereon, or, because of the acceleration of the maturity
thereof, aggregates in excess of $7.5 million; (f) a failure by the Company or
any Restricted Subsidiary to pay final
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judgments (not covered by insurance) aggregating in excess of $7.5 million
which judgments a court of competent jurisdiction does not rescind, annul or
stay within 60 days after their entry; (g) certain events of bankruptcy or
insolvency involving the Company or any Significant Subsidiary; and (h) the
Guarantee of any Guarantor ceases to be in full force and effect (other than
in accordance with the terms of such Guarantee and the Indenture) or is
declared null and void and unenforceable or found to be invalid or any
Guarantor denies its liability under its Guarantee (other than by reason of a
release of such Guarantor from its Guarantee in accordance with the terms of
such Guarantee and the Indenture). In the case of any Event of Default
pursuant to clause (a) or (b) above occurring by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company with the
principal intention of avoiding payment of the premium that the Company would
have to pay pursuant to a redemption of Notes as described under the caption
"--Redemption of Notes--Optional Redemption," an equivalent premium shall also
become and be immediately, due and payable to the extent permitted by law upon
the acceleration of the Notes.
A Default or Event of Default under clause (d) (other than an Event of
Default arising under the provisions described above under the caption "--
Merger or Consolidation" which shall be an Event of Default with the notice
but without the passage of time specified in this paragraph) is not an Event
of Default under the Indenture until the Trustee or the holders of at least
25% in principal amount of the Notes then outstanding notify the Company of
the Default and the Company does not cure the Default within 30 days after
receipt of the notice. A Default or Event of Default under clause (g) of the
preceding paragraph will result in the Notes automatically becoming due and
payable without further action or notice.
Upon the occurrence of an Event of Default, the Trustee or the holders of at
least 25% in principal amount of the then outstanding Notes may declare all
Notes to be due and payable by notice in writing to the Company and the
Trustee specifying the respective Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice") and the same shall become
immediately due and payable or, if there are any amounts outstanding under the
New Credit Facility, shall become immediately due and payable upon the first
to occur of acceleration of the New Credit Facility or five business days
after receipt by the Company of such Acceleration Notice, but only if such
Event of Default is then continuing. The holders of a majority in principal
amount of the Notes then outstanding under the Indenture, by notice to the
Trustee, may rescind any declaration of acceleration of such Notes and its
consequences if all existing Events of Default (other than the nonpayment of
principal of or interest on such Notes that shall have become due by such
declaration) shall have been cured or waived. Subject to certain limitations,
holders of a majority in principal amount of the Notes then outstanding under
the Indenture may direct the Trustee in its exercise of any trust or power.
Holders of the Notes may not enforce the Indenture, except as provided
therein. The Trustee may withhold from holders of Notes notice of any
continuing Default or Event of Default (except a Default or an Event of
Default in payment of principal, premium, if any, or interest) if the Trustee
determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the Notes then
outstanding may on behalf of all holders of such Notes waive any existing
Default or Event of Default under the Indenture and its consequences, except a
continuing Default in the payment of the principal of, or premium, if any, or
interest on, such Notes, which may only be waived with the consent of each
holder of the Notes affected.
Upon any payment or distribution of assets of the Company and its
subsidiaries in a total or partial liquidation, dissolution, reorganization or
similar proceeding, including a Default under clause (g) above involving
certain events of bankruptcy or insolvency of the Company or a Significant
Subsidiary, there may not be sufficient assets remaining to satisfy the claims
of any holders of Notes given the contractual subordination of the Notes and
the Guarantees to Senior Indebtedness of the Company and the Guarantors,
respectively, and the structural subordination of the Notes to direct
obligations of the Subsidiaries of the Company. See "Risk Factors--
Subordination of the Notes and the Guarantees; Holding Company Structure."
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and upon an officer of the Company
becoming aware of any Default or Event of Default, a statement specifying such
Default or Event of Default.
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NO PERSONAL LIABILITY OF OFFICERS, DIRECTORS, EMPLOYEES AND STOCKHOLDERS
No officer, employee, director or stockholder of the Company or any
Subsidiary of the Company shall have any liability for any Obligations of the
Company or any Subsidiary of the Company under the Notes, the Guarantees, the
Exchange Notes and the guarantees thereon or the Indenture, or for any claim
based on, in respect of, or by reason of, such Obligations or the creation of
any such Obligation. Each holder of the Notes by accepting a Note waives and
releases all such liability, and such waiver and release is part of the
consideration for issuance of the Notes, the Guarantees, the Exchange Notes
and the guarantees thereon. The foregoing waiver may not be effective to waive
liabilities under the Federal securities laws and the Commission is of the
view that such a waiver is against public policy.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance option"), except for certain obligations
(including those with respect to the defeasance trust (as defined herein) and
obligations to register the transfer or exchange of the Notes, to replace
mutilated, destroyed, lost or stolen Notes and to maintain a registrar and
paying agent in respect of the Notes). The Company at any time may terminate
(1) its obligations under the covenant described above under the caption "--
Change of Control" and the covenants described above under the caption "--
Certain Covenants" and certain other covenants in the Indenture, (2) the
operation of clauses (c), (d), (e), (f) and, with respect to Significant
Subsidiaries only, (g) contained in the first paragraph of the "--Events of
Default and Remedies" provisions described above and (3) the limitations
contained in clauses (iv) and (v) under the "--Merger or Consolidation"
provisions and in clauses (ii) and (iii) in the second paragraph under the
caption "--Guarantees" above (collectively, a "covenant defeasance option").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Notes shall not be accelerated
because of an Event of Default specified in clauses (c), (d), (e), (f) or,
with respect to Significant Subsidiaries only, (g) in the first paragraph
under the "--Events of Default and Remedies" provisions described above or
because of the Company's failure to comply with clauses (iv) and (v) under the
"--Merger or Consolidation" provisions and clauses (ii) and (iii) in the
second paragraph under the caption "--Guarantees" above.
To exercise either defeasance option with respect to the Notes outstanding,
the Company must irrevocably deposit in trust (the "defeasance trust") with
the Trustee money or U.S. Government Obligations (as defined in the Indenture)
for the payment of principal of, premium, if any, and unpaid interest on the
Notes then outstanding to redemption or maturity, as the case may be, and must
comply with certain other conditions, including the passage of 91 days and the
delivery to the Trustee of an opinion of counsel to the effect that holders of
such Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and defeasance and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred (and, in the case of legal defeasance only, such opinion of counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable federal income tax law).
TRANSFER AND EXCHANGE
Holders of Notes may transfer or exchange their Notes in accordance with the
Indenture, but the Registrar may require a holder, among other things, to
furnish appropriate endorsements and transfer documents, and to pay any taxes
and fees required by law or permitted by the Indenture, in connection with any
such transfer or exchange. Neither the Company nor the Registrar is required
to issue, register the transfer of, or exchange (i) any Note selected for
redemption or tendered pursuant to an Offer, or (ii) any Note during the
period between (a) the date the Trustee receives notice of a redemption from
the Company and the date the Notes to be redeemed
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are selected by the Trustee or (b) a record date and the next succeeding
interest payment date. The registered holder of a Note will be treated as its
owner for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture may be amended or supplemented
with the consent of the holders of at least a majority in principal amount of
the Notes then outstanding under such Indenture, and any existing Default or
Event of Default (other than a payment default) or compliance with any
provision may be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding under the Indenture. Without
the consent of any holder of Notes, the Company and the Trustee may amend or
supplement the Indenture or the Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place
of certificated Notes, to provide for the assumption by a successor
corporation of the Company's obligations to the holders of Notes in the case
of a Disposition, to add further Guarantees with respect to the Notes, to
release Guarantors when permitted by the Indenture, to secure the Notes, to
add to the covenants of the Company and any Subsidiary of the Company for the
benefit of the holders of the Notes or to surrender any right or power
conferred upon the Company or any Subsidiary of the Company, to comply with
the Trust Indenture Act, or to make any change that does not materially
adversely affect the legal rights of any holder of Notes.
Without the consent of each holder of Notes affected, the Company may not
(i) reduce the principal amount of Notes whose holders must consent to an
amendment to the Indenture or a waiver under the Indenture; (ii) reduce the
rate of or change the interest payment time of the Notes, or alter the
redemption provisions with respect thereto (including the provisions relating
to the covenants described above under the captions "--Certain Covenants--
Change of Control" and "--Limitation on Asset Sales" and paragraph (b) under
the caption "--Merger or Consolidation") or the price at which the Company is
required to offer to purchase the Notes; (iii) reduce the principal of or
change the fixed maturity of the Notes; (iv) make the Notes payable in money
other than as stated in the Notes; (v) make any change in the provisions
concerning waiver of Defaults or Events of Default by holders of the Notes, or
rights of holders of the Notes to receive payment of principal or interest;
(vi) waive any default in the payment of principal of, premium, if any, or
unpaid interest on, and Liquidated Damages, if any, with respect to the Notes;
(vii) make any change to the subordination provisions of the Indenture and the
Notes in a manner that materially adversely affects the legal rights of any
holder of the Notes; or (viii) release any Guarantor from its obligations
under any Guarantee, other than in accordance with the Indenture.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee, if
it becomes a creditor of the Company, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined in
the Trust Indenture Act) it must eliminate such conflict or resign.
The holders of a majority in principal amount of the Notes then outstanding
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that if an Event of Default occurs
(and has not been cured), the Trustee will be required, in the exercise of its
power, to use the degree of care and skill of a prudent person in similar
circumstances in the conduct of its own affairs. Subject to the provisions of
the Indenture, the Trustee will be under no obligation to exercise any of its
rights or powers under its Indenture at the request of any of the holders of
the Notes, unless such holders shall have offered to the Trustee security and
indemnity satisfactory to it.
EXISTING NOTES; REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Carson Products and the Initial Purchasers entered into the
Registration Rights Agreement on November 6, 1997, in connection with the sale
of the Existing Notes. Pursuant to the Registration
100
Rights Agreement, the Company and the Guarantors have agreed to file with the
Commission the Exchange Offer Registration Statement (the "Exchange Offer
Registration Agreement") on the appropriate form under the Securities Act with
respect to the Exchange Notes. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will offer to the Holders of Transfer
Restricted Securities pursuant to the Exchange Offer who are able to make
certain representations the opportunity to exchange their Transfer Restricted
Securities for Exchange Notes. See "The Exchange Offer." If (i) the Company is
not required to file the Exchange Offer Registration Statement or not
permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy or (ii) any Holder of
Transfer Restricted Securities notifies the Company within the specified time
period that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Notes acquired directly from the Company or an
affiliate of the Company, the Company and the Guarantors will file with the
Commission a Shelf Registration Statement to cover resales of the Notes by the
Holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. The Company
will use its reasonable best efforts to cause the applicable registration
statement to be declared effective as promptly as possible by the Commission.
For purposes of the foregoing, "Transfer Restricted Securities" means each
Note until (i) the date on which such Note has been exchanged by a person
other than a broker-dealer for an Exchange Note in the Exchange Offer, (ii)
following the exchange by a broker-dealer in the Exchange Offer of a Note for
an Exchange Note, the date on which such Exchange Note is sold to a purchaser
who receives from such broker-dealer on or prior to the date of such sale a
copy of the prospectus contained in the Exchange Offer Registration Statement,
(iii) the date on which such Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such Note is distributed to the public
pursuant to Rule 144 under the Act or may be sold without restrictions
pursuant to Rule 144(k) under the Securities Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 45
days after the Issue Date, (ii) the Company will use its reasonable best
efforts to have the Exchange Offer Registration Statement declared effective
by the Commission on or prior to May 5, 1998, (iii) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, the Company
will commence the Exchange Offer and use its reasonable best efforts to issue
on or prior to 30 business days after the date on which the Exchange Offer
Registration Statement was declared effective by the Commission, Exchange
Notes in exchange for all Notes tendered prior thereto in the Exchange Offer
and (iv) if obligated to file the Shelf Registration Statement, the Company
will use its reasonable best efforts to file the Shelf Registration Statement
with the Commission on or prior to 45 days after such filing obligation arises
and to cause the Shelf Registration to be declared effective by the Commission
on or prior to 180 days after such obligation arises. If (a) the Company and
the Guarantors fail to file any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such filing,
(b) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), or (c) the Company and the Guarantors fail to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement
is declared effective but thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted Securities during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"), then the Company will
be obligated to pay Liquidated Damages, if any, to each Holder of Notes
constituting Transfer Restricted Securities, with respect to the first 90-day
period immediately following the occurrence of such Registration Default in an
amount equal to $.05 per week per $1,000 principal amount of Notes
constituting Notes held by such Holder. The amount of the Liquidated Damages,
if any, will increase by an additional $.05 per week per $1,000 principal
amount of Notes constituting Transfer Restricted Securities with respect to
each subsequent 90-day period until all Registration Defaults have been cured,
up to a maximum amount of Liquidated Damages, if any, of $.50 per week per
$1,000 principal amount of such Notes. All accrued Liquidated Damages, if any,
will be paid by the Company on each
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Damages Payment Date (as defined in the Registration Rights Agreement) to the
Global Note Holder by wire transfer of immediately available funds or by
federal funds check and to Holders of Certificated Securities by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages, if any, will cease.
Holders of Existing Notes who wish to exchange such Existing Notes for
Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company (as described in the Registration Rights
Agreement) in order to participate in the Exchange Offer and will be required
to deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within
the time periods set forth in the Registration Rights Agreement in order to
have their Notes included in the Shelf Registration Statement and benefit from
the provisions regarding Liquidated Damages, if any, set forth above. See "The
Exchange Offer." Notwithstanding the foregoing, no holder of Transfer
Restricted Securities shall be entitled to receive any Liquidated Damages with
respect to such Transfer Restricted Securities, if a holder of such Transfer
Restricted Securities was, at any time while the Exchange Offer was pending,
eligible to exchange, and did not validly tender, such Transfer Restricted
Securities for freely transferable Exchange Notes in such Exchange Offer.
Payment of Liquidated Damages is the sole remedy available to the holders of
Notes in the event that the Company and the Guarantors do not comply with the
deadlines set forth in the Registration Rights Agreement with respect to the
conduct of the Exchange Offer or the registration of the Notes for resale
under a Shelf Registration Statement.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no-action letters to third parties, and
subject to certain expectations with respect to "affiliates" of the Company,
the Company believes that the Exchange Notes may be offered for resale, resold
and otherwise transferred by the Holders thereof without further compliance
with the registration and prospectus delivery provisions of the Securities
Act. See "Plan of Distribution."
Any broker-dealer who holds Existing Notes that were acquired for its own
account as a result of market-making activities or other trading activities
may exchange such Existing Notes pursuant to the Exchange Offer, however, such
broker-dealer may be deemed to be an "underwriter" within the meaning of the
Securities Act and therefore must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of the
Exchange Notes received by such broker-dealer in the Exchange Offer. Pursuant
to the Registration Rights Agreement, such prospectus delivery requirement may
be satisfied by the delivery of this Prospectus. See "Plan of Distribution."
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is qualified in its entirety by
reference to the Registration Rights Agreement, a copy of which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
CERTAIN DEFINITIONS
Set forth below are certain of the defined terms used in the Indenture.
Reference is made to the Indenture for the definition of all other terms used
in the Indenture.
"Affiliate" with respect to any specified person means (i) any person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person, (ii) any spouse, immediate
family member or other relative who has the same principal residence as any
person described in clause (i) above, (iii) any trust in which any such
persons described in clause (i) or (ii) above has a beneficial interest, and
(iv) any corporation or other organization of which any such persons described
above collectively owns 10% or more of the equity of such entity. For purposes
of this definition, "control" (including, with correlative meaning, the terms
"controlling," "controlled by" and "under common control with"), as used with
respect to any person,
102
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such person, whether
through the ownership of voting securities, by agreement or otherwise,
provided that beneficial ownership of 10% or more of the voting securities of
a person shall be deemed to be control.
"AM Cosmetics" means AM Cosmetics, Inc., a Delaware corporation.
"AM Cosmetics Broker Agreement" means the broker agreement dated as of
September 19, 1997 between Carson Products and AM Cosmetics as in effect on
the Issue Date.
"AM Manufacturing Agreement" means the manufacturing agreement dated as of
April 30, 1997, between Carson Products and AM Cosmetics as in effect on the
Issue Date.
"Asset Sale" means the sale, lease, conveyance or other disposition by the
Company or a Restricted Subsidiary of assets or property whether owned on the
Issue Date or thereafter acquired, in a single transaction or in a series of
related transactions; provided that Asset Sales will not include such sales,
leases, conveyances or dispositions in connection with (i) the surrender or
waiver of contract rights or the settlement, release or surrender of contract,
tort or other claims of any kind, (ii) the sale of inventory in the ordinary
course of business, (iii) a sale-leaseback of assets within one year following
the acquisition of such assets, (iv) the grant of any license of patents,
trademarks, registration therefor and other similar intellectual property, (v)
a transfer of assets by the Company or a Restricted Subsidiary to the Company
or a Restricted Subsidiary, (vi) the designation of a Restricted Subsidiary as
a Unrestricted Subsidiary pursuant to the covenant described above under the
caption "--Certain Covenants--Designation of Restricted and Unrestricted
Subsidiaries", (vii) the sale, lease, conveyance or other disposition of all
or substantially all of the assets of the Company as permitted by the covenant
described above under the caption "--Merger or Consolidation," (viii) the sale
or disposition of obsolete, worn out, damaged or otherwise unsuitable or
unnecessary equipment or other obsolete assets, (ix) Restricted Payments
permitted by the covenant described above under the caption "--Certain
Covenants--Limitations on Restricted Payments", (x) the exchange of assets for
other non-cash assets that (a) are useful in the business of the Company and
its Restricted Subsidiaries and (b) have a fair market value at least equal to
the fair market value of the assets being exchanged (as determined by the
Board of Directors or the board of directors of the Restricted Subsidiary
which owns such assets in good faith), (xi) the sale or disposition of any
Restricted Investment or Marketable Securities, (xii) any Equity Offering by
the Company or (xiii) a transaction or series of related transactions that
results in a Change of Control.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Board of Directors" means the Company's board of directors or any
authorized committee of such board of directors.
"Capital Stock" means any and all shares, interests, participations or other
equivalents (however designated) of corporate stock, including any preferred
stock.
"Carson-AM Management Agreement" means the management agreement dated June
26, 1996 between Carson Products and AM Cosmetics as in effect on the Issue
Date.
"Carson Products" means Carson Products Company, a Delaware corporation.
"Carson South Africa" means Carson Holdings Limited, a South African
company.
"Cash Flow" means, for any given period and person, the sum of, without
duplication, Consolidated Net Income, plus (a) any provision for taxes based
on income or profits to the extent such income or profits were
103
included in computing Consolidated Net Income, plus (b) Consolidated Interest
Expense, to the extent deducted in computing Consolidated Net Income, plus (c)
the amortization of all intangible assets, to the extent such amortization was
deducted in computing Consolidated Net Income (including, but not limited to,
inventory write-ups, goodwill, and debt and financing costs), plus (d) all
depreciation and all other non-cash charges (including, without limitation,
those charges relating to purchase accounting adjustments and LIFO adjustments
but excluding charges recorded in anticipation of future cash expenditures and
non-cash Incentive Arrangements), to the extent deducted in computing
Consolidated Net Income, plus (e) any interest income, to the extent such
income was not included in computing Consolidated Net Income, plus (f) all
dividend payments on preferred stock (whether or not paid in cash) to the
extent deducted in computing Consolidated Net Income, plus (g) any
extraordinary or non-recurring charge or expense arising out of the
implementation of SFAS 106 or SFAS 109 to the extent deducted in computing
Consolidated Net Income, plus (h) any non-capitalized transaction costs
incurred in connection with actual or proposed financings, acquisitions or
divestitures; provided, however, that if an acquisition or sale of a person,
business or asset or the issuance or repayment of Indebtedness occurred during
the given period or subsequent to such period and on or prior to the date of
calculation, then such calculation for such period shall be made on a Pro
Forma Basis.
"Cash Flow Coverage Ratio" means, for any given period and person, the ratio
of (i) Cash Flow divided by (ii) Consolidated Interest Expense (except
dividends paid or payable in additional shares of Capital Stock (other than
Disqualified Stock)) in each case, without duplication; provided, however,
that if an acquisition or sale of a person, business or asset or the issuance
or repayment of Indebtedness occurred during the given period or subsequent to
such period and on or prior to the date of calculation, then such calculation
for such period shall be made on a Pro Forma Basis.
"Commission" means the Securities and Exchange Commission.
"Consolidated Interest Expense" means, for any given period and person, the
aggregate of (i) the interest expense in respect of all Indebtedness of such
person and its Restricted Subsidiaries for such period, on a consolidated
basis, determined in accordance with GAAP (including, without duplication,
amortization of original issue discount on any such Indebtedness, all non-cash
interest payments, the interest portion of any deferred payment obligation,
the interest component of capital lease obligations, and amortization of
deferred financing fees) and (ii) the product of (a) all cash dividend
payments (and, in the case of a Person that is a Restricted Subsidiary,
dividends paid or payable in additional shares of Disqualified Stock) on any
series of preferred stock of such Person and its Restricted Subsidiaries
payable to a party other than the Company or a wholly owned Subsidiary, times
(b) a fraction, the numerator of which is one and the denominator of which is
one minus the then current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, on a consolidated basis and in
accordance with GAAP; provided, however, that for the purpose of the Cash Flow
Coverage Ratio, Consolidated Interest Expense shall be calculated on a Pro
Forma Basis; provided further that any premiums, fees and expenses (including
the amortization thereof) paid in connection with the sale of the Existing
Notes and the application of the net proceeds therefrom or any other
refinancing of Indebtedness will be excluded.
"Consolidated Net Income" means, for any given period and person, the
aggregate of the Net Income of such person and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that: (i) the Net Income of any person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (ii) the Net Income of any person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent person, (iii) the Net Income of, or
any dividends or other distributions from, any Unrestricted Subsidiary shall
be included only to the extent of the amount of dividends or distributions
paid in cash to the referent person, (iv) the Net Income of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (which has not been obtained) or, directly or
indirectly, by operation of
104
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders, (v) the cumulative effect of a change in
accounting principles shall be excluded, (vi) income or loss attributable to
discontinued operations shall be excluded; and (vii) all other extraordinary,
unusual or nonrecurring gains and losses shall be excluded; provided, however,
that for purposes of determining the Cash Flow Coverage Ratio, Consolidated
Net Income shall be calculated on a Pro Forma Basis.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) any Indebtedness outstanding
under the New Credit Facility and (ii) any other Senior Indebtedness permitted
under the Indenture the principal amount of which is $10.0 million or more and
that has been designated by the Company as "Designated Senior Indebtedness."
"Disqualified Stock" with respect to any person means any Capital Stock or
Equity Interests that by its terms (or by the terms of any security into which
it is convertible or for which it is exchangeable other than at the Company's
option), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in part on, or
prior to, the maturity date of the Notes other than for Equity Interests
(other than Disqualified Stock).
"Distribution Agreement" means the distribution agreement dated May 14, 1996
between Carson Products S.A. and Carson Products as in effect on the Issue
Date.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500.0 million or its equivalent
in foreign currency, whose debt is rated "A" (or higher) according to S&P or
Moody's at the time as of which any investment or rollover therein is made.
"Equity Interests" means Capital Stock or partnership interests or warrants,
options or other rights to acquire Capital Stock or partnership interests (but
excluding (i) any debt security that is by its terms convertible into, or
exchangeable for, Capital Stock or partnership interests, and (ii) any other
Indebtedness or Obligation); provided, however, that Equity Interests will not
include any Incentive Arrangements or obligations or payments thereunder.
"Equity Offering" means a public or private offering by the Company for cash
of Capital Stock or other Equity Interests and all warrants, options or other
rights to acquire Capital Stock, other than (i) an offering of Disqualified
Stock or (ii) Incentive Arrangements or obligations or payments thereunder.
"Foreign Subsidiary" means a direct or indirect Subsidiary of the Company
organized outside the United States of America and conducting the majority of
its business in its jurisdiction of organization or in other jurisdictions
outside the United States of America.
"GAAP" means generally accepted accounting principles, consistently applied,
as in effect from time to time in the United States of America. All financial
and accounting determinations and calculations under the Indenture will be
made in accordance with GAAP.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which the full
faith and credit of the United States of America is pledged.
"Hedging Obligations" means, with respect to any person, the Obligations of
such persons under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) foreign exchange
contracts, currency swap agreements or similar agreements, and (iii) other
similar agreements or arrangements, in each case designed solely to protect
such person against fluctuations of exchange rates, currency rates or
105
interest rates; provided, that the notional amount of any such Hedging
Obligation shall not exceed the principal amount of the underlying Obligation
to which such Hedging Obligation relates.
"Incentive Arrangements" means any employment agreements, employee stock
option agreements, employee equity subscription agreements, non-competition
agreements, stock plans, stock option plans, stock appreciation rights and
other incentive and bonus plans and similar arrangements made in connection
with acquisitions of persons or businesses by the Company or the Restricted
Subsidiaries or the retention of directors or employees by the Company or the
Restricted Subsidiaries.
"Indebtedness" means, with respect to any person, (i) any indebtedness,
whether or not contingent, in respect of borrowed money or evidenced by bonds,
notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or bankers acceptances or
representing the deferred and unpaid balance of the purchase price of any
property (including pursuant to capital leases), except any such balance that
constitutes an accrued expense or a trade payable, any Hedging Obligations, if
and to the extent such indebtedness (other than a Hedging Obligation) would
appear as a liability upon a balance sheet of such person prepared on a
consolidated basis in accordance with GAAP, and any indebtedness of others of
the type described in this clause (i) secured by a Lien on any asset of such
person (whether or not such indebtedness is assumed by such person) (the
amount of such indebtedness being deemed to be the lesser of the value of such
assets or the indebtedness being so secured) and also includes, to the extent
not otherwise included, the guarantee of items that would be included within
this definition; (ii) Disqualified Stock of such person, valued at the maximum
fixed redemption or repurchase price in respect thereof; or (iii) Preferred
Stock issued by a Restricted Subsidiary of such person; provided, however,
that "Indebtedness" shall not include any Incentive Arrangements or
obligations or payments thereunder or the pledge by the Company of its Equity
Interests in an Unrestricted Subsidiary of the Company to secure Non-Recourse
Debt of such Unrestricted Subsidiary.
"Independent Director" means a director who has not and whose Affiliates
have not, directly or indirectly, at any time during the twelve months prior
to the taking of any action which, under the terms of the Indenture, requires
the approval of Independent Directors of the Company or a Restricted
Subsidiary, received, or entered into any understanding or agreement to
receive, any compensation, payment or other benefit, of any type or form, from
the Company, any Restricted Subsidiary or any of their respective Affiliates,
other than customary directors fees (including pursuant to Incentive
Arrangements) and reimbursement of out-of-pocket expenses.
"Insolvency or Liquidation Proceeding" means (i) any insolvency or
bankruptcy or similar case or proceeding, or any reorganization, receivership,
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, or (ii) any assignment for the benefit of creditors or any other
marshaling of assets and liabilities of the Company.
"Investment" means any capital contribution to, or other debt or equity
investment in, any Person.
"issue" means create, issue, assume, guarantee, incur or otherwise become
directly or indirectly liable for any Indebtedness or Capital Stock, as
applicable; provided, however, that any Indebtedness or Capital Stock of a
person existing at the time such person becomes a Restricted Subsidiary
(whether by merger, consolidation, acquisition or otherwise) shall be deemed
to be issued by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary. For this definition, the terms "issuing," "issuer," "issuance" and
"issued" have meanings correlative to the foregoing.
"Issue Date" means November 6, 1997, the date of original issuance of the
Notes.
"License Agreement" means the license agreement dated April 7, 1994 between
Carson Products S.A. and Carson Products as in effect on the Issue Date.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under
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applicable law (including, without limitation, any conditional sale or other
title retention agreement, any lease in the nature thereof, any other
agreement to sell or give a security interest).
"Marketable Securities" means (a) Government Securities, (b) any certificate
of deposit maturing not more than 270 days after the date of acquisition
issued by, or time deposit of, an Eligible Institution, (c) any bankers
acceptances or money market deposit accounts issued by an Eligible Institution
and (d) securities issued by any fund investing exclusively in investments of
the types described in clauses (a) through (c) above.
"Moody's" means Moody's Investors Service, Inc.
"Morningside" means Morningside Capital Group, L.L.C., a Connecticut limited
liability company.
"Morningside Management Agreement" means the management assistance agreement
dated August 23, 1995 between Carson Products and Morningside as in effect on
the Issue Date.
"Net Income" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP, excluding, however, any gain
or loss, together with any related provision for taxes, realized in connection
with any Asset Sale (including, without limitation, dispositions pursuant to
sale and leaseback transactions).
"Net Proceeds" means, with respect to any Asset Sale, the aggregate amount
of cash proceeds (including any cash received by way of deferred payment
pursuant to a note receivable issued in connection with such Asset Sale, other
than the portion of such deferred payment constituting interest, and including
any amounts received as disbursements or withdrawals from any escrow or
similar account established in connection with any such Asset Sale, but, in
either such case, only as and when so received) received by the Company or any
of its Restricted Subsidiaries in respect of such Asset Sale, net of: (i) the
cash expenses of such Asset Sale (including, without limitation, the payment
of principal of, and premium, if any, and interest on, Indebtedness required
to be paid as a result of such Asset Sale (other than the Notes) and legal,
accounting, management and advisory and investment banking fees and sales
commissions), (ii) taxes paid or payable as a result thereof, (iii) any
portion of cash proceeds that the Company determines in good faith should be
reserved for post-closing adjustments, it being understood and agreed that on
the day that all such post-closing adjustments have been determined, the
amount (if any) by which the reserved amount in respect of such Asset Sale
exceeds the actual post-closing adjustments payable by the Company or any of
its Restricted Subsidiaries shall constitute Net Proceeds on such date, (iv)
any relocation expenses and pension, severance and shutdown costs incurred as
a result thereof and (v) any cash amounts actually set aside by the Company or
any Restricted Subsidiary as a reserve in accordance with GAAP against any
retained liabilities associated with the asset disposed of in such
transaction, including, without limitation, pension and other post-employment
benefit liabilities and liabilities related to environmental matters or
against any indemnification obligations associated with such transaction.
"New Credit Facility" means the credit agreement to be entered into on the
Issue Date among the Company, Carson Products Company and the guarantors named
therein, and Credit Agricole Indosuez as agent and lender, and the other
lenders party thereto, together with all loan documents and instruments
thereunder (including, without limitation, any guarantee agreements and
security documents), in each case as such agreements may be amended (including
any amendment and restatement thereof), supplemented or otherwise modified
from time to time, including any agreement extending the maturity of,
refinancing, renewing, refunding, replacing or otherwise restructuring
(including, without limitation, increasing the amount of available borrowings
thereunder, and all Obligations with respect thereto, in each case, to the
extent permitted by the covenant described above under the caption "--Certain
Covenants--Limitation on Incurrence of Indebtedness" or adding Subsidiaries of
the Company as additional borrowers or guarantors thereunder) all or any
portion of the Indebtedness under such agreement or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides any guarantee or credit
support of any kind (including any undertaking, guarantee,
107
indemnity, agreement or instrument that would constitute Indebtedness) or (b)
is directly or indirectly liable (as a guarantor or otherwise) and (ii) the
explicit terms of which provide that there is no recourse against any of the
assets of the Company or its Restricted Subsidiaries (other than to Equity
Interests in an Unrestricted Subsidiary pledged by the Company or a Restricted
Subsidiary) provided, however, that the Company or any Restricted Subsidiary
may make a loan to an Unrestricted Subsidiary if such loan is permitted by the
covenant described above under the caption "--Certain Covenants--Limitation on
Restricted Payments" at the time of the issuance of the loan, and such loan
shall not constitute Indebtedness which is not Non-Recourse Debt.
"Obligations" means, with respect to any Indebtedness, all principal,
interest, premiums, penalties, fees, indemnities, expenses (including legal
fees and expenses), reimbursement obligations and other liabilities payable to
the holder of such Indebtedness under the documentation governing such
Indebtedness, and any other claims of such holder arising in respect of such
Indebtedness.
"Other Permitted Indebtedness" means:
(i) Indebtedness of the Company and the Restricted Subsidiaries existing
as of the Issue Date and all related Obligations as in effect on such date;
(ii) Indebtedness of the Company and the Restricted Subsidiaries in
respect of bankers acceptances and letters of credit (including, without
limitation, letters of credit in respect of workers' compensation claims)
issued in the ordinary course of business, or other Indebtedness in respect
of reimbursement-type obligations regarding workers' compensation claims;
(iii) Refinancing Indebtedness, provided that: (A) the principal amount
of such Refinancing Indebtedness shall not exceed the outstanding principal
amount of Indebtedness (including unused commitments) extended, refinanced,
renewed, replaced, substituted or refunded plus any amounts incurred to pay
premiums, fees and expenses in connection therewith, (B) the Refinancing
Indebtedness (other than Refinancing Indebtedness with respect to Senior
Indebtedness) shall have a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of the Indebtedness
being extended, refinanced, renewed, replaced, substituted or refunded;
provided, however, that this limitation in this clause (B) does not apply
to Refinancing Indebtedness of Senior Indebtedness, and (C) in the case of
Refinancing Indebtedness of Subordinated Indebtedness, such Refinancing
Indebtedness shall be subordinated to the Notes at least to the same extent
as the Subordinated Indebtedness being extended, refinanced, renewed,
replaced, substituted or refunded;
(iv) Intercompany Indebtedness of and among the Company and the
Restricted Subsidiaries (excluding guarantees by the Company or a
Restricted Subsidiary of Indebtedness of the Company or a Restricted
Subsidiary, as the case may be, not issued in compliance with the covenant
described above under the caption "--Certain Covenants--Subsidiary
Guarantees");
(v) Indebtedness of the Company and the Restricted Subsidiaries under
Hedging Obligations;
(vi) Indebtedness of the Company and its Restricted Subsidiaries arising
from the honoring by a bank or other financial institution of a check,
draft or similar instrument inadvertently (except in the case of daylight
overdrafts, which will not be, and will not be deemed to be, inadvertent)
drawn against insufficient funds in the ordinary course of business;
(vii) guarantees by the Company or any Guarantor of Indebtedness of the
Company or of a Restricted Subsidiary if the Indebtedness so guaranteed is
permitted under the Indenture;
(viii) guarantees by any Foreign Subsidiary of Indebtedness of another
Foreign Subsidiary if the Indebtedness so guaranteed is permitted under the
Indenture;
(ix) Indebtedness of the Company and its Restricted Subsidiaries in
connection with performance, surety, completion, statutory, appeal or
similar bonds in the ordinary course of business; and
(x) Indebtedness of the Company and any Restricted Subsidiary (other than
for borrowed money) in connection with agreements providing for
indemnification, purchase price adjustments and similar obligations in
connection with the sale or disposition of any of its business, property or
assets.
108
"Permitted Holders" means (i) DNL Partners Limited Partnership; (ii) DNL
Group, LLC; (iii) Morningside Capital Group, LLC; (iv) Vincent A. Wasik, S.
Garrett Stonehouse and Lawrence E. Bathgate, II or any of their respective
spouses or lineal descendants; (v) any controlled Affiliate of any of the
persons or entities described in clauses (i), (ii), (iii) and (iv); (vi) in
the event of the incompetence or death of any of the individuals described in
clause (iv), such person's estate, executor, administrator, committee or other
personal representative, in each case who at any particular date will
beneficially own or have the right to acquire, directly or indirectly, Capital
Stock of the Company; or (vii) any trusts created for the benefit of each of
the persons or entities described in this definition, including any trust for
the benefit of the parents or siblings of any of the individuals described in
clause (iv) or any trust for the benefit of any such trust.
"Permitted Junior Securities" means Equity Interests in the Company or
subordinated debt securities of the Company that (i) are subordinated to all
Senior Indebtedness (and any debt securities issued in exchange for Senior
Indebtedness) to at least the same extent as the Notes are subordinated to
Senior Indebtedness pursuant to Article 8 of the Indenture, (ii) have a
Weighted Average Life to Maturity no shorter than the Weighted Average Life to
Maturity of the Notes and (iii) if there are any amounts outstanding under the
New Credit Facility, have a Weighted Average Life to Maturity at least as long
as the sum of (a) the Weighted Average Life to Maturity of the New Credit
Facility or any debt securities issued in exchange therefor (whichever is
longer) plus (b) the positive difference, if any, between the Weighted Average
Life to Maturity of the Notes and the Weighted Average Life to Maturity of the
New Credit Facility, in each case measured immediately prior to the issuance
of such Permitted Junior Securities.
"Permitted Liens" means, with respect to the Company and its Restricted
Subsidiaries,
(1) Liens for taxes, assessments, governmental charges or claims either
(a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or any of its Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
(2) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(3) Liens incurred on deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, governmental
contracts, performance, completion and return-of-money bonds and other
similar obligations (exclusive of obligations for the payment of borrowed
money) or to secure obligations arising from statutory, regulatory,
contractual or warranty requirements;
(4) judgment Liens not giving rise to a Default or an Event of Default so
long as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review of such
judgment shall not have been finally terminated or the period within which
such proceedings may be initiated shall not have expired;
(5) easements, rights-of-way, zoning restrictions, minor defects or
irregularities in title and other similar charges or encumbrances not
interfering in any material respect with the ordinary conduct of the
business of the Company or any of its Subsidiaries;
(6) any interest or title of a lessor under any capital lease or
operating lease;
(7) purchase money Liens to finance the acquisition or construction of
property or assets of the Company or any Subsidiary of the Company acquired
or constructed in the ordinary course of business; provided, however, that
(i) the related purchase money Indebtedness shall not be secured by any
property or assets of the Company or any Subsidiary of the Company other
than the property and assets so acquired or constructed and (ii) the Lien
securing such Indebtedness either (x) exists at the time of such
acquisition or construction or (y) shall be created within 100 days of such
acquisition or completion of construction, repair, improvement, addition or
commencement of full operation of the property subject to such Liens;
109
(8) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customs duties in connection with the
importation of goods;
(9) Liens securing Indebtedness under Hedging Obligations;
(10) Liens arising out of consignment or similar arrangements for the
sale of goods and Liens upon specific items of inventory or other goods and
proceeds of any person securing such person's obligations in respect of
bankers' acceptances issued or created for the account of such person to
facilitate the purchase, shipment or storage of such inventory or other
goods, entered into by the Company or any Restricted Subsidiary in the
ordinary course of business;
(11) Liens in favor of the Company or a Guarantor securing intercompany
Indebtedness issued by the Company or any Restricted Subsidiary to the
Company or a Guarantor;
(12) Liens on property or assets of a person acquired by or merged with
or into or consolidated with the Company or any Restricted Subsidiary at
the time of such acquisition, merger or consolidation, provided that such
Liens were not incurred in contemplation of such acquisition, merger or
consolidation;
(13) Liens on property or shares of Capital Stock of a person existing at
the time such person becomes a Restricted Subsidiary, provided that such
Liens were not incurred in contemplation of such person becoming a
Restricted Subsidiary;
(14) Liens on property or assets existing at the time of acquisition,
construction or improvement thereof by the Company or any Restricted
Subsidiary, provided that such Liens were not incurred in contemplation of
such acquisition, construction or improvement;
(15) Liens to secure Attributable Debt that is permitted to be incurred
pursuant to the covenant described above under the caption "--Certain
Covenants--Sale and Leaseback Transactions";
(16) Liens securing industrial revenue bonds, provided, the Indebtedness
represented thereby is permitted under the Indenture;
(17) Liens securing reimbursement obligations with respect to letters of
credit incurred in the ordinary course which encumber documents and other
property relating to such letters of credit and the products and proceeds
thereof, provided, the Indebtedness represented thereby is permitted under
the Indenture;
(18) Liens on assets or Capital Stock of Unrestricted Subsidiaries;
(19) Liens to secure Indebtedness permitted to be incurred under clauses
(i), (ii) and (iii) of the second sentence under the covenant described
above under the caption "--Certain Covenants--Limitation on Incurrence of
Indebtedness," provided that such Liens extend only to the assets of the
person directly issuing such Indebtedness; and
(20) additional Liens at any one time outstanding in respect of property
or assets of which the aggregate fair market value (determined on the date
such Lien is granted) does not exceed $10.0 million.
"Preferred Stock" of any person means Capital Stock of such person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of such person, to shares
of Capital Stock of any other class of such person.
"Pro Forma Basis" means, for purposes of determining Consolidated Net Income
in connection with the Cash Flow Coverage Ratio (including in connection with
the covenants described above under the captions "--Certain Covenants--
Limitation on Restricted Payments", "--Certain Covenants--Designation of
Restricted and Unrestricted Subsidiaries" and "--Merger or Consolidation" and
the incurrence of Indebtedness pursuant to the first sentence of the covenant
described above under the caption "--Certain Covenants--Limitation on
Incurrence of Indebtedness"), giving pro forma effect to (x) any acquisition,
by way of merger, consolidation or otherwise, or sale of a person, business or
asset, related incurrence, repayment or refinancing of Indebtedness or other
related transactions, including any Restructuring Charges which would
otherwise be accounted for as an adjustment permitted by Regulation S-X under
the Securities Act or on a pro forma basis under GAAP, or
110
(y) any incurrence, repayment or refinancing of any Indebtedness and the
application of the proceeds therefrom, in each case, which occurred during the
relevant period or subsequent to such period and on or prior to the date of
calculation, as if such acquisition or sale and related transactions,
restructurings, consolidations, cost savings, reductions, incurrence,
repayment or refinancing were realized on the first day of the relevant period
permitted by Regulation S-X under the Securities Act or on a pro forma basis
under GAAP. For purposes of this definition, whenever pro forma effect is to
be given to an acquisition of a person, business or asset, the amount of
income or earnings relating thereto, and the amount of Consolidated Interest
Expense associated with any Indebtedness issued in connection therewith, the
pro forma calculations will be determined in good faith by the chief financial
officer of the Company as specified in an officer's certificate of the Company
delivered to the Trustee. Furthermore, in calculating the Cash Flow Coverage
Ratio, (1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the determination date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal to
the rate of interest on such Indebtedness in effect on the determination date;
(2) if interest on any Indebtedness actually incurred on the determination
date may optionally be determined at an interest rate based upon a factor of a
prime or similar rate, a eurocurrency interbank offered rate, or other rates,
then the interest rate in effect on the determination date will be deemed to
have been in effect during the relevant period; and (3) notwithstanding clause
(1) above, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to interest rate swaps
or similar interest rate protection Hedging Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Refinancing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries issued or given in exchange for, or the proceeds of
which are used to, extend, refinance, renew, replace, substitute or refund
Indebtedness Incurred in accordance with the first paragraph of the covenant
described above under the caption "--Certain Covenants--Limitation on
Incurrence of Indebtedness" or any Other Permitted Indebtedness or any
Indebtedness issued to so extend, refinance, renew, replace, substitute or
refund such Indebtedness and any additional Indebtedness issued solely to pay
premiums required by the agreement governing such Indebtedness, and reasonable
fees and expenses incurred by the Company or any Restricted Subsidiary in
connection therewith.
"Restricted Investment" means any Investment in any person; provided that
Restricted Investments will not include: (i) Investments in Marketable
Securities and other negotiable instruments permitted by the Indenture; (ii)
Investments in the Company; or (iii) Investments in any Restricted Subsidiary
or in a Person that becomes a Restricted Subsidiary or is merged, consolidated
or amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary, in
each case as a result of such investment; (iv) the extension of credit to
vendors, suppliers and customers in the ordinary course of business; (v)
Investments which exist on the Issue Date; (vi) payments made pursuant to
Incentive Arrangements (including repurchases of Equity Interests deemed to
occur upon exercise of stock options, warrants or similar rights if such
Equity Interests represent a portion of the exercise price of such options,
warrants or similar rights); (vii) any loan, and any refinancing of such loan,
made to management to enable management to purchase Equity Interests in the
Company; (viii) any Investments made or received in connection with Hedging
Obligations; (ix) Investments made or received in connection with the sale,
transfer or disposition of any business, properties or assets of the Company
or any Restricted Subsidiary of the Company, provided that if such sale,
transfer or disposition constitutes an Asset Sale and the Company complies
with the covenant described above under the caption "--Certain Covenants--
Limitation on Asset Sales", such Investment shall not count as a Restricted
Payment for purposes of the calculation in paragraph (c) of the covenant
described above under the caption "--Certain Covenants--Limitation on
Restricted Payments"; (x) any acquisition of assets solely in exchange for the
issuance of Equity Interests (other than Disqualified Stock) of the Company;
(xi) the payment of cash in lieu of fractional shares in connection with
dividends or distributions permitted by clause (i) of the first sentence of
the covenant described above under the caption "--Certain Covenants--
Limitation on Restricted Payments"; (xii) loans or advances to employees or
directors of the Company or any Restricted Subsidiary in the ordinary course
in an aggregate principal amount not to exceed $1.0 million at any one time
outstanding; (xiii) any Investment constituting Permitted Junior Securities of
a person issued in exchange for trade or other claims against such person in
connection with a financial reorganization or
111
restructuring of such person or as a result of a foreclosure by the Company or
any Restricted Subsidiary with respect to any secured Investment or any other
transfer of title with respect to any secured Investment in default; (xiv)
Investments made pursuant to this clause (xiv) at any time, and from time to
time, after the Issue Date, in one or more contract manufacturers, suppliers,
vendors and distributors that are Affiliates of the Company in connection with
the provision by any such person of manufacturing, research and development,
outsourcing, sales, marketing and/or distribution services to the Company
and/or one or more Restricted Subsidiaries in an aggregate amount at one time
outstanding not to exceed $10.0 million; and (xv) other Investments made
pursuant to this clause (xv) at any time, and from time to time, after the
Issue Date, in any person for a purpose which is reasonably related, ancillary
or complementary to the businesses of the Company and the Restricted
Subsidiaries on the date such investment is made, in an aggregate amount at
any one time outstanding not to exceed $10.0 million.
"Restricted Subsidiary" means any direct or indirect Subsidiary of the
Company that is not an Unrestricted Subsidiary.
"Restructuring Charges" means any charges or expenses in respect of
restructuring or consolidating any business, operations or facilities, any
compensation or headcount reduction, or any other cost savings, of any persons
or businesses either alone or together with the Company or any Restricted
Subsidiary, as permitted by GAAP or Regulation S-X under the Securities Act.
"S&P" means Standard & Poor's Ratings Group.
"Senior Indebtedness" means, with respect to any person, (i) all
Indebtedness of such person outstanding under the New Credit Facility and all
Hedging Obligations with respect thereto, (ii) any other Indebtedness of such
person permitted to be issued under the Indenture, provided, however, that
Senior Indebtedness shall not include any Indebtedness which by the terms of
the instrument creating or evidencing the same is subordinated or junior in
right of payment in any respect to any other Indebtedness of such person or
its Subsidiaries or Affiliates and (iii) all Obligations with respect to the
foregoing, in each case, whether outstanding on the Issue Date or thereafter
issued. Notwithstanding anything to the contrary in the foregoing, Senior
Indebtedness will not include (w) any liability for Federal, state, local,
foreign or other taxes, (x) any Indebtedness of any such person to any of its
Subsidiaries or other Affiliates (other than Indebtedness arising under the
New Credit Facility), (y) any trade payables or liability to trade creditors
arising in the ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities) or (z) any Indebtedness that is
incurred in violation of the Indenture.
To the extent any payment on the Notes, whether by or on behalf of the
Company, as proceeds of security or enforcement of any right of setoff or
otherwise, is declared to be fraudulent or preferential, set aside or required
to be paid to a trustee, receiver or other similar party under any bankruptcy,
insolvency, receivership or similar law, then if such payment is recovered by,
or paid over to, such trustee, receiver or other similar party, the Notes or
part thereof originally intended to be satisfied by such payment shall be
deemed to be reinstated and outstanding as if such payment had not occurred.
"SFAS 106" means Statement of Financial Accounting Standards No. 106.
"SFAS 109" means Statement of Financial Accounting Standards No. 109.
"Significant Subsidiary" means any Restricted Subsidiary of the Company that
would be a "significant subsidiary" as defined in clause (2) of the definition
of such term in Rule 1-02 of Regulation S-X under the Securities Act.
"Subordinated Indebtedness" means all Obligations with respect to
Indebtedness if the instrument creating or evidencing the same, or pursuant to
which the same is outstanding, designates such Obligations as subordinated or
junior in right of payment to Senior Indebtedness and to the Notes.
112
"Subsidiary" of any person means any entity of which the Equity Interests
entitled to cast at least a majority of the votes that may be cast by all
Equity Interests having ordinary voting power for the election of directors or
other governing body of such entity are owned by such person (regardless of
whether such Entity Interests are owned directly by such person or through one
or more Subsidiaries).
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Directors as provided below) and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of the Company (including any newly acquired or newly formed Subsidiary or a
Person becoming a Subsidiary through merger or consolidation or Investment
therein) to be an Unrestricted Subsidiary only if: (a) such Subsidiary does
not own any Capital Stock of, or own or hold any Lien on any property of, any
other Subsidiary of the Company which is not a Subsidiary of the Subsidiary to
be so designated or otherwise an Unrestricted Subsidiary; (b) all the
Indebtedness of such Subsidiary shall at the date of designation, and will at
all times thereafter consist of, Non-Recourse Debt; (c) the Company certifies
that such designation complies with the covenant described above under the
caption "--Certain Covenants--Limitation on Restricted Payments"; (d) such
Subsidiary, either alone or in the aggregate with all other Unrestricted
Subsidiaries, does not operate, directly or indirectly, all or substantially
all of the business of the Company and its Subsidiaries; (e) such Subsidiary
does not directly or indirectly, own any Indebtedness of or Equity Interest
in, and has no Investments in, the Company or any Restricted Subsidiary; (f)
such Subsidiary is a Person with respect to which neither the Company nor any
of its Restricted Subsidiaries has any direct or indirect obligation (1) to
subscribe for additional Equity Interests or (2) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (g) on the date such Subsidiary is designated
an Unrestricted Subsidiary, such Subsidiary is not a party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary with terms substantially less favorable to the Company than those
that might have been obtained from Persons who are not Affiliates of the
Company. Any such designation by the Board of Directors shall be evidenced to
the Trustee by filing with the Trustee a resolution of the Board of Directors
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions. If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred as of such date. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, that immediately after giving effect to such
designation, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof and the Company could incur
the Indebtedness of such Subsidiary pursuant to the covenant described above
under the caption "--Certain Covenants--Limitation on Incurrence of
Indebtedness" on a Pro Forma Basis taking into account such designation.
"Voting Stock" means any class or classes of Capital Stock of any person
pursuant to which the holders thereof have the general voting power under
ordinary circumstances to elect the board of directors (or persons performing
similar functions) of such person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Indebtedness into (ii) the sum of the product(s)
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other requirement payment of principal,
including payment at final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) which will elapse between such
date and the making of such payment.
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all of
the Equity Interests of which (other than Equity Interests constituting
directors' qualifying shares or shares required to be held by foreign
nationals, in each case to the extent mandated by applicable law) is owned by
the Company or one or more Wholly Owned Restricted Subsidiaries or by the
Company and one or more Wholly Owned Restricted Subsidiaries.
113
DESCRIPTION OF THE NEW CREDIT FACILITY
Concurrent with the sale of the Existing Notes, the Company and Carson
Products entered into the New Credit Facility with Credit Agricole Indosuez,
as agent and a lender (the "Bank"), and the other lenders party thereto, under
which the Bank and the other lenders provided a term loan and a revolving
credit facility to Carson Products, subject to the conditions set forth
therein. The following summary of the New Credit Facility is subject to, and
qualified in its entirety by, the credit agreement entered into simultaneously
with the closing of the sale of the Existing Notes as of November 6, 1997 (the
"Credit Agreement").
The New Credit Facility includes (i) a $50.0 million term loan to be used
solely for the purpose of making acquisitions (the "Term Loan Facility") and
(ii) a $25.0 million revolving credit facility (the "Revolving Credit
Facility"). The aggregate of the Revolving Credit Facility and the aggregate
outstanding letters of credit may not exceed Carson Products' Borrowing Base,
which equals the sum of (i) 85% of Eligible Accounts Receivable and (ii) 50%
of Eligible Inventory (each such term is as defined in the Credit Agreement).
The final maturity date for each of the Term Loan Facility and the Revolving
Credit Facility is expected to be October 2006 and 2003, respectively. The
Term Loan Facility will amortize in quarterly installments beginning in
February 1999 and ending in October 2006, on a schedule to be determined.
Borrowings under the Term Loan Facility and the Revolving Credit Facility
will generally bear interest at the Base Rate (as defined in the Credit
Agreement) plus 1.0% and the Base Rate plus 0.5%, respectively, or at Carson
Products' option, the Eurodollar Rate (as defined in the Credit Agreement)
plus 2.5% and the Eurodollar Rate plus 2.0%, respectively. Interest on Base
Rate borrowings are payable quarterly in arrears and interest on Eurodollar
Rate borrowings are payable at the end of the applicable interest period or
quarterly, whichever is earlier.
The Credit Agreement provides for a commitment fee of 0.25% per annum on the
unutilized portion of the Term Loan Facility commitments and the Revolving
Credit Facility, payable quarterly in arrears.
The obligations of Carson Products under the New Credit Facility are secured
by security interests in all accounts receivable, inventory, property, plant
and equipment and other personal, intellectual and real property of the
Company and its domestic subsidiaries, as well as by a pledge of the capital
stock of Carson Products and its subsidiaries. The New Credit Facility is
guaranteed by the Company and each present and future subsidiary of the
Company (excluding Carson Products, which is the primary borrower, and certain
foreign subsidiaries). The Credit Agreement contains customary covenants
relating to, among other things, (i) maintenance by the Company of certain
total interest coverage ratios, fixed charge coverage ratios and leverage
ratios and (ii) restrictions on the incurrence of additional liens or
indebtedness. The Credit Agreement also contains events of default customary
for credit agreements of this type. See "Risk Factors--Leverage and Debt
Service," "Risk Factors--Subordination of the Notes and the Guarantees;
Holding Company Structure" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Revolving Credit Facility is available for working capital and other
general corporate purposes. The Term Loan Facility is to be used to consummate
acquisitions, and is available until November 6, 1998. The Company used a
portion of the net proceeds received from the sale of the Existing Notes to
repay all of the outstanding borrowings under the Existing Bank Credit
Facility. See "Use of Proceeds" and "Capitalization."
114
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS RELATING TO THE EXCHANGE OFFER
The exchange of Exchange Notes for the Existing Notes pursuant to the
Exchange Offer will not be treated as an "exchange" for United States federal
income tax purposes because the Exchange Notes will not be considered to
differ materially in kind or extent from the Existing Notes. Rather, the
Exchange Notes received by a Holder will be treated as a continuation of the
Existing Notes in the hands of such Holder. As a result, there will be no
United States federal income tax consequences to Holders exchanging the
Existing Notes pursuant to the Exchange Offer. The adjusted basis and holding
period of the Exchange Notes for any Holder will be the same as the adjusted
basis and holding period of the Existing Notes. Similarly, there would be no
United States federal income tax consequences to a Holder of Existing Notes
that does not participate in the Exchange Offer.
115
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for the Existing Notes
may be offered for resale, resold and otherwise transferred by holders thereof
(other than any holder which is (i) an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act, (ii) a broker-dealer who
acquired Notes directly from the Company or (iii) broker-dealers who acquired
Notes as a result of market-making or other trading activities) without
compliance with the registration and prospectus delivery provisions of the
Securities Act provided that such Exchange Notes are acquired in the ordinary
course of such holders' business, and such holders are not engaged in, and do
not intend to engage in, and have no arrangement or understanding with any
person to participate in, a distribution of such Exchange Notes; provided that
broker-dealers ("Participating Broker-Dealers") receiving Exchange Notes in
the Exchange Offer will be subject to a prospectus delivery requirement with
respect to resales of such Exchange Notes. To date, the staff of the
Commission has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to transactions
involving an exchange of securities such as the exchange pursuant to the
Exchange Offer (other than a resale of an unsold allotment from the sale of
the Existing Notes to the Initial Purchaser) with the Prospectus, contained in
the Registration Statement. Pursuant to the Registration Rights Agreement, the
Company has agreed to permit Participating Broker-Dealers and other persons,
if any, subject to similar prospectus delivery requirements to use this
Prospectus in connection with the resale of such Exchange Notes. The Company
and the Guarantors have agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus, and any amendment or supplement
to this Prospectus, available to any broker-dealer that requests such
documents in the Letter of Transmittal.
Each holder of the Exchange Notes who wishes to exchange its Exchange Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company as set forth in "The Exchange Offer--Purpose
and Effect of the Exchange Offer." In addition, each holder who is a broker-
dealer and who receives Exchange Notes for its own account in exchange for
Existing Notes that were acquired by it as a result of market-making
activities or other trading activities, will be required to acknowledge that
it will deliver a prospectus in connection with any resale by it of such
Exchange Notes.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver a prospectus, and by delivering a prospectus a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Existing Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act, as set
forth in the Registration Rights Agreement.
LEGAL MATTERS
Certain legal matters with respect to the Exchange Notes will be passed upon
for the Company by Milbank, Tweed, Hadley & McCloy, New York, New York.
116
EXPERTS
The financial statements of Aminco, Inc. (predecessor to Carson, Inc.) for
the fiscal year ended March 31, 1995 included in this Prospectus have been so
included in reliance on the report (which contains an explanatory paragraph
relating to the Company's change in accounting method in accounting for
inventories as described in Note 15 to the financial statements) of Price
Waterhouse LLP, independent auditors, given on the authority of said firm as
experts in auditing and accounting.
The consolidated financial statements of the Company included in this
Prospectus as of March 31, 1996 and for the period from August 23, 1995
through March 31, 1996 and as of December 31, 1996 and for the period from
April 1, 1996 through December 31, 1996 and the consolidated statements of
operations, shareholders equity and cash flows of the Predecessor for the
period from April 1, 1995 to August 22, 1995 have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein
(which report expresses an unqualified opinion and includes an explanatory
paragraph relating to the Company's change in its method of accounting for
inventories and the retroactive restatement of the consolidated balance sheets
as of March 31, 1996 and December 31, 1996 and the consolidated statements of
operations, stockholders' equity, and cash flows for the period from August
23, 1995 to March 31, 1996), and has been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of the Cutex Brands of Chesebrough-Pond's USA Co.
as of December 31, 1995 and 1996 and April 30, 1997 and for each of the two
years in the period ended December 31, 1996 and for the four month period
ended April 30, 1997 have been audited by Coopers & Lybrand L.L.P.,
independent auditors, as stated in their report appearing herein.
117
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Audited Financial Statements for the Company and the Predecessor
Independent Auditors Reports.............................................. F-2
Report of Independent Accountants......................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Balance Sheets............................................... F-5
Consolidated Statement of Stockholders' Equity............................ F-6
Consolidated Statements of Cash Flows..................................... F-8
Notes to Consolidated Financial Statements................................ F-9
Unaudited Financial Statements for the Company
Condensed Consolidated Balance Sheet at September 30, 1997................ F-19
Condensed Consolidated Statements of Operations--Nine Months Ended
September 30, 1997 and 1996.............................................. F-20
Condensed Consolidated Statements of Cash Flows--Nine Months Ended
September 30, 1997 and 1996.............................................. F-21
Notes to Condensed Consolidated Financial Statements...................... F-22
Audited Financial Statements of the Cutex Brands of Chesebrough-Pond's USA
Co.
Report of Independent Accountants......................................... F-25
Statements of Net Assets Sold as of December 31, 1996 and 1995............ F-26
Statements of Net Sales, Cost of Sales and Direct Operating Expenses for
the Years ended December 31, 1996 and 1995............................... F-27
Notes to Financial Statements............................................. F-28
Report of Independent Accountants......................................... F-32
Statement of Net Assets Sold as of April 30, 1997......................... F-33
Statement of Net Sales, Cost of Sales and Direct Operating Expenses for
the four-month period ended April 30, 1997............................... F-34
Notes to Financial Statements............................................. F-35
F-1
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND STOCKHOLDERS OF CARSON, INC.:
We have audited the accompanying consolidated balance sheets of Carson, Inc.
and its subsidiaries as of December 31, 1996 and March 31, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the periods from April 1, 1996 to December 31, 1996 and from August
23, 1995 to March 31, 1996. We also audited the accompanying statement of
operations, stockholders' equity, and cash flows of Aminco, Inc. (the
Predecessor) for the period from April 1, 1995 to August 22, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Carson, Inc. and its
subsidiaries as of December 31, 1996 and March 31, 1996, and the results of
its operations and its cash flows for the periods from April 1, 1996 to
December 31, 1996 and from August 23, 1995 to March 31, 1996, and the results
of operations and cash flows of the Predecessor for the period from April 1,
1995 to August 22, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 15 to the Consolidated Financial Statements, effective
June 30, 1997, the Company changed its method of accounting for inventories
and, retroactively, restated the Consolidated Balance Sheets as of March 31,
1996 and December 31, 1996 and the Consolidated Statements of Operations,
Stockholders' Equity and Cash Flows for the period from August 23, 1995 to
March 31, 1996.
Deloitte & Touche LLP
Atlanta, Georgia
March 7, 1997
(June 30, 1997 as to Note 15)
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the consolidated statements of operations, of changes in
stockholders' equity and of cash flows for the year ended March 31, 1995
present fairly, in all material respects, the results of operations and cash
flows of Aminco, Inc. and its subsidiaries (predecessor to Carson, Inc.) for
the year ended March 31, 1995, in conformity with generally accepted
accounting principles. 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 audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Aminco, Inc. for any period subsequent to
March 31, 1995.
As discussed in Note 15 to the Consolidated Financial Statements, effective
June 30, 1997, the Company changed its method of accounting for inventories
and, retroactively, restated the Consolidated Statement of Operations,
Stockholders' Equity and Cash Flows for the year ended March 31, 1995. The
Company also changed its method of accounting for postretirement benefits
other than pensions during the fiscal year ended March 31, 1995.
Price Waterhouse LLP
May 8, 1995, except as to Note 15, which is as of June 30, 1997
F-3
CARSON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
TWELVE MONTH PERIOD
---------------------------------------------------------
NINE MONTH PERIOD
-----------------------------
COMPANY UNAUDITED PREDECESSOR COMPANY PREDECESSOR
APRIL 1, 1996 AUGUST 23, 1995 APRIL 1, 1995 AUGUST 23, 1995 YEAR ENDED
TO DECEMBER 31, TO DECEMBER 31, TO AUGUST 22, TO MARCH 31, MARCH 31,
1996 1995 1995 1996 1995
--------------- --------------- ------------- --------------- -----------
AMOUNTS IN 000S EXCEPT PER SHARE DATA
Net sales............... $59,938 $23,673 $26,854 $41,465 $58,126
Cost of sales........... 26,940 10,823 11,513 18,806 25,692
------- ------- ------- ------- -------
Gross profit............ 32,998 12,850 15,341 22,659 32,434
------- ------- ------- ------- -------
Selling expenses........ 15,692 6,129 7,467 9,581 17,888
General and
administrative
expenses............... 5,603 2,475 2,276 5,061 5,246
General and
administrative-fees
paid to Morningside.... 233
Incentive compensation,
directors and
management............. 7,123
Depreciation and
amortization........... 1,896 776 502 1,331 1,085
------- ------- ------- ------- -------
Operating income........ 2,451 3,470 5,096 6,686 8,215
------- ------- ------- ------- -------
Interest expense........ 4,545 2,640 56 4,487 136
Other income, net....... 121 35 1,137 182 783
Other income, AM
Cosmetics management
fee and dividend....... 444
------- ------- ------- ------- -------
(Loss) income before
income tax............. (1,529) 865 6,177 2,381 8,862
Provision for income
tax.................... 1,727 527 2,243 1,277 3,174
------- ------- ------- ------- -------
(Loss) income before
extraordinary item and
change in accounting
principle.............. (3,256) 338 3,934 1,104 5,688
Extraordinary item, net
of tax benefit......... (3,527)
Cumulative effect of
change in accounting
principle, net of tax
benefit................ (250)
------- ------- ------- ------- -------
Net (loss) income....... (6,783) 338 3,934 1,104 5,438
Dividends on preferred
stock.................. 554 1,109
------- ------- ------- ------- -------
(Loss) income available
to all shareholders.... $(6,783) $ 338 $ 3,380 $ 1,104 $ 4,329
======= ======= ======= ======= =======
Earnings (loss) per
common share:
Before extraordinary
item................... $ (0.25) $ 0.03 $ 0.09
Extraordinary item, net
of tax benefit......... (0.28)
------- ------- -------
Net (loss) earnings per
share.................. $ (0.53) $ 0.03 $ 0.09
======= ======= =======
Weighted average common
shares outstanding..... 12,715 11,871 11,871
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CARSON, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
1996 1996
------------- ------------
DOLLARS IN 000S EXCEPT
SHARE AND PAR VALUE DATA
ASSETS
Current Assets:
Cash and cash equivalents... $ 4,191 $ 1,553
Accounts receivable (less
allowance for doubtful
accounts of $614 and $531
at December 31, 1996 and
March 31, 1996,
respectively).............. 14,855 12,611
Accounts receivable due
from AM Cosmetics.......... 262
Inventories................. 10,572 8,486
Other current assets........ 1,421 3,169
------------ ------------
Total current assets...... 31,301 25,819
------------ ------------
Property, Plant and
Equipment, at cost:
Land and improvements....... 545 545
Buildings and improvements.. 6,689 5,427
Machinery and equipment..... 7,436 5,806
Furniture and fixtures...... 396 277
Construction-in-progress.... 1,004 282
------------ ------------
16,070 12,337
Less: accumulated
depreciation............... 981 351
------------ ------------
15,089 11,986
------------ ------------
Investment in AM Cosmetics... 3,187
Goodwill, net of accumulated
amortization of $1,573 and
$688 at December 31, 1996
and March 31, 1996,
respectively................ 45,801 46,633
Other Assets................. 2,151 3,542
------------ ------------
Total Assets............ $ 97,529 $ 87,980
------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable............ $ 7,065 $ 3,600
Accrued expenses............ 4,451 5,354
Accrued expenses, directors
and employees.............. 1,333
Current maturities of long-
term debt.................. 2,600 3,010
------------ ------------
Total current liabilities. 15,449 11,964
------------ ------------
Long-term Debt............... 24,501 63,778
Other Liabilities............ 1,700 1,732
Deferred Income Taxes........ 731
Minority Interest in
Subsidiary.................. 1,664
Commitments and Contingencies
(Notes 11 and 14)
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, 4,996,568
shares issued and
outstanding as of
December 31, 1996........ 50
Class B, nonvoting, $.01
par value, 2,000,000
shares authorized,
1,859,677 shares issued
and outstanding.......... 19 19
Class C, voting, $.01 par
value, 13,000,000 shares
authorized, 8,127,937 and
9,510,323 shares issued
and outstanding at
December 31, 1996 and
March 31, 1996,
respectively............. 81 95
Paid-in capital........... 62,418 8,557
Notes receivable from
employee shareholders,
net of discount.......... (1,365)
(Accumulated deficit)
Retained earnings........ (5,679) 1,104
Foreign currency
translation adjustment... (1,309)
------------ ------------
Total stockholders'
equity................... 54,215 9,775
------------ ------------
Total Liabilities and
Stockholders' Equity... $ 97,529 $ 87,980
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CARSON, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PREFERRED
COMMON STOCK STOCK
-------------- --------------
TOTAL
PAID-IN RETAINED VALUATION ESOP DEBT TREASURY STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT GUARANTEE STOCK EQUITY
------- ------ ------- ------ ------- -------- ---------- --------- -------- -------------
AMOUNTS IN 000S
PREDECESSOR
Balance, March 31, 1994. 406,699 $1,220 606,752 $6,068 $214 $28,858 $ -- $(288) $(6,373) $29,699
Net income.............. 5,438 5,438
Cash dividends,
preferred stock........ (1,109) (1,109)
Reduction in ESOP debt
guarantee.............. 288 288
Issuance of treasury
stock.................. 94 232 326
Purchase of treasury
stock.................. (567) (567)
Unrealized gains on
investments available
for sale, net of taxes. 283 283
------- ------ ------- ------ ---- ------- ---- ----- ------- -------
Balance, March 31, 1995. 406,699 1,220 606,752 6,068 308 33,187 283 (6,708) 34,358
Net income.............. 3,934 3,934
Cash dividends,
preferred stock........ (554) (554)
Issuance of treasury
stock.................. 296 296
------- ------ ------- ------ ---- ------- ---- ----- ------- -------
Balance, August 22,
1995................... 406,699 $1,220 606,752 $6,068 $308 $36,567 $283 $ -- $(6,412) $38,034
======= ====== ======= ====== ==== ======= ==== ===== ======= =======
F-6
CARSON, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
RETAINED
CLASS A CLASS B CLASS C EARNINGS NOTES TOTAL
-------------- -------------- --------------- PAID-IN (ACCUMULATED TRANSLATION RECEIVABLE STOCKHOLDERS'
SHARES AMOUNTS SHARES AMOUNTS SHARES AMOUNTS CAPITAL DEFICIT) ADJUSTMENT FROM OFFICERS EQUITY
------ ------- ------ ------- ------ ------- ------- ------------ ----------- ------------- -------------
AMOUNTS IN 000S
COMPANY,
beginning August
23, 1995
Sale of common
stock.......... $ 569 $ 6 5,799 $58 $11,936 $ $ $ $12,000
Issuance of
common stock in
connection with
acquisition.... 1,291 13 2,006 20 2,717 2,750
Carryover of
predecessor
basis.......... 1,705 17 (6,096) (6,079)
Net income, as
restated....... 1,104 1,104
----- --- ----- --- ------ --- ------- ------- ------- ------- -------
Balance, March
31, 1996....... 1,860 19 9,510 95 8,557 1,104 9,775
Gain on sale of
South African
stock, net..... 2,808 2,808
Sale of common
stock, net..... 3,113 31 38,162 38,193
Conversion of
Class C shares
to Class A
shares......... 1,884 19 (1,884) (19)
Reduction of
debt from
shareholders... 5,530 5,530
Net loss........ (6,783) (6,783)
Translation
adjustment..... (1,309) (1,309)
Employee
shareholder
loans, less
discount....... (1,365) (1,365)
Incentive
compensation
and other...... 502 5 7,361 7,366
----- --- ----- --- ------ --- ------- ------- ------- ------- -------
Balance,
December 31,
1996........... 4,997 $50 1,860 $19 8,128 $81 $62,418 $(5,679) $(1,309) $(1,365) $54,215
===== === ===== === ====== === ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-7
CARSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIOD
-----------------------------------------------
TWELVE-MONTH PERIOD
------------------------
COMPANY
COMPANY UNAUDITED PREDECESSOR COMPANY
APRIL 1, AUGUST 23, APRIL 1, AUGUST 23, PREDECESSOR
1996 TO 1995 TO 1995 TO 1995 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 22, MARCH 31, MARCH 31,
1996 1995 1995 1996 1995
------------ ------------ ----------- ---------- -----------
DOLLARS IN 000S
Operating Activities:
Net (loss) income...... $ (6,783) $ 338 $ 3,934 $ 1,104 $ 5,438
-------- -------- ------- -------- --------
Adjustments to reconcile
net (loss) income to
net cash provided by
operating activities:
Depreciation and
amortization.......... 1,896 776 502 1,331 1,085
Extraordinary item,
net of tax benefit.... 3,527
Incentive
compensation.......... 6,163
Provision for doubtful
accounts.............. 112 110
Deferred income taxes.. (957) 805 25
Other, net............. (1,363) (2,238) (1,367) 701 394
Prepayment penalty on
long-term debt........ (1,328)
Changes in operating
assets and liabilities,
net of acquisitions:
Accounts receivable.... (2,356) (446) (588) (2,385) (1,275)
Accounts receivable,
related party......... (262)
Inventories............ (2,086) (1,579) 190 (1,409) 467
Other current assets... 1,748 (89) (546) (1,045) 313
Accounts payable....... 3,465 366 (732) 1,360 755
Accrued liabilities.... (903) (985) 1,688 (1,677) 479
Accrued liabilities,
related party......... 1,333
-------- -------- ------- -------- --------
Total adjustments.. 8,989 (4,085) (853) (2,319) 2,243
-------- -------- ------- -------- --------
Net cash provided by
(used in) operating
activities............ 2,206 (3,747) 3,081 (1,215) 7,681
-------- -------- ------- -------- --------
Investing Activities:
Additions to property,
plant and equipment... (3,805) (624) (375) (1,470) (974)
Long-term investments.. (3,000)
Proceeds from sales
and maturities of
investments........... 21,428 12,498
Package design costs... (244) (356)
Acquisitions of
business assets, net
of cash acquired...... (65,300) (65,300)
Purchases of
investments........... (6,760) (15,704)
Other.................. 299
-------- -------- ------- -------- --------
Net cash (used in)
provided by investing
activities............ (6,805) (65,924) 14,049 (66,770) (4,237)
-------- -------- ------- -------- --------
Financing Activities:
Proceeds from long-
term borrowings....... 32,704 58,550 58,550
Principal payments on
long-term debt........ (67,876) (500) (1,012)
Dividends paid,
preferred stock....... (554) (1,109)
Purchases of treasury
stock................. (296) (567)
Checks outstanding..... (1,043)
Proceeds from sale of
common stock.......... 38,193 12,000 12,000
Proceeds from sale of
subsidiary stock...... 4,216
-------- -------- ------- -------- --------
Net cash provided by
(used in) financing
activities............ 7,237 70,050 (850) 69,538 (2,719)
-------- -------- ------- -------- --------
Net Increase
(Decrease) in Cash
and Cash Equivalents.. 2,638 379 16,280 1,553 725
Cash and Cash
Equivalents at
Beginning of Period... 1,553 1,620 895
-------- -------- ------- -------- --------
Cash and Cash
Equivalents at End of
Period................ $ 4,191 $ 379 $17,900 $ 1,553 $ 1,620
======== ======== ======= ======== ========
Cash paid during the
period for:
Interest............... $ 4,178 $ 3,034 $ 56 $ 3,991 $ 136
Income taxes........... $ 2,421 $ 1,276 $ 457 $ 2,497 $ 2,654
Non-cash financing
activities:
Long-term debt issued
in Acquisition........ $ $ 11,753 $ $ 11,753 $
Reduction of debt from
shareholders.......... $ 5,530 $ $ $ $
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. 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 Company is a leading manufacturer and marketer in the United States of
selected personal care products for both the ethnic market and the mass
market. The Company believes that it is one of the leading global
manufacturers and marketers of ethnic hair care products for persons of
African descent. The Company's more than 60 products are marketed under five
principal brand names. Certain of the Company's international activities are
conducted by its South African subsidiary.
The Company's acquisition of the Predecessor for approximately $95 million
in cash (including $6 million for fees and other costs directly associated
with the acquisition) was initially financed with long-term borrowings
aggregating approximately $68.0 million and has been accounted for as a
purchase (the "Acquisition"). Accordingly, the purchase price has been
allocated to the Predecessor's identifiable assets and liabilities based on
the fair values at the acquisition date. The excess of the purchase price over
the fair value of the Predecessor's identifiable net assets has been
classified as goodwill.
Certain previous shareholders of the Predecessor received 1,705,500 shares
of Class A Common Stock in the acquisition. Such share interest has been
carried over at such shareholders' proportionate equity in the book value of
Aminco (predecessor) basis in accordance with Emerging Issues Task Force Issue
No. 88-16, "Basis in Leveraged Buyout Transactions."
The purchase price of the Predecessor (net of carryover of negative
predecessor basis of approximately $6.1 million) has been allocated as follows
(in millions):
Current assets (including $17.9 of cash ac-
quired)....................................... $ 37.9
Property, plant and equipment.................. 10.8
Goodwill....................................... 47.2
Other assets................................... 4.5
Liabilities assumed............................ (11.4)
------
$ 89.0
======
In July 1996, the Company's South African subsidiary sold 25% of its shares
in an initial public offering on the Johannesburg Stock Exchange. The
subsidiary received net proceeds of approximately $4.2 million from this sale
(which resulted in a gain to the Company of approximately $2.8 million which
was recorded in paid in capital). In conjunction with this public offering,
the Company entered into an amendment to its license agreement with its South
African subsidiary which provides that commencing on April 1, 1998, its South
African subsidiary will pay the Company a royalty in the amount of 3.0% of the
net sales price of all licensed products. The amount of the royalty increases
to 3.5% on April 1, 1999 and 4.0% on April 1, 2000 until the termination of
the agreement. The initial term of the agreement expires on April 1, 1999;
however, the agreement continues indefinitely thereafter until terminated by
either party upon 12 months written notice.
The Company completed an initial public offering of 4,818,500 shares of its
common stock on October 18, 1996. The Company used the proceeds of such
offering to repay certain indebtedness (see Note 7). This repayment resulted
in an extraordinary loss recorded at that time of approximately $3.5 million
(net of tax) for prepayment penalties and the write-off of unamortized debt
discount and deferred financing costs.
F-9
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In October 1996, the Company amended its Certificate of Incorporation to
change the authorized capital stock to Class A Common Stock, Class B Common
Stock, Class C Common Stock and Preferred Stock (each with a par value of $.01
per share). Each share of the Company's former Class A Common Stock was
converted into 11,370 shares of newly created Class C Common Stock, and each
share of former Class B Common Stock was converted into 11,370 shares of newly
created Class B Common Stock. These stock conversions have been given
retroactive recognition in the accompanying financial statements.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Change in Fiscal Year
Effective December 31, 1996, the Company changed its fiscal year-end from
March 31 to December 31 in order to conform the Company's financial reporting
year to the natural business year of its industry.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries and the Predecessor. All significant
intercompany transactions and accounts have been eliminated.
Inventories
Inventories are valued at the lower of First-In, First-Out (FIFO) cost or
market. See Note 15.
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:
Buildings..................................... 42 years
Land improvements............................. 20 years
Machinery and equipment....................... 12 years
Furniture and fixtures........................ 10 years
Office equipment.............................. 8 years
Vehicles...................................... 5 years
Information systems........................... 5 years
Intangible Assets
Goodwill is amortized over 40 years using the straight-line method. Debt
issue costs are amortized on the interest method over the life of the related
debt. Patents are amortized using the straight-line method over 17 years.
Trademarks are amortized using the straight-line method over 40 years. The
Company periodically assesses the recoverability of intangible assets based on
judgments as to future undiscounted cash flows from operations.
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.
F-10
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 and aggregated $349,000 for the nine-month period ended December
31, 1996, $250,000 for the period August 23, 1995 to March 31, 1996, $160,000
for the period from April 1, 1995 to August 22, 1995 and $323,000 for the year
ended March 31, 1995. These costs are included in general and administrative
expenses in the accompanying statements of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets 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.
Foreign Currency Translation
Assets and liabilities of the Company's South African operations are
translated from South African Rand into U.S. dollars at the rate of currency
exchange at the end of the fiscal period. Revenues and expenses are translated
at average monthly exchange rates prevailing during the period. Resulting
translation differences are recognized as a component of stockholders' equity.
Net (Loss) Earnings Per Share
Net (loss) earnings per share is computed by dividing net income by weighted
average common shares outstanding. In accordance with the rules of the
Securities and Exchange Commission, all shares of common stock issued prior to
the Company's initial public offering are included in weighted average shares
outstanding as if they were issued at the Company's formation.
Supplementary Net (Loss) Earnings Per Share
Supplementary net (loss) earnings per share is computed as if the Company's
shares issued in its initial public offering of 3,113,000 were issued at the
beginning of the Company's formation and interest related to debt that was
paid off with proceeds is added back. Supplementary net (loss) earnings per
share was $(0.33), $0.13 and $0.26 for the periods April 1, 1996 to December
31, 1996, August 23, 1995 to December 31, 1995 and August 23, 1995 to March
31, 1996, respectively.
Cash and Cash Equivalents
Cash and investments with maturities of three months or less when purchased
are considered cash equivalents.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable,
inventories, investment in AM Cosmetics preferred stock, accounts payable and
accrued liabilities approximate fair values due to the short-term maturities
of the instruments. The carrying value of long-term debt approximates fair
value.
F-11
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reclassification
Certain prior period balances have been reclassified to conform with current
year presentation.
NOTE 3. INVENTORIES
Inventories at December 31, 1996 and March 31, 1996 are summarized as follows
(in 000s):
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
Raw materials....................... $ 7,017 $4,562
Work-in-process..................... 1,236 1,002
Finished goods...................... 2,319 2,922
------- ------
Total........................... $10,572 $8,486
======= ======
NOTE 4. OTHER CURRENT ASSETS
Other current assets at December 31, 1996 and March 31, 1996 consist of the
following (in 000s):
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
Deferred income taxes............... $ 203 $ 860
Income tax receivable............... 872
Prepaid interest.................... 1,090
Prepaid other....................... 346 1,219
------ ------
Total........................... $1,421 $3,169
====== ======
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Depreciation expense for the nine months ended December 31, 1996 and December
31, 1995 was $672,000 and $586,000, respectively. For the periods from August
23, 1995 to March 31, 1996, April 1, 1995 to August 22, 1995 and April 1, 1994
to March 31, 1995, depreciation expense was $351,000, $322,000 and $679,000,
respectively.
NOTE 6. OTHER ASSETS
Other assets at December 31, 1996 and March 31, 1996 are summarized as
follows (in 000s):
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
Deferred financing costs............ $ 937 $3,275
Deferred tax asset.................. 935
Prepaid interest.................... 433
Patents............................. 184 152
Trademarks and other................ 128
------ ------
2,184 3,860
Less: accumulated amortization...... 33 318
------ ------
Total........................... $2,151 $3,542
====== ======
F-12
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. LONG-TERM DEBT
Long-term debt at December 31, 1996 and March 31, 1996 is summarized as
follows (in 000s):
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
Term Loans......................................... $24,350 $29,000
Revolving line of credit........................... 2,052 7,500
Senior subordinated notes, interest at 12.5%....... 16,693
Subordinated notes, interest at 15%................ 2,004
Junior subordinated notes, interest at 10%......... 11,544
Other.............................................. 699 47
------- -------
27,101 66,788
Less: current portion.............................. 2,600 3,010
------- -------
$24,501 $63,778
======= =======
Annual maturities of outstanding indebtedness at December 31, 1996 are as
follows (in 000s):
DECEMBER
31, 1996
--------
1997................................ $ 2,600
1998................................ 2,840
1999................................ 2,891
2000................................ 2,745
2001................................ 2,623
Thereafter.......................... 13,402
-------
27,101
Less: Current maturities............ 2,600
-------
Long-term portion................... $24,501
=======
The Company used the proceeds from its initial public offering to retire the
senior subordinated notes, subordinated notes and junior subordinated notes.
As a result, during the nine months ended December 31, 1996, the Company
incurred $3.5 million (net of the related tax benefit of $2.4 million) of
debt-related charges and write-offs reflected in the accompanying Statements
of Operations as an extraordinary item. In addition, as a result of
negotiation with shareholders, the Company reduced a portion of the junior
subordinated notes held by such shareholders totaling $5.5 million which is
reflected as a capital addition in the Statement of Shareholders' Equity.
In October 1996, the Company replaced its credit agreement with a new
facility (the "New Senior Bank Facility") that includes (i) a $15.0 million
term loan A, (ii) a $10.0 million term loan B and (iii) a $15.0 million
revolving credit facility, including up to $5.0 million of letters of credit.
Aggregate borrowings under the revolving credit facility and outstanding
letters of credit may not exceed the Borrowing Base, which equals the sum of
(i) 80% of Eligible Accounts Receivable and (ii) 50% of Eligible Inventory.
The amount available for borrowing under the revolver at December 31, 1996 was
$12.9 million. Term loan A, term loan B and the revolving credit facility
mature in September 2002, 2003 and 2002, respectively. Term loan A amortizes
in quarterly installments of $625,000, term loan B amortizes in quarterly
installments of $25,000 through September 2002 and in quarterly installments
of $2,350,000 beginning in December 2002.
F-13
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The term loan A and revolving credit facility bear interest at the
applicable prime rate plus 0.5% or LIBOR plus 2.0% and have a final maturity
of six years. The term loan B bears interest at the applicable prime rate plus
1.0% or LIBOR plus 2.5% and has a final maturity of seven years.
The Credit Agreement provides for (i) a commitment fee of 0.5% per annum on
the unutilized portion of the revolving credit facility, (ii) a fee of 2.0%
per annum on the maximum amount available to be drawn under letters of credit,
and (iii) a letter of credit issuance fee.
The obligations of Carson Products under the New Senior Bank Facility are
secured by substantially all of Carson Products' (and its subsidiaries)
assets, as well as by a pledge of the capital stock of Carson Products. The
New Senior Bank Facility is guaranteed by the Company and each present and
future subsidiary of Carson Products (other than Carson South Africa and its
subsidiaries). The New Senior Bank Facility contains covenants with respect
to, among other things, (i) maintenance by Carson Products of certain total
interest coverage ratios, fixed charge coverage ratios and leverage ratios,
and (ii) restrictions on the incurrence of additional liens or indebtedness.
The New Senior Bank Facility contains restrictions on the payment of any cash
dividends except for dividends or distributions payable in shares of capital
stock.
NOTE 8. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1996 and March 31, 1996 consisted of the
following (in 000s):
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
Compensation and benefits........... $1,587 $2,227
Advertising......................... 1,070 1,340
Self-insurance...................... 719 927
Interest............................ 240 384
Income tax payable.................. 493 --
Other............................... 342 476
------ ------
$4,451 $5,354
====== ======
NOTE 9. INCOME TAXES
The following is a reconciliation of the statutory tax rate on (loss) income
from continuing operations to the Company's effective tax rate for the periods
noted:
COMPANY PREDECESSOR COMPANY PREDECESSOR
--------------------------------- ---------------- ---------------- --------------
UNAUDITED
APRIL 1, 1996 TO AUG. 23, 1995 TO APRIL 1, 1995 TO AUG. 23, 1995 TO YEAR ENDED
DEC. 31, 1996 DEC. 31, 1995 AUG. 22, 1995 MARCH 31, 1996 MARCH 31, 1995
---------------- ---------------- ---------------- ---------------- --------------
Statutory rate.......... (34.0)% 34.0 % 34.0 % 34.0 % 34.0 %
State income taxes (net
of federal benefit).... (2.6)% 2.6 % 4.0 % 4.0 % 4.0 %
Foreign taxes........... 33.8% 21.5 % 21.5 %
Foreign tax credit...... (33.8)% (21.5)% (21.5)%
Permanent differences:
Incentive Compensation.. 93.9 %
Goodwill................ 21.8 % 24.3 % 16.0 %
Other taxes............. 33.8 % (1.7)% (2.2)%
Effective rate.......... 112.9 % 60.9 % 36.3 % 54.0 % 35.8 %
F-14
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense (benefit) for the periods noted include the following (in
000s):
TWELVE-MONTHS
---------------------------------
NINE-MONTHS
---------------------------------
COMPANY PREDECESSOR COMPANY PREDECESSOR
--------------------------------- ---------------- ---------------- --------------
AUG. 23, 1995 TO
APRIL 1, 1996 TO DEC. 31, 1995 APRIL 1, 1995 TO AUG. 23, 1995 TO YEAR ENDED
DEC. 31, 1996 UNAUDITED AUG. 22, 1995 MARCH 31, 1996 MARCH 31, 1995
---------------- ---------------- ---------------- ---------------- --------------
Current:
Federal................ $1,685 $117 $1,744 $ 204 $2,760
State.................. 405 19 333 33 294
Foreign................ 594 177 104 310 95
------ ---- ------ ------ ------
Total current
provision............. 2,684 313 2,181 547 3,149
Deferred:
Federal................ (749) 102 52 546 23
State.................. (269) 65 10 102 2
Foreign................ 61 47 82
------ ---- ------ ------ ------
Total deferred
provision............. (957) 214 62 730 25
Total provision for
continuing operations. 1,727 527 2,243 1,277 3,174
------ ---- ------ ------ ------
Benefit for
extraordinary item.... (2,351)
Benefit for accounting
change................ (147)
Total income tax
(benefit) expense..... $ (624) $527 $2,243 $1,277 $3,027
====== ==== ====== ====== ======
The effects of temporary differences which gave rise to the deferred tax
asset and liability at December 31, 1996 and at March 31, 1996 are as follows
(in 000s):
DECEMBER 31, 1996 MARCH 31, 1996
----------------- -----------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- ---------
Deferred domestic tax assets related to:
Deferred compensation.................... $ $ 643 $ $ 638
Accrued expenses......................... 813 522 188
Package design costs..................... 533 412
Allowance for doubtful accounts.......... 219 199
Foreign tax credit carryforward.......... 702
NOL carryforward......................... 241
Inventories.............................. 14 125
Other.................................... 116 14
----- ------- ---- -------
1,046 2,235 860 1,238
Deferred domestic tax liabilities related
to:
Inventories.............................. (752) (-) (801)
Property, plant and equipment............ (1,300) (1,168)
Other.................................... (91)
----- ------- ---- -------
(843) (1,300) (-) (1,969)
----- ------- ---- -------
Deferred domestic tax asset (liability)... $ 203 $ 935 $860 $ (731)
===== ======= ==== =======
Deferred foreign tax liability............ $ $ (106) $ $ (54)
===== ======= ==== =======
Deferred income taxes were not provided on undistributed earnings of certain
foreign subsidiaries ($5.7 million at December 31, 1996 and $1.0 million at
March 31, 1996) because such undistributed earnings are expected to be
reinvested indefinitely overseas. If these amounts were not considered
permanently invested, an additional deferred tax liability of approximately
$712,500 and $125,000 would have been provided as of December 31, 1996 and
March 31, 1996, respectively. The foreign tax credit and NOL carryforward of
$0.7 million and $0.5 million expire at December 31, 2001 and December 31,
2011, respectively.
F-15
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan which covers substantially all its
U.S. employees. Contributions to the plan are discretionary, as determined by
the Board of Directors. Contributions are made on an annual basis. The Company
contributed $401,000 to the plan for the period from April 1, 1996 to December
31, 1996 and $246,000 to the plan for the period from August 23, 1995 to March
31, 1996.
The Company is obligated for retirement benefits to a former employee for
the remainder of his (and his spouse's) life. The expected present value of
this obligation ($1.6 million at December 31, 1996 and $1.7 million at March
31, 1996) is classified in other liabilities in the accompanying balance
sheets.
The Company provides postretirement health care benefits to a limited number
of key executives. The accumulated postretirement benefit obligation ("APBO")
was $517,000 at December 31, 1996 and $499,000 at March 31, 1996. For
measurement purposes, the cost of providing medical benefits was assumed to
increase by 10% in the fiscal year ended December 31, 1996, decreasing to an
annual rate of 8% after December 31, 1999. The medical cost trend rate
assumption could have an effect on amounts reported. For example, an increase
of 1% in the assumed rate of increase would have an effect of increasing the
APBO by $63,000 and the net periodic postretirement benefit cost by $23,000.
The weighted average discount rate used in determining the APBO was 8%. Net
periodic postretirement benefit cost for the period from August 23, 1995 to
March 31, 1996 was $9,000. Net periodic postretirement benefit cost for the
period from April 1, 1996 to December 31, 1996 was $18,000.
The Company recognized $0.8 million of compensation expense during the
quarter ended June 30, 1996 relating to anticipated costs under certain
equity-based long-term incentive compensation arrangements (such awards and
compensation expense are based upon the fair market value of the Company at
the time of the initial public offering). Such arrangements were awarded
originally as stock appreciation rights ("SARs"). During 1996, the SARs were
amended and converted to immediately exercisable stock purchase rights, on a
complete or partial basis, as agreed to by the Company and the awardee. The
SARs entitled the holder to a specified value (determined as a percentage of
the Company's equity value) over a fixed base value subject to five year
vesting requirements (or earlier upon a public offering or sale of the
Company). Upon amendment and conversion, the SAR rights were cancelled (and
replaced with accelerated, immediately exercisable stock purchase rights).
These rights have a fixed purchase price equal in amount to the canceled SARs
fixed base value.
During August 1996, pursuant to the terms of the accelerated, immediately
exercisable stock purchase rights, several outside directors purchased 115,373
shares of Common Stock at approximately $2.17 per share for an aggregate
purchase price of $250,000 and members of senior management purchased 385,818
shares of Common Stock at approximately $4.21 per share for an aggregate
purchase price of $1.6 million. The purchase of such shares by senior
management was financed with $1.4 million (net of discount) in noninterest
bearing long-term full recourse loans from the Company. The incentive
compensation expense represents the excess of the initial public offering
price over the actual purchase price of these shares plus certain cash
payments. In connection with the South African offering, the Company also
issued shares of the subsidiary to certain members of its management; the
Company recorded compensation expense of approximately $0.3 million for these
share awards.
NOTE 11. 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 and operations
of the Company.
F-16
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12. U.S. AND FOREIGN OPERATIONS
The Company's operations are located in the United States and South Africa.
Financial information by geographic area is as follows (in 000s):
TWELVE MONTHS
-----------------------------
NINE MONTHS
-----------------------------
COMPANY PREDECESSOR COMPANY PREDECESSOR
------------------------------- ------------- --------------- -----------
APRIL 1, 1996 AUGUST 23, 1995 APRIL 1, 1995 AUGUST 23, 1995 YEAR ENDED
TO DECEMBER 31, TO DECEMBER 31, TO AUGUST 22, TO MARCH 31, MARCH 31,
1996 1995 1995 1996 1995
--------------- --------------- ------------- --------------- -----------
(UNAUDITED)
Net sales:
United States:
Domestic............... $42,855 $17,386 $20,189 $30,676 $47,111
Export................. 8,274 3,304 4,407 6,494 7,382
South Africa........... 8,809 2,983 2,258 4,295 3,633
------- ------- ------- ------- -------
$59,938 $23,673 $26,854 $41,465 $58,126
======= ======= ======= ======= =======
Operating income:
United States.......... $ 723 $ 3,096 $ 4,733 $ 5,713 $ 7,852
South Africa........... 1,728 374 363 973 363
------- ------- ------- ------- -------
$ 2,451 $ 3,470 $ 5,096 $ 6,686 $ 8,215
======= ======= ======= ======= =======
Identifiable assets (at
end of period):
United States.......... $95,283 $82,109 $84,886 $42,585
South Africa........... 11,529 2,953 4,404 2,113
Eliminations........... (9,283) (971) (1,310) (835)
------- ------- ------- -------
$97,529 $84,091 $87,980 $43,863
======= ======= ======= =======
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 Europe, the Caribbean and Africa.
NOTE 13. FINANCIAL INFORMATION OF CARSON, INC. (PARENT COMPANY)
The assets of Carson, Inc. on an unconsolidated basis consist solely of its
investment in Carson Products Company. During the period from April 1, 1996 to
December 31, 1996, and for the period from August 23, 1995 to March 31, 1996,
the results of operations of Carson, Inc. consisted solely of its equity in
the earnings of Carson Products Company and its cash flows consisted solely of
the cash provided by financing activities of $42.4 million and $12.0 million,
respectively, from the sale of its common stock and cash used in investing
activities of $42.4 million and $12.0 million, respectively, for its
investment in Carson Products Company.
NOTE 14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Morningside
Carson Products and Morningside Capital Group, L.L.C., ("Morningside")
entered into a Management Assistance Agreement dated August 23, 1995 (the
"Management Agreement"), pursuant to which Morningside CARSON, INC. and a
shareholder of the Company agreed to supply the services of a principal member
of Morningside to the Company to provide certain advice and assistance. Such
services are provided for a fee of $350,000 per year, payable on a monthly
basis in advance plus reimbursement for out-of-pocket expenses. The
termination date of the Management Agreement is August 23, 1998; 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.
In connection with the 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
F-17
CARSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and was reimbursed by the Company for certain related expenses. Under the
Management Agreement, the Company paid Morningside approximately $25,000 in
fiscal 1996 for reimbursement of out-of-pocket expenses. Morningside received
a fee of $100,000 for arranging and negotiating the terms of the New Senior
Bank Facility and performing other consulting and financial advisory services.
In addition, the Company reimbursed Morningside for approximately $35,000 of
out-of-pocket expenses incurred in connection with the initial public
offering. From time to time Morningside may provide additional financial
advisory services to the Company, for which Morningside will receive usual and
customary compensation.
Fees Related to the Acquisition
A corporation in which the Company's former chief financial officer serves
as President and is a principal stockholder, was paid $290,000 and received
159,180 shares of the Company's Class C Common Stock from the Company in
connection with financial advisory services related to the Acquisition. A law
firm in which a director and shareholder of the Company serves as President
and Chief Executive Officer was paid approximately $690,000 for services
rendered in arranging the equity investment in the Company in connection with
the Acquisition. A principal lender and a shareholder of the Company received
fees and reimbursement of out-of-pocket expenses totalling $1,783,000 in
connection with the Acquisition.
AM Cosmetics
Morningside AM Acquisition Corp. ("AM Acquisition"), entered into a
Subscription Agreement dated as of June 26, 1996 (the "Subscription
Agreement") with Carson Products, providing for the purchase by Carson
Products of 300 shares of cumulative Payment in Kind Preferred Shares (the
"PIK Preferred Shares") issued by AM Acquisition, at a price of $10,000 per
share. AM Acquisition was formed by Morningside on behalf of an investor group
to acquire the assets of Arthur Matney Co., Inc. Certain key management
personnel and shareholders of the Company are also key management and
shareholders of AM Cosmetics. AM Cosmetics sells three brands of "budget"
cosmetics, one of which is targeted at the African-American consumer. The PIK
Preferred Shares are non-voting and are entitled to cumulative dividends
payable quarterly in additional PIK Preferred Shares at a rate of 12% per
annum. Additionally, the PIK Preferred Shares are subject to redemption in
whole at the option of Carson Products on or after July 1, 2005, at the stated
value per share (which is $10,000 per share) plus an amount in cash equal to
all accrued and unpaid dividends on the PIK Preferred Shares.
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
for the management and other services it will provide, Carson Products is
entitled to fees equal to 1% of AM Cosmetics' annual net sales subject to a
minimum of $500,000 per annum. The Carson-AM Management Agreement expires on
June 26, 2004 unless terminated earlier, or renewed for an additional three-
year period at AM Cosmetics' option by giving Carson Products written notice
thereof at least 180 days prior to the expiration date. Either CARSON, INC.
party may terminate the AM Management Agreement by providing the other party
with written notice, at least 360 days in advance if terminated by Carson
Products and 60 days in advance if terminated by AM Cosmetics.
NOTE 15. CHANGE IN ACCOUNTING METHOD
Effective June 30 1997, the Company changed its method of valuing
inventories in the United States from the lower of last-in, first-out (LIFO)
cost or market to the lower of first-in, first-out (FIFO) cost or market. The
effect of this change has been reflected to the extent material in all periods
presented in these financial statements. This change in valuing inventories
was made in order to provide conformity among all of the Company's
subsidiaries as well as to conform with general industry practices. As a
result of this change in accounting method, cost of goods sold increased and
net income decreased for the period ended March 31, 1996 by $177,000 and
$102,000, respectively. In addition, inventories decreased by $177,000,
retained earnings decreased by $102,000 and deferred income taxes decreased by
$75,000 as of March 31, 1996 and December 31, 1996. The effect on all other
periods presented was not significant.
F-18
CARSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
SEPTEMBER 30,
1997
(UNAUDITED)
-------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 4,987
Accounts receivable (less allowance for doubtful accounts and
returns of $3,054)............................................ 26,259
Inventories, net............................................... 18,413
Other current assets........................................... 723
--------
Total current assets......................................... 50,382
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation... 19,314
INVESTMENT IN AM COSMETICS....................................... 3,483
GOODWILL, net.................................................... 91,473
OTHER ASSETS..................................................... 6,197
--------
TOTAL ASSETS............................................... $170,849
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $ 8,382
Accrued expenses............................................... 7,447
Income taxes payable........................................... 2,577
Current maturities of long-term debt........................... 3,000
--------
Total current liabilities.................................... 21,406
LONG-TERM DEBT................................................... 84,918
MINORITY INTEREST IN SUBSIDIARY.................................. 3,919
DEFERRED INCOME TAXES AND OTHER LIABILITIES...................... 1,701
STOCKHOLDERS' EQUITY:
Preferred stock................................................ --
Common stock................................................... 150
Paid-in capital................................................ 62,899
Accumulated deficit............................................ (1,234)
Note receivable from employee shareholders, net of discount.... (1,437)
Foreign currency translation adjustment........................ (1,473)
--------
Total stockholders' equity................................... 58,905
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $170,849
========
See notes to condensed consolidated financial statements.
F-19
CARSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
Net sales.................................................. $ 77,791 $ 56,488
Cost of goods sold......................................... 35,431 24,853
-------- --------
Gross profit............................................... 42,360 31,635
Expenses:
Marketing and selling...................................... 19,602 13,283
General and administrative................................. 11,691 8,488
Incentive compensation..................................... -- 7,123
-------- --------
31,293 28,894
-------- --------
Operating income........................................... 11,067 2,741
Interest expense........................................... (3,924) (5,523)
Other income, net.......................................... 608 497
-------- --------
Income before income taxes................................. 7,751 (2,285)
Provision for income taxes................................. 3,310 1,808
-------- --------
Net income (loss).......................................... $ 4,441 (4,093)
======== ========
Earnings (loss) per share.................................. $ 0.30 $ (0.34)
======== ========
Weighted average common shares outstanding................. 15,005 11,871
See notes to condensed consolidated financial statements
F-20
CARSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
NINE MONTHS
ENDED SEPTEMBER
30,
-----------------
1997 1996
-------- -------
OPERATING ACTIVITIES:
Net income (loss)........................................ $ 4,441 $(4,093)
-------- -------
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization............................ 2,686 1,830
Other, net............................................... (1,295) (456)
Minority interest in earnings of subsidiary.............. 507 88
Foreign currency translation adjustment.................. (164) (578)
Changes in operating assets and liabilities, net of
acquisitions
Accounts receivable...................................... (10,030) (2,070)
Inventories.............................................. (5,897) (1,850)
Other current assets..................................... (1,547) (1,074)
Accounts payable......................................... 261 591
Income taxes payable..................................... 2,577 (52)
Accrued expenses......................................... 1,501 783
-------- -------
Total adjustments...................................... (11,401) (2,788)
-------- -------
Net cash used in operating activities.................. (6,960) (6,881)
-------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment............... (5,108) (3,895)
Acquisitions of business assets, net of cash acquired.... (49,406) --
-------- -------
Net cash used in investing activities.................. (54,514) (3,895)
-------- -------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings....................... 62,979 5,991
Principal payments on long-term debt..................... (2,162) (2,000)
Incentive compensation................................... -- 7,123
Other, net............................................... (72) 456
Proceeds from equity rights offering..................... 1,525 --
Proceeds from sale of common stock....................... -- 2,814
-------- -------
Net cash provided by financing activities................ 62,270 14,384
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 796 3,608
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........... 4,191 378
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 4,987 $ 3,986
======== =======
See notes to condensed consolidated financial statements.
F-21
CARSON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements of
Carson, Inc. (the "Company") presented herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been omitted
from these consolidated financial statements pursuant to applicable rules and
regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with the audited Consolidated
Financial Statements and the notes thereto of the Company's 1996 Transition
Report on Form 10-K. In the opinion of management, the accompanying unaudited
financial statements contain all normal recurring adjustments necessary to
present fairly the Company's financial position, results of operations and
cash flows at the dates and for the periods presented. Interim results of
operations are not necessarily indicative of the results to be expected for a
full year. Certain prior period amounts have been reclassified to conform with
the current period presentation.
2. INVENTORIES
Inventories are summarized as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
Raw materials........................................ $ 7,899 $ 7,017
Work-in-process...................................... 1,391 1,236
Finished goods....................................... 9,123 2,319
------- -------
$18,413 $10,572
======= =======
The September 30, 1997 and December 30, 1996 inventory balances are net of
valuation allowances of $1.7 million and $181,000, respectively.
3. ACQUISITIONS
During March 1997, the Company entered into an Asset Purchase Agreement with
Conopco, Inc. d/b/a Chesebrough-Pond's USA Co. in order to acquire the rights
to manufacture and market Cutex in the United States and Puerto Rico (the
"Cutex acquisition"). Cutex is the leading brand of nail polish remover and is
also a line of nail enamels. The purchase price approximated $41.4 million
including amounts paid to Chesebrough-Pond's of $37.5 million and inventory
acquired of $3.9 million. In addition, the Company incurred direct acquisition
fees and expenses of $1.4 million including allowances for returned goods and
obsolete inventory. This acquisition has been accounted for under the purchase
method of accounting and the results of the operations have been included in
the condensed consolidated financial statements since the date of acquisition.
Funds were provided by additional long-term debt and the transaction was
completed on April 30, 1997.
During March 1997, concurrent with the Cutex acquisition, the Company
entered into an Asset Repurchase Agreement with Jean Philippe Fragrances, Inc.
On April 30, 1997, in connection with the termination of a license agreement
between Conopco, Inc. and Jean Philippe Fragrances, Inc. by Carson as
successor in interest to Conopco, Inc., Carson acquired certain assets of Jean
Philippe Fragrances, Inc. used in the packaging, distributing and selling of
nail enamel and nail care treatment products, nail care implements and
lipstick under the trademark Cutex in the United States and Puerto Rico.
F-22
CARSON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the results of the Cutex
acquisition as if the acquisition had occurred as of the beginning of each
period presented:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
-------- --------
(DOLLARS IN
THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
Net sales............................................ $ 82,997 $ 69,843
Net income........................................... 4,669 (2,977)
Net income per share................................. $ 0.31 $ (0.25)
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as an adjustment to cost
of goods sold per a manufacturing agreement between the Company and
Chesebrough-Pond's USA Co., additional goodwill amortization, additional
selling expenses related to an agreement between the Company and AM Cosmetics
and additional interest expense on acquisition debt, among others. These
unaudited pro forma results are not necessarily indicative of what the actual
consolidated results of operations might have been if the Cutex acquisition
had been in effect as of the beginning of each period presented, or of future
results of operations of the consolidated Company. The pro forma nine months
ended September 30, 1996 reflects the change from last-in, first-out (LIFO)
cost or market to the lower of first-in, first-out (FIFO) cost or market.
During April 1997, the Company completed the acquisition of the Let's Jam
product line. This acquisition adds 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 cash with funds provided by
additional long-term debt. This acquisition has been accounted for under the
purchase method of accounting.
In the first half of 1997, Carson South Africa, through its wholly-owned
subsidiary, 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.
Carson South Africa announced on November 13, 1997 that it had completed the
acquisition of A&J Cosmetics, a toiletries company. A&J Cosmetics manufactures
and owns the Sadie brand of toiletry products, which has been selling in the
ethnic market for over 20 years and competes primarily in the roll-on
deodorant market. Carson South Africa will fund the acquisition with the
issuance of shares of its common stock. The purchase consideration payable for
the acquisition is approximately $10.3 million, with an additional purchase
price contingency of up to $2.4 million based upon the after tax profit of the
business for the year ended December 31, 1998. Approximately $5.9 million of
the purchase price is payable on January 31, 1998, approximately $4.4 million
is payable on or before January 3, 1999 and the remainder (subject to
adjustment) is payable by no later than March 31, 1999.
4. NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") in
February 1997. SFAS No. 128 replaces the presentation of primary earnings per
share with a presentation of basic earnings per share and requires dual
presentation of basic and diluted earnings per share on the face of the income
statement for all entities with complex capital structures. SFAS No. 128 is
effective for both interim and annual periods ending after December 15, 1997.
The Company currently has a simple capital structure and therefore expects no
material effect from the adoption of SFAS No. 128.
F-23
CARSON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130") and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). The Company will adopt SFAS No. 130 and 131 in 1998. SFAS No. 130
establishes standards for reporting and displaying comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Management expects to report
comprehensive income for the effects of foreign currency translation
adjustments which are currently reported as a change in shareholders' equity.
SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
Management is currently determining the effect, if any, SFAS No. 131 will have
on the annual and interim consolidated financial statements of the Company.
5. CREDIT FACILITY
On April 30, 1997, the Company entered into an Amended and Restated Credit
Agreement with Banque Indosuez, New York Branch, as agent, and the lenders
named therein. The Amended and Restated Credit Agreement replaced the
Company's existing $40 million senior credit facility with a $100 million
senior credit facility consisting of $25 million in Term A loans maturing in
April 2002, $50 million in Term B loans maturing in April 2004 and $25 million
in revolving loan commitments maturing in April 2002. The proceeds of the new
term loans were used in part to finance the Cutex acquisition. In connection
with this refinancing, the Company incurred debt issuance costs of
approximately $2.6 million, including $520,000 paid to Morningside Capital
Group, L.L.C.
On November 6, 1997, the Company completed a private offering under Rule
144A and Regulation S of the Securities Act of 1933, as amended, of $100
million aggregate principal amount of ten year, fixed rate 10 3/8% senior
subordinated notes. 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 the Existing Credit
Facility and transaction fees and expenses related to a new credit facility.
The balance of the proceeds of the offering ($6.1 million) will be used for
working capital and general corporate purposes. The Company entered into a new
credit facility simultaneously with the closing of the proposed offering. The
new credit facility provides for loans of up to $75 million, $25 million of
which is a revolver for working capital purposes and $50 million of which can
be drawn as term loans to fund acquisitions.
6. CHANGE IN ACCOUNTING METHOD
During the second quarter of 1997, the Company changed its method of valuing
inventories in the United States from the lower of last-in, first-out (LIFO)
cost or market to the lower of first-in, first-out (FIFO) cost or market in
order to provide conformity among subsidiaries due to recent acquisitions. The
effect of this change has been reflected in all periods presented in these
financial statements. This change in valuing inventories was made in order to
provide conformity among all of the Company's subsidiaries as well as to
conform with general industry practices. As a result of this change in
accounting method, cost of goods sold increased and net income decreased for
the three months ended March 31, 1996 by $177,000 and $102,000, respectively.
In addition, inventories as of December 31, 1996 decreased by $177,000,
retained earnings decreased by $102,000 and accrued income taxes decreased by
$75,000. The effect on all other periods presented was not significant.
7. YEAR 2000 COMPUTER PROBLEM
Many computer applications were created with a two digit field for the year
in the date field, and as a result, such applications may fail or create
erroneous results by the year 2000 unless corrective measures are taken. The
Company has evaluated the extent of any problems and corrective measures have
been taken to ensure that the upcoming change of century will not have a
significant impact on future results of operations.
F-24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Chesebrough-Pond's USA Co.
We have audited the accompanying statements of net assets sold of the Cutex
brands of Chesebrough-Pond's USA Co. as of December 31, 1996 and 1995, and the
statements of net sales, cost of sales and direct operating expenses for each
of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of Chesebrough-Pond's USA Co.'s management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also 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.
The accompanying financial statements were prepared to present the net
assets sold of the Cutex brands, pursuant to the purchase agreement described
in Note 1, and the net sales, cost of sales and direct operating expenses of
the Cutex brands and are not intended to be a complete presentation of the
Cutex brands' financial position, results of operations and cash flows.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the net assets sold of the Cutex brands, pursuant to
the purchase agreement referred to in Note 1, as of December 31, 1996 and
1995, and the net sales, cost of sales and direct operating expenses for each
of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND LLP
Stamford, Connecticut
July 14, 1997
F-25
THE CUTEX BRANDS OF CHESEBROUGH-POND'S USA CO.
STATEMENTS OF NET ASSETS SOLD (NOTE 1)
AS OF DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1996 1995
---- ----
ASSETS
Inventory............................................................ $722 $641
LIABILITIES
Sales returns reserve................................................ 145 162
Commitments and contingencies........................................
---- ----
Total net assets sold.......................................... $577 $479
==== ====
The accompanying notes are an integral part of these financial statements.
F-26
THE CUTEX BRANDS OF CHESEBROUGH-POND'S USA CO.
STATEMENTS OF NET SALES, COST OF SALES AND DIRECT OPERATING EXPENSES (NOTE 1)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1996 1995
------- -------
Net product sales.............................................. $18,216 $15,703
Net royalty revenues........................................... 638 1,255
------- -------
Net sales...................................................... 18,854 16,958
Cost of sales.................................................. 9,950 8,423
------- -------
Gross profit................................................... 8,904 8,535
Direct operating expenses...................................... 870 861
------- -------
Excess of net sales over cost of sales and direct operating
expenses...................................................... $ 8,034 $ 7,674
======= =======
The accompanying notes are an integral part of these financial statements.
F-27
THE CUTEX BRANDS OF CHESEBROUGH-POND'S USA CO.
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
Chesebrough-Pond's USA Co. ("CPUSA" or the "Company") is a division of
Conopco, Inc., a wholly owned subsidiary of Unilever United States Inc., which
is a wholly owned subsidiary of Unilever N.V.
The accompanying financial statements have been prepared for the purpose of
presenting the net assets sold of the Cutex brands of CPUSA, pursuant to the
Asset Purchase Agreement (the "Agreement") dated as of March 27, 1997 between
CPUSA and Carson, Inc. (the "Buyer") and its net sales, cost of sales and
direct operating expenses for each of the two years in the period ended
December 31, 1996. The transaction was consummated on April 30, 1997 ("Closing
Date"). Pursuant to the Agreement, CPUSA sold to the Buyer certain assets used
with respect to the Cutex brands, including all inventories of finished nail
polish remover products, a license agreement (see Note 6) dated as of May 31,
1994 between CPUSA and Jean Philippe Fragrances, Inc. ("Jean Philippe"), as
amended, intangible rights and other assets directly related to the Cutex
brands, in exchange for consideration totaling approximately $37.5 million
plus the book value of the inventory transferred. The Buyer has assumed all
liabilities related to refunds or exchanges for products returned or charged
back without being returned, after the Closing Date, for all Cutex brand
products, except for claims with respect to damaged or deficient nail polish
remover products. The Cutex brands consisting of nail polish remover, nail
enamel and nail care treatment products, nail care implements and lipstick are
sold and distributed principally in the United States. As a result of the
Agreement, the Buyer is acquiring the Cutex brands in the United States and
Puerto Rico. Foreign affiliates of Unilever N.V. and Unilever P.L.C. outside
the United States and Puerto Rico will continue to sell Cutex brand products
in countries outside the United States and Puerto Rico. Historically,
financial statements have not been prepared for the Cutefrom the historical
accounting records of CPUSA and present the net assets sold of the Cutex
brands, in accordance with the Agreement, as of December 31, 1996 and 1995,
and the statements of net sales, cost of sales and direct operating expenses
for each of the years then ended, and are not intended to be a complete
presentation of the Cutex brands' financial position, results of operations
and cash flows. The historical operating results may not be indicative of the
results after the acquisition by the Buyer.
The statements of net sales, cost of sales and direct operating expenses
include all revenues and expenses directly attributable to the Cutex brands of
the Company. Direct operating expenses consist principally of selling,
marketing and advertising expenses. The statements do not include general and
administrative, research and development, interest, income tax and
amortization of intangible expenses.
CPUSA did not maintain the Cutex brands as a separate business unit and had
never segregated indirect operating cost information relative to these brands.
Accordingly, it is not practical to isolate or allocate indirect operating
costs applicable to the Cutex brands.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition:
Sales of nail polish remover goods are included in income when goods are
shipped to the customer, net of a provision for estimated returns. Royalty
revenues resulting from the Jean Philippe license agreement, which represent
fixed minimum royalty guarantees, are recognized on a straight-line basis over
the period to which they relate. Provisions have been made for amounts not
considered collectible.
Inventories:
Inventories consisting of finished nail polish remover goods are stated at
the lower of cost or market. Cost is determined using the first-in, first-out
method. According to the purchase agreement, the Buyer is not acquiring any
raw materials or work-in-process inventory and therefore, these components of
inventory have been excluded from these financial statements.
F-28
THE CUTEX BRANDS OF CHESEBROUGH-POND'S USA CO.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 contingent
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Significant estimates
relate to sales returns and royalty revenues. Actual results could differ from
those estimates.
Advertising and Promotional Expenses:
Advertising and promotional expenses are charged to expense during the
periods in which they are incurred. Total advertising and promotional expense
was approximately $122 and $182 for the years ended December 31, 1996 and
1995, respectively.
3. COMMITMENTS AND CONTINGENCIES
CPUSA has various purchase commitments for materials, supplies and other
items incidental to the ordinary course of business. In the aggregate, such
commitments are not at prices in excess of current market price. In addition,
CPUSA has commitments, in the normal course of business, with various
distributors relating to Cutex nail polish remover products.
Pursuant to the Agreement, the Buyer did not assume any product or other
liability in connection with any service performed or product manufactured by
CPUSA prior to the Closing Date except for liabilities related to returns or
exchanges of Cutex brand products as further described in Note 1.
4. CONCENTRATION OF NET SALES
One customer accounted for approximately 17% and 13% of net sales for the
years ended December 31, 1996 and 1995, respectively.
5. MANUFACTURING AGREEMENT
On April 30, 1997, CPUSA and the Buyer, entered into a manufacturing
agreement whereby CPUSA agreed to manufacture, sell and deliver to the Buyer,
and the Buyer agreed to purchase from CPUSA all of its requirements for nail
polish remover products for an agreed-upon amount. The manufacturing agreement
is in effect for five years from the consummation date of the Asset Purchase
Agreement. Thereafter, the manufacturing agreement will be extended for an
additional one-year term, unless terminated in accordance with the
manufacturing agreement.
6. AGREEMENT WITH JEAN PHILIPPE
On May 31, 1994, CPUSA and Jean Philippe entered into asset and license
agreements whereby Jean Philippe acquired certain assets used in the
packaging, distributing and selling of nail enamel and nail care treatment
products, nail care implements and lipstick under the Cutex trademark in the
United States and Puerto Rico. Under the asset agreement, Jean Philippe
acquired the exclusive right to use certain tools, dies, molds, inventories,
intangible assets and assumed certain liabilities.
Under the license agreement, effective as of August 1, 1994 and amended
March 28, 1996, Jean Philippe agreed unconditionally to guarantee and pay
CPUSA royalties based on a percentage of its sales, including an amount
representing a minimum guarantee. This agreement can be terminated under
certain conditions, including the failure by Jean Philippe to achieve certain
sales volumes.
F-29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Chesebrough-Pond's USA Co.
We have audited the accompanying statement of net assets sold of the Cutex
brands of Chesebrough-Pond's USA Co. as of April 30, 1997, and the statement
of net sales, cost of sales and direct operating expenses for the four-month
period ended April 30, 1997. These financial statements are the responsibility
of Chesebrough-Pond's USA Co.'s management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also 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 audit provides a
reasonable basis for our opinion.
The accompanying financial statements were prepared to present the net
assets sold of the Cutex brands, pursuant to the purchase agreement described
in Note 1, and the net sales, cost of sales and direct operating expenses of
the Cutex brands and are not intended to be a complete presentation of the
Cutex brands' financial position, results of operations and cash flows.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the net assets sold of the Cutex brands, pursuant to
the purchase agreement referred to in Note 1, as of April 30, 1997, and the
net sales, cost of sales and direct operating expenses for the four-month
period ended April 30, 1997, in conformity with generally accepted accounting
principles.
Coopers & Lybrand LLP
Stamford, Connecticut
July 17, 1997
F-30
THE CUTEX BRANDS OF CHESEBROUGH-POND'S USA CO.
STATEMENT OF NET ASSETS SOLD (NOTE 1)
AS OF APRIL 30, 1997
(DOLLARS IN THOUSANDS)
APRIL 30,
1997
---------
ASSETS
Inventory............................................................. $808
LIABILITIES
Sales returns reserve................................................. 160
Commitments and contingencies.........................................
----
Total net assets sold........................................... $648
====
The accompanying notes are an integral part of these financial statements.
F-31
THE CUTEX BRANDS OF CHESEBROUGH-POND'S USA CO.
STATEMENT OF NET SALES, COST OF SALES AND DIRECT OPERATING EXPENSES (NOTE 1)
FOR THE FOUR-MONTH PERIOD ENDED APRIL 30, 1997
(DOLLARS IN THOUSANDS)
APRIL 30,
1997
---------
Net product sales....... $5,206
Net royalty revenues.... 181
------
Net sales............... 5,387
Cost of sales........... 2,834
------
Gross profit............ 2,553
Direct operating
expenses............... 224
------
Excess of net sales over
cost of sales and
direct operating
expenses............... $2,329
======
The accompanying notes are an integral part of these financial statements.
F-32
THE CUTEX BRANDS OF CHESEBROUGH-POND'S USA CO.
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
Chesebrough-Pond's USA Co. ("CPUSA" or the "Company") is a division of
Conopco, Inc., a wholly owned subsidiary of Unilever United States Inc., which
is a wholly owned subsidiary of Unilever N.V.
The accompanying financial statements have been prepared for the purpose of
presenting the net assets sold of the Cutex brands of CPUSA as of April 30,
1997, pursuant to the Asset Purchase Agreement (the "Agreement") dated as of
March 27, 1997 between CPUSA and Carson, Inc. (the "Buyer") and its net sales,
cost of sales and direct operating expenses for the four-month period ended
April 30, 1997. The transaction was consummated on April 30, 1997 ("Closing
Date"). Pursuant to the Agreement, CPUSA sold to the Buyer certain assets used
with respect to the Cutex brands, including all inventories of finished nail
polish remover products, a license agreement (see Note 6) dated as of May 31,
1994 between CPUSA and Jean Philippe Fragrances, Inc. ("Jean Philippe"), as
amended, intangible rights and other assets directly related to the Cutex
brands, in exchange for consideration totaling approximately $37.5 million
plus the book value of the inventory transferred. The Buyer has assumed all
liabilities related to refunds or exchanges for products returned or charged
back without being returned, after the Closing Date, for all Cutex brand
products, except for claims with respect to damaged or deficient nail polish
remover products.
The Cutex brands consisting of nail polish remover, nail enamel and nail
care treatment products, nail care implements and lipstick are sold and
distributed principally in the United States. As a result of the Agreement,
the Buyer is acquiring the Cutex brands in the United States and Puerto Rico.
Foreign affiliates of Unilever N.V. and Unilever P.L.C. outside the United
States and Puerto Rico will continue to sell Cutex brand products in countries
outside the United States and Puerto Rico.
Historically, financial statements have not been prepared for the Cutex
brands. The accompanying financial statements are derived from the historical
accounting records of CPUSA and present the net assets sold of the Cutex
brands, in accordance with the Agreement, as of April 30, 1997, and the
statement of net sales, cost of sales and direct operating expenses for the
four-month period then ended, and are not intended to be a complete
presentation of the Cutex brands' financial position, results of operations
and cash flows. The historical operating results may not be indicative of the
results after the acquisition by the Buyer.
The statement of net sales, cost of sales and direct operating expenses
includes all revenues and expenses directly attributable to the Cutex brands
of the Company. Direct operating expenses consist principally of selling,
marketing and advertising expenses. The statement does not include general and
administrative, research and development, interest, income tax and
amortization of intangible expenses.
CPUSA did not maintain the Cutex brands as a separate business unit and had
never segregated indirect operating cost information relative to these brands.
Accordingly, it is not practical to isolate or allocate indirect operating
costs applicable to the Cutex brands.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition:
Sales of nail polish remover goods are included in income when goods are
shipped to the customer, net of a provision for estimated returns. Royalty
revenues resulting from the Jean Philippe license agreement, which represent
fixed minimum royalty guarantees, are recognized on a straight-line basis over
the period to which they relate. Provisions have been made for amounts not
considered collectible.
Inventories:
Inventories consisting of finished nail polish remover goods are stated at
the lower of cost or market. Cost is determined using the first-in, first-out
method. According to the Agreement, the Buyer is not acquiring any
F-33
THE CUTEX BRANDS OF CHESEBROUGH-POND'S USA CO.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
raw materials or work-in-process inventory and therefore, these components of
inventory have been excluded from these financial statements.
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 contingent
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Significant estimates
relate to sales returns and royalty revenues. Actual results could differ from
those estimates.
Advertising and Promotional Expenses:
Advertising and promotional expenses are charged to expense during the
periods in which they are incurred. Total advertising and promotional expense
was approximately $4 for the four-month period ended April 30, 1997.
3. COMMITMENTS AND CONTINGENCIES
CPUSA has various purchase commitments for materials, supplies and other
items incidental to the ordinary course of business. In the aggregate, such
commitments are not at prices in excess of current market price. In addition,
CPUSA has commitments, in the normal course of business, with various
distributors relating to Cutex nail polish remover products.
Pursuant to the Agreement, the Buyer did not assume any product or other
liability in connection with any service performed or product manufactured by
CPUSA prior to the Closing Date except for liabilities related to returns or
exchanges of Cutex brand products as further described in Note 1.
4. CONCENTRATION OF NET SALES
One customer accounted for approximately 17% of net sales for the four-month
period ended April 30, 1997.
5. MANUFACTURING AGREEMENT
On April 30, 1997, CPUSA and the Buyer, entered into a manufacturing
agreement whereby CPUSA agreed to manufacture, sell and deliver to the Buyer,
and the Buyer agreed to purchase from CPUSA all of its requirements for nail
polish remover products for an agreed-upon amount. The manufacturing agreement
is in effect for five years. Thereafter, the manufacturing agreement will be
extended for an additional one-year term, unless terminated in accordance with
the manufacturing agreement.
6. AGREEMENT WITH JEAN PHILIPPE
On May 31, 1994, CPUSA and Jean Philippe entered into asset and license
agreements whereby Jean Philippe acquired certain assets used in the
packaging, distributing and selling of nail enamel and nail care THE CUTEX
BRANDS OF CHESEBROUGH-POND'S USA CO. treatment products, nail care implements
and lipstick under the Cutex trademark in the United States and Puerto Rico.
Under the asset agreement, Jean Philippe acquired the exclusive right to use
certain tools, dies, molds, inventories, intangible assets and assumed certain
liabilities.
Under the license agreement, effective as of August 1, 1994 and amended
March 28, 1996, Jean Philippe agreed unconditionally to guarantee and pay
CPUSA royalties based on a percentage of its sales, including an amount
representing a minimum guarantee. This agreement can be terminated under
certain conditions, including the failure by Jean Philippe to achieve certain
sales volumes.
F-34
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED IN CONNECTION WITH
ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COM-
PANY, THE GUARANTORS OR BY THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
TO ANY PERSON IN ANYJURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
----------------
TABLE OF CONTENTS
PAGE
----
Available Information.................................................... iii
Prospectus Summary....................................................... 1
Risk Factors............................................................. 12
The Company.............................................................. 21
Use of Proceeds of the Exchange Notes.................................... 22
The Exchange Offer....................................................... 23
Capitalization........................................................... 31
Unaudited Pro Forma Consolidated Financial Data.......................... 32
Selected Consolidated Historical Financial Data.......................... 39
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 41
Business................................................................. 50
Management............................................................... 68
Principal Stockholders and Management Ownership.......................... 75
Certain Relationships and Related Transactions........................... 78
Description of the Exchange Notes........................................ 81
Description of the New Credit Facility................................... 114
Certain Federal Income Tax Considerations Relating to the Exchange Of-
fer..................................................................... 115
Plan of Distribution..................................................... 116
Legal Matters............................................................ 116
Independent Auditors..................................................... 117
Index to Financial Statements............................................ F-1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$100,000,000
LOGO
CARSON, INC.
----------------
PROSPECTUS
----------------
OFFER TO EXCHANGE
10 3/8% SENIOR SUBORDINATED NOTES
DUE 2007, SERIES A
($100,000,000 PRINCIPAL AMOUNT
OUTSTANDING) FOR
10 3/8% SENIOR SUBORDINATED NOTES
DUE 2007, SERIES B
($100,000,000 PRINCIPAL AMOUNT)
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware ("Section 145")
provides that a Delaware corporation may indemnify any person who is, or is
threatened to be made, a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation), by reason of
the fact that such person was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, provided such person acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the corporation's best interests and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that his conduct was
illegal. A Delaware corporation may indemnify any person who is, or is
threatened to be made, a party to any threatened, pending or completed action
or suit by or in the right of the corporation by reason of the fact that such
person was a director, officer, employee or agent of such corporation, or is
or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may
include expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection with the defense or settlement of such action or
suit, provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests except
that no indemnification is permitted without jcer or director is adjudged to
be liable to the corporation. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
The Company's Amended and Restated Certificate of Incorporation provides for
the indemnification of directors and officers of the Company to the fullest
extent permitted by Section 145. In that regard, the Amended and Restated
Certificate of Incorporation provides that the Company shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director
or officer of such corporation, or is or was serving at the request of such
corporation as a director, officer or member of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of such corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. Indemnification in connection with an action
or suit by or in the right of such corporation to procure a judgment in its
favor is limited to payment of settlement of such an action or suit except
that no such indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the indemnifying
corporation unless and only to the extent that the Court or the court in which
such action or suit was brought shall determine that, despite the adjudication
of liability but in consideration of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper.
In addition, the by-laws of the Company provide that the Company shall
indemnify to the full extent authorized by law any person made or threatened
to be made a party to an action, suit or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that he, his testator
or intestate is or was a director, officer, employee or agent of the Company
or is or was serving, at the request of the Company, as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
II-1
The Company has purchased an insurance policy covering indemnification of
officers and directors of the Company against certain liabilities arising under
the Securities Act that might be incurred by them in such capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
EXHIBIT NO. 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 3/8% Senior Subordinated Note due 2007, Series B
(included as Exhibit B to Exhibit 4.1)
4.3 Registration Rights Agreement, dated as of November 6, 1997, among
Carson, Inc., Carson Products Company, Donaldson, Lufkin &
Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner
& Smith Incorporated
5.1 Opinion of Milbank, Tweed, Hadley & McCloy
8.1 Opinion of Milbank, Tweed, Hadley & McCloy (included in Exhibit
5.1)
*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 M. Roche
*10.3 Employment Agreement dated as of June 7, 1995, as amended as of
July 31, 1996, between Carson Products Company and Dennis E. Smith
*10.4 Employment Agreement dated as of June 7, 1995, as amended as of
July 31, 1996, between Carson Products Company and John P. Brown,
Jr.
*10.5 Employment Agreement dated as of June 22, 1995, as amended as of
July 31, 1996, between Carson Products Company and Dr. Donald
Cowser
*10.6 Employment Agreement dated as of September 1, 1995, as amended as
of July 31, 1996, between Carson Products Company and Arthur P.
Gnann III
*10.7 Employment Agreement dated as of September 1, 1995, as amended as
of July 31, 1996, between Carson Products Company and Allena Lee-
Brown
*10.8 Employment Agreement dated as of March 11, 1996, as amended as of
July 31, 1996, between Carson Products Company and Miriam Muley
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, 1997 to the Management
Assistance Agreement dated as of August 23, 1995 between Carson
Products Company and Morningside Capital Group L.L.C.
II-2
EXHIBIT NO. DESCRIPTION
----------- -----------
*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
*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., Indosuez Carson Partners and Indosuez CM II, Inc.
*10.22 Subscription Agreement dated as of August 15, 1996 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
*10.26 Distribution Agreement dated May 14, 1996 between Carson Products
Company and Carson Products Company S.A. (Proprietary) Limited
*10.26 Promissory note between Joyce Roche and Carson, Inc.
*10.27 Promissory note between John P. Brown and Carson, Inc.
*10.28 Promissory note between Dennis Smith and Carson, Inc.
*10.29 Promissory note between Donald Cowser and Carson, Inc.
*10.30 Promissory note between Arthur P. Gnann, III and Carson, Inc.
*10.31 Pledge agreement dated August 13, 1996 between Arthur P. Gnann,
III and Carson, Inc.
*10.32 Pledge agreement dated August 13, 1996 between Dr. Donald Cowser
and Carson, Inc.
*10.33 Pledge agreement dated August 13, 1996 between John P. Brown and
Carson, Inc.
*10.34 Pledge agreement dated August 13, 1996 between Miriam Muley and
Carson, Inc.
*10.35 Pledge agreement dated August 13, 1996 between Joyce Roche and
Carson, Inc.
*10.36 Pledge agreement dated August 13, 1996 between Dennis Smith and
Carson, Inc.
**10.37 Asset Purchase Agreement dated as of March 27, 1997 between Carson
Products Company and Conopco, Inc. d/b/a Chesebrough-Pond's USA
Co.
**10.38 Asset Repurchase 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.
II-3
EXHIBIT NO. DESCRIPTION
----------- -----------
10.42 Credit Agreement dated as of November 6, 1997 among Carson
Products Company, Credit Agricole Indosuez and the lenders named
therein
10.43 Term Loan and Revolving Credit Deed to Secure Debt, Assignment of
Leases and Security Agreement dated as of November 6, 1997 made by
Carson Products Company in favor of Credit Agricole Indosuez
10.44 Borrower General Security Agreement dated as of November 6, 1997
made by Carson Products Company in favor of Credit Agricole
Indosuez
10.45 Borrower Intellectual Property Security Agreement dated as of
November 6, 1997 made by Carson Products Company in favor of
Credit Agricole Indosuez
10.46 Borrower Securities Pledge Agreement dated as of November 6, 1997
made by Carson Products Company in favor of Credit Agricole
Indosuez
10.47 Holdings Securities Pledge Agreement dated as of November 6, 1997
made by Carson, Inc. in favor of Credit Agricole Indosuez
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 for the
quarter ended June 30, 1997, as amended
21.1 Subsidiaries of Carson, Inc.
21.2 Subsidiaries of Carson Products Company
23.1 Consent of Milbank, Tweed, Hadley & McCloy (included in Exhibit
5.1)
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Coopers & Lybrand LLP
23.4 Consent of Price Waterhouse LLP
24.1 Powers of Attorney (included on signature pages of this
Registration Statement)
25.1 Statement of Eligibility and Qualification of Trustee on Form T-1
of Marine Midland Bank of New York under the Trust Indenture Act
of 1939
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Instructions to Registered Holder and/or Book-Entry
Transfer Facility Participant from Beneficial Owner
- --------
* Incorporated herein by reference to Carson, Inc.'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 dated as of May 15, 1997, as amended by Form 8-KA dated July 14, 1997,
July 16, 1997 and October 9, 1997
II-4
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of each
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by each
Registrant of expenses incurred or paid by a director, officer, or controlling
person of such Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, each Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Each undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the Registration Statement when it became effective.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Carson, Inc. has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Savannah, Georgia, on December 16,
1997.
CARSON INC.
/s/ Dr. Leroy Keith
By:
_____________________________________
Dr. Leroy Keith
Chairman of the Board
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dr. Leroy Keith, Robert W. Pierce and
John P. Brown Jr., 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
(including post-effective amendments) to this Registration Statement 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
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURES TITLE DATE
/s/ Dr. Leroy Keith Chairman of the December 16,
- ------------------------------------- Board, Director and 1997
DR. LEROY KEITH Chief Executive
Officer (Principal
Executive Officer)
/s/ Joyce M. Roche Director, President, December 15,
- ------------------------------------- Chief Operating 1997
JOYCE M. ROCHE Officer
/s/ Robert W. Pierce Executive Vice December 15,
- ------------------------------------- President of 1997
ROBERT W. PIERCE Finance and Chief
Financial Officer
(Principal
Financial and
Accounting Officer)
II-6
SIGNATURES TITLE DATE
/s/ Dennis E. Smith Director, Executive December 15,
- ------------------------------------- Vice President of 1997
DENNIS E. SMITH Sales
/s/ Lawrence E. Bathgate, II Director December 15,
- ------------------------------------- 1997
LAWRENCE E. BATHGATE, II
/s/ Abbey J. Butler Director December 15,
- ------------------------------------- 1997
ABBEY J. BUTLER
/s/ Suzanne DePasse Director December 15,
- ------------------------------------- 1997
SUZANNE DEPASSE
/s/ Melvyn J. Estrin Director December 15,
- ------------------------------------- 1997
MELVYN J. ESTRIN
/s/ James L. Hudson Director December 15,
- ------------------------------------- 1997
JAMES L. HUDSON
Director , 1997
- -------------------------------------
JACK KEMP
Director , 1997
- -------------------------------------
JOHN L. SABRE
/s/ Vincent A. Wasik Director December 15,
- ------------------------------------- 1997
VINCENT A. WASIK
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Carson Products
Company has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in Savannah, Georgia, on
December 19, 1997.
CARSON PRODUCTS COMPANY
/s/ Dr. Leroy Keith
By: ___________________________________
Dr. Leroy Keith
Chairman of the Board
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dr. Leroy Keith, Robert W. Pierce and
John P. Brown Jr., 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
(including post-effective amendments) to this Registration Statement 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
substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
/s/ Dr. Leroy Keith Chairman of the December 19,
- ------------------------------------- Board, Director and 1997
DR. LEROY KEITH Chief Executive
Officer (Principal
Executive Officer
/s/ Joyce M. Roche Director, President, December 19,
- ------------------------------------- Chief Operating 1997
JOYCE M. ROCHE Officer
/s/ Robert W. Pierce Executive Vice December 19,
- ------------------------------------- President of Finance 1997
ROBERT W. PIERCE and Chief Financial
Officer (Principal
Financial and
Accounting Officer)
II-8
NAME TITLE DATE
/s/ Dennis E. Smith Director, Executive December 19,
- ------------------------------------- Vice President of 1997
DENNIS E. SMITH Sales
/s/ Lawrence E. Bathgate, II Director December 19,
- ------------------------------------- 1997
LAWRENCE E. BATHGATE, II
Director , 1997
- -------------------------------------
ABBEY J. BUTLER
Director , 1997
- -------------------------------------
SUZANNE DEPASSE
/s/ Melvyn J. Estrin Director December 19,
- ------------------------------------- 1997
MELVYN J. ESTRIN
Director , 1997
- -------------------------------------
JAMES L. HUDSON
Director , 1997
- -------------------------------------
JACK KEMP
Director , 1997
- -------------------------------------
JOHN L. SABRE
/s/ Vincent A. Wasik Director December 19,
- ------------------------------------- 1997
VINCENT A. WASIK
II-9
EXHIBIT INDEX
EXHIBIT NO. 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 3/8% Senior Subordinated Note due 2007, Series B
(included as Exhibit B to Exhibit 4.1)
4.3 Registration Rights Agreement, dated as of November 6, 1997, among
Carson, Inc., Carson Products Company, Donaldson, Lufkin &
Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner
& Smith Incorporated
5.1 Opinion of Milbank, Tweed, Hadley & McCloy
8.1 Milbank, Tweed, Hadley & McCloy (included in Exhibit 5.1)
*9 Voting Trust Agreement dated as of August 23, 1995 by and among
Dr. Leroy Keith, S. Garrett Storehouse, 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 M. Roche
*10.3 Employment Agreement dated as of June 7, 1995, as amended as of
July 31, 1996, between Carson Products Company and Dennis E.
Smith
*10.4 Employment Agreement dated as of June 7, 1995, as amended as of
July 31, 1996, between Carson Products Company and John P. Brown,
Jr.
*10.5 Employment Agreement dated as of June 22, 1995, as amended as of
July 31, 1996, between Carson Products Company and Dr. Donald
Cowser
*10.6 Employment Agreement dated as of September 1, 1995, as amended as
of July 31, 1996, between Carson Products Company and Arthur P.
Gnann III
*10.7 Employment Agreement dated as of September 1, 1995, as amended as
of July 31, 1996, between Carson Products Company and Allena Lee-
Brown
*10.8 Employment Agreement dated as of March 11, 1996, as amended as of
July 31, 1996, between Carson Products Company and Miriam Muley
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, 1997 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.
EXHIBIT NO. DESCRIPTION
----------- -----------
10.15 Second Amendment dated as of October 6, 1997 to the Management
Agreement dated as of June 26, 1996 between Carson Products
Company and AM Cosmetics, Inc.
*10.16 Subscription Agreement dated as of June 26, 1996 between Carson
Products Company and Morningside AM Acquisition Corp.
*10.17 Carson, Inc. 1996 Long-term Incentive Plan
*10.18 Carson, Inc. 1996 Non-Employee Directors Equity Incentive Program
*10.19 Subscription Agreement dated as of August 23, 1995 by and among
Carson, Inc. and Investors set forth in Schedule I
*10.20 Subscription Agreement dated as of August 23, 1995 by and among
Carson, Inc. and DNL Partners, Limited Partnership
*10.21 Subscription Agreement dated as of August 23, 1995 by and among
Carson, Inc., Indosuez Carson Partners and Indosuez CM II, Inc.
*10.22 Subscription Agreement dated as of August 15, 1996 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
*10.26 Distribution Agreement dated May 14, 1996 between Carson Products
Company and Carson Products Company S.A. (Proprietary) Limited
*10.26 Promissory note between Joyce Roche and Carson, Inc.
*10.27 Promissory note between John P. Brown and Carson, Inc.
*10.28 Promissory note between Dennis Smith and Carson, Inc.
*10.29 Promissory note between Donald Cowser and Carson, Inc.
*10.30 Promissory note between Arthur P. Gnann, III and Carson, Inc.
*10.31 Pledge agreement dated August 13, 1996 between Arthur P. Gnann,
III and Carson, Inc.
*10.32 Pledge agreement dated August 13, 1996 between Dr. Donald Cowser
and Carson, Inc.
*10.33 Pledge agreement dated August 13, 1996 between John P. Brown and
Carson, Inc.
*10.34 Pledge agreement dated August 13, 1996 between Miriam Muley and
Carson, Inc.
*10.35 Pledge agreement dated August 13, 1996 between Joyce Roche and
Carson, Inc.
*10.36 Pledge agreement dated August 13, 1996 between Dennis Smith and
Carson, Inc.
**10.37 Asset Purchase Agreement dated as of March 27, 1997 between Carson
Products Company and Conopco, Inc. d/b/a Chesebrough-Pond's USA
Co.
**10.38 Asset Repurchase 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.
EXHIBIT NO. DESCRIPTION
----------- -----------
10.42 Credit Agreement dated as of November 6, 1997 among Carson
Products Company, Credit Agricole Indosuez and the lenders named
therein
10.43 Term Loan and Revolving Credit Deed to Secure Debt, Assignment of
Leases and Security Agreement dated as of November 6, 1997 made
by Carson Products Company in favor of Credit Agricole Indosuez
10.44 Borrower General Security Agreement dated as of November 6, 1997
made by Carson Products Company in favor of Credit Agricole
Indosuez
10.45 Borrower Intellectual Property Security Agreement dated as of
November 6, 1997 made by Carson Products Company in favor of
Credit Agricole Indosuez
10.46 Borrower Securities Pledge Agreement dated as of November 6, 1997
made by Carson Products Company in favor of Credit Agricole
Indosuez
10.47 Holdings Securities Pledge Agreement dated as of November 6, 1997
made by Carson, Inc. in favor of Credit Agricole Indosuez
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 for
the quarter ended June 30, 1997
21.1 Subsidiaries of Carson, Inc.
21.2 Subsidiaries of Carson Products Company
23.1 Consent of Milbank, Tweed, Hadley & McCloy (included in Exhibit
5.1)
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Coopers & Lybrand LLP
23.4 Consent of Price Waterhouse LLP
24.1 Powers of Attorney (included on signature pages of this
Registration Statement)
25.1 Statement of Eligibility and Qualification of Trustee on Form T-1
of Marine Midland Bank of New York under the Trust Indenture Act
of 1939
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Instructions to Registered Holder and/or Book-Entry
Transfer Facility Participant from Beneficial Owner
- --------
* Incorporated herein by reference to Carson, Inc.'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 dated as of May 15, 1997, as amended by Form 8-KA dated July 14, 1997,
July 16, 1997 and October 9, 1997