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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 2, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER:
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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 Form 10-K or any
amendment to this Form 10-K. /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
manufacturer and 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. Carter's is a
vertically-integrated manufacturer which sells its products under the brand
names of CARTER'S and CARTER'S CLASSICS to more than 300 department and
specialty store accounts (with an estimated 4,600 store fronts) and through its
144 retail outlet stores.
Carter's generates a majority of its sales in the baby and toddler apparel
market which was a $7.1 billion market in 1998. Management believes that the
baby and toddler market is insulated from changes in fashion trends and less
sensitive to general economic conditions and offers 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 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"). In November 1996, the Company offered and sold in a private
placement $100.0 million of Subordinated Notes (the "Notes"), the net proceeds
of which were used to retire the $90.0 million of Subordinated Loan Facility
borrowings and $5.0 million of borrowings under the Senior Credit Facility.
Holdings has substantially no assets or investments other than the shares of
capital stock of The William Carter 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.
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PRODUCTS AND MARKETS
The Company manufactures and markets a broad array of baby, toddler and
young children's apparel under the CARTER'S and CARTER'S CLASSICS brand names.
The Company's product offerings can be broadly grouped into two primary
categories: (i) "baby and toddler," which includes newborns through toddlers
approximately age three (up to size 4T); and (ii) "young children," which
includes children approximately age three through 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 bedding, diaper bags, lamps, socks, strollers, hair
accessories, outerwear, underwear and shoes, including products for which the
Company licenses the CARTER'S and CARTER'S CLASSICS names.
BABY AND TODDLER
From 1993 through 1998, total industry sales of baby and toddler apparel
increased from $4.9 billion to $7.1 billion, a compound annual growth rate of
7.7%. 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 6.3% market share in its target distribution channels, almost twice that
of its nearest branded competitor.
LAYETTE. Layette includes a complete range of products primarily made of
cotton for newborns, including bodysuits, undershirts, towels, washcloths,
receiving blankets, layette gowns, bibs, caps and booties. In fiscal 1998,
Carter's generated $165.0 million from sales of these products. Carter's is the
leading supplier of layette products, within its distribution channels.
Management attributes Carter's leading market position to Carter's distinctive
print designs, unique embroidery and the reputation for quality Carter's has
developed over its 130 year history. In 1998, the Company continued to introduce
new baby programs targeted toward three consumer groups; gift-givers,
experienced mothers and first-time mothers. Just One Year ("JOY") and the 1998
introduction of Another Bundle of JOY are complete nursery programs aimed at the
first-time mother. Special Deliveries is targeted toward the gift-giver and is
designed and packaged to make buying gifts easy. Baby Basics, another component
of Carter's layette business, provides the experienced mother with the
essentials in value-focused multi-packs. The Company's primary competitors in
the layette market are private label manufacturers.
SLEEPWEAR. Baby sleepwear includes pajamas, long underwear and one-piece
footed sleepers. In fiscal 1998, Carter's generated $77.4 million from sales of
these products. Carter's is the leading supplier of baby sleepwear products
within its distribution channels. As in layette, management attempts to
differentiate its sleepwear products from its competition by offering
consumer-tested prints and embroideries with an emotional appeal. In addition,
management believes Carter's baby and toddler sleepwear product line, which is
well-coordinated with its layette product line, features more functional, higher
quality products than those of its competitors. The Company's primary
competitors in the baby sleepwear market are both private label manufacturers
and other branded children's apparel companies.
PLAYWEAR. Baby and toddler playwear includes cotton knit apparel for
everyday use. In fiscal 1998, Carter's generated $87.9 million from sales of
these products. Although Carter's has historically focused on strengthening its
core volume layette and sleepwear products, it has begun to focus on
strengthening its playwear product offerings by introducing original print
designs and innovative artistic applications in an effort to drive sales growth
and increase market share. Management believes that these new product offerings
and an increased marketing focus, in addition to Carter's high brand name
awareness and strong wholesale customer relationships, will allow the Company's
sales and market share in this category to grow. The baby and toddler playwear
market is highly fragmented, with no one branded competitor having more than a
4% share of the market.
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OTHER. Other baby and toddler products include bedding, outerwear, shoes,
socks, diaper bags, gift sets, lamps and hair accessories, including products
for which the Company licenses the CARTER'S name. In fiscal 1998, Carter's
generated $32.3 million from sales of these products.
YOUNG CHILDREN'S
From 1993 through 1998, total industry sales of young children's apparel
increased from $5.0 billion to $5.5 billion, a compound annual growth rate of
1.9%. Carter's target distribution channels, which include department and
specialty stores, account for approximately half of this market. The Company is
the largest branded supplier of young children's sleepwear products, and is also
a supplier of young children's playwear products.
SLEEPWEAR. Young children's sleepwear product offerings include basic
two-piece pajamas, long underwear and polyester blanket-fleece one-piece
sleepers. In fiscal 1998, Carter's generated $27.7 million from sales of these
products. As with baby and toddler sleepwear, Carter's attempts to differentiate
its young children's sleepwear products from those of its competitors by
offering consumer-tested prints and embroideries with an emotional appeal.
Carter's primary competitors in the young children's sleepwear market are both
branded children's apparel companies and private label manufacturers.
PLAYWEAR. Young children's playwear product offerings include cotton knit
apparel for everyday use. In fiscal 1998, Carter's generated $17.9 million from
sales of these products. Carter's strategy is to leverage its high brand
awareness and leading market shares in layette and sleepwear to increase its
sales of young children's playwear. Carter's primary competitors in the young
children's playwear market are both branded children's apparel companies and
private label manufacturers.
OTHER. Other young children's products include outerwear, shoes, socks,
lamps and hair accessories, including products for which the Company licenses
the CARTER'S name. In fiscal 1998, Carter's generated $2.5 million in royalty
income from the sale of these products.
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.
The Company's design staff continuously strives toward product innovation.
Consumer preference testing drives the product offerings and defines the look
for the brand, while a few showpieces are developed each season to add variety
and interest. Generally, graphics and prints are used to provide originality and
depth with a sophisticated graphic computer network which enhances artistic
talent.
Due to the importance of graphics and prints, the Company devotes particular
effort to consumer preference testing for colors, prints, artwork and
silhouettes. Each year, more than 1,000 different prints are consumer-tested, of
which 40% are eventually used. As part of the Company's extensive testing
program, more than 10,000 potential consumers are surveyed in the Company's
outlet stores as well as in geographically-diverse malls. While testing of new
prints is an important aspect of consumer research, layette prints, for example,
are changed, on average, once every two years. Prints in "basic" items are
tested quarterly by consumers as well as constantly monitored through sales
data. Consumer preference tests are also conducted on sizing and functionality
for new product introductions.
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After consumer preference testing of a fabric or product occurs and internal
review committees approve selections, retailers are often shown a color drawing
in "board form" to register their reactions. Finally, product development teams
from the Company's merchandising department coordinate plans with the managers
from manufacturing to ensure cost-effective execution and quality of the
proposed item.
DISTRIBUTION AND SALES
The Company sells its products to wholesale accounts and through the
Company's retail outlet stores. In fiscal 1998, sales through the wholesale
channel accounted for 58% of total sales, while the retail outlet channel
accounted for 42% of total sales. No one wholesale customer accounts for more
than 10% of consolidated net revenue.
WHOLESALE OPERATIONS
The Company sells its products in the United States through a network of 30
sales professionals. Sales professionals work with each department or specialty
store account in his/her jurisdiction to establish annual plans for "basics"
(primarily layette and certain baby apparel) within the CARTER'S and CARTER'S
CLASSICS 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". Automatic reorder allows the Company to plan its manufacturing
requirements 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 144 retail outlet stores in 40 states
featuring all of CARTER'S quality merchandise, complemented by select brand
accessories and apparel. The stores, which average 5,100 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.
A new retail management team was recruited during 1996 to improve the retail
division operating results. This team implemented a new marketing strategy and
improved store layouts. The new marketing strategy, which was fully implemented
by February 1998, 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 improvements in
customer service were also implemented and contributed to an increase in retail
sales in 1998.
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.
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MANUFACTURING
The Company is a vertically-integrated manufacturer that knits, dyes,
finishes, prints, cuts, sews and embroiders a majority of the products it sells.
In the United States, the Company currently operates four 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. The Company also sources its products through contractual
arrangements throughout the world.
Despite the Company's historical operating improvements, management believes
significant additional opportunities exist to reduce product costs, shorten
cycle times and reduce inventories through the wider use of advanced information
systems, the expansion of offshore production, reductions in SKUs and product
complexity and the enhancement of core product offerings. In 1998, the Company
invested in the expansion of its offshore sewing production capacity in Mexico,
as sewing is the most labor-intensive portion of the Company's production
process. Carter's established its first offshore sewing production facility in
Costa Rica in 1991. The Company currently operates five offshore sewing plants
which process approximately 59% of the Company's sewing requirements. Management
intends to increase its percentage of offshore sewing to 84% by the end of 2001,
which is expected to yield significant incremental cost savings in line with the
Company's historical experience. The Company's manufacturing capacity is
sufficient to meet current and planned operating requirements.
DEMOGRAPHIC TRENDS
The total U.S. apparel industry generated nearly $177.0 billion in sales in
1998, of which approximately $30.1 billion was spent on children's apparel. Of
the $30.1 billion spent on children's apparel, approximately $7.1 billion was
spent on baby and toddler apparel, and approximately $5.5 billion was spent on
young children's apparel. From 1993 through 1998, sales of baby and toddler
apparel grew at a compound annual growth rate of 7.7% and sales of young
children's apparel grew at a compound annual growth rate of 1.9%.
Management believes that numerous demographic trends have contributed to a
particularly strong baby and toddler market, including the following:
- WOMEN HAVING CHILDREN LATER. In 1995, 35% 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, 22% were first children as opposed to only 5% in
1975. Management believes these trends have led to increased spending per
child as parents tend to spend more money on their first born child and
older parents generally have more disposable income.
- MORE WOMEN RETURNING TO THE WORKPLACE AFTER HAVING CHILDREN. In 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 1994 through 1996, when the
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population of children from ages one to six was increasing at a 0.1%
compound annual growth rate, sales of baby and infant apparel increased at
a 6.8% compound annual growth rate.
- MORE FIRST BIRTHS CREATE MORE NEW FAMILY FORMATIONS. In recent years,
approximately 41% of all births have been first births. This differs
dramatically from the baby boom years (1951 to 1965) when 28% 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.
Total births are expected to remain relatively flat through the end of the
1990s but demographic projections anticipate that the number of births will
begin to increase after the turn of the century. This increase will come from an
increase in the number of women moving into their twenties--the primary
childbearing years. 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, larger customer bases and are less financially
leveraged.
ENVIRONMENTAL MATTERS
The Company is subject to certain environmental laws. The Company believes
that it currently conducts its operations, and in the past has operated its
business, in substantial compliance with applicable environmental laws. From
time to time, operations of the Company have resulted or may result in
noncompliance with or liability pursuant to environmental laws. In July and
August 1996, Carter's had studies conducted by an environmental consultant for
13 facilities. Based on available information, including the studies, the
Company has identified certain non-compliance with environmental laws. The
Company has also identified certain actions which may be required in the future.
Carter's has been named as a third-party defendant in an action involving
environmental claims relating to property located near its previously owned
facility in Needham, Massachusetts. In February 1999, the Company and the
plaintiff reached a tentative settlement by which Carter's would pay the
plaintiff $2,500. Such settlement is subject to the approval of other parties
involved in this litigation. Carter's is also in the process of investigating a
potential claim under environmental laws in Lamar County, Georgia. Based on the
information available at this time, the ultimate outcome of these matters is
uncertain and, therefore, the Company is unable to determine the amount of its
liability, if any, or whether the resolution of such matters will have a
material effect on the Company.
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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. Under an agreement which expired December 8, 1998, Baby
Dior-Registered Trademark- was a registered trademark sublicensed to, but not
owned by, the Company. After an assessment of the growth opportunities of Baby
Dior-Registered Trademark- products, management decided not to extend the
sublicense agreement.
EMPLOYEES
As of January 2, 1999, the Company had approximately 8,182 employees, 4,216
of which were employed on a full-time basis in the Company's domestic
operations, 1,005 of which were employed on a part-time basis in the Company's
domestic operations and 2,961 of which were employed on a full-time basis in the
Company's international 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 144 leased retail outlet stores located primarily in
outlet centers across the United States, having an average size of 5,100 square
feet. Typically, 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 two additional manufacturing facilities, one in Texas
and one in 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 resolved 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
The Company paid dividends on its common stock to its parent, Holdings, in
the amount of approximately $700,000 for the fiscal year ended January 2, 1999.
Proceeds from the dividends were used by Holdings to repurchase shares of
Holdings' stock owned by three former employees of the Company for $320,000 and
to pay debt issuance costs of $380,000 in connection with the filing of a
registration statement on Form S-4 for Holdings' $20.0 million of 12% Senior
Subordinated Notes due 2008. In addition, during 1998, Holdings made $90,000 in
capital contributions to the Company in connection with the issuance of shares
of Holdings' stock to two employees of the Company. 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. 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 to the 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 2, 1999. As a result
of certain adjustments made in connection with the Acquisition, the results of
operations for the fiscal years ended January 2, 1999 ("fiscal year 1998") and
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 2, 1999 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 (A) PREDECESSOR
------------------------------------ ------------------------------------
OCT. 30, DEC. 31,
1996 1995
FISCAL YEAR THROUGH THROUGH FISCAL YEAR
---------------------- DEC. 28, OCT. 29, ----------------------
1998 1997 1996 1996 1995 1994
---------- ---------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Wholesale sales.......................... $ 236,486 $ 219,535 $ 28,506 $ 160,485 $ 166,884 $ 150,175
Retail sales............................. 171,696 143,419 22,990 106,254 128,547 121,374
---------- ---------- ------------ ------------ ---------- ----------
Net sales................................ 408,182 362,954 51,496 266,739 295,431 271,549
Cost of goods sold....................... 257,670 228,358 31,708 170,027 191,105 175,244
---------- ---------- ------------ ------------ ---------- ----------
Gross profit............................. 150,512 134,596 19,788 96,712 104,326 96,305
Selling, general and administrative...... 123,090 111,505 16,672 79,296 83,223 77,472
Nonrecurring charge (b)(f)............... -- -- -- 8,834 -- --
---------- ---------- ------------ ------------ ---------- ----------
Operating income......................... 27,422 23,091 3,116 8,582 21,103 18,833
Interest expense......................... 18,525 17,571 2,631 7,075 7,849 6,445
---------- ---------- ------------ ------------ ---------- ----------
Income before income taxes and
extraordinary item..................... 8,897 5,520 485 1,507 13,254 12,388
Provision for income taxes............... 3,616 2,429 212 1,885 5,179 4,000
---------- ---------- ------------ ------------ ---------- ----------
Income (loss) before extraordinary
item................................... 5,281 3,091 273 (378) 8,075 8,388
Extraordinary item, net of tax (c)....... -- -- 2,351 -- -- --
---------- ---------- ------------ ------------ ---------- ----------
Net income (loss)........................ $ 5,281 $ 3,091 $ (2,078) $ (378) $ 8,075 $ 8,388
---------- ---------- ------------ ------------ ---------- ----------
---------- ---------- ------------ ------------ ---------- ----------
Net income (loss) available to common
stockholders........................... $ 2,628 $ 416 $ (2,512) $ (1,510) $ 6,460 $ 6,710
---------- ---------- ------------ ------------ ---------- ----------
---------- ---------- ------------ ------------ ---------- ----------
BALANCE SHEET DATA (END OF PERIOD):
Working capital (d)...................... $ 99,480 $ 87,482 $ 70,792 $ 84,593 $ 68,595
Total assets............................. 349,228 331,899 318,709 167,216 135,471
Total debt, including current
maturities............................. 167,600 157,100 145,000 87,495 71,660
Redeemable preferred stock (e)........... 18,682 18,462 18,234 -- --
Preferred stock.......................... -- -- -- 50,000 50,000
Common stockholders' equity.............. 58,739 56,721 57,488 (4,678) (11,351)
CASH FLOW DATA:
Net cash provided by (used in) operating
activities............................. $ 9,497 $ 4,089 $ 7,095 $ 24,405 $ (5,516) $ 14,643
Net cash used in investing activities.... (17,960) (13,965) (143,227) (4,007) (13,369) (10,926)
Net cash provided by (used in) financing
activities............................. 8,190 12,174 134,263 (19,433) 14,157 (1,746)
OTHER DATA:
EBITDA, as defined (f)................... $ 43,021 $ 36,926 $ 5,530 $ 25,628 $ 30,562 $ 27,098
Gross margin............................. 36.9% 37.1% 38.4% 36.3% 35.3% 35.5%
Depreciation and amortization............ $ 15,599 $ 13,835 $ 2,414 $ 6,612 $ 7,337 $ 6,515
Capital expenditures..................... 17,991 14,013 3,749 4,007 13,715 10,996
</TABLE>
See Notes to Selected Financial Data.
10
<PAGE>
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 years ended
January 2, 1999 and January 3, 1998 and the period from October 30, 1996
through December 28, 1996 are not comparable to prior periods. The fiscal
years ended January 2, 1999 and January 3, 1998 and the period October 30,
1996 through 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 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 million, $1.35 million and $0.23 million for the
fiscal years ended January 2, 1999 and January 3, 1998 and the period
October 30, 1996 through December 28, 1996, respectively, incurred in
connection with the Acquisition;
(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 $1.2 million, $1.1 million and $1.0 million
for fiscal 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 and $0.6 million for fiscal
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 $8.8 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. The EBITDA amounts presented herein may
not be comparable to other similarly titled measures presented by other
companies.
11
<PAGE>
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 manufacturer and marketer of baby, toddler and
young children's apparel. The Company sells its products to more than 300
department and specialty store customers (58% of fiscal 1998 sales) and through
its 144 retail outlet stores (42% of fiscal 1998 sales).
Consolidated net sales have increased from $271.5 million in 1994 to $408.2
million in 1998. During this period, wholesale sales have increased from $150.2
million to $236.5 million and retail sales have increased from $121.4 million to
$171.7 million. The increase in wholesale sales resulted primarily from product
introductions and the growth of new wholesale accounts, including Sears and
JCPenney, partially offset by the removal of certain product lines, such as
outerwear, boys' and girls' underwear and certain BABY DIOR seasonal lines. The
increase in retail sales resulted primarily from new store openings, partially
offset by comparable store sales (stores open more than 12 months) declines from
1994 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 15.0% in
1998.
For purposes of the presentation and the discussions that follow, fiscal
1996 data reflects the mathematical aggregation of historical results of the
Company for the Successor period from October 30, 1996 through December 28, 1996
plus the Predecessor period from December 31, 1995 through October 29, 1996.
This aggregation is 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). Likewise, fiscal 1995 data reflects that of the Predecessor and
fiscal 1997 and 1998 data reflects that of the Successor.
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain components of the Company's
Consolidated Statements of Operations data expressed as a percentage of net
sales:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR 1996
------------ ------------------------------------
<S> <C> <C> <C> <C> <C>
SUCCESSOR PREDECESSOR
PERIOD FROM PERIOD FROM
OCT. 30, DEC. 31,
1996 1995
THROUGH THROUGH
DEC. 28, OCT. 29,
1998 1997 COMBINED 1996 1996
----- ----- -------- ----------- -----------
Statements of Operations:
Wholesale sales......................... 57.9% 60.5% 59.4% 55.4% 60.2%
Retail sales............................ 42.1 39.5 40.6 44.6 39.8
----- ----- -------- ----- -----
Net sales............................... 100.0 100.0 100.0 100.0 100.0
Cost of goods sold...................... 63.1 62.9 63.4 61.6 63.7
----- ----- -------- ----- -----
Gross profit............................ 36.9 37.1 36.6 38.4 36.3
Selling, general and administrative
expenses.............................. 30.2 30.7 30.2 32.4 29.7
Nonrecurring charge..................... -- -- 2.8 -- 3.3
----- ----- -------- ----- -----
Operating income........................ 6.7 6.4 3.6 6.0 3.3
Interest expense........................ 4.5 4.8 3.0 5.1 2.7
----- ----- -------- ----- -----
Income before income taxes and
extraordinary item.................... 2.2 1.6 0.6 0.9 0.6
Provision for income taxes.............. 0.9 0.7 0.7 0.4 0.7
Extraordinary item, net................. -- -- 0.7 4.6 --
----- ----- -------- ----- -----
Net income (loss)....................... 1.3% 0.9% (0.8)% (4.1)% (0.1)%
----- ----- -------- ----- -----
----- ----- -------- ----- -----
</TABLE>
FISCAL YEAR ENDED JANUARY 2, 1999 COMPARED WITH FISCAL YEAR ENDED
JANUARY 3, 1998
NET SALES. Net sales for fiscal 1998 increased 12.5% to $408.2 million from
$363.0 million in fiscal 1997. This increase was due to a 7.7% increase in
wholesale sales and a 19.7% increase in retail sales. Wholesale sales for fiscal
1998 increased to $236.5 million from $219.5 million in fiscal 1997. The
successful introduction of additional lifestyle marketing products drove a
wholesale revenue increase of $17.0 million. Such products include Baby Basics
(high volume products for every day use such as bodysuits, bibs and bed and bath
products), Special Deliveries (fashionable layette products targeted towards
gift purchases), Dreamakers (a higher-end sleepwear product with better
fabrication and brighter colors) and Another Bundle of JOY ("JOY", an acronym
for Just One Year--an expanded product offering for the first-time mom,
including non-apparel products such as plush toys, strollers and bedding).
Retail sales for fiscal 1998 increased to $171.7 million from $143.4 million in
fiscal 1997. Comparable store sales increased 15.0% in 1998. The successful
implementation of a new marketing strategy and the benefit from the new product
line introductions described above drove the favorable outlet store performance
in 1998. The new marketing strategy, which was fully implemented by February
1998, was designed to clearly communicate the value of Carter's products sold
through the outlet stores relative to comparable values offered elsewhere. In
1998, the Company opened 17 stores and closed 11 stores. There were 144 stores
in operation at January 2, 1999 compared with 138 at January 3, 1998.
GROSS PROFIT. Gross profit for fiscal 1998 increased 11.8% to $150.5
million from $134.6 million in fiscal 1997. Gross profit as a percentage of net
sales in fiscal 1998 decreased to 36.9% from 37.1% in fiscal 1997. The reduction
in gross profit percentage reflects the startup costs incurred in the
development of sewing capacity in Mexico.
13
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 1998 increased 10.4% to $123.1 million from
$111.5 million in fiscal 1997. Selling, general and administrative expenses as a
percentage of net sales decreased to 30.2% in fiscal 1998 from 30.7% in fiscal
1997. This improvement is primarily attributed to the increase in comparable
retail store sales and the benefit from such increase on a relatively fixed
operating cost structure.
OPERATING INCOME. Operating income for fiscal 1998 increased to $27.4
million from $23.1 million in fiscal 1997 as a result of the net effect of
margins earned on higher wholesale and retail store sales and the reduction of
selling, general and administrative expenses as a percent of net sales.
Operating income as a percentage of net sales increased to 6.7% in fiscal 1998
from 6.4% in fiscal 1997.
INTEREST EXPENSE. Interest expense for fiscal 1998 increased to $18.5
million from $17.6 million in fiscal 1997. This increase reflects interest
expense on higher average borrowings under the Company's revolving credit
facility. At January 2, 1999, outstanding debt aggregated $167.6 million, of
which $67.6 million 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
$676,000. At January 2, 1999, borrowings under the Company's $65.0 million
revolving credit facility were $24.4 million. The Company also had $6.9 million
of outstanding letters of credit.
INCOME TAXES. The Company's 1998 effective tax rate of 41% was less than
the prior year's effective tax rate of 44%. This can be attributed to the
Company's permanent tax differences, primarily goodwill amortization, which bear
a smaller relationship to the Company's greater pre-tax income in 1998.
NET INCOME. As a result of the factors described above, the Company
reported net income of $5.3 million in fiscal 1998 compared to $3.1 million in
fiscal 1997.
FISCAL YEAR ENDED JANUARY 3, 1998 COMPARED WITH FISCAL YEAR ENDED
DECEMBER 28, 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 Consolidated Financial Statements). A
nonrecurring charge 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 a nonrecurring charge, 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,
tradename, 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 an 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
14
<PAGE>
increase posted since 1992. The improvement in outlet store performance is
attributed to the investment made in a new retail management team. Each of the
key retail management positions was upgraded 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. In 1997, the Company opened 12 stores
and closed 9 stores. There were 138 stores in operation at January 3, 1998
compared with 135 at December 28, 1996.
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. The 1997 expense includes $4.8 million of amortization related to
intangibles recorded at Acquisition. Such expenses for the two-month period
ended December 28, 1996 were $0.8 million. Excluding these Acquisition-related
expenses, selling, general and administrative expenses for fiscal 1997 increased
12.1% to $106.7 million from $95.2 million in fiscal 1996. The higher selling,
general and administrative expenses can be attributed to an increase in retail
store expenses related to the addition of new outlet stores and higher volume
related wholesale distribution costs.
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 transaction 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. Excluding depreciation and amortization
expenses related to the Acquisition, which were $5.1 million in fiscal 1997 and
$0.8 million for the two-month period ended December 28, 1996, and the $8.8
million nonrecurring charge in the period ended October 29, 1996, operating
income for fiscal 1997 increased $6.9 million to $28.2 million from $21.3
million in fiscal 1996. Excluding these Acquisition-related expenses, operating
income as a percentage of net sales increased to 7.8% in fiscal 1997 from 6.7%
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 $57.1 million 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 represented the writeoff of deferred debt
issue costs, which has been reflected in the Company's Consolidated Statements
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.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are working capital, capital expenditures
and debt service. The Company has financed its working capital, capital
expenditures and debt service requirements primarily through internally
generated cash flow, in addition to funds borrowed under the Company's credit
facilities.
Net cash provided by operating activities in the fiscal years 1998, 1997 and
1996 was $9.5 million, $4.1 million and $31.5 million, respectively.
The net cash flow provided by operating activities in fiscal 1998 was $9.5
million, an increase of $5.4 million compared to fiscal year 1997. This increase
reflects a higher level of net income offset by increased working capital
requirements, primarily related to inventories. Inventories at January 2, 1999
were $101.4 million compared with $87.6 million at January 3, 1998 and $76.5
million at December 28, 1996. This increase reflects the growth in inventory
required to support a higher level of sales and additional outlet stores.
The Company invested $18.0 million, $14.0 million and $7.8 million in
capital expenditures during fiscal years 1998, 1997 and 1996, respectively.
Although there are no material commitments for capital expenditures, the Company
plans capital expenditures of approximately $16.0 million in fiscal 1999.
The Company incurred additional indebtedness in connection with the
Acquisition. At January 2, 1999, the Company had approximately $167.6 million of
indebtedness outstanding, consisting of $100.0 million of Notes, $43.2 million
in term loan borrowings under the Senior Credit Facility and $24.4 million of
borrowings outstanding under the $65.0 million revolving credit portion of the
Senior Credit Facility (exclusive of approximately $6.9 million of outstanding
letters of credit). At January 2, 1999, the Company had approximately $33.7
million of financing available under the revolving credit portion of the Senior
Credit Facility. In June 1998, Carter's amended its Senior Credit Facility to
benefit from favorable changes in the interest rate environment since the
Acquisition and to support higher levels of demand for the Company's products
than had been anticipated at Acquisition. As amended, the Senior Credit Facility
provides for a $65.0 million revolving credit facility which was increased from
$50.0 million, to support peak working capital requirements. The term loan has a
final scheduled maturity date of October 31, 2003 and is 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, the
term loan was reduced by $5.0 million with proceeds from the issuance of the
Notes. The future scheduled payments under the Senior Credit Facility have been
reduced ratably for this payment. The revolving credit portion of the Senior
Credit Facility will mature on October 31, 2001 and has no scheduled interim
amortization. No principal payments are required on the Notes prior to their
scheduled maturity.
The Company believes that cash generated from operations, together with
amounts available under the revolving portion of the Senior Credit Facility,
will be adequate to meet its debt service requirements, capital expenditures and
working capital needs for the foreseeable future, although no assurance can be
given in this regard.
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
materials, 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
16
<PAGE>
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 price reductions in the first quarter and promotional retailers' and
manufacturers' emphasis on closeouts of the prior year's product lines.
MARKET RISKS
In the operation of its business, the Company has market risk exposures to
foreign sourcing, raw material prices and interest rates. Each of these risks
and the Company's strategies to manage the exposure is discussed below.
The Company currently sources approximately 59% of its sewing production
through its offshore facilities. As a result, the Company may be adversely
affected by political instability resulting in the disruption of trade from
foreign countries in which the Company's manufacturing facilities are located,
the imposition of additional regulations relating to imports, duties, taxes and
other charges on imports, any significant decreases in the value of the dollar
against foreign currencies and restrictions on the transfer of funds. These and
other factors could result in the interruption of production in offshore
facilities or a delay in the receipt of the products by the Company in the
United States. The Company's future performance may be subject to such factors,
which are beyond the Company's control, and there can be no assurance that such
factors would not have a material adverse effect on the Company's financial
condition and results of operations.
The principal raw materials used by the Company are cotton and polyester
yarns and chemicals, dyes and pastes used in textile manufacturing, as well as
finished fabrics and trim materials. These materials are available from a number
of suppliers. Prices for these materials are affected by changes in market
demand and there can be no assurance that prices for these and other raw
materials will not increase in the near future.
The Company's operating results are subject to risk from interest rate
fluctuations on debt which carries variable interest rates. At January 2, 1999,
outstanding debt aggregated $167.6 million, of which $67.6 million 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 $676,000.
YEAR 2000 READINESS
The Company utilizes electronic technology that processes information and
performs calculations that are date and time dependent. Virtually every computer
operation, encompassing all information systems as well as manufacturing
equipment and plant facilities with embedded logic, unless it is already Year
2000 ("Y2K") ready, will be affected in some way by the rollover of the
two-digit year value from "99" to "00" and the inadvertent recognition by
electronic technology of "00" as the year 1900 rather than 2000. The Company is
aware that it may not only be negatively affected by the failure of its own
systems to be Y2K ready, but may also be adversely impacted by the Y2K
non-readiness of its vendors, customers, service providers and any other party
with which the Company transacts business.
The Company has completed its assessment of all systems (hardware and
software), facilities, suppliers and service providers for all locations.
Through this process, the Company has identified remediational steps necessary
to be Y2K ready. Because the Company primarily uses software provided by third
party vendors, it has not incurred substantial internal programming costs
associated with modifying code and data to handle dates past the Year 2000. The
latest software releases provided by major third-party vendors to the Company
have been certified to be Y2K ready.
The Company is in the process of upgrading its systems (hardware and
software) to Y2K ready releases. The replacement/upgrading of affected hardware
and software supporting the Company's manufacturing and administrative locations
is substantially complete. The Company expects to complete the remaining
replacements/upgrades by the third quarter of 1999. Integrated testing and
validation of all the Company's systems is expected to be completed during the
third quarter of 1999.
17
<PAGE>
All major customers, outside vendors and service providers have been
contacted regarding their Y2K readiness. Appropriate steps and follow-up
measures have been instituted to ensure their readiness on an individual basis
by June 1999. Because of the concerns regarding the Y2K issue and the potential
for disruption of business operations, the Company has established a
comprehensive contingency planning process. The scope of the Y2K contingency
plans includes, but is not limited to, failures or disruptions in: information
systems, plant facilities, equipment, utilities, transportation, voice/data
communications, material supplies and/or key support services. The development
of the contingency plans is scheduled for completion by May 1999.
The Company has incurred and expects to continue to incur internal staffing
and other costs as a result of modifying existing systems to be Y2K ready. Such
costs will continue to be expensed as incurred and funded through internally
generated cash flow while costs to acquire new equipment and software will be
capitalized and depreciated over their useful lives. The hardware replacements
and software upgrades were principally planned to improve operating controls and
their implementation was not significantly accelerated as a result of Y2K. To
date, the Company has incurred $1.1 million of costs in connection with Y2K
readiness. The Company plans to spend approximately $3.0 million in 1999 to
complete its readiness, substantially all of which represents investments in new
equipment. The costs to date and the estimated costs to complete do not include
internal payroll costs, which are not tracked separately.
Management recognizes that the failure of the Company, or any party with
which the Company conducts business, to be Y2K ready in a timely manner could
have a material adverse impact on the operations of the Company. If the
Company's systems were to fail because they were not Y2K ready, the Company
could incur significant costs and inefficiencies. Manual systems for sales,
manufacturing, retail operations and/or financial control would have to be
implemented and staffed. If the Company was not Y2K ready, some customers might
decide to cease doing business with the Company. Disruptions in electric power,
in other critical services or in the delivery of raw materials could cause
significant business interruptions. Similarly, business interruptions incurred
by the Company's customers could result in deferred or canceled orders.
The dates on which the Company believes Y2K readiness will be complete are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, or that there will not be
a delay in, or increased costs associated with the implementation of Y2K
readiness. Specific factors that might cause differences between the estimates
and actual results include, but are not limited to, the lack of availability of
skilled personnel, increased costs for outside resources, untimely responses by
key service providers and the inability to implement interfaces between the new
systems and the existing systems on a timely basis.
Due to the general uncertainty of the Y2K risk, resulting, in part, from the
uncertainty about the Y2K readiness of third-parties, the Company cannot ensure
its ability to resolve problems associated with the Y2K issue or to limit
exposure to third-party liability that may affect its operations and business,
in a timely and cost-effective manner.
ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted Statements of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") and No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 131 requires segment information to
be disclosed based on a "management approach." The management approach refers to
the internal reporting that is used by management for making operating decisions
and assessing the performance of the Company's reportable segments. SFAS 131
also requires disclosure about products and services, geographic areas and major
customers. The adoption of SFAS 131 does not affect results of operations or
financial position but requires disclosure of certain segment information (see
Note 16 to the Consolidated Financial Statements). SFAS 132 revises employers'
disclosure about pensions and other postretirement benefit plans. SFAS 132 does
not change the measurement or recognition of those plans. (see Note 9 to the
Consolidated Financial Statements).
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... 20
Consolidated Balance Sheets at January 2, 1999 and January 3, 1998......................................... 21
Consolidated Statements of Operations for the fiscal years ended January 2, 1999 and 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).............................................................. 22
Consolidated Statements of Cash Flows for the fiscal years ended January 2, 1999 and 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).............................................................. 23
Consolidated Statements of Changes in Common Stockholders' Equity for the fiscal years ended January 2,
1999 and 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)................................. 24
Notes to Consolidated Financial Statements................................................................. 25
</TABLE>
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
The William Carter Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and changes in common
stockholders' equity present fairly, in all material respects, the consolidated
financial position of The William Carter Company and its subsidiaries (the
"Company") as of January 2, 1999 and January 3, 1998, and the consolidated
results of their operations and their cash flows for the years ended January 2,
1999 and January 3, 1998 and the period from October 30, 1996 through December
28, 1996 ("Successor," as defined in Note 1) and the period from December 31,
1995 through October 29, 1996 ("Predecessor," as defined in Note 1), in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
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.
/s/ PricewaterhouseCoopers LLP
Stamford, Connecticut
March 25, 1999
20
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
----------------------
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 3,986 $ 4,259
Accounts receivable, net of allowance for doubtful accounts of $2,500 in 1998 and $2,374
in 1997............................................................................... 34,834 30,134
Inventories............................................................................. 101,408 87,639
Prepaid expenses and other current assets............................................... 3,433 3,964
Deferred income taxes................................................................... 11,725 12,910
---------- ----------
Total current assets................................................................ 155,386 138,906
Property, plant and equipment, net........................................................ 59,674 53,011
Tradename, net............................................................................ 94,583 97,083
Cost in excess of fair value of net assets acquired, net.................................. 30,191 31,445
Deferred debt issuance costs, net......................................................... 6,850 7,980
Other assets.............................................................................. 2,544 3,474
---------- ----------
Total assets........................................................................ $ 349,228 $ 331,899
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt.................................................... $ 900 $ 900
Accounts payable........................................................................ 18,887 14,582
Other current liabilities............................................................... 36,119 35,942
---------- ----------
Total current liabilities........................................................... 55,906 51,424
Long-term debt............................................................................ 166,700 156,200
Deferred income taxes..................................................................... 39,632 39,777
Other long-term liabilities............................................................... 9,569 9,315
---------- ----------
Total liabilities................................................................... 271,807 256,716
---------- ----------
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....................... 18,682 18,462
---------- ----------
Common stockholder's equity:
Common stock, par value $.01 per share, 1,000 shares authorized, issued and
outstanding........................................................................... -- --
Additional paid-in capital.............................................................. 56,811 56,721
Retained earnings....................................................................... 1,928 --
---------- ----------
Common stockholder's equity............................................................. 58,739 56,721
---------- ----------
Total liabilities and stockholder's equity.......................................... $ 349,228 $ 331,899
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
21
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
-------------------------------------------- ------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE FOR THE FROM FROM
YEAR ENDED YEAR ENDED OCTOBER 30, 1996 DECEMBER 31, 1995
JANUARY 2, JANUARY 3, THROUGH THROUGH
1999 1998 DECEMBER 28, 1996 OCTOBER 29, 1996
----------- ----------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales........................................ $ 408,182 $ 362,954 $ 51,496 $ 266,739
Cost of goods sold............................... 257,670 228,358 31,708 170,027
----------- ----------- ------- --------
Gross profit..................................... 150,512 134,596 19,788 96,712
Selling, general and administrative.............. 123,090 111,505 16,672 79,296
Nonrecurring charge.............................. -- -- -- 8,834
----------- ----------- ------- --------
Operating income................................. 27,422 23,091 3,116 8,582
Interest expense................................. 18,525 17,571 2,631 7,075
----------- ----------- ------- --------
Income before income taxes and extraordinary
item........................................... 8,897 5,520 485 1,507
Provision for income taxes....................... 3,616 2,429 212 1,885
----------- ----------- ------- --------
Income (loss) before extraordinary item.......... 5,281 3,091 273 (378)
Extraordinary item, net of income tax benefit of
$1,270......................................... -- -- 2,351 --
----------- ----------- ------- --------
Net income (loss)................................ 5,281 3,091 (2,078) (378)
Dividend requirements on preferred/ redeemable
preferred and accretion on redeemable preferred
stock.......................................... (2,653) (2,675) (434) (1,132)
----------- ----------- ------- --------
Net income (loss) applicable to common
stockholder.................................... $ 2,628 $ 416 $ (2,512) $ (1,510)
----------- ----------- ------- --------
----------- ----------- ------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
22
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
-------------------------------------------
FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED FROM OCTOBER 30,
JANUARY 2, JANUARY 3, 1996 THROUGH
1999 1998 DECEMBER 28, 1996
----------- ----------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................... $ 5,281 $ 3,091 $ (2,078)
Extraordinary loss, net of taxes.................................... -- -- 2,351
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization................................... 16,946 15,122 2,588
Loss on disposal of fixed assets and other...................... 387 153 --
Deferred tax provision.......................................... 1,040 870 212
Effect of changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.................... (4,700) (10,875) 7,975
(Increase) decrease in inventories............................ (13,769) (7,047) (704)
Decrease (increase) in prepaid expenses and other assets...... 111 2,876 (4,432)
Increase in accounts payable and other liabilities............ 4,201 62 1,183
Other......................................................... -- (163) --
----------- ----------- -----------------
Net cash provided by operating activities.................. 9,497 4,089 7,095
----------- ----------- -----------------
Cash flows from investing activities:
Proceeds from sale of fixed assets.................................. 31 48 --
Capital expenditures................................................ (17,991) (14,013) (3,749)
Payment to Sellers for the Acquisition.............................. -- -- (117,773)
Payments of Acquisition costs....................................... -- -- (21,705)
----------- ----------- -----------------
Net cash used in investing activities...................... (17,960) (13,965) (143,227)
----------- ----------- -----------------
Cash flows from financing activities:
Proceeds from Successor revolving line of credit.................... 114,750 107,000 6,100
Payments of Successor revolving line of credit...................... (103,350) (94,000) (6,100)
Proceeds from other Successor debt.................................. -- -- 240,000
Payments of other Successor debt.................................... (900) (900) (95,000)
Proceeds from Predecessor revolving line of credit.................. -- -- --
Payments of Predecessor revolving line of credit.................... -- -- --
Payments of other Predecessor debt.................................. -- -- (68,062)
Payment of Predecessor accrued interest............................. -- -- (1,059)
Payments of financing costs......................................... (217) (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)
Payments of Successor preferred stock dividends..................... (2,433) (2,447) --
Capital contributions from Holdings................................. 60 -- --
Payments of other dividends to Holdings............................. (700) (1,183) --
Payment of Predecessor preferred stock dividends.................... -- -- (2,747)
Payment of Predecessor guaranteed yield dividend on common stock.... -- -- (4,237)
Other............................................................... 980 4,354 --
----------- ----------- -----------------
Net cash provided by (used in) financing activities........ 8,190 12,174 134,263
----------- ----------- -----------------
Net (decrease) increase in cash and cash equivalents.................. (273) 2,298 (1,869)
Cash and cash equivalents at beginning of period...................... 4,259 1,961 3,830
----------- ----------- -----------------
Cash and cash equivalents at end of period............................ $ 3,986 $ 4,259 $ 1,961
----------- ----------- -----------------
----------- ----------- -----------------
<CAPTION>
PREDECESSOR
-----------------
FOR THE PERIOD
FROM DECEMBER 31,
1995 THROUGH
OCTOBER 29, 1996
-----------------
<S> <C>
Cash flows from operating activities:
Net income (loss)................................................... $ (378)
Extraordinary loss, net of taxes.................................... --
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization................................... 6,979
Loss on disposal of fixed assets and other...................... --
Deferred tax provision.......................................... 2,381
Effect of changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.................... (12,540)
(Increase) decrease in inventories............................ 8,392
Decrease (increase) in prepaid expenses and other assets...... 2,759
Increase in accounts payable and other liabilities............ 16,812
Other......................................................... --
-------
Net cash provided by operating activities.................. 24,405
-------
Cash flows from investing activities:
Proceeds from sale of fixed assets.................................. --
Capital expenditures................................................ (4,007)
Payment to Sellers for the Acquisition.............................. --
Payments of Acquisition costs....................................... --
-------
Net cash used in investing activities...................... (4,007)
-------
Cash flows from financing activities:
Proceeds from Successor revolving line of credit.................... --
Payments of Successor revolving line of credit...................... --
Proceeds from other Successor debt.................................. --
Payments of other Successor debt.................................... --
Proceeds from Predecessor revolving line of credit.................. 12,500
Payments of Predecessor revolving line of credit.................... (31,500)
Payments of other Predecessor debt.................................. (433)
Payment of Predecessor accrued interest............................. --
Payments of financing costs......................................... --
Proceeds from issuance of Successor common stock.................... --
Proceeds from issuance of Successor preferred stock................. --
Stock issuance costs of Successor preferred stock................... --
Payments of Successor preferred stock dividends..................... --
Capital contributions from Holdings................................. --
Payments of other dividends to Holdings............................. --
Payment of Predecessor preferred stock dividends.................... --
Payment of Predecessor guaranteed yield dividend on common stock.... --
Other............................................................... --
-------
Net cash provided by (used in) financing activities........ (19,433)
-------
Net (decrease) increase in cash and cash equivalents.................. 965
Cash and cash equivalents at beginning of period...................... 2,865
-------
Cash and cash equivalents at end of period............................ $ 3,830
-------
-------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
23
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
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
STOCK STOCK STOCK STOCK CAPITAL
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PREDECESSOR:
BALANCE AT DECEMBER 30, 1995......................... $ - $ - $ - $ 92,379
Net loss.............................................
Preferred stock dividend.............................
Common stock guaranteed-yield dividend...............
--- --- --- -----------
BALANCE AT OCTOBER 29, 1996.......................... $ - $ - $ - $ 92,379
--- --- --- -----------
--- --- --- -----------
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.............................................
--- -----------
BALANCE AT DECEMBER 28, 1996......................... - 59,566
Accrued dividends and accretion on redeemable
preferred stock.................................... (1,662)
Other dividends...................................... (1,183)
Net income...........................................
--- -----------
BALANCE AT JANUARY 3, 1998........................... - 56,721
Capital contributions from Holdings.................. 90
Accrued dividends and accretion on redeemable
preferred stock....................................
Other dividends......................................
Net income...........................................
--- -----------
BALANCE AT JANUARY 2, 1999........................... $ - $ 56,811
--- -----------
--- -----------
<CAPTION>
(ACCUMULATED
DEFICIT)
RETAINED
EARNINGS
------------
<S> <C>
PREDECESSOR:
BALANCE AT DECEMBER 30, 1995......................... $ (97,057)
Net loss............................................. (378)
Preferred stock dividend............................. (2,747)
Common stock guaranteed-yield dividend............... (4,237)
------------
BALANCE AT OCTOBER 29, 1996.......................... $ (104,419)
------------
------------
SUCCESSOR:
BALANCE AT OCTOBER 30, 1996.......................... $ -
Sale of common stock on October 30, 1996.............
Accrued dividends and accretion on redeemable
preferred stock....................................
Net loss............................................. (2,078)
------------
BALANCE AT DECEMBER 28, 1996......................... (2,078)
Accrued dividends and accretion on redeemable
preferred stock.................................... (1,013)
Other dividends......................................
Net income........................................... 3,091
------------
BALANCE AT JANUARY 3, 1998........................... -
Capital contributions from Holdings..................
Accrued dividends and accretion on redeemable
preferred stock.................................... (2,653)
Other dividends...................................... (700)
Net income........................................... 5,281
------------
BALANCE AT JANUARY 2, 1999........................... $ 1,928
------------
------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
24
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
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 of 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 retire all outstanding balances on
the Company's previously outstanding long-term debt along with accrued interest
thereon ($69.1 million). In November 1996, the Company offered and sold in a
private placement $100.0 million of Subordinated Notes, the net proceeds of
which were used to retire the $90.0 million of Subordinated Loan Facility
borrowings and $5.0 million of borrowings under the Senior Credit Facility.
Holdings has 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
25
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY: (CONTINUED)
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
---------
---------
Allocated to:
Cash and cash equivalents......................................... $ 3,830
Accounts receivable, net.......................................... 27,234
Inventories....................................................... 75,836
Prepaid expenses and other assets................................. 5,999
Property, plant and equipment, net................................ 46,081
Tradename......................................................... 100,000
Cost in excess of fair value...................................... 38,522
Deferred debt issuance costs...................................... 8,283
Accounts payable.................................................. (13,393)
Other current liabilities......................................... (32,882)
Other long-term liabilities....................................... (9,590)
Deferred taxes, net............................................... (26,020)
Preferred stock issuance costs.................................... 2,200
---------
$ 226,100
---------
---------
</TABLE>
In fiscal 1998 and 1997, certain revisions to the preceding estimates were
made, as follows ($000):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Inventories........................................................................... $ -- $ 4,052
Cost in excess of fair value.......................................................... (444) (5,956)
Deferred taxes, net................................................................... (261) 201
Other current liabilities............................................................. 705 1,703
</TABLE>
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 expenses ($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 other expenses
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
26
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY: (CONTINUED)
included in the pro forma statement actually taken place on December 31, 1995,
or of future results of operations ($000).
<TABLE>
<CAPTION>
PREDECESSOR FOR SUCCESSOR FOR
THE PERIOD FROM THE PERIOD FROM
DECEMBER 31, 1995 OCTOBER 30, 1996 PRO FORMA FOR
THROUGH THROUGH PRO FORMA THE YEAR ENDED
OCTOBER 29, 1996 DECEMBER 28, 1996 ADJUSTMENTS DECEMBER 28, 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>
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
Investcorp International, Inc. (see Note 15); 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 the extraordinary charge directly
related to the transaction; 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 manufacturer and marketer of premier branded childrenswear
under the CARTER'S and CARTER'S CLASSICS 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 144 retail outlet
stores that market its brand name merchandise and certain products manufactured
by other companies.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified for comparative purposes.
27
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. These subsidiaries consist of operations in
Costa Rica, the Dominican Republic and Mexico. These operations represented
approximately 59%, 47% and 40% of the Company's sewing production for the fiscal
years 1998, 1997 and 1996, respectively. Total net assets (primarily property,
plant and equipment and inventory) of the international subsidiaries were
approximately $17.0 million at January 2, 1999. 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 2, 1999 and
January 3, 1998 and results of operations for the years ended January 2, 1999
and January 3, 1998 ("Successor periods"), 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 2, 1999 (fiscal 1998) contains 52 weeks, 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
deposits, in excess of deposit insurance limits, in four and six banks at
January 2, 1999 and January 3, 1998, respectively.
ACCOUNTS RECEIVABLE:
Approximately 75% and 69% of the Company's gross accounts receivable at
January 2, 1999 and January 3, 1998, 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 at
January 2, 1999 and January 3, 1998, respectively, but not more than 20%. Sales
to these customers represent comparable percentages to total wholesale revenues.
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.
28
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
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 2, 1999 and January 3, 1998 was $5,417,000 and $2,917,000,
respectively. Accumulated amortization of goodwill at January 2, 1999 and
January 3, 1998 was $1,931,000 and $1,121,000, 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 $1,347,000 and $1,287,000
for the years ended January 2, 1999 and January 3, 1998, respectively, $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).
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.
29
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid in cash approximated $17,178,000 and $16,283,000 for the years
ended January 2, 1999 and January 3, 1998, respectively, $2,463,000 for the
Successor period ended December 28, 1996 and $6,708,000 for the Predecessor
period ended October 29, 1996. Income taxes paid (received) in cash approximated
$2,345,000 and ($900,000) for the years ended January 2, 1999 and January 3,
1998, respectively, ($771,000) for the Successor period ended December 28, 1996
and $903,000 for the Predecessor 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 1998, the Company adopted Statements of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") and No. 132 "Employers' Disclosures About Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 131 requires segment information to
be disclosed based on a "management approach." The management approach refers to
the internal reporting that is used by management for making operating decisions
and assessing the performance of the Company's reportable segments. SFAS 131
also requires disclosure about products and services, geographic areas and major
customers. The adoption of SFAS 131 does not affect results of operations or
financial position but requires disclosure of certain segment information (see
Note 16). SFAS 132 revises employers' disclosure about pensions and other
postretirement benefit plans. SFAS 132 does not change the measurement or
recognition of those plans (see Note 9).
NOTE 3--INVENTORIES:
Inventories consisted of the following ($000):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---------- -----------
<S> <C> <C>
Finished goods........................................................ $ 68,236 $ 50,026
Work in process....................................................... 21,286 24,069
Raw materials and supplies............................................ 11,886 13,544
---------- -----------
$ 101,408 $ 87,639
---------- -----------
---------- -----------
</TABLE>
30
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--FIXED ASSETS:
Fixed assets consisted of the following ($000):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
----------- -----------
<S> <C> <C>
Land, buildings and improvement....................................... $ 15,724 $ 14,526
Machinery and equipment............................................... 63,874 49,077
----------- -----------
79,598 63,603
Accumulated depreciation and amortization............................. (19,924) (10,592)
----------- -----------
$ 59,674 $ 53,011
----------- -----------
----------- -----------
</TABLE>
Depreciation expense ($000) was $10,940 and $9,023 for the years ended
January 2, 1999 and January 3, 1998, respectively, and $1,613 and $6,612 for the
periods ended December 28, 1996 and October 29, 1996, respectively.
NOTE 5--LONG-TERM DEBT:
Long-term debt consisted of the following ($000):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
<S> <C> <C>
Senior Credit Facility term loan...................................... $ 43,200 $ 44,100
Senior Credit Facility revolving credit............................... 24,400 13,000
10 3/8% Series A Senior Subordinated Notes due 2006................... 100,000 100,000
---------- ----------
167,600 157,100
Current maturities.................................................... (900) (900)
---------- ----------
$ 166,700 $ 156,200
---------- ----------
---------- ----------
</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.
In June 1998, Carter's amended its Senior Credit Facility to benefit from
favorable changes in the interest rate environment since the Acquisition and to
support higher levels of demand for the Company's products than had been
anticipated at Acquisition. As amended, the Senior Credit Facility provides for
a $65.0 million revolving credit facility which was increased from $50.0
million, to support peak working capital requirements. 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 $15.0 million
for letters of credit, increased from $10.0 million, of which $6.9 million and
$4.3 million was used for letters of credit as of January 2, 1999 and January 3,
1998, respectively. A commitment fee of 1/2 of 1% per annum is charged on the
unused portion of the revolving credit facility.
31
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM DEBT: (CONTINUED)
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 (as defined in the Credit Agreement) plus 1% per annum and
(iii) The Chase Manhattan Bank's Prime Rate. The applicable interest margin for
loans which accrue interest at the Eurodollar Rate was adjusted from 2.50% to
2.25% per annum for the revolving credit facility and is 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 was adjusted from 3.00% to 2.50% per
annum for loans that accrue interest at the Eurodollar Rate and is 2.00% per
annum for loans that accrue interest at the Alternate Base Rate. The amendment
provides for additional reductions in the interest margin based on the
achievement of certain leverage ratios. The effective interest rate on variable
rate Senior Credit Facility borrowings outstanding at January 2, 1999 and
January 3, 1998 was 8.0% and 9.1%, 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, as well as 65% of the
issued and outstanding stock of the Company's foreign subsidiaries.
The Senior Credit Facility imposes certain covenants, requirements and
restrictions on actions by the Company and its subsidiaries that, among other
things, restrict: (i) the incurrence and existence of indebtedness; (ii)
consolidations, mergers and sales of assets; (iii) the incurrence and existence
of liens or other encumbrances; (iv) the incurrence and existence of contingent
obligations; (v) the payment of dividends and repurchases of common stock; (vi)
prepayments and amendments of certain subordinated debt instruments and equity;
(vii) investments, loans and advances; (viii) capital expenditures; (ix) changes
in fiscal year; (x) certain transactions with affiliates; and (xi) changes in
lines of business. In addition, the Senior Credit Facility requires that the
Company comply with specified financial ratios and tests, including minimum cash
flow, a maximum ratio of indebtedness to cash flow and a minimum interest
coverage ratio.
The 10 3/8% Senior Subordinated Notes were issued in November 1996. The
proceeds from the Notes were used to repay $90.0 million of Acquisition-related
financing and $5.0 million of the Senior Credit Facility term loan.
32
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM DEBT: (CONTINUED)
In April 1997, the Company completed a registration with the Securities and
Exchange Commission related to an Exchange Offer for $100.0 million 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 2, 1999 are as follows ($000):
1999--$900; 2000--$900; 2001--$29,800; 2002--$13,500; and 2003--$22,500.
The fair value of the Company's long-term debt was approximately $8.0
million and $6.0 million greater than the book value as of January 2, 1999 and
January 3, 1998, respectively. The fair values were estimated based on similar
issues or on current rates offered to the Company for debt of the same remaining
maturities.
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 2, 1999 and January 3,
1998, 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, 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 1998 and 1997, dividends totaling $2,433,000 and
$2,447,000, respectively, were declared and paid pursuant to these provisions.
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
33
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--REDEEMABLE PREFERRED STOCK: (CONTINUED)
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 2, 1999 and January 3, 1998, the authorized Common Stock of the
Company consisted of 1,000 shares of Common Stock, par value $.01 per share. At
January 2, 1999 and January 3, 1998, 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.
34
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 connection with the
Acquisition, cumulative dividends totaling $2.8 million on the Series A
preferred stock and $4.2 million guaranteed-yield dividends on the common stock
were required to be paid to the respective stockholders, and all shares were
acquired and retired.
NOTE 9--EMPLOYEE BENEFIT PLANS:
The Company offers a comprehensive post-retirement medical plan to current
and certain future retirees and their spouses until they become eligible for
Medicare or 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 is a reconciliation of the Accumulated Post-Retirement Benefit
Obligations ("APBO") under this plan ($000):
<TABLE>
<CAPTION>
SUCCESSOR SUCCESSOR
YEAR ENDED YEAR ENDED
JANUARY 2, JANUARY 3,
1999 1998
----------- -----------
<S> <C> <C>
Benefit Obligation (APBO) at beginning of year....................... $ 9,995 $ 8,485
Service cost......................................................... 169 120
Interest cost........................................................ 649 567
Plan participants' contributions..................................... 508 532
Actuarial loss....................................................... 375 1,498
Benefits paid........................................................ (1,107) (1,207)
----------- -----------
Benefit Obligation (APBO) at end of year............................. $ 10,589 $ 9,995
----------- -----------
----------- -----------
</TABLE>
The Company's contribution for these post-retirement benefit obligations was
$599,005 in fiscal 1998 and $675,000 in fiscal 1997.
The funded status of the plan is reconciled to the accrued post-retirement
benefit liability recognized in the accompanying consolidated balance sheets, as
follows ($000):
<TABLE>
<CAPTION>
AT AT
JANUARY 2, JANUARY 3,
1999 1998
----------- -----------
<S> <C> <C>
Funded status (unfunded APBO)......................................... $ 10,589 $ 9,995
Unrecognized net loss from past experience different from that assumed
and from changes in assumptions..................................... (1,783) (1,442)
----------- -----------
Accrued benefit cost.................................................. $ 8,806 $ 8,553
----------- -----------
----------- -----------
</TABLE>
35
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--EMPLOYEE BENEFIT PLANS: (CONTINUED)
The discount rates used in determining the APBO as of January 2, 1999 and
January 3, 1998 were 6.25% and 6.75%, respectively.
The components of postretirement benefit expense charged to operations are
as follows ($000):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
SUCCESSOR SUCCESSOR PERIOD FROM PERIOD FROM
YEAR ENDED YEAR ENDED OCTOBER 30, 1996 DECEMBER 31, 1995
JANUARY 2, JANUARY 3, THROUGH THROUGH
1999 1998 DECEMBER 28, 1996 OCTOBER 29, 1996
------------- ------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Service cost--benefits attributed to service
during the period............................... $ 169 $ 120 $ 21 $ 100
Interest cost on accumulated postretirement
benefit obligation.............................. 649 567 95 482
Amortization of transition obligation............. -- -- -- 318
Amortization of net actuarial loss................ 34 -- -- 45
----- ----- ----- -----
Total net periodic postretirement benefit cost.... $ 852 $ 687 $ 116 $ 945
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
In conjunction with purchase accounting for the Acquisition, the Company was
required to record a liability on its balance sheet for the APBO 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 costs 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 2, 1999 and January 3, 1998, 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 2.5% 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); $906 for the
fiscal year ended January 2, 1999, $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.
36
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--MANAGEMENT STOCK INCENTIVE PLAN:
At 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 Class C stock of Holdings.
Options for up to 75,268 shares may be granted to certain employees under the
Plan, of which 4,013 and 7,966 remained ungranted at January 2, 1999 and January
3, 1998, 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 years 1998 and
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 any 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 eight years
at January 2, 1999.
A summary of stock options (in number of shares that may be purchased) is
presented below:
<TABLE>
<CAPTION>
SUCCESSOR SUCCESSOR
YEAR ENDED YEAR ENDED
JANUARY 2, 1999 JANUARY 3, 1998
--------------- ---------------
<S> <C> <C>
Outstanding, beginning of year............................... 67,302 72,199
Granted...................................................... 4,976 4,000
Exercised.................................................... -- --
Forfeited.................................................... (1,023) (8,897)
Expired...................................................... -- --
------ ------
Outstanding, end of year..................................... 71,255 67,302
------ ------
------ ------
Exercisable, end of year..................................... 26,511 13,460
------ ------
------ ------
</TABLE>
The fair value of each granted option, at the date of grant, has been
estimated to be $19.78 for options granted during 1998, $23.61 for options
granted during 1997, and $29.50 for options granted during the two-month period
ended December 28, 1996. The fair value of the options granted was estimated
using a minimum value method, at an assumed risk free interest rate of 5% for
options granted during 1998, 6.25% for options granted during 1997, and 7% for
options granted during the two-month period ended December 28, 1996. The
expected life of the options was estimated to be 8 years for options granted
during 1998 and 1997 and 10 years for 1996. No dividends were assumed.
If the fair value based method required by SFAS 123 had been applied,
estimated compensation expense for the years ended January 2, 1999 and January
3, 1998 would have been approximately $414,000 and $400,000, respectively,
resulting in pro forma net income of approximately $5,037,000 and $2,851,000,
respectively. 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 for the period would have been unchanged.
37
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES:
The provision for income taxes consisted of the following ($000):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
PERIOD FROM PERIOD FROM
SUCCESSOR SUCCESSOR OCTOBER 30, 1996 DECEMBER 31, 1995
YEAR ENDED YEAR ENDED THROUGH THROUGH
JANUARY 2, 1999 JANUARY 3, 1998 DECEMBER 28, 1996 OCTOBER 29, 1996
--------------- --------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Current tax provision (benefit):
Federal................................. $ 1,999 $ 1,231 $ -- $ (484)
State................................... 495 278 -- (12)
Foreign................................. 82 50 -- --
------ ------ ----- ------
Total current provision (benefit)..... 2,576 1,559 -- (496)
------ ------ ----- ------
Deferred tax provision:
Federal................................. 926 775 188 2,121
State................................... 114 95 24 260
------ ------ ----- ------
Total deferred provision.............. 1,040 870 212 2,381
------ ------ ----- ------
Total provision....................... $ 3,616 $ 2,429 $ 212 $ 1,885
------ ------ ----- ------
------ ------ ----- ------
</TABLE>
Components of deferred tax assets and liabilities were as follows ($000):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance........................................................... $ 1,754 $ 1,237
Inventory valuation..................................................................... 4,775 5,777
Liability accruals...................................................................... 4,995 5,879
Deferred employee benefits.............................................................. 3,848 3,755
Loss and tax credit carryforwards....................................................... -- 193
Other................................................................................... 737 929
----------- -----------
Total deferred tax assets............................................................. $ 16,109 $ 17,770
----------- -----------
----------- -----------
Deferred tax liabilities:
Tradename............................................................................... $ 34,996 $ 35,921
Depreciation............................................................................ 8,744 8,284
Deferred employee benefits.............................................................. 276 432
Other................................................................................... -- --
----------- -----------
Total deferred tax liabilities........................................................ $ 44,016 $ 44,637
----------- -----------
----------- -----------
</TABLE>
38
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES: (CONTINUED)
The difference between the Company's effective income tax rate and the
federal statutory tax rate is reconciled below:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
PERIOD FROM PERIOD FROM
SUCCESSOR SUCCESSOR OCTOBER 30, 1996 DECEMBER 31, 1995
YEAR ENDED YEAR ENDED THROUGH THROUGH
JANUARY 2, 1999 JANUARY 3, 1998 DECEMBER 28, 1996 OCTOBER 29, 1996
------------------- ------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate......... 34% 34% 34% 34%
State income taxes, net of Federal income
tax benefit............................. 5 5 3 11
Non-deductible Acquisition costs.......... -- -- -- 77
Goodwill amortization..................... 3 6 11 --
Other permanent items..................... 1 1 -- --
Foreign income, net of tax................ (2) (2) (2) (3)
Other..................................... -- -- (2) 6
-- -- --
---
Total..................................... 41% 44% 44% 125%
-- -- --
-- -- --
---
---
</TABLE>
The portion of income before income taxes and extraordinary item
attributable to foreign income was approximately $735,000 and $437,000 for the
years ended January 2, 1999 and January 3, 1998, respectively, $40,000 for the
period ended December 28, 1996 and $150,000 for the period ended October 29,
1996.
NOTE 12--LEASE COMMITMENTS AND CONTINGENCIES:
Annual rent expense ($000) under operating leases was $13,855 and $14,093
for the years ended January 2, 1999 and January 3, 1998, respectively, $2,148
for the period ended December 28, 1996 and $10,902 for the period ended October
29, 1996.
Minimum annual rental commitments under current noncancelable operating
leases as of January 2, 1999 were as follows ($000):
<TABLE>
<CAPTION>
BUILDINGS,
PRIMARILY DATA TOTAL
RETAIL TRANSPORTATION PROCESSING MANUFACTURING NONCANCELABLE
FISCAL YEAR STORES EQUIPMENT EQUIPMENT EQUIPMENT LEASES
- ----------------------------------------- ----------- --------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
1999..................................... $ 10,671 $ 545 $ 582 $ 481 $ 12,279
2000..................................... 7,631 478 511 435 9,055
2001..................................... 5,422 428 238 261 6,349
2002..................................... 3,543 281 -- 199 4,023
2003..................................... 1,733 36 -- 59 1,828
Thereafter............................... 1,088 11 -- -- 1,099
----------- ------ ----------- ------ -------------
Total.................................... $ 30,088 $ 1,779 $ 1,331 $ 1,435 $ 34,633
----------- ------ ----------- ------ -------------
----------- ------ ----------- ------ -------------
</TABLE>
In July and August 1996, the Company had studies conducted by an
environmental consultant for 13 facilities. Based on available information,
including the studies, the Company has identified certain non-compliance with
environmental laws. The Company has also identified certain actions which may
39
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--LEASE COMMITMENTS AND CONTINGENCIES: (CONTINUED)
be required in the future. Carter's has been named as a third-party defendant in
an action involving environmental claims relating to property located near its
previously owned facility in Needham, Massachusetts. In February 1999, the
Company and the plaintiff reached a tentative settlement by which Carter's would
pay the plaintiff $2,500. Such settlement is subject to the approval of other
parties involved in this litigation. The Company is also in the process of
investigating a potential claim under environmental laws in Lamar County,
Georgia. Based on the information available at this time, the ultimate outcome
of these matters is uncertain and, therefore, the Company is unable to determine
the amount of its liability, if any. Accordingly, no accrual has been recorded
in the accompanying financial statements for these matters.
NOTE 13--OTHER CURRENT LIABILITIES:
Other current liabilities consisted of the following ($000):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
----------- -----------
<S> <C> <C>
Accrued liability for retail store closures........................... $ 1,522 $ 2,381
Accrued liability for plant closures.................................. 2,110 2,748
Accrued income taxes.................................................. 7,453 7,017
Accrued workers compensation.......................................... 4,157 4,500
Accrued incentive compensation........................................ 3,593 2,650
Other current liabilities............................................. 17,284 16,646
----------- -----------
$ 36,119 $ 35,942
----------- -----------
----------- -----------
</TABLE>
40
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
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 INVENTORY
ACCOUNTS VALUATION
------------- -----------
<S> <C> <C>
PREDECESSOR:
Balance, December 30, 1995........................................ $ 2,888 $ 3,781
Additions, charged to expense..................................... 408 2,510
Writeoffs......................................................... (772) (3,877)
------ -----------
Balance, October 29, 1996......................................... $ 2,524 $ 2,414
------ -----------
------ -----------
SUCCESSOR:
Balance, October 30, 1996......................................... $ 2,524 $ 2,414
Additions, charged to expense..................................... 156 100
Recoveries (Writeoffs)............................................ 11 (10)
------ -----------
Balance, December 28, 1996........................................ 2,691 2,504
Additions, charged to expense..................................... 1,178 2,254
Writeoffs......................................................... (1,495) (1,992)
------ -----------
Balance, January 3, 1998.......................................... 2,374 2,766
Additions, charged to expense..................................... 1,427 2,947
Writeoffs......................................................... (1,301) (2,595)
------ -----------
Balance, January 2, 1999.......................................... $ 2,500 $ 3,118
------ -----------
------ -----------
</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.
The Company paid dividends on its common stock held by its parent, Holdings,
in the amounts of approximately $700,000 and $1,183,000 for the fiscal years
ended January 2, 1999 and January 3, 1998, respectively. Proceeds from these
dividends were used by Holdings to repurchase shares of Holdings' stock owned by
certain former employees of the Company in the amounts of $320,000 and
$1,183,000
41
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--RELATED PARTY TRANSACTIONS: (CONTINUED)
for the fiscal years ended January 2, 1999 and January 3, 1998, respectively. In
the fiscal year ended January 2, 1999, proceeds were also used by Holdings to
pay $380,000 of debt issuance costs in connection with the filing of a
Registration Statement on Form S-4, for Holdings' $20.0 million of 12% Senior
Subordinated Notes due 2008. In addition during fiscal 1998, Holdings made
$90,000 in capital contributions to the Company in connection with the issuance
of shares of Holdings' stock to certain employees of the Company.
NOTE 16--SEGMENT INFORMATION:
The Company's two reportable segments are "Retail" and "Wholesale and
Other". The accounting policies of the segments are the same as those described
in Note 2--"Nature of Business and Summary of Significant Accounting Policies".
The Company generally sells the same products in each business segment. The
Company evaluates the performance of its Retail segment based on, among other
things, its earnings before interest, taxes, depreciation and amortization
expenses ("EBITDA"). EBITDA shown in the accompanying table for the Wholesale
and Other segment is an amount determined by deduction based on consolidated
EBITDA and is not a measurement used by management in its decision-making
process. As described in the accompanying table, the Retail segment's EBITDA is
determined on a direct contribution basis only and does not include allocations
of all costs incurred to support Retail operations.
The Retail segment consists of the Company's retail outlet stores which
numbered 144, 138 and 135 at January 2, 1999, January 3, 1998 and December 28,
1996, respectively. The financial results of the Retail segment shown in the
accompanying table reflect revenue from the outlet stores, the cost of
merchandise sold including point-of-sale markdowns, store operating costs and
retail management expenses. Product costs reported by the Retail segment are
determined based on the Company's standard cost system. Although the standard
costs are the same as those used for the Company's Wholesale and Other segment,
the Retail segment's product costs do not reflect any variances from standard
costs; such variances represent the difference between standard costs of
production and actual costs. Accordingly, Retail results do not reflect the
actual costs and related margins resulting from its operations.
Retail results do not include allocation of various costs incurred to
support Retail operations such as merchandising and product development costs,
obsolescence, marketing, advertising, distribution or corporate expenses such as
information technology, finance, executive management or corporate occupancy
costs. Retail financial results, therefore, are not reflective of the actual
results which would be derived if such allocations were made. The Wholesale and
Other segment includes all other revenue and expenses of the Company not
directly related to the Retail segment.
42
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SEGMENT INFORMATION: (CONTINUED)
The table below presents certain segment information for the periods
indicated ($000):
<TABLE>
<CAPTION>
WHOLESALE
RETAIL AND OTHER TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
SUCCESSOR:
Year ended January 2, 1999:
Sales.......................................................... $ 171,696 $ 236,486 $ 408,182
EBITDA......................................................... $ 37,965 $ 5,056 $ 43,021
Year ended January 3, 1998:
Sales.......................................................... $ 143,419 $ 219,535 $ 362,954
EBITDA......................................................... $ 27,299 $ 9,627 $ 36,926
Period from October 30, 1996 through December 28, 1996:
Sales.......................................................... $ 22,990 $ 28,506 $ 51,496
EBITDA......................................................... $ 4,371 $ 1,159 $ 5,530
PREDECESSOR:
Period from December 31, 1995 through October 29, 1996:
Sales.......................................................... $ 106,254 $ 160,485 $ 266,739
EBITDA......................................................... $ 18,971 $ 6,657 $ 25,628
</TABLE>
A reconciliation of total segment EBITDA to total consolidated income before
income taxes is presented below ($000):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
SUCCESSOR SUCCESSOR PERIOD FROM PERIOD FROM
YEAR ENDED YEAR ENDED OCTOBER 30, 1996 DECEMBER 31, 1995
JANUARY 2, JANUARY 3, THROUGH THROUGH
1999 1998 DECEMBER 28, 1996 OCTOBER 29, 1996
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Total EBITDA for reportable segments...... $ 43,021 $ 36,926 $ 5,530 $ 25,628
Depreciation and amortization expense..... (15,599) (13,835) (2,414) (6,612)
Interest expense.......................... (18,525) (17,571) (2,631) (7,075)
Nonrecurring charge....................... (8,834)
Long-Term Incentive Compensation Plan
costs................................... (1,000)
Management Equity Participation Plan
costs................................... (600)
------- ------- ------ -------
Consolidated income before income
taxes................................... $ 8,897 $ 5,520 $ 485 $ 1,507
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
43
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SEGMENT INFORMATION: (CONTINUED)
The table below represents inventory by segment at ($000):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
---------- ----------- ------------
<S> <C> <C> <C>
Wholesale and Other.................................... $ 81,817 $ 73,097 $ 61,989
Retail................................................. 19,591 14,542 14,551
---------- ----------- ------------
$ 101,408 $ 87,639 $ 76,540
---------- ----------- ------------
---------- ----------- ------------
</TABLE>
Wholesale and Other inventories include inventory produced and warehoused
for the Retail segment.
The following represents property, plant and equipment, net, by geographic
area as of ($000):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
----------- ----------- ------------
<S> <C> <C> <C>
United States.......................................... $ 49,178 $ 45,836 $ 45,264
International.......................................... 10,496 7,175 2,957
----------- ----------- ------------
$ 59,674 $ 53,011 $ 48,221
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The Company's international operations consist primarily of sewing
facilities and, accordingly, no revenues are recorded at these locations.
44
<PAGE>
ITEM 9. CHANGE IN ACCOUNTANTS
Not applicable.
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 59 President, Chief Executive Officer and Chairman of the Board of
Directors.
Joseph Pacifico 49 President-Marketing.
Charles E. Whetzel, Jr. 48 Executive Vice President-Manufacturing.
David A. Brown 41 Executive Vice President-Business Planning & Administration and
Director.
Michael D. Casey 38 Senior Vice President and Chief Financial Officer.
Christopher J. O'Brien 40 Director.
Charles J. Philippin 48 Director.
Christopher J. Stadler 34 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 34 years, has been
in senior executive positions for nearly 22 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 increased responsibility with Mast
Industries, Health-Tex and Wellmade Industries, respectively. In 1988, Mr.
Whetzel joined Bassett-Walker, Inc. and was later promoted to Vice President of
Manufacturing for the H.D. Lee Company.
DAVID A. BROWN joined the Company in 1992 as Senior Vice President-Business
Planning and Administration and became a Director of the Company in October
1996. 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.
45
<PAGE>
MICHAEL D. CASEY joined the Company in 1993 as Vice President-Finance and
was named Senior Vice President-Finance in 1997. In 1998, Mr. Casey was named
Senior Vice President and Chief Financial Officer. Prior to joining the Company,
Mr. Casey was a Senior Manager with 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 Star Markets Holdings, Inc., CSK Auto, Inc. and Falcon Building
Products, 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 at Coopers & Lybrand L.L.P. Mr. Philippin is a Director
of Saks Holdings, Inc., CSK Auto, Inc., Star Markets Holdings, Inc., Werner
Holding Co., Inc. and Falcon Building Products, 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 Managing Director with BT Securities Corporation from prior to
June 1993 through April 1995, a Managing Director with the Davis Companies from
April 1995 through September 1995 and a Managing Director with CS First Boston
Corporation from September 1995 through April 1996. Mr. Stadler is a Director of
Werner Holding Co., Inc., CSK Auto Corporation and Falcon Building Products,
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 1998
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."
46
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS (A) COMPENSATION (B)
- ----------------------------------------------------------------------- ---------- ---------- ----------------
<S> <C> <C> <C>
Frederick J. Rowan, II................................................. $ 560,750 $ 632,500 $ 394,074
President, Chief Executive Officer and Chairman of the Board of
Directors
Joseph Pacifico........................................................ $ 375,000 $ 268,200 $ 439,572
President-Marketing
Charles E. Whetzel, Jr................................................. $ 250,000 $ 178,800 $ 109,019
Executive Vice President-Manufacturing
David A. Brown......................................................... $ 247,500 $ 178,800 $ 74,721
Executive Vice President-Business Planning & Administration and
Director
Michael D. Casey....................................................... $ 190,208 $ 143,000 $ 126,080
Senior Vice President and Chief Financial Officer
</TABLE>
- ------------------------
(a) Earned in 1998 but paid in 1999.
(b) Includes Holdings' Class C Stock compensation, supplemental retirement plan
benefits, automobile allowances, insurance premiums and medical cost
reimbursement. Other compensation for Messrs. Pacifico, Whetzel and Casey
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 $600,000 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 65(th) 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 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. Michael D. Casey entered into a two-year employment
agreement effective October 28, 1998. Pursuant to such agreements, Messrs.
Pacifico, Whetzel, Brown and Casey (each an "Executive") are entitled to receive
(i) a base salary, currently $390,000, $262,500, $262,500 and $210,000,
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, including a retirement trust. The employment
agreements automatically extend annually for successive one-year terms, subject
to termination upon notice. 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
47
<PAGE>
until either the expiration of the remainder of the employment term or his
65(th) birthday. Each Executive has agreed not to compete with the Company for a
one-year period following the end of his employment with the Company, unless he
is terminated without cause, in which case the duration of such period is six
months. All executive officers are eligible to participate in the Company's
Annual Cash Bonus Plan, payments under which are based upon the Company's
achievement of targeted performance levels as determined by the Board of
Directors.
MANAGEMENT STOCK INCENTIVE PLAN
At 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 January 2, 1999,
options to purchase up to 71,255 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. At the Acquisition, there were 151,049 shares of Holdings' Class C
Stock issued to members of the Company's management. As of January 2, 1999,
members of the Company's management owned 127,512 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
NAME SHARES(A) OF 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, or the sole or shared power to dispose
of, or direct the disposition of, a security.
(b) INVESTCORP S.A. ("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 Limited ("CIP") owns no stock in Holdings. CIP indirectly owns less than
0.1% of the stock in each of Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinnia Limited (see (f) below). CIP may be
deemed to share beneficial ownership of the shares of voting stock of
Holdings held by such entities because CIP acts as a Director of such
entities and the ultimate beneficial shareholders of each of those entities
have granted to CIP revocable proxies in companies that own those entities'
stock. None of the ultimate beneficial owners of such entities beneficially
owns individually more than 5% of Holdings' voting stock.
(f) Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinnia Limited is a Cayman Islands
corporation with its address at P.O. Box 2197, West Wind Building, George
Town, Grand Cayman, Cayman Islands.
49
<PAGE>
CLASS C NON-VOTING STOCK:
<TABLE>
<CAPTION>
NUMBER OF PERCENT
NAME SHARES (A) OF 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............................................................................ 2,289 0.9%
----------- ---
All directors and executive officers of the Company as a group (8 persons).................. 104,091 42.9%
----------- ---
----------- ---
</TABLE>
- ------------------------
(a) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of, or the sole or shared power to dispose
of, 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. ("International") advisory fees aggregating $2.25
million. Holdings also paid $1.5 million to Invifin in fees in connection with
providing a standby commitment for up to $100.0 million to fund the Acquisition.
In connection with the closing of the Acquisition, the Company entered into an
agreement for management advisory and consulting services 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 Management Equity
Participation Plan and the Long Term Incentive Plan.
In October 1996, the Company made a $1.5 million loan to an officer. 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 by the officer of his stock in
Holdings.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(a) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Morrow, Georgia on
March 25, 1999.
THE WILLIAM CARTER COMPANY
By: /s/ FREDERICK J. ROWAN II
-----------------------------------------
Frederick J. Rowan II
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 25, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
NAME TITLE
- ------------------------------ ---------------------------
Chairman of the Board of
/s/ FREDERICK J. ROWAN II Directors, President and
- ------------------------------ Chief Executive Officer
Frederick J. Rowan II (Principal Executive
Officer)
Executive Vice
/s/ DAVID A. BROWN President-Business
- ------------------------------ Planning & Administration
David A. Brown and Director
/s/ MICHAEL D. CASEY Senior Vice President and
- ------------------------------ Chief Financial Officer
Michael D. Casey
/s/ CHRISTOPHER J. O'BRIEN Director
- ------------------------------
Christopher J. O'Brien
/s/ CHARLES J. PHILIPPIN Director
- ------------------------------
Charles J. Philippin
/s/ CHRISTOPHER J. STADLER Director
- ------------------------------
Christopher J. Stadler
51
<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 2, 1999 and January 3, 1998
Consolidated Statements of Operations for the fiscal years ended
January 2, 1999 and 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 years ended
January 2, 1999 and 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 years ended January 2, 1999 and 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
2. Financial Statement Schedules: None
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.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- ----------------------------------------------------------------------------------------------
<C> <S>
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 Michael D. Casey incorporated herein by reference
to Exhibit 10.8 to the Carter Holdings, Inc. 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.
10.8 Amendment to Employment Agreement between the Company and Michael D. Casey.
21 Subsidiaries of the Company incorporated herein by reference to Exhibit 21 filed with Carter
Holdings, Inc.'s Registration Statement Form S-4.
27 Financial Data Schedule.
</TABLE>
53
<PAGE>
Exhibit 10.8
AMENDMENT
This AMENDMENT is made as of February 25, 1999 between The William
Carter Company, a Massachusetts corporation (the "Company"), and Michael D.
Casey ("Executive").
W I T N E S S E T H
WHEREAS, the Company and the Executive are parties to the Employment
Agreement dated as of April 1, 1998 (the "Employment Agreement").
WHEREAS, the Company and the Executive now desire to amend the
Employment Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parities hereto
agree as follows:
A G R E E M E N T
1. DEFINITIONS. Capitalized terms not otherwise defined herein shall
have the meaning ascribed to them in the Employment Agreement.
2. AMENDMENTS TO THE EMPLOYMENT AGREEMENT.
(a) The Effective Date of the Employment Agreement is October 30,
1998.
(b) Section 4(a) is deleted in its entirety and replaced with the
following:
(a) The Employment Period shall initially extend until
October 31, 2000 but shall be extended for an
additional one-year period on each Anniversary Date
unless either the Company or Executive gives the
other written notice at least sixty (60) days prior
to such Anniversary Date of its or his intention not
to further extend the term of this Agreement;
provided that (i) the Employment Period shall
terminate prior to such date upon Executive's
resignation, Retirement or death and (ii) the
Employment Period may be terminated by the Company at
any time prior to such date for Cause, Executive's
Disability or Without Cause.
3. NO EFFECT ON CONSISTENT TERMS. All terms of the Employment Agreement
not inconsistent with this Amendment shall remain in place and in full force and
effect and shall be unaffected by this Amendment.
4. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed to be an original by the party
executing such counterpart, but all of which shall be considered one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered as of the date first set forth above.
THE WILLIAM CARTER COMPANY
By: /s/ Frederick J.Rowan, II
--------------------------------
Frederick J. Rowan, II,
Chairman & Chief Executive
Officer
/s/ Michael D. Casey
--------------------------------
Michael D. Casey
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 3,986
<SECURITIES> 0
<RECEIVABLES> 37,334
<ALLOWANCES> 2,500
<INVENTORY> 101,408
<CURRENT-ASSETS> 155,386
<PP&E> 79,598
<DEPRECIATION> 19,924
<TOTAL-ASSETS> 349,228
<CURRENT-LIABILITIES> 55,906
<BONDS> 166,700
18,682
0
<COMMON> 0
<OTHER-SE> 58,739
<TOTAL-LIABILITY-AND-EQUITY> 349,228
<SALES> 408,182
<TOTAL-REVENUES> 408,182
<CGS> 257,670
<TOTAL-COSTS> 257,670
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,525
<INCOME-PRETAX> 8,897
<INCOME-TAX> 3,616
<INCOME-CONTINUING> 5,281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,281
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
