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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER: 333-22155
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THE WILLIAM CARTER COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1156680
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1590 ADAMSON PARKWAY, SUITE 400
MORROW, GEORGIA 30260
(Address of principal executive offices, including zip code)
(770) 961-8722
(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. Yes /X/ 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 I
ITEM 1. BUSINESS
GENERAL
The William Carter Company (the "Company" or "Carter's") is the largest
branded manufacturer and 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 138 retail outlet stores.
Carter's generates a majority of its sales in the baby and toddler apparel
market, a $7.0 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; (iv) an increasing social emphasis on
attractive children's apparel; and (v) an increase in the percentage of births
to first time mothers.
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) 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 substantially 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
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offerings can be broadly grouped into two primary categories: (i) "baby and
toddler," which includes newborns through toddlers approximately age three (up
to size 4T); and (ii) "young children," which includes children approximately
age three through approximately age six (boys' sizes 4-7 and girls' sizes 4-6x).
The Company's product offerings in these categories include layette, sleepwear
and playwear for the baby and toddler market, and sleepwear and playwear for the
young children's market. In addition, the Company sells products such as diaper
bags, lamps, socks, strollers, hair accessories, outerwear, underwear and shoes,
including products for which the Company licenses the CARTER'S and CARTER'S
CLASSIC names.
From 1993 through 1997, total industry sales of baby and toddler apparel
increased from $4.9 billion to $7.0 billion, a compound annual rate of 9.2%,
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 6.6% 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.
DISTRIBUTION AND SALES
The Company sells its products to wholesale accounts and through the
Company's retail outlet stores. In fiscal 1997, sales through the wholesale
channel accounted for 60.5% of total sales, while the retail channel accounted
for 39.5% of total sales.
WHOLESALE OPERATIONS
In fiscal 1997, 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 33 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 currently operates 138 retail outlet stores in 41 states
featuring all of CARTER'S quality merchandise, complemented by select brand
accessories and apparel. The stores, which average 5,200 square feet per
location, offer a broad assortment of baby, toddler and young children's apparel
including layette, sleepwear, underwear, playwear, swimwear, outerwear and
related accessories.
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Over the past 18 months, the Company recruited a new retail management team
to improve the retail division's operating results. This team implemented a new
marketing strategy and improved store layouts, which resulted in the first
increase in same store revenues since 1992 with improved profitability.
In order to clearly communicate the Company's commitment to provide
outstanding quality and value to the consumer, a chainwide roll-out of a new
promotional and pricing strategy was implemented in 1997. This strategy, in
effect in 98 stores by year-end 1997, communicates the value offered relative to
comparable values elsewhere. Major improvements in the merchandise planning and
allocation process, a more impactful and coordinated visual display of
merchandise, continued commitment to improving the quality of customer service
and targeted cost reduction initiatives all contributed to increased store
productivity and profitability.
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 high value to consumers. To this
end, management employs a comprehensive four-step marketing strategy which
incorporates identifying core products through extensive consumer preference
testing; superior brand and product presentation at the consumer
point-of-purchase; marketing the brand name through dominant communications; and
providing consistent, premium service, including delivering and replenishing
products at the right time to fulfill customer and consumer needs.
Management believes that the Company has further strengthened its brand
image to the consumer through innovative product designs, national print
advertising, joint mailers with wholesale customers, meetings between senior
account representatives and Carter's executives, trade show participation and
store-in-store shops.
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, one textile facility, three distribution centers, a cutting facility
and an embroidery facility. Internationally, the Company operates two sewing
facilities in Costa Rica, one sewing facility in the Dominican Republic and two
sewing facilities in Mexico.
DEMOGRAPHIC TRENDS
The total U.S. apparel industry generated more than $169.0 billion in sales
in 1997, of which approximately $29.0 billion was spent on children's apparel.
Of the $29.0 billion spent on children's apparel, approximately $7.0 billion was
spent on baby and toddler apparel, and approximately $5.6 billion was spent on
young children's apparel. From 1993 through 1997, sales of baby and toddler
apparel grew at a compound annual rate of 9.2% and sales of young children's
apparel grew at a compound annual rate of 3.0%.
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 1994, more than 34% of the births which
took place in the U.S. were to women over the age of 30. This was twice as
many as in 1975. 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.
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- MORE WOMEN RETURNING TO THE WORKPLACE AFTER HAVING CHILDREN. In 1994, 59%
of all married women with a child under one year of age were employed.
This compares with only 17% of these women being employed in the early
1960s. Management believes this trend has had a positive effect on sales
of children's apparel because these dual income families report higher
family incomes and spend more of their discretionary income on their
children.
- 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.
- MORE FIRST BIRTHS CREATE MORE NEW FAMILY FORMATIONS. In recent years,
approximately 42% of all births have been first births. This differs
dramatically from the baby boom years (1951 to 1965) when 26% of children
born were born to first-time mothers. This has significant implications to
the baby apparel business because first-time mothers are forming new
families and have greater purchasing needs.
Although total births are expected to remain relatively flat through the end
of the 1990s, management believes the aforementioned demographic trends, in
addition to other non-population growth factors, will continue to drive
increased spending per child for the foreseeable future and will lead to
increased sales of children's apparel in the Company's primary markets.
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 competitors of the Company
have greater financial resources, 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
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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 noncompliance 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 financial condition or results of operations.
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, bedding, plush toys
and shoes. Baby Dior-Registered Trademark- is a registered trademark
sub-licensed to, but not owned by, the Company.
EMPLOYEES
As of January 3, 1998, the Company had approximately 7,532 employees, 4,468
of which were employed on a full-time basis in the Company's domestic
operations, 962 of which were employed on a part-time basis in the Company's
domestic operations and 2,102 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.
ITEM 2. PROPERTIES
The Company operates 138 leased retail outlet stores located primarily in
outlet centers across the United States, having an average size of 5,200 square
feet. The leases have an average term of approximately five years 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, one in the Dominican Republic and two in Mexico.
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
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On October 7, 1997, the Company paid a dividend of $1.2 million on its
Common Stock held by its parent, Holdings. The proceeds from the dividend were
used by Holdings to repurchase shares of Holdings stock owned by three former
Company employees. The Company generally 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 (see Note 5--Long-Term Debt to the 1997 Consolidated Financial
Statements).
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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 January 3, 1998. As a result
of certain adjustments made in connection with the Acquisition, the results of
operations for the fiscal year ended January 3, 1998 ("fiscal year 1997") and
the period October 30, 1996 through December 28, 1996 (together, the "Successor"
periods) are not comparable to prior periods (the "Predecessor" periods). The
selected financial data for the five fiscal years ended January 3, 1998 were
derived from the Company's audited Consolidated Financial Statements.
The following table should be read in conjunction with ITEM 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
ITEM 8 "Financial Statements and Supplementary Data".
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
SUCCESSOR PREDECESSOR
---------------------------- ----------------------------------------------
OCT. 30, 1996
THROUGH DEC. 31, 1995 FISCAL YEAR
FISCAL YEAR DEC. 28, 1996 THROUGH -------------------------------
1997 (a) OCT. 29, 1996 1995 1994 1993
----------- --------------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Wholesale sales............................... $ 219,535 $ 28,506 $ 160,485 $ 166,884 $ 150,175 $ 127,457
Retail sales.................................. 143,419 22,990 106,254 128,547 121,374 109,554
----------- --------------- ------------- --------- --------- ---------
Net sales..................................... 362,954 51,496 266,739 295,431 271,549 237,011
Cost of goods sold............................ 228,358 31,708 170,027 191,105 175,244 156,525
----------- --------------- ------------- --------- --------- ---------
Gross profit.................................. 134,596 19,788 96,712 104,326 96,305 80,486
Selling, general and administrative........... 111,505 16,672 79,296 83,223 77,472 67,699
Nonrecurring charges(b)(f).................... -- -- 8,834 -- -- --
----------- --------------- ------------- --------- --------- ---------
Operating income.............................. 23,091 3,116 8,582 21,103 18,833 12,787
Interest expense.............................. 17,571 2,631 7,075 7,849 6,445 5,957
----------- --------------- ------------- --------- --------- ---------
Income before income taxes and extraordinary
item........................................ 5,520 485 1,507 13,254 12,388 6,830
Provision for income taxes.................... 2,429 212 1,885 5,179 4,000 3,000
----------- --------------- ------------- --------- --------- ---------
Income (loss) before extraordinary item....... 3,091 273 (378) 8,075 8,388 3,830
Extraordinary item, net of tax (c)............ -- 2,351 -- -- -- --
----------- --------------- ------------- --------- --------- ---------
Net income (loss)............................. $ 3,091 $ (2,078) $ (378) $ 8,075 $ 8,388 $ 3,830
----------- --------------- ------------- --------- --------- ---------
----------- --------------- ------------- --------- --------- ---------
Net income (loss) available to common
stockholders................................ $ 416 $ (2,512) $ (1,510) $ 6,460 $ 6,710 $ 3,830
----------- --------------- ------------- --------- --------- ---------
----------- --------------- ------------- --------- --------- ---------
BALANCE SHEET DATA (end of period):
Working capital (d)........................... $ 87,583 $ 70,792 $ 84,593 $ 68,595 $ 66,670
Total assets.................................. 331,899 318,709 167,216 135,471 123,938
Total debt, including current maturities...... 157,100 145,000 87,495 71,660 73,406
Redeemable Preferred Stock (e)................ 18,462 18,234 -- -- --
Preferred Stock............................... -- -- 50,000 50,000 50,000
Common stockholders' equity................... 56,721 57,488 (4,678) (11,351) (19,739)
OTHER DATA:
EBITDA (f).................................... $ 36,926 $ 5,530 $ 25,628 $ 30,562 $ 27,098 $ 20,647
Gross margin.................................. 37.1% 38.4% 36.3% 35.3% 35.5% 34.0%
Depreciation and amortization................. $ 13,835 $ 2,414 $ 6,612 $ 7,337 $ 6,515 $ 6,431
Capital expenditures.......................... $ 14,013 $ 3,749 $ 4,007 $ 13,715 $ 10,996 $ 7,941
</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 fiscal year
ended January 3, 1998 and the period October 30, 1996 through December 28, 1996
are not comparable to prior periods. The fiscal year ended January 3, 1998 and
the period October 30, 1996 to December 28, 1996 reflect increased depreciation,
amortization 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, respectively, 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) excluding the following charges:
(i) depreciation and amortization expense including prepaid management
fee amortization of $1.35 and $0.23 million for the fiscal year ended
January 3, 1998 and the period October 30, 1996 through December 28, 1996,
respectively, incurred in connection with the Aquisition;
(ii) 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
(iii) in fiscal 1996, the nonrecurring charge of $8.3 million related to
the Acquisition.
The Company has reported 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 (60.5% of fiscal 1997 sales) and
through its 138 retail outlet stores (39.5% of fiscal 1997 sales).
Consolidated net sales have increased from $271.5 million in 1994 to $363.0
million in 1997. During this period, wholesale sales have increased from $150.2
million to $219.6 million, and retail sales have increased from $121.4 million
to $143.4 million.
The increase in wholesale sales resulted primarily from new product
introductions and the opening of new wholesale accounts, including Sears and JC
Penney, 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 (stores open more than 12 months) declines from
1992 to 1996. Management believes the comparable store sales declines were due
to a soft retailing environment and to certain operational and merchandising
problems which were corrected in 1997. Comparable store sales increased .4% in
1997.
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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>
1997 1996 1995
--------- --------- ---------
Statement of Operations:
Wholesale sales................................................................ 60.5% 59.4% 56.5%
Retail sales................................................................... 39.5 40.6 43.5
--------- --------- ---------
Net sales...................................................................... 100.0 100.0 100.0
Cost of goods sold............................................................. 62.9 63.4 64.7
--------- --------- ---------
Gross profit................................................................... 37.1 36.6 35.3
Selling, general and administrative expenses................................... 30.7 30.2 28.2
Nonrecurring charge............................................................ -- 2.8 --
--------- --------- ---------
Operating income............................................................... 6.4 3.6 7.1
Interest expense............................................................... 4.8 3.0 2.7
--------- --------- ---------
Income before income taxes and extraordinary item.............................. 1.6 0.6 4.5
Provision for income taxes..................................................... 0.7 0.7 1.8
Extraordinary item, net........................................................ -- 0.7 --
--------- --------- ---------
Net income (loss).............................................................. 0.9% (0.8)% 2.7%
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL YEAR ENDED JANUARY 3, 1998 COMPARED WITH FISCAL YEAR ENDED
DECEMBER 26, 1996
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 (see Notes 1, 5, 6 and 7 to the 1997 Consolidated Financial
Statements). Certain nonrecurring charges and an extraordinary loss were
recorded in connection with the Acquisition and financing. Accordingly, the
results of operations for 1997 and 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 1997 increased 14.1% to $363.0 million from
$318.2 million in fiscal 1996. This increase was due to a 16.2% increase in
wholesale sales and a 11.0% increase in retail sales. Wholesale sales for fiscal
1997 increased to $219.5 million from $189.0 million in fiscal 1996. This
increase was due primarily to the successful launch of the Company's first
lifestyle marketing product line "JOY" (acronym for "Just One Year"). Retail
sales for fiscal 1997 increased to $143.4 million from $129.2 million in fiscal
1996. Comparable store sales increased 0.4% in 1997, the first increase posted
since 1992. The improvement in outlet store performance is attributed to the
investment made in a very talented
11
<PAGE>
management team. Each of the key retail management positions was upgraded over
the past 18 month period in an effort to improve retail's performance. This team
implemented a new marketing strategy and made other operating improvements,
which resulted in the first same store sales increase since 1992, with improved
profitability.
GROSS PROFIT. Gross profit for fiscal 1997 increased 15.5% to $134.6
million from $116.5 million in fiscal 1996. Gross profit as a percentage of net
sales in fiscal 1997 increased to 37.1% from 36.6% in fiscal 1996. The
improvement is attributed to the growth in the Company's "baby" product
category, including the new JOY program, improvement in margins from off-price
sales, the maturing effect of the Company's three offshore sewing plants and
higher levels of efficiency in the Company's manufacturing operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 1997 increased 16.2% to $111.5 million from
$96.0 million in fiscal 1996. Selling, general and administrative expenses as a
percentage of net sales increased to 30.7% in fiscal 1997 from 30.2% in fiscal
1996. This increase in selling, general and administrative expenses as a
percentage of net sales resulted from the full year effect of amortization of
intangible assets resulting from the Acquisition.
NONRECURRING CHARGE. In connection with the Acquisition, the Company
recorded an $8.8 million nonrecurring charge in 1996. 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 1997 increased to $23.1
million from $11.7 million in fiscal 1996 as a result of the changes in selling,
general and administrative expenses, gross profit and the nonrecurring charge
described above. Operating income as a percentage of net sales increased to 6.4%
in fiscal 1997 from 3.6% in fiscal 1996.
INTEREST EXPENSE. Interest expense for fiscal 1997 increased to $17.6
million from $9.7 million in fiscal 1996. This increase reflects higher interest
expense on additional indebtedness resulting from the Acquisition, and higher
average borrowings under the Company's revolving credit facility. At January 3,
1998, outstanding debt aggregated $157.1 million, of which a $44.1 million term
loan and a $13.0 million revolving credit facility balance 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 $571,000. At January 3, 1998, borrowings
under the Company's $50.0 million revolving credit facility were $13.0 million.
The Company also had $4.3 million of outstanding letters of credit.
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 INCOME (LOSS). As a result of the factors described above, the Company
reported net income of $3.1 million in fiscal 1997 compared with a net loss of
$2.5 million in fiscal 1996.
FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED WITH FISCAL YEAR ENDED
DECEMBER 30, 1995
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
12
<PAGE>
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
declines of 8.8%. Management believes that the comparable store sales declines
were due primarily to certain operational and merchandising problems, as well as
to a soft retailing environment. Although the soft retailing environment
negatively affected the financial performance of all stores, its impact was 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 addressed 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
most notably, a new retail management team was recruited in 1996 and 1997 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
13
<PAGE>
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 INCOME (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
$8.1 million in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are working capital, capital expenditures
and debt service. The Company has financed its working capital, capital
expenditures and debt service requirements primarily through internally
generated cash flow, in addition to funds borrowed under the Company's credit
facilities.
Net cash provided by (used in) operating activities ($ millions) in 1997,
1996 and 1995 were $4.1, $31.5 and ($5.5), respectively.
The net cash flow provided by operating activities in 1997 was $4.1 million,
a decrease of $27.4 million compared to fiscal year 1996. This decrease is
attributed to an increase in both the 1997 year-end inventory levels and
accounts receivable balances. Year-end inventory levels grew to $87.6 million at
fiscal year-end 1997 from $76.5 at fiscal year-end 1996. This increase reflects
the growth in inventory required to support higher levels of sales demand. The
higher accounts receivable balance was due to the increased level of wholesale
revenues generated in the fourth quarter of 1997. Wholesale revenues of $53.5
million in the fourth quarter of 1997 reflected an increase of $7.7 million
compared to the fourth quarter of 1996.
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 the Company believes were
successfully addressed in fiscal 1996. Improvements in production planning and
reporting were made possible with new information systems, 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 was continuing
to aggressively reduce the scope of its product offerings 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 $13.7 million, $7.8 million and $14.0 million in
capital expenditures during fiscal years 1995, 1996 and 1997, respectively.
The Company incurred significant indebtedness in connection with the
Acquisition. At January 3, 1998, the Company had approximately $157.1 million of
indebtedness outstanding, consisting of $100.0 million of Notes, $44.1 million
in term loan borrowings under the Senior Credit Facility, and $13.0 million of
borrowings outstanding under its $50.0 million revolving credit portion of the
Senior Credit Facility (exclusive of approximately $4.3 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
$0.9 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,
14
<PAGE>
capital expenditures and working capital needs for the foreseeable future,
although no assurance can be given in this regard.
The Senior Credit Facility imposes certain covenants, requirements, and
restrictions on actions by the Company and its subsidiaries that, among other
things, restrict the payment of dividends.
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.
YEAR 2000
The potential for software processing errors arising from calculations using
the Year 2000 date are a known risk. The Company is currently evaluating its
financial and operating systems capabilities to ensure such systems and related
processes are not adversely affected by conversion of system dates to Year 2000.
The Company is also communicating with its strategic suppliers and financial
institutions to determine whether their information systems will comply with
Year 2000 requirements and not disrupt transactions with the Company. The
Company has established a task force to address Year 2000 requirements and to
determine cost of compliance. The costs to comply with such requirements have
not yet been determined.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which establishes
standards for reporting information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. SFAS 131 is effective for
fiscal years beginning after December 15, 1997. In February 1998, the FASB
issued Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"),
which revises employers' disclosures about pension and other postretirement
benefit plans. SFAS 132 does not change the measurement or recognition of those
plans. SFAS 132 is effective for fiscal years beginning after December 15, 1997.
The Company is currently evaluating the impact of the new statements on its 1998
disclosures.
15
<PAGE>
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......................................................................... 17
Consolidated Balance Sheets at January 3, 1998 and December 28, 1996...................................... 18
Consolidated Statements of Operations for the fiscal year ended January 3, 1998 (Successor) and for the
periods October 30, 1996 through December 28, 1996 (Successor) and
December 31, 1995 through October 29, 1996 (Predecessor)................................................ 19
Consolidated Statements of Cash Flows for the fiscal year ended January 3, 1998 (Successor) and for the
periods October 30, 1996 through December 28, 1996 (Successor) and
December 31, 1995 through October 29, 1996 (Predecessor)................................................ 20
Consolidated Statements of Changes in Common Stockholders' Equity for the fiscal year ended January 3,
1998 (Successor) and for the periods October 30, 1996 through December 28, 1996 (Successor) and December
31, 1995 through October 29, 1996 (Predecessor)......................................................... 21
Notes to Consolidated Financial Statements................................................................ 22
Report of Independent Accountants......................................................................... 37
Consolidated Statement of Income for the fiscal year ended December 30, 1995.............................. 38
Consolidated Statement of Cash Flows for the fiscal year ended December 30, 1995.......................... 39
Consolidated Statement of Changes in Stockholders' Equity for the fiscal year ended
December 30, 1995....................................................................................... 40
Notes to Consolidated Financial Statements................................................................ 41
</TABLE>
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
The William Carter Company:
We have audited the accompanying consolidated balance sheets of The William
Carter Company and its subsidiaries (the "Company") as of January 3, 1998 and
December 28, 1996 and the related consolidated statements of operations, cash
flows and changes in common stockholders' equity for the year ended January 3,
1998 ("Successor," as defined in Note 1), the period from October 30, 1996
through December 28, 1996 (Successor) 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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 January 3, 1998 and December 28, 1996,
and the consolidated results of their operations and their cash flows for the
Successor year ended January 3, 1998, the Successor period from October 30, 1996
through December 28, 1996, and 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
March 27, 1998
17
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
-------------------------
JANUARY 3, DECEMBER 28,
1998 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 4,259 $ 1,961
Accounts receivable, net of allowance for doubtful accounts of $2,374 in 1997 and
$2,691 in 1996.................................................................... 30,134 19,259
Inventories......................................................................... 87,639 76,540
Prepaid expenses and other current assets........................................... 3,390 6,378
Deferred income taxes............................................................... 12,910 14,502
----------- ------------
Total current assets.............................................................. 138,332 118,640
Property, plant and equipment, net.................................................... 53,011 48,221
Tradename, net........................................................................ 97,083 99,583
Cost in excess of fair value of net asset acquired, net............................... 31,445 38,363
Deferred debt issuance costs, net..................................................... 7,980 8,618
Other assets.......................................................................... 4,048 5,284
----------- ------------
Total assets...................................................................... $ 331,899 $ 318,709
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt................................................ $ 900 $ 900
Accounts payable.................................................................... 14,582 14,593
Other current liabilities........................................................... 35,267 32,355
----------- ------------
Total current liabilities......................................................... 50,749 47,848
Long-term debt........................................................................ 156,200 144,100
Deferred income taxes................................................................. 39,777 40,861
Other long-term liabilities........................................................... 9,990 10,178
----------- ------------
Total liabilities................................................................. 256,716 242,987
----------- ------------
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................... 18,462 18,234
----------- ------------
Common stockholder's equity:
Common stock, par value $.01 per share, 1,000 shares authorized, issued and
outstanding....................................................................... -- --
Additional paid-in-capital.......................................................... 56,721 59,566
Accumulated deficit................................................................. -- (2,078)
----------- ------------
Common stockholder's equity......................................................... 56,721 57,488
----------- ------------
Total liabilities and stockholder's equity........................................ $ 331,899 $ 318,709
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
18
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
----------------------------
FOR THE PERIOD PREDECESSOR
FROM OCTOBER --------------------
FOR THE 30, FOR THE PERIOD
YEAR ENDED 1996 THROUGH FROM DECEMBER 31,
JANUARY 3, DECEMBER 28, 1995 THROUGH
1998 1996 OCTOBER 29, 1996
----------- --------------- --------------------
<S> <C> <C> <C>
Net sales..................................................... $ 362,954 $ 51,496 $ 266,739
Cost of goods sold............................................ 228,358 31,708 170,027
----------- ------- --------
Gross profit.................................................. 134,596 19,788 96,712
Selling, general and administrative........................... 111,505 16,672 79,296
Nonrecurring charge........................................... -- -- 8,834
----------- ------- --------
Operating income.............................................. 23,091 3,116 8,582
Interest expense.............................................. 17,571 2,631 7,075
----------- ------- --------
Income before income taxes and extraordinary item............. 5,520 485 1,507
Provision for income taxes.................................... 2,429 212 1,885
----------- ------- --------
Income (loss) before extraordinary item....................... 3,091 273 (378)
Extraordinary item, net of income tax benefit of $1,270....... -- 2,351 --
----------- ------- --------
Net income (loss)............................................. 3,091 (2,078) (378)
Dividend requirements on preferred/redeemable preferred and
accretion on redeemable preferred stock..................... (2,675) (434) (1,132)
----------- ------- --------
Net income (loss) applicable to common stockholder............ $ 416 $ (2,512) $ (1,510)
----------- ------- --------
----------- ------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
19
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
----------------------------
FOR THE PERIOD PREDECESSOR
FROM OCTOBER -----------------
FOR THE 30, FOR THE PERIOD
YEAR ENDED 1996 THROUGH FROM DECEMBER 31,
JANUARY 3, DECEMBER 28, 1995 THROUGH
1998 1996 OCTOBER 29, 1996
----------- --------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................. $ 3,091 $ (2,078) $ (378)
Extraordinary loss, net of taxes.............................. -- 2,351 --
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................... 15,122 2,588 6,979
Loss on disposal of fixed assets............................ 153 -- --
Deferred tax provision...................................... 870 212 2,381
Effect of changes in operating assets and liabilities:
(Increase) decrease in accounts receivable................ (10,875) 7,975 (12,540)
(Increase) decrease in inventories........................ (7,047) (704) 8,392
Decrease (increase) in prepaid expenses and other
assets.................................................. 2,876 (4,432) 2,759
Increase in accounts payable and other liabilities........ 62 1,183 16,812
Other..................................................... (163) -- --
----------- --------------- --------
Net cash provided by operating activities................. 4,089 7,095 24,405
----------- --------------- --------
Cash flows from investing activities:
Proceeds from sale of fixed assets............................ 48 -- --
Capital expenditures.......................................... (14,013) (3,749) (4,007)
Payment to Sellers for the Acquisition........................ -- (117,773) --
Payments of Acquisition costs................................. -- (21,705) --
----------- --------------- --------
Net cash used in investing activities..................... (13,965) (143,227) (4,007)
----------- --------------- --------
Cash flows from financing activities:
Proceeds from Successor revolving line of credit.............. 107,000 6,100 --
Payments of Successor revolving line of credit................ (94,000) (6,100) --
Proceeds from other Successor debt............................ -- 240,000 --
Payments of other Successor debt.............................. (900) (95,000) --
Proceeds from Predecessor revolving line of credit............ -- -- 12,500
Payments of Predecessor revolving line of credit.............. -- -- (31,500)
Payments of other Predecessor debt............................ -- (68,062) (433)
Payment of Predecessor accrued interest....................... -- (1,059) --
Payments of financing costs................................... (650) (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 Successor preferred stock dividends................ (2,447) -- --
Payment of other Successor dividends.......................... (1,183) -- --
Payment of Predecessor preferred stock dividends.............. -- (2,747) --
Payment of Predecessor's guaranteed yield dividend on common
stock....................................................... -- (4,237) --
Other......................................................... 4,354 -- --
----------- --------------- --------
Net cash provided by (used in) financing activities....... 12,174 134,263 (19,433)
----------- --------------- --------
Net increase (decrease) in cash and cash equivalents............ 2,298 (1,869) 965
Cash and cash equivalents at beginning of period................ 1,961 3,830 2,865
----------- --------------- --------
Cash and cash equivalents at end of period...................... $ 4,259 $ 1,961 $ 3,830
----------- --------------- --------
----------- --------------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
20
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENTS 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)
Accrued dividends and accretion on redeemable
preferred stock.................................... (1,662) (1,013)
Other dividends...................................... (1,183)
Net income........................................... 3,091
----------- ----------- ------------
BALANCE AT JANUARY 3, 1998........................... $ -- $ 56,721 $ --
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
21
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY:
The William Carter Company, Inc. (the "Company") is a wholly-owned
subsidiary of Carter Holdings, Inc. ("Holdings"). On October 30, 1996, Holdings,
a company organized on behalf of affiliates of INVESTCORP S.A. ("Investcorp"),
management and certain other investors, acquired 100% of the previously
outstanding Common and Preferred Stock of the Company from MBL Life Assurance
Corporation, CHC Charitable Irrevocable Trust and certain management
stockholders (collectively, the "Sellers"). Financing for the Acquisition
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 million of Subordinated Notes, the net
proceeds of which were used to retire the $90 million of Subordinated Loan
Facility borrowings and $5 million of borrowings under the Senior Credit
Facility. Holdings has substantially no assets or investments other than the
shares 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, at the Acquisition
date, to reflect the allocation of the purchase price based on estimated fair
values. A summary of the purchase price allocation, at the Acquisition date, is
as follows ($000):
<TABLE>
<S> <C>
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 taxes................................................ (26,020)
Preferred stock issuance costs.................................... 2,200
---------
$ 211,185
---------
---------
</TABLE>
22
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY: (CONTINUED)
In fiscal 1997, certain revisions to the preceding estimates were made, as
follows ($000):
<TABLE>
<S> <C>
Inventories....................................................... $ 4,052
Cost in excess of fair value...................................... (5,956)
Net deferred taxes................................................ 201
Other current liabilities......................................... 1,703
</TABLE>
While actual results may differ from these revised estimates, such
differences are not expected to be material.
A $14.9 million portion of the purchase price was applied to pay certain
Predecessor dividends and expenses during the period ended December 28, 1996.
This consisted of $2.8 million and $4.2 million, respectively, in dividends
triggered on the Predecessor's Preferred and Common Stock, plus portions of
compensation-related charges ($5.1 million) and other expense charges ($2.8
million) of the Predecessor incurred in connection with the Acquisition.
The nonrecurring charge in the Predecessor period December 31, 1995 through
October 29, 1996 reflects total compensation-related charges of $5.3 million for
amounts paid to management in connection with the Acquisition and total other
expense charges of $3.5 million for costs and fees that the Company incurred in
connection with the Acquisition.
The following unaudited pro forma statement of operations presents the
results of operations for the fiscal year ended December 28, 1996 as though the
controlling ownership of the Predecessor had been acquired on December 31, 1995,
with financing established through the private placement, and assumes that there
were no other changes in the operations of the Predecessor. The pro forma
results are not necessarily indicative of the financial results that might have
occurred had the transaction included in the pro forma statement actually taken
place on December 31, 1995, or of future results of operations ($000).
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
FOR THE FOR THE
PERIOD FROM PERIOD FROM PRO FORMA FOR
DECEMBER 31, OCTOBER 30, THE YEAR
1995 THROUGH 1996 THROUGH ENDED
OCTOBER 29, DECEMBER 28, PRO FORMA DECEMBER 28,
1996 1996 ADJUSTMENTS 1996
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Net sales........................................ $ 266,739 $ 51,496 $ -- $ 318,235
Gross profit..................................... 96,712 19,788 (282)(a) 116,218
Selling, general and administrative.............. 79,296 16,672 3,519(b) 99,487
Nonrecurring charge.............................. 8,834 -- (8,834)(c) --
Operating income................................. 8,582 3,116 5,033 16,731
Interest expense................................. 7,075 2,631 7,172(d) 16,878
Income (loss) before income taxes and
extraordinary item............................. 1,507 485 (2,139) (147)
Provision for income taxes....................... 1,885 212 (1,848)(e) 249
Income (loss) before extraordinary item.......... (378) 273 (291) (396)
Extraordinary item, net.......................... -- 2,351 (2,351)(f) --
Net income (loss)................................ $ (378) $ (2,078) $ 2,060 $ (396)
Dividend and accretion on redeemable preferred
stock.......................................... $ (434) $ (2,186)(g) $ (2,620)
Net loss applicable to common stockholder........ $ (3,016)
</TABLE>
23
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY: (CONTINUED)
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.
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, the Dominican Republic and Mexico. Products are manufactured for wholesale
distribution to major domestic retailers and for the Company's 138 retail outlet
stores that market its brand name merchandise and certain products manufactured
by other companies. The retail operations represent approximately 40% 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, the Dominican Republic and, added in fiscal 1997, Mexico. These
facilities represent approximately 47% 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 January 3, 1998 and
December 28, 1996 and results of operations for the year ended January 3, 1998
("Successor period"), the period from October 30, 1996 through December 28, 1996
("Successor period") and the period from December 31, 1995 through October 29,
1996 ("Predecessor period"). The fiscal year ended January 3, 1998 (fiscal 1997)
contains 53 weeks and, collectively, the fiscal 1996 Predecessor and Successor
periods contain 52 weeks.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments that have original
maturities of three months or less to be cash equivalents. The Company had cash
concentrations, in excess of deposit insurance limits, in six banks at both
January 3, 1998 and December 28, 1996.
ACCOUNTS RECEIVABLE:
Approximately 69% and 75% of the Company's gross accounts receivable at
January 3, 1998 and December 28, 1996, respectively, were from its ten largest
wholesale customers, primarily major retailers. Of these customers, three have
individual receivable balances in excess of 10% of gross accounts receivable.
24
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
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--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 determines whether there has
been a permanent impairment in 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 at January 3, 1998 and December 28, 1996 was $2,917,000 and $417,000,
respectively. Accumulated amortization of goodwill at January 3, 1998 and
December 28, 1996 was $1,121,000 and $159,000, respectively.
DEFERRED DEBT ISSUANCE COSTS:
Debt issuance costs are deferred and amortized to interest expense using the
straight line method, which approximates the effective interest method, over the
lives of the related debt. Amortization approximated $1,287,000 for the year
ended January 3, 1998, $174,000 for the period ended December 28, 1996 and
$367,000 for the period ended October 29, 1996. An extraordinary item for the
Successor period from 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 $90.0 million Subordinated Loan Facility and portion of the
Senior Credit Facility, respectively, repaid with the proceeds of the $100.0
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," ("SFAS
123") was adopted in 1996 for disclosure purposes only. See Note 10.
25
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
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 generally 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.
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid in cash approximated $16,283,000 for the year ended January 3,
1998, $2,463,000 for the period ended December 28, 1996 and $6,708,000 for the
period ended October 29, 1996. Income taxes (received) paid in cash approximated
($900,000) for the year ended January 3, 1998, ($771,000) for the period ended
December 28, 1996 and $903,000 for the period ended October 29, 1996.
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.
NEW ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes standards
for reporting information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS 131 is effective for
fiscal years beginning after December 15, 1997. In February 1998, the FASB
issued Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"),
which revises employers' disclosures about pension and other postretirement
benefit plans. SFAS 132 does not change the measurement or recognition of those
plans. SFAS 132 is effective for fiscal years beginning after December 15, 1997.
The Company is currently evaluating the impact of the new statements on its 1998
disclosures.
26
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INVENTORIES:
Inventories consisted of the following ($000):
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
----------- ------------
<S> <C> <C>
Finished goods..................................................... $ 50,026 $ 51,700
Work in process.................................................... 24,069 15,884
Raw materials and supplies......................................... 13,544 8,956
----------- ------------
$ 87,639 $ 76,540
----------- ------------
----------- ------------
</TABLE>
NOTE 4--FIXED ASSETS:
Fixed assets consisted of the following ($000):
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
----------- ------------
<S> <C> <C>
Land, buildings and improvements................................... $ 14,526 $ 12,679
Machinery and equipment............................................ 49,077 37,155
----------- ------------
63,603 49,834
Accumulated depreciation and amortization.......................... (10,592) (1,613)
----------- ------------
$ 53,011 $ 48,221
----------- ------------
----------- ------------
</TABLE>
Depreciation expense ($000) was $9,023 for the year ended January 3, 1998,
$1,613 for the period ended December 28, 1996 and $6,612 for the period ended
October 29, 1996.
NOTE 5--LONG-TERM DEBT:
Long-term debt consisted of the following ($000):
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
---------- ------------
<S> <C> <C>
Senior Credit Facility term loan................................... $ 44,100 $ 45,000
Senior Credit Facility revolving credit............................ 13,000 --
10 3/8% (Series A) Senior Subordinated Notes due 2006.............. 100,000 100,000
---------- ------------
157,100 145,000
Current maturities................................................. (900) (900)
---------- ------------
$ 156,200 $ 144,100
---------- ------------
---------- ------------
</TABLE>
The Senior Credit Facility provides for a $50.0 million Tranche B term loan
facility. The Tranche B term loans have a final scheduled maturity date of
October 31, 2003. The principal amounts of the Tranche B term loans are required
to be repaid in 14 consecutive semi-annual installments totaling $0.9 million in
each of fiscal years 1997 through 2000, $5.4 million in fiscal year 2001, $13.5
million in fiscal year 2002 and $22.5 million in fiscal year 2003. In November
1996, proceeds of the 10 3/8% Senior Subordinated Notes were used to repay $5.0
million of the term loan. The repayment schedule has been adjusted ratably for
this payment.
27
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM DEBT: (CONTINUED)
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 or (b) such other date as the revolving credit commitments
thereunder shall terminate in accordance with the terms of the Senior Credit
Facility. There is no scheduled interim amortization of principal. The facility
has a sublimit of $10.0 million for letters of credit of which $4.3 million was
used for letters of credit as of January 3, 1998. 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
January 3, 1998 and December 28, 1996 was 9.9% and 9.8%, respectively. Interest
on the Senior Credit Facility is payable quarterly.
The Senior Credit Facility requires that upon a public offering by the
Company, Holdings or any subsidiary of the Company of its common or other voting
stock, 50% of the net proceeds from such offering (only after the redemption,
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 applied. In addition, the Senior Credit Facility requires that
either 75% or 50% (depending on certain circumstances) of Excess Cash Flow (as
defined in the Senior Credit Facility) is required to be applied toward the
prepayment of indebtedness under the Senior Credit Facility. Such prepayments
are required to be so 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
28
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM DEBT: (CONTINUED)
Senior Credit Facility requires that the Company comply with specified financial
ratios and tests, including minimum cash flow, a maximum ratio of indebtedness
to cash flow and a minimum interest coverage ratio.
The 10 3/8% Senior Subordinated Notes were issued in November 1996. The
proceeds from the Notes were used to repay $90.0 million of Acquisition-related
financing and $5.0 million of the Senior Credit Facility term loan.
In April 1997, the Company completed a registration 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. The terms and
provisions of the Notes were essentially unchanged.
Interest on the Notes is to 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 are uncollateralized. 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 subsequent to January 3, 1998 are as follows ($000):
fiscal 1998--$900; 1999--$900; 2000--900; 2001-- $18,400; and 2002--$13,500.
The fair value of the Company's long-term debt was approximately $6.0
million greater than the book value as of January 3, 1998. At December 28, 1996,
the carrying value of the Company's debt was 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 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 January 3, 1998 and 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 therefore, 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. During fiscal 1997, dividends totaling $2,447,000 were declared and paid
pursuant to these provisions.
29
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--REDEEMABLE PREFERRED STOCK: (CONTINUED)
The shares of Preferred Stock are redeemable at the option of the Company at
a redemption price of $4,000 per share plus accrued and unpaid dividends thereon
to the date fixed for redemption. If permitted under the Senior Credit Facility
and the Indenture, the shares of Preferred Stock may be redeemed in whole, or in
not more than two partial redemptions, provided that in the first of such two
partial redemptions not less than 50% of the number of shares of Preferred Stock
then outstanding shall be redeemed, and that in the second of such two partial
redemptions all of the shares of Preferred Stock then outstanding shall be
redeemed. On December 15, 2007, the Company is required to redeem all
outstanding shares of Preferred Stock at a redemption price of $4,000 per share
plus accrued and unpaid dividends. All outstanding shares of Preferred Stock are
pledged to collateralize the Company's obligations under the Senior Credit
Facility.
The shares of Preferred Stock have no voting rights, other than as provided
by Massachusetts law.
In the event of liquidation, the holders of the Preferred Stock are entitled
to receive out of the assets of the Company available for distribution to
shareholders, on a priority basis, the amount of $4,000 per share, plus a sum
equal to all dividends on such shares accrued and unpaid.
The Preferred Stock was issued for $20.0 million and was recorded net of
issuance costs of $2.2 million. 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 January 3, 1998 and December 28, 1996, the authorized Common Stock of the
Company consisted of 1,000 shares of Common Stock, par value $.01 per share. At
January 3, 1998 and December 28, 1996, there were 1,000 shares of Common Stock
issued and outstanding, all of which were held of record by Holdings. All
outstanding shares of Common Stock are pledged to collateralize the Company's
obligations under the Senior Credit Facility. Pursuant to the restrictions
contained in the Senior Credit Facility and the Indenture, the Company is not
expected to be able to pay dividends on its Common Stock for the foreseeable
future, other than certain limited dividends or winding up of the Company. Each
share of Common Stock entitles the holder thereof to one vote on all matters to
be voted on by shareholders of the Company. In the event of a liquidation, the
holders of the Common Stock are entitled to share in the remaining assets of the
Company after payment of all liabilities and after satisfaction of all
liquidation preferences payable to the holders of Preferred Stock.
NOTE 8--PREDECESSOR CAPITAL STOCK:
At December 30, 1995 and until October 30, 1996, the Company had outstanding
50,000 shares of Series A preferred stock, $.01 par value per share, carried at
$50 million; 10,000 shares of Class A Common, $.01 par value per share; 10,000
shares of Class B Common, $.01 par value per share; 2,785 shares of Class C
Common; and $92.4 million of additional paid-in-capital. In conjunction with the
Acquisition, cumulative dividends 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.
30
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--EMPLOYEE BENEFIT PLANS:
The Company offers a comprehensive plan to current and certain future
retirees and their spouses until they become eligible for Medicare and a
Medicare Supplement plan. The Company also offers life insurance to current and
certain future retirees. Employee contributions are required as a condition of
participation for both medical benefits and life insurance, and the Company's
liabilities are net of these employee contributions.
The following table sets forth the components of the accumulated
postretirement benefit obligation (APBO) at January 3, 1998 and December 28,
1996 ($000):
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
----------- -------------
<S> <C> <C>
Retirees........................................................... $ 6,139 $ 5,527
Actives ineligible to retire....................................... 2,813 2,552
Actives eligible to retire......................................... 1,043 406
----------- ------
Total APBO......................................................... $ 9,995 $ 8,485
----------- ------
----------- ------
</TABLE>
The funded status of the plan is reconciled to the accrued postretirement
benefit liability recognized in the accompanying consolidated balance sheets
(included in "Other long-term liabilities") at January 3, 1998 and December 28,
1996, as follows ($000):
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
----------- -------------
<S> <C> <C>
Total APBO......................................................... $ 9,995 $ 8,485
Plan assets at fair value.......................................... -- --
Unrecognized net loss.............................................. (1,442) 56
----------- ------
Accrued postretirement benefit liability........................... $ 8,553 $ 8,541
----------- ------
----------- ------
</TABLE>
Net periodic postretirement benefit cost (NPPBC) charged to operations for
the Predecessor period from December 31, 1995 through October 29, 1996, the
Successor period from October 30, 1996 through December 28, 1996 and for the
Successor year ended January 3, 1998 included the following components ($000):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
PERIOD FROM PERIOD FROM
SUCCESSOR OCTOBER 30, 1996 DECEMBER 31, 1995
YEAR ENDED THROUGH THROUGH
JANUARY 3, 1998 DECEMBER 28, 1996 OCTOBER 29, 1996
----------------- ------------------- -------------------------
<S> <C> <C> <C>
Service cost.......................................... $ 169 $ 21 $ 100
Interest cost......................................... 649 95 482
Amortization of transition obligation................. -- -- 318
Amortization of net loss.............................. 34 -- 45
----- ----- -----
Total NPPBC........................................... $ 852 $ 116 $ 945
----- ----- -----
----- ----- -----
</TABLE>
The discount rate used in determining the APBO was 6.75% and 7.0% as of
January 3, 1998 and December 28, 1996, respectively. 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
31
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--EMPLOYEE BENEFIT PLANS: (CONTINUED)
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 January 3, 1998 and December 28, 1996, the present value of
the estimated remaining payments under this plan was approximately $1.8 million
and is included in other current and long-term liabilities.
Prior to the Acquisition, the Company also maintained a Management Equity
Participation Plan ("MEPP") and a Long Term Incentive Plan ("LTIP") for
executive and other key salaried employees. These plans were terminated in
conjunction with the Acquisition. Expenses related to these two plans for the
Predecessor period totaled $4.9 million, including $3.3 million paid as a result
of the Acquisition.
The Company also sponsors a defined contribution plan within the U.S. The
plan covers employees who are at least 21 years of age and have completed one
year of service, during which at least 1,000 hours were served. The plan
provides for the option for employee contributions of between 1% and 15% of
salary, of which the Company matches up to 4% of the employee contribution, at a
rate of 75% on the first 2% and 50% on the second 2%. The Company's expense for
the defined contribution plan totaled approximately ($000): $785 for the fiscal
year ended January 3, 1998, $100 for the period ended December 28, 1996 and
$1,112 for the period ended October 29, 1996.
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. Options for up to 75,268 shares may be granted to certain employees
under the plan, of which 7,966 and 3,069 remain ungranted at January 3, 1998 and
December 28, 1996, respectively. In October 1996, Holdings granted options to
purchase 72,199 shares of its Class C stock to certain employees of the Company.
The exercise price of each such option and options granted in fiscal year 1997
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 stock at the time the options were granted. Accordingly, no compensation
expense has been recognized on the options granted in either of the Successor
periods. All options granted vest ratably over five years (contingent upon the
Company meeting specific earnings targets) and expire in ten years, with
weighted average remaining contractual lives of approximately nine years at
January 3, 1998.
32
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--MANAGEMENT STOCK INCENTIVE PLAN: (CONTINUED)
A summary of stock options as of January 3, 1998 and changes during the year
then ended is presented below:
<TABLE>
<CAPTION>
OPTION TO
PURCHASE
NUMBER OF
SHARES
-----------
<S> <C>
Outstanding, beginning of year (none exercisable)................................. 72,199
Granted........................................................................... 4,000
Exercised......................................................................... --
Forfeited......................................................................... (8,897)
Expired........................................................................... --
-----------
Outstanding, end of year.......................................................... 67,302
-----------
-----------
Exercisable, end of year.......................................................... 13,460
-----------
-----------
</TABLE>
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 SFAS 123 had been applied,
estimated compensation expense for the year ended January 3, 1998 would have
been approximately $400,000, resulting in pro forma net income of $2,851,000.
There would have been no compensation cost associated with these option grants
for the period ended December 28, 1996 and the Company's net income would have
been unchanged.
NOTE 11--INCOME TAXES:
The provision for income taxes consisted of the following ($000):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
PERIOD FROM PERIOD FROM
SUCCESSOR OCTOBER 30, 1996 DECEMBER 31, 1995
YEAR ENDED THROUGH THROUGH
JANUARY 3, 1998 DECEMBER 28, 1996 OCTOBER 29, 1996
--------------- ------------------------- -----------------
<S> <C> <C> <C>
Current tax provision (benefit):
Federal............................................. $ 1,231 $ -- $ (484)
State............................................... 278 -- (12)
Foreign............................................. 50 -- --
------ ----- ------
Total current provision (benefit)................. 1559 -- (496)
------ ----- ------
Deferred tax provision
Federal............................................. 775 188 2,121
State............................................... 95 24 260
------ ----- ------
Total deferred provision.......................... 870 212 2,381
------ ----- ------
Total provision................................... $ 2,429 $ 212 $ 1,885
------ ----- ------
------ ----- ------
</TABLE>
33
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES: (CONTINUED)
Components of deferred tax assets and liabilities were as follows ($000):
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
----------- ------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance.................................... $ 1,237 $ 1,279
Inventory valuation.............................................. 5,777 7,740
Liability accruals............................................... 5,879 6,659
Deferred employee benefits....................................... 3,755 3,820
Loss and tax credit carryforwards................................ 193 1,149
Other............................................................ 929 808
----------- ------------
Total deferred tax assets...................................... $ 17,770 $ 21,455
----------- ------------
----------- ------------
Deferred tax liabilities
Tradename........................................................ $ 35,921 $ 36,846
Depreciation..................................................... 8,284 8,788
Deferred employee benefits....................................... 432 1,733
Other............................................................ -- 447
----------- ------------
Total deferred tax liabilities................................. $ 44,637 $ 47,814
----------- ------------
----------- ------------
</TABLE>
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 PERIOD FROM
SUCCESSOR OCTOBER 30, 1996 DECEMBER 31, 1995
YEAR ENDED THROUGH THROUGH
JANUARY 3, 1998 DECEMBER 28, 1996 OCTOBER 29, 1996
------------------- ----------------------- ---------------------
<S> <C> <C> <C>
Statutory federal income tax rate.......................... 34% 34% 34%
State income taxes, net of
federal income tax benefit............................... 5 3 11
Non-deductible Acquisition costs........................... -- -- 77
Goodwill amortization...................................... 6 11 --
Other permanent items...................................... 1 -- --
Foreign income, net of tax................................. (2) (2) (3)
Other...................................................... -- (2) 6
-- --
---
Total...................................................... 44% 44% 125%
-- --
-- --
---
---
</TABLE>
The portion of income before income taxes and extraordinary item
attributable to foreign income was approximately $437,000 for the year ended
January 3, 1998, $40,000 for the period ended December 28, 1996, and $150,000
for the period ended October 29, 1996.
NOTE 12--LEASE COMMITMENTS:
Annual rent expense ($000) under operating leases was $14,093 for the year
ended January 3, 1998, $2,148 for the period ended December 28, 1996 and $10,902
for the period ended October 29, 1996.
34
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--LEASE COMMITMENTS: (CONTINUED)
Minimum annual rental commitments under current noncancelable operating leases
as of January 3, 1998 were as follows ($000):
<TABLE>
<CAPTION>
BUILDINGS,
PRIMARILY DATA TOTAL
RETAIL TRANSPORTATION PROCESSING MANUFACTURING NONCANCELABLE
YEAR STORES EQUIPMENT EQUIPMENT EQUIPMENT LEASES
- ------------------------------------------ ----------- --------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
1998...................................... $ 10,850 $ 555 $ 355 $ 185 $ 11,945
1999...................................... 8,556 294 226 175 9,251
2000...................................... 5,624 170 184 145 6,123
2001...................................... 3,441 122 -- 5 3,568
2002...................................... 1,808 81 -- 5 1,894
Thereafter................................ 1,669 -- -- -- 1,669
----------- ------ ----- ----- -------------
Total..................................... $ 31,948 $ 1,222 $ 765 $ 515 $ 34,450
----------- ------ ----- ----- -------------
----------- ------ ----- ----- -------------
</TABLE>
NOTE 13--OTHER CURRENT LIABILITIES:
Other current liabilities consisted of the following ($000):
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
----------- ------------
<S> <C> <C>
Accrued liability for retail store closures........................ $ 2,381 $ 6,000
Accrued liability for plant closures............................... 2,748 3,000
Accrued income taxes............................................... 7,017 4,477
Accrued workers compensation....................................... 4,500 3,000
Accrued incentive compensation..................................... 2,650 2,400
Other current liabilities.......................................... 15,971 13,478
----------- ------------
$ 35,267 $ 32,355
----------- ------------
----------- ------------
</TABLE>
35
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--VALUATION AND QUALIFYING ACCOUNTS:
Information regarding valuation and qualifying accounts is 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
Additions, charged to expense................................................. 1,178
Writeoffs..................................................................... (1,495)
------
Balance at January 3, 1998...................................................... $ 2,374
------
------
</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 the officer's stock
in Holdings.
On October 7, 1997, the Company paid a dividend of $1,183,000 on its common
stock held by its parent, Holdings. The proceeds from the dividend were used by
Holdings to repurchase shares of Holdings stock owned by three former Company
employees.
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The William Carter Company
In our opinion, the consolidated statements of income, of cash flows and of
changes in stockholders' equity for the fiscal year ended December 30, 1995
(appearing on pages 38 through 40 of this Form 10-K Annual Report) present
fairly, in all material respects, the results of operations and cash flows of
The William Carter Company and its subsidiaries for the fiscal year ended
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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of The William
Carter Company for any period subsequent to December 30, 1995.
/s/ Price Waterhouse LLP
Stamford, Connecticut
February 16, 1996
37
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FISCAL YEAR
ENDED
DECEMBER 30,
1995
------------
<S> <C>
Net sales........................................................................................... $ 295,431
Cost of goods sold.................................................................................. 191,105
------------
Gross profit........................................................................................ 104,326
Selling, general and administrative................................................................. 83,223
------------
Operating income.................................................................................... 21,103
Interest expense.................................................................................... 7,849
------------
Income before income taxes.......................................................................... 13,254
Provision for income taxes.......................................................................... 5,179
------------
Net income.......................................................................................... $ 8,075
------------
------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
38
<PAGE>
THE WILLIAM CARTER COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FISCAL YEAR
ENDED
DECEMBER 30,
1995
------------
<S> <C>
Cash flows from operating activities:
Net income........................................................................................ $ 8,075
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................................... 7,737
Deferred income tax benefit..................................................................... (465)
(Gain) loss on disposal of assets............................................................... (40)
Compensation charge on stock issued to employees................................................ 276
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable............................................................................. (3,878)
Inventories..................................................................................... (28,099)
Prepaid expenses and other current assets....................................................... 1,641
Increase in liabilities:
Accounts payable................................................................................ 3,981
Other current liabilities....................................................................... 3,431
Other long-term liabilities..................................................................... 1,825
------------
Net cash (used in) provided by operating activities......................................... (5,516)
------------
Cash flows from investing activities:
Proceeds from sale of assets...................................................................... 346
Capital expenditures.............................................................................. (13,715)
------------
Net cash used in investing activities............................................................... (13,369)
------------
Cash flows from financing activities:
Borrowings under revolving credit facility........................................................ 19,000
Payments under term loan and subordinated note agreements......................................... (2,732)
Payments of industrial revenue bond............................................................... (433)
Preferred stock dividend.......................................................................... (1,678)
------------
Net cash provided by (used in) financing activities......................................... 14,157
------------
Net (decrease) increase in cash and cash equivalents................................................ (4,728)
Cash and cash equivalents at beginning of period.................................................. 7,593
------------
Cash and cash equivalents at end of period.......................................................... $ 2,865
------------
------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
39
<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 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 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
40
<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 year ended December 30, 1995
contained 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.
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 1995.
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 FLOW INFORMATION:
Interest paid in cash approximated $7,323 for the fiscal year ended December
30, 1995. Income taxes paid in cash approximated $4,212 in fiscal 1995.
41
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 1-- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
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--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 3--INCOME TAXES:
The provision for income taxes for fiscal 1995 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER
30,
1995
-----------
<S> <C>
Current tax provision (benefit):
Federal....................................................... $ 4,612
State......................................................... 1,032
-----------
Total current................................................... 5,644
Deferred tax provision (benefit):
Federal....................................................... (372)
State......................................................... (93)
-----------
Deferred tax benefit............................................ (465)
-----------
Total provision............................................. $ 5,179
-----------
-----------
</TABLE>
42
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--INCOME TAXES: (CONTINUED)
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 difference between the Company's effective income tax rate and the
federal statutory tax rate is reconciled below:
<TABLE>
<CAPTION>
DECEMBER 30,
1995
---------------
<S> <C>
Statutory federal income tax rate............................................... 35.0%
State income taxes, net of federal income tax benefit........................... 4.6
Alternative minimum tax......................................................... --
Valuation allowance reversal, net............................................... --
Jobs tax credit................................................................. (0.7)
Other........................................................................... 0.2
---
Total........................................................................... 39.1%
---
---
</TABLE>
43
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--LEASE COMMITMENTS:
Annual rent expense under operating leases was $11,228 in fiscal 1995.
Minimum annual rental commitments under current noncancelable operating leases
as of December 30, 1995 were as follows:
<TABLE>
<CAPTION>
BUILDINGS,
PRIMARILY DATA TOTAL
RETAIL TRANSPORTATION PROCESSING NONCANCELABLE
YEAR STORES EQUIPMENT EQUIPMENT LEASES
- ------------------------------------ ------------ --------------- ------------- -------------
<S> <C> <C> <C> <C>
1996................................ $ 10,893 $ 490 $ 262 $ 11,645
1997................................ 9,388 469 -- 9,857
1998................................ 7,057 206 -- 7,263
1999................................ 5,122 110 -- 5,232
2000................................ 2,878 50 -- 2,928
Thereafter.......................... 3,806 -- -- 3,806
------------ ------ ----- -------------
Total............................... $ 39,144 $ 1,325 $ 262 $ 40,731
------------ ------ ----- -------------
------------ ------ ----- -------------
</TABLE>
NOTE 5--VALUATION AND QUALIFYING ACCOUNTS:
Information regarding valuation and qualifying accounts for fiscal year 1995
were 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
-----------
-----------
</TABLE>
44
<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.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---------------------------------------------------- --------- ----------------------------------------------------
<S> <C> <C>
Frederick J. Rowan, II.............................. 58 President, Chief Executive Officer and Chairman of
the Board of Directors.
Joseph Pacifico..................................... 48 President-Marketing.
Charles E. Whetzel, Jr.............................. 47 Executive Vice President-Manufacturing.
David A. Brown...................................... 40 Executive Vice President-Business Planning &
Administration and Director.
Michael D. Casey.................................... 37 Senior Vice President-Finance.
Christopher J. O'Brien.............................. 39 Director.
Charles J. Philippin................................ 47 Director.
Christopher J. Stadler.............................. 33 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 33 years, has been
in senior executive positions for nearly 21 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 and was named President-Marketing in 1997. Mr. Pacifico began his
career with VF Corporation in 1981 as a sales representative for the H.D. Lee
Company and was promoted 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 and was named Executive Vice President-Manufacturing in
1997. 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.
45
<PAGE>
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. In 1997 Mr. Brown was named Executive Vice President-Business Planning and
Administration. 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.
MICHAEL D. CASEY joined the Company in 1993 as Vice President-Finance and
was named Senior Vice President-Finance in 1997. Prior to joining the Company,
Mr. Casey was a Senior Manager of Price Waterhouse LLP.
CHRISTOPHER J. O'BRIEN became a director of the Company in October 1996. He
has been an executive of Investcorp, its predecessor or one or more of its
wholly owned subsidiaries since December 1993. Prior to joining Investcorp, Mr.
O'Brien was a Managing Director of Mancuso & Company for four years. Mr. O'Brien
is a director of Simmons Holdings, Inc., Star Markets Holdings, Inc., Prime
Service, Inc. and CSK Auto, Inc.
CHARLES J. PHILIPPIN became a director of the Company in October 1996. He
has been an executive of Investcorp, its predecessor or one or more of its
wholly owned subsidiaries since July 1994. Prior to joining Investcorp, Mr.
Philippin was a partner of Coopers & Lybrand L.L.P. Mr. Philippin is a director
of Saks Holdings, Inc., Prime Service, Inc. and CSK Auto, Inc.
CHRISTOPHER J. STADLER became a director of the Company in October 1996. He
has been an executive of Investcorp, its predecessor or one or more of its
wholly owned subsidiaries since April 1996. Prior to joining Investcorp, Mr.
Stadler was a Director with CS First Boston Corporation. Mr. Stadler is a
director of Prime Service, Inc. and CSK Auto, Inc.
DIRECTOR COMPENSATION
The Company pays no additional remuneration to its employees or to
executives of Investcorp for serving as directors. There are no family
relationships among any of the directors or executive officers.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation earned in fiscal 1997
by the Company's Chief Executive Officer and each of the other four most highly
compensated executive officers whose remuneration exceeded $100,000
(collectively, the "Named Executive Officers"). The current compensation
arrangements for each of these officers are described in "Employment
Arrangements" below.
46
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
SALARY BONUS(A) COMPENSATION(b)
NAME AND PRINCIPAL POSITION ($) ($) ($)
- -------------------------------------------------------------------------- --------- --------- ----------------
<S> <C> <C> <C>
Frederick J. Rowan, II.................................................... 483,542 440,600 351,244
President, Chief Executive Officer and Chairman of the Board of
Directors
Joseph Pacifico........................................................... 335,271 189,800 204,163
President-Marketing
Charles E. Whetzel, Jr.................................................... 222,058 97,400 240,922
Executive Vice President-Manufacturing
David A. Brown............................................................ 209,804 118,700 320,502
Executive Vice President-Business Planning & Administration and Director
Michael D. Casey.......................................................... 142,042 60,000 --
Senior Vice President-Finance
</TABLE>
- ------------------------
(a) Earned in 1997 but paid in 1998.
(b) Includes Holdings' Class C Stock compensation, supplemental retirement plan
benefits, automobile allowances, insurance premiums, and medical cost
reimbursement. Other compensation for Mssrs. Whetzel and Brown include
relocation assistance.
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 $489,500 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. and David A. Brown (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 and Brown are entitled to receive (i) a base salary, currently
$375,000, $250,000 and $235,000, 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,
47
<PAGE>
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 72,199 shares of its Class C Stock to certain members of the Company's senior
management, other officers and employees of the Company. As of fiscal year end
1997, options to purchase up to 67,302 shares of Class C stock were outstanding.
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 Holdings' Class C 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, 1998,
there were 5,000 shares of Holdings' Class D Stock issued and outstanding. At
the Acquisition, there were 151,049 shares of Holdings' Class C Stock issued to
members of the Company's management. As of January 3, 1998, members of the
Company's management owned 132,870 shares of Class C Stock of Holdings. This
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.
48
<PAGE>
CLASS D VOTING STOCK:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME SHARES(a) CLASS(a)
- ---------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
INVESTCORP S.A.(b)(c)................................................. 5,000 100.0%
SIPCO Limited(d)...................................................... 5,000 100.0
CIP Limited(e)(f)..................................................... 4,600 92.0
Ballet Limited(e)(f).................................................. 460 9.2
Denary Limited(e)(f).................................................. 460 9.2
Gleam Limited(e)(f)................................................... 460 9.2
Highlands Limited(e)(f)............................................... 460 9.2
Noble Limited(e)(f)................................................... 460 9.2
Outrigger Limited(e)(f)............................................... 460 9.2
Quill Limited(e)(f)................................................... 460 9.2
Radial Limited(e)(f).................................................. 460 9.2
Shoreline Limited(e)(f)............................................... 460 9.2
Zinnia Limited(e)(f).................................................. 460 9.2
INVESTCORP Investment Equity Limited(c)............................... 400 8.0
</TABLE>
- ------------------------
(a) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power
to dispose, or direct the disposition of, a security.
(b) Investcorp does not directly own any stock in Holdings. The number of shares
shown as owned by Investcorp includes all of the shares owned by INVESTCORP
Investment Equity Limited (see (c) below). Investcorp owns no stock in
Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble
Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline
Limited, Zinnia Limited, or in the beneficial owners of these entities (see
(f) below). Investcorp may be deemed to share beneficial ownership of the
shares of voting stock held by these entities because the entities have
entered into revocable management services or similar agreements with an
affiliate of Investcorp, pursuant to which each of such entities has granted
such affiliate the authority to direct the voting and disposition of the
Holdings voting stock owned by such entity for so long as such agreement is
in effect. Investcorp is a Luxembourg corporation with its address at 37 rue
Notre-Dame, Luxembourg.
(c) INVESTCORP Investment Equity Limited is a Cayman Islands corporation, and a
wholly-owned subsidiary of Investcorp, with its address at P.O. Box 1111,
West Wind Building, George Town, Grand Cayman, Cayman Islands.
(d) SIPCO Limited may be deemed to control Investcorp through its ownership of a
majority of a company's stock that indirectly owns a majority of
Investcorp's shares. SIPCO Limited's address is P.O. Box 1111, West Wind
Building, George Town, Grand Cayman, Cayman Islands.
(e) CIP ("CIP") owns no stock in Holdings. CIP indirectly owns less than 0.1 %
of the stock in each of Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinnia Limited (see (f) below). CIP may be
deemed to share beneficial ownership of the shares of voting stock of
Holdings held by such entities because CIP acts as a director of such
entities and the ultimate beneficial shareholders of each of those entities
have granted to CIP revocable proxies in companies that own those entities'
stock. None of the ultimate beneficial owners of such entities beneficially
owns individually more than 5% of Holdings' voting stock.
(f) Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinnia Limited is a
49
<PAGE>
Cayman Islands corporation with its address at P.O. Box 2197, West Wind
Building, George Town, Grand Cayman, Cayman Islands.
CLASS C NON-VOTING STOCK:
<TABLE>
<CAPTION>
PERCENT
NUMBER OF OF
NAME SHARES(a) CLASS
- ---------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Frederick J. Rowan, II........................................................................ 56,649 23.4%
Joseph Pacifico............................................................................... 15,051 6.2%
Charles E. Whetzel, Jr........................................................................ 15,051 6.2%
David A. Brown................................................................................ 15,051 6.2%
Michael D. Casey.............................................................................. 2,923 1.2%
All directors and executive officers of the Company as a group (8 persons).................... 104,725 43.2%
</TABLE>
- ------------------------
(a) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power
to dispose, or direct the disposition of, a security.
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.
50
<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 Sheets at January 3, 1998 and December 28, 1996
Consolidated Statements of Operations for the fiscal year ended
January 3, 1998 (Successor) and for the periods October 30, 1996 through
December 28, 1996 (Successor) and December 31, 1995 through October 29,
1996 (Predecessor)
Consolidated Statements of Cash Flows for the fiscal year ended
January 3, 1998 (Successor) and for the periods October 30, 1996 through
December 28, 1996 (Successor) and December 31, 1995 through October 29,
1996 (Predecessor)
Consolidated Statements of Changes in Common Stockholders' Equity for
the fiscal year ended January 3, 1998 (Successor) and 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 Statement of Income for the fiscal year ended December
30, 1995
Consolidated Statement of Cash Flows for the fiscal year ended
December 30, 1995
Consolidated Statement of Changes in Stockholders' Equity for the
fiscal year ended December 30, 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: None
52
<PAGE>
3. Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
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
Statement on 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.
</TABLE>
- ------------------------
* Filed herewith
53
<PAGE>
STAMFORD, CONNECTICUT
EXHIBIT 16
[PRICE WATERHOUSE LLP LETTERHEAD]
April 1, 1998
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 April 1,
1998 and are in agreement with the statements contained therein.
Yours very truly,
/s/ Price Waterhouse, LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JAN-03-1998
<CASH> 4,259
<SECURITIES> 0
<RECEIVABLES> 32,508
<ALLOWANCES> 2,374
<INVENTORY> 87,639
<CURRENT-ASSETS> 138,332
<PP&E> 63,603
<DEPRECIATION> 10,592
<TOTAL-ASSETS> 331,899
<CURRENT-LIABILITIES> 50,749
<BONDS> 156,200
18,462
0
<COMMON> 0
<OTHER-SE> 56,721
<TOTAL-LIABILITY-AND-EQUITY> 331,899
<SALES> 362,954
<TOTAL-REVENUES> 362,954
<CGS> 228,358
<TOTAL-COSTS> 228,358
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,571
<INCOME-PRETAX> 5,520
<INCOME-TAX> 2,429
<INCOME-CONTINUING> 3,091
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,091
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
