<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED APRIL 4, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
________________________
COMMISSION FILE NUMBER:
THE WILLIAM CARTER COMPANY
(Exact name of registrant as specified in 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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
Applicable only to corporate issuers:
As of May 18, 1998, there were 1,000 shares of Common Stock outstanding.
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<PAGE>
FORM 10-Q
THE WILLIAM CARTER COMPANY
INDEX
Page
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of April 4,
1998 (unaudited) and January 3, 1998 3
Unaudited Condensed Consolidated Statements of
Operations for the three-month periods ended April 4,
1998 and March 29, 1997 4
Unaudited Condensed Consolidated Statements of Cash
Flows for the three-month periods ended April 4, 1998
and March 29, 1997 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. Other Information 11
2
<PAGE>
THE WILLIAM CARTER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
April 4, January 3,
1998 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,126 $ 4,259
Accounts receivable, net 26,858 30,134
Inventories 102,589 87,639
Prepaid expenses and other current assets 3,508 3,390
Deferred income taxes 12,961 12,910
-------- --------
Total current assets 151,042 138,332
Property, plant and equipment, net 51,992 53,011
Tradename, net 96,458 97,083
Cost in excess of fair value of net assets acquired, net 31,205 31,445
Deferred debt issuance costs, net 7,660 7,980
Other assets 3,735 4,048
-------- --------
Total assets $342,092 $331,899
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 900 $ 900
Accounts payable 17,579 14,582
Other current liabilities 35,815 35,267
-------- --------
Total current liabilities 54,294 50,749
Long-term debt 164,700 156,200
Deferred income taxes 39,767 39,777
Other long-term liabilities 9,990 9,990
-------- --------
Total liabilities 268,751 256,716
-------- --------
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 19,125 18,462
-------- --------
Common stockholder's equity:
Common stock, par value $.01 per share, 1,000 shares authorized,
issued and outstanding -- --
Additional paid-in capital 55,981 56,721
Accumulated deficit (1,765) --
-------- --------
Total common stockholder's equity 54,216 56,721
-------- --------
Total liabilities and stockholder's equity $342,092 $331,899
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements
3
<PAGE>
THE WILLIAM CARTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three-months Ended
--------------------
April 4, March 29,
1998 1997
---- ----
<S> <C> <C>
Net sales $85,144 $75,201
Costs of goods sold 54,509 47,809
------- -------
Gross profit 30,635 27,392
Selling, general and administrative expenses 29,375 26,382
------- -------
Operating income 1,260 1,010
Interest expense 4,469 4,023
------- -------
Loss before benefit from income taxes (3,209) (3,013)
Benefit from income taxes 1,444 1,474
------- -------
Net loss (1,765) (1,539)
Dividend requirements and accretion on redeemable preferred stock 663 658
------- -------
Net loss applicable to common stockholder $(2,428) $(2,197)
======= =======
</TABLE>
See accompanying notes to the condensed consolidated financial statements
4
<PAGE>
THE WILLIAM CARTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three-months Ended
--------------------
April 4, March 29,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,765) $ (1,539)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 4,118 3,707
Deferred tax (benefit) provision (61) 126
Effect of changes in operating assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable 3,276 (1,896)
Inventories (14,950) (6,055)
Prepaid expenses and other assets (142) 1,398
Increase (decrease) in liabilities:
Accounts payable 2,997 1,825
Other liabilities 54 213
-------- --------
Net cash used in operating activities (6,473) (2,221)
-------- --------
Cash flows from investing activities:
Capital expenditures (1,580) (1,027)
Proceeds from sale of fixed assets 3 11
-------- --------
Net cash used in investing activities (1,577) (1,016)
-------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit 36,000 19,000
Payments of revolving line of credit (27,500) (17,000)
Capital contribution from Holdings 60 --
Dividend to Holdings (137) --
Other 494 --
-------- --------
Net cash provided by financing activities 8,917 2,000
-------- --------
Net increase (decrease) in cash and cash equivalents 867 (1,237)
Cash and cash equivalents, beginning of period 4,259 1,961
-------- --------
Cash and cash equivalents, end of period $ 5,126 $ 724
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements
5
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1--BASIS OF PREPARATION:
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of The William Carter Company (the "Company")
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position of the Company as of April 4,
1998, and the results of its operations and cash flows for the three-month
periods ended April 4, 1998 and March 29, 1997. Operating results for the
three-months ended April 4, 1998 are not necessarily indicative of the results
that may be expected for the fiscal year ending January 2, 1999. The
accompanying condensed consolidated balance sheet of the Company as of January
3, 1998 has been derived from the audited consolidated financial statements
included in the Company's fiscal 1997 Annual Report on Form 10-K.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission and the instructions to Form 10-Q. The
accounting policies followed by the Company are set forth in its Annual Report
on Form 10-K in the Notes to the Company's consolidated financial statements for
the fiscal year ended January 3, 1998.
NOTE 2--THE COMPANY:
The Company is a manufacturer and marketer of premier branded childrenswear
under the CARTER'S, CARTER'S CLASSICS 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 139 retail
outlet stores that market its brand name merchandise and certain products
manufactured by other companies. The Company's retail operations represented
approximately 39% of its consolidated net sales in the first quarter of 1998
(36% in the first quarter of 1997).
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 (the "Acquisition").
The Acquisition was accounted for by the purchase method. Accordingly, the
assets and liabilities of the Company were adjusted at the Acquisition date to
reflect the allocation of the purchase price based on estimated fair values.
6
<PAGE>
THE WILLIAM CARTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3--INVENTORIES:
Inventories consisted of the following $(000):
<TABLE>
<CAPTION>
April 4, January 3,
1998 1998
---- ----
<S> <C> <C>
Finished goods $ 62,077 $ 50,026
Work in process 27,222 24,069
Raw materials 13,290 13,544
-------- --------
Total $102,589 $ 87,639
======== ========
</TABLE>
NOTE 4--OTHER:
During the quarter ended April 4, 1998, the Company paid a dividend to
Holdings in the amount of approximately $137,000, the proceeds of which were
used by Holdings to repurchase shares of Holdings' stock owned by certain former
employees of the Company. In addition, Holdings made a $60,000 capital
contribution to the Company in connection with proceeds received by Holdings
from the issuance of shares of Holdings stock to an employee of the Company.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. 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.
RESULTS OF OPERATIONS
THREE-MONTHS ENDED APRIL 4, 1998 COMPARED TO THREE-MONTHS ENDED MARCH 29,
1997
In the first quarter of fiscal 1998, consolidated net sales increased $9.9
million (13.2%) to $85.1 million from $75.2 million in the first quarter of
fiscal 1997. The Company's wholesale sales increased $5.4 million (11.7%) to
approximately $51.6 million in the first quarter of 1998 from $46.2 million in
the first quarter of 1997. The increase in wholesale sales was due primarily to
the new Special Delivery and Baby Basics product line introductions and the
continued success of the Company's first lifestyle marketing product line, JOY
(acronym for "Just One Year"), a total nursery concept focused on apparel and
related accessories for a child's first year of life introduced in 1997.
The Company's retail store sales were approximately $33.6 million for the
first quarter of 1998, which represented an increase of $6.5 million (24.0%)
compared to the first quarter of 1997. Comparable store sales increased 14.6% in
the first quarter of 1998 compared to the first quarter of 1997. This increase
is attributed to a new marketing strategy implemented in the latter part of
1997. This strategy was designed to clearly communicate the value of Carter's
products sold through the outlet stores relative to comparable values offered
elsewhere. Improvements in the merchandise planning and allocation process, a
more impactful and coordinated visual display of merchandise, and a commitment
to improve the quality of customer service, contributed to the increase in
retail sales in the first quarter of 1998. During the first quarter of 1998,
the Company opened one retail outlet store which brought the total number of
outlet stores operating as of April 4, 1998 to 139 as compared to 136 as of
March 29, 1997.
The Company's gross profit increased $3.2 million (11.8%) to $30.6 million
in the first quarter of 1998 from $27.4 million in the first quarter of 1997.
The improvement in gross profit reflects the benefit derived from the growth in
wholesale sales in the "baby" product category, including the new JOY program,
and growth in retail store sales in the first quarter of 1998 compared to the
first quarter of 1997. Gross profit as a percentage of net sales in the first
quarter of 1998 decreased to 36.0% from 36.4% in the first quarter of 1997.
This decrease in gross margin as a percentage of net sales reflects the impact
of start-up costs incurred in the development of the Company's sewing operations
in Mexico.
Selling, general and administrative expenses for the first quarter of 1998
increased 11.3% to $29.4 million from $26.4 million in the first quarter of
1997. Selling, general and administrative expenses as a percentage of net sales
decreased to 34.5% in the first quarter of 1998 from 35.1% in the first quarter
of 1997. The improvement in selling, general and administrative expenses as a
percentage of net sales reflects the benefit from comparable store sales
increases achieved by the Company's retail outlet stores and lower retail store
expenses relative to sales resulting from cost controls implemented in store
operations.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS: (CONTINUED)
Operating income for the first quarter of 1998 was $1.3 million compared to
income of $1.0 million in the first quarter of 1997. This increase reflects the
changes in gross profit and selling, general and administration expenses
described above.
Interest expense in the first quarter of 1998 increased to $4.5 million from
$4.0 million in the first quarter of 1997. This increase reflects the cost of
higher average revolver borrowings for working capital requirements in the first
quarter of 1998, needed to support an increased level of demand for Carter's
products. Average revolver borrowings during the first quarter of 1998 were
$17.7 million compared to $2.8 million in the first quarter of 1997. At April 4,
1998, outstanding debt aggregated $165.6 million compared to $147.0 at March 29,
1997.
The Company recorded an income tax benefit of $1.4 million in the first
quarter of 1998 compared to an income tax benefit of $1.5 million in the first
quarter of 1997. The Company's effective tax rate was approximately 45.0%
during the first quarter of 1998, an estimated tax rate somewhat lower than the
first quarter of 1997, due primarily to higher projected pretax income for
1998.
As a result of the factors described above, the Company reported a net loss
of $1.8 million in the first quarter of 1998 compared to a net loss of $1.5
million in the first quarter of 1997.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
The Company has financed its working capital, capital expenditures and debt
service requirements primarily through internally generated cash flow, and funds
borrowed under the Company's revolving credit facility.
Net accounts receivable at April 4, 1998 were $26.9 million compared to
$21.2 million at March 29, 1997. This increase reflects the higher levels of
wholesale revenues in the first quarter of 1998 as compared to 1997. The
increase in 1998 revenues occurred in the latter half of the first quarter. Due
to the seasonal nature of the Company's operations, the net accounts receivable
balance at April 4, 1998 is not comparable to the net accounts receivable
balance at January 3, 1998.
Inventories at April 4, 1998 were $102.6 million compared to $82.6 million
at March 29, 1997. This increase reflects the growth in inventory required to
support higher levels of sales demands. Inventory turnover in 1998 has improved
relative to 1997. Due to the seasonal nature of the Company's operations,
inventories at April 4, 1998 are not comparable to inventories at January 3,
1998.
The Company invested $1.6 million and $1.0 million in capital expenditures
during the first quarter of 1998 and 1997, respectively. The Company plans to
invest a total of $18.0 million in capital expenditures in 1998.
At April 4, 1998, the Company had $165.6 million of debt outstanding,
consisting of $100.0 million of 10 3/8% Series A Senior Subordinated Notes, and
$44.1 million in term loan borrowings and $21.5 million in revolver borrowings
under the Senior Credit Facility, exclusive of approximately $5.8 million of
outstanding letters of credit. At April 4, 1998, the Company had approximately
$22.7 million of financing available under the revolving credit portion of the
Senior Credit Facility.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS: (CONTINUED)
The Company believes that cash generated from operations, together with
availability under the revolving portion of the Senior Credit Facility, will be
adequate to meet its debt service requirements, capital expenditures and working
capital needs for the foreseeable future, although no assurance can be given in
this regard.
On February 25, 1998, the Company's Board of Directors declared a semiannual
dividend of 12% on $20.0 million of redeemable preferred stock which was paid on
May 1, 1998. The Company plans to pay a similar dividend on November 1, 1998.
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 on Fall and
Holiday sales, including back to school promotions, which results in higher
sales and profitability in the third and fourth quarters. Accordingly, the
results of operations for the three-month period ended April 4, 1998 are not
indicative of the results to be expected for the full year.
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.
10
<PAGE>
PART II--OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS:
The Company is a party to various legal proceedings arising out of the
ordinary course of its business. Management believes that none of these actions,
individually or in the aggregate, will have a material adverse effect on the
results of operations or financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES:
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
ITEM 5. OTHER INFORMATION:
None
11
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
*27 Financial Data Schedule.
__________________
* Filed herewith
(b) Reports on Form 8-K
No report was filed by the Registrant during the quarter ended April 4,
1998
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WILLIAM CARTER COMPANY
Date: May 18, 1998 /s/ FREDERICK J. ROWAN, II
-----------------------------
Frederick J. Rowan, II
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: May 18, 1998 /s/ MICHAEL D. CASEY
----------------------
Michael D. Casey
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> APR-04-1998
<CASH> 5,126
<SECURITIES> 0
<RECEIVABLES> 29,228
<ALLOWANCES> 2,370
<INVENTORY> 102,589
<CURRENT-ASSETS> 151,042
<PP&E> 65,174
<DEPRECIATION> 13,182
<TOTAL-ASSETS> 342,092
<CURRENT-LIABILITIES> 54,249
<BONDS> 164,700
19,125
0
<COMMON> 0
<OTHER-SE> 54,216
<TOTAL-LIABILITY-AND-EQUITY> 342,092
<SALES> 85,144
<TOTAL-REVENUES> 85,144
<CGS> 54,509
<TOTAL-COSTS> 54,509
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,469
<INCOME-PRETAX> (3,209)
<INCOME-TAX> (1,444)
<INCOME-CONTINUING> (1,765)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,765)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
