<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 1997
REGISTRATION NO. 333-22155
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
THE WILLIAM CARTER COMPANY
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
MASSACHUSETTS 2300 04-1156680
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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1590 ADAMSON PARKWAY, SUITE 400
MORROW, GEORGIA 30260
(770) 961-8722
(Address, including zip code, and telephone number,
including area code, of registrant's and co-registrant's principal executive
offices)
------------------------
JAY A. BERMAN
SENIOR VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
THE WILLIAM CARTER COMPANY
1590 ADAMSON PARKWAY, SUITE 400
MORROW, GEORGIA 30260
(770) 961-8722
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
WITH A COPY TO:
CHARLES K. MARQUIS, ESQ.
GIBSON, DUNN & CRUTCHER LLP
200 PARK AVENUE
NEW YORK, NEW YORK 10166
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 28, 1997
INFORMATION HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION
STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE
ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
OFFER FOR ALL OUTSTANDING 10 3/8% SENIOR SUBORDINATED NOTES DUE 2006
IN EXCHANGE FOR
10 3/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2006 OF
THE WILLIAM CARTER COMPANY
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON , 1997, UNLESS EXTENDED
-------------------
The William Carter Company, a Massachusetts corporation (the "Company"),
hereby offers to exchange an aggregate principal amount of up to $100,000,000 of
its 10 3/8% Series A Senior Subordinated Notes due 2006 (the "New Notes") for a
like principal amount of its 10 3/8% Senior Subordinated Notes due 2006 (the
"Old Notes") outstanding on the date hereof upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal (which together constitute the "Exchange Offer"). The New Notes and
the Old Notes are collectively hereinafter referred to as the "Notes." The terms
of the New Notes are identical in all material respects to those of the Old
Notes, except for certain transfer restrictions and registration rights relating
to the Old Notes. The New Notes will be issued pursuant to, and entitled to the
benefits of, the Indenture (as defined) governing the Old Notes.
The New Notes will be unsecured, will be subordinated to all existing and
future Senior Indebtedness (as defined) of the Company and will be effectively
subordinated to all obligations of any subsidiaries of the Company as may exist
from time to time. The New Notes will rank PARI PASSU with all future Senior
Subordinated Indebtedness (as defined) of the Company and will rank senior to
all other subordinated indebtedness of the Company. The Indenture permits the
Company to incur additional indebtedness, including Senior Indebtedness under
its $100.0 million Senior Credit Facility (as defined), subject to certain
limitations. See "Description of Notes." As of December 28, 1996, the aggregate
amount of the Company's Senior Indebtedness was $45.0 million (exclusive of
unused commitments), and the Company had no Senior Subordinated Indebtedness
outstanding other than the Notes.
The New Notes will bear interest from and including the date of consummation
of the Exchange Offer. Interest on the New Notes will be payable semi-annually
on June 1 and December 1 of each year, commencing June 1, 1997. Additionally,
interest on the New Notes will accrue from the last interest payment date on
which interest was paid on the Old Notes surrendered in exchange therefor or, if
no interest has been paid on the Old Notes, from the date of original issue of
the Old Notes. Upon the occurrence of a Change of Control (as defined), the
Company will be required to offer to repurchase the Notes. There is no assurance
that the Company will have, or will have access to, sufficient funds to
repurchase the Notes upon any such occurrence. See "Description of Notes."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Exchange and Registration Rights
Agreement dated November 25, 1996 (the "Registration Rights Agreement"), between
the Company and the Initial Purchasers (as defined), with respect to the initial
sale of the Old Notes.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. Tenders of Old
Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date (as defined) for the Exchange Offer. In the event the Company
terminates the Exchange Offer and does not accept for exchange any Old Notes
with respect to the Exchange Offer, the Company will promptly return such Old
Notes to the holders thereof. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivery of a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 90 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
---------------------
Prior to the Exchange Offer, there has been no public market for the Old
Notes. If a market for the New Notes should develop, such New Notes could trade
at a discount from their principal amount. The Company currently does not intend
to list the New Notes on any securities exchange or to seek approval for
quotation through any automated quotation system and no active public market for
the New Notes is currently anticipated. There can be no assurance that an active
public market for the New Notes will develop.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange pursuant to the Exchange Offer.
<PAGE>
SEE "RISK FACTORS" COMMENCING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT HOLDERS OF OLD NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE NEW NOTES OR OLD NOTES BY ANY PERSON
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE EXCHANGE
PROPOSED TO BE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS.
AVAILABLE INFORMATION
The Company is not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Pursuant to the Indenture, the Company has agreed to file
with the Securities and Exchange Commission (the "Commission") and provide to
the holders of the Notes annual reports and the information, documents and other
reports that are specified in Sections 13 and 15(d) of the Exchange Act.
The Company has filed with the Commission a Registration Statement (which
term includes any amendments thereto) on Form S-4 under the Securities Act with
respect to the New Notes offered by this Prospectus. This Prospectus does not
contain all information set forth in the Registration Statement and the exhibits
thereto, to which reference is hereby made. Statements made in this Prospectus
as to the contents of any contract, agreement, or other document are not
necessarily complete. With respect to each such contract, agreement, or other
document filed as an exhibit to the Registration Statement, reference is made to
such exhibit for a more complete description of the matter involved.
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. FOR PURPOSES OF THIS PROSPECTUS, THE "COMPANY" AND "CARTER'S"
SHALL REFER TO THE WILLIAM CARTER COMPANY AND ALL OF ITS CONSOLIDATED
SUBSIDIARIES, UNLESS THE CONTEXT OTHERWISE REQUIRES. THE FISCAL YEAR OF THE
COMPANY ENDS ON THE SATURDAY IN DECEMBER OR JANUARY NEAREST THE LAST DAY OF
DECEMBER. ALL REFERENCES TO DEMOGRAPHIC DATA IN THIS PROSPECTUS ARE BASED UPON
INDUSTRY PUBLICATIONS, CENSUS INFORMATION AND COMPANY DATA AND, UNLESS
INDICATED, ALL REFERENCES TO NUMBER OF STORES ARE AS OF DECEMBER 28, 1996. AS
USED HEREIN, REFERENCES TO "BABY AND TODDLER" MEAN NEWBORNS THROUGH TODDLERS
APPROXIMATELY AGE THREE (UP TO SIZE 4T) AND REFERENCES TO "YOUNG CHILDREN" MEAN
CHILDREN FROM APPROXIMATELY AGE THREE UP TO APPROXIMATELY AGE SIX (BOYS' SIZES
4-7 AND GIRLS' SIZES 4-6X). MARKET SHARE DATA IN THIS PROSPECTUS ARE IN UNITS AS
REPORTED IN AN AUGUST 1996 NATIONAL PANEL DIARY SURVEY AND REFER ONLY TO THE
COMPANY'S TARGET DISTRIBUTION CHANNELS, WHICH INCLUDE ALL DOMESTIC DEPARTMENT
AND SPECIALTY STORES AND EXCLUDE OFF-PRICE, DISCOUNT AND OUTLET OPERATORS.
THE COMPANY
The William Carter Company is the largest marketer of baby and toddler
apparel and a leading marketer of young children's apparel. Over the Company's
more than 130 years of operation, CARTER'S has become one of the most highly
recognized brand names in the children's apparel industry. The Company is a
vertically-integrated manufacturer that sells its products under the CARTER'S,
CARTER'S CLASSICS and BABY DIOR brand names to more than 300 department and
specialty store accounts (with an estimated 4,600 store fronts) and through its
135 retail outlet stores. Carter's is the leading provider of layette (a
complete range of apparel and related products for newborns) in its target
distribution channels, with a market share of approximately 16%, more than four
times that of its nearest branded competitor. Carter's is also the leading
provider of baby and toddler sleepwear in its target distribution channels, with
a market share of approximately 28%, more than three times that of its nearest
branded competitor. The Company also has a significant presence in the much
larger and highly fragmented baby and toddler playwear market.
Carter's generates approximately 87% of its sales in the baby and toddler
apparel market, a $5.6 billion market which grew at a 6.1% compound annual rate
from 1991 through 1995. Management believes that the baby and toddler market is
well-insulated from changes in fashion trends and less sensitive to general
economic conditions, while offering strong prospects for continued growth. The
growth in this market is being driven by a number of factors, including: (i)
women having children later, resulting in more disposable income available for
expenditures on children; (ii) more women returning to the workplace after
having children, resulting in more disposable income and increased day care
apparel needs; (iii) the increasing number of grandparents, a demographic
segment with high per capita discretionary income and an important consumer base
for children's apparel; and (iv) an increasing social emphasis on attractive
children's apparel.
Carter's senior management has significantly increased earnings and market
share since joining the Company in 1992. Management's fundamental strategy has
been to promote the Company's brand image as the absolute leader in baby apparel
products and to consistently provide high quality, attractive products at a
strong perceived value to consumers. To this end, management employs a
comprehensive four-step marketing strategy which incorporates: (i) extensive
consumer preference testing; (ii) superior brand and product presentation at the
consumer point-of-purchase; (iii) dominant marketing communications; and (iv)
consistent, premium service to fulfill customer and consumer needs. In addition,
the Company continues to realize significant operating efficiencies by reducing
SKUs and product complexity, enhancing core product offerings, increasing
off-shore production and implementing the wider use of advanced information
systems. Operating income increased from a loss of $(2.4) million in fiscal 1992
to income of $11.7 million in fiscal 1996. EBITDA (as defined) increased from
$12.4 million in fiscal 1992 to $31.2 million in fiscal 1996.
3
<PAGE>
COMPANY STRENGTHS
The Company attributes its market leadership and its significant
opportunities for continued growth and increased profitability to the following
competitive strengths:
SUPERIOR BRAND AWARENESS. Carter's has achieved a high level of positive
brand awareness with both consumers and retailers as a result of more than a
century of providing quality baby, toddler and young children's apparel. In a
1993 survey, 92% of mothers and grandmothers surveyed were familiar with the
CARTER'S brand name, and 80% reported that they had purchased CARTER'S brand
products. The Company has maintained this positive brand awareness despite a
relatively low marketing budget with little national advertising. Management
believes that the consolidation of the apparel industry and changes in the
retail environment will continue to favor strong branded companies such as
Carter's, as many department and specialty stores have focused on promoting
leading brands while reducing their number of suppliers.
LEADING AND GROWING MARKET POSITIONS. Carter's is the largest provider of
baby and toddler apparel, with leading market shares in the layette and
sleepwear product categories in its target distribution channels. Since 1992,
the Company has increased its share of the layette market from 9% to 16% and its
share of the baby and toddler sleepwear market from 22% to 28%. In addition, the
Company is the second largest provider of young children's sleepwear and has a
significant presence in the much larger and highly fragmented baby and toddler
playwear market.
STRONG MANAGEMENT TEAM. Since joining Carter's in 1992, the Company's
management team, led by Frederick J. Rowan, II, has been responsible for sales
and EBITDA increasing at compound annual rates of 8.7% and 25.8%, respectively.
Four of the Company's top executives, including Mr. Rowan, joined the Company
following successful careers running the Bassett-Walker and Lee Jeans divisions
of the VF Corporation. The Company's five top executives average more than 20
years of experience in the textile and apparel industries. Management believes
that they have significant experience in developing brand names, have a strong
reputation with customers, the trade and the financial community, and possess a
diverse skill base which incorporates brand marketing, multiple sourcing,
off-shore production, vertical manufacturing and management information systems
("MIS") integration.
VERTICALLY-INTEGRATED MANUFACTURING CAPABILITIES. Carter's is a
vertically-integrated manufacturer that knits, dyes, finishes, prints, cuts,
sews and embroiders approximately 80% of the products it sells. The Company
believes that its vertical integration allows it to maintain a competitive cost
structure, accelerate speed to market and provide consistent, premium quality.
Since 1992, the Company has made significant investments in equipment,
facilities and systems to improve quality, reduce costs, minimize shrinkage,
decrease inventories and shorten cycle times. In 1991, the Company commenced
off-shore sewing operations to decrease costs of sewing, typically the most
labor-intensive portion of the manufacturing process. At year-end 1996,
approximately 40% of the Company's sewing production was conducted off-shore
which reduced annual manufacturing costs by approximately $10 million. In
addition, in 1993, management initiated a substantial upgrade of its MIS
capabilities with a fully-integrated operating system designed to support the
growth of the business and to further improve manufacturing efficiencies. These
system upgrades are 65% complete and are expected to be completed in 1998.
STRONG CUSTOMER RELATIONSHIPS. Due to focused and consistent management
efforts to create retail partnerships, the Company enjoys strong relationships
with its wholesale customers, as evidenced by the nine supplier awards the
Company has received since 1992. Management meets frequently with the Company's
major accounts to review product offerings, establish and monitor sales plans
and design joint advertising and promotional campaigns. In addition, the Company
has introduced to several of its major wholesale customers, including Macy's,
Bloomingdale's, Burdine's, Rich's and JCPenney, its "store-in-store" concept in
which the Company creates a CARTER'S-brand shop within its wholesale customers'
children's apparel departments. Such store-in-store shops provide the Company
with dedicated selling space, superior and consistent brand presentation and
greater control of product mix, resulting in higher profitability and
productivity for both the Company and its wholesale customers.
4
<PAGE>
OPERATING STRATEGY
The Company intends to strengthen its market leadership positions and
further increase sales and EBITDA by continuing to implement an operating
strategy which has the following primary components:
INCREASE INVESTMENTS IN BRAND EQUITY. Management believes Carter's enjoys
among the highest brand awareness of any children's apparel company, despite
having spent an estimated 0.3% of sales on advertising, including only $1.1
million on national advertising, in fiscal 1996. In order to capitalize further
on the potential of the CARTER'S name, the Company intends to increase its joint
promotional activities with its key wholesale accounts, accelerate the roll out
of its branded "store-in-store" shops and selectively increase its national
print advertising, with heightened visibility of its tag line "If they could
just stay little 'til their CARTER'S wear out."-TM- Management believes that
selective investments in its brand will result in high returns and will help
support continued growth.
INCREASE OPERATING EFFICIENCIES. The Company's management team has
successfully increased EBITDA margins from 5.5% of sales in 1992 to 9.8% of
sales in fiscal 1996. The Company has achieved these results by reducing SKUs,
decreasing product complexity, upgrading information systems and moving certain
labor-intensive portions of its production process off-shore. Management
believes additional opportunities exist to continue to reduce manufacturing
costs and accelerate speed to market by shortening cycle times, more efficiently
managing inventories and further expanding off-shore production. Management
expects to increase the Company's percentage of off-shore sewing production to
approximately 60% by the end of 1998 and approximately 80% by the end of 2001,
which is expected to yield incremental cost savings in line with the Company's
historical experience.
ENHANCE RETAIL OUTLET STORE PRODUCTIVITY. During the past year, the Company
has emphasized improving the value, quality and convenience of the retail
shopping experience. Management has recently increased the percentage of
sleepwear and baby products in the Company's retail product mix, which represent
the Company's historical product strengths and also carry higher margins. The
Company is also reducing the complexity and assortment of retail products
offered to simplify the consumer's shopping experience. In addition, the Company
has created new consumer-friendly store layouts, with clearly identified
departments, designated clearance areas and higher impact store fronts. Since
November 1995, the Company has implemented these new store layouts in 24 of its
135 retail outlet stores, and expects to have this new store layout implemented
in approximately 100 of its stores by the end of 1997.
CAPITALIZE ON ADDITIONAL GROWTH OPPORTUNITIES. The Company intends to
aggressively pursue selected growth opportunities in its primary markets,
including:
- Leveraging its leading positions in layette and sleepwear to increase its
share of the larger and more highly fragmented playwear market, which is
more than five times the size of the sleepwear market. Management has
recently increased the marketing focus on its playwear lines and
introduced new playwear product designs. The success of these efforts is
reflected in the 33% increase in wholesale playwear shipments from fiscal
1995 to fiscal 1996.
- Continuing to implement the Company's "store-in-store" concept. The
Company first introduced these shops in fiscal 1995, had 250 such shops at
the end of fiscal year 1996 and expects to have approximately 400 such
shops by the end of fiscal 1997. Management believes that there are
significant opportunities to expand the "store-in-store" concept
throughout its wholesale customer base.
- Leveraging the CARTER'S brand through other growth opportunities. Carter's
has recently initiated product extensions through a gift-giving program
and a renewed focus on selectively increasing licensing relationships. In
addition, Carter's is investigating opportunities for international and
direct marketing sales, alternative retail formats and brand extensions to
serve the discount channel, a market in which the Company currently does
not compete.
5
<PAGE>
THE ACQUISITION
On October 30, 1996 (the "Acquisition Closing Date"), Carter Holdings, Inc.
("Holdings"), a company organized on behalf of affiliates of INVESTCORP S.A.
("Investcorp"), management and certain other investors, acquired 100% of the
outstanding common and preferred stock of the Company (the "Acquisition") from
MBL Life Assurance Corporation ("MBL"), CHC Charitable Irrevocable Trust (the
"Trust") and certain management stockholders (collectively, the "Sellers") for
$208.0 million, which includes the issuance of shares of non-voting stock of
Holdings valued at $9.1 million to certain members of management, plus certain
other payments, costs and expenses of approximately $18.1 million. Financing for
the Acquisition was provided by (i) $56.1 million of borrowings under a $100.0
million senior credit facility among the Company, certain lenders and The Chase
Manhattan Bank, as administrative agent (the "Senior Credit Facility"), (ii)
$90.0 million of borrowings under a subordinated loan facility among the
Company, certain lenders and Bankers Trust Company, as administrative agent (the
"Subordinated Loan Facility") and (iii) $70.9 million of capital invested by
affiliates of Investcorp and certain other investors in Holdings. See "The
Acquisition."
The Company and Holdings are Massachusetts corporations. The principal
executive offices of the Company and Holdings are located at 1590 Adamson
Parkway, Suite 400, Morrow, Georgia 30260, and their telephone number is (770)
961-8722.
RISK FACTORS
Holders of Old Notes should carefully consider all of the information set
forth under "Risk Factors" in connection with the Exchange Offer.
THE EXCHANGE OFFER
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Securities Offered.............. Up to $100,000,000 aggregate principal amount of 10 3/8%
Series A Senior Subordinated Notes due 2006 (the "New
Notes"). The terms of the New Notes and Old Notes are
identical in all material respects, except for certain
transfer restrictions and registration rights relating to
the Old Notes.
The Exchange Offer.............. The New Notes are being offered in exchange for a like
principal amount of Old Notes. Old Notes may be exchanged
only in integral multiples of $1,000. The issuance of the
New Notes is intended to satisfy obligations of the Company
contained in the Registration Rights Agreement.
Expiration Date; Withdrawal of
Tender.......................... The Exchange Offer will expire at 5:00 p.m. New York City
time, on , 1997, or such later date and time to
which it is extended by the Company. The tender of Old
Notes pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. Any Old Notes not
accepted for exchange for any reason will be returned
without expense to the tendering holder thereof as promptly
as practicable after the expiration or termination of the
Exchange Offer.
Certain Conditions to the
Exchange Offer.................. The Company's obligation to accept for exchange, or to
issue New Notes in exchange for, any Old Notes is subject
to certain customary
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6
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<S> <C>
conditions relating to compliance with any applicable law,
order of any governmental agency or any applicable
interpretation by any staff of the Commission, which may be
waived by the Company in its reasonable discretion. The
Company currently expects that each of the conditions will
be satisfied and that no waivers will be necessary. See
"The Exchange Offer--Certain Conditions to the Exchange
Offer."
Procedures for Tendering Old
Notes........................... Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with the
instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or such
facsimile, together with such Old Notes and any other
required documentation, to the Exchange Agent (as defined)
at the address set forth herein. See "The Exchange
Offer--Procedures for Tendering Old Notes."
Use of Proceeds................. There will be no proceeds to the Company from the exchange
of Notes pursuant to the Exchange Offer.
Exchange Agent.................. State Street Bank and Trust Company is serving as the
Exchange Agent in connection with the Exchange Offer.
</TABLE>
CONSEQUENCES OF EXCHANGING OLD NOTES PURSUANT
TO THE EXCHANGE OFFER
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, holders of Old Notes (other than any
holder who is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act) who exchange their Old Notes for New Notes pursuant to the
Exchange Offer generally may offer such New Notes for resale, resell such New
Notes, and otherwise transfer such New Notes without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
such New Notes are acquired in the ordinary course of the holder's business and
such holders have no arrangement with any person to participate in a
distribution of such New Notes. Each broker-dealer that receives New Notes for
its own account in exchange for Old Notes must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdiction or an
exemption from registration or qualification is available and is complied with.
The Company has agreed, pursuant to the Registration Rights Agreement and
subject to certain specified limitations therein, to register or qualify the New
Notes for offer or sale under the securities or blue sky laws of such
jurisdictions as any holder of the Notes reasonably requests in writing. If a
holder of Old Notes does not exchange such Old Notes for New Notes pursuant to
the Exchange Offer, such Old Notes will continue to be subject to the
restrictions on transfer contained in the legend thereon. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. See "The Exchange
Offer--Consequences of Failure to Exchange; Resales of New Notes."
The Old Notes are currently eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market. Following
commencement of the Exchange Offer but prior to
7
<PAGE>
its consummation, the Old Notes may continue to be traded in the PORTAL market.
Following consummation of the Exchange Offer, the New Notes will not be eligible
for PORTAL trading.
THE NEW NOTES
THE TERMS OF THE NEW NOTES ARE IDENTICAL IN ALL MATERIAL RESPECTS TO THE OLD
NOTES, EXCEPT FOR CERTAIN TRANSFER RESTRICTIONS AND REGISTRATION RIGHTS RELATING
TO THE OLD NOTES. FOR PURPOSES OF THIS PROSPECTUS, THE TERM "NOTES" SHALL REFER
COLLECTIVELY TO THE NEW NOTES AND THE OLD NOTES.
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Issuer.......................... The William Carter Company.
Securities Offered.............. $100,000,000 principal amount of 10 3/8% Series A Senior
Subordinated Notes due 2006 (the "New Notes").
Maturity Date................... December 1, 2006.
Interest Payment Dates.......... June 1 and December 1 of each year, commencing on June 1,
1997.
Optional Redemption............. Except as described below, the Company may not redeem the
Notes prior to December 1, 2001. On or after such date, the
Company may redeem the Notes, in whole or in part, at the
redemption prices set forth herein, together with accrued
and unpaid interest, if any, to the date of redemption. In
addition, at any time on or prior to December 1, 1999, the
Company may redeem up to 35% of the original aggregate
principal amount of the Notes with the net cash proceeds of
one or more Public Equity Offerings (as defined) by the
Company or Holdings at a redemption price equal to 110.375%
of the principal amount to be redeemed, together with
accrued and unpaid interest, if any, to the date of
redemption, provided that at least 65% of the original
aggregate principal amount of Notes remains outstanding
immediately after any such redemption. See "Description of
Notes--Optional Redemption."
Change of Control............... Upon the occurrence of a Change of Control (i) the Company
will have the option, at any time on or prior to December
1, 2001, to redeem the New Notes in whole but not in part
at a redemption price equal to 100% of the principal amount
thereof plus the Applicable Premium (as defined) as of, and
accrued and unpaid interest, if any, to, the date of
redemption, and (ii) if the Company does not so redeem the
New Notes or if such Change of Control occurs after
December 1, 2001, the Company will be required to make an
offer to repurchase the New Notes at a price equal to 101%
of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of purchase. There can
be no assurance that the Company will have, or will have
access to, sufficient funds to repurchase the New Notes
upon any such occurrence. See "Description of Notes--Change
of Control."
Ranking......................... The New Notes will be general unsecured obligations of the
Company and will be subordinated in right of payment to all
existing and future Senior Indebtedness (as defined) of the
Company. The New Notes will rank PARI PASSU with all
present and future
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Indebtedness of the Company other than Senior Indebtedness
and will rank senior to any Subordinated Obligations (as
defined) of the Company. At December 28, 1996, the
aggregate amount of the Company's outstanding Senior
Indebtedness was $45.0 million (exclusive of unused
commitments). See "Description of Notes-- Ranking."
Certain Covenants............... The indenture under which the New Notes will be issued (the
"Indenture") limits, among other things, (i) the incurrence
of additional indebtedness by the Company and its
subsidiaries, (ii) the payment of dividends on, and
redemption of, capital stock of the Company and its
subsidiaries and the redemption of certain subordinated
obligations of the Company and its subsidiaries, (iii)
investments, (iv) sales of assets and subsidiary stock, (v)
transactions with affiliates, (vi) the creation of liens
and (vii) consolidations, mergers and transfers of all or
substantially all of the Company's assets. The Indenture
also prohibits certain restrictions on distributions from
subsidiaries. However, all of these limitations and
prohibitions are subject to a number of important
qualifications and exceptions. See "Description of
Notes--Certain Covenants."
Absence of a Public Market for
the New Notes................... The New Notes are new securities and there is currently no
established market for the New Notes. Accordingly, there
can be no assurance as to the development or liquidity of
any market for the New Notes. The Company does not intend
to apply for listing of the New Notes on a securities
exchange.
</TABLE>
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth summary historical financial and other data
of the Company for the five fiscal years ended December 28, 1996 and certain pro
forma financial and other data for the fiscal year ended December 28, 1996. The
pro forma operating data and other data assume that the Acquisition and the
issuance of the Old Notes and the application of the net proceeds therefrom
(collectively, the "Transactions") occurred on December 31, 1995 (the first day
of fiscal 1996). The adjusted pro forma operating and other data assume that the
Transactions and the issuance of the New Notes occurred on December 31, 1995.
The pro forma financial and other data do not purport to represent what the
Company's financial position or results of operations would actually have been
had the Transactions in fact occurred on the assumed dates or to project the
Company's financial position or results of operations for any future date or
period. For additional information, see the Consolidated Financial Statements
and related notes thereto included elsewhere in this Prospectus. The following
table should also be read in conjunction with "Selected Historical and Pro Forma
Financial Data," "Unaudited Pro Forma Condensed Consolidated Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
FISCAL YEAR
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR SUCCESSOR
--------------------------------------------------------- -------------
<CAPTION>
DEC. 31, 1995 OCT. 30, 1996
THROUGH THROUGH PRO FORMA
1992 1993 1994 1995 OCT. 29, 1996 DEC. 28, 1996 1996
--------- --------- --------- --------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales................................. $ 228.1 $ 237.0 $ 271.5 $ 295.4 $ 266.7 $ 51.5 $ 318.2
Gross profit.............................. 63.7 80.5 96.3 104.3 96.7 19.8 116.2
Selling, general and administrative....... 58.0 67.7 77.5 83.2 79.3 16.7 99.6
Operating income (loss) (a)............... (2.4) 12.8 18.8 21.1 8.6 3.1 16.6
Interest expense.......................... 7.4 6.0 6.4 7.8 7.1 2.6 16.9
Income (loss) before income taxes and
extraordinary item...................... (9.8) 6.8 12.4 13.3 1.5 0.5 (0.3)
Extraordinary item, net of tax (b)........ -- -- -- -- -- 2.4 --
--------- --------- --------- --------- ------ ------ -----------
Net income (loss)......................... $ (10.1) $ 3.8 $ 8.4 $ 8.1 $ (0.4) $ (2.1) $ (0.5)
--------- --------- --------- --------- ------ ------ -----------
--------- --------- --------- --------- ------ ------ -----------
Net income (loss) available to common
stockholders............................ $ (10.1) $ 3.8 $ 6.7 $ 6.5 $ (1.5) $ (2.5) $ (3.2)
--------- --------- --------- --------- ------ ------ -----------
--------- --------- --------- --------- ------ ------ -----------
<CAPTION>
AT DECEMBER
28,
1996
-------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(c)(d)................................................................................ $ 70.8
Total assets......................................................................................... 318.7
Total debt, including current maturities............................................................. 145.0
Redeemable preferred stock(e)........................................................................ 18.2
Common stockholder's equity.......................................................................... 57.5
<CAPTION>
<S> <C>
ADJUSTED
PRO FORMA
1996
-----------
<S> <C>
OPERATING DATA:
Net sales................................. $ 318.2
Gross profit.............................. 116.2
Selling, general and administrative....... 99.6
Operating income (loss) (a)............... 16.6
Interest expense.......................... 17.0
Income (loss) before income taxes and
extraordinary item...................... (0.4)
Extraordinary item, net of tax (b)........ --
-----------
Net income (loss)......................... $ (0.6)
-----------
-----------
Net income (loss) available to common
stockholders............................ $ (3.2)
-----------
-----------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
FISCAL YEAR
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR SUCCESSOR
--------------------------------------------------------- -------------
<CAPTION>
DEC. 31, 1995 OCT. 30, 1996
THROUGH THROUGH PRO FORMA
1992 1993 1994 1995 OCT. 29, 1996 DEC. 28, 1996 1996
--------- --------- --------- --------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (f)................................ $ 12.4 $ 20.6 $ 27.1 $ 30.6 $ 25.6 $ 5.5 $ 31.5
Gross margin.............................. 27.9% 34.0% 35.5% 35.3% 36.3% 38.4% 36.5%
Depreciation and amortization............. $ 6.7 $ 6.4 $ 6.5 $ 7.3 $ 6.6 $ 2.4 $ 13.3
Capital expenditures...................... 5.0 7.9 11.0 13.7 4.0 3.7 7.8
Cash interest expense (g)................. 7.0 5.6 6.0 7.4 6.7 2.5 15.7
Ratio of earnings to fixed charges (h).... -- 1.8x 2.3x 2.1x 1.1x 1.1x --
<CAPTION>
<S> <C>
ADJUSTED
PRO FORMA
1996
-----------
<S> <C>
OTHER DATA:
EBITDA (f)................................ $ 31.5
Gross margin.............................. 36.5%
Depreciation and amortization............. $ 13.3
Capital expenditures...................... 7.8
Cash interest expense (g)................. 15.7
Ratio of earnings to fixed charges (h).... --
</TABLE>
- ---------
(a) Operating income (loss) for the period December 31, 1995 through October 29,
1996 includes: (1) compensation-related charges of $5.3 million for amounts
paid to management in connection with the Acquisition; and (2) other expense
charges of $3.5 million for costs and fees the Company incurred in
connection with the Acquisition. Both of these items are excluded from pro
forma and adjusted pro forma fiscal 1996 results.
(b) The extraordinary item for the period October 30, 1996 through December 28,
1996 reflects the write-off of $3.4 million and $0.2 million of deferred
debt issuance costs related to the Subordinated Loan Facility and the
portion of the Senior Credit Facility repaid with the proceeds of the Old
Notes in November 1996, net of income tax effects. These items are excluded
from pro forma and adjusted pro forma fiscal 1996 results.
(c) Represents total current assets less total current liabilities.
(d) On an adjusted pro forma basis, working capital would be $69.8 million, due
to the use of cash for $1.0 million of estimated debt issuance costs
incurred for the New Notes.
(e) The Company issued redeemable preferred stock at the closing of the
Acquisition to Holdings for $20.0 million (its estimated fair value, which
equals its redemption value), net of $2.2 million of fees associated with
its issuance.
(f) EBITDA represents earnings before interest expense and income tax expense
(i.e., operating income (loss)) excluding the following charges:
(i) depreciation and amortization expense including prepaid management fee
amortization of $0.23 million for the period October 30, 1996 through
December 28, 1996 and $1.35 million for pro forma and adjusted pro forma
fiscal 1996 in connection with the Acquisition;
(ii) in fiscal 1992, $8.2 million of restructuring charges related to new
management establishing a strategy to rationalize SKUs within its product
lines, decrease product complexity and improve manufacturing operations,
a reduction in the carrying value of a facility held for sale, and costs
associated with certain plant closings;
(iii) recurring costs associated with certain benefit plans which were
terminated as a result of the Acquisition and not replaced, as follows:
(1) Long-Term Incentive Plan expenses of $0.8 million, $1.2 million, $1.1
million and $1.0 million for fiscal 1993, 1994, 1995 and the period
December 31, 1995 through October 29, 1996, respectively, and $1.0
million for pro forma and adjusted pro forma fiscal 1996; (2) Management
Equity Participation Plan expenses of $0.6 million, $0.6 million, $0.6
million and $0.6 million for fiscal 1993, 1994, 1995 and the period
December 31, 1995 through October 29, 1996, respectively, and $0.6
million for pro forma and adjusted pro forma fiscal 1996; and (3) Stock
Compensation Plan expense of $0.4 million in fiscal 1995; and
11
<PAGE>
(iv) in fiscal 1996, nonrecurrring charges of $8.3 million related to the
Acquisition.
The Company has included information concerning EBITDA as it is relevant for
covenant analysis under the Indenture, which defines EBITDA as set forth
above for the periods shown. See "Description of Notes--Certain
Definitions." In addition, management believes that EBITDA is generally
accepted as providing useful information regarding a company's ability to
service and/or incur debt. EBITDA should not be considered in isolation or
as a substitute for net income, cash flows or other consolidated income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
(g) Cash interest expense is defined as interest expense less amortization of
debt issuance costs.
(h) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and fixed charges. Fixed
charges consist of interest expense, which includes the amortization of
deferred debt issuance costs and the interest portion of the Company's rent
expense (assumed to be one-third of total rent expense). Earnings were
insufficient to cover fixed charges for fiscal 1992 by $9.8 million, for pro
forma fiscal 1996 by $0.3 million and for adjusted pro forma fiscal 1996 by
$0.4 million.
12
<PAGE>
RISK FACTORS
IN EVALUATING AN INVESTMENT IN THE NEW NOTES, PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AS WELL AS THE OTHER INFORMATION
SET FORTH ELSEWHERE IN THIS PROSPECTUS.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company incurred substantial indebtedness in connection with the
Acquisition and the offering of the Old Notes (the "Offering"), the effect of
which was to increase the Company's indebtedness by approximately $83.0 million.
At December 28, 1996, the Company's total indebtedness was $145.0 million
(exclusive of $50.0 million of available borrowings and outstanding letters of
credit under the Senior Credit Facility), and the Company had redeemable
preferred stock of $20.0 million ($18.2 million net of fees associated with its
issuance and accretion) and common stockholder's equity of $57.5 million. The
degree to which the Company is leveraged could have important consequences to
holders of the Notes, including the following: (i) the Company's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired; (ii) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of interest on the Notes and its other existing indebtedness, thereby
reducing the funds available to the Company for other purposes; (iii) the
agreements governing the Company's long-term indebtedness contain certain
restrictive financial and operating covenants; (iv) certain indebtedness under
the Senior Credit Facility is at variable rates of interest, which causes the
Company to be vulnerable to increases in interest rates; (v) all of the
indebtedness outstanding under the Senior Credit Facility is secured by
substantially all the assets of the Company and becomes due prior to the time
the principal on the Notes will become due; (vi) the Company is substantially
more leveraged than certain of its competitors, which might place the Company at
a competitive disadvantage; (vii) the Company may be hindered in its ability to
adjust rapidly to changing market conditions; and (viii) the Company's
substantial degree of leverage could make it more vulnerable in the event of a
downturn in general economic conditions or in its business.
The Company may be required to refinance all or a portion of the Senior
Credit Facility at or prior to its maturity, which is prior to the maturity of
the Notes. Potential measures to raise cash may include the sale of assets or
equity. However, the Company's ability to raise funds by selling assets is
restricted by the Senior Credit Facility, and its ability to effect equity
financings is dependent on results of operations and market conditions. In the
event that the Company is unable to refinance the Senior Credit Facility or
raise funds through asset sales, sales of equity or otherwise, its ability to
pay principal of and interest on the Notes would be adversely affected.
SUBORDINATION OF NOTES; ASSET ENCUMBRANCE
At December 28, 1996, the Company had $45.0 million of Senior Indebtedness
outstanding (exclusive of $50.0 million of available borrowings and outstanding
letters of credit under the Senior Credit Facility). The Indenture permits the
Company to incur additional Senior Indebtedness subject to certain conditions.
The Notes will be subordinated in right of payment to all existing and future
Senior Indebtedness, including the principal, premium (if any) and interest with
respect to the Senior Indebtedness under the Senior Credit Facility.
The Company may not pay principal of, premium on (if any), or interest on,
the Notes, make any deposit pursuant to defeasance provisions or repurchase or
redeem or otherwise retire any Notes (i) if any Senior Indebtedness is not paid
when due or (ii) if any other default on Senior Indebtedness occurs and the
maturity of such Senior Indebtedness is accelerated in accordance with its
terms, unless, in either case, the default has been cured or waived, any such
acceleration has been rescinded or such Senior Indebtedness has been paid in
full, except that the Company may pay the Notes upon the approval of the
Representative of the relevant Designated Senior Indebtedness (as defined in the
Indenture). In addition, if any other default exists with respect to the
Designated Senior Indebtedness and certain other conditions
13
<PAGE>
are satisfied, the Company may not make any payments on the Notes for up to 179
days. Upon any payment or distribution of the assets of the Company in
connection with a total or partial liquidation or dissolution or reorganization
of or similar proceeding relating to the Company, the holders of Senior
Indebtedness will be entitled to receive payment in full before the holders of
the Notes are entitled to receive any payment. See "Description of
Notes--Ranking."
The Notes are also unsecured and thus, in effect, will rank junior to any
secured indebtedness of the Company. Furthermore, they will effectively be
subordinated to any indebtedness and other liabilities of the Company's
subsidiaries. The indebtedness outstanding under the Senior Credit Facility will
be secured by liens on substantially all of the personal property and certain
real property of the Company. The Senior Credit Facility includes certain
covenants that, among other things, restrict: (i) the making of investments,
loans and advances and the paying of dividends and other restricted payments;
(ii) the incurrence of additional indebtedness; (iii) the granting of liens,
other than liens created pursuant to the Senior Credit Facility and certain
permitted liens; (iv) mergers, consolidations, and sales of all or a substantial
part of the Company's business or property; (v) the sale of assets; and (vi) the
making of capital expenditures. The Senior Credit Facility also requires the
Company to maintain certain financial ratios, including interest coverage and
leverage ratios, and to maintain a minimum level of consolidated EBITDA (as
defined in the Senior Credit Facility). The ability of the Company to comply
with these and other provisions of the Senior Credit Facility may be affected by
events beyond the Company's control. The breach of any of these covenants could
result in a default under the Senior Credit Facility, in which case, depending
on the actions taken by the lenders thereunder or their successors or assignees,
such lenders could elect to declare all amounts borrowed under the Senior Credit
Facility, together with accrued interest, to be due and payable, and the Company
could be prohibited from making payments of interest and principal on the Notes
until the default is cured or all Senior Indebtedness is paid or satisfied in
full. If the Company were unable to repay such borrowings, such lenders could
proceed against their collateral. If the indebtedness under the Senior Credit
Facility were to be accelerated, there can be no assurance that the assets of
the Company would be sufficient to repay in full such indebtedness and the other
indebtedness of the Company, including the Notes. See "Capital Structure--Senior
Credit Facility" and "Description of Notes--Ranking."
CONTROL BY INVESTCORP
Investcorp and its affiliates, through their ownership of the voting stock
of Holdings or through other contractual arrangements, indirectly control the
power to vote all of the outstanding capital stock of the Company. Accordingly,
Investcorp and its affiliates are entitled to elect all directors of the
Company, approve all amendments to the Company's Articles of Organization and
effect fundamental corporate transactions such as mergers and asset sales. See
"Ownership of Voting Securities."
POTENTIAL INABILITY TO PURCHASE TENDERED NOTES UPON A CHANGE OF CONTROL
A Change of Control (as defined) could require the Company to refinance
substantial amounts of indebtedness. Upon the occurrence of a Change of Control,
the holders of the Notes would be entitled to require the Company to purchase
the Notes at a purchase price equal to 101% of the principal amount of such
Notes, plus accrued and unpaid interest, if any, to the date of purchase.
However, the Senior Credit Facility prohibits the purchase of the Notes by the
Company in the event of a Change of Control, unless and until such time as the
indebtedness under the Senior Credit Facility is repaid in full. The Company's
failure to purchase the Notes would result in a default under the Indenture and
the Senior Credit Facility. The inability to repay the indebtedness under the
Senior Credit Facility, if accelerated, would also constitute an event of
default under the Indenture, which could have adverse consequences to the
Company and the holders of the Notes. In the event of a Change of Control, there
can be no assurance that the Company would have sufficient assets to satisfy all
of its obligations under the Senior Credit
14
<PAGE>
Facility and the Notes. See "Capital Structure--Senior Credit Facility" and
"Description of Notes-- Change of Control."
POTENTIAL CLAIMS OF FRAUDULENT CONVEYANCE OR PREFERENTIAL TREATMENT WITH RESPECT
TO THE NOTES
If the court in a lawsuit brought by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy or the Company as a
debtor-in-possession, were to find under relevant federal and state fraudulent
conveyance statutes that the Company did not receive fair consideration or
reasonably equivalent value for incurring certain of the indebtedness, including
the Notes, incurred by the Company in connection with the Acquisition, and that,
at the time of such incurrence, the Company (i) was insolvent, (ii) was rendered
insolvent by reason of such incurrence or grant, (iii) was engaged in a business
or transaction for which the assets remaining with the Company constituted
unreasonably small capital or (iv) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they matured, such court,
subject to applicable statutes of limitation, could void the Company's
obligations under the Notes, subordinate the Notes to obligations of the Company
that do not otherwise constitute Senior Indebtedness or take other action
detrimental to the holders of the Notes.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than all that company's property at a fair valuation, or if the present
fair salable value of that company's assets is less than the amount that will be
required to pay its probable liability on its existing debts as they become
absolute and matured. Moreover, regardless of solvency, a court could void an
incurrence of indebtedness, including the Notes, if it determined that such
transaction was made with intent to hinder, delay or defraud creditors, or a
court could subordinate the indebtedness, including the Notes, to the claims of
all existing and future creditors on similar grounds.
There can be no assurance as to what standard a court would apply in order
to determine whether the Company was "insolvent" upon consummation of the
Acquisition or the sale of the Notes or that, regardless of the method of
valuation, a court would not determine that the Company was insolvent upon
consummation of the Acquisition or sale of the Notes.
Additionally, under federal bankruptcy or applicable state insolvency law,
if a bankruptcy or insolvency were initiated by or against the Company within 90
days after any payment by the Company with respect to the Notes, or if the
Company anticipated becoming insolvent at the time of such payment, all or a
portion of the payment could be avoided as a preferential transfer and the
recipient of such payment could be required to return such payment.
COMPARABLE STORE SALES DECLINES
Comparable store sales for the Company's retail outlet stores declined 1.4%,
2.8%, 7.1% and 8.8% in fiscal years 1993, 1994, 1995 and 1996, respectively. The
Company believes that these comparable store sales declines were a result of
several factors, including poor product mix, weak retail operating disciplines,
the removal of certain product lines and overall weaker performance in the
outlet industry. In an effort to slow comparable store sales declines,
management recently introduced new merchandise, changed its product mix and
strengthened certain operating disciplines. Despite these improvements,
comparable store sales remain low, and there can be no assurance that recent
performance can be maintained or further improved in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS RELATED TO FOREIGN SOURCING
The Company currently sources approximately 40% of its sewing production
through its off-shore facilities, and intends to increase this percentage to up
to 80% over the next five years. As a result, the Company may be adversely
affected by political instability resulting in the disruption of trade from
foreign
15
<PAGE>
countries in which the Company's manufacturing facilities are located, the
imposition of additional regulations relating to imports, duties, taxes and
other charges on imports, any significant decreases in the value of the dollar
against foreign currencies and restrictions on the transfer of funds. These and
other factors could result in the interruption of production in off-shore
facilities or a delay in the receipt of the products by the Company in the
United States. The Company's future performance may be subject to such factors,
which are beyond the Company's control, and there can be no assurance that such
factors would not have a material adverse effect on the Company's financial
condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success is largely dependent upon the
abilities and experience of its senior management team. The loss of the services
of one or more of these senior executives could adversely affect the Company's
results of operations. See "Management--Employment Arrangements."
DEPENDENCE ON MAJOR SUPPLIERS
The Company purchases the majority of the various raw materials used to
manufacture its products from a few vendors of each material. For example, in
1996, 100% of the thread purchased by the Company was supplied by three vendors,
96% of the yarn purchased by the Company was supplied by five vendors and 77% of
the fabric purchased by the Company was supplied by five vendors. The Company
expects that these vendors will provide a comparable portion of the Company's
raw materials in 1997. There can be no assurance that the loss of one or more of
these vendors as a supplier would not result in an interruption of supply, which
could have an adverse effect on the Company's results of operations.
COMPETITION
The baby and toddler and young children's apparel markets are highly
competitive. Competition generally is based upon product quality, brand name
recognition, price, selection, service and convenience. Both branded and private
label manufacturers compete in the baby and toddler and children's apparel
markets. The Company's primary branded competitors include Health-Tex and
Oshkosh B'Gosh together with Disney licensed products in playwear, and numerous
smaller branded companies, as well as Disney licensed products, in sleepwear.
Certain retailers, including several which are customers of the Company, have
significant private label product offerings in playwear. The Company does not
believe that it has any significant branded competitors in its layette market in
which most of the alternative products are offered by private label
manufacturers. Because of the highly fragmented nature of the industry, the
Company also competes with many small, local manufacturers and retailers.
Certain of the Company's competitors have greater financial resources than the
Company, have larger customer bases and are less financially leveraged.
EXPIRATION OF LICENSING ARRANGEMENT IN 1998
The Company is the exclusive sub-licensee of the BABY DIOR brand name for
baby clothes through 1998. The BABY DIOR line is currently positioned as the
most luxurious brand marketed by the Company, accounting for $17.7 million, or
5.6%, of the Company's sales in fiscal 1996. The Company's licensing arrangement
with Dior expires in 1998 at which time Dior may, but is not obligated to, renew
the license. There can be no assurance that Dior will renew the Company's
license beyond 1998.
DEPENDENCE ON WHOLESALE CUSTOMERS
Approximately 57.2% and 57.5% of the Company's total wholesale sales for
fiscal 1995 and fiscal 1996, respectively, were derived from sales to its top
six customers, with no one customer accounting for more than 11.6% of such sales
(or more than 6.6% of the Company's total sales) in either period. The Company
expects that these wholesale customers will continue to represent a significant
portion of the
16
<PAGE>
Company's wholesale sales in the future. There can be no assurance that the loss
of, or a significant decrease in business from, one or more of these customers
would not result in a material adverse effect on the Company's financial
condition and results of operations.
LACK OF PUBLIC MARKET; RESTRICTIONS ON TRANSFERABILITY
The New Notes are new securities for which there currently is no market.
Although the Initial Purchasers have been making a market in the Old Notes and
have informed the Company that they currently intend to make a market in the New
Notes, they are not obligated to do so and any such market making may be
discontinued at any time without notice. In addition, such market making
activity may be limited during the pendency of the Exchange Offer. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the New Notes. The Old Notes are currently eligible for trading by qualified
buyers in the PORTAL market. The Company does not intend to apply for listing of
the New Notes on any securities exchange or for quotation through The Nasdaq
National Market.
The liquidity of, and trading market for, the New Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
RISKS RELATED TO ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes, and (ii) impose liability
for response costs and certain damages resulting from past and current spills,
disposals or other releases of hazardous materials (together, "Environmental
Laws"). The Company believes that it currently conducts its operations, and in
the past has operated its business, in substantial compliance with applicable
Environmental Laws. From time to time, operations of the Company have resulted
or may result in noncompliance with or liability for cleanup pursuant to
Environmental Laws. In July and August 1996, the Company had Phase I
Environmental Site Assessment and Regulatory Compliance Reviews (the "Reports")
conducted by an environmental consultant for 13 facilities. Based on available
information, including the Reports, the Company has identified certain
non-compliance with Environmental Laws, including waste water discharge at its
textile manufacturing facility in Barnesville, Georgia. The Company has also
identified certain actions that may be required in the future at this facility.
Environmental Laws have changed rapidly in recent years, and the Company may be
subject to more stringent Environmental Laws in the future. There can be no
assurance that more stringent Environmental Laws could not have a material
adverse effect on the Company's results of operations. See
"Business--Environmental Matters."
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Notes pursuant
to the Exchange Offer.
17
<PAGE>
THE ACQUISITION
On the Acquisition Closing Date, Holdings, a company organized on behalf of
affiliates of Investcorp, management and certain other investors, acquired 100%
of the outstanding preferred and common stock of the Company from the Sellers
for total consideration of $208.0 million, which amount includes the base
purchase price of $194.7 million (including refinancing of indebtedness and
certain payments to management but excluding fees and expenses), the issuance of
shares of non-voting stock of Holdings valued at $9.1 million to certain members
of management and a payment of $4.2 million to the Sellers representing the
estimated future tax benefit to the Company resulting from certain payments. The
Company also incurred additional financing and transaction fees and expenses of
$18.1 million related to the Acquisition. Financing for the Acquisition was
provided by (i) $56.1 million of borrowings under the Senior Credit Facility,
(ii) $90.0 million of borrowings under the Subordinated Loan Facility, (iii)
$50.9 million of equity investments in Holdings by affiliates of Investcorp and
certain other investors (which excludes the exchange of management stock
described below) and (iv) the issuance by Holdings of $20.0 million of senior
subordinated notes to affiliates of Investcorp and certain other investors which
Holdings used to purchase $20.0 million of the Company's redeemable preferred
stock (the "Preferred Stock"). Holdings has no assets or investments other than
the shares of capital stock of the Company.
Upon the Acquisition, the Company paid a total of approximately $11.3
million to members of management (the "Management Payments"), including payments
under a Management Equity Participation Plan and a Long-Term Incentive Plan. In
addition, upon the closing of the Acquisition, certain members of management
exchanged capital stock of the Company with an aggregate value of $9.1 million
for non-voting stock of Holdings. See "Certain Transactions."
18
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 28, 1996. There is no adjustment to give effect to the
Exchange Offer. This table should be read in conjunction with the "Selected
Historical and Pro Forma Financial Data," "Unaudited Pro Forma Condensed
Consolidated Financial Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 28, 1996
--------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
Debt:
Term loans (a)............................................................................ $ 45,000
Revolving credit facility (a)............................................................. --
10 3/8% Senior Subordinated Notes due 2006................................................ 100,000
--------
Total debt.............................................................................. 145,000
--------
Redeemable preferred stock (b).............................................................. 18,234
--------
Common stockholder's equity:
Common Stock, $.01 par value, 1,000 shares authorized; 1,000 shares outstanding........... --
Capital in excess of par value............................................................ 59,566
Accumulated deficit....................................................................... (2,078)
--------
Total common stockholder's equity....................................................... 57,488
--------
Total capitalization.................................................................... $ 220,722
--------
--------
</TABLE>
- ---------
(a) The term loan portion of the Senior Credit Facility will mature in the year
2003 and requires semi-annual principal payments totaling $0 in 1996, $0.9
million in each of 1997, 1998, 1999 and 2000 and $5.4 million, $13.5 million
and $22.5 million in 2001, 2002 and 2003, respectively. See "Capital
Structure--Senior Credit Facility" for a description of the revolving credit
facility and term loans under the Senior Credit Facility. In November 1996,
the term loan was reduced by $5.0 million with proceeds from the issuance of
the Old Notes. The future scheduled payments under the Senior Credit
Facility have been reduced ratably for this payment.
(b) The Company issued the redeemable Preferred Stock at the closing of the
Acquisition to Holdings for $20.0 million (its estimated fair value, which
equals its redemption value), net of $2.2 million of fees associated with
its issuance. The carrying value reflects accretion of issuance costs and
cumulative dividends. See "Capital Structure--Preferred Stock" for a
description of the Preferred Stock.
19
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements are based on the consolidated financial statements included elsewhere
in this Prospectus, adjusted to give effect to the Transactions.
The unaudited pro forma statement of operations data are derived from the
Consolidated Statements of Operations for the periods December 31, 1995 through
October 29, 1996 (predecessor) and October 30, 1996 through December 28, 1996
(successor), included elsewhere in this Prospectus, and assume that the
Transactions were consummated as of December 31, 1995. Unaudited pro forma
condensed consolidated balance sheet data is not presented, as the Acquisition
and issuance of the Old Notes are reflected in the historical December 28, 1996
consolidated balance sheet presented elsewhere in this Prospectus. On a pro
forma basis adjusted for the Exchange Offer, all balance sheet amounts would be
unaffected, except for a decrease in cash and an increase in other assets to
reflect $1.0 million of debt issuance costs incurred for the New Notes. The
unaudited pro forma condensed consolidated financial statements should be read
in conjunction with the Consolidated Financial Statements of the Company,
included elsewhere in this Prospectus.
The unaudited pro forma condensed consolidated financial statements do not
purport to be indicative of the results that would actually have been obtained
if the Transactions had occurred on the dates indicated or of the results that
may be obtained in the future. The unaudited pro forma condensed consolidated
financial statements are presented for comparative purposes only. The pro forma
adjustments, as described in the accompanying data, are based on available
information and certain assumptions that management believes are reasonable.
The unaudited pro forma information is based on the historical financial
statements of the business acquired, adjusted to reflect the Transactions. The
Acquisition was accounted for under the purchase method of accounting. The
purchase price for the Acquisition, including the related fees and expenses, has
been allocated to the tangible and identifiable intangible assets and
liabilities of the acquired business based upon the Company's estimates of their
fair value with the remainder allocated to goodwill. While actual results may
differ from these estimates, such differences are not expected to be material.
The pro forma adjustments directly attributable to the Transactions primarily
include adjustments to interest expense related to the financing, changes in
depreciation of property, plant and equipment and amortization of intangible
assets relating to the allocation of the purchase price, management fees and the
related tax effects.
20
<PAGE>
THE WILLIAM CARTER COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED ACQUISITION EXCHANGE OFFER ADJUSTED
HISTORICAL(A) ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
------------ ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 318,235 $ -- $ 318,235 $ -- $ 318,235
Cost of goods sold................. 201,735 282(b) 202,017 -- 202,017
------------ ----------- ----------- ----- ------------
Gross profit....................... 116,500 (282) 116,218 -- 116,218
Selling, general and administrative
expenses.......................... 95,968 3,668(c) 99,636 -- 99,636
Nonrecurring charge................ 8,834 (8,834)(d) -- -- --
------------ ----------- ----------- ----- ------------
Operating income................... 11,698 4,884 16,582 -- 16,582
Interest expense................... 9,706 7,172(e) 16,878 100(h) 16,978
------------ ----------- ----------- ----- ------------
Income (loss) before income taxes
and extraordinary item............ 1,992 (2,288) (296) (100) (396)
Provision (benefit) for income
taxes............................. 2,097 (1,848)(f) 249 (37)(i) 212
------------ ----------- ----------- ----- ------------
Loss before extraordinary
item (g).......................... $ (105) $ (440) $ (545) $ (63) $ (608)
------------ ----------- ----------- ----- ------------
------------ ----------- ----------- ----- ------------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations.
21
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the fiscal year ended December 28, 1996 reflects the Transactions as if they had
occurred on December 31, 1995 and excludes nonrecurring items directly
attributable to the Transactions.
<TABLE>
<S> <C>
(a) The Combined Historical amounts represent the mathematical addition of the
historical amounts for the predecessor period (December 31, 1995 through
October 29, 1996) and the successor period (October 30, 1996 through
December 28, 1996) and are not indicative of results that would have been
obtained had the Acquisition occurred on December 31, 1995.
(b) Reflects increase in depreciation expense on property, plant and
equipment..................................................................... $ 282
-----------
-----------
(c) Reflects the following:
Goodwill, gross value............................................... $38,522
Amortization period.............................................. 40 years
Increase in amortization expense.......................................... $ 793
Tradename, gross value............................................. $100,000
Amortization period.............................................. 40 years
Increase in amortization expense.......................................... 2,083
Decrease to periodic expense for postretirement benefits as a result of
recognition of accrued benefit obligation in purchase accounting.......... (333)
Amortization of management agreement fees which were prepaid to Investcorp
International Inc. at Acquisition Closing Date............................ 1,125
-----------
Net adjustments..................................................... $ 3,668
-----------
-----------
(d) Reflects elimination of nonrecurring items, as follows:
Compensation charges for amounts paid to management in connection with the
Acquisition................................................................ $ (5,334)
Other expense charges for expenses of the Company in connection with the
Acquisition................................................................ (3,500)
-----------
Total............................................................... $ (8,834)
-----------
-----------
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
(e) Reflects net increases in interest expense resulting from the Acquisition
and issuance of the Old Notes, as follows:
Elimination of historical interest expense on debt retired in connection
with the Acquisition.................................................... $ (6,306)
Adjustment of interest expense on Predecessor revolving credit borrowings
to reflect assumed 8% interest rate applicable to Successor revolving
credit arrangements..................................................... (125)
Elimination of amortization of debt issuance costs on the retired debt.... (398)
Interest resulting from $45,000 of term loan borrowings under the Senior
Credit Facility, at an assumed interest rate of 8.50%................... 3,188
Interest resulting from $6,100 of borrowings on revolving credit facility
under the Senior Credit Facility, at an assumed interest rate of
8.0%.................................................................... 407
Interest resulting from $100,000 of borrowings under Senior Subordinated
Notes due 2006 (the Old Notes), at an interest rate of 10.375%.......... 9,363
Amortization of $8,787 debt issuance costs on the Senior Credit Facility
and the Old Notes....................................................... 1,043
-----------
Net adjustments..................................................... $ 7,172
-----------
-----------
Borrowings under the Company's new Senior Credit Facility are at variable
rates. The rates used for these pro forma adjustments reflect rates
actually in effect at the date of the Acquisition as well as at December
28, 1996. Assuming the levels of borrowings reflected in the pro forma
results, a 1/8% variance in the assumed interest rates on these borrowings
would impact the fiscal 1996 pro forma annual interest expense by
approximately $85.
(f) Reflects tax effects of above items, except for goodwill amortization and
Company Acquisition expenses, at an assumed tax rate of 37%................. $ (1,848)
-----------
-----------
(g) Excludes extraordinary items related to:
The write-off of $3,377 of debt issuance costs on the Subordinated Loan
Facility and $244 of debt issuance costs on the portion of the Senior
Credit Facility repaid with the proceeds of the Old Notes, net of related
income tax benefits of $1,270.
(h) Amortization of $1,000 in debt issuance costs over the 10 year term of the
New Notes issued in the Exchange Offer...................................... $ 100
-----------
-----------
(i) Reflects tax effects of the Exchange Offer adjustment (h) above............. $ (37)
-----------
-----------
</TABLE>
23
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth selected historical financial and other data
of the Company as of and for the five fiscal years ended December 28, 1996 and
certain unaudited pro forma financial data as of and for the fiscal year ended
December 28, 1996. As a result of certain adjustments made in connection with
the Acquisition, the results of operations for the period October 30, 1996
through December 28, 1996 are not comparable to prior periods. The unaudited pro
forma operating data and other data assume that the Transactions occurred on
December 31, 1995. The unaudited adjusted pro forma operating and other data
assume that the Transactions and the issuance of the New Notes occurred on
December 31, 1995. The unaudited adjusted pro forma balance sheet data reflect
the historical December 28, 1996 balance sheet data as adjusted for the Exchange
Offer. The selected historical financial data for the five fiscal years ended
December 28, 1996 were derived from the Company's audited Consolidated Financial
Statements. The pro forma financial data were derived from the Unaudited Pro
Forma Condensed Consolidated Financial Statements included elsewhere in this
Prospectus. The pro forma adjustments are based upon available information and
certain assumptions that management believes are reasonable. The pro forma
financial information does not purport to represent what the Company's financial
position or results of operations would actually have been had the Transactions
in fact occurred on such dates or to project the Company's financial position or
results of operations for any future date or period. The pro forma adjustments
are based on the purchase method of accounting and a preliminary allocation of
the purchase costs incurred in connection with the Acquisition.
The following table should be read in conjunction with "Capitalization,"
"Unaudited Pro Forma Condensed Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." For reports by the Company's independent accountants with respect
to historical financial information, see "Index to Consolidated Financial
Statements."
24
<PAGE>
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR
----------------------------------------------------- SUCCESSOR
DEC. 31, ---------------
1995 OCT. 30, 1996
FISCAL YEAR THROUGH THROUGH PRO ADJUSTED
------------------------------------------ OCT. 29, DEC. 28, FORMA PRO FORMA
1992 1993 1994 1995 1996 1996(A) 1996 1996
--------- --------- --------- --------- --------- --------------- --------- -----------
OPERATING DATA:
Wholesale sales............. $ 142,694 $ 127,457 $ 150,175 $ 166,884 $ 160,485 $ 28,506 $ 188,991 $ 188,991
Retail sales................ 85,417 109,554 121,374 128,547 106,254 22,990 129,244 129,244
--------- --------- --------- --------- --------- --------------- --------- -----------
Net sales................... 228,111 237,011 271,549 295,431 266,739 51,496 318,235 318,235
Cost of goods sold.......... 164,366 156,525 175,244 191,105 170,027 31,708 202,017 202,017
--------- --------- --------- --------- --------- --------------- --------- -----------
Gross profit................ 63,745 80,486 96,305 104,326 96,712 19,788 116,218 116,218
Selling, general and
administrative............ 57,975 67,699 77,472 83,223 79,296 16,672 99,636 99,636
Nonrecurring
charges(b)(g)............. 8,194 -- -- -- 8,834 -- -- --
--------- --------- --------- --------- --------- --------------- --------- -----------
Operating income (loss)..... (2,424) 12,787 18,833 21,103 8,582 3,116 16,582 16,582
Interest expense............ 7,368 5,957 6,445 7,849 7,075 2,631 16,878 16,978
--------- --------- --------- --------- --------- --------------- --------- -----------
Income (loss) before income
taxes and extraordinary
item...................... (9,792) 6,830 12,388 13,254 1,507 485 (296) (396)
Provision for income
taxes..................... 270 3,000 4,000 5,179 1,885 212 249 212
--------- --------- --------- --------- --------- --------------- --------- -----------
Income (loss) before
extraordinary item........ (10,062) 3,830 8,388 8,075 (378) 273 (545) (608)
Extraordinary item, net of
tax (c)................... -- -- -- -- -- 2,351 -- --
--------- --------- --------- --------- --------- --------------- --------- -----------
Net income (loss)........... $ (10,062) $ 3,830 $ 8,388 $ 8,075 $ (378) $ (2,078) $ (545) $ (608)
--------- --------- --------- --------- --------- --------------- --------- -----------
--------- --------- --------- --------- --------- --------------- --------- -----------
Net income (loss) available
to common stockholders.... $ (10,062) $ 3,830 $ 6,710 $ 6,460 $ (1,510) $ (2,512) $ (3,165) $ (3,228)
--------- --------- --------- --------- --------- --------------- --------- -----------
--------- --------- --------- --------- --------- --------------- --------- -----------
BALANCE SHEET DATA
(END OF PERIOD):
Working capital (d)(e)...... $ 63,345 $ 66,670 $ 68,595 $ 84,593 $ 70,792
Total assets................ 127,506 123,938 135,471 167,216 318,709
Total debt, including
current
maturities................ 81,332 73,406 71,660 87,495 145,000
Redeemable Preferred
Stock (f)................. -- -- -- -- 18,234
Preferred stock............. 50,000 50,000 50,000 50,000 --
Common stockholders'
equity.................... (23,569) (19,739) (11,351) (4,678) 57,488
OTHER DATA:
EBITDA (g).................. $ 12,437 $ 20,647 $ 27,098 $ 30,562 $ 25,628 $ 5,530 $ 31,502 $ 31,502
Gross margin................ 27.9% 34.0% 35.5% 35.3% 36.3% 38.4% 36.5% 36.5%
Depreciation and
amortization.............. $ 6,667 $ 6,431 $ 6,515 $ 7,337 $ 6,612 $ 2,414 $ 13,320 $ 13,320
Capital expenditures........ 4,991 7,941 10,996 13,715 4,007 3,749 7,756 7,756
Ratio of earnings to fixed
charges (h)............... -- 1.8x 2.3x 2.1x 1.1x 1.1x -- --
</TABLE>
See Notes to Selected Historical and Pro Forma Financial Data.
25
<PAGE>
NOTES TO SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(a) As a result of the Acquisition, the Company's assets and liabilities were
adjusted to their estimated fair values as of October 30, 1996. In
addition, the Company entered into new financing arrangements and changed
its capital structure. Accordingly, the results of operations for the
period October 30, 1996 through December 28, 1996 are not comparable to
prior periods. The period October 30, 1996 to December 28, 1996 reflects
increased depreciation, amortization, management fee and interest expenses.
(b) The nonrecurring charge for the period December 31, 1995 through October 29,
1996 includes: (1) compensation-related charges of $5.3 million for amounts
paid to management in connection with the Acquisition; and (2) other expense
charges of $3.5 million for costs and fees the Company incurred in
connection with the Acquisition. Both of these items are excluded from pro
forma and adjusted pro forma fiscal 1996 results.
(c) The extraordinary item for the period October 30, 1996 through December 28,
1996 reflects the write-off of $3.4 million and $0.2 million of deferred
debt issuance costs related to the Subordinated Loan Facility and the
portion of the Senior Credit Facility repaid with the proceeds of the Old
Notes in November 1996, net of income tax effects. These items are excluded
from pro forma and adjusted pro forma fiscal 1996 results.
(d) Represents total current assets less total current liabilities.
(e) On an adjusted pro forma basis, working capital would be $69.8 million, due
to the use of cash for $1.0 million of estimated debt issuance costs for the
New Notes.
(f) The Company issued redeemable preferred stock at the closing of the
Acquisition to Holdings for $20.0 million (its estimated fair value, which
equals its redemption value), net of $2.2 million of fees associated with
its issuance.
(g) EBITDA represents earnings before interest expense and income tax expense
(i.e., operating income (loss)) excluding the following charges:
(i) depreciation and amortization expense including prepaid management fee
amortization of $0.23 million for the period October 30, 1996 through
December 28, 1996 and $1.35 million for pro forma and adjusted pro forma
fiscal 1996 in connection with the Acquisition;
(ii) in fiscal 1992, $8.2 million of restructuring charges related to new
management establishing a strategy to rationalize SKUs within its product
lines, decrease product complexity and improve manufacturing operations;
a reduction in the carrying value of a facility held for sale; and costs
associated with certain plant closings;
(iii) recurring costs associated with certain benefit plans that were
terminated as a result of the Acquisition and not replaced, as follows:
(1) Long-Term Incentive Plan expenses of $0.8 million, $1.2 million, $1.1
million and $1.0 million for fiscal 1993, 1994, 1995 and the period
December 31, 1995 through October 29, 1996, respectively, and $1.0
million for pro forma and adjusted pro forma fiscal 1996; (2) Management
Equity Participation Plan expenses of $0.6 million, $0.6 million, $0.6
million and $0.6 million for fiscal 1993, 1994, 1995 and the period
December 31, 1995 through October 29, 1996, respectively, and $0.6
million for pro forma and adjusted pro forma fiscal 1996; and (3) Stock
Compensation Plan expense of $0.4 million in fiscal 1995; and
(iv) in fiscal 1996, the nonrecurring charge of $8.3 million related to the
Acquisition.
The Company has included information concerning EBITDA as it is relevant for
covenant analysis under the Indenture, which defines EBITDA as set forth
above for the periods shown. See "Description of Notes--Certain
Definitions." In addition, management believes that EBITDA is generally
accepted as providing useful information regarding a company's ability to
service and/or incur debt. EBITDA should not be considered in isolation or
as a substitute for net income, cash flows or other consolidated income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
(h) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and fixed charges. Fixed
charges consist of interest expense, which includes the amortization of
deferred debt issuance costs and the interest portion of the Company's rent
expense (assumed to be one-third of total rent expense). Earnings were
insufficient to cover fixed charges for fiscal 1992 by $9.8 million, for pro
forma fiscal 1996 by $0.3 million and for adjusted pro forma fiscal 1996 by
$0.4 million.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED
HISTORICAL AND PRO FORMA FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL
STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INCLUDE RISKS AND OTHER UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE
THOSE DISCUSSED BELOW, AS WELL AS GENERAL ECONOMIC AND BUSINESS CONDITIONS,
COMPETITION AND OTHER FACTORS DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE
COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR
UNANTICIPATED EVENTS.
GENERAL
The Company is a leading marketer and manufacturer of baby, toddler and
young children's apparel. The Company sells its products to more than 300
department and specialty store customers (59.4% of fiscal 1996 sales) and
through its 135 retail outlet stores (40.6% of fiscal 1996 sales). The Company
was acquired in a leveraged buyout in 1988. Despite the continuing strength of
the CARTER'S brand name, the Company's results of operations from 1988 to 1991
were adversely affected by a high degree of financial leverage and a lack of
liquidity and, among other things, poor customer relationships, an unfocused
product offering and an inefficient cost structure. As a result of these
factors, the Company was forced to restructure certain of its debt obligations
in December 1991, and sought new management.
Carter's senior management has significantly increased earnings and market
share since joining the Company in 1992. Management believes these improvements
resulted primarily from efforts to strengthen customer relationships, improve
product offerings and further enhance the CARTER'S brand image. In addition, the
Company has realized significant operating efficiencies by reducing the scope of
its product offerings while enhancing core product offerings, increasing
off-shore production, and implementing the wider use of advanced operating and
financial information systems. Management believes that these actions have been
instrumental in enabling the Company to increase sales and operating income
(loss) from $228.1 million and $(2.4) million, respectively, in fiscal 1992 to
$318.2 million and $11.7 million, respectively, in fiscal 1996. In addition,
during this period, the Company's gross margins increased from 27.9% to 36.6%.
The Company's sales growth since fiscal 1992 resulted from a $46.3 million
increase in wholesale sales and a $43.8 million increase in retail sales. The
increase in wholesale sales resulted primarily from new product introductions
and the opening of new wholesale accounts, including Sears and JCPenney,
partially offset by the removal of certain product lines, such as outerwear,
boys' and girls' underwear and certain BABY DIOR seasonal lines. The increase in
retail sales resulted primarily from new store openings, partially offset by
comparable store sales declines since the beginning of fiscal 1993. Management
believes the comparable store sales declines were due to a soft retailing
environment and to certain operational and merchandising problems, which have
recently been addressed. Management plans to open nine new stores in 1997. The
average cost of opening each store is expected to be approximately $110,000,
exclusive of any contribution by the property owner toward the cost of
construction. See "--Liquidity and Capital Resources" and
"Business--Distribution and Sales--Retail Operations."
Since fiscal 1992, the Company has invested an aggregate of $45.4 million in
capital expenditures which were primarily related to the purchase of new
equipment, information systems and off-shore production facilities.
Notwithstanding the substantial improvements in operating results achieved
over the past four years, the Company's financial results in 1996 were adversely
affected by the performance of its retail outlet stores. Comparable store sales
in 1996 decreased 8.8%.
27
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain components of the Company's
Consolidated Statement of Operations data expressed as a percentage of net
sales:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Wholesale sales..................................................................... 55.3% 56.5% 59.4%
Retail sales........................................................................ 44.7 43.5 40.6
--------- --------- ---------
Net sales......................................................................... 100.0 100.0 100.0
Cost of goods sold.................................................................. 64.5 64.7 63.4
--------- --------- ---------
Gross profit........................................................................ 35.5 35.3 36.6
Selling, general and administrative expenses........................................ 28.5 28.2 30.2
Nonrecurring charge................................................................. -- -- 2.8
--------- --------- ---------
Operating income.................................................................... 6.9 7.1 3.6
Interest expense.................................................................... 2.4 2.7 3.0
--------- --------- ---------
Income before income taxes and extraordinary item................................... 4.6 4.5 0.6
Provision for income taxes.......................................................... 1.5 1.8 0.7
Extraordinary item, net............................................................. -- -- 0.7
--------- --------- ---------
Net income (loss)................................................................... 3.1% 2.7% (0.8)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED WITH FISCAL YEAR ENDED DECEMBER 30,
1995
The 1996 results discussed below represent the mathematical addition of the
historical results for the period from December 31, 1995 through October 29,
1996 (the "Predecessor" period) and the period from October 30, 1996 through
December 28, 1996 (the "Successor" period) for purposes of the discussion below
only and are not indicative of results that would actually have been obtained if
the Acquisition had occurred on December 31, 1995 (the first day of fiscal
1996).
As a result of the Acquisition, the Company's assets and liabilities were
adjusted to their estimated fair values as of October 30, 1996. In addition, the
Company entered into new financing arrangements and had a change in its capital
structure. Certain nonrecurring charges and an extraordinary loss were recorded
in connection with the Acquisition and financing. Accordingly, the results of
operations for 1996 are not comparable to prior periods. The period prior to the
Acquisition reflects nonrecurring charges, principally the Company's and
Sellers' expenses, such as accelerated compensation plan payments to management
and professional fees. The period subsequent to the Acquisition reflects
increased cost of sales due to higher depreciation expense for assets revalued
at the Acquisition, increased interest expense, the amortization of goodwill and
tradename and certain prepaid expenses, and an extraordinary loss resulting from
the early extinguishment of debt.
NET SALES. Net sales for fiscal 1996 increased 7.7% to $318.2 million from
$295.4 million in fiscal 1995. This increase was due to a 13.2% increase in
wholesale sales and a 0.5% increase in retail sales. Wholesale sales for fiscal
1996 increased to $189.0 million from $166.9 million in fiscal 1995. This
increase was due primarily to continued strong sales to wholesale customers and
improved average pricing, as well as to increased clearance and off-price
merchandise sales resulting from the Company's efforts to reduce the high
inventory levels experienced at the end of fiscal 1995. In addition, the Company
continued to rationalize its product lines by scaling back certain products and
by continuing to reduce the overall number of SKUs. Retail sales for fiscal 1996
increased to $129.2 million from $128.5 million in fiscal 1995. This increase
was a result of the incremental volume provided by 36 new stores opened since
the beginning of fiscal 1995, partially offset by comparable store sales (stores
open more than 12 months) declines of
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8.8%. Management believes that the comparable store sales declines were due
primarily to certain operational and merchandising problems, as well as to a
soft retailing environment. Although the soft retailing environment negatively
affected the financial performance of all stores, its impact is more measurable
when analyzing the performance of comparable stores.
Comparable store sales declines were also affected by the removal of certain
product categories that were sold in the Company's retail outlet stores in
fiscal 1995. Management currently is addressing the comparable store sales
declines by improving product mix; emphasizing core layette and sleepwear
products; improving store layouts; assessing locations, demographics and store
sizes; and upgrading management and retailing skills at the corporate, regional
and store levels.
GROSS PROFIT. Gross profit for fiscal 1996 increased 11.7% to $116.5
million from $104.3 million in fiscal 1995. Gross profit as a percentage of net
sales in fiscal 1996 increased to 36.6% from 35.3% in fiscal 1995. This increase
resulted primarily from pricing improvements in the Company's wholesale and
retail businesses, the maturing effect of the Company's three off-shore sewing
plants, one of which was opened in 1995, and the change in the retail store
product mix toward higher margin sleepwear and layette products, partially
offset by an increase in depreciation expense and lower margins in the first
quarter of 1996 as a result of actions taken to decrease inventories that had
built up at the end of fiscal 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 1996 increased 15.3% to $96.0 million from
$83.2 million in fiscal 1995. Selling, general and administrative expenses as a
percentage of net sales increased to 30.2% in fiscal 1996 from 28.2% in fiscal
1995. This increase in selling, general and administrative expenses as a
percentage of net sales resulted from the comparable store sales declines
experienced by the Company's retail outlet stores and higher retail store
expenses associated with the 36 new stores opened since the beginning of fiscal
1995.
NONRECURRING CHARGE. In connection with the Acquisition, the Company
recorded an $8.8 million nonrecurring charge. This charge includes $3.5 million
of Company and Sellers' expenses and $5.3 million of expenses related to
management payments, including the unaccrued costs associated with accelerated
compensation plan payments.
OPERATING INCOME. Operating income for fiscal 1996 decreased 44.6% to $11.7
million from $21.1 million in fiscal 1995 as a result of the changes in selling,
general and administrative expenses, gross profit and the nonrecurring charges
described above. Operating income as a percentage of net sales decreased to 3.6%
in fiscal 1996 from 7.1% in fiscal 1995.
INTEREST EXPENSE. Interest expense for fiscal 1996 increased 23.7% to $9.7
million from $7.8 million in fiscal 1995. This increase reflects higher interest
expense on additional indebtedness resulting from the Acquisition, and higher
average borrowings under the Company's revolving credit facility in place prior
to the Acquisition. At December 28, 1996, outstanding debt aggregated $145.0
million, of which a $45.0 million term loan bore interest at a variable rate, so
that an increase of 1% in the applicable rate would increase the Company's
annual interest cost by $450,000. At December 28, 1996, there were no borrowings
under the Company's $50.0 million revolving credit facility, except for $4.2
million of outstanding letters of credit. Any borrowings under the revolving
credit facility would bear interest at a variable rate.
EXTRAORDINARY LOSS. In November 1996, the Company used the proceeds from
the issuance of the Old Notes to prepay $90.0 million of Acquisition-related
borrowings under the Subordinated Loan Facility and $5.0 million of the term
loan portion of the Senior Credit Facility. As a result, the Company recorded an
after-tax loss of $2.4 million, which has been reflected in the Company's
Consolidated Statement of Operations as an extraordinary item.
NET LOSS. As a result of the factors described above, the Company reported
a net loss of $2.5 million in fiscal 1996 compared with net income of $8.1
million in fiscal 1995.
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FISCAL YEAR ENDED DECEMBER 30, 1995 COMPARED WITH FISCAL YEAR ENDED DECEMBER 31,
1994
NET SALES. Net sales for fiscal 1995 increased 8.8% to $295.4 million from
$271.5 million in fiscal 1994. This increase was due to an 11.1% increase in
wholesale sales and a 5.9% increase in retail sales. Wholesale sales for fiscal
1995 increased to $166.9 million from $150.2 million in fiscal 1994. This
increase was due to the continued success of the Company's business strategy,
which included increased wholesale volume in its core layette and sleepwear
product categories, as well as the full year impact of sales to Sears, a new
wholesale customer for the Company in 1994. The Company also continued to scale
back its total product offerings and continued to reduce the overall number of
SKUs. Retail sales for fiscal 1995 increased to $128.5 million from $121.4
million. This increase was primarily due to the incremental volume provided by
20 new stores opened in 1995, partially offset by comparable store sales
declines of 7.1%. The comparable store sales declines were due to certain
operational and merchandising problems which management believes have recently
been addressed, as well as to a soft retailing environment.
GROSS PROFIT. Gross profit for fiscal 1995 increased 8.3% to $104.3 million
from $96.3 million in fiscal 1994. Gross profit as a percentage of net sales
decreased slightly to 35.3% in fiscal 1995 from 35.5% in fiscal 1994. This
moderate decline reflects $0.5 million of start-up costs in 1995 associated with
the opening of a new off-shore sewing plant in the Dominican Republic and a $1.8
million increase in retail markdowns, partially offset by improved overhead
absorption, lower yarn cost and the initial benefits of the second off-shore
plant in Costa Rica.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 1995 increased 7.4% to $83.2 million from
$77.5 million in fiscal 1994. Selling, general and administrative expenses as a
percentage of net sales declined to 28.2% in fiscal 1995 from 28.5% in fiscal
1994 primarily due to a reduction in retail sales administration costs as a
percentage of net sales.
OPERATING INCOME. As a result of the changes in selling, general and
administrative expenses and gross profit discussed above, operating income for
fiscal 1995 increased 12.1% to $21.1 million from $18.8 million in fiscal 1994.
Operating income as a percentage of net sales increased to 7.1% in fiscal 1995
from 6.9% in fiscal 1994.
INTEREST EXPENSE. Interest expense for fiscal 1995 increased 21.8% to $7.8
million from $6.4 million in fiscal 1994 due to higher average borrowings under
the Company's revolving credit facility.
NET INCOME. As a result of the factors discussed above, net income for
fiscal 1995 decreased 3.7% to $8.1 million from $8.4 million in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are working capital, capital expenditures
and debt service. The Company has financed its working capital, capital
expenditures and debt service requirements primarily through internally
generated cash flow, in addition to funds borrowed under the Company's credit
facilities.
Net cash provided by operating activities in fiscal 1996 was $31.5 million
as compared with net cash used in operating activities of $5.5 million in the
prior year. This increase reflects the reduction in inventory balances resulting
from management's efforts in this regard described below. Operating cash flow
for fiscal 1996 also reflects a significant increase in accounts payable and
other liabilities, such increases resulting primarily from expenses incurred in
connection with the Acquisition. Net cash provided by (used in) operating
activities in fiscal 1995 decreased to $(5.5) million from $14.6 million in
fiscal 1994. This decrease resulted primarily from the increase in the Company's
inventory levels during fiscal 1995.
At the end of fiscal 1995, the Company's inventory levels exceeded its prior
year-end inventories by $28.1 million and its budget by approximately $13.0
million. Management attributes the inventory build-up during fiscal 1995 to a
number of items which include: (i) aggressive production plans reflecting
stronger
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anticipated demand; (ii) historically inadequate production planning and
monitoring systems; (iii) high levels of "open market goods" purchased for the
retail outlet stores; (iv) extra basics fabric manufactured late in 1995 to
reduce the Company's reliance on expensive contracting in 1996; (v) excessive
seasonal fabric due to a mid-year shift in merchandise mix; and (vi) excessive
seconds inventory. Management maintained adequate reserves to adjust inventory
balances to lower of cost or market at December 30, 1995.
The Company believes that each of these items has been successfully
addressed in fiscal 1996. First, the Company moderated production plans in the
first quarter of fiscal 1996, mitigating additional build-up and allowing much
of the excess inventory to be sold. Second, excess basics fabric was quickly
worked through the system and most of the Company's excess seasonal fabric was
sold to third parties at a loss. Third, the Company significantly increased its
capacity in embroidery in 1996 in order to reduce the requirements for
contracting, thus reducing its work-in-process inventory. Finally, most of the
excessive seconds inventories created from the new off-shore sewing facilities
were eliminated through an aggressive sell-off of goods to off-price customers
and temporary retail clearance stores set up by the Company.
Management believes that improvements in production planning and reporting
have been made possible with new information systems installed in the first
quarter of fiscal 1996, as well as with the implementation of an automatic
replenishment system which was fully functioning at its retail stores as of
August 1996. In addition, the Company is continuing to aggressively reduce the
scope of its product offerings (since 1992, wholesale and retail style-colors
have been reduced by approximately 60% and 30%, respectively) and reduce the
amount of open-market purchases, which management believes will help mitigate
the Company's exposure to excess finished goods and will allow the Company to
continue moderating inventory levels going forward. As a result of these
factors, the Company's inventory levels at fiscal year-end 1996 were lower than
those at fiscal year-end 1995 despite higher sales.
The Company invested $11.0 million, $13.7 million and $7.8 million in
capital expenditures during fiscal years 1994, 1995 and 1996, respectively. The
Company's budgeted capital expenditures for fiscal 1997 are approximately $14.0
million.
The Company incurred significant indebtedness in connection with the
Acquisition. At December 28, 1996, the Company had approximately $145.0 million
of indebtedness outstanding, consisting of $100.0 million of Notes and $45.0
million in term loan borrowings under the Senior Credit Facility, with no other
debt or capital lease obligations. In addition, the Company has approximately
$50.0 million in availability under the revolving credit portion of the Senior
Credit Facility (exclusive of approximately $4.2 million of outstanding letters
of credit). The term loan portion of the Senior Credit Facility will mature on
October 31, 2003 and requires semi-annual principal payments totaling $0.0 in
1996, $0.9 million in each of 1997, 1998, 1999 and 2000, and $5.4 million, $13.5
million and $22.5 million in 2001, 2002 and 2003, respectively. In November
1996, the term loan was reduced by $5.0 million with proceeds from the issuance
of the Old Notes. The future scheduled payments under the Senior Credit Facility
have been reduced ratably for this payment. The revolving credit portion of the
Senior Credit Facility will mature on October 31, 2001 and has no scheduled
interim amortization. For a description of the Senior Credit Facility, see
"Capital Structure--Senior Credit Facility." No principal payments are required
on the Notes prior to their scheduled maturity.
The Company believes that cash generated from operations, together with
amounts available under the revolving portion of the Senior Credit Facility,
will be adequate to meet its debt service requirements, capital expenditures and
working capital needs for the foreseeable future, although no assurance can be
given in this regard.
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EFFECTS OF INFLATION
The Company is affected by inflation primarily through the purchase of raw
material, increased operating costs and expenses, and higher interest rates. The
effects of inflation on the Company's operations have not been material in
recent years.
SEASONALITY
The Company experiences seasonal fluctuations in its sales and
profitability, with generally lower sales and gross profit in the first and
second quarters of its fiscal year. The Company believes that seasonality of
sales and profitability is a factor that affects the baby and children's apparel
industry generally and is primarily due to retailers' emphasis in the first
quarter on price reductions, and promotional retailers' and manufacturers'
emphasis on closeouts of the prior year's product lines.
ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which the Company has been
required to adopt in 1996. SFAS No. 123 establishes optional alternative
accounting methods for stock-based compensation as well as new required
disclosures. The Company will account for stock-based compensation under
previously existing accounting guidance. As such, SFAS No. 123 has been adopted
for disclosure purposes only and will not impact the Company's financial
position, annual operating results or cash flows.
CHANGE IN ACCOUNTANTS
In connection with the Acquisition, on November 1, 1996, the Company
dismissed Price Waterhouse LLP ("Price Waterhouse") as its principal independent
accountant and engaged Coopers & Lybrand L.L.P. as its principal independent
accountant. The decision to change accountants was approved by the Company's
Board of Directors. In connection with the audits of the Company's financial
statements for the two most recent completed fiscal years prior to the
Acquisition and during the interim period up until the date of the change in
accountants, there were no disagreements with Price Waterhouse on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure. Price Waterhouse's report on the financial statements for
such years did not contain an adverse opinion or disclaimer of opinion, nor was
it modified as to uncertainty, audit scope or accounting principles.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
GENERAL. Upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal (which together
constitute the Exchange Offer), the Company will accept for exchange Old Notes
which are properly tendered on or prior to the Expiration Date and not withdrawn
as permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on , 1997; PROVIDED, HOWEVER, that if the Company
has extended the period of time for which the Exchange Offer is open, the term
"Expiration Date" means the latest time and date to which the Exchange Offer is
extended.
As of the date of this Prospectus, $100.0 million aggregate principal amount
of the Old Notes was outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1997, to all holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain conditions as set
forth under "-- Certain Conditions to the Exchange Offer" below.
EXTENSION; RETURN OF OLD NOTES NOT ACCEPTED FOR EXCHANGE. The Company
expressly reserves the right, at any time or from time to time, to extend the
period of time during which the Exchange Offer is open, and thereby delay
acceptance for exchange of any Old Notes, by giving notice of such extension to
the holders thereof. During any such extension, all Old Notes previously
tendered will remain subject to the Exchange Offer and may be accepted for
exchange by the Company. Any Old Notes not accepted for exchange for any reason
will be returned without expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
AMENDMENT; TERMINATION. The Company expressly reserves the right to amend
or terminate the Exchange Offer, and not to accept for exchange any Old Notes
not theretofore accepted for exchange, upon the occurrence of any of the
conditions of the Exchange Offer specified below under "--Certain Conditions to
the Exchange Offer."
NOTICE. The Company will give notice of any extension, amendment,
non-acceptance or termination to the holders of the Old Notes as promptly as
practicable, such notice in the case of any extension to be issued no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
NO APPRAISAL OR DISSENTERS' RIGHTS. Holders of Old Notes do not have any
appraisal or dissenters' rights under the Massachusetts Business Corporation Law
in connection with the Exchange Offer.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to State Street Bank and Trust Company
(the "Exchange Agent") at one of the addresses set forth below under "Exchange
Agent" on or prior to the Expiration Date. In addition, either (i) certificates
for such Old Notes must be received by the Exchange Agent along with the Letter
of Transmittal, or (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Old Notes, if such procedure is available,
into the Exchange Agent's account at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
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procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. THE COMPANY IS NOT
ASKING NOTEHOLDERS FOR A PROXY AND NOTEHOLDERS ARE REQUESTED NOT TO SEND THE
COMPANY A PROXY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instruction" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Old Notes are registered in the name of a person other than a
signer of the Letter of Transmittal, the Old Notes surrendered for exchange must
be endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by the Company in its
sole discretion, duly executed by the registered holder with the signature
thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders that appear on the Old
Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each broker-dealer holder will represent to the Company that,
among other things, the New Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of the holder and any
beneficial holder, that neither the holder nor any such beneficial holder has an
arrangement or understanding with any person to participate in the distribution
of such New Notes and
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that neither the holder nor any such other person is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company. If the holder is not a
broker-dealer, the holder must represent that it is not engaged in nor does it
intend to engage in a distribution of the New Notes.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See "--Certain Conditions to the Exchange Offer" below. For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral and
written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described below, such non-exchanged Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration of the Exchange Offer.
BOOK-ENTRY TRANSFER
Any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "Exchange Agent" on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates for all physically tendered Old Notes,
in proper form for transfer, or
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<PAGE>
a Book-Entry Confirmation, as the case may be, and any other documents required
by the Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within five NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date. For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes are registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes that have been tendered for exchange but that are not exchanged for any
reason will be returned to the holder thereof without cost to such holder (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "--Procedures for Tendering Old Notes" above
at any time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, the Company determines that the Exchange Offer
violates applicable law, any applicable interpretation of the staff of the
Commission or any order of any governmental agency or court of competent
jurisdiction.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939 (the
"TIA"). In any such event, the
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Company is required to use every reasonable effort to obtain the withdrawal of
any stop order at the earliest possible time.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or of
the Letter of Transmittal and requests for Notices of Guaranteed Delivery should
be directed to the Exchange Agent addressed as follows:
BY HAND/OVERNIGHT EXPRESS/MAIL/OVERNIGHT DELIVERY:
(insured if registered recommended)
<TABLE>
<S> <C> <C>
State Street Bank and Trust Company, or State Street Bank and Trust
N.A. Company
Corporate Trust Window Corporate Trust Dept.
Concourse Level 2 International Place - 4th Floor
61 Broadway Boston, MA 02110
New York, NY 10006 Attn: William Norkus
</TABLE>
VIA FACSIMILE:
(617) 664-5371
FOR INFORMATION CALL:
Lisa Guymont
(617) 664-5618
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES
NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $ , which includes fees and expenses of the Trustee,
accounting, legal, printing and related fees and expenses.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is the principal amount as reflected in the Company's accounting records
on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The expenses of the Exchange Offer will be
capitalized as debt issuance costs and amortized over the term of the New Notes
through 2006.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
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CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to the exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities law. Old Notes not exchanged pursuant to the
Exchange Offer will continue to accrue interest at 10 3/8% per annum and will
otherwise remain outstanding in accordance with their terms. Holders of Old
Notes do not have any appraisal or dissenters' rights under the Massachusetts
Business Corporation Law in connection with the Exchange Offer. In general, the
Old Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. However, (i) if any Initial Purchaser so requests with respect to Old Notes
not eligible to be exchanged for New Notes in the Exchange Offer and held by it
following consummation of the Exchange Offer or (ii) if any holder of Old Notes
is not eligible to participate in the Exchange Offer or, in the case of any
holder of Old Notes that participates in the Exchange Offer, does not receive
freely tradable New Notes in exchange for Old Notes, the Company is obligated to
file a registration statement on the appropriate form under the Securities Act
relating to the Old Notes held by such persons.
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, New Notes issued pursuant to the
Exchange Offer may be offered for resale, resold or otherwise transferred by
holders thereof (other than (i) any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act or (ii) any
broker-dealer that purchases Notes from the Company to resell pursuant to Rule
144A or any other available exemption) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement or understanding with any person to participate in
the distribution of such New Notes. If any holder has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. The Company has not sought, and
does not intend to seek, its own interpretive letter from the Commission with
respect to the resale of the New Notes. There can be no assurance that the
Commission would make similar interpretations with respect to the Exchange
Offer. A broker-dealer who holds Old Notes that were acquired for its own
account as a result of market-making or other trading activities may be deemed
to be an "underwriter" within the meaning of the Securities Act and must,
therefore, deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of New Notes. Each such broker-dealer who receives
New Notes for its own account in exchange for Old Notes, where such Old Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge in the Letter of Transmittal that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution." While the Company has an obligation under the
Registration Rights Agreement to update this Prospectus by amendment or
supplement for a period of 90 days following consummation of the Exchange Offer,
the Company has no obligation thereafter to update the Prospectus and,
therefore, holders required to deliver a prospectus may not thereafter be able
to resell because they may be unable to comply with the prospectus delivery
requirements described above.
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the New Notes for offer or
sale under the securities or blue sky laws of such jurisdictions as any holder
of the Notes reasonably requests in writing.
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BUSINESS
GENERAL
The Company is the largest marketer of baby and toddler apparel and a
leading marketer of young children's apparel. Over the Company's more than 130
years of operation, CARTER'S has become one of the most highly recognized brand
names in the children's apparel industry. The Company is a vertically-integrated
manufacturer which sells its products under the CARTER'S, CARTER'S CLASSICS and
BABY DIOR brand names to more than 300 department and specialty store accounts
(with an estimated 4,600 store fronts) and through its 135 retail outlet stores.
Carter's is the leading provider of layette (a complete range of apparel and
related products for newborns) in its target distribution channels, with a
market share of approximately 16%, more than four times that of its nearest
branded competitor. Carter's is also the leading provider of baby and toddler
sleepwear in its target distribution channels, with a market share of
approximately 28%, more than three times that of its nearest branded competitor.
The Company also has a significant presence in the much larger and highly
fragmented baby and toddler playwear market.
Carter's generates approximately 87% of its sales in the baby and toddler
apparel market, a $5.6 billion market which has grown at a 6.1% compound annual
rate from 1991 through 1995. Management believes that the baby and toddler
market is well-insulated from changes in fashion trends and less sensitive to
general economic conditions, while offering strong prospects for continued
growth. The growth in this market is being driven by a number of factors,
including: (i) women having children later, resulting in more disposable income
available for expenditures on children; (ii) more women returning to the
workplace after having children, resulting in more disposable income and
increased day care apparel needs; (iii) the increasing number of grandparents, a
demographic segment with high per capita discretionary income and an important
consumer base for children's apparel; and (iv) an increasing social emphasis on
attractive children's apparel.
Carter's senior management has significantly increased earnings and market
share since joining the Company in 1992. Management's fundamental strategy has
been to promote the Company's brand image as the absolute leader in baby apparel
products and to consistently provide high quality, attractive products at a
strong perceived value to consumers. To this end, management employs a
comprehensive four-step marketing strategy which incorporates: (i) extensive
consumer preference testing; (ii) superior brand and product presentation at the
consumer point-of-purchase; (iii) dominant marketing communications; and (iv)
consistent, premium service to fulfill customer and consumer needs. In addition,
the Company continues to realize significant operating efficiencies by reducing
SKUs and product complexity, enhancing core product offerings, increasing
off-shore production and implementing the wider use of advanced information
systems. As a result of these efforts, the Company has increased its operating
income (loss) from $(2.4) million in 1992 to $11.7 million in fiscal 1996.
EBITDA increased from $12.4 million in fiscal 1992 to $31.2 million in fiscal
1996.
COMPANY STRENGTHS
The Company attributes its market leadership and its significant
opportunities for continued growth and increased profitability to the following
competitive strengths:
SUPERIOR BRAND AWARENESS
Carter's has achieved a high level of positive brand awareness with both
consumers and retailers as a result of more than a century of providing quality
baby, toddler and young children's apparel. In a 1993 survey, 92% of mothers and
grandmothers surveyed were familiar with the CARTER'S brand name, and 80%
reported that they had purchased CARTER'S brand products. The Company has
maintained this positive brand awareness despite a relatively low marketing
budget with little national advertising. Management believes that the
consolidation of the apparel industry and changes in the retail environment will
continue
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to favor strong branded companies such as Carter's, as many department and
specialty stores have focused on promoting leading brands while reducing their
number of suppliers.
LEADING AND GROWING MARKET POSITIONS
Carter's is the largest marketer of baby and toddler apparel, with leading
market shares in the layette and sleepwear product categories in its target
distribution channels. Since 1992, the Company has increased its share of the
layette market from 9% to 16% and its share of the baby and toddler sleepwear
market from 22% to 28%. In addition, the Company is the second largest marketer
of young children's sleepwear and has a significant presence in the much larger
and highly fragmented baby and toddler playwear market.
STRONG MANAGEMENT TEAM
Since joining Carter's in 1992, the Company's management team, led by
Frederick J. Rowan, II, has been responsible for sales and EBITDA increasing at
compound annual rates of 8.7% and 25.8%, respectively. Four of the Company's top
executives, including Mr. Rowan, joined the Company following successful careers
running the Bassett-Walker and Lee Jeans divisions of the VF Corporation. The
Company's five top executives average more than 20 years of experience in the
textile and apparel industries. Management believes that they have significant
experience in developing brand names, have a strong reputation with customers,
the trade and the financial community, and possess a diverse skill base which
incorporates brand marketing, multiple sourcing, off-shore production, vertical
manufacturing and MIS integration.
VERTICALLY-INTEGRATED MANUFACTURING CAPABILITIES
Carter's is a vertically-integrated manufacturer that knits, dyes, finishes,
prints, cuts, sews and embroiders approximately 80% of the products it sells.
The Company believes that its vertical integration allows it to maintain a
competitive cost structure, accelerate speed to market and provide consistent,
premium quality. Since 1992, the Company has made significant investments in
equipment, facilities and systems to improve quality, reduce costs, minimize
shrinkage, decrease inventories and shorten cycle times. In 1991, the Company
commenced off-shore sewing operations to decrease costs of sewing, typically the
most labor-intensive portion of the manufacturing process. At year-end 1996,
approximately 40% of the Company's sewing production was conducted off-shore
which reduced annual manufacturing costs by approximately $10 million. In
addition, in 1993, management initiated a substantial upgrade of its MIS
capabilities with a fully-integrated operating system designed to support the
growth of the business and to further improve manufacturing efficiencies. These
system upgrades are 65% complete and are expected to be completed in 1998.
STRONG CUSTOMER RELATIONSHIPS
Due to focused and consistent management efforts to create retail
partnerships, the Company enjoys strong relationships with its wholesale
customers, as evidenced by the nine supplier awards the Company has received
since 1992. Management meets frequently with the Company's major accounts to
review product offerings, establish and monitor sales plans and design joint
advertising and promotional campaigns. In addition, the Company has introduced
to several of its major wholesale customers, including Macy's, Bloomingdale's,
Burdine's, Rich's and JCPenney, its "store-in-store" concept in which the
Company creates a CARTER'S-brand shop within its wholesale customers' children's
apparel departments. Such store-in-store shops provide the Company with
dedicated selling space, superior and consistent brand presentation and greater
control of product mix, resulting in higher profitability and productivity for
both the Company and its wholesale customers.
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OPERATING STRATEGY
The Company intends to strengthen its market leadership positions and
further increase sales and EBITDA by continuing to implement an operating
strategy that has the following primary components:
INCREASE INVESTMENTS IN BRAND EQUITY
Management believes Carter's enjoys among the highest brand awareness of any
children's apparel company, despite having spent only $1.1 million on national
advertising in fiscal 1996. In order to capitalize further on the potential of
the CARTER'S name, the Company intends to increase its joint promotional
activities with its key wholesale accounts, accelerate the roll out of its
branded "store-in-store" shops and selectively increase its national print
advertising with heightened visibility of its tag line "If they could just stay
little 'til their CARTER'S wear out."-TM- Management believes that selective
investments in its brand will result in high returns and will help support
continued growth.
INCREASE OPERATING EFFICIENCIES
The Company's management team has successfully increased EBITDA margins from
5.5% of sales in 1992 to 9.8% of sales in fiscal 1996. The Company has achieved
these results by reducing SKUs, decreasing product complexity, upgrading
information systems and moving certain labor-intensive portions of its
production process off-shore. Management believes additional opportunities exist
to continue to reduce manufacturing costs and accelerate speed to market by
shortening cycle times, more efficiently managing inventories and further
expanding off-shore production. Management expects to increase the Company's
percentage of off-shore sewing to approximately 60% by the end of 1998 and
approximately 80% by the end of 2001, which is expected to yield incremental
cost savings in line with the Company's historical experience.
ENHANCE RETAIL OUTLET STORE PRODUCTIVITY
During the past year, the Company has emphasized improving the value,
quality and convenience of the retail shopping experience. Management has
recently increased the percentage of sleepwear and baby products in the
Company's retail product mix, which represent the Company's historical product
strengths and also carry higher margins. The Company is also reducing the
complexity and assortment of retail products offered to simplify the consumer's
shopping experience. In addition, the Company has created new consumer-friendly
store layouts, with clearly identified departments, designated clearance areas
and higher impact store fronts. Since November 1995, the Company has implemented
these new store layouts in 24 of its 135 retail outlet stores, and expects to
have this new store layout implemented in approximately 100 of its stores by the
end of 1997.
CAPITALIZE ON ADDITIONAL GROWTH OPPORTUNITIES
The Company intends to aggressively pursue selected growth opportunities in
its primary markets, including:
- Leveraging its leading positions in layette and sleepwear to increase its
share of the larger and more highly fragmented playwear market, which is
more than five times the size of the sleepwear market. Management has
recently increased the marketing focus on its playwear lines and
introduced new playwear product designs. The success of these efforts is
reflected in the 33% increase in wholesale playwear shipments from fiscal
1995 to fiscal 1996.
- Continuing to implement the Company's "store-in-store" concept. The
Company first introduced these shops in fiscal 1995, had 250 such shops at
the end of fiscal 1996 and expects to have approximately 400 such shops at
the end of fiscal 1997. Management believes that there are
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significant opportunities to expand the "store-in-store" concept
throughout its wholesale customer base.
- Leveraging the CARTER'S brand through other growth opportunities. Carter's
has recently initiated product extensions through a gift-giving program
and a renewed focus on selectively increasing licensing relationships. In
addition, Carter's is investigating opportunities for international and
direct marketing sales, alternative retail formats and brand extensions to
serve the discount channel, a market in which the Company currently does
not compete.
PRODUCTS AND MARKETS
The Company markets and manufactures a broad array of baby, toddler and
young children's apparel under the CARTER'S, CARTER'S CLASSICS and BABY DIOR
brand names. The Company's product offerings can be broadly grouped into two
primary categories: (i) "baby and toddler," which includes newborns through
toddlers approximately age three (up to size 4T); and (ii) "young children,"
which includes children approximately age three through approximately age six
(boys' sizes 4-7 and girls' sizes 4-6x). The Company's product offerings in
these categories include layette, sleepwear and playwear for the baby and
toddler market, and sleepwear and playwear for the young children's market. In
addition, the Company sells products such as diaper bags, lamps, socks,
strollers, hair accessories, outerwear, underwear and shoes, including products
for which the Company licenses the CARTER'S name.
BABY AND TODDLER
From 1991 through 1995, total industry sales of baby and toddler apparel
increased from $4.4 billion to $5.6 billion, a compound annual rate of 6.1%,
making it one of the fastest growing sectors of the apparel industry. Carter's
target distribution channels, which include department and specialty stores,
account for approximately half of this market. Carter's is currently the leading
supplier of baby and toddler apparel in the United States, with a 7.1% market
share in its target distribution channels, nearly twice that of its nearest
branded competitor. In fiscal 1996, the Company generated $253.1 million of
sales, or 87.0% of its total regular-priced sales, in the baby and toddler
apparel market.
LAYETTE. Layette includes a complete range of products primarily made of
cotton for newborns, including bodysuits, undershirts, towels, washcloths,
receiving blankets, layette gowns, bibs, caps and booties. In fiscal 1996, the
Company generated $52.6 million in sales of these products. Carter's is the
leading supplier of layette products, with an approximate 16% market share in
its target distribution channels. Management attributes Carter's leading market
position to the Company's distinctive print designs, unique embroidery and the
reputation for quality Carter's has developed over its 130 year history. The
Company is currently introducing enhancements to its layette product offerings,
including new fabrics, prints and increased embroidery, which it believes will
enhance margins. The Company's primary competitors in the layette market are
private label manufacturers.
SLEEPWEAR. Baby and toddler sleepwear includes pajamas, long underwear and
one-piece footed sleepers made out of cotton. In fiscal 1996, the Company
generated $91.3 million in sales of these products. Carter's is the leading
supplier of baby and toddler sleepwear products with an approximate 28% market
share in its target distribution channels. As in layette, management attempts to
differentiate its sleepwear products from its competition by offering
consumer-tested prints and embroideries with an emotional appeal. In addition,
management believes Carter's baby sleepwear product line, which is well-
coordinated with its layette product line, features more functional, higher
quality products than those of its competitors. The Company's primary
competitors in the baby and toddler sleepwear market are both private label
manufacturers and other branded children's apparel companies.
PLAYWEAR. Baby and toddler playwear includes cotton knit apparel for
everyday use. In fiscal 1996, the Company generated $101.6 million in sales of
these products. Although the Company has historically
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focused on strengthening its core volume layette and sleepwear products, it has
recently begun to focus on strengthening its playwear product offerings by
introducing original print designs and innovative artistic treatments in an
effort to drive sales growth and increase market share. Management believes that
these new product offerings and an increased marketing focus, in addition to
Carter's high brand name awareness and strong wholesale customer relationships,
will allow the Company's sales and market share in this category to grow. The
success of this strategy is reflected in the 33% increase in wholesale playwear
shipments from fiscal 1995 to fiscal 1996. The baby and toddler playwear market
is highly fragmented, with no one branded competitor enjoying more than a 5%
share of the market.
OTHER. Other baby and toddler products include outerwear, shoes, socks,
diaper bags, lamps and hair accessories, including products for which the
Company licenses the CARTER'S name. In fiscal 1996, the Company generated $7.6
million in sales of these products.
YOUNG CHILDREN'S
From 1991 through 1995, total industry sales of young children's apparel
increased from $4.7 billion to $5.3 billion, a compound annual rate of 2.9%.
Carter's target distribution channels, which include department and specialty
stores, account for approximately half of this market. The Company is the second
largest supplier of young children's sleepwear products, and is also a supplier
of young children's playwear products. In fiscal 1996, the Company generated
$37.9 million of sales, or 13.0% of its total regular-priced sales, in the young
children's apparel market.
SLEEPWEAR. Young children's sleepwear product offerings include basic
two-piece pajamas, long underwear and polyester blanket-fleece one-piece
sleepers. In fiscal 1996, the Company generated $23.0 million in sales of these
products. As with baby and toddler sleepwear, the Company attempts to
differentiate its young children's sleepwear products from those of its
competitors by offering consumer-tested prints and embroideries with an
emotional appeal. The Company's primary competitors in the young children's
sleepwear market are both branded children's apparel companies and private label
manufacturers.
PLAYWEAR. Young children's playwear product offerings include cotton knit
apparel for everyday use. In fiscal 1996, the Company generated $14.9 million in
sales of these products. The Company's management elected to focus initially on
strengthening the Company's core products in layette and sleepwear when it
joined the Company in 1992. The Company has recently begun to leverage its high
brand awareness and leading market shares in layette and sleepwear to increase
its sales of young children's playwear. The Company's primary competitors in the
young children's playwear market are both branded children's apparel companies
and private label manufacturers.
OTHER. Other young children's products include underwear, outerwear, shoes,
socks, lamps and hair accessories, including products for which the Company
licenses the CARTER'S name. In fiscal 1996, the Company generated $1.5 million
in royalty income from the sale of these products.
BRAND NAMES
The Company markets its products under three distinct brands, each with its
own positioning, distribution and price point. The traditional CARTER'S brand is
positioned as a premium, moderately-priced core resource for department and
specialty stores and for the Company's retail outlet stores. CARTER'S CLASSICS
products are targeted solely for the baby market and are distributed only
through department stores and the Company's retail outlet stores at a price
point approximately 15% higher than CARTER'S brand products. Management expects
to increase the price differential between CARTER'S CLASSICS and CARTER'S over
time in order to create greater brand differentiation among the Company's
brands. BABY DIOR, the Company's only licensed brand, is also produced solely
for the baby market. BABY DIOR products are sold at
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a price point approximately 100% higher than that of the CARTER'S CLASSICS
brand. In fiscal 1996, approximately 87%, 7%, and 6% of the Company's sales were
of CARTER'S, CARTER'S CLASSICS, and BABY DIOR apparel, respectively.
CARTER'S
CARTER'S products are characterized by a distinct look representing classic
yet updated styling, practical yet innovative design and childlike yet
sophisticated artistic applications. The full assortment of products provides a
24-hour dressing "system," focusing on core resources and complemented by themed
collections. CARTER'S represents the Company's opening price point and is
positioned at the upper portion of the middle market. As a result of this
positioning, CARTER'S is represented prominently throughout the Company's
targeted distribution channels (i.e., all department and specialty stores), as
well as in Carter's retail outlet stores. Management expects that growth will be
driven by product line initiatives such as fabric innovation and creative
embroidery rather than by brand repositioning. Management believes that further
growth opportunity for the CARTER'S brand lies in additional licensing
potential. Currently, the CARTER'S name appears on diaper bags, lamps, socks,
strollers, hair accessories, outerwear, underwear and shoes.
CARTER'S CLASSICS
Introduced in 1994, the CARTER'S CLASSICS brand is positioned further
upscale than the CARTER'S brand. CARTER'S CLASSICS products are offered
primarily through the department store channel of distribution, and secondarily
through the Company's retail outlet stores. The Company currently produces only
baby products under the CARTER'S CLASSICS brand name. The Company maintains a
cohesive theme in the CARTER'S CLASSICS brand as contrasted with the broad
offerings available under the CARTER'S brand; colors tend to be pastels and
naturals, more luxurious fabrics are utilized and a greater amount of embroidery
is applied. CARTER'S CLASSICS is also differentiated from CARTER'S by packaging
in softer materials and colors. As a result of its higher price point, CARTER'S
CLASSICS products provide higher margins for both the Company and its wholesale
customers.
BABY DIOR
The Company is the exclusive sub-licensee of the BABY DIOR brand name for
baby clothes through 1998. This licensing relationship began in 1978 and BABY
DIOR is now positioned as the most elegant and luxurious brand marketed by the
Company. Over the past three years, management has focused on reducing the
complexity of the BABY DIOR line. The number of SKUs has been reduced as the
Company has moved toward core products and eliminated seasonal products. The
BABY DIOR line maintains a cohesive theme through soft-pastel or white clothing
designed with a European flair. As with CARTER'S CLASSICS, this product line
provides higher margins for both the Company and its wholesale customers.
Department stores and specialty retailers, as well as Carter's retail outlet
stores, offer BABY DIOR brand products.
PRODUCT DESIGN AND DEVELOPMENT
Since joining Carter's in 1992, the Company's management team has
significantly improved the Company's product design and development process by
investing in advanced design systems, improving its design staff and introducing
proven customer marketing tools. Whereas prior to 1993 the Company utilized a
single design staff for all of its product design requirements, the Company's
product design and development organization is now comprised of teams that focus
on each of the Company's primary product markets. Each team has its own artistic
and design staff to develop new ideas specifically for its respective market.
Management believes that this organizational structure provides the Company
greater flexibility and allows it to introduce products more quickly and with a
greater success rate.
The Company's design staff continuously strives toward product innovation.
Consumer preference testing drives the product offerings and defines the look
for the brand, while a few showpieces are
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developed each season to add variety and interest. Generally, graphics and
prints are used to provide originality and depth. A sophisticated graphic
computer network enhances artistic talent.
Due to the importance of graphics and prints, the Company devotes particular
effort to consumer preference testing for colors, prints, art and silhouettes.
Each year, more than 1,000 different prints are consumer-tested, of which 40%
are eventually used. As part of the Company's extensive testing program, more
than 10,000 potential consumers are surveyed in the Company's outlet stores as
well as in geographically-diverse malls. While testing of new prints is an
important aspect of consumer research, layette prints, for example, are changed,
on average, once every two years. Prints in "basic" items are tested quarterly
by consumers as well as constantly monitored through sales data. Consumer
preference tests are also conducted on sizing and functionality for new product
introductions.
After consumer preference testing of a fabric or product occurs and internal
review committees approve selections, retailers are often shown a color drawing
in "board form" to register their reactions. Finally, product development teams
from the Company's merchandising department coordinate plans with the managers
from manufacturing to ensure cost-effective execution and quality of the
proposed item.
DISTRIBUTION AND SALES
The Company sells its products to wholesale accounts and through the
Company's retail outlet stores. In fiscal 1996, sales through the wholesale
channel accounted for 59.4% of total sales, while the retail channel accounted
for 40.6% of total sales.
WHOLESALE OPERATIONS
In fiscal 1996, more than 90% of the Company's wholesale business was
generated from department and specialty stores. The Company sells its products
in the United States to approximately 300 wholesale accounts with an estimated
4,600 store fronts through a network of 35 sales professionals. Sales
professionals work with each account in his/her jurisdiction to establish annual
plans for "basics" (primarily layette and certain baby apparel) within the
CARTER'S line, as well as all products in the CARTER'S CLASSICS and BABY DIOR
lines. Once an annual plan has been established with an account, Carter's places
the account on its semi-monthly automatic reorder plan for "basics." Management
intends to increase the number of accounts on this program to help better manage
inventories, control costs and increase sales. Automatic reorder allows the
Company to plan its manufacturing further in advance and benefits both the
Company and its wholesale customers by maximizing customers' in-stock positions,
thereby maximizing sales and profitability. Currently, Carter's non-basics
sleepwear and playwear are planned and ordered seasonally as new products are
introduced.
Since 1994 the Company has introduced its store-in-store concept to certain
locations of several of its major wholesale customers, including Macy's,
Bloomingdale's, Burdine's, Rich's and JCPenney, in which the Company creates a
Carter's-brand shop within its wholesale customers' children's apparel
departments. Sales performance at these sites has been strong, prompting
Carter's to roll this program out to more of its wholesale customers' locations.
The store-in-store shops have resulted in higher productivity and profitability
to both the Company and its wholesale customers by providing the Company with
dedicated selling space, superior and consistent brand presentation and greater
control of product mix, including the ability to dedicate more selling space to
playwear.
RETAIL OPERATIONS
The Company operates 135 retail outlet stores nationwide averaging 5,300
square feet, making it the fifteenth largest retail outlet store operator as
measured by number of stores. These stores sell all of CARTER'S products, as
well as accessories and certain items purchased from outside manufacturers which
are sold under the CARTER'S brand name. The product mix in the Company's retail
stores differs from that of its wholesale operations, with a greater amount of
playwear sold (approximately 53.6% of fiscal 1996 retail
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sales). Management believes that strong consumer acceptance of its playwear
products in its retail outlet stores is an indication of significant
opportunities to improve playwear sales through the wholesale channel as more
selling space in this channel becomes dedicated to its playwear offerings.
Although total retail sales increased at a compound annual rate of 5.7% from
fiscal 1993 through fiscal 1996 (due to new store openings), comparable store
sales have declined since 1993. In an effort to stem declining same store sales,
improve profitability and better leverage the CARTER'S brand name, management
has recently integrated the retail division with the wholesale division under
the same marketing leadership and upgraded management and retailing skills at
the corporate, regional and store levels. To improve the value, quality and
convenience of products offered in the Company's retail outlet stores,
management has: (i) enhanced the CARTER'S CLASSICS offerings; (ii) shifted the
product mix more toward sleepwear, baby and core volume products; (iii) reduced
the complexity and assortment of products offered; and (iv) further developed
the gift business through pre-assembled gift assortments.
In addition, to make the consumer's shopping experience easier and more
convenient, the Company has redesigned its store layout by widening aisles,
improving signage and creating distinct product departments, with an increased
focus on the Company's core baby products. Since the beginning of the fourth
quarter of fiscal 1995, the Company has implemented these new store layouts in
24 of its 135 retail outlet stores (17 of which were new store openings), and
expects to have the new store layout implemented in 100 of its stores by the end
of 1997. The 17 new stores which have been opened since the beginning of the
fourth quarter of fiscal 1995 have had, in recent periods, higher sales per
square foot and higher gross margins, and they carry less inventory than the
Company's other stores. As leases expire, the Company evaluates a store's
current and future prospects and determines whether to continue to operate in
that location, to relocate in that market or to cease a store's operations.
MARKETING
Management's fundamental strategy has been to promote the Company's brand
image as the absolute leader in baby apparel products and to consistently
provide high quality, attractive products at a strong perceived value to
consumers. To this end, management employs a comprehensive four-step marketing
strategy which incorporates identifying core products through extensive consumer
preference testing; superior brand and product presentation at the consumer
point-of-purchase; marketing the brand name through dominant communications; and
providing consistent, premium service, including delivering and replenishing
products at the right time to fulfill customer and consumer needs. Management
believes that the Company has further strengthened its brand image to the
consumer through innovative product designs, national print advertising, joint
mailers with wholesale customers, meetings between senior account
representatives and Carter's executives, trade show participation and
store-in-store shops.
Despite the Company's high brand awareness and substantial sales growth
during the last three years, marketing support on the whole remains low with
only $1.1 million spent on national advertising in fiscal 1996. Management
believes that selective investments in its brand will result in high returns and
will help support continued growth.
MANUFACTURING
The Company is a vertically-integrated manufacturer that knits, dyes,
finishes, prints, cuts, sews and embroiders approximately 80% of the product it
sells. The Company believes that its vertical integration allows it to maintain
a competitive cost structure, accelerate speed to market and provide consistent,
premium quality. Domestically, the Company currently operates five sewing
facilities, as well as one combination distribution and sewing facility, one
textile facility, two other stand-alone distribution centers, a cutting facility
and an embroidery facility. Internationally, the Company operates two sewing
facilities in Costa Rica and one sewing facility in the Dominican Republic.
46
<PAGE>
Despite the Company's historical operating improvements, management believes
significant additional opportunities exist to reduce product costs, shorten
cycle times and reduce inventories through the wider use of advanced information
systems, the expansion of off-shore production, reductions in SKUs and product
complexity and the enhancement of core product offerings. The Company intends to
further invest in the expansion of its off-shore sewing production capacity, as
sewing is currently the most labor-intensive portion of the Company's production
process. The Company established its first off-shore sewing production facility
in Costa Rica in 1991. The Company currently operates three off-shore sewing
plants which process approximately 40% of the Company's sewing requirements.
Management intends to increase its percentage of off-shore sewing to 60% by the
end of 1998 and 80% by the end of 2001, which is expected to yield significant
incremental cost savings in line with the Company's historical experience.
DEMOGRAPHIC TRENDS
The total U.S. apparel industry generated more than $150 billion in sales in
1995, of which approximately $23 billion was spent on children's apparel. Of the
$23 billion spent on children's apparel, approximately $5.6 billion was spent on
baby and toddler apparel, and approximately $5.3 billion was spent on young
children's apparel. From 1991 through 1995, sales of baby and toddler apparel
grew at a compound annual rate of 6.1% and sales of young children's apparel
grew at a compound annual rate of 2.9%.
Management believes that numerous demographic trends have contributed to a
particularly strong baby, toddler and young children's apparel market during the
1990s, including the following:
- WOMEN HAVING CHILDREN LATER. In 1992, more than 32% of the births which
took place in the U.S. were to women over the age of 30, which represents
a 52% increase since 1980. Of these births, 25% were first children.
Management believes these trends have led to increased spending per child
as parents tend to spend more money on their first born child and older
parents generally have more disposable income.
- MORE WOMEN RETURNING TO THE WORKPLACE AFTER HAVING CHILDREN. In 1992, 54%
of women returned to work after having a baby, a 58% increase since 1980.
Management believes this trend has had a positive effect on sales of
children's apparel as dual income families tend to have more discretionary
income and greater day care apparel needs.
- GRANDPARENT BOOM. According to the U.S. Bureau of the Census, people in
the U.S. age 45 or older numbered approximately 85.7 million in 1995. The
U.S. Bureau of the Census projects this number to increase by
approximately 25% to approximately 107.3 million by the year 2005.
Management expects that this will result in an increase in the total
number of grandparents in the U.S., which is an important demographic
segment for children's apparel manufacturers.
- INCREASED FOCUS ON CHILDREN'S CLOTHING. Management believes that there is
an increasing social emphasis on attractive children's apparel, which is
resulting in increased spending per child. As a result of this, as well as
the other factors discussed above, from 1993 through 1995, when the
population of children from ages one to six was increasing at a 0.9%
compound annual rate, sales of baby and infant apparel increased at a 4.6%
compound annual rate.
Although total births are expected to remain relatively flat through the end
of the 1990s, management believes the aforementioned demographic trends, in
addition to other non-population growth factors, will continue to drive
increased spending per child for the foreseeable future and will lead to
increased sales of children's apparel in the Company's primary markets.
47
<PAGE>
COMPETITION
The baby and toddler and young children's apparel markets are highly
competitive. Competition is generally based upon product quality, brand name
recognition, price, selection, service and convenience. Both branded and private
label manufacturers compete in the baby and toddler and young children's
markets. The Company's primary branded competitors include Health-Tex and
Oshkosh B'Gosh, together with Disney licensed products, in playwear and numerous
smaller branded companies, as well as Disney licensed products, in sleepwear.
Although management believes that the Company does not compete as directly with
most private label manufacturers in sleepwear and playwear, certain retailers,
including several which are customers of the Company, have significant private
label product offerings. The Company does not believe that it has any
significant branded competitors in its layette market in which most of the
alternative products are offered by private label manufacturers. Because of the
highly fragmented nature of the industry, the Company also competes with many
small, local manufacturers and retailers. Certain of the Company's competitors
have greater financial resources than the Company, have larger customer bases
and are less financially leveraged.
REAL PROPERTY
The Company operates 135 leased retail outlet stores located primarily in
outlet centers across the United States, having an average size of 5,300 square
feet. The leases have an average term of approximately five years until final
expiration with additional five-year renewal options. Domestically, the Company
also owns three distribution and five manufacturing facilities in Georgia and
Pennsylvania, and has ground leases on three additional manufacturing facilities
in Texas and Mississippi. Internationally, the Company leases two sewing
facilities in Costa Rica and one in the Dominican Republic.
ENVIRONMENTAL MATTERS
The Company is subject to certain Environmental Laws. The Company believes
that it currently conducts its operations, and in the past has operated its
business, in substantial compliance with applicable Environmental Laws. From
time to time, operations of the Company have resulted or may result in
noncompliance with or liability pursuant to Environmental Laws. In July and
August 1996, the Company had Reports conducted by an environmental consultant
for 13 facilities. Based on available information, including the Reports, the
Company has identified certain non-compliance with Environmental Laws. The
Company has also identified certain actions which may be required in the future.
However, the Company believes that any existing noncompliance or liability or
future requirements under the Environmental Laws would not have a material
adverse effect on its results of operations and financial condition.
PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
The Company owns many trademarks and tradenames, including
CARTER'S-REGISTERED TRADEMARK-, CARTER'S GROWBODY-REGISTERED TRADEMARK-,
CARTER-SET-REGISTERED TRADEMARK-, JAMAKINS-REGISTERED TRADEMARK-, TODAY'S
CLASSICS-REGISTERED TRADEMARK- and TYKES-REGISTERED TRADEMARK-, as well as
patents and copyrights, most of which are registered in the United States and in
46 foreign countries. The Company licenses the CARTER'S name and many of its
trademarks, tradenames and patents to third-party manufacturers to produce and
distribute children's apparel and related products such as diaper bags, lamps,
socks, strollers, hair accessories, outwear, underwear and shoes. BABY
DIOR-REGISTERED TRADEMARK- is a registered trademark sub-licensed to, but not
owned by, the Company.
EMPLOYEES
As of December 28, 1996, the Company had approximately 6,910 employees,
4,422 of which were employed on a full-time basis in the Company's domestic
operations, 1,080 of which were employed on a part-time basis in the Company's
domestic operations and 1,408 of which were employed on a full-time
48
<PAGE>
basis in the Company's foreign operations. None of the Company's employees is
unionized. The Company has had no labor-related work stoppages and believes that
its labor relations are good.
LEGAL PROCEEDINGS
From time to time, the Company has been involved in various legal
proceedings. Management believes that all of such litigation is routine in
nature and incidental to the conduct of its business, and that none of such
litigation, if determined adversely to the Company, would have a material
adverse effect on the financial condition or results of operations of the
Company.
49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors and executive officers of the Company. Each director of the Company
will hold office until the next annual meeting of shareholders of the Company or
until his successor has been elected and qualified. Officers of the Company are
elected by the Board of Directors of the Company and serve at the discretion of
the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ------------------------------ --- -------------------------------------------------------
<S> <C> <C>
Frederick J. Rowan, II........ 57 President, Chief Executive Officer and Chairman of the
Board of Directors.
Joseph Pacifico............... 47 Executive Vice President--Marketing.
Charles E. Whetzel, Jr........ 46 Executive Vice President--Manufacturing & Operations.
David A. Brown................ 39 Senior Vice President--Business Planning &
Administration and Director.
Jay A. Berman................. 46 Senior Vice President, Chief Financial Officer,
Treasurer and Director.
Christopher J. O'Brien........ 38 Director.
Charles J. Philippin.......... 46 Director.
Christopher J. Stadler........ 32 Director.
</TABLE>
FREDERICK J. ROWAN, II joined the Company in 1992 as President and Chief
Executive Officer and became Chairman of the Board of Directors of the Company
in October 1996. Prior to joining the Company, Mr. Rowan was Group Vice
President of VF Corporation, a multi-division apparel company and, among other
positions, served as President and Chief Executive Officer of both the H.D. Lee
Company and Bassett-Walker, Inc., divisions of VF Corporation. Mr. Rowan, who
has been involved in the textile and apparel industries for 32 years, has been
in senior executive positions for nearly 20 of those years. Mr. Rowan began his
career at the DuPont Corporation and later joined Aileen Inc., a manufacturer of
women's apparel, where he subsequently became President and Chief Operating
Officer.
JOSEPH PACIFICO joined the Company in 1992 as Executive Vice
President--Sales and Marketing. Mr. Pacifico began his career with VF
Corporation in 1981 as a sales representative for the H.D. Lee Company and was
promoted ultimately to the position of Vice President of Marketing in 1989, a
position he held until 1992.
CHARLES E. WHETZEL, JR. joined the Company in 1992 as Executive Vice
President--Operations. Mr. Whetzel began his career at Aileen Inc. in 1971 in
the Quality function and was later promoted to Vice President of Apparel.
Following Aileen Inc., Mr. Whetzel held positions of increasing responsibility
with Mast Industries, Health-Tex and Wellmade Industries, respectively. In 1988,
Mr. Whetzel joined Bassett-Walker, Inc. and was later promoted to Vice President
of Manufacturing for the H.D. Lee Company.
DAVID A. BROWN joined the Company in 1992 as Senior Vice
President--Business Planning and Administration and became a director of the
Company in October 1996. Prior to 1992, Mr. Brown held various positions at VF
Corporation including Vice President--Human Resources for both the H.D. Lee
Company and Bassett-Walker, Inc. Mr. Brown also held personnel-focused positions
with Blue Bell, Inc. and Milliken & Company earlier in his career.
50
<PAGE>
JAY A. BERMAN joined the Company in 1988 as Treasurer and was named Chief
Financial Officer and Senior Vice President in 1989. Mr. Berman became a
director of the Company in October 1996. Prior to joining the Company, Mr.
Berman was employed by Warnaco, Inc., where he served in various capacities from
1981 to 1988 including Treasurer and head of Financial Planning. Prior to 1981,
Mr. Berman was employed by Coopers & Lybrand and the Connecticut Savings Bank.
CHRISTOPHER J. O'BRIEN became a director of the Company in October 1996. He
has been an executive of Investcorp, its predecessor or one or more of its
wholly owned subsidiaries since December 1993. Prior to joining Investcorp, Mr.
O'Brien was a Managing Director of Mancuso & Company for four years. Mr. O'Brien
is a director of Simmons Holdings, Inc., Star Markets Holdings, Inc., Prime
Service, Inc. and CSK Auto, Inc.
CHARLES J. PHILIPPIN became a director of the Company in October 1996. He
has been an executive of Investcorp, its predecessor or one or more of its
wholly owned subsidiaries since July 1994. Prior to joining Investcorp, Mr.
Philippin was a partner of Coopers & Lybrand L.L.P. Mr. Philippin is a director
of Saks Holdings, Inc., Prime Service, Inc. and CSK Auto, Inc.
CHRISTOPHER J. STADLER became a director of the Company in October 1996. He
has been an executive of Investcorp, its predecessor or one or more of its
wholly owned subsidiaries since April 1996. Prior to joining Investcorp, Mr.
Stadler was a Director with CS First Boston Corporation. Mr. Stadler is a
director of Prime Service, Inc. and CSK Auto, Inc.
DIRECTOR COMPENSATION
The Company pays no additional remuneration to its employees or to
executives of Investcorp for serving as directors. See "--Executive
Compensation." There are no family relationships among any of the directors or
executive officers.
51
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation earned in fiscal 1996
by the Company's Chief Executive Officer and each of the other four most highly
compensated executive officers whose remuneration exceeded $100,000. The current
compensation arrangements for each of these officers are described in
"Employment Arrangements" below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
SALARY BONUS (A) COMPENSATION(B)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
- -------------------------------------------------------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Frederick J. Rowan, II ................................. 1996 475,200 469,300 6,007,875
President, Chief Executive Officer
and Chairman of the Board of Directors
Joseph Pacifico ........................................ 1996 315,000 202,100 1,418,172
Executive Vice President--Marketing
Charles E. Whetzel, Jr. ................................ 1996 208,000 169,000 1,421,962
Executive Vice President--Manufacturing & Operations
David A. Brown ......................................... 1996 197,000 126,400 1,416,526
Senior Vice President--Business Planning &
Administration and Director
Jay A. Berman .......................................... 1996 177,000 67,300 1,420,446
Senior Vice President, Chief Financial Officer,
Treasurer and Director
</TABLE>
- ------------
(a) Earned in 1996 but paid in 1997.
(b) Includes Management Equity Participation Plan and Long-Term Incentive Plan
distributions, Holdings' Class C Stock compensation, supplemental retirement
plan benefits, automobile allowances, insurance premiums, and medical cost
reimbursement.
EMPLOYMENT ARRANGEMENTS
Frederick J. Rowan, II, President and Chief Executive Officer, and the
Company entered into a three-year employment agreement as of October 30, 1996,
which automatically extends annually for successive one-year terms, subject to
termination upon notice. Pursuant to such agreement, Mr. Rowan is entitled to
receive (i) a base salary, currently $475,200 per year (subject to annual cost
of living adjustments and any increases approved by the Board of Directors),
(ii) annual cash bonuses based upon a bonus plan to be determined each year by
the Board of Directors in conjunction with the Company's achievement of targeted
performance levels as defined in the plan and (iii) certain specified fringe
benefits, including a retirement trust. If Mr. Rowan's employment with the
Company is terminated without cause (as defined), he will continue to receive
his then current salary for the remainder of the employment term and the Company
will maintain certain fringe benefits on his behalf until either the expiration
of the remainder of the employment term or his 65th birthday. Mr. Rowan has
agreed not to compete with the Company for the two-year period following the end
of his employment with the Company, unless he is terminated without cause, in
which case the duration of such period is one year.
52
<PAGE>
Joseph Pacifico, Charles E. Whetzel, Jr., David A. Brown and Jay A. Berman
(each, an "Executive") entered into two-year employment agreements with the
Company as of October 30, 1996, which automatically extend annually for
successive one-year terms, subject to termination upon notice. Pursuant to such
agreements, Messrs. Pacifico, Whetzel, Brown and Berman are entitled to receive
(i) a base salary, currently $315,000, $208,000, $197,000 and $177,000,
respectively (subject to annual cost of living adjustments and any increases
approved by the Board of Directors), (ii) annual cash bonuses based upon a bonus
plan to be determined each year by the Board of Directors and (iii) certain
specified fringe benefits. If an Executive's employment with the Company is
terminated without cause (as defined), he will continue to receive his then
current salary for the remainder of the employment term and the Company will
maintain certain fringe benefits on his behalf until either the expiration of
the remainder of the employment term or his 65th birthday. Each Executive has
agreed not to compete with the Company for a one-year period following the end
of his employment with the Company, unless he is terminated without cause, in
which case the duration of such period is six months. All executive officers are
eligible to participate in the Company's Annual Cash Bonus Plan, payments under
which are based upon the Company's achievement of targeted performance levels as
determined by the Board of Directors.
MANAGEMENT STOCK INCENTIVE PLAN
Upon the consummation of the Acquisition, Holdings adopted a Management
Stock Incentive Plan (the "Plan"), in order to provide incentives to employees
and directors of Holdings and the Company by granting them awards tied to the
Class C Stock of Holdings. The Plan is administered by a committee of the Board
of Directors of Holdings (the "Compensation Committee"), which has broad
authority to administer and interpret the Plan. Awards to employees are not
restricted to any specified form or structure and may include, without
limitation, restricted stock, stock options, deferred stock or stock
appreciation rights (collectively, "Awards"). Options granted under the Plan may
be options intended to qualify as incentive stock options under Section 422 of
the Code or options not intended to so qualify. An Award granted under the Plan
to an employee may include a provision terminating the Award upon termination of
employment under certain circumstances or accelerating the receipt of benefits
upon the occurrence of specified events, including, at the discretion of the
Compensation Committee, any change of control of the Company.
In connection with the Acquisition, Holdings granted options to purchase up
to 75,268 shares of its Class C Stock to certain members of the Company's senior
management, other officers and employees of the Company. The exercise price of
each such option is $60.00 per share, which is the same price per share paid by
existing holders of Class C Stock of Holdings to acquire such Class C Stock. The
exercise price of each option granted in the future will be equal to the fair
market value of the Company's common stock at the time of the grant. Each option
will be subject to certain vesting provisions. To the extent not earlier vested
or terminated, all options will vest on the tenth anniversary of the date of
grant and will expire 30 days thereafter if not exercised.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 13 of Chapter 156B of the Massachusetts Business Corporation Law
(the "MBCL") authorizes a Massachusetts corporation to include a provision in
its articles of organization limiting or eliminating the personal liability of
its directors to the corporation and its shareholders for monetary damages for
breach of the directors' fiduciary duty of care. The duty of care requires that,
when acting on behalf of the corporation, directors exercise an informed
business judgment based on all material information reasonably available to
them. Absent the limitations authorized by such provision, directors are
accountable to corporations and their shareholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Although Section 13 of Chapter 156B of the MBCL does not change a director's
duty of care, it enables corporations to limit available relief to equitable
remedies such as injunction or rescission. The Company's Articles of
Organization and Bylaws include provisions which limit or eliminate the personal
liability of its directors to the fullest extent permitted by Section 13 of
53
<PAGE>
Chapter 156B of the MBCL. Consequently, a director or officer will not be
personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for (i) any breach of the
director's duty of loyalty to the Company or its shareholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases, redemptions, loans or other distributions and (iv) any transaction
from which the director derived an improper personal benefit.
The Company's Bylaws also provide, in effect, to the fullest extent under
the circumstances permitted by Section 67 of Chapter 156B of the MBCL, the
Company will indemnify any person who was or is made a party or is threatened to
be made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he or she is or was a director or an officer of the Company or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation or enterprise. The inclusion of these indemnification
provisions in the Company's Articles of Organization and Bylaws is intended to
enable the Company to attract qualified persons to serve as directors and
officers who might otherwise be reluctant to do so. The Company may, in it
discretion, similarly indemnify its employees and agents.
Depending upon the character of the proceeding, the Company may indemnify
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with any action,
suit or proceeding if the person indemnified acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, had no
cause to believe his or her conduct was unlawful. To the extent that a director
or officer of the Company has been successful in the defense of any action, suit
or proceeding referred to above, the Company would have the right to indemnify
him or her against expenses (including attorneys' fees) actually and reasonably
incurred in connection therewith.
54
<PAGE>
OWNERSHIP OF VOTING SECURITIES
All of the Company's issued and outstanding capital stock is owned by
Holdings. Class D Stock, par value $.01 per share, is the only class of
Holdings' stock that currently possesses voting rights. At January 31, 1997,
there were 5,000 shares of Holdings' Class D Stock issued and outstanding.
Members of the Company's management own 143,490 shares of Class C Stock of
Holdings, which stock has no voting rights except in certain limited
circumstances. The following table sets forth the beneficial ownership of each
class of issued and outstanding securities of Holdings, as of the date hereof,
by each director of the Company, each of the executive officers of the Company
listed under "Management," the directors and executive officers of the Company
as a group and each person who beneficially owns more than 5% of the outstanding
shares of any class of voting securities of Holdings.
CLASS D VOTING STOCK:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME SHARES (A) CLASS (A)
- ---------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
INVESTCORP S.A.(b)(c)................................................. 5,000 100.0%
SIPCO Limited(d)...................................................... 5,000 100.0
CIP Limited(e)(f)..................................................... 4,600 92.0
Ballet Limited(e)(f).................................................. 460 9.2
Denary Limited(e)(f).................................................. 460 9.2
Gleam Limited(e)(f)................................................... 460 9.2
Highlands Limited(e)(f)............................................... 460 9.2
Noble Limited(e)(f)................................................... 460 9.2
Outrigger Limited(e)(f)............................................... 460 9.2
Quill Limited(e)(f)................................................... 460 9.2
Radial Limited(e)(f).................................................. 460 9.2
Shoreline Limited(e)(f)............................................... 460 9.2
Zinnia Limited(e)(f).................................................. 460 9.2
INVESTCORP Investment Equity Limited(c)............................... 400 8.0
</TABLE>
- ------------
(a) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power
to dispose, or direct the disposition of, a security.
(b) Investcorp does not directly own any stock in Holdings. The number of shares
shown as owned by Investcorp includes all of the shares owned by INVESTCORP
Investment Equity Limited (see (c) below). Investcorp owns no stock in
Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble
Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline
Limited, Zinnia Limited, or in the beneficial owners of these entities (see
(f) below). Investcorp may be deemed to share beneficial ownership of the
shares of voting stock held by these entities because the entities have
entered into revocable management services or similar agreements with an
affiliate of Investcorp, pursuant to which each of such entities has granted
such affiliate the authority to direct the voting and disposition of the
Holdings voting stock owned by such entity for so long as such agreement is
in effect. Investcorp is a Luxembourg corporation with its address at 37 rue
Notre-Dame, Luxembourg.
(c) INVESTCORP Investment Equity Limited is a Cayman Islands corporation, and a
wholly-owned subsidiary of Investcorp, with its address at P.O. Box 1111,
West Wind Building, George Town, Grand Cayman, Cayman Islands.
(d) SIPCO Limited may be deemed to control Investcorp through its ownership of a
majority of a company's stock that indirectly owns a majority of
Investcorp's shares. SIPCO Limited's address is P.O. Box 1111, West Wind
Building, George Town, Grand Cayman, Cayman Islands.
(e) CIP ("CIP") owns no stock in Holdings. CIP indirectly owns less than 0.1 %
of the stock in each of Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinnia Limited (see (f) below). CIP may be
deemed to share beneficial ownership of the shares of voting stock of
Holdings held by such entities because CIP acts as a director of such
entities and the ultimate beneficial shareholders of each of those entities
have granted to CIP revocable proxies in companies that own those entities'
stock. None of the ultimate beneficial owners of such entities beneficially
owns individually more than 5% of Holdings' voting stock.
(f) Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinnia Limited is a Cayman Islands
corporation with its address at P.O. Box 2197, West Wind Building, George
Town, Grand Cayman, Cayman Islands.
55
<PAGE>
CLASS C NON-VOTING STOCK:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES (A)
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Frederick J. Rowan, II(b)......................................................... 56,649
Joseph Pacifico(b)................................................................ 15,051
Charles E. Whetzel, Jr.(b)........................................................ 15,051
David A. Brown(b)................................................................. 15,051
Jay A. Berman(c).................................................................. 15,051
All directors and executive officers of the Company as a group (8 persons)........ 116,854
</TABLE>
- ------------
(a) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power
to dispose, or direct the disposition of, a security.
(b) The address of each of Messrs. Rowan, Pacifico, Whetzel and Brown is c/o the
Company, 1590 Adamson Parkway, Suite 400, Morrow, Georgia 30260.
(c) The address of Mr. Berman is c/o the Company, 1000 Bridgeport Avenue, P.O.
Box 879, Shelton, Connecticut 06484.
CERTAIN TRANSACTIONS
Holdings was formed to consummate the Acquisition on behalf of affiliates of
Investcorp, management and certain other investors. Financing for the
Acquisition was provided in part by $70.9 million of capital provided by
affiliates of Investcorp and other investors. In addition, certain employees of
the Company exchanged capital stock of the Company with an aggregate value of
$9.1 million for non-voting stock of Holdings, representing approximately 15% of
the outstanding equity of Holdings.
In connection with the issuance by Holdings of $20.0 million of senior
subordinated debt, Invifin SA ("Invifin"), an affiliate of Investcorp, received
a fee of $2.2 million. In connection with the Acquisition, the Company paid
Investcorp International Inc. ("International") advisory fees aggregating $2.25
million. Holdings also paid $1.5 million to Invifin in fees in connection with
providing a standby commitment for up to $100.0 million to fund the Acquisition.
In connection with the closing of the Acquisition, the Company entered into an
agreement for management advisory and consulting services (the "Management
Agreement") with International pursuant to which the Company agreed to pay
International $1.35 million per annum for a five-year term. At the closing of
the Acquisition, the Company paid International $4.05 million for the first
three years of the term of the Management Agreement in accordance with its
terms. Upon the Acquisition, the Company was required to pay the Management
Payments in an aggregate amount of $11.3 million to certain members of
management.
In October 1996, the Company made a $1.5 million loan to an officer. The
loan has a term of five years, is secured by the officer's stock of Holdings and
bears interest at 6.49%, compounded semi-annually. The loan is prepayable with
the proceeds of any disposition by the officer of his stock in Holdings.
CAPITAL STRUCTURE
SENIOR CREDIT FACILITY
GENERAL. The Senior Credit Facility, dated as of October 30, 1996, among
the Company, the several lenders from time to time parties thereto
(collectively, the "Lenders") and The Chase Manhattan Bank, as administrative
agent for the Lenders (the "Administrative Agent"), provides for a $100.0
million term and revolving loan credit facility (the "Loans").
At December 28, 1996, the amount under the revolving credit portion of the
Senior Credit Facility that was available to be drawn was approximately $50
million, excluding $4.2 million that was reserved in
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respect of the Company's obligations under outstanding letters of credit. The
remaining availability under the revolving credit facility may be utilized to
meet the Company's current working capital requirements, including issuance of
stand-by and trade letters of credit. The Company also may utilize the remaining
availability under the revolving credit facility to fund acquisitions and
capital expenditures.
The Loans are collateralized by a first priority security interest in
substantially all the personal property and certain real property of the Company
and a pledge of all the issued and outstanding stock of the Company and its
domestic subsidiary, as well as 65% of the issued and outstanding stock of the
Company's foreign subsidiaries. Upon the request of the Administrative Agent,
any domestic subsidiary of the Company formed in the future that has material
assets will also be required to issue a guarantee of the Loans which will be
secured by a first priority security interest in substantially all personal
property of such subsidiary, and, upon the request of the Administrative Agent,
the Company will be required to pledge the issued and outstanding capital stock
of such subsidiary owned by the Company or any of its subsidiaries or up to 65%
of the issued and outstanding capital stock of any foreign subsidiary owned by
the Company or any of its subsidiaries that has material assets to secure
indebtedness under the Senior Credit Facility.
TERM LOANS. The Senior Credit Facility provides for a $50.0 million Tranche
B term loan facility. The Tranche B term loans have a final scheduled maturity
date of October 31, 2003. The principal amounts of the Tranche B term loans are
required to be repaid in 14 consecutive semi-annual installments totaling $1.0
million in each of fiscal years 1997 through 2000, $6.0 million in fiscal year
2001, $15.0 million in fiscal year 2002 and $25.0 million in fiscal year 2003.
In November 1996, the term loan was reduced by $5.0 million with proceeds from
the issuance of the Old Notes. The future scheduled payments under the Senior
Credit Facility will be reduced ratably for this payment.
REVOLVING CREDIT FACILITY. The Senior Credit Facility provides for a $50.0
million revolving credit facility. The revolving credit facility will expire on
the earlier of (a) October 31, 2001 and (b) such other date as the revolving
credit commitments thereunder shall terminate in accordance with the terms of
the Senior Credit Facility.
INTEREST RATES. Borrowings under the Senior Credit Facility accrue interest
at either the Alternate Base Rate (the "Alternate Base Rate") or an adjusted
Eurodollar Rate (the "Eurodollar Rate"), at the option of the Company, plus the
applicable interest margin. The Alternate Base Rate at any time is determined to
be the highest of (i) the Federal Effective Funds Rate plus 1/2 of 1% per annum,
(ii) the Base CD Rate plus 1% per annum and (iii) The Chase Manhattan Bank's
Prime Rate. The applicable interest margin with respect to loans made under the
revolving credit facility is 2.50% per annum with respect to loans that accrue
interest at the Eurodollar Rate and 1.50% per annum for loans that accrue
interest at the Alternate Base Rate. The applicable interest margin with respect
to Tranche B term loans is 3.00% per annum for loans that accrue interest at the
Eurodollar Rate and 2.00% per annum for loans that accrue interest at the
Alternate Base Rate.
MANDATORY AND OPTIONAL PREPAYMENTS. The Senior Credit Facility requires
that upon a public offering by the Company, Holdings or any subsidiary of the
Company of its common or other voting stock, 50% of the net proceeds from such
offering (only after the redemption or repurchase or cancellation of the
Preferred Stock and the redemption of up to 35% of the Notes) is required to be
applied toward the prepayment of indebtedness under the Senior Credit Facility.
Upon the incurrence of any additional indebtedness (other than indebtedness
permitted under the Senior Credit Facility), or upon the receipt of proceeds
from certain asset sales and exchanges, 100% of the net proceeds from such
incurrence, sale or exchange is required to be so applied. In addition, the
Senior Credit Facility requires that either 75% or 50% (depending on certain
circumstances) of Excess Cash Flow (as defined in the Senior Credit Facility) is
required to be applied toward the prepayment of indebtedness under the Senior
Credit Facility. Such prepayments are required to be applied first to the
prepayment of the term loans and, second, to reduce permanently the revolving
credit commitments. Subject to certain conditions, the Company may, from time to
time, make optional prepayments of Loans without premium or penalty.
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COVENANTS. The Senior Credit Facility imposes certain covenants and other
requirements on the Company and its subsidiaries. In general, the affirmative
covenants provide for mandatory reporting by the Company of financial and other
information to the Lenders and notice by the Company to the Lenders upon the
occurrence of certain events. The affirmative covenants also include standard
operating covenants requiring the Company to operate its business in an orderly
manner consistent with past practice.
The Senior Credit Facility also contains certain negative covenants and
restrictions on actions by the Company and its subsidiaries that, among other
things, restrict: (i) the incurrence and existence of indebtedness, (ii)
consolidations, mergers and sales of assets; (iii) the incurrence and existence
of liens or other encumbrances; (iv) the incurrence and existence of contingent
obligations; (v) the payment of dividends and repurchases of common stock; (vi)
prepayments and amendments of certain subordinated debt instruments (including
the Notes and the Indenture) and equity; (vii) investments, loans and advances;
(viii) capital expenditures; (ix) changes in fiscal year; (x) certain
transactions with affiliates; and (xi) changes in lines of business. In
addition, the Senior Credit Facility requires that the Company comply with
specified financial ratios and tests, including minimum cash flow, a maximum
ratio of indebtedness to cash flow and a minimum interest coverage ratio.
EVENTS OF DEFAULT. The Senior Credit Facility specifies certain customary
events of default including non-payment of principal, interest or fees,
violation of covenants, inaccuracy of representations and warranties in any
material respect, cross default and cross-acceleration to certain other
indebtedness and agreements, bankruptcy and insolvency events, material
judgments and liabilities, change of control, unenforceability of certain
documents under the Senior Credit Facility and any amendment or other
modification of the Subordinated Loan Facility or the Notes made without all
required written consents in accordance with the terms of the Senior Credit
Facility. If certain bankruptcy and insolvency events of default occur, then all
amounts owing under the Senior Credit Facility become immediately due and
payable. If any other event of default occurs, and so long as such event of
default continues, the Administrative Agent may, with the consent of, or shall
upon the request of, a majority of the Lenders, declare all amounts owing under
the Senior Credit Facility to be due and payable.
FEES AND EXPENSES. The Company is required to pay to the Administrative
Agent an agent's fee in an amount agreed between the Company and the
Administrative Agent.
The description of the Senior Credit Facility set forth above does not
purport to be complete and is qualified in its entirety by reference to the
Senior Credit Facility, which is available upon request from the Company.
PREFERRED STOCK
The Company is authorized to issue 5,000 shares of preferred stock, par
value $.01 per share. At January 31, 1997, there were 5,000 shares of Preferred
Stock outstanding, all of which were held by Holdings.
Dividends on the Preferred Stock accrue at a rate of 12% per annum.
Dividends are cumulative and are payable when and as declared by the Board of
Directors of the Company, out of assets legally available therefor, on May 1 and
November 1 of each year, commencing on May 1, 1997. To the extent that dividends
are accrued, but have not been declared and paid, such undeclared and unpaid
dividends will accrue additional dividends from the date upon which such
dividends accrued until the date upon which they are paid at the rate of 14% per
annum.
The shares of Preferred Stock are redeemable at the option of the Company at
a redemption price of $4,000 per share plus accrued and unpaid dividends thereon
to the date fixed for redemption. If permitted under the Senior Credit Facility
and the Indenture, the shares of Preferred Stock may be redeemed in whole, or in
not more than two partial redemptions, provided that in the first of such two
partial redemptions not less than 50% of the number of shares of Preferred Stock
then outstanding shall be
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redeemed, and that in the second of such two partial redemptions all of the
shares of Preferred Stock then outstanding shall be redeemed. On December 15,
2007, the Company is required to redeem all outstanding shares of Preferred
Stock at a redemption price of $4,000 per share plus accrued and unpaid
dividends thereon to the date fixed for redemption. All outstanding shares of
Preferred Stock are pledged to secure the Company's obligations under the Senior
Credit Facility.
The shares of Preferred Stock have no voting rights, other than as provided
by Massachusetts law. However, the consent of holders of at least a majority of
all of the shares of Preferred Stock is necessary for authorizing, effecting or
validating the amendment, alteration or repeal of any of the provisions of the
Articles of Organization of the Company or of any amendatory statement thereto
(including any statement with respect to shares or any similar document relating
to any series of Preferred Stock) so as to affect materially and adversely the
rights, preferences, privileges or voting power of shares of the Preferred
Stock.
In the event of any involuntary or voluntary liquidation, dissolution or
winding-up of the affairs of the Company, the holders of the Preferred Stock are
entitled to receive out of the assets of the Company available for distribution
to shareholders, before any payment or distribution shall be made on any common
stock or on any other class of stock ranking junior to the Preferred Stock upon
liquidation, the amount of $4,000 per share, plus a sum equal to all dividends
on such shares accrued and unpaid thereon to the date of final distribution.
COMMON STOCK
The authorized common stock of the Company consists of 1,000 shares of
common stock, par value $.01 per share ("Common Stock"). At January 31, 1997,
there were 1,000 shares of Common Stock issued and outstanding, all of which are
held of record by Holdings. All outstanding shares of Common Stock are pledged
to secure the Company's obligations under the Senior Credit Facility. Each share
of Common Stock entitles the holder thereof to one vote on all matters to be
voted on by shareholders of the Company. Pursuant to the restrictions contained
in the Senior Credit Facility and the Indenture, the Company is not expected to
be able to pay dividends on its Common Stock for the foreseeable future, other
than certain limited dividends permitted by the Senior Credit Facility and the
Indenture. In the event of a liquidation, dissolution or winding-up of the
Company, the holders of the Common Stock are entitled to share in the remaining
assets of the Company after payment of all liabilities (including payments
required to be made to holders of the Notes) and after satisfaction of all
liquidation preferences payable to the holders of all shares of stock ranking
senior to the Common Stock in respect of any distribution upon the liquidation,
dissolution or winding-up of the Company. The Common Stock has no pre-emptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of the Common Stock are fully paid and non-assessable.
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DESCRIPTION OF NOTES
GENERAL
The New Notes are to be issued under an Indenture, dated as of November 25,
1996 (the "Indenture"), between the Company and State Street Bank and Trust
Company, as Trustee (the "Trustee"), a copy of which is available upon request
to the Company.
The following summary of certain provisions of the Indenture and the Notes
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939, as amended ("TIA"). Capitalized terms used herein
and not otherwise defined have the meanings set forth in "--Certain
Definitions."
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee's agent, at State Street Bank and
Trust Company N.A., 61 Broadway, Concourse Level, Corporate Trust Window, New
York, New York 10006), except that, at the option of the Company, payment of
interest may be made by check mailed to the addresses of the Holders as such
addresses appear in the Note Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes will be unsecured senior subordinated obligations of the Company,
limited to $100.0 million aggregate principal amount, and will mature on
December 1, 2006. Each Note will bear interest at a rate per annum shown on the
front cover of this Prospectus from November 25, 1996, or from the most recent
date to which interest has been paid or provided for, payable semiannually to
Holders at the close of business on the May 15 or November 15 immediately
preceding the interest payment date on June 1 and December 1 of each year,
commencing June 1, 1997.
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the option of
the Company prior to December 1, 2001. On and after such date, the Notes will be
redeemable, at the Company's option, in whole or in part, at any time upon not
less than 30 nor more than 60 days prior notice mailed by first-class mail to
each Holder's registered address, at the following redemption prices (expressed
in percentages of principal amount), plus accrued interest to the Redemption
Date (subject to the right of Holders on the relevant record date to receive
interest due on the relevant interest payment date):
If redeemed during the 12-month period commencing on December 1 of the years
set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------------------------------------------------------------------------------- -----------
<S> <C>
2001........................................................................... 105.188%
2002........................................................................... 103.458%
2003........................................................................... 101.729%
2004 and thereafter............................................................ 100.000%
</TABLE>
In addition, at any time and from time to time on or prior to December 1,
1999, the Company may redeem in the aggregate up to 35% of the original
aggregate principal amount of Notes with the proceeds of one or more Public
Equity Offerings by Holdings (so long as substantially all its assets consist of
its
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investment in the Company) or the Company following which there is a Public
Market, at a redemption price (expressed as a percentage of principal amount) of
110.375% plus accrued interest to the Redemption Date (subject to the right of
Holders on the relevant record date to receive interest due on the relevant
interest payment date); PROVIDED, HOWEVER, that at least 65% of the aggregate
principal amount of the Notes originally issued must remain outstanding after
each such redemption.
At any time on or prior to December 1, 2001, the Notes may also be redeemed
as a whole but not in part at the option of the Company upon the occurrence of a
Change of Control, upon not less than 30 nor more than 60 days' prior notice
(but in no event more than 90 days after the occurrence of such Change of
Control) mailed by first-class mail to each Holder's registered address, at a
redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium as of, and accrued but unpaid interest, if any, to, the
Redemption Date (subject to the right of Holders on the relevant record date to
receive interest due on the relevant interest payment date).
"Applicable Premium" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Note and (ii) the excess
of (A) the present value at such time of (1) the redemption price of such Note
at December 1, 2001 (such redemption price being described under "-- Optional
Redemption") plus (2) all required interest payments (excluding accrued but
unpaid interest) due on such Note through December 1, 2001, computed using a
discount rate equal to the Treasury Rate plus 100 basis points, over (B) the
principal amount of such Note.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H. 15(519)
which has become publicly available at least two Business Days prior to the
Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the Redemption Date to December 1, 2001, PROVIDED, HOWEVER, that if
the period from the Redemption Date to December 1, 2001 is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the Redemption Date to December 1, 2001 is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
SELECTION
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a PRO RATA basis, by lot or by such other method
as the Trustee in its sole discretion shall deem to be fair and appropriate,
provided that no Note of $1,000 in original principal amount or less will be
redeemed in part. If any Note is to be redeemed in part only, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.
RANKING
The payment of the principal of, premium (if any) and interest on the Notes
is subordinated in right of payment, as set forth in the Indenture, to the
payment when due of all Senior Indebtedness of the Company. However, payment
from the money or the proceeds of U.S. Government Obligations held in any
defeasance trust described under "Defeasance" below is not subordinated to any
Senior Indebtedness or subject to the restrictions described herein. At December
28, 1996, the outstanding Senior Indebtedness of the Company was $45.0 million.
Although the Indenture contains limitations on the amount of additional
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Indebtedness which the Company may incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may be Senior Indebtedness. See "--Certain Covenants--Limitation on
Indebtedness" below.
"Senior Indebtedness" whether outstanding on the date of the Indenture or
thereafter issued, is defined as: (i) all obligations consisting of the Bank
Indebtedness; (ii) all obligations consisting of the principal of and premium,
if any, and accrued and unpaid interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company regardless of whether post-filing interest is allowed in such
proceeding) in respect of (A) indebtedness of the Company for money borrowed and
(B) indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which the Company is responsible or liable; (iii)
all Capitalized Lease Obligations of the Company; (iv) all obligations of the
Company (A) for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (B) under Hedging Obligations
entered into in respect of any obligations described in clauses (i), (ii) and
(iii) or (C) the deferred purchase price of newly acquired property, or the
price of construction or improvement of any property, in each case used in the
ordinary course of business of the Company and its Subsidiaries, whether such
indebtedness is owed to the seller or Person carrying out such construction or
improvement or to any third party; (v) all obligations of other persons of the
type referred to in clauses (ii), (iii) and (iv) and all dividends of other
persons for the payment of which, in either case, the Company is responsible or
liable, directly or indirectly, as obligor, guarantor or otherwise, including
Guarantees of such obligations and dividends; and (vi) all obligations of the
Company consisting of modifications, renewals, extensions, replacements and
refundings of any obligations described in clauses (i), (ii), (iii), (iv) or
(v); unless, in each case in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that such obligations
are not superior in right of payment to the Notes; PROVIDED, HOWEVER, that
Senior Indebtedness will not include (1) any obligation of the Company to any
Subsidiary, (2) any liability for Federal, state, local or other taxes owed or
owing by the Company, (3) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities), (4) any Indebtedness,
Guarantee or obligation of the Company that is subordinate or junior to any
other Indebtedness, Guarantee or obligation of the Company or (5) any
Indebtedness that is incurred in violation of the Indenture. If any Designated
Senior Indebtedness is disallowed, avoided or subordinated pursuant to the
provisions of Section 548 of Title 11 of the United States Code or any
applicable state fraudulent conveyance law, such Designated Senior Indebtedness
nevertheless will constitute Senior Indebtedness.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes in accordance with the provisions of the Indenture. The
Notes will in all respects rank PARI PASSU with all Indebtedness of the Company
other than Senior Indebtedness or Subordinated Obligations. The Company has
agreed in the Indenture that it will not incur, directly or indirectly, any
Indebtedness which is subordinate or junior in right of payment to Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is
expressly subordinated in right of payment to Senior Subordinated Indebtedness.
Unsecured Indebtedness is not deemed to be subordinate or junior to secured
Indebtedness merely because it is unsecured.
The Company may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not otherwise purchase or retire any Notes
(collectively, "pay the Notes") if (i) any Senior Indebtedness is not paid as
and when due or (ii) any other default on Senior Indebtedness occurs and the
maturity of such Senior Indebtedness is accelerated in accordance with its terms
unless, in either case, the default has been cured or waived and any such
acceleration has been rescinded or such Senior Indebtedness has been paid in
full. However, the Company may pay the Notes without regard to the foregoing if
the Company and the Trustee receive written notice approving such payment from
the Representative of the Designated Senior Indebtedness with respect to which
either of the events set forth in clause (i) or (ii) of the immediately
preceding
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sentence has occurred and is continuing. During the continuance of any default
(other than a default described in clause (i) or (ii) of the second preceding
sentence) with respect to any Designated Senior Indebtedness pursuant to which
the maturity thereof may be accelerated immediately without further notice
(except such notice as may be required to effect such acceleration) or the
expiration of any applicable grace periods, the Company may not pay the Notes
for a period (a "Payment Blockage Period") commencing upon the receipt by the
Trustee (with a copy to the Company) of written notice (a "Blockage Notice") of
such default from the Representative of the Designated Senior Indebtedness
specifying an election to effect a Payment Blockage Period and ending 179 days
thereafter (or earlier if such Payment Blockage Period is terminated (i) by
written notice to the Trustee and the Company from the Person or Persons who
gave such Blockage Notice, (ii) because the default giving rise to such Blockage
Notice is no longer continuing or (iii) because such Designated Senior
Indebtedness has been repaid in full). Notwithstanding the provisions described
in the immediately preceding sentence, unless the holders of such Designated
Senior Indebtedness or the Representative of such holders have accelerated the
maturity of such Designated Senior Indebtedness, the Company may resume payments
on the Notes after the end of such payment Blockage Period. Not more than one
Blockage Notice may be given in any consecutive 360-day period, irrespective of
the number of defaults with respect to Designated Senior Indebtedness during
such period. However, if any Blockage Notice within such 360-day period is given
by or on behalf of any holders of Designated Senior Indebtedness (other than the
Bank Indebtedness), the Representative of the Bank Indebtedness may give another
Blockage Notice within such period. In no event, however, may the total number
of days during which any Payment Blockage Period or Periods is in effect exceed
179 days in the aggregate during any consecutive 360-day period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution, whether voluntary or involuntary, or any
reorganization, bankruptcy or receivership of or similar proceeding relating to
the Company or its property, or any assignment for the benefit of creditors or
other marshalling of assets or liabilities of the Company, the holders of Senior
Indebtedness will be entitled to receive payment in full of the Senior
Indebtedness before the Noteholders are entitled to receive any payment and
until the Senior Indebtedness is paid in full, any payment or distribution to
which Noteholders would be entitled, but for the subordination provisions of the
Indenture, will be made to holders of the Senior Indebtedness as their interest
may appear. If a distribution is made to Noteholders that, due to the
subordination provisions, should not have been made to them, such Noteholders
are required to hold it in trust for the holders of Senior Indebtedness and
promptly pay it over to them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of the Designated
Senior Indebtedness or the Representative of such holders of the acceleration.
The Company may not pay the Notes until five Business Days after such holders or
the Representative of the Designated Senior Indebtedness receive notice of such
acceleration and, thereafter, may pay the Notes only if the subordination
provisions of the Indenture otherwise permit payment at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the Noteholders, and creditors of
the Company who are not holders of Senior Indebtedness or of Senior Subordinated
Indebtedness (including the Notes) may recover less, ratably, than holders of
Senior Indebtedness and may recover more, ratably, than the holders of Senior
Subordinated Indebtedness (including the Notes).
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require the Company to repurchase
all or any part of such Holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
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date of purchase (subject to the right of Holders on the relevant record date to
receive interest due on the relevant interest payment date):
(i) prior to the first public offering of Voting Stock of the Company or
Holdings, as the case may be, the Permitted Holders cease to be the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, of majority voting power of the Voting Stock
of Holdings or Holdings shall cease to own 100% of the issued and
outstanding Voting Stock of the Company, whether as a result of issuance of
securities of the Company or Holdings, as the case may be, any merger,
consolidation, liquidation or dissolution of the Company or Holdings, as the
case may be, any direct or indirect transfer of securities by any Permitted
Holder or otherwise (for purposes of this clause (i) and clause (ii) below,
the Permitted Holders will be deemed to beneficially own any Voting Stock of
a corporation (the "specified corporation") held by any other corporation
(the "parent corporation") so long as the Permitted Holders beneficially own
(as so defined), directly or indirectly, a majority of the Voting Stock of
the parent corporation);
(ii) following the first public offering of Voting Stock of the Company
or Holdings, as the case may be, any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), other than one or more
Permitted Holders, is or becomes the beneficial owner (as defined in clause
(i) above, except that a person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 40% of the total voting power of
the Voting Stock of the Company or Holdings, as the case may be; provided
that Permitted Holders beneficially own (as defined in clause (i) above),
directly or indirectly, in the aggregate a lesser percentage of the total
voting power of the Voting Stock of the Company or Holdings, as the case may
be, than such other person and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a majority
of the board of directors of the Company or Holdings, as the case may be
(for purposes of this clause (ii), such other person shall be deemed to
beneficially own any Voting Stock of a specified corporation held by a
parent corporation, if such other person "beneficially owns" (as defined in
this clause (ii)), directly or indirectly, more than 40% of the voting power
of the Voting Stock of such parent corporation and the Permitted Holders
"beneficially own" (as defined in clause (i) above), directly or indirectly,
in the aggregate a lesser percentage of the voting power of the Voting Stock
of such parent corporation and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a majority
of the board of directors of such parent corporation); or
(iii) following the first public offering of Voting Stock of the Company
or Holdings, as the case may be, (a) any person (other than Investcorp, its
Affiliates and members of the Management Group, or their designated board
members) nominates one or more individuals for election to the board of
directors of the Company or Holdings, as the case may be, and solicits
proxies, authorizations or consents in connection therewith and (b) as a
result, such number of nominees elected to serve on the board of directors
represents a majority of the board of directors of the Company or Holdings,
as the case may be, following such election.
In the event that at the time of such Change of Control the terms of the
Bank Indebtedness restrict or prohibit the repurchase of Notes pursuant to this
covenant, then prior to the mailing of the notice to Holders provided for in the
immediately following paragraph but in any event within 30 days following any
Change of Control, the Company shall (i) repay in full all Bank Indebtedness or
offer to repay in full all Bank Indebtedness and repay the Bank Indebtedness of
each lender who has accepted such offer or (ii) obtain the requisite consent
under the agreements governing the Bank Indebtedness to permit the repurchase of
the Notes as provided for in the immediately following paragraph, unless notice
of redemption of all of the Notes has been given pursuant to the fourth
paragraph of "Optional Redemption" above and such redemption is permitted by the
terms of the Bank Indebtedness (or the requisite number of lenders thereof has
consented thereto).
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Within 30 days following any Change of Control, unless notice of redemption
of the Notes has then been given pursuant to the fourth paragraph of "Optional
Redemption" above, the Company shall mail a notice to each Holder with a copy to
the Trustee stating: (1) that a Change of Control has occurred and that such
Holder has the right to require the Company to purchase such Holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of Holders of record on a record date to receive interest on the relevant
interest payment date); (2) the circumstances and relevant facts and financial
information regarding such Change of Control; (3) the repurchase date (which
shall be no earlier than 30 days nor later than 60 days from the date such
notice is mailed and not more than 90 days after the Change of Control); and (4)
the instructions determined by the Company, consistent with this covenant, that
a Holder must follow in order to have its Notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Senior Credit Facility. Future
Senior Indebtedness of the Company may contain prohibitions of certain events
which would constitute a Change of Control or require such Senior Indebtedness
to be repurchased upon a Change of Control. Moreover, the exercise by the
Holders of their right to require the Company to repurchase the Notes could
cause a default under such Senior Indebtedness, even if the Change of Control
itself does not. Finally, the Company's ability to pay cash to the Holders upon
a repurchase may be limited by the Company's then existing financial resources.
There can be no assurance that sufficient funds will be available when necessary
to make any required repurchases.
SINKING FUND
There will be no mandatory sinking fund for the Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS. (a) The Company will not, and will not permit
any Restricted Subsidiary to, Incur any Indebtedness; PROVIDED, HOWEVER, that
the Company may Incur Indebtedness if on the date thereof the Consolidated
Coverage Ratio would be greater than 2.00:1.00, if such Indebtedness is incurred
on or prior to September 30, 1998; and 2.25:1.00 if such Indebtedness is
Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may incur the following Indebtedness: (i) Indebtedness
under the Senior Credit Facility (as the same may be amended from time to time)
and any Refinancing Indebtedness with respect thereto in each case in an
aggregate principal amount that, when added to all other Indebtedness Incurred
pursuant to this clause (i) and then outstanding, shall not exceed $100.0
million less the sum of all repayments thereon made with the Net Cash Proceeds
from Asset Dispositions (to the extent, in the case of repayment of revolving
credit Indebtedness, that the corresponding commitments have been permanently
reduced); PROVIDED, HOWEVER, that any Refinancing Indebtedness with respect to
Indebtedness Incurred pursuant to this clause (i) shall
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not be subject to the limitations contained in clauses (i) and (ii) of the
definition of Refinancing Indebtedness set forth in "--Certain Definitions"
below; (ii) Indebtedness (A) of the Company to any Restricted Subsidiary, (B) of
any Restricted Subsidiary to the Company or any other Restricted Subsidiary;
(iii) Indebtedness represented by the Notes, any Indebtedness (other than the
Indebtedness described in clauses (i) and (ii) above) outstanding on the date of
the Indenture and any Refinancing Indebtedness Incurred in respect of any
Indebtedness described in this clause (iii) or paragraph (a); (iv) Indebtedness
of the Company and its Restricted Subsidiaries in respect of (A) industrial
revenue bonds or other similar governmental and municipal bonds and (B) the
deferred purchase price of newly acquired property of the Company and its
Restricted Subsidiaries, or the price of construction or improvement of any
property of the Company or its Subsidiaries, in each case used in the ordinary
course of business of the Company and its Subsidiaries, including Capitalized
Lease Obligations, whether such Indebtedness is owed to the seller or Person
carrying out such construction or improvement or to any third party (PROVIDED
such financing is entered into within 180 days of the acquisition or the
conclusion of such construction or improvement of such property) in an amount
(based on the remaining balance of the obligations therefor on the books of the
Company and its Restricted Subsidiaries) which in the case of the preceding
clauses (A) and (B) shall not exceed $12.0 million in the aggregate at any time
outstanding; (v) Indebtedness of the Company or any of its Restricted
Subsidiaries (which may comprise Bank Indebtedness) in an aggregate principal
amount at any time outstanding not in excess of $15.0 million; (vi) Indebtedness
in an aggregate principal amount at any time outstanding not in excess of $5.0
million in respect of letters of credit (other than letters of credit issued
under the Senior Credit Facility); (vii) (A) Indebtedness assumed in connection
with acquisitions permitted under the Senior Credit Facility or any Refinancing
Indebtedness in respect thereof (so long as such Indebtedness was not incurred
in anticipation of such acquisitions), (B) Indebtedness of newly acquired
Subsidiaries acquired in such acquisitions (so long as such Indebtedness was not
incurred in anticipation of such acquisitions) and (C) Indebtedness owed to the
seller in any acquisition permitted under the Senior Credit Facility or any
Refinancing Indebtedness in respect thereof constituting part of the purchase
price thereof, all in an aggregate principal amount at any time outstanding not
in excess of $5.0 million; (viii) Indebtedness represented by the Note
Guarantees and Guarantees of Indebtedness Incurred pursuant to clause (i), (iv)
or (v) above; (ix) Indebtedness incurred in connection with the repurchase of
shares of the Capital Stock of the Company or Holdings as permitted by paragraph
(b)(vi)(C) of the covenant described under "--Limitation on Restricted
Payments"; (x) Refinancing Indebtedness with respect to Indebtedness permitted
pursuant to clauses (iv), (vii) or (ix) of this paragraph (b) (provided that
such Refinancing Indebtedness shall be included in determining the aggregate
amount of Indebtedness for purposes of the monetary limitations contained in
such clauses); and (xi) Hedging Obligations designed to protect the Company or
its Subsidiaries from fluctuations in interest or exchange rates.
(c) Notwithstanding any other provision of this covenant, the Company will
not incur any Indebtedness (i) pursuant to paragraph (b) if the proceeds thereof
are used, directly or indirectly, to repay, prepay, redeem, defease, retire,
refund or refinance any Subordinated Obligations unless such Indebtedness shall
be subordinated to the Notes to at least the same extent as such Subordinated
Obligations or (ii) pursuant to paragraph (a) or (b) if such Indebtedness is
subordinate or junior in right of payment to any Senior Indebtedness unless such
Indebtedness is Senior Subordinated Indebtedness or is expressly subordinated in
right of payment to Senior Subordinated Indebtedness.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) except dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and except dividends or distributions
payable to the Company or another Restricted Subsidiary (and, if such Restricted
Subsidiary is not wholly owned, to its other shareholders on a PRO RATA basis),
(ii) repurchase, redeem, retire or otherwise acquire for value any Capital Stock
of the Company or any Restricted Subsidiary held by Persons other than the
Company or another Restricted Subsidiary, (iii)
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purchase, repurchase, redeem, defease or otherwise acquire or retire for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund
payment any Subordinated Obligations (other than the purchase, repurchase or
other acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition), or (iv) make any
Investment (other than a Permitted Investment) in any Person (any such dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition,
retirement, payment or Investment being herein referred to as a "Restricted
Payment") if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); (2) the Company could not Incur at least $1.00 of
additional Indebtedness pursuant to paragraph (a) of the covenant described
under "--Limitation on Indebtedness"; or (3) the aggregate amount of such
Restricted Payment and all other Restricted Payments (the amount so expended, if
other than in cash, to be determined in good faith by the Board of Directors,
whose determination shall be conclusive and evidenced by a resolution of the
Board of Directors) declared or made subsequent to the Issue Date would exceed
the sum of: (A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal quarter
during which the Notes are originally issued to the end of the most recent
fiscal quarter ending prior to the date of such Restricted Payment for which
consolidated income statements of the Company are available (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such deficit); (B) the
aggregate Net Cash Proceeds received by the Company from capital contribution by
Holding with respect to, or the issue or sale of, the Company's Capital Stock
(other than Disqualified Stock) subsequent to the Issue Date (other than an
issuance or sale to a Subsidiary of the Company or an employee stock ownership
plan or other trust established by the Company or any of its Subsidiaries); (C)
the amount by which Indebtedness of the Company or its Restricted Subsidiaries
is reduced on the Company's balance sheet upon the conversion or exchange (other
than by a Subsidiary) subsequent to the Issue Date of any Indebtedness of the
Company or its Restricted Subsidiaries convertible into or exchangeable for
Capital Stock (other than Disqualified Stock) of the Company (less the amount of
any cash or other property distributed by the Company or any Restricted
Subsidiary upon such conversion or exchange); and (D) without duplication, the
sum of (x) the aggregate amount returned in cash on or with respect to
Investments (other than Permitted Investments) made subsequent to the Issue Date
whether through interest payments, principal payments, dividends or other
distributions or payments, (y) the Net Cash Proceeds received by the Company or
any Restricted Subsidiary from the disposition of all or any portion of such
Investments (other than to a Subsidiary of the Company) and (z) upon
redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, the fair
market value of such Subsidiary; PROVIDED, HOWEVER, that with respect to all
Investments made in any Unrestricted Subsidiary or joint venture the sum of
clauses (x), (y) and (z) above with respect to such Investments shall not exceed
the aggregate amount of all such Investments made subsequent to the date hereof
in such Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph shall not prohibit: (i) any
purchase or redemption of Capital Stock of the Company or Subordinated
Obligations made out of a substantially concurrent capital contribution to, or
by exchange for, or out of the proceeds of the substantially concurrent sale of,
Capital Stock of the Company (other than Disqualified Stock and other than
Capital Stock issued or sold to a Subsidiary or an employee stock ownership plan
or other trust established by the Company or any of its Subsidiaries); PROVIDED,
HOWEVER, that (A) such capital contribution, purchase or redemption will be
excluded in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such capital contribution or sale applied in the manner set
forth in this clause (i) will be excluded from clause (3)(B) of paragraph (a);
(ii) any purchase or redemption of Subordinated Obligations made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company that is permitted to be Incurred pursuant to the
covenant described under "--Limitation on Indebtedness"; PROVIDED, HOWEVER, that
such purchase or redemption will be excluded in the calculation of the amount of
Restricted Payments; (iii) any purchase or redemption of Subordinated
Obligations from Net Available Cash to the extent permitted by the covenant
described under "--Limitation on Sales of Assets and Subsidiary Stock";
PROVIDED, HOWEVER, that such purchase or redemption will be excluded in the
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calculation of the amount of Restricted Payments; (iv) dividends paid within 60
days after the date of declaration thereof if at such date of declaration such
dividend would have complied with paragraph (a); PROVIDED, HOWEVER, that such
dividend will be included in the calculation of the amount of Restricted
Payments; (v) payments by the Company to members of management of the Company
under the management incentive and equity participation plans as a result of and
upon the Acquisition; PROVIDED, HOWEVER, that such payments shall be excluded in
the calculation of the amount of Restricted Payments; (vi) payment of dividends,
other distributions or other amounts by the Company for the purposes set forth
in clauses (A) through (D) below; PROVIDED, HOWEVER, that such dividend,
distribution or amount set forth in clauses (A), (C) and (D) will be included in
the calculation of the amount of Restricted Payments for purposes of the
preceding paragraph: (A) to Holdings in amounts equal to the amounts required
for Holdings to pay franchise taxes and other fees required to maintain its
corporate existence and provide for other operating costs of up to $500,000 per
fiscal year; (B) to Holdings in amounts equal to amounts required for Holdings
to pay Federal, state and local income taxes to the extent such income taxes are
attributable to the income of the Company and its Restricted Subsidiaries (and,
to the extent of amounts actually received from its Unrestricted Subsidiaries,
in amounts required to pay such taxes to the extent attributable to the income
of such Unrestricted Subsidiaries); PROVIDED, HOWEVER, that such dividend or
distribution from an Unrestricted Subsidiary shall not be included in the
calculation of Consolidated Net Income and any such dividend or distribution to
Holdings shall not be included in the amount of Restricted Payments; (C) to
Holdings in amounts equal to amounts expended by Holdings to repurchase Capital
Stock of Holdings owned by former employees of the Company or its Subsidiaries
or their assigns, estates and heirs; PROVIDED, HOWEVER, that the aggregate
amount paid, loaned or advanced to Holdings pursuant to this clause (C) shall
not, in the aggregate, exceed $2.5 million per fiscal year of the Company, up to
a maximum aggregate amount of $7.5 million during the term of the Indenture,
plus any amounts contributed by Holdings to the Company as a result of resales
of such repurchased shares of Capital Stock; (D) so long as, after giving effect
thereto, no Default has occurred and is continuing, on May 1 and November 1 in
each year (or, if such day is not a Business Day, on the next succeeding
Business Day), the Company may pay cash dividends to Holdings on the Existing
Preferred Stock to enable Holdings to pay dividends or interest to the holders
of the Holding Securities in respect of the six-month period ended on such day
(or accrued deferred interest in respect of any prior period); provided that
within 20 days Holdings uses such dividends to pay current or accrued cash
interest on the Holding Securities; (vii) payments which would otherwise be
Restricted Payments in an aggregate amount not to exceed $2.5 million; PROVIDED,
HOWEVER, that such payments shall be included in the calculation of the amount
of Restricted Payments; or (viii) after December 1, 1998, Investments in
Unrestricted Subsidiaries or joint ventures in an amount not to exceed $2.5
million at any time outstanding; PROVIDED, HOWEVER, that such Investments shall
be included in the calculation of the amount of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligations owed to the Company, (ii)
make any loans or advances to the Company or (iii) transfer any of its property
or assets to the Company, except: (1) any encumbrance or restriction pursuant to
an agreement in effect at or entered into on the date of the Indenture; (2) any
encumbrance or restriction with respect to a Restricted Subsidiary pursuant to
an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary
prior to the date on which such Restricted Subsidiary was acquired by the
Company or designated as a Restricted Subsidiary (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date; (3) any
encumbrance or restriction pursuant to an agreement effecting a refinancing of
Indebtedness Incurred pursuant to an agreement referred to in clause (1) or (2)
of this covenant or this clause (3) or contained in any amendment, supplement or
other
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modification to an agreement referred to in clause (1) or (2) of this covenant
or this clause (3); PROVIDED, HOWEVER, that the encumbrances and restrictions
contained in any such refinancing agreement or amendment, supplement or other
modification are not materially less favorable to the Noteholders than
encumbrances and restrictions contained in such agreements; (4) in the case of
clause (iii), any encumbrance or restriction (A) that restricts in a customary
manner the subletting, assignment or transfer of any property or asset that is
subject to a lease, license or similar contract, (B) by virtue of any transfer
of, agreement to transfer, option or right with respect to, or Lien on, any
property or assets of the Company or any Restricted Subsidiary not otherwise
prohibited by the Indenture or (C) contained in security agreements or mortgages
securing Indebtedness of a Restricted Subsidiary to the extent such encumbrance
or restrictions restrict the transfer of the property subject to such security
agreements or mortgages; and (5) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration (including by way of relief from, or by any other Person assuming
sole responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to fair market value of the shares and
assets subject to such Asset Disposition, (ii) at least 80% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form of
cash and (iii) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as the
case may be): (A) FIRST, to the extent the Company elects (or is required by the
terms of any Senior Indebtedness or Indebtedness (other than Preferred Stock) of
a Wholly Owned Subsidiary), to prepay, repay or purchase Senior Indebtedness or
such Indebtedness (other than Preferred Stock) of a Wholly Owned Subsidiary (in
each case other than Indebtedness owed to the Company or an Affiliate of the
Company) within twelve months after the later of the date of such Asset
Disposition or the receipt of such Net Available Cash; (B) SECOND, to the extent
of the balance of Net Available Cash after application in accordance with clause
(A), to the extent the Company or such Restricted Subsidiary elects, to reinvest
in Additional Assets (including by means of an Investment in Additional Assets
by a Restricted Subsidiary with Net Available Cash received by the Company or
another Restricted Subsidiary) within twelve months from the later of the date
of such Asset Disposition or the receipt of such Net Available Cash; (C) THIRD,
to the extent of the balance of such Net Available Cash after application in
accordance with clauses (A) and (B), to make an offer to purchase Notes pursuant
and subject to the conditions of the Indenture to the Noteholders at a purchase
price of 100% of the principal amount thereof plus accrued and unpaid interest
to the purchase date; and (D) FOURTH, to the extent of the balance of such Net
Available Cash after application in accordance with clauses (A), (B) and (C), to
any application not prohibited by the Indenture. The Company and the Restricted
Subsidiaries will not be required to apply any Net Available Cash in accordance
with this covenant except to the extent that the aggregate Net Available Cash
from all Asset Dispositions that is not applied in accordance with this covenant
exceeds $2.0 million.
For the purposes of this covenant, the following will be deemed to be cash:
(x) the assumption of Indebtedness of the Company (other than Disqualified Stock
of the Company) or any Restricted Subsidiary and the release of the Company or
such Restricted Subsidiary from all liability on such Indebtedness in connection
with such Asset Disposition; and (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are converted by the Company or
such Restricted Subsidiary into cash within twelve months.
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(b) In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (a)(iii)(C), the Company will be required to purchase Notes
tendered pursuant to an offer by the Company for the Notes (the "Offer") at a
purchase price of 100% of their principal amount plus accrued and unpaid
interest to the Purchase Date in accordance with the procedures (including
prorating in the event of oversubscription) set forth in the Indenture. If the
aggregate purchase price of the Notes tendered pursuant to the Offer is less
than the Net Available Cash allotted to the purchase of the Notes, the Company
will apply the remaining Net Available Cash in accordance with clause
(a)(iii)(D) above. The Company shall not be required to make an Offer for Notes
pursuant to this covenant if the Net Available Cash available therefor (after
application of the proceeds as provided in clauses (a)(iii)(A) and (a)(iii)(B))
is less than $5.0 million for any particular Asset Disposition (which lesser
amounts shall be carried forward for purposes of determining whether an Offer is
required with respect to the Net Available Cash from any subsequent Asset
Disposition).
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS. (a) The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
conduct any transaction (including the purchase, sale, lease or exchange of any
property or the rendering of any service) with any Affiliate of the Company (an
"Affiliate Transaction") on terms (i) that are less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could be
obtained at the time of such transaction in arm's-length dealing with a Person
who is not such an Affiliate and (ii) that, in the event such Affiliate
Transactions involves an aggregate amount in excess of $500,000, are not in
writing and have not been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction. In addition,
any transaction involving aggregate payments or other transfers by the Company
and its Restricted Subsidiaries in excess of $3.0 million will also require an
opinion from an independent investment banking firm or appraiser that is
nationally recognized, as appropriate, to the effect that such transaction is
fair to the Company or such Restricted Subsidiary from a financial point of
view.
(b) The provisions of the foregoing paragraph (a) will not apply to (i) any
Permitted Investment or Restricted Payment permitted to be made or paid pursuant
to the covenant described under "--Limitation on Restricted Payments," (ii) the
performance of the Company's or Subsidiary's obligations under any employment
contract, collective bargaining agreement, employee benefit plan, related trust
agreement or any other similar arrangement heretofore or hereafter entered into
in the ordinary course of business, (iii) payment of compensation to employees,
officers, directors or consultants in the ordinary course of business, (iv)
maintenance in the ordinary course of business (and payments required thereby)
of benefit programs or arrangements for employees, officers or directors,
including vacation plans, health and life insurance plans, deferred compensation
plans, directors' and officers' indemnification agreements, arrangements and
insurance and retirement or savings plans and similar plans, (v) any transaction
between the Company and a Wholly Owned Subsidiary or between Wholly Owned
Subsidiaries, (vi) beginning November 1, 1999, the payment of certain fees under
the Management Agreement or any amendment or supplement thereto, to the extent
that such payment will not exceed an aggregate amount of $1.35 million during
any twelve-month period or (vii) payments made to Holdings to reimburse Holdings
for costs, fees and expenses incident to a registration of any of the capital
stock of Holdings for a primary offering under the Securities Act, so long as
the net proceeds (after application to the redemption of the Holding Securities)
of such offering (if it is completed) are contributed to, or otherwise used for
the benefit of, the Company.
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LIMITATION ON LIENS. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create or permit to exist any
Lien on any of its property or assets (including Capital Stock), whether owned
on the date of the Indenture or thereafter acquired, securing any obligation
other than Permitted Liens unless the obligations due under the Indenture and
the Notes are secured, on an equal and ratable basis (or on a senior basis, in
the case of Indebtedness subordinated in right of payment to the Notes), with
the obligations so secured.
COMMISSION REPORTS. The Company shall file with the Trustee and provide
Noteholders, within 15 days after it files them with the Commission, copies of
its annual report and the information, documents and other reports which the
Company is required to file with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall file with the Commission (if then permissible) and, within 15 days after
such reports would be required to be filed, provide the Trustee and Noteholders
(at their addresses as set forth in the register of Notes) with the annual
reports and the information, documents and other reports which are specified in
Sections 13 and 15(d) of the Exchange Act. The Company shall also comply with
the other provisions of TIA 314(a).
FUTURE NOTE GUARANTORS. The Company will cause each Domestic Subsidiary
that Incurs Indebtedness and each Restricted Subsidiary that is a guarantor of
Indebtedness Incurred, in each case, pursuant to clause (b)(i) of the covenant
described under "--Limitation on Indebtedness" to execute and deliver to the
Trustee a Note Guarantee pursuant to which such Subsidiary will Guarantee
payment of the Notes. Each Note Guarantee will be limited in amount to an amount
not to exceed the maximum amount that can be Guaranteed by that Subsidiary
without rendering the Note Guarantee, as it relates to such Subsidiary, voidable
under applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
Each such Note Guarantee will be subordinated to Senior Indebtedness of the
respective Note Guarantor on the same basis and to the same extent as the Notes
are subordinated to Senior Indebtedness of the Company. See "--Ranking." Each
Note Guarantor may consolidate with or merge into or sell its assets, and may be
released from its obligations under its Note Guarantee, upon the terms and
conditions set forth in the Indenture.
LIMITATION ON LINES OF BUSINESS. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any business, other than a Related
Business.
MERGER AND CONSOLIDATION. The Company will not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all its assets
to, any Person, unless: (i) the resulting, surviving or transferee Person (the
"Successor Company") is a corporation organized and existing under the laws of
the United States of America, any State thereof of the District of Columbia and
the Successor Company (if not the Company) expressly assumes, by a supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Company under the Notes and the Indenture;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness that becomes an obligation of the Successor Company or any
Restricted Subsidiary as a result of such transaction as having been Incurred by
the Successor Company or such Restricted Subsidiary at the time of such
transaction), no Default will have occurred and be continuing; (iii) immediately
after giving effect of such transaction, the Successor Company would be able to
incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of the
covenant described under "--Limitation on Indebtedness"; (iv) immediately after
giving effect to such transaction, the Successor Company will have Consolidated
Net Worth in an amount that is not less than the Consolidated Net Worth of the
Company immediately prior to such transaction; and (v) the Company will have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the Indenture.
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The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a lease of all or substantially all its
assets will not be released from the obligation to pay the principal of and
interest on the Notes.
Notwithstanding the foregoing clauses (ii), (iii) and (v), (1) any
Restricted Subsidiary may consolidate with, merge into or transfer all or part
of its properties and assets to the Company and (2) the Company may merge with
an Affiliate incorporated for the purpose of reincorporating the Company in
another jurisdiction to realize tax or other benefits.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
whether or not such payment is prohibited by the provisions described under
"--Ranking" above, (iii) the failure by the Company to comply with its
obligations under the covenant described under "--Merger and Consolidation"
above, (iv) the failure by the Company to comply for 30 days after notice with
any of its obligations under the covenants described under "--Change of Control"
above or under the covenants described under "--Certain Covenants--Limitation on
Indebtedness", "--Limitation on Restricted Payments," "--Limitation on Sales of
Assets and Subsidiary Stock" and "--Future Note Guarantors" above (in each case,
other than a failure to purchase Notes), (v) the failure by the Company to
comply for 60 days after notice with its other agreements contained in the
Indenture, (vi) the failure by the Company or any Significant Subsidiary to pay
any Indebtedness within any applicable grace period after final maturity or
acceleration by the holders thereof because of a default if the total amount of
such Indebtedness unpaid or accelerated exceeds $10 million (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of the Company or a Significant Subsidiary (the "bankruptcy
provisions"), (viii) the rendering of any judgment or decree for the payment or
money in excess of $10 million against the Company or a Significant Subsidiary
if (A) an enforcement proceeding thereon is commenced or (B) such judgment or
decree remains outstanding for a period of 60 days following such judgment and
is not discharged, waived or stayed (the "judgment default provision") or (ix)
the failure of any Note Guarantee by a Note Guarantor which is a Significant
Subsidiary to be in full force and effect (except as contemplated by the terms
thereof or the Indenture) or the denial or disaffirmation by any such Note
Guarantor of its obligations under the Indenture or any Note Guarantee if such
Default continues for 10 days. However, a default under clauses (iv) and (v)
will not constitute an Event of Default until the Trustee or the Holders of 25%
in principal amount of the outstanding Notes notify the Company of the default
and the Company does not cure such default within the time specified in clauses
(iv) and (v) hereof after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the outstanding Notes by notice to the
Company may declare the principal of and accrued but unpaid interest on all the
Notes to be due and payable. Upon such a declaration, such principal and
interest shall be due and payable immediately. If an Event of Default relating
to certain events of bankruptcy, insolvency or reorganization of the Company
occurs and is continuing, the principal of and interest on all the Notes will
become immediately due and payable without any declaration or other act on the
part of the Trustee or any Holders. Under certain circumstances, the Holders of
a majority in principal amount of the outstanding Notes any rescind any such
acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to
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enforce the right to receive payment of principal, premium (if any) or interest
when due, no Holder may pursue any remedy with respect to the Indenture or the
Notes unless (i) such Holder has previously given the Trustee notice that an
Event of Default is continuing, (ii) Holders of at least 25% in principal amount
of the outstanding Notes have requested the Trustee to pursue the remedy, (iii)
such Holders have offered the Trustee reasonable security or indemnity against
any loss, liability or expense, (iv) the Trustee has not complied with such
request within 60 days after the receipt of the request and the offer of
security or indemnity and (v) the Holders or a majority in principal amount of
the outstanding Notes have not given the Trustee a direction inconsistent with
such request within such 60-day period. Subject to certain restrictions, the
Holders of a majority in principal amount of the outstanding Notes are given the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or of exercising any trust or power conferred on
the Trustee. The Trustee, however, may refuse to follow any direction that
conflicts with law or the Indenture or that the Trustee determines is unduly
prejudicial to the rights of any other Holder or that would involve the Trustee
in personal liability. Prior to taking any action under the Indenture, the
Trustee shall be entitled to indemnification satisfactory to it in its sole
discretion against all losses and expenses caused by taking or not taking such
action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
no later than the date that is the earlier of 90 days after such default occurs
or 30 days after it is known to a trust officer or written notice is received by
the Trustee. Except in the case of a Default in the payment of principal of,
premium (if any) or interest on any Note, the Trustee may withhold notice if and
so long as a committee of its Trust officers in good faith determines that
withholding notice is in the interests of the Noteholders. In addition, the
Company is required to deliver to the Trustee, within 120 days after the end of
each fiscal year, a certificate indicating whether the signers thereof know of
any Default that occurred during the previous year. The Company also is required
to deliver to the Trustee, within 30 days after the occurrence thereof, written
notice of any event which would constitute certain Defaults, their status and
what action the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the Notes then outstanding
and any past default or compliance with any provisions may be waived with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding. However, without the consent of each Holder of an outstanding Note
affected, no amendment may, among other things, (i) reduce the amount of Notes
whose Holders must consent to an amendment, (ii) reduce the rate of or extend
the time for payment of interest on any Note, (iii) reduce the principal of or
extend the Stated Maturity of any Note, (iv) reduce the premium payable upon the
redemption of any Note or change the time at which any Note may be redeemed as
described under "-- Optional Redemption" above, (v) make any Note payable in
money other than that stated in the Note, (vi) may any change to the
subordination provisions of the Indenture that adversely affects the rights of
any Holder, (vii) impair the right of any Holder to receive payment of principal
of and interest on such Holder's Notes on or after the due dates therefor or to
institute suit for the enforcement of any payment on or with respect to such
Holder's Notes or (viii) make any change in the amendment provisions which
require each Holder's consent or in the waiver provisions.
Without the consent of any Holder, the Company and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the Company
or any Note Guarantor under the Indenture or under any Note Guarantee, as the
case may be, to provide for uncertificated Notes in addition to or in place of
certificated Notes (PROVIDED, HOWEVER, that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(b) of the
Code), to add Note Guarantees with respect to the Notes, to secure the Notes, to
add
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to the covenants of the Company for the benefit of the Noteholders or to
surrender any right or power conferred upon the Company, to make any change that
does not adversely affect the rights of any Holder or to comply with any
requirement of the Commission in connection with the qualification of the
Indenture under the Trust Indenture Act. However, no amendment may be made to
the subordination provisions of the Indenture that adversely affects the rights
of any holder of Senior Indebtedness then outstanding unless the holders of such
Senior Indebtedness (or any group or representative thereof authorized to give a
consent) consent to such change.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange Notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Noteholder to pay any taxes
or other governmental charges required by law or permitted by the Indenture. The
Company is not required to transfer or exchange any Note selected for redemption
or repurchase or to transfer or exchange any Note for a period of 15 days prior
to a selection of Notes to be redeemed or repurchased. The Notes will be issued
in registered form and the registered holder of a Note will be treated as the
owner of such Note for all purposes.
DEFEASANCE
The Company and the Note Guarantors, if any, at any time may terminate all
their obligations under the Notes and the Note Guarantees and the Indenture
("legal defeasance"), except for certain obligations, including those respecting
the defeasance trust and obligations to register the transfer or exchange of the
Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a
registrar and paying agent in respect of the Notes. The Company at any time may
terminate its obligations under the covenants described under "--Certain
Covenants," the operation of the cross acceleration provision, the bankruptcy
provisions with respect to Subsidiaries and the judgment default provision
described under "--Defaults" above and the limitations contained in clauses
(iii) and (iv) under "--Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default under the provisions described in the last sentence of the
foregoing paragraph.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to Federal income tax on the same amount and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had
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not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the New Notes will initially be issued in the
form of one or more permanent global Notes in definitive, fully registered form
without interest coupons (each, a "Global Note"). Upon issuance, each Global
Note will be deposited with the Trustee as custodian for, and registered in the
name of, a nominee of The Depository Trust Company ("DTC").
If a holder tendering Old Notes so requests, such holder's New Notes will be
issued as described below under "--Certificated Securities" in registered form
without coupons (the "Certificated Securities").
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC, or its nominee, is the registered owner or Holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or Holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture.
Payments of the principal of, premium, if any, and interest, on a Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. Neither the Company, the Trustee nor any Paying Agent will have
any responsibility or liability for any aspects of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest in respect of a Global Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in such Global Note
held through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by a
Holder of a Note only at the direction of one or more participants to whose
account the DTC interests in a Global Note is credited and only in respect of
such portion of the aggregate principal amount of a Note as to which such
participant or participants has or have given direction.
DTC has advised the Company that it is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and to facilitate the clearance and settlement of securities transactions
between participants through electronic book-entry changes in accounts of its
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participants. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Note among participants of DTC, it
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depository and the Company is unable to locate a
qualified successor within 90 days or (ii) the Company, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by DTC of its Global
Note, Certificated Securities will be issued to each person that DTC identifies
as the beneficial owner of the New Notes represented by the Global Note. In
addition, any person having a beneficial interest in a Global Note or any holder
of Old Notes whose Old Notes have been accepted for exchange may, upon request
to the Trustee or the Exchange Agent, as the case may be, exchange such
beneficial interest or Old Notes for Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of such person or persons (or the nominee of any thereof), and cause
the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any participant or indirect participant in identifying the beneficial owners of
the related New Notes and each such person may conclusively rely on, and shall
be protected in relying on, instructions from DTC for all purposes (including
with respect to the registration and delivery, and the respective principal
amounts, of the New Notes to be issued).
CONCERNING THE TRUSTEE
State Street Bank and Trust Company is to be the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Notes.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other that
Indebtedness and Capital Stock of the acquiring Person) to be used by the
Company or a Restricted Subsidiary in a Related Business; (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by the Company or another Restricted Subsidiary; or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; PROVIDED, HOWEVER, that, in the case of clauses (ii)
and (iii), such Restricted Subsidiary is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means (i) any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any Person who
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is a director or officer (a) of such Person, (b) of any Subsidiary of such
Person or (c) of any Person described in clause (i) above. For the purposes of
this definition, "control" when used with respect to any Person means the power
to direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Disposition" means any sale, lease, transfer or other disposition of
shares of Capital Stock of a Restricted Subsidiary (other than directors'
qualifying shares), property or other assets (each referred to for the purposes
of this definition as a "disposition") by the Company or any of its Restricted
Subsidiaries (including any disposition by means of a merger, consolidation or
similar transaction) other than: (i) a disposition by a Restricted Subsidiary to
the Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary; (ii) a disposition of property or assets in the ordinary course of
business; (iii) for purposes of the covenants described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition subject to the covenants described under "--Certain
Covenants--Limitation on Restricted Payments" and "--Merger and Consolidation";
(iv) leases or subleases to third parties of real property owned in fee or
leased by the Company or its Subsidiaries; (v) a disposition of a lease of real
property; and (vi) any disposition of property of the Company or any of its
Subsidiaries that, in the reasonable judgment of the Company, has become
uneconomic, obsolete or worn out.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect of
the Senior Credit Facility and the other Senior Credit Documents and the
Refinancing Indebtedness with respect thereto, as amended, supplemented or
otherwise modified from time to time, including increases in the principal
amount thereof permitted under the Indenture and including principal, premium
(if any), interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not a claim for post filing interest is allowed in such proceedings), fees,
charges, expenses, reimbursement obligations, guarantees and all other amounts
payable thereunder or in respect thereof.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banking institutions (including, without limitation, the
Federal Reserve System) are authorized or required by law to close in New York
City.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligation" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending prior to the
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date of such determination to (ii) Consolidated Interest Expense for such four
fiscal quarters; PROVIDED, HOWEVER, that (1) if the Company or any Restricted
Subsidiary (x) has Incurred any Indebtedness (other than Indebtedness Incurred
for working capital purposes under a revolving credit facility) since the
beginning of such period that remains outstanding on such date of determination
or if the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness as if such Indebtedness had been Incurred
on the first day of such period and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of such
period, or (y) has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of the period that is no longer outstanding on
such date of determination, or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio involves a discharge of Indebtedness,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect to such discharge of such Indebtedness, including with the
proceeds of such new Indebtedness, as if such discharge had occurred on the
first day of such period (except that, in making such computation, the amount of
Indebtedness under any revolving credit facility shall be computed based upon
the average daily balance of such Indebtedness during such four-quarter period);
(2) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition of a company, business or group
of assets comprising an operating unit, the EBITDA for such period shall be
reduced by any amount equal to the EBITDA (if positive) directly attributable to
the assets that are the subject of such Asset Disposition for such period or
increased by an amount equal to the EBITDA (if negative) directly attributable
thereto for such period and Consolidated Interest Expense for such period shall
be reduced by an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of the Company or any Restricted Subsidiary
repaid, repurchased, defeased or otherwise discharged with respect to the
Company and its continuing Restricted Subsidiaries in connection with such Asset
Disposition for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent the
Company and its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale), (3) if since the beginning of such period the
Company or any Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person that becomes a Restricted
Subsidiary) or an acquisition of assets, including any acquisition of assets
occurring in connection with a transaction causing a calculation to be made
hereunder, which constitutes all or substantially all of an operating unit of a
business, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness) as if such Investment or acquisition occurred on the first day
of such period and (4) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made any Asset Disposition or any Investment or acquisition of assets that
would have required an adjustment pursuant to clause (2) or (3) above if made by
the Company or a Restricted Subsidiary during such period, EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition, Investment or acquisition
of assets occurred on the first day of such period. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting Officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term as at the
date of determination in excess of twelve months).
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"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Subsidiaries, plus, to the extent
incurred by the Company and its Subsidiaries in such period but not included in
such interest expense, (i) interest expense attributable to Capitalized Lease
Obligations, (ii) amortization of debt discount, (iii) capitalized interest,
(iv) noncash interest expense (excluding amortization of debt issuance costs,
commissions, and other fees and expenses), (v) commissions, discounts and other
fees and charges attributable to letters of credit and bankers' acceptance
financing, (vi) interest actually paid by the Company or any such Subsidiary
under any Guarantee of Indebtedness or other obligation of any other Person,
(vii) net costs associated with Hedging Obligations (including amortization of
fees), and (viii) the product of (a) all Preferred Stock dividends in respect of
all Preferred Stock of Subsidiaries of the Company and Disqualified Stock of the
Company (excluding the Existing Preferred Stock) held by Persons other than the
Company or a Wholly Owned Subsidiary multiplied by (b) a fraction, the numerator
of which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of the Company, expressed
as a decimal, in each case, determined on a consolidated basis in accordance
with GAAP; PROVIDED, HOWEVER, that there shall be excluded therefrom any such
interest expense of any Unrestricted Subsidiary to the extent the related
Indebtedness is not Guaranteed or paid by the Company or any Restricted
Subsidiary.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries before any reduction in respect of
Preferred Stock dividends plus, in each case, to the extent deducted in
determining net income for such period, any expenses incurred in connection with
the Acquisition (other than the amortization of the prepaid management fee)
including, without limitation, management bonuses and payments under the
management incentive and equity participation plans; PROVIDED, HOWEVER, that
there shall not be included in such Consolidated Net Income: (i) any net income
of any Person if such Person is not a Restricted Subsidiary, except that (A)
subject to the limitations contained in clause (iv) below, the Company's equity
in the net income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually distributed
by such Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained in clause
(iv) below) and (B) the Company's equity in a net loss of any such Person (other
than an Unrestricted Subsidiary) for such period shall be included in
determining such Consolidated Net Income; (ii) any expense recognized (net of
tax benefits related thereto) as a consequence of payments permitted to be made
by the Company under clauses (vi)(A), (B) and (D) of paragraph (b) of the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments"; (iii) any net income (loss) of any person acquired by the Company or
a Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition; (iv) any net income (loss) of any Restricted
Subsidiary if such Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company, except that (A)
subject to the limitations contained in (v) below, the Company's equity in the
net income of any such Restricted Subsidiary for such period shall be included
in such Consolidated Net Income up to the aggregate amount of cash that could
have been distributed by such Restricted Subsidiary during such period to the
Company or another Restricted Subsidiary as a dividend (subject, in the case of
a dividend that could have been made to another Restricted Subsidiary, to the
limitation contained in this clause) and (B) the Company's equity in a net loss
of any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income; (v) any gain or loss realized upon the
sale or other disposition of any asset of the Company or its consolidated
Subsidiaries (including pursuant to any sale/leaseback transaction) that is not
sold or otherwise disposed of in the ordinary course of business and any gain or
loss realized upon the sale or other disposition of any Capital Stock of any
Person; (vi) any extraordinary or non-recurring gain, loss or charge (together
with any related provision for taxes on such extraordinary or non-recurring
gain, loss or charge); and (vii) the cumulative effect of a change in accounting
principles (effected either through cumulative effect adjustment or a
retroactive application, in each case, in accordance with GAAP).
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"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and the Restricted Subsidiaries, determined on a
consolidated basis, as of the end of the most recent fiscal quarter of the
Company ending prior to the taking of any action for the purpose of which the
determination is being made, as (i) the par or stated value of all outstanding
Capital Stock of the Company plus (ii) paid-in capital or capital surplus
relating to such Capital Stock plus (iii) any retained earnings or earned
surplus less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness which, at the date of determination, has an
aggregate principal amount of, or under which, at the date of determination, the
holders thereof, are committed to lend up to, at least $10.0 million and is
specifically designated by the Company in the instrument evidencing or governing
such Senior Indebtedness as "Designated Senior Indebtedness" for purposes of the
Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable or exercisable) or upon the happening of any
event (other than as a result of a Change of Control) (i) matures or is
mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (ii)
is convertible or exchangeable for Indebtedness or Disqualified Stock or (iii)
is redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the first anniversary of the Stated Maturity of the Notes.
"Domestic Subsidiary" means any Restricted Subsidiary of the Company other
than a Foreign Subsidiary.
"EBITDA" means, for any period, the Consolidated Net Income for such period,
plus the following to the extent deducted in calculating such Consolidated Net
Income: (i) total income tax expense, (ii) Consolidated Interest Expense
together with amortization of debt issuance costs, commissions, and other fees
and expenses, (iii) depreciation expense, (iv) amortization expense, including
amortization of inventory write-up under APB 16, amortization of intangibles
(including, but not limited to, goodwill and the costs of Interest Rate
Agreements or Currency Agreements, license agreements and non-competition
agreements) and organization costs, (v) non-cash expenses related to the
amortization of prepaid management fees pursuant to certain agreements referred
to in the Indenture, (vi) costs of surety bonds in connection with financing
activities, (vii) non-cash amortization of Capitalized Lease Obligations, (viii)
franchise taxes, (ix) expenses recorded in historical periods through the
Acquisition Date related to the management incentive and equity participation
plans and allocation of "C" stock, (x) any other write-downs, write-offs,
minority interests and other non-cash charges in determining such Consolidated
Net Income for such period, and (xi) all extraordinary non-cash charges in
determining such Consolidated Net Income for such period; provided that the
impact of foreign currency translations shall be excluded.
"Existing Preferred Stock" means the 12% preferred stock of the Company
issued outstanding on the Issue Date, and any extensions, refinancings, renewals
or replacements thereof (the "Refinancing Preferred Stock"); provided that (i)
the aggregate liquidation preference of such Refinancing Preferred Stock does
not exceed the aggregate liquidation preference of the Existing Preferred Stock,
(ii) the dividend rate per annum of such Refinancing Preferred Stock does not
exceed the dividend rate per annum of the Existing Preferred Stock and (iii) the
Refinancing Preferred Stock has a mandatory redemption date no earlier than the
Existing Preferred Stock.
"Foreign Subsidiary" means any Restricted Subsidiary of the Company that is
not organized under the laws of the United States of America or any state
thereof or the District of Columbia.
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"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
All ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP as in effect as of the Issue Date.
"Government Authority" means any nation or government, any state or other
political subdivision thereof or any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); PROVIDED, HOWEVER, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
in the Note Register.
"Holding Securities" means the $20.0 million aggregate principal amount of
senior subordinated notes of Holdings, as amended from time to time.
"Holdings" means Carter Holdings, Inc., a Massachusetts corporation.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication) (i) the principal of and premium (if any) in
respect of indebtedness of such Person for borrowed money; (ii) the principal of
and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments; (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto but excluding letters
of credit supporting the purchase of goods in the ordinary course of business
and expiring no more than six months from the date of issuance); (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services (except Trade Payables), which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services; (v) all
Capitalized Lease Obligations of such Person; (vi) the amount of all obligations
of such Person with respect to the redemption, repayment or other repurchase of
any Disqualified Stock or, with respect to any Subsidiary of the Company, any
Preferred Stock (but excluding, in each case, any accrued dividends); (vii) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person; PROVIDED, HOWEVER,
that the amount of Indebtedness of such Person shall be the lesser of (A) the
fair market value of such asset at such date of determination and (B) the amount
of such Indebtedness of such other Persons; (viii) all Indebtedness of other
Persons to the extent Guaranteed by such Person; and (ix) to the extent not
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otherwise included in this definition, Hedging Obligations of such Person. The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
liability, assuming the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date. For purposes of
clarification, Indebtedness shall not include undrawn commitments on credit
facilities.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person) or other extension
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the covenant described under "--Certain
Covenants--Limitation on Restricted Payments," (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the fair market value of the net assets of any Subsidiary of the Company at
the time that such Subsidiary is designated an Unrestricted Subsidiary; and (ii)
any property transferred to or from an Unrestricted Subsidiary shall be valued
at its fair market value at the time of such transfer, in each case as
determined in good faith by the Board of Directors.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Group" means the senior management of the Company or Holdings.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations relating
to the properties or assets that are the subject of such Asset Disposition or
received in any other noncash form) therefrom, in each case net of (i) all
legal, title and recording tax expenses, commissions and other fees and expenses
incurred (including legal, accounting and investment banking fees and any
relocation expenses incurred as a result of an Asset Disposition), and all
Federal, state, provincial, foreign and local taxes required to be paid or
accrued as a liability under GAAP, as a consequence of such Asset Disposition,
(ii) all payments made on any Indebtedness that is secured by any assets subject
to such Asset Disposition, in accordance with the terms of any Lien upon such
assets, or that must by its terms, or in order to obtain a necessary consent to
such Asset Disposition, or by applicable law be repaid out of the proceeds from
such Asset Disposition, (iii) all distributions and other payments required to
be made to minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Disposition and (iv) appropriate amounts to be provided by
the seller as a reserve, in accordance with GAAP, against any liabilities
associated with the assets disposed of in such Asset Disposition and retained
(including by way of indemnification obligations) by the Company or any
Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock or disposition of any Investment by the Company or any Subsidiary, the
cash proceeds of such issuance, sale or disposition net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance, sale or disposition and net of taxes paid or
payable as a result thereof.
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"Note Guarantee" means any guarantee executed and delivered by a Note
Guarantor pursuant to the provisions of the covenant described under "--Certain
Covenants--Future Note Guarantors". Each such Note Guarantee will be in the form
prescribed in the Indenture.
"Note Guarantor" means each of the Company's Subsidiaries that in the future
executes a supplemental indenture in which such Subsidiary agrees to be bound by
the terms of the Indenture as a Note Guarantor; provided that any Person
constituting a Note Guarantor as described above shall cease to constitute a
Note Guarantor when its respective Note Guarantee is released in accordance with
the terms thereof.
"Officer" means the President, the Treasurer or the Clerk of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Holders" means Investcorp, its Affiliates, members of the
Management Group, the international investors who are the initial holders of the
Capital Stock of Holdings and any Person acting in the capacity of an
underwriter in connection with a public or private offering of the Company's or
Holdings' Capital Stock.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary, the Company or a Person that will,
upon the making of such Investment, become a Restricted Subsidiary; PROVIDED,
HOWEVER, that the primary business of such Restricted Subsidiary is a Related
Business; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
PROVIDED, HOWEVER, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; PROVIDED,
HOWEVER, that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) payroll, travel, entertainment, relocation and similar
advances that are made in the ordinary course of business; (vi) loans or
advances to employees made in the ordinary course of business consistent with
past practices of the Company or such Restricted Subsidiary; (vii) loans or
advances to employees (or guarantees of third party loans to employees) in an
aggregate amount not to exceed $2.5 million at any time outstanding; (viii)
stock, obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; or (ix) securities received in
connection with an Asset Disposition complying with the provisions of the
covenant described under "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock".
"Permitted Liens" means: (a) Liens securing Senior Indebtedness (or
Indebtedness of a Subsidiary of the Company which if incurred by the Company
would be Senior Indebtedness) permitted to be Incurred under the Indenture; (b)
Liens for taxes, assessments or other governmental charges not yet delinquent or
that are being contested in good faith and by appropriate proceedings if
adequate reserves with respect thereto are maintained on the books of the
Company or such Restricted Subsidiary, as the case may be, in accordance with
GAAP; (c) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business in
respect of obligations that are not yet due or that are bonded or that are being
contested in good faith and by appropriate proceedings if adequate reserves with
respect thereto are maintained on the books of the Company or such Restricted
Subsidiary, as the case may be, in accordance with GAAP; (d) pledges or deposits
in connection with workmen's compensation, unemployment insurance and other
social security legislation; (e) deposits to secure the performance of bids,
tenders, trade or government contracts (other than for borrowed money), leases,
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licenses, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature incurred in the ordinary course of business;
(f) easements (including reciprocal easement agreements), rights-of-way,
building, zoning and similar restrictions, utility agreements, covenants,
reservations, restrictions, encroachments, changes, and other similar
encumbrances or title defects incurred, or leases or subleases granted to
others, in the ordinary course of business, which do not in the aggregate
materially detract from the aggregate value of the properties of the Company and
its Subsidiaries, taken as a whole or in the aggregate materially interfere with
or adversely affect in any material respect the ordinary conduct of the business
of the Company and its Subsidiaries on the properties subject thereto, taken as
a whole; (g) Liens pursuant to the Senior Credit Documents, Liens in connection
with industrial revenue bonds, Liens securing the Bank Indebtedness and bankers'
Liens arising by operation of law; (h) Liens on property of the Company or any
of its Restricted Subsidiaries created solely for the purpose of securing
Indebtedness permitted by clause (b)(iv) of the covenant described under
"--Certain Covenants-- Limitation on Indebtedness" or incurred in connection
with Indebtedness permitted by clause (b)(vii) thereof; PROVIDED, HOWEVER that,
in the case of Liens described in such clause (b)(iv), no such Lien shall extend
to or cover other property of the Company or such Restricted Subsidiary other
than the respective property so acquired, and the principal amount of
Indebtedness secured by any such Lien shall at no time exceed the original
purchase price of such property; (i) Liens existing on the date of the
Indenture; (j) Liens on goods (and the proceeds thereof) and documents of title
and the property covered thereby securing Indebtedness in respect of commercial
letters of credit; (k) (i) mortgages, liens, security interests, restrictions,
encumbrances or any other matters of record that have been placed by any
developer, landlord or other third party on property over which the Company or
any Restricted Subsidiary of the Company has easement rights or on any real
property leased by the Company on the Issue Date and subordination or similar
agreements relating thereto and (ii) any condemnation or eminent domain
proceedings affecting any real property; (l) leases or subleases to third
parties; (m) Liens in connection with workmen's compensation obligations and
general liability exposure of the Company and its Restricted Subsidiaries; (n)
Liens securing Indebtedness Incurred under clauses (a) or (b)(v) of the covenant
described under "-- Certain Covenants--Limitation on Indebtedness" PROVIDED,
HOWEVER, that such Indebtedness is not subordinate or junior in ranking to the
Notes; and (o) Liens securing Indebtedness of any Subsidiary of the Company to
the Company.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock" as applied to the Capital Stock of any corporation means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note that is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock (or other voting stock) of the Company or Holdings pursuant to an
effective registration statement (other than a registration statement on Form
S-4, S-8 or any successor or similar forms) under the Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 15% of the total issued and outstanding common
stock of the Company or Holdings (as applicable) has been distributed by means
of an effective registration statement under the Securities Act.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) (collectively, "refinances," and "refinanced" shall have
a correlative meaning) any Indebtedness existing on the date of the Indenture or
Incurred in compliance with the Indenture (including Indebtedness of the Company
that refinances
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Indebtedness of any Restricted Subsidiary (to the extent permitted in the
Indenture) and Indebtedness of any Restricted Subsidiary that refinances
Indebtedness of another Restricted Subsidiary) including Indebtedness that
refinances Refinancing Indebtedness; PROVIDED, HOWEVER, that (i) except in the
case of any refunding, refinancing, replacement, renewal, repayment or extension
of any Bank Indebtedness, the Refinancing Indebtedness has a Stated Maturity no
earlier than the Stated Maturity of the Indebtedness being refinanced, (ii)
except in the case of any refunding, refinancing, replacement, renewal,
repayment or extension of any Bank Indebtedness, the Refinancing Indebtedness
has an Average Life at the time such Refinancing Indebtedness is Incurred that
is equal to or greater than the Average Life of the Indebtedness being
refinanced and (iii) such Refinancing Indebtedness is Incurred in an aggregate
principal amount (or if issued with original issue discount, an aggregate issue
price) that is equal to or less than the sum of (A) the aggregate principal
amount (or if issued with original issue discount, the aggregate accreted value)
then outstanding of the Indebtedness being refinanced, (B) in the case of
revolving credit Indebtedness, the unused commitment thereunder, plus (C) fees,
underwriting discounts and other costs and expenses incurred in connection with
such Refinancing Indebtedness; PROVIDED FURTHER, HOWEVER, that Refinancing
Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary that
refinances Indebtedness of the Company or (y) Indebtedness of the Company or a
Restricted Subsidiary that refinances Indebtedness of an Unrestricted
Subsidiary.
"Related Business" means those businesses in which the Company or any of its
Subsidiaries are engaged on the date of the Indenture, or that are related
thereto.
"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Senior Credit Documents" means collectively, the Senior Credit Facility,
the notes issued pursuant thereto and the Guarantees thereof, and the Security
Agreements, the Mortgages and the Pledge Agreements (each as defined in the
Senior Credit Facility).
"Senior Credit Facility" means the credit agreement dated as of October 30,
1996, as amended, waived or otherwise modified from time to time, including
increases in the principal amount thereof, among the Company, the several
lenders party thereto and The Chase Manhattan Bank, a New York banking
corporation, as administrative agent (except to the extent that any such
amendment, waiver or other modification thereto would be prohibited by the terms
of the Indenture, unless otherwise agreed to by the Holders of at least a
majority in aggregate principal amount of Notes at the time outstanding).
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank PARI PASSU with the Notes or is not subordinated by its terms to any
Indebtedness or other obligation of the Company that is not Senior Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the Commission.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed dated on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision for the repurchase of such security at
the option of the holder thereof upon the happening of any contingency beyond
the control of the issuer unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the date of the Indenture or thereafter Incurred) that is
subordinate or junior in right of payment to the Notes pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including
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partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person
or (ii) one or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency or
instrumentality thereof or obligations Guaranteed by the United States of
America or any agency or instrumentality thereof; (ii) investments in time
deposit accounts, certificates of deposit and money market deposits maturing
within 180 days of the date of acquisition thereof, bankers' acceptances with
maturities of 180 days or less and overnight bank deposits, in each case with or
issued by a bank or trust company that is organized under the laws of the United
States of America, any state thereof or any foreign country recognized by the
United States of America having capital, surplus and undivided profits
aggregating in excess of $300.0 million (or the foreign currency equivalent
thereof); (iii) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clause (i) or (ii) above
entered into with a bank meeting the qualifications described in clause (ii)
above; and (iv) investments in commercial paper, maturing not more than six
months after the date of acquisition, issued by any Lender (as defined under the
Senior Credit Facility) or the parent corporation of any Lender, and commercial
paper with a rating at the time as of which any investment therein is made of
"P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard and Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary if (a) such Subsidiary or any of its
Subsidiaries does not own any Capital Stock or Indebtedness of, or own or hold
any Lien on any property of, the Company or any other Subsidiary of the Company
that is not a Subsidiary of the Subsidiary to be so designated; and (b) either
(A) the Subsidiary to be so designated has total consolidated assets of $1,000
or less or (B) if such Subsidiary has consolidated assets greater than $1,000,
then such designation would be permitted under the provisions of the covenant
described under "--Certain Covenants--Limitations on Restricted Payments." The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; PROVIDED, HOWEVER, that immediately after giving effect to such
designation (x) the Company could Incur $1.00 of additional Indebtedness under
paragraph (a) of the covenant described under "--Certain Covenants--Limitation
on Indebtedness" and (y) no Default shall have occurred and be continuing. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the resolution of the Board of
Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or another Wholly Owned Subsidiary.
86
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of the material United States federal income tax
consequences of the Exchange Offer is for general information only. It is based
on the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), existing and proposed Treasury regulations, and judicial and
administrative determinations, all of which are subject to change at any time,
possibly on a retroactive basis. The following relates only to Old Notes, and
New Notes received therefor, that are held as "capital assets" within the
meaning of Section 1221 of the Code by persons who are citizens or residents of
the United States. It does not discuss state, local, or foreign tax
consequences, nor does it discuss tax consequences to categories of holders that
are subject to special rules, such as foreign persons, tax-exempt organizations,
insurance companies, banks, and dealers in stocks and securities. Tax
consequences may vary depending on the particular status of an investor. No
rulings will be sought from the Internal Revenue Service ("IRS") with respect to
the federal income tax consequences of the Exchange Offer.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO PURCHASE THE NOTES.
EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR CONCERNING THE APPLICATION
OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS PARTICULAR SITUATION
BEFORE DETERMINING WHETHER TO PURCHASE THE NOTES.
THE EXCHANGE OFFER
In the opinion of Gibson, Dunn & Crutcher LLP, counsel to the Company, the
exchange of Old Notes for New Notes pursuant to the Exchange Offer will not
constitute a material modification of the terms of the Notes and, accordingly,
such exchange will not constitute an exchange for federal income tax purposes.
Accordingly, such exchange will have no federal income tax consequences to
holders of Notes, either those who exchange or those who do not, and each holder
of Notes will continue to be required to include interest on the Notes in its
gross income in accordance with its method of accounting for federal income tax
purposes and the Company intends, to the extent required, to take such position.
BACKUP WITHHOLDING
Under the Code, a holder of a Note may be subject, under certain
circumstances, to "backup withholding" at a 31% rate with respect to payments in
respect of interest thereon or the gross proceeds from the disposition thereof.
This withholding generally applies only if the holder (i) fails to furnish his
or her social security or other taxpayer identification number ("TIN") within a
reasonable time after request therefor, (ii) furnishes an incorrect TIN, (iii)
is notified by the IRS that he or she has failed to report properly payments of
interest and dividends and the IRS has notified the Company that he or she is
subject to backup withholding, or (iv) fails, under certain circumstances, to
provide a certified statement, signed under penalty of perjury, that the TIN
provided is his or her correct number and that he or she is not subject to
backup withholding. Any amount withheld from a payment to a holder under the
backup withholding rules is allowable as a credit against such holder's federal
income tax liability, provided that the required information is furnished to the
IRS. Corporations and certain other entities described in the Code and Treasury
regulations are exempt from such withholding if their exempt status is properly
established.
87
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 90 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 1997 (90 days after the date of this Prospectus),
all dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Company has agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for the holders of the Old
Notes), other than commissions or concessions of any brokers or dealers, and
will indemnify the holders of the Old Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Gibson, Dunn & Crutcher LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 30, 1995
and for the fiscal years ended December 31, 1994 and December 30, 1995 appearing
in this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of such firm as
experts in auditing and accounting.
The consolidated balance sheet as of December 28, 1996 and the consolidated
statements of operations, cash flows and changes in common stockholders' equity
for the periods December 31, 1995 through October 29, 1996 (predecessor) and
October 30, 1996 through December 28, 1996 (successor), included in this
Prospectus, have been included herein in reliance on the report, which includes
an explanatory paragraph regarding the October 30, 1996 change in controlling
ownership, of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm, as experts in accounting and auditing.
88
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheet at December 28, 1996............................................................ F-3
Consolidated Statement of Operations for the periods December 31, 1995 through October 29, 1996
(Predecessor) and October 30, 1996 through December 28, 1996 (Successor)................................. F-4
Consolidated Statement of Cash Flows for the periods December 31, 1995 through October 29, 1996
(Predecessor) and October 30, 1996 through December 28, 1996 (Successor)................................. F-5
Consolidated Statement of Changes in Common Stockholders' Equity for the periods December 31, 1995 through
October 29, 1996 (Predecessor) and October 30, 1996 through December 28, 1996 (Successor)................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
Report of Independent Accountants.......................................................................... F-20
Consolidated Balance Sheet at December 30, 1995............................................................ F-21
Consolidated Statement of Income for the fiscal years ended
December 31, 1994 and December 30, 1995.................................................................. F-22
Consolidated Statement of Cash Flows for the fiscal years ended December 31, 1994 and December 30, 1995.... F-23
Consolidated Statement of Changes in Stockholders' Equity for the fiscal years ended December 31, 1994 and
December 30, 1995........................................................................................ F-24
Notes to Consolidated Financial Statements................................................................. F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
The William Carter Company:
We have audited the accompanying consolidated balance sheet of The William
Carter Company and its subsidiaries (the "Company") as of December 28, 1996 and
the related consolidated statements of operations, cash flows and changes in
common stockholders' equity for the period from December 31, 1995 through
October 29, 1996 ("Predecessor," as defined in Note 1) and for the period from
October 30, 1996 through December 28, 1996 ("Successor," as defined in Note 1).
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 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 audit provides a reasonable basis for our opinion.
As explained in Note 1 to the financial statements, controlling ownership of
the Predecessor was acquired by the Company's parent in a purchase transaction
as of October 30, 1996. The acquisition was accounted for as a purchase and,
accordingly, the purchase price was allocated to the assets and liabilities of
the Predecessor based upon their estimated fair value at October 30, 1996.
Accordingly, the financial statements of the Successor are not comparable to
those of the Predecessor.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The William
Carter Company and its subsidiaries as of December 28, 1996, and the
consolidated results of their operations and their cash flows for the
Predecessor period from December 31, 1995 through October 29, 1996 and the
consolidated results of their operations and their cash flows for the Successor
period from October 30, 1996 through December 28, 1996 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Stamford, Connecticut
February 20, 1997
F-2
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR, AT DECEMBER
28, 1996
-------------------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 1,961
Accounts receivable, net of allowance for doubtful accounts of $2,691................ 19,259
Inventories.......................................................................... 76,540
Prepaid expenses and other current assets............................................ 6,378
Deferred income taxes................................................................ 14,502
--------
Total current assets............................................................. 118,640
Property, plant and equipment, net..................................................... 48,221
Tradename, net......................................................................... 99,583
Cost in excess of fair value of net assets acquired, net............................... 38,363
Deferred debt issuance costs, net...................................................... 8,618
Other assets........................................................................... 5,284
--------
$ 318,709
--------
--------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt................................................. $ 900
Accounts payable..................................................................... 14,593
Other current liabilities............................................................ 32,355
--------
Total current liabilities........................................................ 47,848
Long-term debt......................................................................... 144,100
Deferred income taxes.................................................................. 40,861
Other long-term liabilities............................................................ 10,178
--------
Total liabilities................................................................ 242,987
--------
Commitments and contingencies
Redeemable preferred stock, par value $.01 per share, $4,000 per share liquidation and
redemption value, 5,000 shares authorized, issued and outstanding.................... 18,234
--------
Common stockholder's equity:
Common stock, par value $.01 per share, 1,000 shares authorized, issued and
outstanding........................................................................ --
Additional paid-in capital........................................................... 59,566
Accumulated deficit.................................................................. (2,078)
--------
Common stockholder's equity...................................................... 57,488
--------
Total liabilities and stockholder's equity..................................... $ 318,709
--------
--------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-3
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR FOR SUCCESSOR FOR
THE PERIOD FROM THE PERIOD FROM
DECEMBER 31, 1995 OCTOBER 30, 1996
THROUGH THROUGH
OCTOBER 29, 1996 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Net sales.................................................................. $ 266,739 $ 51,496
Cost of goods sold......................................................... 170,027 31,708
----------------- -----------------
Gross profit............................................................... 96,712 19,788
Selling, general and administrative........................................ 79,296 16,672
Nonrecurring charge........................................................ 8,834 --
----------------- -----------------
Operating income........................................................... 8,582 3,116
Interest expense........................................................... 7,075 2,631
----------------- -----------------
Income before income taxes and extraordinary item.......................... 1,507 485
Provision for income taxes................................................. 1,885 212
----------------- -----------------
Income (loss) before extraordinary item.................................... (378) 273
Extraordinary item, net of income tax benefit of $1,270.................... -- 2,351
----------------- -----------------
Net loss................................................................... (378) (2,078)
Dividend requirements on preferred/redeemable preferred and accretion on
redeemable
preferred stock.......................................................... (1,132) (434)
----------------- -----------------
Net loss applicable to common stockholder.................................. $ (1,510) $ (2,512)
----------------- -----------------
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-4
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
FOR THE FOR THE
PERIOD FROM PERIOD FROM
DECEMBER 31, 1995 OCTOBER 30, 1996
THROUGH THROUGH
OCTOBER 29, 1996 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $ (378) $ (2,078)
Extraordinary loss, net of taxes......................................... -- 2351
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization........................................ 6,979 2,588
Deferred tax provision............................................... 2,381 212
Effect of changes in operating assets and liabilities:
Decrease (increase) in accounts receivable......................... (12,540) 7,975
Decrease (increase) in inventories................................. 8,392 (704)
Decrease (increase) in prepaid expenses and other assets........... 2,759 (4,432)
Increase in accounts payable and other liabilities................. 16,812 1,183
-------- -----------------
Net cash provided by operating activities.......................... 24,405 7,095
-------- -----------------
Cash flow from investing activities:
Capital expenditures..................................................... (4,007) (3,749)
Payment to Sellers for the Acquisition................................... -- (117,773)
Payments of Acquisition costs............................................ -- (21,705)
-------- -----------------
Net cash used in investing activities.............................. (4,007) (143,227)
-------- -----------------
Cash flows from financing activities:
Proceeds from Successor revolving line of credit......................... -- 6,100
Payments of Successor revolving line of credit........................... -- (6,100)
Proceeds from other Successor debt....................................... -- 240,000
Payments of other Successor debt......................................... -- (95,000)
Payments of Predecessor revolving line of credit......................... (19,000) --
Payments of other Predecessor debt....................................... (433) (68,062)
Payment of Predecessor accrued interest.................................. -- (1,059)
Payments of financing costs.............................................. (12,432)
Proceeds from issuance of Successor common stock......................... -- 60,000
Proceeds from issuance of Successor preferred stock...................... -- 20,000
Stock issuance costs of Successor preferred stock........................ -- (2,200)
Payment of Predecessor preferred stock dividends......................... -- (2,747)
Payment of Predecessor's guaranteed yield dividend on common stock....... -- (4,237)
-------- -----------------
Net cash (used in) provided by financing activities................ (19,433) 134,263
-------- -----------------
Net increase (decrease) in cash and cash equivalents....................... 965 (1,869)
Cash and cash equivalents at beginning of period........................... 2,865 3,830
-------- -----------------
Cash and cash equivalents at end of period................................. $ 3,830 $ 1,961
-------- -----------------
-------- -----------------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
F-5
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C ADDITIONAL
COMMON COMMON COMMON PAID- ACCUMULATED
COMMON STOCK STOCK STOCK STOCK IN CAPITAL DEFICIT
-------------- ----------- ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR:
BALANCE AT DECEMBER 30, 1995............... $ -- $ -- $ -- $ 92,379 $ (97,057)
Net loss................................... (378)
Preferred stock dividend................... (2,747)
Common stock guaranteed-
yield dividend........................... (4,237)
----- ----- ----- ------- ------------
BALANCE AT OCTOBER 29, 1996................ $ -- $ -- $ -- $ 92,379 $ (104,419)
----- ----- ----- ------- ------------
----- ----- ----- ------- ------------
SUCCESSOR:
BALANCE AT OCTOBER 30, 1996................ $ -- $ -- $ --
Sale of Common Stock on October 30, 1996... 60,000
Accrued dividends and accretion on
redeemable preferred stock............... (434)
Net loss................................... (2,078)
------- ------- ------------
BALANCE AT DECEMBER 28, 1996............... $ -- $ 59,566 $ (2,078)
------- ------- ------------
------- ------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-6
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
The William Carter Company, Inc. (the "Company") is a wholly-owned
subsidiary of Carter Holdings, Inc. ("Holdings"). On October 30, 1996, Holdings,
a company organized on behalf of affiliates of INVESTCORP S.A. ("Investcorp"),
management and certain other investors, acquired 100% of the previously
outstanding common and preferred stock of the Company from MBL Life Assurance
Corporation, CHC Charitable Irrevocable Trust and certain management
stockholders (collectively, the "Sellers"). Financing for the acquisition
totalled $226.1 million and was provided by (i) $56.1 million borrowings under a
$100.0 million senior credit facility; (ii) $90.0 million of borrowings under a
subordinated loan facility; (iii) $70.9 million of capital invested by
affiliates of Investcorp and certain other investors in Holdings, which included
a $20.0 million investment by Holdings in the Company's newly issued redeemable
preferred stock; and (iv) issuance of non-voting stock of Holdings valued at
$9.1 million to certain members of management.
In addition to purchasing or exchanging and retiring the previously issued
capital stock of the Company, the proceeds of the acquisition and financing were
used to make certain contractual payments to management ($11.3 million), pay for
costs of the transactions ($20.9 million), and to retire all outstanding
balances on the Company's previously outstanding long-term debt along with
accrued interest thereon ($69.1 million). In November 1996, the Company offered
and sold in a private placement $100 million of Senior Subordinated Notes, the
net proceeds of which were used to retire the $90 million of subordinated loan
facility borrowings and $5 million of borrowings under the Senior Credit
Facility. Holdings has no assets or investments other than the shares of stock
of The William Carter Company.
For purposes of identification and description, the Company is referred to
as the "Predecessor" for the period prior to the Acquisition, the "Successor"
for the period subsequent to the Acquisition and the "Company" for both periods.
The Acquisition was accounted for by the purchase method. Accordingly, the
assets and liabilities of the Predecessor were adjusted to reflect the
allocation of the purchase price based on estimated fair values. While actual
results may differ from these estimates, such differences are not expected to be
material. A summary of the purchase price allocation is as follows ($000):
<TABLE>
<CAPTION>
Total financed purchase price..................................... $ 226,100
<S> <C>
Less, amounts applied to pay Predecessor dividends and expenses... (14,915)
---------
$ 211,185
---------
---------
Allocated to:
Cash and cash equivalents......................................... $ 3,830
Accounts receivable, net.......................................... 27,234
Inventories....................................................... 75,836
Prepaid expenses and other current assets......................... 4,696
Property, plant and equipment, net................................ 46,081
Tradename......................................................... 100,000
Cost in excess of fair value...................................... 38,522
Deferred debt issuance costs...................................... 8,283
Other assets...................................................... 1,303
Accounts payable.................................................. (13,393)
Other current liabilities......................................... (47,797)
Other long-term liabilities....................................... (9,590)
Net deferred tax liabilities...................................... (26,020)
Preferred stock issuance costs.................................... 2,200
---------
$ 211,185
---------
---------
</TABLE>
F-7
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY (CONTINUED)
A $14.9 million portion of the purchase price was applied to pay certain
Predecessor dividends and expenses. This consisted of $2.8 million and $4.2
million, respectively, in dividends triggered on the Predecessor's preferred and
common stock, plus portions of compensation-related charges ($5.1 million) and
other expense charges ($2.8 million) of the Predecessor incurred in connection
with the Acquisition.
The nonrecurring charge in the Predecessor period December 31, 1995 through
October 29, 1996 reflects total compensation-related charges of $5.3 million for
amounts paid to management in connection with the Acquisition and total other
expense charges of $3.5 million for costs and fees that the Company incurred in
connection with the Acquisition.
The following unaudited pro forma statement of operations presents the
results of operations for the fiscal year ended December 28, 1996 as though the
controlling ownership of the Predecessor had been acquired on December 31, 1995,
with financing established through the private placement, and assumes that there
were no other changes in the operations of the Predecessor. The pro forma
results are not necessarily indicative of the financial results that might have
occurred had the transaction included in the pro forma statement actually taken
place on December 31, 1995, or of future results of operations ($000).
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
FOR THE FOR THE
PERIOD FROM PERIOD FROM PRO FORMA
DECEMBER 31, OCTOBER 30, FOR THE
1995 THROUGH 1996 THROUGH YEAR ENDED
OCTOBER 29, DECEMBER 28, PRO FORMA DECEMBER 28,
1996 1996 ADJUSTMENTS 1996
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales............................................ $ 266,739 $ 51,496 -- $ 318,235
Gross profit......................................... 96,712 19,788 (282)(a) 116,218
Selling, general and administrative.................. 79,296 16,672 3,668(b) 99,636
Nonrecurring charge.................................. 8,834 -- (8,834)(c) --
Operating income..................................... 8,582 3,116 4,884 16,582
Interest expense..................................... 7,075 2,631 7,172(d) 16,878
Income (loss) before income taxes and extraordinary
item............................................... 1,507 485 (2,288) (296)
Provision for income taxes........................... 1,885 212 (1,848)(e) 249
Income (loss) before extraordinary item.............. (378) 273 (440) (545)
Extraordinary item, net.............................. -- 2,351 (2,351)(f) --
Net income (loss).................................... $ (378) $ (2,078) $ 1,911 (545)
Dividend and accretion on redeemable preferred
stock.............................................. $ (434) $ (2,186)(g) (2,620)
Net loss applicable to common stockholder............ $ (3,165)
</TABLE>
Pro forma adjustments represent: (a) increase in depreciation expenses
relating to revaluation of property, plant and equipment; (b) amortization of
tradename and cost in excess of fair value of net assets acquired; decrease to
periodic expense for postretirement benefits; and management fee expense in
accordance with the terms of the Company's new management agreement with
Holdings; (c) elimination of nonrecurring charges directly related to the
transactions; (d) increases in interest expense resulting from the change in the
Company's debt structure; (e) income tax effects of pro forma adjustments; (f)
elimination of extraordinary charges directly related to the transactions; and
(g) dividend and accretion requirements on redeemable preferred stock.
F-8
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company is a United States based manufacturer and marketer of premier
branded childrenswear under the Carter's and Baby Dior labels. The Company
manufactures its products in plants located in the southern United States, Costa
Rica and the Dominican Republic. Products are manufactured for wholesale
distribution to major domestic retailers, and for the Company's 135 retail
outlet stores that market its brand name merchandise and certain products
manufactured by other companies. The retail operations represent approximately
40.6% of consolidated net sales.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. These subsidiaries consist of facilities in
Costa Rica and the Dominican Republic and represent approximately 40% of the
Company's sewing production. All intercompany transactions and balances have
been eliminated in consolidation.
FISCAL YEAR:
The Company's fiscal year ends on the Saturday in December or January
nearest the last day of December. The accompanying consolidated financial
statements reflect the Company's financial position as of December 28, 1996 and
results of operations for the ten month period prior to the Acquisition,
December 31, 1995 through October 29, 1996 (the "Predecessor period") and the
two month period subsequent to the Acquisition, October 30, 1996 through
December 28, 1996 (the "Successor period"). Collectively, the fiscal 1996
Predecessor and Successor periods contain 52 weeks.
REVENUE RECOGNITION:
Revenues from the Company's wholesale operations are recognized upon
shipment; revenues from retail operations are recognized at point of sale.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments that have original
maturities of three months or less to be cash equivalents. At December 28, 1996,
approximately $1.2 million of the Company's cash and cash equivalents were held
in three banks in excess of deposit insurance limits.
ACCOUNTS RECEIVABLE:
Approximately 75% of the Company's gross accounts receivable at December 28,
1996 were from its ten largest wholesale customers, primarily major department
store chains.
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out basis for
wholesale inventories and retail method for retail inventories) or market.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. When fixed assets are sold
or otherwise disposed, the accounts are relieved of the original costs of the
assets and the related accumulated depreciation and
F-9
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
any resulting profit or loss is credited or charged to income. For financial
reporting purposes, depreciation is computed on the straight-line method over
the estimated useful lives of the assets as follows: buildings-- 15 to 50 years;
and machinery and equipment--3 to 10 years. Leasehold improvements are amortized
over the lesser of the asset life or related lease term.
TRADENAME AND COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED:
Cost in excess of fair value of net assets acquired ("goodwill") represents
the excess of the cost of the Acquisition over the fair value of the net assets
acquired. At each balance sheet date, management will assess whether there has
been a permanent impairment of the value of the tradename and goodwill by
comparing anticipated undiscounted future cash flows from operating activities
with the carrying value of these intangibles. The amount of any resulting
impairment will be calculated using the present value of the same cash flows
from operating activities. The factors considered in this assessment will
include operating results, trends, and prospects, as well as the effects of
demand, competition and other economic factors.
The tradename and goodwill are each being amortized on a straight-line basis
over their estimated lives of 40 years. Accumulated amortization of the
tradename and goodwill at December 28, 1996 was $417,000 and $159,000,
respectively.
DEFERRED DEBT ISSUANCE COSTS:
Debt issuance costs are deferred and amortized to interest expense using the
effective interest method over the lives of the related debt. Amortization
approximated $367,000 and $174,000 for the Predecessor and Successor periods,
respectively. An extraordinary item for the Successor period reflects the
write-off of $3.4 million and $0.2 million of deferred debt issuance costs
related to the $90 million Subordinated Loan Facility and portion of the Senior
Credit Facility repaid with the proceeds of the $100 million Senior Subordinated
Notes in November 1996, net of income tax effects.
STOCK-BASED EMPLOYEE COMPENSATION ARRANGEMENTS:
The Company accounts for stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which
the Company was required to adopt in fiscal 1996, has been adopted for
disclosure purposes only. See Note 10.
INCOME TAXES:
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). In accordance with SFAS 109, the deferred tax provision is determined
under the liability method. Deferred tax assets and liabilities are recognized
based on differences between the book and tax bases of assets and liabilities
using presently enacted tax rates. Valuation allowances are established when it
is more likely than not that a deferred tax asset will not be recovered. The
provision for income taxes is the sum of the amount of income taxes paid or
payable for the year as determined by applying the provisions of enacted tax
laws to the taxable income for that year; the net change during the year in the
Company's deferred tax assets and liabilities; and the net change during the
year in any valuation allowances.
F-10
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid in cash approximated $6,708,000 and $2,463,000 for the
Predecessor and Successor periods, respectively. Income taxes paid (received) in
cash approximated $903,000 and $(771,000) for the Predecessor and Successor
periods, respectively.
USE OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL
STATEMENTS:
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management of the Company
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures 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.
NOTE 3--INVENTORIES:
Inventories at December 28, 1996 consisted of the following ($000):
<TABLE>
<S> <C>
Finished goods.................................................. $ 51,700
Work in process................................................. 15,884
Raw materials and supplies...................................... 8,956
-----------
$ 76,540
-----------
-----------
</TABLE>
NOTE 4--FIXED ASSETS:
Fixed assets at December 28, 1996 consisted of the following ($000):
<TABLE>
<S> <C>
Land, buildings and improvements................................ $ 12,679
Machinery and equipment......................................... 37,155
-----------
49,834
Accumulated depreciation and amortization....................... (1,613)
-----------
$ 48,221
-----------
-----------
</TABLE>
Depreciation expense ($000) was $6,612 and $1,613 for the Predecessor and
Successor periods, respectively.
NOTE 5--LONG-TERM DEBT:
Long-term debt at December 28, 1996 consisted of the following ($000):
<TABLE>
<S> <C>
Senior Credit Facility term loan.................................. $ 45,000
Senior Credit Facility revolving credit........................... --
10 3/8% Senior Subordinated Notes due 2006........................ 100,000
---------
145,000
Current maturities................................................ (900)
---------
$ 144,100
---------
---------
</TABLE>
The Senior Credit Facility provides for a $50.0 million Tranche B term loan
facility. The Tranche B term loans have a final scheduled maturity date of
October 31, 2003. The principal amounts of the Tranche B term loans are required
to be repaid in 14 consecutive semi-annual installments totaling $0.9 million in
F-11
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM DEBT: (CONTINUED)
each of fiscal years 1997 through 2000, $5.4 million in fiscal year 2001, $13.5
million in fiscal year 2002 and $22.5 million in fiscal year 2003. In November
1996, proceeds of the 10 3/8% Senior Subordinated Notes were used to repay $5.0
million of the term loan. The repayment schedule has been adjusted ratably for
this payment.
The Senior Credit Facility also provides for a $50.0 million revolving
credit facility. The revolving credit facility will expire on the earlier of (a)
October 31, 2001 and (b) such other date as the revolving credit commitments
thereunder shall terminate in accordance with the terms of the Senior Credit
Facility. The facility has a sublimit of $5.0 million for letters of credit of
which $3.9 million were used for letters of credit as of December 28, 1996. A
commitment fee of 1/2 of 1% per annum is charged on the unused portion of the
revolving credit facility.
Borrowings under the Senior Credit Facility accrue interest at either the
Alternate Base Rate (the "Alternate Base Rate") or an adjusted Eurodollar Rate
(the "Eurodollar Rate"), at the option of the Company, plus the applicable
interest margin. The Alternate Base Rate at any time is determined to be the
highest of (i) the Federal Effective Funds Rate plus 1/2 of 1% per annum, (ii)
the Base CD Rate plus 1% per annum and (iii) The Chase Manhattan Bank's Prime
Rate. The applicable interest margin with respect to loans made under the
revolving credit facility is 2.50% per annum with respect to loans that accrue
interest at the Eurodollar Rate and 1.50% per annum for loans that accrue
interest at the Alternate Base Rate. The applicable interest margin with respect
to Tranche B term loans is 3.00% per annum for loans that accrue interest at the
Eurodollar Rate and 2.00% per annum for loans that accrue interest at the
Alternate Base Rate. The effective interest rate on borrowings outstanding at
December 28, 1996 was 8.5%.
The Senior Facility requires that upon a public offering by the Company,
Holdings or any subsidiary of the Company of its common or other voting stock,
50% of the net proceeds from such offering (only after the redemption or
repurchase or cancellation of the Redeemable Preferred Stock and the redemption
of up to 35% of the Notes) is required to be applied toward the prepayment of
indebtedness under the Senior Credit Facility. Upon the incurrence of any
additional indebtedness (other than indebtedness permitted under the Senior
Credit Facility), or upon the receipt of proceeds from certain asset sales and
exchanges, 100% of the net proceeds from such incurrence, sale or exchange is
required to be so applied. In addition, the Senior Credit Facility requires that
either 75% or 50% (depending on certain circumstances) of Excess Cash Flow (as
defined in the Senior Credit Facility) is required to be applied toward the
prepayment of indebtedness under the Senior Credit Facility. Such prepayments
are required to be applied first to the prepayment of the term loans and,
second, to reduce permanently the revolving credit commitments. Subject to
certain conditions, the Company may, from time to time, make optional
prepayments of loans without premium or penalty.
F-12
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM DEBT: (CONTINUED)
The loans are collateralized by a first priority interest in substantially
all the personal property and certain real property of the Company and a pledge
of all the issued and outstanding stock of the Company and its domestic
subsidiary, as well as 65% of the issued and outstanding stock of the Company's
foreign subsidiaries.
The Senior Credit Facility imposes certain covenants, requirements, and
restrictions on actions by the Company and its subsidiaries that, among other
things, restrict: (i) the incurrence and existence of indebtedness; (ii)
consolidations, mergers and sales of assets; (iii) the incurrence and existence
of liens or other encumbrances; (iv) the incurrence and existence of contingent
obligations; (v) the payment of dividends and repurchases of common stock; (vi)
prepayments and amendments of certain subordinated debt instruments and equity;
(vii) investments, loans and advances; (viii) capital expenditures; (ix) changes
in fiscal year; (x) certain transactions with affiliates; and (xi) changes in
lines of business. In addition, the Senior Credit Facility requires that the
Company comply with specified financial ratios and tests, including minimum cash
flow, a maximum ratio of indebtedness to cash flow and a minimum interest
coverage ratio.
The 10 3/8% Senior Subordinated Notes were issued in November 1996. The
proceeds from the Notes were used to repay $90.0 million of Acquisition-related
financing and $5.0 million of the Senior Credit Facility term loan. The Notes
are uncollateralized.
Interest will be paid semi-annually on June 1 and December 1 of each year,
commencing on June 1, 1997. The Notes will be redeemable, in whole or in part,
at the option of the Company on or after December 1, 2001 at the following
redemption prices, plus accrued interest to the date of redemption:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
2001........................................................................ 105.188%
2002........................................................................ 103.458%
2003........................................................................ 101.729%
2004 and thereafter......................................................... 100.000%
</TABLE>
The Notes contain provisions and covenants, including limitations on other
indebtedness, restricted payments and distributions, sales of assets and
subsidiary stock, liens, and certain other transactions.
Aggregate minimum scheduled maturities of long-term debt during each of the
next five fiscal years are as follows ($000): fiscal year ended December 28,
1997--$900; 1998--$900; 1999--$900; 2000--$900; and 2001--$5,400.
NOTE 6--REDEEMABLE PREFERRED STOCK
On October 30, 1996, the Company authorized and issued 5,000 shares of
preferred stock, par value $.01 per share. At December 28, 1996, there were
5,000 shares of Preferred Stock outstanding, all of which were held by Holdings.
Dividends on the Preferred Stock accrue at a rate of 12% per annum.
Dividends are cumulative and are payable when and as declared by the Board of
Directors of the Company, out of assets legally available therefor, on May 1 and
November 1 of each year, commencing on May 1, 1997. To the extent that dividends
are accrued, but have not been declared and paid, such undeclared and unpaid
dividends will
F-13
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--REDEEMABLE PREFERRED STOCK (CONTINUED)
accrue additional dividends from the date upon which such dividends accrued
until the date upon which they are paid at the rate of 14% per annum.
The shares of Preferred Stock are redeemable at the option of the Company at
a redemption price of $4,000 per share plus accrued and unpaid dividends thereon
to the date fixed for redemption. If permitted under the Senior Credit Facility
and the Indenture, the shares of Preferred Stock may be redeemed in whole, or in
not more than two partial redemptions, provided that in the first of such two
partial redemptions not less than 50% of the number of shares of Preferred Stock
then outstanding shall be redeemed, and that in the second of such two partial
redemptions all of the shares of Preferred Stock then outstanding shall be
redeemed. On December 15, 2007, the Company is required to redeem all
outstanding shares of Preferred Stock at a redemption price of $4,000 per share
plus accrued and unpaid dividends. All outstanding shares of Preferred Stock are
pledged to collateralize the Company's obligations under the Senior Credit
Facility.
The shares of Preferred Stock have no voting rights, other than as provided
by Massachusetts law.
In the event of liquidation, the holders of the Preferred Stock are entitled
to receive out of the assets of the Company available for distribution to
shareholders, on a priority basis, the amount of $4,000 per share, plus a sum
equal to all dividends on such shares accrued and unpaid.
The Preferred Stock was issued for $20,000,000 and was recorded net of
issuance costs of $2,200,000. The carrying amount is increased by periodic
accretion, using the interest method with charges to retained earnings or
paid-in capital, so that the carrying amount will equal the mandatory redemption
amount, including accrued but undeclared or unpaid dividends, at the mandatory
redemption date.
NOTE 7--COMMON STOCK
At December 28, 1996, the authorized common stock of the Company consists of
1,000 shares of common stock, par value $.01 per share. At December 28, 1996,
there were 1,000 shares of Common Stock issued and outstanding, all of which are
held of record by Holdings. All outstanding shares of Common Stock are pledged
to collateralize the Company's obligations under the Senior Credit Facility.
Pursuant to the restrictions contained in the Senior Credit Facility and the
Indenture, the Company is not expected to be able to pay dividends on its Common
Stock for the foreseeable future, other than certain limited dividends or
winding up of the Company. Each share of Common Stock entitles the holder
thereof to one vote on all matters to be voted on by shareholders of the
Company. In the event of a liquidation, the holders of the Common Stock are
entitled to share in the remaining assets of the Company after payment of all
liabilities and after satisfaction of all liquidation preferences payable to the
holders of Preferred Stock.
NOTE 8--PREDECESSOR CAPITAL STOCK:
At December 30, 1995 and until October 30, 1996, the Company had outstanding
50,000 shares of Series A preferred stock, $.01 par value per share, carried at
$50 million; 10,000 shares of Class A Common, $.01 par value per share; 10,000
shares of Class B Common, $.01 par value per share; 2,785 shares of Class C
Common; and $92.4 million of additional paid-in-capital. In conjunction with the
Acquisition, cumulative dividends totalling $2.8 million on the Series A
preferred, and $4.2 million guaranteed-yield dividends on the common were
required to be paid to the respective stockholders, and all shares were acquired
and retired.
F-14
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--EMPLOYEE BENEFIT PLANS:
The Company offers a comprehensive plan to current and certain future
retirees and their spouses until they become eligible for Medicare and a
Medicare Supplement plan. The Company also offers life insurance to current and
certain future retirees. Employee contributions are required as a condition of
participation for both medical benefits and life insurance, and the Company's
liabilities are net of these employee contributions.
The following table sets forth the components of the accumulated
postretirement benefit obligation (APBO) at December 28, 1996 ($000):
<TABLE>
<S> <C>
Retirees............................................................ $ 5,527
Actives ineligible to retire........................................ 2,552
Actives eligible to retire.......................................... 406
---------
Total APBO.......................................................... $ 8,485
---------
---------
</TABLE>
The funded status of the plan is reconciled to the accrued postretirement
benefit liability recognized in the accompanying consolidated balance sheet at
December 28, 1996 as follows ($000):
<TABLE>
<S> <C>
Total APBO.......................................................... $ 8,485
Plan assets at fair value........................................... --
Unrecognized net loss............................................... 56
---------
Accrued postretirement benefit liability............................ $ 8,541
---------
---------
</TABLE>
Net periodic postretirement benefit cost (NPPBC) charged to operations for
the predecessor period from December 31, 1995 through October 29, 1996 and
successor period from October 30, 1996 through December 28, 1996 included the
following components ($000):
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
PERIOD FROM PERIOD FROM
DECEMBER 31, 1995 OCTOBER 30, 1996
THROUGH THROUGH
OCTOBER 29, 1996 DECEMBER 28, 1996
------------------- -------------------
<S> <C> <C>
Service cost........................................... $ 100 $ 21
Interest cost.......................................... 482 95
Amortization of transition obligation.................. 318 --
Amortization of net loss............................... 45 --
----- -----
Total NPPBC............................................ $ 945 $ 116
----- -----
----- -----
</TABLE>
The discount rate used in determining the APBO was 7.0% as of December 28,
1996. In conjunction with purchase accounting for the Acquisition, the Company
was required to record a liability on its balance sheet for the accumulated
postretirement benefit obligation at the Acquisition date. Accordingly, net
periodic postretirement benefit cost for the Successor is not comparable to that
for the Predecessor. The effects on the Company's plan of all future increases
in health care cost are borne by employees; accordingly, increasing medical
costs are not expected to have any material effect on the Company's future
financial results.
F-15
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--EMPLOYEE BENEFIT PLANS: (CONTINUED)
The Company has an obligation under a defined benefit plan covering certain
former officers. At December 28, 1996, the present value of the estimated
remaining payments under this plan was approximately $1.8 million and is
included in other long-term liabilities.
Prior to the Acquisition, the Company also maintained a Management Equity
Participation Plan ("MEPP") and a Long Term Incentive Plan ("LTIP") for
executive and other key salaried employees. These plans were terminated in
conjunction with the Acquisition. Expense related to these two plans for the
Predecessor period totalled $4.9 million, including $3.3 million triggered as a
result of the Acquisition.
NOTE 10--MANAGEMENT STOCK INCENTIVE PLAN:
Upon consummation of the Acquisition, Holdings adopted a Management Stock
Incentive Plan in order to provide incentives to employees and directors of
Holdings and the Company by granting them awards tied to Class C stock of
Holdings. In October 1996, Holdings granted options to purchase up to 75,268
shares of its Class C stock to certain employees of the Company, all of which
remain outstanding as of December 28, 1996. The exercise price of each such
option is $60.00 per share, which is the same price per share paid by existing
holders of Holdings' Class C stock, and which is deemed to be the fair market
value of the Company's common stock at the time the options were granted.
Accordingly, no compensation expense has been recognized on these options in the
statement of operations for the Successor period. The options granted vest
ratably over the next five years and contingent upon the Company meeting
specific earnings targets, with weighted average remaining contractual lives of
approximately ten years at December 28, 1996. No options were exercisable as of
December 28, 1996.
The fair value of each granted option, at the date of grant, has been
estimated to be $29.50. This was estimated using a minimum value method, at a
risk free interest rate assumption of 7.0%, expected life of ten years, and no
expected dividends.
If the fair value based method required by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," had been applied,
there would have been no compensation cost associated with these option grants
for the Successor period and the Company's net income for the Successor period
would have been unchanged.
NOTE 11--INCOME TAXES:
The provision for income taxes consisted of the following ($000):
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
PERIOD FROM PERIOD FROM
DECEMBER 31, 1995 OCTOBER 30, 1996
THROUGH THROUGH
OCTOBER 29, 1996 DECEMBER 28, 1996
----------------- -------------------
<S> <C> <C>
Current tax provision (benefit):
Federal.............................................. $ (484) $ --
State................................................ (12) --
------ -----
Total current provision (benefit)................ (496) --
------ -----
Deferred tax provision:
Federal.............................................. 2,121 188
State................................................ 260 24
------ -----
Total deferred provision......................... 2,381 212
------ -----
Total provision.................................. $ 1,885 $ 212
------ -----
------ -----
</TABLE>
F-16
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES: (CONTINUED)
Components of net deferred tax assets and liabilities are as follows, at
December 28, 1996 ($000):
<TABLE>
<S> <C>
Deferred tax assets:
Accounts receivable allowance............................. $ 1,279
Inventory valuation....................................... 7,740
Liability accruals........................................ 6,659
Deferred employee benefits................................ 3,820
Loss and tax credit carryforwards......................... 1,149
Other..................................................... 808
-------
Total deferred tax assets............................. $ 21,455
-------
Deferred tax liabilities
Tradename................................................. $ 36,846
Depreciation.............................................. 8,788
Deferred employee benefits................................ 1,733
Other..................................................... 447
-------
Total deferred tax liabilities........................ $ 47,814
-------
-------
</TABLE>
The difference between the Company's effective income tax rate and the
federal statutory tax rate is reconciled below:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
PERIOD FROM PERIOD FROM
DECEMBER 31, 1995 OCTOBER 30, 1996
THROUGH THROUGH
OCTOBER 29, 1996 DECEMBER 28, 1996
--------------------- ---------------------
<S> <C> <C>
Statutory federal income tax rate.......................................... 34% 34%
State income taxes, net of federal income tax benefit...................... 11 3
Non-deductible Acquisition costs........................................... 77 --
Goodwill amortization...................................................... -- 11
Non-taxable foreign income................................................. (3) (2)
Other...................................................................... 6 (2)
--- ---
Total...................................................................... 125% 44%
--- ---
--- ---
</TABLE>
F-17
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--LEASE COMMITMENTS:
Annual rent expense under operating leases was $10,902 and $2,148 in the
Predecessor and Successor periods, respectively. Minimum annual rental
commitments under current noncancelable operating leases as of December 28, 1996
were as follows ($000):
<TABLE>
<CAPTION>
BUILDINGS,
PRIMARILY TOTAL
RETAIL TRANSPORTATION DATA PROCESSING NONCANCELABLE
YEAR STORES EQUIPMENT EQUIPMENT LEASES
- ---------------------------------------------------- ----------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
1997................................................ $ 10,905 $ 544 $ 180 $ 11,629
1998................................................ 8,254 262 180 8,696
1999................................................ 6,359 157 -- 6,516
2000................................................ 4,125 96 -- 4,221
2001................................................ 2,193 40 -- 2,233
Thereafter.......................................... 2,445 -- -- 2,445
----------- ------ ----- -------------
Total............................................... $ 34,281 $ 1,099 $ 360 $ 35,740
----------- ------ ----- -------------
----------- ------ ----- -------------
</TABLE>
NOTE 13--OTHER CURRENT LIABILITIES:
Other current liabilities as of December 28, 1996 consisted of the following
($000):
<TABLE>
<S> <C>
Accrued liability for retail store closures................. $ 6,000
Accrued liability for plant closures........................ 3,000
Accrued income taxes........................................ 4,477
Accrued workers compensation................................ 3,000
Accrued incentive compensation.............................. 2,400
Other current liabilities................................... 13,478
-------
$ 32,355
-------
-------
</TABLE>
NOTE 14--VALUATION AND QUALIFYING ACCOUNTS:
Information regarding valuation and qualifying accounts for the Predecessor
and Successor periods are as follows ($000):
<TABLE>
<CAPTION>
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
-----------------
<S> <C>
Predecessor:
Balance, December 30, 1995..................................................................... $ 2,888
Additions, charged to expense................................................................ 408
Writeoffs.................................................................................... (772)
------
Balance, October 29, 1996...................................................................... $ 2,524
------
------
Successor:
Balance, October 30, 1996...................................................................... $ 2,524
Additions, charged to expense................................................................ 156
Recoveries................................................................................... 11
------
Balance, December 28, 1996..................................................................... $ 2,691
------
------
</TABLE>
F-18
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--RELATED PARTY TRANSACTIONS:
In connection with the Acquisition, Invifin SA ("Invifin"), an affiliate of
Investcorp, received a fee of $2.2 million. Also in connection with the
Acquisition, the Company paid Investcorp International, Inc. ("International")
advisory fees aggregating $2.25 million. Holdings also paid $1.5 million to
Invifin in fees in connection with providing a standby commitment to fund the
Acquisition. In connection with the closing of the Acquisition, the Company
entered into an agreement for management advisory and consulting services (the
"Management Agreement") with International pursuant to which the Company agreed
to pay International $1.35 million per annum for a five-year term. At the
closing of the Acquisition, the Company prepaid International $4.05 million for
the first three years of the term of the Management Agreement in accordance with
its terms.
In October 1996, the Company made a $1.5 million loan to an officer of the
Company. The loan has a term of five years, is collateralized by the officer's
stock of Holdings and bears interest at 6.49%, compounded semi-annually. The
loan is prepayable with the proceeds of any disposition of his stock in
Holdings.
NOTE 16--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
At December 28, 1996, the carrying value of the Company's debt is deemed to
approximate its fair value, since the terms of such debt, including interest
rates, are variable with market rates and/or were recently negotiated.
NOTE 17--SUBSEQUENT EVENT:
In February 1997, the Company filed a registration statement on Form S-4
with the Securities and Exchange Commission related to an Exchange Offer for
$100,000,000 of 10 3/8% Series A Senior Subordinated Notes for a like amount of
the 10 3/8% Senior Subordinated Notes issued in the November 1996 private
placement.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The William Carter Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in stockholders'
equity present fairly, in all material respects, the financial position of The
William Carter Company and its subsidiaries at December 30, 1995 and the results
of their operations and their cash flows for the fiscal years ended December 31,
1994 and December 30, 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 audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Stamford, Connecticut
February 16, 1996
F-20
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 30,
1995
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................................... $ 2,865
Accounts receivable, net of allowances for doubtful accounts of $2,888............................ 14,694
Inventories....................................................................................... 94,428
Prepaid expenses and other current assets......................................................... 6,206
------------
Total current assets.......................................................................... 118,193
Property, plant and equipment, net.................................................................. 46,785
Other assets........................................................................................ 2,238
------------
$ 167,216
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.............................................................. $ 5,143
Accounts payable.................................................................................. 10,947
Other current liabilities......................................................................... 17,510
------------
Total current liabilities..................................................................... 33,600
Long-term debt...................................................................................... 82,352
Other long-term liabilities......................................................................... 5,942
------------
Total liabilities............................................................................. 121,894
------------
Stockholders' equity:
Preferred stock, Series A, par value $.01 per share, 50,000 shares authorized and outstanding..... 50,000
Common stock, Class A, 100,000 shares authorized, 10,000 shares issued and outstanding, par value
$.01 per share.................................................................................. --
Common stock, Class B, 100,000 shares authorized, 10,000 shares issued and outstanding, par value
$.01 per share.................................................................................. --
Common stock, Class C, 100,000 shares authorized, 2,785 issued and outstanding.................... --
Capital in excess of par value.................................................................... 92,379
Accumulated deficit............................................................................... (97,057)
------------
Total stockholders' equity.................................................................... 45,322
------------
$ 167,216
------------
------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-21
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Net sales............................................................................ $ 271,549 $ 295,431
Cost of goods sold................................................................... 175,244 191,105
------------ ------------
Gross profit......................................................................... 96,305 104,326
Selling, general and administrative.................................................. 77,472 83,223
------------ ------------
Operating income..................................................................... 18,833 21,103
Interest expense..................................................................... 6,445 7,849
------------ ------------
Income before income taxes........................................................... 12,388 13,254
Provision for income taxes........................................................... 4,000 5,179
------------ ------------
Net income........................................................................... $ 8,388 $ 8,075
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
F-22
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------
<S> <C> <C>
DECEMBER 31, DECEMBER 30,
1994 1995
------------- ------------
Cash flows from operating activities:
Net income......................................................................... $ 8,388 $ 8,075
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.................................................. 6,915 7,737
Deferred income tax benefit.................................................... (1,407) (465)
(Gain) loss on disposal of assets.............................................. 189 (40)
Compensation charge on stock issued to employees............................... -- 276
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable............................................................ 744 (3,878)
Inventories.................................................................... (5,459) (28,099)
Prepaid expenses and other current assets...................................... 382 1,641
Increase in liabilities:
Accounts payable............................................................... 1,914 3,981
Other current liabilities...................................................... 1,131 3,431
Other long-term liabilities.................................................... 1,846 1,825
------------- ------------
Net cash provided by (used in) operating activities........................ 14,643 (5,516)
------------- ------------
Cash flows from investing activities:
Proceeds from sale of assets....................................................... 70 346
Capital expenditures............................................................... (10,996) (13,715)
------------- ------------
Net cash used in investing activities...................................... (10,926) (13,369)
------------- ------------
Cash flows from financing activities:
Borrowings under revolving credit facility......................................... -- 19,000
Payments under term loan and subordinated note agreements.......................... (1,243) (2,732)
Payments of industrial revenue bond................................................ (503) (433)
Preferred stock dividend........................................................... -- (1,678)
------------- ------------
Net cash (used in) provided by financing activities........................ (1,746) 14,157
------------- ------------
Net increase (decrease) in cash and cash equivalents................................. 1,971 (4,728)
Cash and cash equivalents at beginning of period..................................... 5,622 7,593
------------- ------------
Cash and cash equivalents at end of period........................................... $ 7,593 $ 2,865
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
F-23
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A CLASS A CLASS B CLASS C CAPITAL IN
PREFERRED COMMON COMMON COMMON EXCESS ACCUMULATED
STOCK STOCK STOCK STOCK OF PAR VALUE DEFICIT TOTAL
--------- ----------- ----------- ----------- --------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994.............. $ 50,000 -- -- -- $ 92,103 $ (111,842) $ 30,261
Net income.............................. -- -- -- -- -- 8,388 8,388
--------- ----- ----- ----- ------- ------------ ---------
BALANCE AT DECEMBER 31, 1994............ 50,000 -- -- -- 92,103 (103,454) 38,649
Preferred stock dividend................ -- -- -- -- -- (1,678) (1,678)
Issuance of Class C common stock to
employees............................. -- -- -- -- 276 -- 276
Net income.............................. -- -- -- -- -- 8,075 8,075
--------- ----- ----- ----- ------- ------------ ---------
BALANCE AT DECEMBER 30, 1995............ $ 50,000 $ -- $ -- $ -- $ 92,379 $ (97,057) $ 45,322
--------- ----- ----- ----- ------- ------------ ---------
--------- ----- ----- ----- ------- ------------ ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-24
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The William Carter Company (the "Company") is a United States based
manufacturer and marketer of premier branded childrenswear under the Carter's
and Baby Dior labels. The Company manufactures its products in plants located in
the southern United States, Costa Rica and the Dominican Republic.
Products are manufactured for wholesale distribution to major domestic
retailers, and for the Company's more than 120 retail outlet stores that market
its brand name merchandise and certain products manufactured by other companies.
Approximately 56.5% of the Company's 1995 net sales were wholesale and 43.5%
were retail.
PRINCIPLES OF CONSOLIDATION:
Effective January 1, 1995, Carter Holdings Corp., the former parent company,
was merged into the Company. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
FISCAL YEAR:
The Company's fiscal year ends on the Saturday in December or January
nearest the last day of December. The fiscal years ended December 31, 1994 and
December 30, 1995 each contain 52 weeks.
REVENUE RECOGNITION:
Revenues from the Company's wholesale operations are recognized upon
shipment; revenues from retail operations are recognized at point of sale.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments that have original
maturities of three months or less to be cash equivalents.
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out basis for
wholesale inventories and retail method for retail inventories) or market.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. When fixed assets are sold
or otherwise disposed, the accounts are relieved of the original costs of the
assets and the related accumulated depreciation and any resulting profit or loss
is credited or charged to income. For financial reporting purposes, depreciation
is computed on the straight-line method over the estimated useful lives of the
assets as follows: buildings-- 15 to 50 years; and machinery and equipment--4 to
10 years. Leasehold improvements are amortized over the lesser of the asset life
or related lease term.
DEBT ISSUE COSTS:
Debt issue costs are deferred and amortized over a five year period ending
in fiscal year 1996. Amortization approximated $400 in fiscal 1994 and 1995.
F-25
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
INCOME TAXES:
The Company accounts for income taxes under the provisions of FASB Statement
No. 109, "Accounting for Income Taxes" (FAS 109). In accordance with FAS 109,
the deferred tax provision is determined under the liability method. Deferred
tax assets and liabilities are recognized based on differences between the book
and tax bases of assets and liabilities using presently enacted tax rates. The
provision for income taxes is the sum of the amount of income taxes paid or
payable for the year as determined by applying the provisions of enacted tax
laws to the taxable income for that year and the net change during the year in
the Company's deferred tax assets and liabilities.
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid in cash approximated $5,840 and $7,323 for the fiscal years
ended December 31, 1994 and December 30, 1995, respectively. Income taxes paid
in cash approximated $5,342 and $4,212 in fiscal 1994 and 1995 respectively.
USE OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL
STATEMENTS:
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management of the Company
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures 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.
NOTE 2--INVENTORIES:
Inventories at December 30, 1995 consisted of the following:
<TABLE>
<S> <C>
Finished goods.................................................. $ 61,032
Work in process................................................. 20,402
Raw materials and supplies...................................... 12,994
-----------
$ 94,428
-----------
-----------
</TABLE>
NOTE 3--FIXED ASSETS:
Fixed assets at December 30, 1995 consisted of the following:
<TABLE>
<S> <C>
Land, buildings and improvements................................ $ 19,218
Machinery and equipment......................................... 64,476
-----------
83,694
Accumulated depreciation and amortization....................... (36,909)
-----------
$ 46,785
-----------
-----------
</TABLE>
F-26
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--LONG-TERM DEBT:
Long-term debt at December 30, 1995 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 30,
1995
------------
<S> <C>
Term loan....................................................................... $ 46,962
Revolving credit facility....................................................... 19,000
Senior subordinated note--prime plus 1%......................................... 4,485
Subordinated note--prime plus 1%................................................ 15,702
Industrial revenue bond, interest at 90-day CD rate, payable in installments
through 1999.................................................................. 1,346
------------
87,495
Current maturities.............................................................. (5,143)
------------
$ 82,352
------------
------------
</TABLE>
The revolving credit facility provides for maximum borrowings of $30,000, of
which $19,000 was outstanding as of December 30, 1995. The facility has a
sublimit of $5,000 for letters of credit, of which $3,868 and $3,306 were used
for letters of credit as of December 31, 1994 and December 30, 1995,
respectively. Interest on the term loan and revolving credit facilities is
payable at the greater of the lender's prime rate or the federal funds rate plus
50 basis points, plus an additional margin percentage. Each $5,000 repayment of
the term loan facility results in a 20 basis point reduction in the margin until
the margin reaches zero. As of December 30, 1995, the interest rate on the term
loan and revolving credit facility was equal to the prime rate plus 60 basis
points.
Amounts drawn under the revolving credit facility may not exceed the
borrowing base (as defined) calculated by reference to certain percentages of
eligible accounts receivable and eligible inventory. Prepayments of the term
loan are required to be made from the net cash proceeds realized from sales of
assets, other than inventory sold in the normal course of business.
The facilities agreement contains various covenants which require the
Company to meet certain defined financial tests including net worth, current
ratio, capital expenditures, interest coverage ratio, a debt to worth ratio and
dividend restrictions. The agreement is collateralized by all assets of the
Company.
Interest on the senior subordinated note and the subordinated note is
payable on a semi-annual basis. Interest on the subordinated note is payable at
the rate of prime plus 1%, but may not exceed 14%.
Principal payments on the term loan, senior subordinated note and the
subordinated note are required to be made in fiscal 1994 through 1996 from the
excess cash flows (as defined) generated in each of the preceding fiscal years.
Cash flow payments will be allocated on a pro rata basis based on the
outstanding balances of the three classes of debt. Principal payments equal to
75% of defined excess cash flows for the preceding fiscal year are required to
be made on or before April 30 of the subsequent year. There was no defined
excess cash flow generated in fiscal 1995.
The term loan must be reduced by a minimum of $5,000 each year from 1994 to
1996. As of December 30, 1995, the term loan has been reduced by payments of
$12,790, of which $10,290 qualifies toward minimum payments due under the
agreement. If in any one year the Company is unable to meet its minimum payment,
it will be given credit toward the shortfall for any defined excess cash flow
payments
F-27
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--LONG-TERM DEBT: (CONTINUED)
made in prior years above minimum payments for those years. The Company can, at
any time, prepay without penalty indebtedness under the term loan and revolving
credit facilities. The revolving credit and term loan facilities agreement
expires on December 31, 1996, by which time management expects to have
refinancing in place. The subordinated notes are due on December 31, 2001.
Aggregate minimum scheduled maturities of long-term debt during each of the
next five fiscal years are as follows: fiscal year ended December 28,
1996--$5,143; 1997--$61,685; 1998--$433; 1999--$47, and 2000--$0.
Industrial revenue bond financing was obtained in connection with the
construction of a distribution facility. Financing of $6,500 originally
available under this agreement has been expended and the obligation is secured
by the related building, machinery and equipment.
FASB Statement No. 107, "Disclosure about Fair Value of Financial
Instruments," requires the Company to estimate and disclose, if practicable, the
fair value of its long-term debt. The Company has disclosed the carrying
amounts, interest rates and maturity dates of its long-term debt. Management
estimates that the aggregate fair value of these obligations and other financial
instruments approximates their aggregate carrying value.
NOTE 5--CAPITAL STOCK:
For each of Class A and Class B common stock, 100,000 shares of stock, par
value $.01 per share, are authorized. There were 10,000 shares each of Class A
and Class B common stock issued and outstanding at the end of fiscal 1995. The
holders of Class A and Class B common stock are entitled to four votes per share
and one vote per share, respectively.
In January 1995, 100,000 shares of Class C non-voting common stock, par
value $.01 per share, were authorized of which 2,785 shares were issued to
participants in the Management Equity Participation Plan (see Note 6).
As of the end of fiscal 1995, 50,000 shares of non-voting Series A preferred
stock, par value $.01 per share, were authorized, issued and outstanding.
Dividends on Series A preferred stock are payable on May 31 of each year,
commencing May 31, 1995, and will be equal to the lesser of (1) 20% of
consolidated net income for the preceding fiscal year or (2) 5% of the
liquidation value of all preferred stock; such dividends are cumulative. The
dividend payable on May 31, 1996, calculated based on 1995 consolidated net
income, will be $1,615. The dividend paid on May 31, 1995 was $1,678.
NOTE 6--EMPLOYEE BENEFIT PLANS:
The Company offers a comprehensive plan to current and certain future
retirees and their spouses until they become eligible for Medicare and a
Medicare Supplement plan. The Company also offers life insurance to current and
certain future retirees. Employee contributions are required as a condition of
participation for both medical benefits and life insurance, and the Company's
liabilities are net of these employee contributions.
F-28
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)
The following table sets forth the components of the accumulated
postretirement benefit obligation (APBO) as of December 30, 1995:
<TABLE>
<CAPTION>
DECEMBER 30,
1995
-------------
<S> <C>
Retirees........................................................................ $ 5,748
Actives ineligible to retire.................................................... 2,300
Actives eligible to retire...................................................... 590
Disableds....................................................................... --
------
Total APBO...................................................................... $ 8,638
------
------
</TABLE>
The funded status of the plan is reconciled to the accrued postretirement
benefit liability recognized in the accompanying consolidated balance sheet:
<TABLE>
<CAPTION>
DECEMBER 30,
1995
------------
<S> <C>
Total APBO...................................................................... $ 8,638
Plan assets at fair value....................................................... --
Unrecognized transition obligation.............................................. (6,485)
Unrecognized net loss........................................................... (1,353)
------------
Accrued postretirement benefit liability........................................ $ 800
------------
------------
</TABLE>
Net periodic postretirement benefit cost (NPPBC) charged to operations for
fiscal 1994 and 1995 included the following components:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Service cost............................................................... $ 116 $ 121
Interest cost.............................................................. 539 577
Amortization of transition obligation...................................... 381 381
Amortization of net loss................................................... -- 54
--------- ---------
Total NPPBC................................................................ $ 1,036 $ 1,133
--------- ---------
--------- ---------
</TABLE>
The discount rate used in determining the APBO was 7.0% as of December 30,
1995. The effects on the Company's plan of all future increases in health care
cost are borne by employees; accordingly, increasing medical costs are not
expected to have any material effect on the Company's future financial results.
The Company has an obligation under a defined benefit plan covering certain
former officers. At December 30, 1995, the present value of the estimated
remaining payments under this plan was approximately $1,934.
The Company also maintains a Management Equity Participation Plan ("MEPP")
and Long Term Incentive Plan ("LTIP") for executive and other key salaried
employees. Long-term liabilities under these plans as of December 30, 1995 were
$1,976 and $2,908, respectively. In 1995, the Board of Directors
F-29
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)
capped the amount payable under the MEPP at $5,000, and approved the issuance to
plan participants of 2,785 shares of Class C common stock of the Company (see
Note 5).
Distributions under the MEPP are payable upon a "trigger event" (as defined)
which includes, among other things, the sale of the Company. In the absence of a
trigger event, distributions to MEPP participants are payable upon the later of
age 62 or January 1, 2002. LTIP awards are determined annually based on five
percent of the Company's earnings before interest and taxes. Cumulative LTIP
awards will be distributed to plan participants in 1997.
NOTE 7--INCOME TAXES:
The provision for income taxes for fiscal years 1994 and 1995 consisted of
the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------
<S> <C> <C>
DECEMBER 31, DECEMBER 30,
1994 1995
------------ -------------
Current tax provision:
Federal........................................................ $ 4,387 $ 4,612
State.......................................................... 1,020 1,032
------------ ------
Total current.............................................. 5,407 5,644
Deferred tax provision (benefit):
Federal........................................................ (1,407) (372)
State.......................................................... -- (93)
Deferred tax benefit............................................. (1,407) (465)
------------ ------
Total provision............................................ $ 4,000 $ 5,179
------------ ------
------------ ------
</TABLE>
Temporary differences which give rise to deferred tax assets and liabilities
at December 30, 1995 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Inventory valuation........................................... $ 4,801
Accrued liabilities........................................... 2,426
Accounts receivable allowance................................. 1,376
State taxes................................................... 481
Debt issue costs.............................................. 265
Deferred compensation......................................... 2,459
-----------
Total deferred tax assets................................. 11,808
-----------
Deferred tax liabilities
Depreciation.................................................. 7,746
Deferred employee benefits.................................... 2,190
-----------
Total deferred tax liabilities............................ 9,936
-----------
Net deferred tax assets................................... $ 1,872
-----------
-----------
</TABLE>
F-30
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 7--INCOME TAXES: (CONTINUED)
Deferred tax assets are included in the accompanying consolidated balance
sheet under the caption "other assets." The deferred tax asset at the beginning
of 1994 was fully offset by a valuation allowance. The valuation allowance was
released during 1994 based on the Company's sustained profitability.
The difference between the Company's effective income tax rate and the
federal statutory tax rate is reconciled below:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------------
DECEMBER 31, DECEMBER 30,
1994 1995
--------------- ---------------
<S> <C> <C>
Statutory federal income tax rate.................................................... 35.0% 35.0%
State income taxes, net of federal income tax benefit................................ 5.4 4.6
Alternative minimum tax.............................................................. (1.7) --
Valuation allowance reversal, net.................................................... (5.4) --
Jobs tax credit...................................................................... (1.6) (0.7)
Other................................................................................ 0.6 0.2
--- ---
Total................................................................................ 32.3% 39.1%
--- ---
--- ---
</TABLE>
NOTE 8--LEASE COMMITMENTS:
Annual rent expense under operating leases was $9,653 and $11,228 in fiscal
1994 and 1995, respectively. Minimum annual rental commitments under current
noncancelable operating leases as of December 30, 1995 were as follows:
<TABLE>
<CAPTION>
BUILDINGS,
PRIMARILY TOTAL
RETAIL TRANSPORTATION DATA PROCESSING NONCANCELABLE
YEAR STORES EQUIPMENT EQUIPMENT LEASES
- ---------------------------------------------------- ----------- -------------- ----------------- -------------
<S> <C> <C> <C> <C>
1996................................................ $ 10,893 $ 490 $ 262 $ 11,645
1997................................................ 9,388 469 -- 9,857
1998................................................ 7,057 206 -- 7,263
1999................................................ 5,122 110 -- 5,232
2000................................................ 2,878 50 -- 2,928
Thereafter.......................................... 3,806 -- -- 3,806
----------- ------- ----- -------------
Total............................................... $ 39,144 $ 1,325 $ 262 $ 40,731
----------- ------- ----- -------------
----------- ------- ----- -------------
</TABLE>
NOTE 9--OTHER CURRENT LIABILITIES:
Other current liabilities at December 30, 1995 consisted of the following:
<TABLE>
<S> <C>
Accrued income taxes payable................................. $ 5,962
Accrued health insurance..................................... 3,082
Accrued incentive compensation............................... 1,753
Other current liabilities.................................... 6,713
-------------
$ 17,510
-------------
-------------
</TABLE>
F-31
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--VALUATION AND QUALIFYING ACCOUNTS:
Information regarding valuation and qualifying accounts for fiscal years
1994 and 1995 are as follows:
<TABLE>
<CAPTION>
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
---------------------
<S> <C>
Balance at January 1, 1994............................................. $ 2,535
Additions, charged to expense........................................ 622
Writeoffs............................................................ (1,006)
-------
Balance at December 31, 1994........................................... $ 2,151
-------
-------
Balance at December 31, 1994........................................... $ 2,151
Additions, charged to expense........................................ 653
Recoveries........................................................... 84
-------
Balance at December 30, 1995........................................... $ 2,888
-------
-------
</TABLE>
F-32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Summary................................................................... 3
Risk Factors.............................................................. 13
Use of Proceeds........................................................... 17
The Acquisition........................................................... 18
Capitalization............................................................ 19
Unaudited Pro Forma Condensed Consolidated Financial Statements........... 20
Selected Historical and Pro Forma Financial
Data.................................................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 27
The Exchange Offer........................................................ 33
Business.................................................................. 39
Management................................................................ 50
Ownership of Voting Securities............................................ 55
Certain Transactions...................................................... 56
Capital Structure......................................................... 56
Description of Notes...................................................... 60
Certain Federal Income Tax Considerations................................. 87
Plan of Distribution...................................................... 88
Legal Matters............................................................. 88
Experts................................................................... 88
Index to Consolidated Financial Statements................................ F-1
</TABLE>
-------------------
UNTIL , 1997 (90 DAYS AFTER THE
DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES,
WHETHER OR NOT PARTICIPATING IN THE ORIGINAL DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
--------------
PROSPECTUS
--------------
$100,000,000
THE WILLIAM CARTER COMPANY
10 3/8% SERIES A
SENIOR SUBORDINATED NOTES
DUE 2006
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 13 of Chapter 156B of the Massachusetts Business Corporation Law
(the "MBCL") authorizes a Massachusetts corporation to include a provision in
its articles of organization limiting or eliminating the personal liability of
its directors to the corporation and its shareholders for monetary damages for
breach of the directors' fiduciary duty of care except for (i) any breach of the
directors' duty of loyalty to the Company or its shareholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases, redemptions, loans or other distributions and (iv) any transaction
from which the director derived an improper personal benefit. Although Section
13 of Chapter 156B of the MBCL does not change a director's duty of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Company's Articles of Organization includes a
provision which limits or eliminates the personal liability of its directors to
the fullest extent permitted by Section 13 of Chapter 156B of the MBCL.
The Company's Bylaws provide, in effect, that, to the fullest extent under
the circumstances permitted by Section 67 of Chapter 156B of the MBCL, the
Company will indemnify against any expense, liability and loss (including
attorneys' fees) any person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he or she is or was a director or an officer of the Company or is or was
serving at the request of the Company as a director, officer, employee, agent,
partner or trustee of another corporation or enterprise. Under Section 67 of
Chapter 156B of the MBCL, no indemnification shall be provided for any person
with respect to any matter as to which such person shall have been adjudicated
in any proceeding not to have acted in good faith in the reasonable belief that
their action was in the best interest of the Company. The inclusion of these
indemnification provisions in the Company's Bylaws is intended to enable the
Company to attract qualified persons to serve as directors and officers who
might otherwise be reluctant to do so. The Company is also required, under
certain circumstances, to advance expenses to an indemnitee.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*2 Agreement of Merger between TWCC Acquisition Corp. and the Company, dated September 18, 1996.
*3.1 Amended and Restated Articles of Organization of the Company.
*3.2 Articles of Merger of the Company.
*3.3 By-laws of the Company.
*3.4 Certificate of Designation relating to the Preferred Stock of the Company, dated October 30, 1996
(included in Exhibit 3.2).
*4.1 Indenture between the Company and State Street Bank and Trust Company, as Trustee, dated as of November
25, 1996.
*4.2 Exchange and Registration Rights Agreement between the Company and BT Securities Corporation, Bankers
Trust International plc, Chase Securities Inc. and Goldman, Sachs & Co. dated November 25, 1996.
*4.3 Letter of Transmittal.
5.1 Opinion of Gibson, Dunn & Crutcher LLP.
5.2 Opinion of Testa, Hurwitz & Thibeault LLP.
8.1 Opinion of Gibson, Dunn & Crutcher LLP relating to tax matters.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*10.1 Employment Agreement between the Company and Frederick J. Rowan, II.
*10.2 Employment Agreement between the Company and Joseph Pacifico.
*10.3 Employment Agreement between the Company and Charles E. Whetzel, Jr.
*10.4 Employment Agreement between the Company and David A. Brown.
*10.5 Employment Agreement between the Company and Jay A. Berman.
*10.6 Credit Agreement dated October 30, 1996 among the Company, certain lenders and The Chase Manhattan Bank,
as administrative agent.
*10.7 Purchase Agreement dated November 20, 1996 between the Company and BT Securities Corporation, Bankers
Trust International plc, Chase Securities Inc. and Goldman, Sachs & Co.
*12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
16 Letter of Price Waterhouse LLP.
*21 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1).
23.4 Consent of Testa, Hurwitz & Thibeault LLP (included in Exhibit 5.2).
*25 Statement of Eligibility of Trustee.
*27 Financial Data Schedule.
</TABLE>
- ---------
* filed previously
(b) Financial Statement Schedules:
(1) Financial Statement Schedules filed herewith:
None applicable.
ITEM 22. UNDERTAKINGS
(a) The Company undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment will be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time will be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Company undertakes to respond to requests for information that is
incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or
13 of this form, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding to
the request.
(c) The Company undertakes to supply by means of a post-effective amendment
all information concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in the Registration
Statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Morrow, Georgia on
March 28, 1997.
THE WILLIAM CARTER COMPANY
BY: /S/ FREDERICK J. ROWAN II
-----------------------------------------
Frederick J. Rowan, II
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on March 28, 1997.
NAME TITLE
- ------------------------------ ---------------------------
Chairman of the Board of
/s/ FREDERICK J. ROWAN II Directors, President,
- ------------------------------ Chief Executive Officer
Frederick J. Rowan, II and Director (Principal
Executive Officer)
Senior Vice
/s/ DAVID A. BROWN President--Business
- ------------------------------ Planning & Administration
David A. Brown and Director
Senior Vice President,
/s/ JAY A. BERMAN Chief Financial Officer
- ------------------------------ and Director (Principal
Jay A. Berman Accounting Officer)
/s/ CHRISTOPHER J. O'BRIEN Director
- ------------------------------
Christopher J. O'Brien
/s/ CHARLES J. PHILIPPIN Director
- ------------------------------
Charles J. Philippin
/s/ CHRISTOPHER J. STADLER Director
- ------------------------------
Christopher J. Stadler
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
*2 Agreement of Merger between TWCC Acquisition Corp. and the Company, dated September 18, 1996.....
*3.1 Amended and Restated Articles of Organization of the Company.....................................
*3.2 Articles of Merger of the Company................................................................
*3.3 By-laws of the Company...........................................................................
*3.4 Certificate of Designation relating to the Preferred Stock of the Company, dated October 30, 1996
(included in Exhibit 3.2)........................................................................
*4.1 Indenture between the Company and State Street Bank and Trust Company, as Trustee, dated as of
November 25, 1996................................................................................
*4.2 Exchange and Registration Rights Agreement between the Company and BT Securities Corporation,
Bankers Trust International plc, Chase Securities Inc. and Goldman, Sachs & Co. dated November
25, 1996.........................................................................................
*4.3 Letter of Transmittal............................................................................
5.1 Opinion of Gibson, Dunn & Crutcher LLP...........................................................
5.2 Opinion of Testa, Hurwitz & Thibeault LLP........................................................
8.1 Opinion of Gibson, Dunn & Crutcher LLP relating to tax matters...................................
*10.1 Employment Agreement between the Company and Frederick J. Rowan, II..............................
*10.2 Employment Agreement between the Company and Joseph Pacifico.....................................
*10.3 Employment Agreement between the Company and Charles E. Whetzel, Jr..............................
*10.4 Employment Agreement between the Company and David A. Brown......................................
*10.5 Employment Agreement between the Company and Jay A. Berman.......................................
*10.6 Credit Agreement dated October 30, 1996 among the Company, certain lenders and The Chase
Manhattan Bank, as administrative agent..........................................................
*10.7 Purchase Agreement dated November 20, 1996 between the Company and BT Securities Corporation,
Bankers Trust International plc, Chase Securities Inc. and Goldman, Sachs & Co...................
*12 Statement re: Computation of Ratio of Earnings to Fixed Charges..................................
16 Letter of Price Waterhouse LLP...................................................................
*21 Subsidiaries of the Company......................................................................
23.1 Consent of Price Waterhouse LLP..................................................................
23.2 Consent of Coopers & Lybrand L.L.P...............................................................
23.3 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1).................................
23.4 Consent of Testa, Hurwitz & Thibeault LLP (included in Exhibit 5.2)..............................
*25 Statement of Eligibility of Trustee..............................................................
*27 Financial Data Schedule..........................................................................
</TABLE>
- ---------
* filed previously
<PAGE>
Exhibit 5.1
[LETTERHEAD OF GIBSON, DUNN & CRUTCHER LLP]
March 28, 1997
(212) 351-4000 C 97723-00005
The William Carter Company
1590 Adamson Parkway,
Suite 400
Morrow, Georgia 30260
Re: 10-3/8% Series A Senior Subordinated Notes Due 2006
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-4 (the "Registration Statement") of The William Carter Company, a
Massachusetts corporation (the "Company"), which the Company has filed with
the Securities and Exchange Commission (the "Commission") in connection with
the registration under the Securities Act of 1933, as amended (the
"Securities Act"), of up to $100,000,000 aggregate principal amount of the
Company's 10-3/8% Series A Senior Subordinated Notes due 2006 (the "Exchange
Notes"). The Exchange Notes are to be issued in exchange for an equal
aggregate principal amount of the Company's outstanding 10-3/8% Senior
Subordinated Notes due 2006 (the "Original Notes") pursuant to the Exchange
and Registration Rights Agreement dated as of November 25, 1996 between the
Company and BT Securities Corporation, BT International plc, Chase Securities
Inc. and Goldman, Sachs & Co. The Exchange Notes are to be issued by the
Company pursuant to the terms of an Indenture (the "Indenture") dated as of
November 25, 1996 between the Company and State Street Bank and Trust
Company, as Trustee (the "Trustee").
We have examined the proceedings taken or proposed to be taken by
the Company in connection with the issuance of the Exchange Notes. In
arriving at the following opinion, we have relied, among other things, upon
our examination of such corporate records of the Company and such
certificates of public officials and of officers of the Company as we have
deemed appropriate for purposes of rendering this opinion. We have assumed
with your permission that the terms of the Original Notes and the Exchange
Notes have been established in accordance with the terms of the Indenture,
and that their issuance and sale (i) did not and will not violate any
applicable law or result in a default under or breach of any agreement or
instrument binding upon the Company and (ii) complied and will comply with
any requirement or restriction imposed by any court or governmental body
having jurisdiction over the
<PAGE>
Company. In addition, we have assumed that the Indenture has been duly
authorized, executed and delivered by the Trustee and constitutes the legal,
valid and binding agreement of the Trustee.
Based upon the foregoing examination and assumptions and in reliance
thereon, and subject to the completion prior to the issuance of the Exchange
Notes of such proceedings now contemplated by the Company, and subject to the
issuance by the Commission of an order declaring the Registration Statement
effective, it is our opinion that the Exchange Notes, when issued in
accordance with the terms of the Indenture, duly executed by the Company,
duly authenticated by the Trustee, and issued and delivered against exchange
of the Original Notes in accordance with the terms set forth in the
prospectus that forms a part of the Registration Statement, will constitute
valid and binding obligations of the Company.
Our opinion is subject to: (i) the effect of applicable bankruptcy,
reorganization, insolvency, moratorium, arrangement and other laws affecting
creditors' rights, including, without limitation, the effect of statutory or
other laws regarding fraudulent conveyances, fraudulent transfers and
preferential transfers; and (ii) the limitations imposed by general
principles of equity (regardless of whether such enforceability is considered
in a proceeding at law or in equity).
This opinion is limited to the effect of the present state of the
laws of the United States of America and the State of New York. The opinions
expressed herein are based upon the law and circumstances as they are in
effect or exist on the date hereof, and we assume no obligation to revise or
supplement this letter in the event of future changes in the law or
interpretation thereof with respect to circumstances or events that may occur
subsequent to the date hereof. We are expressing no opinion as to the effect
of the laws of any other jurisdiction.
We consent to the filing of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name under
the caption "Legal Matters" in the Registration Statement and the prospectus
which forms a part thereof. In giving this consent, we do not admit that we
are within the category of persons whose consent is required under Section 7
of the Securities Act or the Rules and Regulations of the Commission
promulgated thereunder.
Very truly yours,
/s/ Gibson, Dunn & Crutcher LLP
GIBSON DUNN & CRUTCHER LLP
<PAGE>
Exhibit 5.2
[LETTERHEAD TESTA, HURWITZ & THIBEAULT LLP]
March 28, 1997
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, New York 10166
Re: The William Carter Company
Ladies and Gentlemen:
We have acted as special Massachusetts counsel for The William Carter
Company, a Massachusetts corporation (the "Company"), in connection with the
offer to exchange the Company's outstanding $100,000,000 10 3/8% Senior
Subordinated Notes due 2006 for 10 3/8% Series A Senior Subordinated Notes
due 2006 ("New Notes") pursuant to an exchange offer registered with the
Securities and Exchange Commission ("SEC"). Capitalized terms used herein and
not otherwise defined shall have their respective meanings as set forth in the
Registration Statement on Form S-4, File No. 333-22155, of the Company filed
with the SEC (the "Registration Statement"). We are furnishing you this
opinion on which you may rely solely for purposes of rendering your opinion,
as counsel to the Company, in connection with the filing of the Registration
Statement.
In connection with this opinion, we have examined originals, or copies
identified to our satisfaction, of the Registration Statement and certain
corporate records of the Company.
As to all questions of fact material to our opinion, we have assumed the
completeness and accuracy of, and have relied solely upon, the
representations, warranties and statements of the Company contained in the
Registration Statement, and upon certificates and corporate records obtained
from and representations made by officers of the Company and public
officials, and have undertaken no independent verification of such facts. In
our examination of the foregoing documents, we have assumed the
genuineness of all signatures and the legal capacity of all natural persons
executing all documents examined by us, the authenticity and completeness of
all documents submitted to us as originals, the conformity to original
documents of documents submitted to us as copies or facsimiles and the
authenticity and completeness of the originals of such latter documents.
<PAGE>
Gibson, Dunn & Crutcher, LLP
March 28, 1997
Page 2
In rendering the opinion expressed in paragraph 1 below with respect to
the legal existence and good standing of the Company in Massachusetts, we
have relied solely upon a certificate received from the Secretary of the
Commonwealth of Massachusetts.
Our opinions expressed herein are limited to the current laws of the
Commonwealth of Massachusetts, and we do not express herein any opinion with
respect to, or with respect to any matter subject to, any other law.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is a corporation validly existing and in corporate
good standing under the laws of the Commonwealth of Massachusetts.
2. The Company has the power and authority to execute and deliver
and to perform its obligations under the New Notes and has taken all
requisite corporate action to authorize, execute and deliver the New Notes.
3. The New Notes have been duly authorized by the Company.
This letter is furnished by us as special Massachusetts counsel for the
Company solely in connection with the transaction described above. We consent
to the filing of this opinion as an exhibit to the Registration Statement. In
giving this consent, we do not admit that we are within the category of
persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the Rules and Regulations of the SEC promulgated
thereunder.
Very truly yours
/s/ TESTA, HURWITZ & THIBEAULT, LLP
TESTA, HURWITZ & THIBEAULT, LLP
<PAGE>
Exhibit 8.1
[LETTERHEAD OF GIBSON, DUNN & CRUTCHER LLP]
March 28, 1997
(212) 351-4000 C 97723-00005
The William Carter Company
1590 Adamson Parkway, Suite 400
Morrow, Georgia 30260
Re: 10 3/8% Series A Senior Subordinated Notes due 2006
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-4,
as amended, Registration No. 333-22155 (the "Registration Statement") of The
William Carter Company, a Massachusetts corporation (the "Company"), to be
filed in connection with the registration under the Securities Act of 1933,
as amended (the "Securities Act"), of $100,000,000 aggregate principal amount
of the Company's 10-3/8% Series A Senior Subordinated Notes due 2006 (the
"New Notes") and the exchange of the New Notes for a like principal amount of
the Company's 10 3/8% Senior Subordinated Notes due 2006.
We hereby confirm our opinions set forth in the Registration Statement
under the caption "Certain Federal Income Tax Considerations." Furthermore,
it is our opinion that the discussion under the caption "Certain Federal
Income Tax Considerations," to the extent it discusses matters of law or
legal conclusions, is correct in all material respects.
<PAGE>
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement, and we further consent to the use of our name under
the captions "Legal Matters" and "Certain Federal Income Tax Considerations."
In giving this consent, we do not thereby admit that we are within the
category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/ Gibson, Dunn & Crutcher LLP
Gibson, Dunn & Crutcher LLP
<PAGE>
Exhibit 16
Stamford, Connecticut
[Letterhead of Price Waterhouse LLP]
March 28, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
The William Carter Company
We have read the "Change in Accountants" paragraph, located on page 32 of The
William Carter Company's Form S-4, dated March 28, 1997 and are in agreement
with the statements contained therein.
Yours very truly,
/s/ Price Waterhouse LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of The William Carter Company of our
report dated February 16, 1996 relating to the financial statements of The
William Carter Company, which appears in such Prospectus. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Stamford, Connecticut
March 28, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 1 to the Registration
Statement on Form S-4 (File No. 333-22155) of our report, which includes an
explanatory paragraph regarding the October 30, 1996 change in controlling
ownership, dated February 20, 1997, on our audit of the fiscal year 1996
financial statements of The William Carter Company. We also consent to the
reference to our firm under the caption "Experts."
Stamford, Connecticut /s/ Coopers & Lybrand, L.L.P.
March 28, 1997
