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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended
December 28, 1996
--- TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
Commission file number: 333-22155
THE WILLIAM CARTER COMPANY
--------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-1156680
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1590 Adamson Parkway, Suite 400
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Morrow, Georgia 30260
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(Address of principal executive offices, including zip code)
(770) 961-8722
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X
Yes ------ No ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this report or any
amendment to this Report [X].
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PART 1
Item 1. Business
GENERAL
The William Carter Company (the "Company" or "Carter's") 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 generates a majority of its sales in the baby and toddler
apparel market, a $5.6 billion market. 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.
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 preferred and common stock of the Company (the "Acquisition")
from MBL Life Assurance Corporation, CHC Charitable Irrevocable Trust and
certain management stockholders (collectively, 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 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"), (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.
The Company is a Massachusetts corporation. The principal executive
office of the Company is located at 1590 Adamson Parkway, Suite 400, Morrow,
Georgia 30260 and its telephone number is (770) 961-8722.
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
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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.
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.
PRODUCT DESIGN AND DEVELOPMENT
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. 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.
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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 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.
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.
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.
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.
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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.
MANUFACTURING
The Company is a vertically-integrated manufacturer that knits, dyes,
finishes, prints, cuts, sews and embroiders a majority 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. 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.
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
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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.
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.
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, the "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 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. 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, outerwear, 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
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.
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ITEM 2. PROPERTIES
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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 21, 1996, a special meeting of the security holders of all
classes of common stock of the Company was held to approve: (i) the merger of
the Company with TWCC Acquisition Corp. pursuant to the terms of that certain
Agreement and Plan of Merger, dated as of September 28,1996 by and between
the Company and TWCC Acquisition Corp. and (ii) the Amendment and Restatement
of the Articles of Organization of the Company. The holders of all shares of
Class A Common Stock and the holders of all shares of Class B Common Stock
voted as a single class and the holders of all shares of Class C Common Stock
voted as a single class. The holders of all shares of Class A Common Stock
and the holders of all shares of Class B Common Stock cast their votes in
favor of the proposals. The holders of 2,213 shares of Class C Common Stock
cast their votes in favor of the proposals. The holders of 556 shares of
Class C Common Stock either abstained or did not vote their shares, and a
further 431 shares of Class C Common Stock were unissued.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In September 1996, the Company allocated to seven members of its senior
management an aggregate of 431 shares of its Class C Common Stock pursuant to
the Company's Master Executive Stock Plan dated as of January 1, 1995 and the
Executive Stock Purchase Agreements dated as of September 18, 1996 by and
between the Company and each individual.
On October 30, 1996, in connection with the Acquisition, Holdings
acquired 100% of the outstanding common and preferred stock of the Company
for aggregate consideration of $208.0 million. Certain members of senior
management and other employees of the Company exchanged 3,101 shares of
Class C Common Stock for 151,049 of Class C shares of Holdings. In connection
with the Acquisition, the Company issued 5,000 shares of preferred stock, par
value $.01, and 1,000 shares of common stock, par value $.01, to Holdings.
In November, 1996, the Company issued $100,000,000 of 10-3/8% Senior
Subordinated Notes due 2006 ("the Notes") in a private placement, pursuant to
a Purchase Agreement dated November 20, 1996 with BT Securities Corp.,
Bankers Trust International plc, Chase Securities Inc. and Goldman, Sachs &
Co. (collectively, the "Initial Purchasers"). The issuance of Notes was
exempt from registration under the Securities Act by virtue of Rule 144A. In
accordance with an Exchange and Registration Rights Agreement dated as of
November 25, 1996 by and between the Company and the Initial Purchasers, the
Company will offer to exchange 100% of the Notes for 10-3/8% Series A Senior
Subordinated Notes due 2006 which exchange will be registered with the
Securities and Exchange Commission.
At Acquisition, the Company paid a $4.3 million dividend on the
Predecessor (as defined) Common Stock. The Company intends to retain all of
its future earnings to finance its operations and does not anticipate paying
cash dividends in the foreseeable future. Any decision made by the Company's
Board of Directors to declare dividends in the future will depend upon the
Company's future earnings, capital requirements, financial condition and
other factors deemed relevant by the Company's Board of Directors. In
addition, certain agreements to which the Company is a party restrict the
Company's ability to pay dividends on common equity.
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Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and other
data of the Company as of and for the five fiscal years 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 selected
financial data for the five fiscal years ended December 28, 1996
were derived from the Company's audited Consolidated Financial Statements.
The following table should be read in conjunction with and Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8 "Financial Statement and Supplementory Data."
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(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
|| PREDECESSOR
SUCCESSOR || DEC. 31,
OCT. 30, 1996 || 1995
THROUGH || THROUGH FISCAL YEAR
DEC. 28, || OCT. 29, ----------------------------------------------
1996(a) || 1996 1995 1994 1993 1992
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<S> <C> || <C> <C> <C> <C> <C> <C>
OPERATING DATA: ||
Wholesale sales....................... $ 28,506 || $ 160,485 $ 166,884 $ 150,175 $ 127,457 $ 142,694
Retail sales.......................... 22,990 || 106,254 128,547 121,374 109,554 85,417
|| --
------- || ------------ ---------- ---------- ---------- ----------
Net sales............................. 51,496 || 266,739 295,431 271,549 237,011 228,111
Cost of goods sold.................... 31,708 || 170,027 191,105 175,244 156,525 164,366
|| --
------- || ------------ ---------- ---------- ---------- ----------
Gross profit.......................... 19,788 || 96,712 104,326 96,305 80,486 63,745
Selling, general and administrative... 16,672 || 79,296 83,223 77,472 67,699 57,975
Nonrecurring charges(b)(f)............ -- || 8,834 -- -- -- 8,194
|| --
------- || ------------ ---------- ---------- ---------- ----------
Operating income (loss)............... 3,116 || 8,582 21,103 18,833 12,787 (2,424)
Interest expense...................... 2,631 || 7,075 7,849 6,445 5,957 7,368
|| --
------- || ------------ ---------- ---------- ---------- ----------
Income (loss) before income taxes and ||
extraordinary item.................. 485 || 1,507 13,254 12,388 6,830 (9,794)
Provision for income taxes............ 212 || 1,885 5,179 4,000 3,000 270
|| --
------- || ------------ ---------- ---------- ---------- ----------
Income (loss) before extraordinary ||
item................................ 273 || (378) 8,075 8,388 3,830 (10,062)
Extraordinary item, net of tax (c).... 2,351 || -- -- -- -- --
|| --
------- || ------------ ---------- ---------- ---------- ----------
Net income (loss)..................... $ (2,078) || $ (378) $ 8,075 $ 8,388 $ 3,830 $ (10,602)
|| --
|| --
------- || ------------ ---------- ---------- ---------- ----------
------- || ------------ ---------- ---------- ---------- ----------
Net income (loss) available to common ||
stockholders........................ $ (2,512) || $ (1,510) $ 6,460 $ 6,710 $ (10,602 $ 3,830)
------- || ------------ ---------- ---------- ---------- ----------
------- || ------------ ---------- ---------- ---------- ----------
BALANCE SHEET DATA ||
(end of period): ||
Working capital (d)................... $ 70,792 || $ 84,593 $ 68,595 $ 66,670 $ 63,345
Total assets.......................... 318,709 || 167,216 135,471 123,938 127,506
Total debt, including current ||
maturities.......................... 145,000 || 87,495 71,660 73,406 81,332
Redeemable Preferred Stock (e)........ 18,234 || -- -- -- --
Preferred stock....................... -- || 50,000 50,000 50,000 50,000
Common stockholders' equity........... 57,488 || (4,678) (11,351) (19,739) (23,569)
||
OTHER DATA: ||
EBITDA (f)............................ $ 5,530 || $ 25,628 $ 30,562 $ 27,098 $ 20,647 $ 12,437
Gross margin.......................... 38.4% || 36.3% 35.3% 35.5% 34.0% 27.9%
Depreciation and amortization......... $ 2,414 || $ 6,612 $ 7,337 $ 6,515 $ 6,431 $ 6,667
Capital expenditures.................. 3,749 || 4,007 13,715 10,996 7,941 4,991
</TABLE>
See Notes to Selected Financial Data.
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NOTES TO SELECTED 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.
(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
Notes in November 1996, net of income tax effects.
(d) Represents total current assets less total current liabilities.
(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;
(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; (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 (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. 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED
FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND
THE NOTES THERETO. THIS REPORT 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 REPORT. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS 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).
Consolidated net sales have increased from $271.5 million in 1994 to $318.2
million in 1996. During this period, wholesale sales have increased from $150.2
million to $183.8 million, and retail sales have increased from $121.4 million
to $129.2 million.
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.
Notwithstanding the substantial improvements in operating results
achieved over the past three 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%.
12
<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
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Statement of Operations:
Wholesale sales............................................................................. 59.4% 56.5% 55.3%
Retail sales................................................................................ 40.6 43.5 44.7
--- --- ---
Net sales................................................................................. 100.0 100.0 100.0
Cost of goods sold.......................................................................... 63.4 64.7 64.5
--- --- ---
Gross profit................................................................................ 36.6 35.3 35.5
Selling, general and administrative expenses................................................ 30.2 28.2 28.5
Nonrecurring charge......................................................................... 2.8 -- --
--- --- ---
Operating income............................................................................ 3.6 7.1 6.9
Interest expense............................................................................ 3.0 2.7 2.4
Income before income taxes and extraordinary item........................................... 0.6 4.5 4.6
Provision for income taxes.................................................................. 0.7 1.8 1.5
Extraordinary item, net..................................................................... 0.7 -- --
--- --- ---
Net income (loss)........................................................................... (0.8%) 2.7% 3.1%
--- --- ---
--- --- ---
</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
Company 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, reduced by
comparable store sales (stores open more than 12 months) declines of 8.8%.
Management believes
13
<PAGE>
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 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.
14
<PAGE>
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.
15
<PAGE>
At the end of fiscal 1995, the Company's inventory levels exceeded its
prior year-end inventories by $28.1 million. Management attributes the
inventory build-up during fiscal 1995 to a number of items which include: (i)
aggressive production plans reflecting stronger 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.
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 $3.9
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 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. 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.
16
<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE WILLIAM CARTER COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants............................................................................. 18
Consolidated Balance Sheet at December 28, 1996............................................................... 19
Consolidated Statement of Operations for the periods October 30, 1996 through December 28, 1996
(Successor) and December 31, 1995 through October 29, 1996 (Predecessor).................................... 20
Consolidated Statement of Cash Flows for the periods October 30, 1996 through December 28, 1996
(Successor) and December 31, 1995 through October 29, 1996 (Predecessor).................................... 21
Consolidated Statement of Changes in Common Stockholders' Equity for the periods October 30, 1996
through December 28, 1996 (Successor) and December 31, 1995 through October 29, 1996 (Predecessor).......... 22
Notes to Consolidated Financial Statements.................................................................... 23
Report of Independent Accountants............................................................................. 35
Consolidated Balance Sheet at December 30, 1995............................................................... 36
Consolidated Statement of Income for the fiscal years ended
December 30, 1995 and December 31, 1994..................................................................... 37
Consolidated Statement of Cash Flows for the fiscal years ended December 30, 1995 and December 31, 1994....... 38
Consolidated Statement of Changes in Stockholders' Equity for the fiscal years ended December 30, 1995 and
December 31, 1994........................................................................................... 39
Notes to Consolidated Financial Statements.................................................................... 40
</TABLE>
17
<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 October 30,
1996 through December 28, 1996 ("Successor," as defined in Note 1) and the
period from December 31, 1995 through October 29, 1996 ("Predecessor," 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
Successor period from October 30, 1996 through 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 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Stamford, Connecticut
February 20, 1997
18
<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
19
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
SUCCESSOR FOR PREDECESSOR FOR
THE PERIOD FROM THE PERIOD FROM
OCTOBER 30, 1996 DECEMBER 31, 1995
THROUGH THROUGH
DECEMBER 28, 1996 OCTOBER 29, 1996
----------------- -----------------
<S> <C> <C>
Net sales.............................................. $ 51,496 $ 266,739
Cost of goods sold..................................... 31,708 170,027
------- --------
Gross profit........................................... 19,788 96,712
Selling, general and administrative.................... 16,672 79,296
Nonrecurring charge.................................... -- 8,834
------- --------
Operating income....................................... 3,116 8,582
Interest expense....................................... 2,631 7,075
------- --------
Income before income taxes and extraordinary item...... 485 1,507
Provision for income taxes............................. 212 1,885
------- --------
Income (loss) before extraordinary item................ 273 (378)
Extraordinary item, net of income tax benefit of
$1,270............................................... 2,351 --
------- --------
Net loss............................................... (2,078) (378)
Dividend requirements on preferred/redeemable
preferred and accretion on redeemable
preferred stock.................................... (434) (1,132)
------- --------
Net loss applicable to common stockholder.............. $ (2,512) $ (1,510)
------- --------
------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
20
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR FOR THE
PERIOD PREDECESSOR FOR THE
FROM OCTOBER 30, 1996 PERIOD FROM DECEMBER
THROUGH 31, 1995 THROUGH
DECEMBER 28, 1996 OCTOBER 29, 1996
---------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (2,078) $ (378)
Extraordinary loss, net of taxes............. 2,351 --
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............. 2,588 6,979
Deferred tax provision.................... 212 2,381
Effect of changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable............................. 7,975 (12,540)
(Increase) decrease in inventories...... (704) 8,392
(Increase) decrease in prepaid expenses
and other assets..................... (4,432) 2,759
Increase in accounts payable and other
liabilities.......................... 1,183 16,812
-------- -------
Net cash provided by operating
activities........................... 7,095 24,405
-------- -------
Cash flow from investing activities:
Capital expenditures.................... (3,749) (4,007)
Payment to Sellers for the Acquisition.. (117,773) --
Payments of Acquisition costs........... (21,705) --
-------- -------
Net cash used in investing activities... (143,227) (4,007)
-------- -------
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)
Payment of other Predecessor debt....... (68,062) (433)
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 dividends on common stock....... (4,237)
-------- -------
Net cash provided by (used in)
financing activities............... 134,263 (19,433)
-------- -------
Net (decrease) increase in cash
and cash equivalents.................. (1,869) 965
Cash and cash equivalents at beginning of
period....................................... 3,830 2,865
-------- -------
Cash and cash equivalents at end of period..... $ 1,961 $ 3,830
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
21
<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 COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK 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
22
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-THE COMPANY
The William Carter Company (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
totaled $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 $100.0 million of Senior
Subordinated Notes, the net proceeds of which were used to retire the $90.0
million of subordinated loan facility borrowings and $5.0 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):
Total financed purchase price.................... $ 226,100
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
---------
---------
23
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 Aquisition.
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 FOR
SUCCESSOR FOR THE PERIOD FROM
THE PERIOD FROM DECEMBER 31, PRO FORMA FOR
OCTOBER 30, 1995 THROUGH THE YEAR ENDED
1996 THROUGH OCTOBER 29, PRO FORMA DECEMBER 28,
DECEMBER 28, 1996 1996 ADJUSTMENTS 1996
----------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
Net sales...................................... $ 51,496 $ 266,739 $ -- $ 318,235
Gross profit................................... 19,788 96,712 (282)(a) 116,218
Selling, general and administrative............ 16,672 79,296 3,668(b) 99,636
Nonrecurring charge............................ -- 8,834 (8,834)(c) --
Operating income............................... 3,116 8,582 4,884 16,582
Interest expense............................... 2,631 7,075 7,172(d) 16,878
Income (loss) before income taxes and
extraordinary item........................... 485 1,507 (2,288) (296)
Provision for income taxes..................... 212 1,885 (1,848)(e) 249
Income (loss) before extraordinary item........ 273 (378) (440) (545)
Extraordinary item, net........................ 2,351 -- (2,351((f) --
Net income (loss).............................. $ (2,078) $ (378) $ 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.
24
<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 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
25
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $174,000 and $367,000 for the Successor and
Predecessor 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.
26
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid in cash approximated $2,463,000 and $6,708,000 for the
Successor and Predecessor periods, respectively. Income taxes (received) paid
in cash approximated $(771,000) and $903,000 for the Successor and
Predecessor 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):
Finished goods..................................................... $ 51,700
Work in process.................................................... 15,884
Raw materials and supplies......................................... 8,956
---------
$ 76,540
---------
---------
NOTE 4-FIXED ASSETS:
Fixed assets at December 28, 1996 consisted of the following ($000):
Land, buildings and improvements................................... $ 12,679
Machinery and equipment............................................ 37,155
---------
49,834
Accumulated depreciation and amortization.......................... (1,613)
---------
$ 48,221
---------
---------
Depreciation expense ($000) was $1,613 and $6,612 for the Successor and
Predecessor periods, respectively.
NOTE 5-LONG-TERM DEBT:
Long-term debt at December 28, 1996 consisted of the following ($000):
Senior Credit Facility term loan.................................. $ 45,000
Senior Credit Facility revolving credit........................... --
10 3/8% Senior Subordinated Notes due 2006........................ 100,000
--------
Current maturities................................................ 145,000
(900)
--------
$144,100
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 each of fiscal years 1997 through 2000, $5.4 million in
fiscal year 2001, $13.5
27
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Excess Cash Flow (as defined in the Senior
Credit Facility) 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.
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.
28
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 dated as of November 25, 1996 between the
Company and State Street Bank and Trust Company, as Trustee (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.
29
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
$50.0 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 totaling $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.
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>
30
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
SUCCESSOR PREDECESSOR
PERIOD FROM OCTOBER PERIOD FROM DECEMBER
30, 1995 THROUGH 31, 1995 THROUGH
DECEMBER 28, 1996 OCTOBER 29, 1996
--------------------- -----------------------
<S> <C> <C>
Service cost....................................... $ 21 $ 100
Interest cost...................................... 95 482
Amortization of transition obligation.............. -- 318
Amortization of net loss........................... -- 45
----- -----
Total NPPBC........................................ $ 116 $ 945
----- -----
----- -----
</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.
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 and a Long Term Incentive Plan 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
totaled $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
31
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
SUCCESSOR PREDECESSOR
PERIOD FROM OCTOBER PERIOD FROM DECEMBER
30, 1996 THROUGH 31, 1995 THROUGH
DECEMBER 28, 1996 OCTOBER 29, 1996
--------------------- ---------------------
<S> <C> <C>
Current tax provision (benefit):
Federal.......................................... $ -- $ (484)
State............................................ -- (12)
----- ------
Total current provision (benefit):................. -- (496)
----- ------
Deferred tax provision:
Federal.......................................... 188 2,121
State............................................ 24 260
----- ------
Total deferred provision:...................... 212 2,381
----- ------
Total provision................................ $ 212 $ 1,885
----- ------
----- ------
</TABLE>
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>
32
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The difference between the Company's effective income tax rate and the
federal statutory tax rate is reconciled below:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
PERIOD FROM OCTOBER PERIOD FROM DECEMBER
30, 1996 THROUGH 31, 1995 THROUGH
DECEMBER 28, 1996 OCTOBER 29, 1996
------------------- --------------------
<S> <C> <C>
Statutory federal income tax rate...... 34% 34%
State income taxes, net of federal
income tax benefit................... 3 11
Non-deductible Acquisition costs....... -- 77
Goodwill amortization.................. 11 --
Non-taxable foreign income............. (2) (3)
Other.................................. (2) 6
-- ---
Total.................................. 44% 125%
-- ---
-- ---
</TABLE>
NOTE 12-LEASE COMMITMENTS:
Annual rent expense under operating leases was $2,148 and $10,902 in the
Successor and Predecessor 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 NONCANCELLABLE
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>
33
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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.
34
<PAGE>
Report to 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
35
<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 sha................................ --
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
36
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Net sales........................................................ $ 295,431 $ 271,549
Cost of goods sold............................................... 191,105 175,244
------------ ------------
Gross profit..................................................... 104,326 96,305
Selling, general and administrative.............................. 83,223 77,472
------------ ------------
Operating income................................................. 21,103 18,833
Interest expense................................................. 7,849 6,445
------------ ------------
Income before income taxes....................................... 13,254 12,388
Provision for income taxes....................................... 5,179 4,000
------------ ------------
Net income....................................................... $ 8,075 $ 8,388
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
37
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-----------------------------
DECEMBER 30, DECEMBER 31,
1995 1994
--------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 8,075 $ 8,388
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 7,737 6,915
Deferred income tax benefit............................... (465) (1,407)
(Gain) loss on disposal of assets......................... (40) 189
Compensation charge on stock issued to employees.......... 276 --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable....................................... (3,878) 744
Inventories............................................... (28,099) (5,459)
Prepaid expenses and other current assets................. 1,641 382
Increase in liabilities:
Accounts payable.......................................... 3,981 1,914
Other current liabilities................................. 3,431 1,131
Other long-term liabilities............................... 1,825 1,846
--------------- ------------
Net cash (used in) provided by operating activities..... (5,516) 14,643
--------------- ------------
Cash flows from investing activities:
Proceeds from sale of assets................................. 346 70
Capital expenditures......................................... (13,715) (10,996)
--------------- ------------
Net cash used in investing activities................... (13,369) (10,926)
--------------- ------------
Cash flows from financing activities:
Borrowings under revolving credit facility................... 19,000 --
Payments under term loan and subordinated note agreements.... (2,732) 1,243)
Payments of industrial revenue bond.......................... (433) (503)
Preferred stock dividend..................................... (1,678) --
--------------- -----------
Net cash provided by (used in) financing activities..... 14,157 (1,746)
--------------- -----------
Net (decrease) increase in cash and cash equivalents......... (4,728) 1,971
Cash and cash equivalents at beginning of period............. 7,593 5,622
--------------- -----------
Cash and cash equivalents at end of period................... $ 2,865 $ 7,593
--------------- -----------
--------------- -----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
38
<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 OF ACCUMULATED
STOCK STOCK STOCK STOCK PAR VALUE DEFICIT
--------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994..................... $ 50,000 -- -- -- $ 92,103 $ (111,842)
Net income..................................... -- -- -- -- -- 8,388
--------- ----------- ----------- ----------- ----------- ------------
Balance at December 31, 1994................... 50,000 -- -- -- 92,103 (103,454)
Preferred stock dividend....................... -- -- -- -- -- (1,678)
Issuance of Class C common stock to
employees.................................... -- -- -- -- 276 --
Net income..................................... -- -- -- -- -- 8,075
--------- ----------- ----------- ----------- ---------- -----------
Balance at December 30, 1995................... $ 50,000 $ -- $ -- $ -- $ 92,379 $ (97,057)
--------- ----------- ----------- ----------- ---------- -----------
--------- ----------- ----------- ----------- ---------- -----------
<CAPTION>
TOTAL
---------
<S> <C>
Balance at January 1, 1994..................... $ 30,261
Net income..................................... 8,388
---------
Balance at December 31, 1994................... 38,649
Preferred stock dividend....................... (1,678)
Issuance of Class C common stock to
employees.................................... 276
Net income..................................... 8,075
---------
Balance at December 30, 1995................... $ 45,322
---------
---------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
39
<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.
40
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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 $7,323 and $5,840 for the fiscal years
ended December 30, 1995 and December 31, 1994, respectively. Income taxes
paid in cash approximated $4,212 and $5,342 in fiscal 1995 and 1994
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>
<CAPTION>
<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>
<CAPTION>
<S> <C>
Land, buildings and improvements................................... $ 19,218
Machinery and equipment............................................ 64,476
---------
83,694
Accumulated depreciation and amortization.......................... (36,909)
---------
$ 46,785
---------
---------
</TABLE>
41
<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 $3,306 and $3,868 were
used for letters of credit as of December 30, 1995 and December 31, 1994,
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 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.
42
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
43
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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 net loss.............................................................. (6,485)
Unrecognized net loss.............................................................. (1,353)
-----------
Accrued postretirement benefit liability........................................... $ 800
-----------
-----------
</TABLE>
Net periodic postretirement benefit cost (NPPBC) charged to operations
for fiscal 1995 and 1994 included the following components:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Service cost............................................................... $ 121 $ 116
Interest cost.............................................................. 577 539
Amortization of transition obligations..................................... 381 381
Amortization of net loss................................................... 54 --
--------- ---------
Total NPPBC................................................................ $ 1,133 $ 1,036
--------- ---------
--------- ---------
</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 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).
44
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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. The LTIP provides for payment of awards in 1997.
NOTE 7-INCOME TAXES:
The provision for income taxes for fiscal years 1995 and 1994 consisted of
the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
----------------------------
<S> <C> <C>
DECEMBER 30, DECEMBER 31,
1995 1994
------------- -------------
Current tax provision (benefit):
Federal.......................................................... $ 4,612 $ 4,387
State............................................................ 1,032 1,020
------ ------
Total current................................................. 5,644 5,407
Deferred tax provision (benefit):
Federal.......................................................... (372) (1,407)
State............................................................ (93) --
Deferred tax benefit............................................... (465) (1,407)
------ ------
Total provision................................................ $ 5,179 $ 4,000
------ ------
------ ------
</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>
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.
45
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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
--------------------------------
<S> <C> <C>
DECEMBER 30, DECEMBER 31,
1995 1994
--------------- ---------------
Statutory federal income tax rate................................ 35.0% 35.0%
State income taxes, net of federal income tax benefit............ 4.6 5.4
Alternative minimum tax.......................................... -- (1.7)
Valuation allowance reversal, net................................ -- (5.4)
Jobs tax credit.................................................. (0.7) (1.6)
Other............................................................ 0.2 0.6
--- ---
Total............................................................ 39.1% 32.3%
--- ---
--- ---
</TABLE>
NOTE 8-LEASE COMMITMENTS:
Annual rent expense under operating leases was $11,228 and $9,653 in fiscal
1995 and 1994, 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 NONCANCELLABLE
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>
46
<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
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
-----------------
<S> <C>
Balance at December 31, 1994..................................................... $ 2,151
Additions, charged to expense.................................................... 653
Recoveries....................................................................... 84
---------
Balance at December 30, 1995..................................................... $ 2,888
---------
---------
Balance at January 1, 1994....................................................... $ 2,535
Additions, charged to expense 622
Writeoffs........................................................................ (1,006)
---------
Balance at December 31, 1994..................................................... $ 2,151
---------
---------
</TABLE>
<PAGE>
ITEM 9. 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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.
47
<PAGE>
<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.
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
48
<PAGE>
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 driectors. There are no family
relationships among any of the directors or executive officers.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all cahs 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 $100,000
(collectively, the "Named Executive Officers"). The current compensation
arrangements for each of these officers are described in "Employment
Arrangements" below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION> OTHER ANNUAL
NAME AND PRINCIPAL SALARY BONUS (A) COMPENSATION(b)
POSITION ($) ($) ($)
- -------------------------- --------- ---------- ----------------
<S> <C> <C> <C>
Frederick J. Rowan, II........................................ 475,200 469,300 6,007,875
President, Chief Executive Officer and Chairman of the Board
of Directors Joseph Pacifico................................ 315,000 202,100 1,418,172
Executive Vice President-Marketing Charles E. Whetzel, Jr..... 208,000 169,000 1,421,962
Executive Vice President-Manufacturing & Operations David A.
Brown....................................................... 197,000 126,400 1,416,526
Senior Vice President-Business Planning & Administration and
Director
Jay A. Berman................................................. 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.
49
<PAGE>
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.
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
50
<PAGE>
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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, 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:
NUMBER OF PERCENT OF
NAME SHARES (A) CLASS (A)
- ------------------------------------------- ----------- -----------
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
- ------------------------
(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
51
<PAGE>
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.
52
<PAGE>
CLASS C NON-VOTING STOCK:
NUMBER OF
NAME SHARES (A)
- ---------------------------------------------- -----------
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
- ------------------------
(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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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. 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
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 an aggregate amount of
approximately $11.3 million to certain members of management, including
payments under the MEPP and LTIP.
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.
53
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements: included in Item 8.
Report of Independent Accountants
Consolidated Balance Sheet at December 28, 1996
Consolidated Statement of Operations for the periods October 30,
1996 through December 28, 1996 (Successor) and December 31,
1995 through October 29, 1996 (Predecessor)
Consolidated Statement of Cash Flows for the periods October 30,
1996 through December 28, 1996 (Successor) and December 31,
1995 through October 29, 1996 (Predecessor)
Consolidated Statement of Changes in Common Stockholders' Equity
for the periods October 30, 1996 through December 28, 1996
(Successor) and December 31, 1995 through October 29, 1996
(Predecessor).
Notes to Consolidated Financial Statements
Report of Independent Accountants
Consolidated Balance Sheet at December 30, 1995
Consolidated Statement of Income for the fiscal years ended
December 30, 1995 and December 31, 1994
Consolidated Statement of Cash Flows for the fiscal years ended
December 30, 1995 and December 31, 1994
Consolidated Statement of Changes in Stockholders' Equity for the
fiscal years ended December 30, 1995 and December 31, 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: None
54
<PAGE>
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ---------------------------------------------------------------------
2 Agreement of Merger dated September 18, 1996 between TWCC Acquisition
Corp. and the Company, incorporated herein by reference to Exhibit 2
to the Company's Registration Statement on Form S-4.
3.1 Amended and Restated Articles of Organization of the Company,
incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4.
3.2 Articles of Merger of the Company, incorporated herein by reference
to Exhibit 3.2 to the Company's Registration Statement on Form S-4.
3.3 By-laws of the Company, incorporated herein by reference to Exhibit
3.3 to the Company's Registration Statementon Form S-4.
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 dated as of November 25, 1996 between the Company and State
Street Bank and Trust Company, as Trustee, incorporated herein by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-4.
4.2 Exchange and Registration Rights Agreement dated November 25, 1996
between the Company and BT Securities Corporation, Bankers Trust
International plc, Chase Securities Inc. and Goldman, Sachs & Co.,
incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4.
10.1 Employment Agreement between the Company and Frederick J. Rowan, II,
incorporated herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-4.
10.2 Employment Agreement between the Company and Joseph Pacifico,
incorporated herein by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-4.
10.3 Employment Agreement between the Company and Charles E. Whetzel, Jr.
incorporated herein by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-4.
10.4 Employment Agreement between the Company and David A. Brown
incorporated herein by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-4.
10.5 Employment Agreement between the Company and Jay A. Berman incorporated
herein by reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-4.
10.6 Credit Agreement dated October 30, 1996 among the Company, certain
lenders and The Chase Manhattan Bank, as administrative agent,
incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-4.
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., incorporated herein by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-4.
*16 Letter of Price Waterhouse LLP.
21 Subsidiaries of the Company, incorporated herein by reference to
Exhibit 21 to the Company's Registration Statement on Form S-4.
27.1 Financial Data Schedule, incorporated herein by reference to
Exhibit 27.1 to the Company's Registration Statement on Form S-4.
- --------------------------
* Filed herewith
55
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(a) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, 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
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
Name Title
---- -----
/s/ Frederick J. Rowan II Chairman of the Board of Directors,
------------------------------ President, Chief Executive Officer
Frederick J. Rowan II and Director (Principal Executive Officer)
/s/ David A. Brown Senior Vice President--Business
- ------------------------------ Planning & Administration and
David A. Brown Director
/s/ Jay A. Berman Senior Vice President, Chief
------------------------------ Financial Officer and Director
Jay A. Berman (Principal 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
56
<PAGE>
Stamford, Connecticut
Exhibit 16
[PRICE WATERHOUSE LLP LETTERHEAD]
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 item 9 of The William Carter Company's Form 10-K dated March 28,
1997 and are in agreement with the statements contained therein.
Yours very truly,
/s/ Price Waterhouse, LLP
