SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                 FORM 10-K/A
                        AMENDMENT NUMBER 1 TO FORM 10-K

[   ]     Annual Report Pursuant to Section 13 or 15(d)
          of the  Securities  Exchange  Act of 1934 [Fee Required]

                                          or

[X] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                                     Act of 1934

          For the transition period from April 1, 1996 to December 31, 1996

                            Commission file number 1-12271

================================================================================
                                     CARSON, INC.
================================================================================
                (Exact name of registrant as specified in its charter)

            DELAWARE                                  06-1428605
(State or other jurisdiction of incorporation
            or organization)                    (I.R.S. Employer Identification
                                                             Number)

                        64 Ross Road, Savannah Industrial Park
                               Savannah, Georgia 31405
            (Address, including zip code, of principal executive offices)

          Registrant's telephone number, including area code: (912) 651-3400

             Securities Registered Pursuant to Section 12 (b) of the Act:

Title of Each Class:                       Name of Exchange On Which Registered:
Common Stock - Class A, $0.01 Par Value             New York Stock Exchange

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes _X__ No
 
          Securities Registered Pursuant to Section 12 (g) of the Act: None

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Aggregate  market  value  of the  voting  stock  held by  non-affiliates  of the
registrant,  computed by  reference  to the closing  price on The New York Stock
Exchange on February 28, 1997 was: $90,248,064

Indicate the number of shares  outstanding of each of the registrant's  classes,
as of the latest practicable date.

                   Title of Each Class: Outstanding at February 28,
                                        1997:
Common Stock - Class A, $0.01 Par Value                    4,996,568 shares
Common Stock - Class B, $0.01 Par Value                    1,859,677 shares
Common Stock - Class C, $0.01 Par Value                    8,127,937 shares

                         Documents incorporated by reference:
1996 Annual Report to Shareholders -- Part II, Exhibit 13.
Definitive Proxy Statement for the 1997 Annual Meeting of Shareholders on May 9,
1997 -- Part III.


<PAGE>
                                         Part I.

Item 1.  Business

Forward Looking Statements

     This  transition  report on Form 10-K/A for the nine months ended  December
31,  1996  as  well  as  other   public   documents   of  the  Company   contain
forward-looking statements which involve risks and uncertainties,  including (i)
the Company's plans to introduce new products and product enhancements, (ii) the
Company's plans to expand its international  operations in Africa,  Brazil,  and
the Caribbean,  (iii) the Company's plans to enter 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,  and (vi) the Company's marketing,  distribution and manufacturing
expansion plans.  The Company's actual results may differ  materially from those
discussed  in such  forward-looking  statements.  When  used  herein  and in the
Company's future filings, the terms "expects", "plans", "intends",  "estimates",
"projects",  or  "anticipates"  or similar  expressions are intended to identify
forward-looking  statements (within the meaning of Section 21E of the Securities
Exchange Act of 1934,  as amended  (the  "Exchange  Act")).  In addition to risk
factors that may be described in the Company's  filings with the  Securities and
Exchange Commission (the "Commission")  (including this filing and the Company's
prospectus dated October 14, 1996),  actual results could differ materially from
those  expressed  in  any  forward-looking   statements  made  by  the  Company.
Additional risk factors include, but are not limited to, the following:  (a) the
Company's success in implementing its growth strategy,  including its success in
obtaining financing where required, (b) difficulties or delays in developing and
introducing  new  products  or the  failure of  consumers  to accept new product
offerings,  (c)  changes in consumer  preferences,  including  reduced  consumer
demand for the Company's current  products,  (d) the nature and extent of future
competition  in the Company's  principal  marketing  areas,  and (e)  political,
economic and demographic  developments in the United States, Africa, Brazil, the
Caribbean,  Europe  and other  countries  where the  Company  now does or in the
future may do business.

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'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.
     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.

<PAGE>

General

     Carson,  Inc. is a leading  manufacturer  and marketer in the United States
retail ethnic hair care market for African-Americans.  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 United  States
retail ethnic hair care market.  The Company  currently  sells over 70 different
products under five  principal  brand names,  including Dark & Lovely,  Excelle,
Beautiful  Beginnings,  Dark & Natural and Magic.  The majority of the Company's
sales are  derived  from four  categories  of the ethnic  health and beauty aids
market:  hair relaxers and  texturizers,  which are used to chemically treat and
straighten hair  (constituting  approximately  50% of the Company's ner sales in
1996),  hair color,  shaving  products and hair care maintenance  products.  The
Company's   products  are   specifically   formulated   to  address  the  unique
physiological  characteristics  of hair of  persons of  African  descent,  which
typically  include  curliness and dryness.  The Company believes that it has the
number one United States retail market position in three of the four ethnic hair
care categories in which it competes (hair relaxers and texturizers,  hair color
and shaving  products).  In addition,  the Company believes that the strength of
its competitive  position in the ethnic hair care industry is  attributable,  in
part, to its heritage of  technological  innovation and its focused Research and
Development  effort.  The Company markets its products in the United States with
its own  experienced  direct  sales  force.  The Company  currently  markets its
products in over 60 countries  outside of the United States,  primarily  through
local  distributors.  In the nine months ended December 31, 1996,  approximately
28.5% of the Company's net sales were derived from sales within these countries.
The United  States  retail  ethnic hair care market,  principally  targeting the
distinct  hair  care  needs of  African-Americans,  was  estimated  to be a $1.2
billion  retail  business in 1995.  According to 1995 United  States Census Data
("Census  Data")  published by the United  States  Department  of Commerce,  the
African-American  population was  approximately 34 million and represented 12.7%
of the United States population.  This segment of the population is projected by
the United States 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,  research  indicates  that  African-American  consumers
generally spend up to three times as much of their  disposable  income on health
and beauty products as Caucasian consumers.

<PAGE>

On a global scale, the Company currently  estimates that there are approximately
900 million people of African  descent  outside the United States,  including an
estimated 750 million  people on the African  continent,  100 million  people in
Brazil,  20 million people in the Caribbean,  10-15 million people in Europe and
10-13 million people in Central America.  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.

Ethnic Market Leadership

The Company's  resources are focused primarily on satisfying the unique personal
care needs of individuals of African  descent  worldwide.  The Company  believes
that it has the number one United States retail market  position in three of the
four  ethnic  hair care  categories  in which it  competes  (hair  relaxers  and
texturizers,  hair color and  shaving  products).  The  Company  attributes  its
leading  market  position to its strong  brand names,  combined  with its direct
sales force,  broad  distribution,  R&D capabilities and experienced  management
team. Because of these strengths, the Company believes that it has a competitive
advantage over both the companies  specializing  in products for the ethnic hair
care market and the few general market companies that compete in the ethnic hair
care market but whose principal resources are targeted to the general health and
beauty aids market.


     Strong  Brands.  The  Company  currently  sells  its  products  under  five
principal brand names including Dark & Lovely,  Excelle,  Beautiful  Beginnings,
Dark & Natural and Magic. The Company's  flagship brand,  Dark & Lovely,  is the
most widely recognized ethnic brand name in the United States retail ethnic hair
care market for African-Americans.  The Company believes that its brand strength
is based upon product quality,  properly targeted  advertising,  package design,
reputation for  innovation and focused  commitment to the unique needs of ethnic
consumers.

     Experienced Sales Force and Broad Distribution.  In April 1995, the Company
established  a direct  sales force to enhance  its ability to further  penetrate
existing  markets  with both  current  and new  products.  The  sales  force has
significant  sales  experience  both with major consumer  product  companies and
ethnic hair care  competitors.  The Company believes that it now has the largest
direct sales force  serving the United  States  retail  ethnic hair care market.
Historically,  the Company used commissioned  sales brokers,  as is the industry
norm,  who tended to have  conflicting  brand  loyalties  and  provided  minimal
marketing and sell-through  support.  In the United States, the Company benefits
from  having its  extensive  product  line  distributed  broadly  through  three
principal  channels:  (i) multi-warehouse  chains,  including mass merchandisers
(e.g.,  Wal-Mart,  K-Mart),  major drug chains (e.g.,  Walgreens,  Revco),  food
chains (e.g.,  Winn Dixie,  Kroger) and discount  chains (e.g.,  Family  Dollar,
Dollar  General),  (ii)  Beauty  and  Barber  Supply  Stores  ("B&B's")  such as
Alberto-Culver  Company's  Sally's  Beauty  Supply  stores  and  members  of the
National   Beauty  Supply   Dealers   Association,   and  (iii)  ethnic  product
distributors.

     Research  and  Development.  The  Company  believes  that its  heritage  of
technological innovation and its focused R&D effort are important to maintaining
its market  leadership  position.  Three of the ethnic hair care industry's most
significant  innovations  were  introduced by the Company:  the first hair color
developed  exclusively for hair of persons of African descent (1972),  the first
no-lye relaxer,  which provided a safe relaxer product for home use (1978),  and
the recently patented Fail Safe technology for no-lye relaxers, which eliminates
problems  associated  with imprecise  mixing which can make no-lye  products too
weak, thereby impacting  straightening,  or too strong,  leading to hair damage.
One of the most  significant  sources of consumer  complaints in the industry is
inconsistent  results caused by mixing errors. The Company believes that its R&D
department,  led by two industry  experienced  chemists with Ph.Ds and including
nine other  researchers  and  technicians,  represents  the  largest  R&D effort
focused on the ethnic hair care market.

     Experienced  Management Team.  Carson's team of seasoned senior  executives
with extensive  experience in the ethnic market and consumer  products  industry
continue to build on the  Company's  strong  position in the global  ethnic hair
care market.  This management team has focused the Company's strategy to further
develop  the  ethnic   hair  care   market   both  in  the  United   States  and
internationally.

<PAGE>

Carson's Growth Strategy

The Company  believes  that it is well  positioned to grow both  internally  and
through  acquisitions,  in order to enhance  its market  position  in the ethnic
personal care market. The Company intends to achieve its goals by (i) increasing
its share of existing markets, (ii) increasing  international  expansion,  (iii)
leveraging  brands  into  new  categories,  (iv)  targeting  the  United  States
professional  salon  market  and  (v)  capitalizing  on  selective   acquisition
opportunities.

     Increase Share of Existing  Markets.  Using Carson's  90-year  research and
development  expertise in male  depilatories,  the Company expects to launch its
first  depilatory  for women,  Naturally  Soft,  in 1997.  The  Company has high
aspirations for this product as we believe the product  formulation  outperforms
any of the other female  depilatories  on the market.  In  addition,  we plan to
target the growing children's market with a newly patented  texturizer for boys,
a pre-teen female relaxer and a children's bubble bath and body lotion.

     The Company plans on supplementing its existing products with new additions
each year,  while at the same time  challenging R&D to improve  existing product
lines.  Since the Company has the largest R&D group in the ethnic  personal care
industry,  the Company  believes that it can protect our current position in our
existing  markets  by  constantly  upgrading  the  quality of our  products  and
simultaneously entering new and developing markets.

     Increase  International   Expansion.   The  primary  targets  for  Carson's
international expansion are Africa, Brazil and the Caribbean. For the nine-month
period ended December 31, 1996 compared to the nine-month  period ended December
31, 1995, international sales were up 31.9%.

     Southern  Africa has been the  largest  growth area for the  Company.  As a
result,  the Company is currently doubling the manufacturing and warehouse space
at its South Africa  facility  after less than one year of operation in order to
support the anticipated growth of the Company. In late 1996, we also purchased a
production  facility in Ghana located near the Ghanaian Coca-Cola bottling plant
which will enable the Company to better  service  the 200 million  Black  people
located in the region. The plant is projected to be operational by June 1997.

     In Kenya, East Africa, the Company anticipates having a similar facility to
the West  African  Ghanaian  plant which should be  operational  by late 1997 or
early 1998. Since East Africa has over 150 million Black people,  we believe the
Company has a similar opportunity for growth in this region.

     Brazil is another key international area for Carson.  With the magnitude of
the target  population  in Brazil,  estimated  at 100 million  people of African
descent,  which is almost three times the targeted  market of the United States,
the Company believes it has a significant opportunity in this region. All of the
Company's products have been approved by the Brazilian authorities.  The Company
is in discussions  with a number of financial  institutions  and major Brazilian
corporations  to  establish  a bonded  warehouse  operation  which  will  ensure
consistent and timely delivery of its products and reduce its overall risk.

     In the Caribbean,  sales for the nine-month  period ended December 31, 1996
increased  by more than 120% above the same  period in 1995.  Our success in the
Caribbean reflects the Company's  decision in March 1996 to substantially  alter
its distribution  strategy and to assign direct responsibility to a Carson sales
manager  dedicated  exclusively  to this region.  The Company plans to acquire a
facility  in  Jamaica,  which will  enable the Company to produce in a Caribbean
Community and Common Market (CARICOM) nation, and thereby  substantially  reduce
the taxes and tariffs on its products.

     Leverage Brands into New Product Categories. The introduction of the Dark &
Lovely  Cosmetic Line is on target for launch in the second quarter of 1997. The
position  for the Dark & Lovely  Cosmetic  Line is "Class to Mass." The  Company
plans to leverage the same distribution  channels as its core business and offer
a  quality  line of  products  at an  affordable  price.  The  Company  plans to
introduce a complete line of cosmetics with 76 SKU's. Initially,  face products,
eye shadows,  lipsticks and nail enamels will be introduced.  In early 1998, the
Company plans to add accessory products such as pencils and mascaras.

     Target the United States  Professional Salon Market.  Carson is planning to
introduce a specially  formulated  50 SKU-line of  professional  products in the
fourth quarter of calendar 1997. Product formulation and development, along with
packaging  and  quantitatively  based  concept  testing have been  completed.  A
Professional   Salon   Design   Council   comprised   of   expert   professional
cosmetologists  has been assembled to provide input into the  development of the
professional  product line.  Their  preliminary  responses and evaluation of the
product  formulas have been very positive.  An experienced  management  team has
been put in place to direct the expansion into the professional  market.

     Capitalize  on  Selective  Acquisition  Opportunities.  Because  the ethnic
personal care market is a highly fragmented industry, the Company believes it is
properly positioned for pursuing strategic acquisitions. Carson has entered into
an agreement with a leading Wall Street firm to act as the Company's acquisition
financial  advisor.  The Company  believes it can strengthen its current product
categories  or enter  certain  market  segments  where it has had  little  or no
presence, with the correct acquisitions. There can be no assurance that suitable
acquisitions 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.

<PAGE>

Key Brands And 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
December 31, 1996.

<TABLE>
<S>                 <C>

Brand                               Products
Dark &Lovely        RELAXERS:  Cream Relaxer,  Regular  Strength;  Cream Relaxer Plus,
                    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  
                    REVIVING COLORS HAIRCOLOR:  Semi-Permanent:  Radiant  Black;  Ebone Brown;  Spiced Auburn;
                    Passion Plum;  Natural Black;  Brown Cinnamon

Excelle             RELAXERS:  Cream Relaxer,
                    Regular Strength; Cream Relaxer Plus, Super Strength
                    HAIR CARE MAINTENANCE PRODUCTS: Silky Sensation Shampoo; 5-Minute Reconstructer;
                    Leave-In Conditioning Mist

Beautiful Beginnings
                    RELAXERS: Children's Relaxer
                    HAIR CARE MAINTENANCE PRODUCTS: Conditioning Shampoo Plus Detangler; Leave-In
                    Conditioner Plus Detangler; Natural Oil Moisturizer
                    Plus Detangler; Scalp Conditioner and Hair Dress

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               SHAVING PRODUCTS: Shaving Powders: Gold,
                    Platinum, Blue and Red; Cream Shave: Regular & Mild and Pre-shave/After-shave
                    lotion

</TABLE>


<PAGE>

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 last two fiscal years 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% of net  sales in the  nine  months  ended  December  31,  1996 was
allocated to advertising and consumer  promotions.  The Company believes that is
the leading advertiser in the ethnic hair care market, with most of its emphasis
on television and print. The Company regularly  advertises in magazines aimed at
consumers of African descent, such as Essence,  Ebony, Black Enterprise and Jet,
and in targeted spot  advertising on television and cable channels such as Black
Entertainment  Television  (BET)  and  engages  in  promotional  activities  and
in-store  displays to  introduce  new  products or attract  new  consumers.  The
Company also uses its kit packaging format to conduct sampling  programs for new
products.

      In January  1996,  the  Company's  advertising  account 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 late autumn of 1996.

      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 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,
promoted awareness of breast cancer among  African-American  women. In addition,
the Company has  committed  to donate $0.10 from the sale of every Dark & Lovely
relaxer and hair color unit sold  during that  period,  up to  $150,000,  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.

<PAGE>

Distribution and Sales

      The  Company's   customers  can  be  categorized   into  three   principal
distribution channels in the U.S. retail ethnic hair care market, as follows:

           Multi-warehouse  Chains.  Multi-warehouse chains are groups of stores
           operating  under  the  same  name  that  have a number  of  different
           distribution  points,  warehouses  or shipping  points.  Chains which
           carry  the  Company's  products  include  mass  merchandisers   (e.g.
           Wal-Mart,  K-Mart),  drug chains (e.g.,  Walgreens,  Revco, CVS, Rite
           Aid,  Duane  Reade),  food chains  (e.g.,  Winn Dixie,  Kroger),  and
           discount chains (e.g.,  Family Dollar,  Dollar  General).  The chains
           generally  are an important  part of the  Company's  retail  business
           because  of  their  ability  to draw  ethnic  customers  from a large
           geographic  area. The Company's  multi-warehouse  chain customers may
           purchase the Company's products directly from the Company, through an
           ethnic product distributor, or both.

           Beauty & Barber  Supply  Stores.  The Beauty & Barber  Supply  Stores
           ("B&Bs") are  dominated  by the Sally's  Beauty  Supply  retail chain
           (Alberto-Culver  Company)  and the  National  Beauty  Supply  Dealers
           Association   (the   "NBSDA"),   a   large   group   of   independent
           family-controlled  retail outlets. B&Bs that are members of the NBSDA
           are prevalent in the African-American community,  typically in retail
           outlets in strip  shopping  malls.  B&Bs  generally  have  convenient
           locations,  low  everyday  prices,  and a wide  selection  of  ethnic
           products relative to retail chains.

           Ethnic  Product   Distributors.   Ethnic  product   distributors  are
           wholesalers  who either place  products  directly in stores or have a
           warehouse-to-warehouse  relationship with the major chains. K-Mart is
           an example of a chain that has a warehouse-to-warehouse  relationship
           in which  K-Mart  obtains the  Company's  products for certain of its
           stores  through a major ethnic product  distributor  in Detroit.  The
           overall  importance  of this  class of trade  has  gained  increasing
           significance in recent years.

     The  combination  of  multi-warehouse   chains,  B&Bs  and  ethnic  product
distributors  accounted for  approximately  87.0% of the Company's  domestic net
sales in the nine months ended  December 31, 1996.  The balance of the Company's
net sales  during this period were  generated  by general  market  distributors,
regional  chains and military  exchanges  and  commissaries.  No single  Company
customer  accounted for more than  approximately 8.6% of the Company's net sales
in the nine months ended December 31, 1996.

      As the  Company  develops  new stock  keeping  units  (SKUs) for  existing
product lines,  launches new products and enters new markets in the U.S.  ethnic
health and beauty aids  sector,  the Company  believes  that its strong,  direct
relationships with multi-warehouse  chains, B&Bs and ethnic product distributors
will play an increasingly  valuable role in maintaining  market share as well as
gaining  additional  shelf  space,   promotional/advertising   space  and  store
merchandising   coverage.   The  Company  has  been   selected  by  one  of  its
multi-warehouse chain customers to be the ethnic category manager for all ethnic
health and beauty aids products  carried by such  customer.  As ethnic  category
manager, the Company assists in the development of the customer's  merchandising
program for ethnic health and beauty aids products.

      The  Company's  strong  relationships  with its  customers  in the various
distribution  channels  are enhanced by its direct sales force which totals over
30 and is comprised of two  divisional  managers,  eight  regional  managers and
between three and six sales  merchandisers  per region,  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 sells to all of the  distribution  channels doing
business in its market.

      The Company has established distributor relationships in various countries
in international  markets. In South Africa, the Company focuses its direct sales
efforts  primarily  on hair care  salons  which are  serviced  through  regional
distributors  and specialty  cash-and-carry  wholesale  outlets.  Retail product
distribution  in South  Africa is  currently  being  expanded  to  include  mass
merchandisers and other large retail chains.

<PAGE>

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  heritage  of
technological  innovation  and its focused R&D effort.  Three of the ethnic hair
care industry's most significant innovations were introduced by the Company: the
first hair color developed  exclusively for  African-American  hair (1972),  the
first no-lye relaxer, which provided a safe relaxer product for home use (1978),
and the  recently  patented  Fail Safe  technology  for no-lye  relaxers,  which
eliminates problems associated with mixing no-lye relaxer products to obtain the
correct  strength.  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 DL2000 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 entry into the U.S. professional salon market with a line of specially
formulated  products;  (ii)  expand the rapidly  growing  line of Dark & Natural
products;  (iii) develop new and innovative hair care maintenance products; (iv)
strengthen the Company's hair color  products;  (v) and develop more  effective,
milder  depilatories for both men and women.  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 years ended March 31, 1994,  1995 and 1996 was $0.4  million,
$0.3 million and $0.4 million,  respectively. For the nine months ended December
31, 1996,  the Company's R&D costs were $0.3  million.  The Company's  estimated
budget for R&D costs for 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 of 13 who
perform 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 its four in-house  cosmetology  technicians  at its
on-site salon.

Manufacturing
      The Company uses a batching  process in its  manufacturing  operations for
virtually  all of its  products.  The  batching  process  begins  with  chemical
ingredients  being  mixed in kettles in batch sizes  ranging  from 2,000 lbs. to
21,000 lbs. The kettles heat, cool, homogenize and blend each batch of materials
according to standard operating procedures (SOPs). The SOPs for each product are
established by the Company's R&D and Quality Control staff and are  periodically
reviewed and improved to ensure  uniformity and  batch-to-batch  conformity with
the manufacturing specifications for the product.

      The product is then  transferred  from the kettles  into a holding tank or
another type of storage  device  until it is pumped into a filling  machine that
volumetrically  fills the liquid or cream into plastic jars,  tubes,  bottles or
packets. Each container (i.e., jar, tube, bottle or packet) is coded to identify
or track a specific  batch.  Hair care  maintenance  products are then packed in
shipping  boxes and sent to the finished goods  warehouse  ready for shipment to
the Company's  customers.  Certain other products are filled,  capped,  labeled,
coded and stored  temporarily  until they are  assembled  as  components  in the
relaxer, texturizer or hair color kits.

      The  Company  emphasizes  quality  and  adherence  to  Good  Manufacturing
Practices  (according to FDA  guidelines)  throughout the production  operation.
Each batch of finished  product is tested by Quality  Control staff before it is
packaged and shipped.  The  Company's  quality  control  measures and  standards
include testing raw materials and packaging materials.

      The Company purchases raw materials,  packaging, and components throughout
the world and reviews the efficiency  and quality of its  purchasing  contracts.
Except as  described  below,  the Company  believes  that  alternate  sources of
supplies  exist  and  does not  anticipate  any  significant  shortages  of,  or
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 would satisfy its requirements for approximately four to
six months of future production.  The Company believes that guanidine  carbonate
of comparable quality could be made available within this time period from other
suppliers on comparable terms.

<PAGE>

Competition

      The U.S.  retail  ethnic  hair  care  market  is  competitive  and  highly
fragmented with a number of market  participants that focus specifically on this
market. Six companies generated approximately 50% of industry sales in 1995 with
the remainder being generated by a number of smaller companies, according to the
Towne-Oller  Report.  Some of the larger companies,  such as Soft Sheen,  Luster
Products and Pro-Line Corp., are  privately-owned and compete only in the ethnic
market, as does the Johnson Products  subsidiary of IVAX, Inc., a New York Stock
Exchange  traded  company.  However,  a few general  market  companies,  such as
Revlon,  Inc.  and  Alberto-Culver  Company,  also  produce  a  limited  line of
specialized  products for the ethnic  consumer.  In certain product  categories,
such as shampoos and hair color,  competition  also arises from  general  market
manufacturers  such as the  Procter & Gamble  Company and  Bristol-Myers  Squibb
Company's  Clairol  division.  Such general market companies are larger and have
substantially   greater   financial  and  other   resources  than  the  Company.
Internationally,  the Company's  competitors  differ from market to market,  and
include Revlon, Soft Sheen and several regionally based foreign companies.

      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. 

Trademarks and Patents

      The Company owns all of the trademark  rights used in connection  with its
principal  brands both in the United States and in the other  countries in which
its  products are  principally  sold.  Significant  trademarks  include:  Dark &
Lovely, Dark & Lovely Excelle,  Beautiful Beginnings,  Dark & Natural and Magic.
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. 

Consumer Laws, Government and Industry Regulations

      The Company is subject to the Food,  Drug and Cosmetics  Act, the Consumer
Product Safety Act, the Federal Hazardous  Substance Act and to the jurisdiction
of the Consumer  Product  Safety  Commission  as well as product  safety laws in
foreign  jurisdictions.  Such regulations subject the Company to the possibility
of  requirements  of repurchase or recall of products  found to be defective and
the possibility of fines or penalties.  The Food and Drug Administration ("FDA")
has promulgated  certain  regulations  concerning product  ingredients,  product
labeling and product claims. In addition,  the FTC regulates product claims. The
Company is subject to consumer laws in foreign  countries where its products are
sold, for example,  bilingual  packaging  requirements  (Canada) and new product
registration  requirements  (Brazil).  Existing  and future FDA, FTC and foreign
regulations  could  impact  distribution  and sales of certain of the  Company's
products.

      The Company  operates under the FDA's Good  Manufacturing  Practices (GMP)
guidelines  and is  regulated by the FDA,  although its product  formulas do not
have to be approved in advance by the FDA. Coloring agents used in the Company's
products may be either  Food,  Drug & Cosmetic  (FD&C) or Drug & Cosmetic  (D&C)
classified.   Additionally,  as  a  member  of  the  Cosmetics,  Toiletries  and
Fragrances  Association  ("CTFA"),  the  Company  agrees to  adhere  to  Quality
Assurance  Guidelines as promulgated  by CTFA.  The Company  believes that it is
substantially  in compliance  with such  guidelines and uses such  guidelines as
standards for its operational activities. The Company is also subject to various
other Federal,  state, local and foreign regulations.  Federal,  State and local
regulations  in the United States that are designed to protect  customers or the
environment  have had an increasing  influence on product  claims,  contents and
packaging.  The Company believes that it is in substantial  compliance with such
regulations.

<PAGE>

Employees

      The Company is organized into seven departments--Marketing, R&D (including
Quality  Control),  Sales,  Operations  (Production  and Materials  Management),
Finance,  Administration  and Human  Resources.  As of December  31,  1996,  the
Company  employed  approximately  281  persons  in  Georgia,  an  additional  31
elsewhere in the United States and 90 internationally. In the United States, 214
were hourly personnel and 98 were salaried employees.  The Company also utilizes
temporary workers as needed,  primarily in manufacturing.  Approximately 90 such
temporary  workers were utilized on a daily basis by the Company during the nine
months ended  December 31, 1996.  The Company is non-union and believes that its
relationship with employees is good.

Environmental Matters

      The  Company  is  subject to various  Federal,  state,  local and  foreign
environmental requirements, including those relating to discharges to air, water
and land, the handling and disposal of solid and hazardous waste and the cleanup
of properties affected by hazardous substances. Certain environmental laws, such
as the Comprehensive Environmental Response, Compensation, and Liability Act, as
amended ("CERCLA"), impose strict, retroactive, joint and several liability upon
persons responsible for releases of hazardous substances.

      The Company is not aware of any  liabilities  arising under  environmental
requirements,  except as would not be expected to have a material adverse effect
on the  Company's  business,  results  of  operations  or  financial  condition.
However,  some risk of environmental  liability is inherent in the nature of the
Company's  current and former  businesses  and the  Company  might in the future
incur material costs to meet current or more  stringent  compliance,  cleanup or
other obligations pursuant to environmental requirements.

      The  Company  has had  difficulty  meeting  its permit  levels for various
parameters for its wastewater  discharge to the City of Savannah's  sewer system
resulting  in the issuance of notices of violation to the Company by the City of
Savannah. In response, the Company installed pretreatment  equipment,  which has
reduced the concentrations of many of the constituents of concern.  However, the
Company   continues  to  experience   difficulty   meeting   certain   discharge
limitations. If the Company cannot either improve the reliability of its present
treatment system, or obtain modifications to its discharge limits from the sewer
authorities,  it may be required to install additional treatment equipment.  The
Company is working cooperatively with the City of Savannah to address this issue
and has not  been nor does it  expect  to be  fined.  However,  there  can be no
guarantee  that the  Company  will not incur  future  costs,  including  but not
limited  to,  fines in  connection  with waste water  compliance.  The costs for
installing  additional  treatment could be as much as $0.5 million.  The Company
does not  currently  expect  the  costs of  environmental  compliance  to have a
material  adverse  effect on its  business,  results of  operations or financial
condition.

Item 2. Properties

      The Company  owns and  occupies  six  buildings  on a  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 capacity of the Savannah  facility.  Following the planned capacity
increase,  the Company believes that the capacity in the Savannah  facility will
be adequate for its needs in the reasonably foreseeable future.

      The Company's  South African  subsidiary 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.  Ample  acreage  is
available for expansion of the facility.  The Company  believes that capacity in
the  South  African  facility  is  adequate  for  its  needs  in the  reasonably
foreseeable future.

      In late 1996, the Company purchased a production facility in Ghana located
near the  Ghanaian  Coca-Cola  bottling  plant  which will enable the Company to
better service the 200 million Black people located in the region.  The plant is
expected to be  operational  by June 1997.  In Kenya,  East Africa,  the Company
anticipates  having a similar  facility to the West African Ghanaian plant which
should be operational by late 1997 or early 1998. Since East Africa has over 150
million  Black people,  the Company  believes it has a similar  opportunity  for
growth in this region.

<PAGE>

Item 3.  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.

Item 4.  Submission of Matters to Vote of Security Holders

          Not applicable.

Executive Officers of the Registrant

--------------------------------------------------------------------------------
  Name                   Age       Position
--------------------------------------------------------------------------------
  Dr. LeRoy Keith        57        Chairman of the Board and Chief Executive
                                   Officer
--------------------------------------------------------------------------------
  Joyce M. Roche         49        President and Chief Operating Officer
 -------------------------------------------------------------------------------
  Dennis E. Smith        49        Executive Vice President, Sales
 -------------------------------------------------------------------------------
  Bill Bradley           48        Executive Vice President, Worldwide
                                   Operations
 -------------------------------------------------------------------------------
  Miriam Muley           42        Executive Vice President, Marketing
 -------------------------------------------------------------------------------
  Bradford N. Creswell   37        Executive Vice President, Finance and Chief
                                   Financial Officer
 -------------------------------------------------------------------------------

      Officers of the Company are elected annually by the Board of Directors.

      Dr.  Keith  became  Chairman  and  Chief  Executive  Officer  of  Carson
Products  concurrent with the Acquisition in August 1995 and a Director of the
Company upon its  inception in May 1995,  and served as Vice  President  until
1996.  Dr. Keith became  Chairman and Chief  Executive  Officer of the Company
in August  1996.  Dr.  Keith 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 Keystone  Investment  Group,  the Mutual Funds Board
of Phoenix Home Life Insurance Company,  One to One Partnership,  Inc. and the
National Committee for the Performing Arts of the John F. Kennedy Center.

      Ms. Roche became President and Chief Operating  Officer of Carson Products
in July 1996 and President,  Chief Operating Officer and Director of the Company
in August 1996.  Prior to July 1996,  she held the  position of  Executive  Vice
President of Global  Marketing  and Director  since joining  Carson  Products in
August 1995.  Before  joining Carson  Products,  Ms. Roche was employed by Avon,
Inc.  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.

     Mr.  Smith became  Executive  Vice  President  of Sales of Carson  Products
concurrent  with the  Acquisition  in August  1995 and of the  Company in August
1996. Mr. Smith became a Director of Carson Products in December 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 Carson Products
in July 1996 and of the Company in August 1996. Prior to July 1996, she held the
position of Vice  President,  Marketing  since joining Carson  Products in April
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.

     Mr. Creswell became Executive Vice President of Finance and Chief Financial
Officer of Carson Products concurrent with the Acquisition in August 1995 and of
the Company in August 1996.  He also served as  President of Northwest  Capital,
Inc.  since  1992.  Prior  to that  time,  he was  employed  as Vice  President,
Investment  Banking with Bankers Trust Company from 1987 to 1992.  Mr.  Creswell
resigned from his position with the Company in May 1997.

<PAGE>

                                   PART II

Item 5. Market for the  Registrant's  Common  Stock and Related  Shareholder
Matters

      The high and low sales prices for the  Company's  common stock as reported
by the New York Stock  Exchange  since the time of the Company's  initial public
offering through December 31, 1996 are as follows:

            High                    16 5/8
            Low                     13 3/4

     At February 28, 1996,  there were  approximately  1,252 holers of record of
the Company's common stock. Since the Acquisition,  the Company has not declared
or paid any cash or other  dividends  on its Common Stock and does not expect to
pay dividends for the forseeable  future.  The Company  anticipates that for the
forseeable  future,  earnings  will be reinvested in the business to finance its
growth and development.  The declaration and payment of dividends by the Company
are subject to the  discretion  of the Board of  Directors  of the Company  (the
"Board").  The Company  entered into a new bank credit  facility which restricts
the ability of the  Company or any  subsidiary  of the Company  from paying cash
dividends  other than  dividends or  distributions  payable in shares of capital
stock.  Any future  determination  to pay dividends will depend on the Company's
results of operations,  financial condition,  capital requirements,  contractual
restrictions and other factors deemed relevant by the Board.

Item 6.  Selected Financial Data

Selected Consolidated Historical Financial Data
Carson, Inc.
<TABLE>


<S>                                <C>         <C>               <C>           <C>            <C>      <C>      <C>       <C>
                                               Combined (1)
                                   Company (3) (Unaudited)       Full Fiscal Year
                                                                                                              Predecessor
                                    Nine        Nine
                                   Months      Months          Predecessor     Company (2)
                                   Ended       Ended          April 1, 1995     August 23, 1995          Year Ended March 31,
Amounts in 000s except per
   share data                     December 31,  December 31,   to August 22,    to March 31,
                                      1996         1995           1995              1996 (5)    1995    1994(5)    1993    1992
Statement of Operations Data :                                                  
                                                                              
Net sales                           $59,938    $50,527        $26,854            $41,465      $58,126  $50,108    $49,335  $49,947
Income (loss)
   from continuing operations (4)    (3,256)     4,272          3,934              1,104        5,688    2,697      4,939    5,605
(Loss) earnings per share from
   continuing operations (4)       $  (0.25)                                    $   0.09
Weighted average common shares
   outstanding                        12,715                                       11,871

</TABLE>

<TABLE>
<S>                                                    <C>             <C>            <C>           <C>          <C>     <C>

                                                            Company     Company (2)                     Predecessor
                                                       December 31,       March 31,                      March 31,
Balance Sheet Data:                                           1996          1996           1995         1994        1993    1992
                                                              (5)           (5)                          (5)
                                                          
  Total assets                                              $97,529       $87,980      $  43,863      $38,609    $37,572  $37,848
  Long-term debt (excluding current portion)                 24,501        63,778                                    288      552
  Stockholders' equity                                       54,215         9,775         34,358       29,313     30,473   29,141
  Working capital                                           $15,852       $13,855      $  15,140      $11,267    $14,256  $14,184


</TABLE>

     (1) The combined  unaudited  nine months ended  December 31, 1995  includes
results of the  Predecessor for the period from April 1, 1995 to August 22, 1995
combined with the Company  results of operations  for the period from August 23,
1995 to December 31, 1995.

     (2) The  acquisition  of Aminco,  Inc. (the  Predecessor)  was completed on
August 23,  1995.  The  Company's  financial  statements  include the  operating
results from the acquisition date.

     (3) Effective  December 31, 1996, the Company  changed its fiscal  year-end
from  March 31 to  December  31. 

     (4) Before extraordinary item and cumulative effect of accounting change.

     (5) 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.
If  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.



Item 7.  Management's  Discussion  and  Analysis of Financial  Condition  and
Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Overview
     Carson,  Inc.  (formerly DNL Savannah  Holding  Corp.  and also referred to
herein as the "Company" or "Carson") is a leading  manufacturer  and marketer in
the U.S.  retail  ethnic  hair care  market for  African-Americans.  The Company
currently  sells over 70 different  products in the United States and in over 60
other countries under five principal brand names.  The majority of the Company's
net sales are derived from four  categories of the ethnic health and beauty aids
market:  hair relaxers and texturizers (which  constituted  approximately 50% of
the Company's  net sales in 1996),  hair color,  shaving  products and hair care
maintenance products.
        Carson 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 include the operating  results of
Carson Products Company ("Carson Products") from the acquisition date.
        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.   Liabilities   assumed   aggregated
approximately  $11.4  million.  The excess of the  purchase  price over the fair
value of the  Predecessor's  identifiable  net  assets  has been  classified  as
goodwill.  In  connection  with the  acquisition,  the senior  management of the
Predecessor  was  replaced.  The  Predecessor  had a March 31  fiscal  year-end.
Effective  December 31, 1996, the Company changed its fiscal year-end from March
31 to December 31. The decision to change the fiscal  year-end was made in order
to conform the Company's  financial  reporting year to the natural business year
of the industry.
        On  July  3,  1996,  the  Company's  South  African  subsidiary,  Carson
Holdings,  Ltd.  ("Carson  South Africa") sold 25.0% of its shares in an initial
public offering on the Johannesburg  Stock Exchange.  This offering  resulted in
net  proceeds of  approximately  $4.2  million.  At the same time,  Carson South
Africa issued 1.875% of its shares to certain employees,  officers and directors
involved in the Company's South African operations.  As a result of the issuance
of these  shares,  the Company has  reflected in its  consolidated  statement of
operations for periods  subsequent to the share issuance a minority  interest in
subsidiary earnings. The amount of the charge reflected in this line item equals
Carson South  Africa's net income for the  applicable  period  multiplied by the
percentage of the Carson South Africa shares which are not  indirectly  owned by
the Company. In conjunction with the South African initial public offering,  the
Company's  U.S.  subsidiary,  Carson  Products  entered into an amendment to its
license agreement with Carson Products  Proprietary  Limited ("Carson  Products,
S.A."), a South African  registered company wholly owned by Carson South Africa,
which provides 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 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.



<PAGE>
        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 recorded 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.
        On  June  26,  1996,  Carson  made an  investment  of  $3.0  million  in
Morningside  AM  Acquisition  Corp.,  the  parent  of AM  Cosmetics,  Inc.  ("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 statements 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 entered into a management  agreement and will enter into certain  related
sales agreements and manufacturing agreements with AM Cosmetics.
        The Company  completed the offering (the "Offering") of 4,818,500 shares
of Class A common stock on the New York Stock  Exchange on October 18, 1996 at a
price of $14 per share. Of these shares  3,113,000 were sold by the Company with
the balance sold by selling stockholders,  none of which included any members of
management or the original buyout group.

Effect of the Acquisition on Results of Operations
The  consummation  of the Company's  acquisition of the stock of the Predecessor
(the "acquisition")  affected the Company's results of operations  following the
acquisition in certain significant respects. The 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 the
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.  Therefore,  the  Company's  amortization  expenses are  significantly
higher  than  the  corresponding  amounts  for  the  Predecessor.  Additionally,
interest   expense   increased  due  to  debt  initially  used  to  finance  the
acquisition.

Results of Operations
The acquisition was completed on August 23, 1995.  Because of the application of
purchase  accounting and the resulting  revaluation of the Predecessor's  assets
and liabilities and the impact on certain expenses,  the financial statements of
the  Predecessor  for the  periods  prior to August  23,  1995 are not  strictly
comparable to those of 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.



<PAGE>
Statement of Operations Data
<TABLE>
<S>                   <C>                    <C>              <C>              <C>

                             Company         Combined (a)
                             Nine-Month       Nine-Month      Combined (b)      Predecessor
                           Period Ended      Period Ended         Year Ended      Year Ended
                      December 31, 1996      December 31, 1995    March 31, 1996  March 31, 1995
                                                                   (d)
                                               (Unaudited)
Net sales                      $    59,938  $  50,527        $  68,319            $ 58,126
Cost of sales                       26,940     22,336           30,319              25,692
    Gross profit                    32,998     28,191           38,000              32,434
Selling expenses                    15,692     13,596           17,048              17,888
General and
  administrative expenses            5,836      4,751            7,337               5,246
Incentive compensation               7,123
Depreciation and
  amortization                       1,896      1,278            1,833               1,085
    Operating income                 2,451      8,566           11,782               8,215
Interest expense                     4,545      2,696            4,543                 136
Other income, net                      565      1,172            1,319                 783
(Loss) Income before taxes          (1,529)     7,042            8,558               8,862
Provision for income taxes           1,727      2,770            3,520               3,174
(Loss) Income before
  extraordinary item                (3,256)     4,272            5,038               5,688
Extraordinary item, net of tax      (3,527)
Net (loss) income (c)              $(6,783)$    4,272   $        5,038           $   5,688

Data As A Percentage Of Sales:
Net sales                           100.0%      100.0%           100.0%             100.0%
Cost of sales                        44.9        44.2             44.4               44.2
    Gross profit                     55.1        55.8             55.6               55.8
Selling expenses                     26.2        26.9             25.0               30.8
General and
  administrative expenses             9.7         9.4             10.7                9.0
Incentive compensation               11.9
Depreciation and amortization         3.2        2.5              2.7                1.9
Operating income                      4.1%      17.0%            17.2%              14.1%
</TABLE>

     (a) The combined  unaudited  statement  of  operations  for the  nine-month
period ended December 31, 1995 includes  results of  Predecessor  operations for
the period from April 1, 1995 to August 22, 1995 combined  with Company  results
of operations for the period from August 23, 1995 to December 31, 1995.  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) 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.

     (c)  Before  effect of change in  accounting  principle  and  dividends  on
preferred stock of the Predecessor.

     (d) 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.
If  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.



<PAGE>

Company Nine-Month Period Ended December 31, 1996 Compared to Combined
Nine-Month Period Ended December 31, 1995


     Presentation.  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 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.  As a percent of net sales,  gross
profit  decreased from 55.8% for the combined  nine-month  period ended December
31, 1995 to 55.1% for the nine-month  period ended December 31, 1996,  primarily
due to an i nventory  adjustment  related to repackaging  and  reformulation  of
several product lines.

     Selling  Expenses.  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
selling  expense was almost entirely a result of the increase in net sales. As a
percentage of net sales,  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 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 acquisition.

     Incentive  Compensation  Expenses.  The Company  recognized $7.1 million of
incent ive 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 acquisition was partially offset by a change
in the  way  the  Company  accounts  for  package  design  costs.  Prior  to the
acquisition,  the Predecessor  capitalized package design costs and amortized it
over a four year period. Since the acquisition, the Company has expensed package
design costs as incurred.

     Operating  Income.  As a result  of the  above  changes,  operating  income
decreased  from $8.6 million for the combined  nine-month  period ended December
31, 1995 to $2.5 million for the nine-month period ended December 31, 1996.

     Interest  Expense.  Interest  expense  increased  substantially  from  $2.7
million for the  combined  nine-month  period  ended  December  31, 1995 to $4.5
million for the  nine-month  period ended  December 31, 1996, as a result of the
new debt incurred to finance the acquisition.



<PAGE>

     Other Income, net. Other income decreased as a result of the elimination of
royalty income associated with the Caribbean.  The Company now handles Caribbean
sales  through its in-house  sales  organization.  Investment  income  decreased
because most of the  Predecessor's  investments  were  liquidated in conjunction
with  the  acquisition.  Additionally,  in June of  1996,  the  Company  made an
investment and entered into a management  contract with AM Cosmetics,  a leading
low-cost  producer  of  cosmetics.  Under  the terms of the  investment  and the
management agreement,  the Company is entitled to a 12% paid in kind dividend on
its $3.0 million  investment and an annual  management fee of the greater of $.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 
Twelve-Months Ended March 31, 1995

     Presentation.  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.

     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,  shaving 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 increased slightly from
55.8% to 55.6% during this period.

     Selling Expenses.  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,  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.

     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 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 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  acquisition,  the
Predecessor  capitalized  package design costs and amortized it over a four year
period. Since the acquisition,  the Company has expensed package design costs as
incurred.  The application of purchase accounting related to the acquisition did
not have a material impact on the Company's depreciation expense.

<PAGE>

     Operating  Income.  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.

     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 acquisition.

     Other Income;  Investment 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
        The Company used the net proceeds of the Offering to repay  indebtedness
incurred in the  Acquisition.  In  conjunction  with the  Offering,  the Company
refinanced  the remaining  portion of its Bank Credit  Facility with  borrowings
under a New Senior  Bank  Facility  pursuant to a credit  agreement  dated as of
October 18, 1996,  which  included (i) a $15.0 million term loan A, (ii) a $10.0
million term loan B and (iii) a $15.0 million  revolving credit facility,  which
provides  more  availability  than the  previous  facility.  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 LIB OR plus 2.5% and
has a final maturity of seven years. The New Senior Bank Faci lity contains less
restrictive  covenants compared to the previous  facility,  since the Company is
substantially less leveraged following the Offering.
        In the nine months  ended  December  31, 1996 net cash flow  provided by
operations  was $2.2  million as a result of an increase in accounts  payable of
$3.5 million and a decrease in other current assets of $1.7 million. These items
were offset in part by increases in accounts  receivable and inventories of $2.6
million and $2.1 million,  respectively.  Working  capital  increased from $14.0
million at March 31, 1996 to $16.0 million at December 31, 1996.
        Net cash used in investing activities for the nine months ended December
31,  1996  totaled  $6.8  million   which   included  $3.8  million  of  capital
expenditures  and a $3.0 million  investment in AM Cosmetics.  The three largest
capital  projects  involved  purchasing  and  equipping  the new  South  African
manufacturing  facility,  reorganizing the shaving powder production in Savannah
to better  optimize  capacity  and adding  production  equipment in the Savannah
facility to address short term capacity constraints.
        Net cash provided from  financing  activities  for the nine months ended
December  31,  1996  totaled  $7.2  million.  This  included  $32.7  million  of
borrowings  from the New Senior Bank Facility,  proceeds from the initial public
offerings of the Company and its South African subsidiary of $42.4 million, less
$69.2 million to repay acquisition indebtedness.
        The net cash flow for the nine months ended December 31, 1996 was
$2.6 million, which when combined with beginning cash of $1.6 million results
in a net cash balance of $4.2 million as of December 31, 1996.

Inflation
        The Company's manufacturing costs and operating expenses are affected by
price changes.  The Company has historically  mitigated  inflationary effects by
passing price changes along to its customers and by continually  developing more
cost-effective  manufacturing and operational procedures.  The Company's ability
to mitigate the effects of price changes will depend on market factors.

<PAGE>

Outlook
        The Company believes that cash flow from operating activities,  existing
cash balances and available  borrowings  under its New Senior Bank Facility will
be sufficient to fund working capital  requirements,  capital  expenditures  and
debt service requirements in the foreseeable future.
        The preceding  statement and certain other  statements  contained herein
are  forward-looking  statements.  It is  important  to note that the  Company's
actual   results  could  differ   materially   from  those   projected  in  such
forward-looking  statements  based on a number  of  factors,  some of which  are
beyond the Company's control.
     Risk  factors  include,  but are not limited to, the  Company's  ability to
successfully  implement  its  growth  strategy,  the nature and extent of future
competition in the Company's  principal  marketing  areas and increased costs of
compliance with any developments in the U.S., Brazil, the Caribbean,  Europe and
other  countries  where the  Company  now does  business or in the future may do
business  and  other  factors  described  in  the  Company's  filings  with  the
Securities and Exchange Commission.

<PAGE>

Item 8.  Financial Statements and Supplementary Data


                          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.  Our audits
also included the financial  statement  schedule  listed in the index at Item 14
for such periods.  These financial  statements and financial  statement schedule
are the  responsibility of the Company's  management.  Our  responsibility is to
express  an  opinion  on these  financial  statements  and  financial  statement
schedule 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.  Also, in
our opinion,  such financial statement schedule,  when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
 
     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)
 
                                      
 
<PAGE> 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
Directors of Aminco, Inc.
and Subsidiaries:
 
     In our opinion, the accompanying consolidated statements of income, of cash
flows and of shareholders' equity present fairly, in all material respects,  the
results of operations and cash flows of Aminco,  Inc. and its  subsidiaries  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 from 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
 
Atlanta, Georgia
May 8, 1995, except as to Note 15,
which is as of June 30, 1997

 
 
<PAGE> 
                                  CARSON, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
 
                                                                                  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     
                                            --------------- --------------- ------------- --------------- ----------- 
                                                                                                (Restated-               
                                                                                               see note 15)              
                                                                 Amounts in 000s except per share data                   
<S>                                                 <C>              <C>           <C>             <C>        <C>      
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 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.
</TABLE>

<PAGE>
                                   CARSON, INC.
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<S>                                                                                          <C>           <C>
                                                                                         December 31,   March 31,  
                                                                                             1996         1996     
                                                                                         (Restated -   (Restated-  
                                                                                         See Note 15) See Note 15) 
                                                                                         ------------ ------------ 
                                                                                           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. 

</TABLE>

<PAGE>

<TABLE>
 
                                  CARSON, INC.
 
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
                                     Common Stock  Preferred Stock 
                                    -------------- --------------- 
                                                                                                                       Total     
                                                                   Paid-in Retained  Valuation ESOP Debt Treasury  Stockholders' 
                                     Shares Amount  Shares  Amount Capital Earnings Adjustment Guarantee   Stock      Equity     
                                    ------- ------ -------- ------ ------- -------- ---------- --------- --------- --------------
                                                                          Amounts in 000s                                        
PREDECESSOR                                 
<S>                                 <C>     <C>     <C>     <C>       <C>  <C>             <C>    <C>     <C>           <C>      
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  
                                    ======= ====== ======== ====== ======= ======== ========== ========= ========= ============= 
</TABLE>
 
<PAGE>
 
<TABLE>
 
                                  CARSON. INC.
 
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
 
                                Class A       Class B        Class C     
                             ------------- ------------- --------------- 
                                                                                    Retained
                                                                                    Earnings
                                                                                  (Accumulated                           Total
                                                                                    Deficit)                   Notes   Stockholders'
                                                                         Paid-in   (Restated-  Translation  Receivable   Equity
                             Shares Amount Shares Amount  Shares  Amount Capital  See Note 15) Adjustment  from Officers (Restated
                                                                                                                       -See Note 15)
                             ------ ------ ------ ------ -------- ------ -------- ------------ ----------- ------------- -----------
                                                                           Amounts in 000s                                       
COMPANY,                                    
beginning August 23, 1995                   
<S>                                  <C>      <C>           <C>   <C>      <C>  <C>         <C>        <C>       <C>     <C>
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.

</TABLE>
<PAGE>

 
 
                                  CARSON, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
 <S>                                                             <C>                   <C>        <C>            <C>         <C>
                                                                           Nine-Month Period          
                                                                       ------------------------------ 
                                                                                                   Twelve-Month Period
                                                                                            -------------------------------
                                                                                                                  Company
                                                                                                             August 23, 1995 to 
                                                        Company       Company Unaudited    Predecessor        March 31,  Predecessor
                                                    April 1, 1996 to  August 23, 1995 to April 1, 1995 to        1996     Year ended
                                                      December 31,      December 31,       August 22,      (Restated-See   March 31,
                                                          1996              1995              1995            Note 15)         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)          (970)        313  
Accounts payable.......................................           3,465                366         (732)         1,285         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. 
                             
</TABLE>
 
<PAGE> 
 
                                  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 acquired)...   $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. 
      
 
<PAGE>
                               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. 
                             
      
<PAGE>
 
                              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. 
                                 
      
<PAGE>
 
                         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): 
 
                       (Restated - See Note 15)
                        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 (as restated- see note 15)..               $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 
                                  ============ ========= 
                                  
 
      
 
<PAGE>
 
 
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. 
 
  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 New Senior Bank Facility 
contains less restrictive covenants compared to the previous facility, since 
the Company is substantially less leveraged following the Offering. 

<PAGE>
 
                                  CARSON, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
  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: 
<TABLE>
 
                                        Company                 Predecessor           Company          Predecessor
                            --------------------------------- ---------------- ---------------------- -------------- 
                                              Unaudited                          Aug. 23, 1995 to                    
                            April 1, 1996 to Aug. 23, 1995 to April 1, 1995 to    March 31, 1996       Year Ended    
                            Dec. 31, 1996   Dec. 31, 1995      Aug. 22, 1995   (Restated-See note 15) March 31, 1995 
                            ------------- ------------------- ---------------- ---------------------- -------------- 
<S>                               <C>                  <C>              <C>                    <C>            <C>    
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 % 
</TABLE>
 
<PAGE>
 
                                  CARSON, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 
Note 9. Income Taxes (continued)
 
  Income tax expense (benefit) for the periods noted include the following (in 
000s): 
 
<TABLE>
                                                                      Twelve-Months                       
                                                              ----------------------------                
                                                        Nine-Months         
                                                --------------------------- 
                                            Company            Predecessor      Company     Predecessor   
                                  --------------------------- ------------- -------------- -------------- 
                                                                             Aug. 23, 1995                
                                                Aug. 23, 1995                     to                      
                                  April 1, 1996       to      April 1, 1995 March 31, 1996                
                                       to       Dec. 31, 1995       to       (Restated-See   Year ended   
                                  Dec. 31, 1996   Unaudited   Aug. 22, 1995    Note 15)    March 31, 1995 
                                  ------------- ------------- ------------- -------------- -------------- 
Current:                          
<S>                                     <C>              <C>        <C>               <C>        <C>      
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  
                                  ============= ============= ============= ============== ============== 
</TABLE>
 
  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): 
<TABLE>
 
                                                                  Restated (See Note 15)                

                                                     December 31, 1996              March 31, 1996                
                                            ------------------------------  -------------------------------           
                                            Current       Long-term         Current             Long-term           
                                            -----------   ----------------  ---------------   --------------

Deferred domestic tax assets related to:                                                            
<S>                                               <C>         <C>               <C>                   <C>   
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                                 
NOLcarryforward..............................                   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) 
                                              -------- -------------        ------- ---------------------- 
</TABLE>


<PAGE>
                                  CARSON, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
       
  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. 
 
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. 
 
<PAGE> 
                                 CARSON, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
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. 
 
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): 
<TABLE>
 
                                                                                      Twelve Months              
                                                                         --------------------------------------- 
                                                                    Nine Months                                       
      
                                                         --------------------------------                             
      
              (UNAUDITED)                           Company                 Predecessor          Company        Predecessor    
                                        -------------------------------- ---------------- ---------------------------------    
                                        April 1, 1996 to August 23, 1995 April 1, 1995 to    August 23, 1995     YearEnded  
                                          December 31,   to December 31,    August 22,        March 31, 1996     March 31,  
                                              1996            1995             1995       (Restated-See Note 15)  1995     
                                        ---------------- --------------- ---------------- --------------------------------- 
Net sales:                                               
United States:                                           
<S>                                             <C>             <C>               <C>                   <C>        <C>      
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  


</TABLE>
 
  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 

<PAGE>

                                  CARSON, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
     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 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. AMCosmetics 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
                              
<PAGE>    
                              CARSON, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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 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.     

Item 9.  Disagreements on Accounting and Financial Disclosure

      None.



<PAGE>



                                   PART III

Item 10.  Directors and Executive Officers of the Registrant

     Information  concerning directors is incorporated by reference to "Proposal
Number 1 - Election of Directors" on pages 8-10 of the Company's Proxy Statement
to be filed for its 1997 Annual Meeting of Stockholders.  Reference is also made
to Item 4, Part I of this report,  "Executive Officers of the Registrant," which
information is incorporated herein.
      Section  16(a) of the Exchange act  requires  the  directors,  executive
officers  and persons  who own  beneficially  more than 10% of certain  equity
securites  of the Company to file reports of  ownership  with the  Commission.
Copies of all such  reports  are  required  to be  furnished  to the  Company.
Based on the reports  received by the Company (and on written  representations
from the reporting  persons),  the Company believes that each of the Company's
directors,  officers  and 10%  beneficial  owners of its Class A Common  Stock
failed  to  file  on a  timely  basis  the  required  Form 3 at the  time  the
Company's  registration statement for its initial public offering was declared
effective by the Commission.  In addition,  the following insider filings were
delinquent:  Lawrence  Bathgate,  Form 4 and 5 with respect to one transaction
not filed on a timely basis; Bradford N. Creswell,  Form 4 with respect to one
transaction  not filed on a timely  basis;  Arthur P. Gnann,  III, Form 4 with
respect  to one  transaction  not filed on a timely  basis;  James L.  Hudson,
Form 4 with respect to one transaction  not filed on a timely basis;  Joyce M.
Roche,  Form 4 with respect to one  transaction  not filed on a timely  basis;
Vincent  A.  Wasik,  Form 4 with  respect  to one  transaction  not filed on a
timely basis.

Item 11.  Executive Compensation

      This information is incorporated  herein by reference to "Compensation and
Other  Transactions  with Executive  Officers and Directors - Executive  Officer
Compensation" on pages 14-22 of the Company's Proxy Statement to be
filed for its 1997 Annual Meeting of Stockholders.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     This  information  is  incorporated   herein  by  reference  to  "Principal
Stockholders" and "Stock Ownership of Directors and Executive Officers" on pages
2-4 and 14,  respectively,  of the Company's Proxy Statement to be filed for its
1997 Annual Meeting of Stockholders.

Item 13.  Certain Relationships and Related Transactions

     This   information  is   incorporated   herein  by  reference  to  "Certain
Relationships  and Related  Transactions" on pages 5-7 of the Proxy Statement to
be filed for its 1997 Annual Meeting of Shareholders.




<PAGE>

                                   PART IV

Item 14.  Exhibits, Financial Statements, Schedules and Reports on Form 8-K

(a) The following documents are incorporated by reference herein:

      1.    Financial Statements


     Item 8 filed  with this  Form  10-K/A,  contains  the  Balance  Sheet as of
December 31, 1996 (as  restated) and March 31, 1996 (as  restated),  the related
statements  of  operations,  shareholders'  investment  and cash  flows  for the
following  periods:  Company April 1, 1996 through December 31, 1996,  Unaudited
Company  August 23,  1995 to December  31,  1995,  Predecessor  April 1, 1995 to
August 22, 1995,  Company  August 23, 1995 to March 31, 1996 (as  restated)  and
Predecessor year ended March 31, 1995 and the related reports of Deloitte Touche
LLP and Price Waterhouse LLP. The financial  statements  included herein include
the following:

     Balance Sheets (as restated)-- December 31, 1996 and March 31, 1996

     Statements  of  Operations  for the  following  periods:  April 1,  1996 to
December 31, 1996;  August 23, 1995 to December 31, 1995  (unaudited);  April 1,
1995 to August 22, 1995;  August 23, 1995 to March 31, 1996 (as  restated);  and
April 1, 1994 to March 31, 1995

     Statement of Shareholders' Equity for the following periods:  April 1, 1996
to  December  31,  1996 (as  restated);  August 23,  1995 to March 31,  1996 (as
restated); April 1, 1995 to August 22, 1995; and April 1, 1994 to March 31, 1995

     Statements  of Cash  Flows  for the  following  periods:  April 1,  1996 to
December 31, 1996;  August 23, 1995 to December 31, 1995  (unaudited);  April 1,
1995 to August 22, 1995;  August 23, 1995 to March 31, 1996 (as  restated);  and
April 1, 1994 to March 31, 1995

      2.  Financial Statement Schedule

     Schedule II -- Valuation and Qualifying Accounts for the following periods:
Nine months ended December 31, 1996, August 23, 1995 to March 31, 1996, April 1,
1995 to August 22, 1995 and April 1, 1994 to March 31, 1995.


      3.  Exhibits incorporated by reference or filed with this report

--------------------------------------------------------------------------------
Number            Description
--------------------------------------------------------------------------------
*3.1 ...........  Amended and Restated Articles of Incorporation
--------------------------------------------------------------------------------
*3.2 ...........  By-laws of Registrant
--------------------------------------------------------------------------------
*4 .............  Form of Commnon Stock Certificate
--------------------------------------------------------------------------------
*9 .............  Voting Trust Agreement
--------------------------------------------------------------------------------
*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 April 1, 1996, as amended as
                    of July 31, 1996, between Carson Products Company and Sharon
                    A. Davis
--------------------------------------------------------------------------------
*10.5 ..........  Employment Agreement dated as of June 7, 1995, as amended as
                    of July 31, 1996, between Carson Products Company and John
                    P. Brown, Jr.
--------------------------------------------------------------------------------
*10.6 ..........  Employment Agreement dated as of June 22, 1995, as amended as
                    of July 31, 1996, between Carson Products Company and Dr.
                    Donald Cowser
--------------------------------------------------------------------------------
*10.7 ..........  Employment Agreement dated as of September 1, 1995, as amended
                     as of July 31, 1996, between Carson Products Company and
                     Arthur P. Gnann III
--------------------------------------------------------------------------------
*10.8 ..........  Employment Agreement dated as of September 1, 1995, as amended
                  as of July 31,  1996,  between  Carson  Products  Company  and
                  Allena Lee-Brown
--------------------------------------------------------------------------------
*10.9 ..........  Employment Agreement dated as of March 11, 1996, as amended as
                  of July 31, 1996,  between Carson Products  Company and Miriam
                  Muley
--------------------------------------------------------------------------------
*10.10 .........  Management Assistance Agreement dated as of August 23, 1995
                    between Carson Products Company and Morningside Captial
                    Group L.L.C.
--------------------------------------------------------------------------------
*10.11 .........  Management  Agreement  dated  as of June  26,  1996  between
                    Carson Products Company and AM Cosmetics, Inc.
--------------------------------------------------------------------------------
*10.12 .........  Subscription  Agreement  dated  as of June  26,  1996  between
                  Carson Products Company and Morningside AM Acquisition Corp.
--------------------------------------------------------------------------------
*10.13 .........  Carson, Inc. 1996 Long-term Incentive Plan
--------------------------------------------------------------------------------
*10.14 .........  Carson, Inc. 1996 Non-Employee Directors Equity Incentive
                    Program
--------------------------------------------------------------------------------
*10.15 .........  Subscription Agreement dated as of August 23, 1995 by and
                    among the Registrant and Investors set forth in Schedule I
--------------------------------------------------------------------------------
*10.16 .........  Subscription Agreement dated as of August 23, 1995 by and
                    among the Registrant and DNL Partners,Limited Partnership
--------------------------------------------------------------------------------
*10.17 .........  Subscription  Agreement  dated as of  August  23,  1995 by and
                  among the Registrant, Indosuez Carson Partners and Indosuez CM
                  II, Inc.
--------------------------------------------------------------------------------
*10.18 .........  Subscription Agreement dated as of August 15, 1996 by and
                    among the Registrant and the indivudials (outside directors)
                    named therein
--------------------------------------------------------------------------------
*10.19 .........  Subscription Agreement dated as of August 15, 1995 by and 
                    among the Registrant and the individuals (members of 
                    senior management) named  therein
--------------------------------------------------------------------------------
*10.20 .........  Licensing Agreement dated April 7, 1994, as amended May 14, 
                    1996, between Carson Products Company and Carson Products 
                    Company S.A. (Proprietary) Limited
--------------------------------------------------------------------------------
*10.21 .........  Distribution Agreement dated May 14, 1996 between Carson 
                    Products Company and Carson Products Company S.A. 
                    (Proprietary) Limited
--------------------------------------------------------------------------------
*10.22 .........  Promissory note between Joyce Roche and the Registrant
--------------------------------------------------------------------------------
*10.23 .........  Promissory note between John P. Brown and the Registrant
--------------------------------------------------------------------------------
*10.24 .........  Promissory note between Dennis Smith and the Registrant
--------------------------------------------------------------------------------
*10.25 .........  Promissory note between Donald Cowsar and the Registrant
--------------------------------------------------------------------------------
*10.26 .........  Promissory note between Arthur P. Gnann, III and the 
                    Registrant
--------------------------------------------------------------------------------
*10.27 .........  Promissory note between Sharon A. Davis and the Registrant
--------------------------------------------------------------------------------
*10.28 .........  Pledge agreement dated August 13, 1996 between Arthur P. 
                    Gnann, III and the Registrant
--------------------------------------------------------------------------------
*10.29 ......... Pledge agreement dated August 13, 1996 between Sharon A. Davis
                     and the Registrant
--------------------------------------------------------------------------------
*10.30 ......... Pledge agreement dated August 13, 1996 between Dr. Donald 
                    Cowser and the Registrant
--------------------------------------------------------------------------------
*10.31 ......... Pledge agreement dated August 13, 1996 between John P. Brown 
                    and the Registrant
--------------------------------------------------------------------------------
*10.32 .........  Pledge agreement dated August 13, 1996 between Miriam Muley 
                    and the Registrant
--------------------------------------------------------------------------------
*10.33 .........  Pledge agreement dated August 13, 1996 between Joyce Roche and
                    the Registrant
--------------------------------------------------------------------------------
*10.34 .........  Pledge agreement dated August 13, 1996 between Dennis Smith 
                    and the Registrant
--------------------------------------------------------------------------------
**10.35 ..........  New Senior Bank Facility (including exhibits) dated as of 
                    October 18, 1996
<PAGE>
--------------------------------------------------------------------------------
13 ..............  Annual Report to Shareholders for the nine months ended 
                    December 31, 1996
--------------------------------------------------------------------------------
*16 .............  Letter regarding Change in Certifying Accountant from Price
                    Waterhouse LLP
--------------------------------------------------------------------------------
*21 .............  Subsidiaries of the Registrant
--------------------------------------------------------------------------------
23 ..............  Consent of Deloitte Touche LLP
--------------------------------------------------------------------------------
23.1 ............  Consent of Price Waterhouse LLP
--------------------------------------------------------------------------------
27 ..............  Financial Data Schedule
--------------------------------------------------------------------------------

* Incorporated herein by reference to the Registrant's Registration Statement on
Form S-1 filed with the Securities  and Exchange  Commission on October 14, 1996
[File No. 333-10191] and the amendments thereto.

** Incorporated herein by reference to the Registrant's Transition Report on 
  Form 10-K filed with the Securities and Exchange Commission on March 31, 1997.

(b)  No reports on Form 8-K were filed during the last quarter of 1996.


<PAGE>



SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registration  has duly  caused  this  report to be  signed on its  behalf by the
undersigned, thereunto duly authorized.

                                          CARSON, INC.



Date: October 9, 1997                     By: /s/  Dr. Leroy Keith
                                          Dr. LeRoy Keith
                                          Chairman,  Chief  Executive  Officer
                                          and Director


Pursuant to the  requirements  of the Securities and Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates included.




Date: October 9, 1997                     By: /s/ Dr. Leroy Keith
                                          Dr. LeRoy Keith
                                          Chairman,  Chief  Executive  Officer
                                          and Director



Date: October 9, 1997                     By: /s/ Joyce M. Roche
                                          Joyce M. Roche
                                          President   and   Chief    Operating
                                          Officer and Director



Date:October 9, 1997                      By: /s/ Dennis E. Smith
                                          Dennis E. Smith
                                          Executive Vice President,  Sales and
                                          Director



Date: October 9, 1997                     By: /s/ Lawrence E. Bathgate, II
                                          Lawrence E. Bathgate, II
                                          Director



Date: October 9, 1997                     By: /s/ Abbey J. Butler
                                          Abbey J. Butler
                                          Director



Date: October 9, 1997                     By: /s/  Suzanne de Passe
                                          Suzanne de Passe
                                          Director



Date: October 9, 1997                     By: /s/ Melvyn J. Estrin
                                          Melvyn J. Estrin
                                          Director



Date: October 9, 1997                     By: /s/ James L. Hudson
                                          James L. Hudson
                                          Director



<PAGE>

Date: October 9, 1997                     By: /s/ Jack Kemp
                                          Jack Kemp
                                          Director



Date: October 9, 1997                     By: /s/ John L. Sabre
                                          John L. Sabre
                                          Director



Date: October 9, 1997                     By: /s/ Vincent A. Wasik
                                          Vincent A. Wasik
                                          Director



Date: October 9, 1997                     By: /s/ Robert W. Pierce
                                          Robert W. Pierce
                                          Executive Vice President and Chief 
                                          Financial Officer
                                          (Chief Accounting Officer)

<PAGE>

Carson, Inc.
Valuation and Qualifying Accounts
For the Nine Months Ended December 31, 1996

(in thousands)

<TABLE>
                                                                                                  Schedule II

<S>                                                         <C>              <C>               <C>                   <C> 
                                                                            ----------Twelve months---------
                                                          Predecessor      Predecessor         Company               Company
                                                                             Period            Period                  Nine
                                                              Year             From              From                 Months
                                                             Ended       April 1, 1995 to  August 23, 1995 to         Ended
                                                         March 31, 1995  August 22, 1995    March 31, 1996       December 31, 1996
Allowance for doubtful accounts:

  Balance, beginning of period                              $206             $242              $358                  $531
  Addition - provisions charged to income                    629              158               329                   112
  Deduction - accounts written off as uncollectible         (593)             (42)             (156)                  (29)
  Balance, end of period                                    $242             $358              $531                  $614

</TABLE>