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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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<C> <S>
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
JANUARY 1, 2000
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
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COMMISSION FILE NUMBER:
333-22155
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THE WILLIAM CARTER COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MASSACHUSETTS 04-1156680
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
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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<PAGE>
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
135 years of operation, Carter's has become one of the most highly recognized
brand names in the children's apparel industry. Carter's 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 146 retail outlet stores.
Carter's generates a majority of its sales in the baby and toddler apparel
market which was a $7.9 billion market in 1999. 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) a strong and growing birth market; (ii) more women
returning to the workplace after having children, resulting in more disposable
income and increased day care apparel needs; (iii) the increasing number of
grandparents, a demographic segment with high per capita discretionary income
and an important consumer base for children's apparel; and (iv) an 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").
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.
PRODUCTS AND MARKETS
Carter's manufactures and markets a broad array of baby, toddler and young
children's apparel. The Company also licenses its brand name to other companies
to create a complete collection of coordinating lifestyle products including:
bedding, strollers, underwear, shoes, room decor, toys and more.
In 1999, the Company launched a new brand theme based on Celebrating
Imagination. This theme solidified the Company's product positioning of creating
great core products that are differentiated through imaginative and creative
artistic application. Celebrating Imagination has opened new growth
opportunities for the brand and has been widely embraced by both consumers and
retailers.
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BABY AND TODDLER
In 1999, total industry sales of baby and toddler apparel (newborn through
size 4T) were $7.9 billion, which grew 10.8% over 1998. This growth was over 2.5
times faster than the apparel industry as a whole. Carter's target distribution
(department and specialty stores) accounts for approximately half this market.
Carter's is currently the leading supplier of branded baby and toddler apparel
in the US with a 5.8% 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 1999,
Carter's generated $163.0 million in 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 embroideries and the reputation for quality Carter's has
developed over its 135 year history. In 1999, 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 1999
introduction of the LENNON REAL LOVE line are complete nursery programs designed
for the first-time mother and the giftgivers. 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 and toddler sleepwear includes pajamas, long underwear and
one-piece footed sleepers. In fiscal 1999, Carter's generated $86.0 million in
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 creative
artwork in consumer-tested prints and embroideries with an emotional appeal. In
addition, management believes Carter's baby and toddler sleepwear product line
features more functional, higher quality products than those of its competitors.
The Company's primary competitors in the baby and toddler sleepwear market are
both private label manufacturers and licensed character products.
PLAYWEAR. Baby and toddler playwear includes cotton apparel for everyday
use. In fiscal 1999, Carter's generated $80.5 million in sales of these
products. Although Carter's has historically focused on expanding 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. The Company's Celebrating Imagination brand theme has created a
strong competitive differentiation for the brand in this marketplace. Management
believes that this new focus, in addition to Carter's high brand name awareness
and strong wholesale customer relationships, will enable 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 3.7% share
of the market.
OTHER. Other baby and toddler products include bedding, outerwear, shoes,
socks, diaper bags, gift sets, toys, room decor and hair accessories, including
products for which the Company licenses the CARTER'S and CARTER'S CLASSICS name.
In fiscal 1999, Carter's generated $40.1 million in sales of these products.
YOUNG CHILDREN'S
In 1999, total industry sales of young children's apparel were
$5.8 billion. 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.
3
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SLEEPWEAR. Young children's sleepwear product offerings include basic
two-piece pajamas, long underwear and polyester blanket-fleece one-piece
sleepers. In fiscal 1999, Carter's generated $25.9 million in 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 creative artwork through consumer-tested prints and embroideries with
an emotional appeal. Carter's primary competitors in the young children's
sleepwear market are private label manufacturers and licensed character
products.
PLAYWEAR. Young children's playwear product offerings include cotton
apparel for everyday use. In fiscal 1999, Carter's generated $19.1 million in
sales of these products. Carter's strategy is to leverage its high brand
awareness and leading market shares in layette and sleepwear in combination with
its new creative design to increase its sales of young children's playwear.
Carter's primary competitors in the young children's playwear market are private
label manufacturers and licensed character products.
LICENSING. The Company licenses the CARTER'S and CARTER'S CLASSICS names to
other companies for use on baby, toddler and young children's products including
bedding, outerwear, shoes, socks, room decor, toys, stationary, strollers and
hair accessories. In 1998, the Company entered into a three year license
agreement for the rights to John Lennon's Real Love artwork collection for use
on children's apparel, accessories and related products. In fiscal 1999,
Carter's generated $4.2 million in royalty income from the sale of licensed
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 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
and distinctive artistic applications. 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, prints
and embroideries 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 and baby fairs.
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 provide market feedback. 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 entire
line.
DISTRIBUTION AND SALES
The Company sells its products to wholesale accounts and through the
Company's retail outlet stores. In fiscal 1999, sales through the wholesale
channel accounted for 56% of total sales, while the
4
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retail outlet channel accounted for 44% of total sales. No one wholesale
customer accounts for more than 10% of consolidated net sales.
WHOLESALE OPERATIONS
The Company sells its products in the United States through a network of
approximately 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 146 retail outlet stores in 39 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.
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 good 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 its Celebrating Imagination brand theme with
innovative product designs, national print advertising, joint mailers with
wholesale customers, meetings between senior customer representatives and
Carter's executives, trade show participation and store-in-store shops.
MANUFACTURING
In December 1999, the Company closed its textile operations in Barnesville,
Georgia and fabric previously produced by the Company is now purchased from
third-party manufacturers. The Company prints, cuts, sews, finishes and
embroiders a majority of the products it sells. In the United States, the
Company currently operates one print facility, one cutting facility, one sewing
facility, one embroidery facility and three distribution centers.
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. Management believes that the Company's manufacturing
capacity is sufficient to meet current and planned operating requirements.
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 sourcing, reductions in SKUs and product
complexity and focus on core product offerings.
5
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DEMOGRAPHIC TRENDS
Demographic and psychographic trends support a strong and growing baby and
toddler market and help insulate the Company from seasonal or fashion
fluctuations. Highlights of these trends include:
- A strong birth market - 3.9 million births were reported in 1998 and
demographers project a progressive increase in births over the next 20
years that will ultimately surpass the original baby boom.
- More money is being spent on babies than ever before. Today's mother is
more likely to be working than in previous years. This woman is more
affluent and is spending more on her children.
- Multiple births are at record levels.
- 40% of all births are first births meaning new families are being formed
and higher levels of spending are required.
- Grandparents are a growing and highly lucrative market.
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 various federal, state and local laws that govern
activities or operations that may have adverse environmental effects.
Noncompliance with these laws and regulations can result in significant
liabilities, penalties and costs. From time to time, operations of the Company
have resulted or may result in noncompliance with or liability pursuant to
environmental laws. Carter's is in the process of resolving a potential
environmental claim associated with waste deposited at or near a landfill in
Lamar County, Georgia in the 1970's. The Company currently estimates that the
total cost to the Company to resolve this matter will be less than $1.0 million
although there can be no assurance that this estimate will prove accurate.
Generally, compliance with environmental laws has not had a material impact on
the Company's operations, but there can be no assurance that future compliance
with such laws will not have a material adverse effect on the Company or its
operations.
PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
The Company owns many trademarks and tradenames, including
Carter's-Registered Trademark-, Carter's Growbody-Registered Trademark-,
Carter-Set-Registered Trademark-, Jamakins-Registered Trademark-, Today's
Classics-Registered Trademark- and Tykes-Registered Trademark-, as well as
patents and copyrights, most of which are registered in the United States and in
46 foreign countries. The Company licenses the CARTER'S and CARTER'S CLASSICS
names and many of its trademarks, tradenames and patents to third-party
6
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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 the Company. Based on an assessment of the growth opportunities
of Baby Dior-Registered Trademark- products, management decided not to extend
the sublicense agreement. The Company licenses, under a three year agreement
which expires 2001, the rights to John Lennon's Real Love artwork collection for
use on children's apparel, accessories and related products.
EMPLOYEES
As of January 1, 2000, the Company had approximately 7,244 employees, 2,847
of which were employed on a full-time basis in the Company's domestic
operations, 1,113 of which were employed on a part-time basis in the Company's
domestic operations and 3,284 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 146 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 owns three
distribution facilities, two in Georgia and one in Pennsylvania. The Company
also owns four manufacturing facilities as well as an office building in
Georgia, has a ground lease on one additional manufacturing facility in Texas
and leases office space in three buildings--one in Georgia, one in Connecticut
and one in New York. 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 $507,000 for the fiscal year ended January 1, 2000.
Proceeds from the dividends were used by Holdings to repurchase shares of
Holdings' stock owned by seven former employees of the Company. In addition,
during 1999, Holdings made $60,000 in capital contributions to the Company in
connection with the issuance of shares of Holdings' stock to one employee 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 1, 2000. As a result
of certain adjustments made in connection with the Acquisition, the results of
operations for the fiscal years ended January 1, 2000 ("fiscal year 1999"),
January 2, 1999 ("fiscal year 1998"), 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 1, 2000 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".
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<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
SUCCESSOR (a) Predecessor
---------------------------------------------- ---------------------------
FISCAL YEAR OCT. 30, 1996 DEC. 31, 1995
------------------------------ THROUGH THROUGH FISCAL YEAR
1999 1998 1997 DEC. 28, 1996 OCT. 29, 1996 1995
-------- -------- -------- ------------- ------------- -----------
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OPERATING DATA:
Wholesale sales........................ $231,284 $236,486 $219,535 $ 28,506 $160,485 $166,884
Retail sales........................... 183,312 171,696 143,419 22,990 106,254 128,547
-------- -------- -------- --------- -------- --------
Net sales.............................. 414,596 408,182 362,954 51,496 266,739 295,431
Cost of goods sold..................... 271,844 256,482 227,332 31,631 169,167 190,230
-------- -------- -------- --------- -------- --------
Gross profit........................... 142,752 151,700 135,622 19,865 97,572 105,201
Selling, general and administrative.... 120,773 124,278 112,531 16,749 80,156 84,098
Nonrecurring charges (b)(f)............ 7,124 -- -- -- 8,834 --
-------- -------- -------- --------- -------- --------
Operating income....................... 14,855 27,422 23,091 3,116 8,582 21,103
Interest expense....................... 17,748 18,525 17,571 2,631 7,075 7,849
-------- -------- -------- --------- -------- --------
(Loss) income before income taxes and
extraordinary item................... (2,893) 8,897 5,520 485 1,507 13,254
(Benefit from) provision for income
taxes................................ (869) 3,616 2,429 212 1,885 5,179
-------- -------- -------- --------- -------- --------
(Loss) income before extraordinary
item................................. (2,024) 5,281 3,091 273 (378) 8,075
Extraordinary item, net of tax (c)..... -- -- -- 2,351 -- --
-------- -------- -------- --------- -------- --------
Net (loss) income...................... $ (2,024) $ 5,281 $ 3,091 $ (2,078) $ (378) $ 8,075
======== ======== ======== ========= ======== ========
Net (loss) income available to common
stockholders......................... $ (4,677) $ 2,628 $ 416 $ (2,512) $ (1,510) $ 6,460
======== ======== ======== ========= ======== ========
BALANCE SHEET DATA (END OF PERIOD):
Working capital (d).................... $ 81,508 $ 99,480 $ 87,482 $ 70,792 $ 84,593
Total assets........................... 313,133 349,228 331,899 318,709 167,216
Total debt, including current
maturities........................... 142,300 167,600 157,100 145,000 87,495
Redeemable preferred stock (e)......... 18,902 18,682 18,462 18,234 --
Preferred stock........................ -- -- -- -- 50,000
Common stockholders' equity............ 53,615 58,739 56,721 57,488 (4,678)
CASH FLOW DATA:
Net cash provided by (used in)
operating activities................. $ 38,891 $ 9,497 $ 4,089 $ 7,095 $ 24,405 $ (5,516)
Net cash used in investing
activities........................... (12,362) (17,960) (13,965) (143,227) (4,007) (13,369)
Net cash (used in) provided by
financing activities................. (27,100) 8,190 12,174 134,263 (19,433) 14,157
OTHER DATA:
EBITDA, as defined (f)................. $ 38,834 $ 43,021 $ 36,926 $ 5,530 $ 25,628 $ 30,562
Gross margin........................... 34.4% 37.2% 37.4% 38.6% 36.6% 35.6%
Depreciation and amortization.......... $ 16,855 $ 15,599 $ 13,835 $ 2,414 $ 6,612 $ 7,337
Capital expenditures................... 12,726 17,991 14,013 3,749 4,007 13,715
</TABLE>
See Notes to Selected Financial Data.
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NOTES TO SELECTED FINANCIAL DATA
(a) As a result of the Acquisition, the Company's assets and liabilities were
adjusted to their estimated fair values as of October 30, 1996. In addition,
the Company entered into new financing arrangements and changed its capital
structure. Accordingly, the results of operations for the fiscal years ended
January 1, 2000, 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 1, 2000, 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 fiscal year ended January 1, 2000 represents
the $6.9 million writedown in the carrying value of the Company's textile
facility assets, for which the operations were closed in December 1999, and
a $0.2 million loss on property, plant and equipment related to the closures
of three domestic sewing facilities. 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) the $7.1 million nonrecurring charge in 1999 related to the closure of
textile and sewing facilities, and, in fiscal 1996, the nonrecurring
charge of $8.8 million related to the Acquisition.
(ii) depreciation and amortization expense including prepaid management fee
amortization of $1.125 million, $1.35 million and $1.35 million for the
fiscal years ended January 1, 2000, January 2, 1999 and January 3,
1998, respectively, and $0.23 million for the period October 30, 1996
through December 28, 1996, incurred in connection with the Acquisition;
and
(iii) 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 $1.1 million and $1.0 million for fiscal
1995 and the period December 31, 1995 through October 29, 1996,
respectively; (2) Management Equity Participation Plan expenses of
$0.6 million and $0.6 million for fiscal 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.
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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED
FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE
NOTES THERETO. THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INCLUDE RISKS AND OTHER UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE
THOSE DISCUSSED BELOW, AS WELL AS GENERAL ECONOMIC AND BUSINESS CONDITIONS,
COMPETITION AND OTHER FACTORS DISCUSSED ELSEWHERE IN THIS REPORT. THE COMPANY
UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS.
GENERAL
The Company is a leading 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 (56% of fiscal 1999 sales) and through
its 146 retail outlet stores (44% of fiscal 1999 sales).
Consolidated net sales have increased from $295.4 million in 1995 to
$414.6 million in 1999. During this period, wholesale sales have increased from
$166.9 million to $231.3 million and retail sales have increased from
$128.5 million to $183.3 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 the BABY DIOR product
lines. The increase in retail sales resulted from new store openings and
comparable store sales increases (stores open more than 12 months).
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
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statements of Operations:
Wholesale sales............................................. 55.8% 57.9% 60.5%
Retail sales................................................ 44.2 42.1 39.5
----- ----- -----
Net sales................................................... 100.0 100.0 100.0
Cost of goods sold.......................................... 65.6 62.8 62.6
----- ----- -----
Gross profit................................................ 34.4 37.2 37.4
Selling, general and administrative expenses................ 29.1 30.5 31.0
Nonrecurring charge......................................... 1.7 -- --
----- ----- -----
Operating income............................................ 3.6 6.7 6.4
Interest expense............................................ 4.3 4.5 4.8
----- ----- -----
(Loss) income before income taxes........................... (0.7) 2.2 1.6
(Benefit from) provision for income taxes................... (0.2) 0.9 0.7
----- ----- -----
Net (loss) income........................................... (0.5)% 1.3% 0.9%
===== ===== =====
</TABLE>
11
<PAGE>
FISCAL YEAR ENDED JANUARY 1, 2000 COMPARED WITH FISCAL YEAR ENDED JANUARY 2,
1999
NET SALES. Net sales for fiscal 1999 increased 1.6% to $414.6 million from
$408.2 million in fiscal 1998. This increase includes a 2.2% decrease in
wholesale sales offset by a 6.8% increase in retail sales. Wholesale sales for
fiscal 1999 decreased to $231.3 million from $236.5 million in fiscal 1998.
Retail sales for fiscal 1999 increased to $183.3 million from $171.7 million in
fiscal 1998.
The decrease in wholesale sales reflects:
- lower 1999 sleepwear revenue compared to increases generated from the
successful launch of the Dreamakers sleepwear product line in May 1998;
- underperformance of the CARTER'S CLASSICS and playwear product lines; and
- lower layette product revenues resulting from the expiration of the BABY
DIOR license in December 1998.
In this increasingly competitive marketplace, revenue gains are achieved
through the frequent introduction of products which are distinctive in fabric
and creative application (i.e., embroidery and prints) and which provide value
to the consumer. The decline in 1999 revenue reflects the Company's previous
insufficient ability to source better products from lower cost manufacturers. As
discussed below, the Company has made changes in its product sourcing strategy.
In late 1998, the Company began to develop the infrastructure necessary to
source products globally. The Company plans to achieve future growth in revenue
and profitability by sourcing products at lower costs from manufacturers
throughout the world. This strategy is designed to build on the Company's core
business strengths in layette and sleepwear product markets and will improve
product performance in the highly fragmented children's playwear market.
Wholesale sales in 1999 included a higher mix of off-price sales
(merchandise promoted at more than 25% off regular wholesale selling prices) to
the secondary market. Off-price sales as a percentage of consolidated sales in
1999 were 5.4% compared to 4.0% in 1998. The higher level of off-price sales
reflects management's efforts to reduce excess inventory levels.
The Company's retail comparable store sales increased 3.2% in 1999. In 1999,
the Company opened ten stores and closed eight stores. There were 146 stores in
operation at January 1, 2000 compared with 144 at January 2, 1999.
GROSS PROFIT. Gross profit for fiscal 1999 decreased 5.9% to
$142.8 million from $151.7 million in fiscal 1998. Gross profit as a percentage
of net sales in fiscal 1999 decreased to 34.4% from 37.2% in fiscal 1998. The
reduction in gross profit percentage reflects the higher mix of off-price sales
to the secondary market, costs incurred to close sewing facilities in Georgia
and Mississippi, the costs to phase-down and close the Company's textile
facility in Georgia and the curtailment of production to lower inventory levels.
In 1999, the Company closed three sewing facilities in the United States.
Such closures and expansion of sewing capacity in Mexico, Costa Rica and the
Dominican Republic have enabled the Company to decrease costs in the most
labor-intensive component of its supply chain.
In 1998, the Company expanded its ability to source its products from
manufacturers throughout the world. Such products are manufactured, labeled and
packaged to Carter's specifications. The Company's global sourcing strategy
provides the opportunity to source a broader range of products at lower costs
and eliminates the requirement for internal textile capacity. Lower levels of
throughput in the Company's textile facility in Barnesville, Georgia and related
unabsorbed manufacturing costs negatively impacted 1999 financial results.
12
<PAGE>
In recent years, the domestic textile knit industry experienced increasing
levels of overcapacity caused by consolidation and higher levels of global
sourcing. Overcapacity has resulted in lower prices offered by the Company's
fabric suppliers, which in turn, reduced the cost advantages previously gained
by Carter's through vertical integration.
As more fully described in Note 17 to the accompanying financial statements,
the Company began to phase-down production in its textile facility in the third
quarter of 1999. All textile processes, with the exception of printing, were
closed by the end of fiscal 1999. The Company has negotiated fabric-sourcing
arrangements with its suppliers which will meet current and future fabric
requirements. While there may be no near-term cost reduction by sourcing fabrics
externally, the Company expects to purchase lower cost fabrics from Mexico and
Central America within the next two to three years.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 1999 decreased 2.8% to $120.8 million from
$124.3 million in fiscal 1998. Selling, general and administrative expenses as a
percentage of net sales decreased to 29.1% in fiscal 1999 from 30.5% in fiscal
1998. The improvement in selling, general and administrative expenses as a
percentage of net sales is attributed to a reduction in discretionary spending,
including marketing expenditures and incentive compensation to mitigate the
impact of manufacturing plant closing costs and production curtailment.
NONRECURRING CHARGE. The nonrecurring charge of $7.1 million in fiscal 1999
represents the $6.9 million writedown in the carrying value of assets related to
the closure of the textile facility, and the $0.2 million loss on property,
plant and equipment related to the closures of the three domestic sewing
facilities.
OPERATING INCOME. Operating income for fiscal 1999 decreased to
$14.9 million from $27.4 million in fiscal 1998 as a result of the net effect of
lower margins earned on wholesale sales, the cost of exiting certain
manufacturing facilities, and the reduction of selling, general and
administrative expenses. Operating income as a percentage of net sales decreased
to 3.6% in fiscal 1999 from 6.7% in fiscal 1998.
INTEREST EXPENSE. Interest expense for fiscal 1999 decreased to
$17.7 million from $18.5 million in fiscal 1998. This decrease reflects lower
interest expense on lower average borrowings under the Company's revolving
credit facility. At January 1, 2000, outstanding debt aggregated
$142.3 million, of which $42.3 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 $423,000. At January 1, 2000, there were no borrowings under
the Company's $65.0 million revolving credit facility. The Company had
outstanding letters of credit of $6.0 million as of January 1, 2000.
INCOME TAXES. The Company's 1999 effective tax rate of 30% was less than
the prior year's effective tax rate of 41% due to the effect of permanent tax
differences, primarily goodwill amortization, in relation to the change in
pre-tax income (loss).
NET (LOSS) INCOME. As a result of the factors described above, the Company
reported a net loss of $(2.0) million in fiscal 1999 compared to net income of
$5.3 million in fiscal 1998.
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 included Baby Basics
(high volume products for every day use such as
13
<PAGE>
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 11.9% to
$151.7 million from $135.6 million in fiscal 1997. Gross profit as a percentage
of net sales in fiscal 1998 decreased to 37.2% from 37.4% in fiscal 1997. The
reduction in gross profit percentage reflects the startup costs incurred in the
development of sewing capacity in Mexico.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 1998 increased 10.4% to $124.3 million from
$112.5 million in fiscal 1997. Selling, general and administrative expenses as a
percentage of net sales decreased to 30.5% in fiscal 1998 from 31.0% 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.
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.
14
<PAGE>
Net cash provided by operating activities in the fiscal years 1999, 1998 and
1997 was $38.9 million, $9.5 million and $4.1 million, respectively.
The net cash flow provided by operating activities in fiscal 1999 was
$38.9 million, an increase of $29.4 million compared to fiscal year 1998. This
increase was driven primarily by a $21.8 million (21.5%) reduction in
inventories. Inventories at January 1, 2000 were $79.6 million compared with
$101.4 million at January 2, 1999. The reduction in inventory and revolver
borrowings was driven by new management disciplines and measurements implemented
at the end of 1998 which included the:
- rationalization of fabrics and trims to increase the productivity of raw
materials;
- development of "pull-based" planning disciplines to better match
production to consumer demand;
- clustering of manufacturing processes to reduce cycle times; and
- implementation of performance metrics to drive desired results.
The Company invested $12.7 million, $18.0 million and $14.0 million in
capital expenditures during fiscal years 1999, 1998 and 1997, respectively.
Although there are no material commitments for capital expenditures, the Company
plans capital expenditures of approximately $20.0 million in fiscal 2000.
At January 1, 2000, the Company had approximately $142.3 million of
indebtedness outstanding, consisting of $100.0 million of Notes, $42.3 million
in term loan borrowings under the Senior Credit Facility and no borrowings
outstanding under the $65.0 million revolving credit portion of the Senior
Credit Facility (exclusive of approximately $6.0 million of outstanding letters
of credit). At January 1, 2000, the Company had approximately $59.0 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. 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.
15
<PAGE>
SEASONALITY
The Company experiences seasonal fluctuations in its sales and
profitability, with generally lower sales and gross profit in the first and
second quarters of its fiscal year. The Company believes that seasonality of
sales and profitability is a factor that affects the baby and children's apparel
industry generally and is primarily due to retailers' emphasis on 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 over 90% of its sewing production from its
offshore operations as well as contractors. 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 Company's operating results are subject to risk from interest rate
fluctuations on debt which carries variable interest rates. At January 1, 2000,
outstanding debt aggregated $142.3 million, of which $42.3 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 $423,000.
YEAR 2000
The Year 2000 ("Y2K") issue was the result of computer programs using two
digits rather than four to define the applicable year. The Company's Y2K
remediation efforts were completed in the fourth quarter of 1999. As a result of
these efforts, the Company experienced no significant Y2K related problems as of
the date of this filing. However, there is no assurance that the Company will
not be negatively impacted by the Y2K situation in the future. The Company will
continue to monitor this situation and expeditiously remediate any issues that
may arise. The Company's total cost was approximately $4.0 million on its Y2K
project, of which $2.8 million was related to new point of sale registers for
the Company's retail outlet stores.
16
<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........................... 18
Consolidated Balance Sheets at January 1, 2000 and January
2, 1999................................................... 19
Consolidated Statements of Operations for the fiscal years
ended January 1, 2000, January 2, 1999 and January 3,
1998...................................................... 20
Consolidated Statements of Cash Flows for the fiscal years
ended January 1, 2000, January 2, 1999 and January 3,
1998...................................................... 21
Consolidated Statements of Changes in Common Stockholder's
Equity for the fiscal years ended January 1, 2000, January
2, 1999 and January 3, 1998............................... 22
Notes to Consolidated Financial Statements.................. 23
</TABLE>
17
<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
stockholder's equity present fairly, in all material respects, the consolidated
financial position of The William Carter Company and its subsidiaries (the
"Company") as of January 1, 2000 and January 2, 1999, and the consolidated
results of their operations and their cash flows for the years ended January 1,
2000, January 2, 1999 and January 3, 1998, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Stamford, Connecticut
March 24, 2000
18
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,415 $ 3,986
Accounts receivable, net of allowance for doubtful
accounts of $2,765 in 1999 and $2,500 in 1998........... 34,405 34,834
Inventories............................................... 79,636 101,408
Prepaid expenses and other current assets................. 3,863 3,433
Assets held for sale...................................... 1,000 --
Deferred income taxes..................................... 10,276 11,725
-------- --------
Total current assets.................................... 132,595 155,386
Property, plant and equipment, net.......................... 51,776 59,674
Assets held for sale........................................ 950 --
Tradename, net.............................................. 92,083 94,583
Cost in excess of fair value of net assets acquired, net.... 27,457 30,191
Deferred debt issuance costs, net........................... 5,514 6,850
Other assets................................................ 2,758 2,544
-------- --------
Total assets............................................ $313,133 $349,228
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 900 $ 900
Accounts payable.......................................... 19,532 18,887
Other current liabilities................................. 30,655 36,119
-------- --------
Total current liabilities............................... 51,087 55,906
Long-term debt.............................................. 141,400 166,700
Deferred income taxes....................................... 36,564 39,632
Other long-term liabilities................................. 11,565 9,569
-------- --------
Total liabilities....................................... 240,616 271,807
-------- --------
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........................ 18,902 18,682
-------- --------
Common stockholder's equity:
Common stock, par value $.01 per share, 1,000 shares
authorized, issued and outstanding...................... -- --
Additional paid-in capital................................ 53,711 56,811
(Accumulated deficit) retained earnings................... (96) 1,928
-------- --------
Common stockholder's equity............................... 53,615 58,739
-------- --------
Total liabilities and stockholder's equity.............. $313,133 $349,228
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
19
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 1, JANUARY 2, JANUARY 3,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................................... $414,596 $408,182 $362,954
Cost of goods sold.......................................... 271,844 256,482 227,332
-------- -------- --------
Gross profit................................................ 142,752 151,700 135,622
Selling, general and administrative......................... 120,773 124,278 112,531
Nonrecurring charge......................................... 7,124 -- --
-------- -------- --------
Operating income............................................ 14,855 27,422 23,091
Interest expense............................................ 17,748 18,525 17,571
-------- -------- --------
(Loss) income before income taxes........................... (2,893) 8,897 5,520
(Benefit from) provision for income taxes................... (869) 3,616 2,429
-------- -------- --------
Net (loss) income........................................... (2,024) 5,281 3,091
Dividend requirements and accretion on redeemable preferred
stock..................................................... (2,653) (2,653) (2,675)
-------- -------- --------
Net (loss) income applicable to common stockholder.......... $ (4,677) $ 2,628 $ 416
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
20
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 1, JANUARY 2, JANUARY 3,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $ (2,024) $ 5,281 $ 3,091
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization........................... 18,191 16,946 15,122
Writedown and loss on property, plant and equipment and
other................................................. 7,183 387 153
Deferred tax (benefit) provision........................ (2,676) 1,040 870
Effect of changes in operating assets and liabilities:
Decrease (increase) in accounts receivable............ 429 (4,700) (10,875)
Decrease (increase) in inventories.................... 21,772 (13,769) (7,047)
(Increase) decrease in prepaid expenses and other
assets.............................................. (1,769) 111 2,876
(Decrease) increase in accounts payable and other
liabilities......................................... (2,215) 4,201 62
Other................................................. -- -- (163)
--------- --------- --------
Net cash provided by operating activities........... 38,891 9,497 4,089
--------- --------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment....... 364 31 48
Capital expenditures...................................... (12,726) (17,991) (14,013)
--------- --------- --------
Net cash used in investing activities............... (12,362) (17,960) (13,965)
--------- --------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit.................... 89,850 114,750 107,000
Payments of revolving line of credit...................... (114,250) (103,350) (94,000)
Payments of other debt.................................... (900) (900) (900)
Payments of financing costs............................... -- (217) (650)
Borrowings on capital leases.............................. 558 -- --
Payments of capital lease obligation...................... (458) -- --
Capital contributions from Holdings....................... -- 60 --
Payments of preferred stock dividends..................... (2,433) (2,433) (2,447)
Payments of other dividends to Holdings................... (507) (700) (1,183)
Other..................................................... 1,040 980 4,354
--------- --------- --------
Net cash (used in) provided by financing
activities........................................ (27,100) 8,190 12,174
--------- --------- --------
Net (decrease) increase in cash and cash equivalents........ (571) (273) 2,298
Cash and cash equivalents at beginning of period............ 3,986 4,259 1,961
--------- --------- --------
Cash and cash equivalents at end of period.................. $ 3,415 $ 3,986 $ 4,259
========= ========= ========
</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 CHANGES IN COMMON STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(ACCUMULATED
ADDITIONAL DEFICIT)
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
-------- ---------- ------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 28, 1996................................ $ -- $59,566 $(2,078)
Accrued dividends and accretion on redeemable preferred
stock..................................................... (1,662) (1,013)
Other dividends............................................. (1,183)
Net income.................................................. 3,091
---- ------- -------
BALANCE AT JANUARY 3, 1998.................................. -- 56,721 --
Capital contributions from Holdings......................... 90
Accrued dividends and accretion on redeemable preferred
stock..................................................... (2,653)
Other dividends............................................. (700)
Net income.................................................. 5,281
---- ------- -------
BALANCE AT JANUARY 2, 1999.................................. -- 56,811 1,928
Capital contributions from Holdings......................... 60
Accrued dividends and accretion on redeemable preferred
stock..................................................... (2,653)
Other dividends............................................. (507)
Net loss.................................................... (2,024)
---- ------- -------
BALANCE AT JANUARY 1, 2000.................................. $ -- $53,711 $ (96)
==== ======= =======
</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.)
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 (the
"Acquisition Closing Date"), 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 (the "Acquisition") from MBL Life Assurance Corporation,
CHC Charitable Irrevocable Trust and certain management stockholders for a total
financed purchase price of $226.1 million.
For purposes of identification and description, the Company is referred to
as the "Predecessor" for the period prior to the Acquisition.
The Acquisition was accounted for by the purchase method. Accordingly, the
assets and liabilities of the Predecessor were adjusted, at the Acquisition
date, to reflect the allocation of the purchase price based on estimated fair
values.
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 its plants located in the southern United States, Costa Rica, the
Dominican Republic and Mexico. The Company also sources its products through
contractual arrangements throughout the world. Products are manufactured for
wholesale distribution to major domestic retailers and for the Company's 146
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.
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 78%, 59% and 47% of the Company's sewing production for the fiscal
years 1999, 1998 and 1997, respectively. Total net assets (primarily property,
plant and equipment and inventory) of the international subsidiaries were
approximately $15.5 million at January 1, 2000. 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 1, 2000 and
January 2, 1999 and results of operations for the fiscal years ended January 1,
2000, January 2, 1999 and January 3, 1998. The fiscal year ended January 1, 2000
(fiscal 1999) contains 52 weeks, January 2, 1999 (fiscal 1998) contains 52 weeks
and the fiscal year ended January 3, 1998 (fiscal 1997) contains 53 weeks.
23
<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)
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 nine and four banks at
January 1, 2000 and January 2, 1999, respectively.
ACCOUNTS RECEIVABLE:
Approximately 75% of the Company's gross accounts receivable at January 1,
2000 and January 2, 1999 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 1, 2000 and
January 2, 1999, 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 less accumulated
depreciation and amortization which includes the amortization of assets recorded
under capital leases. 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 and amortization are
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 and fixed assets purchased under capital leases
are amortized over the lesser of the asset life or related lease term.
TRADENAME AND COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED:
Cost in excess of fair value of net assets acquired ("goodwill") represents
the excess of the cost of the Acquisition over the fair value of the net assets
acquired.
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 1, 2000 and January 2, 1999 was $7,917,000 and $5,417,000,
respectively. Accumulated amortization of goodwill at January 1, 2000 and
January 2, 1999 was $2,739,000 and $1,931,000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company reviews long-lived assets, including property, plant and
equipment and certain intangibles (tradename and goodwill), for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such an asset may not be recoverable. Intangibles are also reviewed at least
annually. Management determines whether there has been a permanent impairment
24
<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)
IMPAIRMENT OF LONG-LIVED ASSETS: (CONTINUED)
on such assets held for use in the business by comparing anticipated
undiscounted future cash flows from operating activities involving the asset to
the carrying value of the asset. The amount of any resulting impairment will be
calculated using the present value of the same cash flows. The factors
considered in this assessment would include operating results, trends and
prospects, as well as the effects of demand, competition and other economic
factors. Long-lived assets to be disposed of are valued at the lower of carrying
amount or net realizable value.
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 $1,336,000, $1,347,000 and
$1,287,000 for the years ended January 1, 2000, January 2, 1999 and January 3,
1998, respectively.
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 9).
INCOME TAXES:
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). In accordance with SFAS 109, the deferred tax provision is
determined under the liability method. Deferred tax assets and liabilities are
recognized based on differences between the book and tax bases of assets and
liabilities using presently enacted tax rates. Valuation allowances are
established when it is more likely than not that a deferred tax asset will not
be recovered. The provision for income taxes is generally the sum of the amount
of income taxes paid or payable for the year as determined by applying the
provisions of enacted tax laws to the taxable income for that year, the net
change during the year in the Company's deferred tax assets and liabilities, and
the net change during the year in any valuation allowances.
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid in cash approximated $16,368,000, $17,178,000 and $16,283,000
for the years ended January 1, 2000, January 2, 1999 and January 3, 1998,
respectively. Income taxes paid (received) in cash approximated $756,000,
$2,345,000 and ($900,000) for the years ended January 1, 2000, January 2, 1999
and January 3, 1998, respectively. Equipment acquired under capital leases
approximated $2,296,000 for the year ended January 1, 2000.
25
<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)
USE OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS:
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management of the Company
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities, at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 3--INVENTORIES:
Inventories consisted of the following ($000):
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
<S> <C> <C>
Finished goods.......................................... $57,695 $ 68,236
Work in process......................................... 13,842 21,286
Raw materials and supplies.............................. 8,099 11,886
------- --------
$79,636 $101,408
======= ========
</TABLE>
NOTE 4--PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following ($000):
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
<S> <C> <C>
Land, buildings and improvement......................... $ 17,443 $ 15,724
Machinery and equipment................................. 60,778 63,874
Equipment under capital leases.......................... 2,854 --
-------- --------
81,075 79,598
Accumulated depreciation and amortization............... (29,299) (19,924)
-------- --------
$ 51,776 $ 59,674
======== ========
</TABLE>
Depreciation and amortization expense ($000) was $12,420, $10,940 and $9,023
for the years ended January 1, 2000, January 2, 1999 and January 3, 1998,
respectively.
26
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM DEBT:
Long-term debt consisted of the following ($000):
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
<S> <C> <C>
Senior Credit Facility term loan........................ $ 42,300 $ 43,200
Senior Credit Facility revolving credit................. -- 24,400
10 3/8% Series A Senior Subordinated Notes due 2006..... 100,000 100,000
-------- --------
142,300 167,600
Current maturities...................................... (900) (900)
-------- --------
$141,400 $166,700
======== ========
</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 $6.0 million and
$6.9 million was used for letters of credit as of January 1, 2000 and
January 2, 1999, respectively. A commitment fee of 1/2 of 1% per annum is
charged on the unused portion of the revolving credit facility.
Borrowings under the Senior Credit Facility accrue interest at either the
Alternate Base Rate (the "Alternate Base Rate") or an adjusted Eurodollar Rate
(the "Eurodollar Rate"), at the option of the Company, plus the applicable
interest margin. The Alternate Base Rate at any time is determined to be the
highest of (i) the Federal Effective Funds Rate plus 1/2 of 1% per annum;
(ii) the Base CD Rate (as defined in the Credit Agreement) plus 1% per annum; or
(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
27
<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)
outstanding at January 1, 2000, January 2, 1999 and January 3, 1998 was 8.7%,
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 10 3/8% Senior Subordinated 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.
In November 1996, the Company issued 10 3/8% Senior Subordinated Notes. The
proceeds from the Notes were used to repay $90.0 million of Acquisition-related
financing and $5.0 million of the Senior Credit Facility term loan.
In April 1997, the Company completed a registration with the Securities and
Exchange Commission related to an Exchange Offer for $100.0 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.
28
<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)
Interest on the Notes is to be paid semi-annually on June 1 and December 1
of each year. 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 1, 2000 are as follows ($000):
2000--$900; 2001--$5,400; 2002--$13,500; 2003--$22,500 and 2004--$0.
The fair value of the Company's long-term debt was approximately
$11.0 million lower than and $8.0 million greater than the book value as of
January 1, 2000 and January 2, 1999, 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 1, 2000 and January 2,
1999, 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. 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 1999,
1998 and 1997 dividends totaling $2,433,000, $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 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.
29
<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)
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 1, 2000 and January 2, 1999, the authorized Common Stock of the
Company consisted of 1,000 shares of Common Stock, par value $.01 per share. At
January 1, 2000 and January 2, 1999, there were 1,000 shares of Common Stock
issued and outstanding, all of which were held of record by Holdings. All
outstanding shares of Common Stock are pledged to collateralize the Company's
obligations under the Senior Credit Facility. Pursuant to the restrictions
contained in the Senior Credit Facility and the Indenture, the Company is not
expected to be able to pay dividends on its Common Stock for the foreseeable
future, other than certain limited dividends or winding up of the Company. Each
share of Common Stock entitles the holder thereof to one vote on all matters to
be voted on by shareholders of the Company. In the event of a liquidation, the
holders of the Common Stock are entitled to share in the remaining assets of the
Company after payment of all liabilities and after satisfaction of all
liquidation preferences payable to the holders of Preferred Stock.
NOTE 8--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.
30
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--EMPLOYEE BENEFIT PLANS: (CONTINUED)
The following is a reconciliation of the Accumulated Post-Retirement Benefit
Obligations ("APBO") under this plan ($000):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
<S> <C> <C>
Benefit Obligation (APBO) at beginning of year.......... $10,589 $ 9,995
Service cost............................................ 166 169
Interest cost........................................... 639 649
Plan participants' contributions........................ 615 508
Actuarial (gain) loss................................... (1,216) 375
Benefits paid........................................... (1,446) (1,107)
------- -------
APBO at end of year..................................... $ 9,347 $10,589
======= =======
</TABLE>
The Company's contribution for these post-retirement benefit obligations was
$831,448 in fiscal 1999 and $599,005 in fiscal 1998.
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 1, JANUARY 2,
2000 1999
---------- ----------
<S> <C> <C>
Funded status (unfunded APBO)........................... $9,347 $10,589
Unrecognized net loss from past experience different
from that assumed and from changes in assumptions..... (511) (1,783)
------ -------
Accrued benefit cost.................................... $8,836 $ 8,806
====== =======
</TABLE>
The discount rates used in determining the APBO as of January 1, 2000 and
January 2, 1999 were 7.50% and 6.25%, respectively.
The components of post-retirement benefit expense charged to operations are
as follows ($000):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 1, JANUARY 2, JANUARY 3,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Service cost--benefits attributed to service
during the period.......................... $166 $169 $120
Interest cost on accumulated post-retirement
benefit obligation......................... 639 649 567
Amortization of net actuarial loss........... 56 34 --
---- ---- ----
Total net periodic post-retirement benefit
cost....................................... $861 $852 $687
==== ==== ====
</TABLE>
31
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--EMPLOYEE BENEFIT PLANS: (CONTINUED)
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 1, 2000 and January 2, 1999, the present value of
the estimated remaining payments under this plan was approximately $1.5 million
and $1.6 million, respectively, and is included in other current and long-term
liabilities.
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 three
months of service, during which at least 257 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): $997 for the
fiscal year ended January 1, 2000, $906 for the fiscal year ended January 2,
1999 and $785 for the fiscal year ended January 3, 1998.
NOTE 9--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 286 and 4,013 remained ungranted at January 1, 2000 and
January 2, 1999, 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 1999,
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. 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 seven years at January 1, 2000.
A summary of stock options (in number of shares that may be purchased) is
presented below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 1, JANUARY 2, JANUARY 3,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Outstanding, beginning of year............... 71,255 67,302 72,199
Granted...................................... 5,751 4,976 4,000
Exercised.................................... -- -- --
Forfeited.................................... (2,024) (1,023) (8,897)
Expired...................................... -- -- --
------ ------ ------
Outstanding, end of year..................... 74,982 71,255 67,302
====== ====== ======
Exercisable, end of year..................... 42,889 26,511 13,460
====== ====== ======
</TABLE>
32
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--MANAGEMENT STOCK INCENTIVE PLAN: (CONTINUED)
The fair value of each granted option, at the date of grant, has been
estimated to be $19.04 for options granted during 1999, $19.78 for options
granted during 1998 and $23.61 for options granted during 1997. The fair value
of the options granted was estimated using a minimum value method, at an assumed
risk free interest rate of 5.5% for options granted during 1999, 5% for options
granted during 1998 and 6.25% for options granted during 1997. The expected life
of the options was estimated to be 7.13 years for options granted during 1999,
and eight years for 1998 and 1997. 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 1, 2000, January 2,
1999 and January 3, 1998 would have been approximately $418,000, $414,000 and
$400,000, respectively, resulting in pro forma net (loss) income of
approximately $(2,287,000), $5,037,000 and $2,851,000, respectively.
NOTE 10--INCOME TAXES:
The provision for income taxes consisted of the following ($000):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 1, 2000 JANUARY 2, 1999 JANUARY 3, 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Current tax provision:
Federal.......................... $ 1,239 $1,999 $1,231
State............................ 275 495 278
Foreign.......................... 293 82 50
------- ------ ------
Total current provision........ 1,807 2,576 1,559
------- ------ ------
Deferred tax (benefit) provision:
Federal.......................... (2,372) 926 775
State............................ (304) 114 95
------- ------ ------
Total deferred (benefit)
provision.................... (2,676) 1,040 870
------- ------ ------
Total (benefit) provision...... $ (869) $3,616 $2,429
======= ====== ======
</TABLE>
33
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES: (CONTINUED)
Components of deferred tax assets and liabilities were as follows ($000):
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance......................... $ 1,886 $ 1,754
Inventory valuation................................... 5,108 4,775
Liability accruals.................................... 3,273 4,995
Deferred employee benefits............................ 4,039 3,848
Other................................................. 560 737
------- -------
Total deferred tax assets........................... $14,866 $16,109
======= =======
Deferred tax liabilities:
Tradename............................................. $34,071 $34,996
Depreciation.......................................... 6,615 8,744
Deferred employee benefits............................ 468 276
------- -------
Total deferred tax liabilities...................... $41,154 $44,016
======= =======
</TABLE>
The difference between the Company's effective income tax rate and the
federal statutory tax rate is reconciled below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 1, 2000 JANUARY 2, 1999 JANUARY 3, 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Statutory federal income tax
rate............................. (34)% 34% 34%
State income taxes, net of Federal
income tax benefit............... (1) 5 5
Goodwill amortization.............. 9 3 6
Other permanent items.............. (6) 1 1
Foreign income, net of tax......... 2 (2) (2)
--- -- --
Total.............................. (30)% 41% 44%
=== == ==
</TABLE>
The portion of income before income taxes attributable to foreign income was
approximately $704,000, $735,000 and $437,000 for the years ended January 1,
2000, January 2, 1999 and January 3, 1998, respectively.
NOTE 11--LEASE COMMITMENTS:
Annual rent expense ($000) under operating leases was $18,108, $16,739 and
$15,970 for the years ended January 1, 2000, January 2, 1999 and January 3,
1998, respectively.
34
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--LEASE COMMITMENTS: (CONTINUED)
Minimum annual rental commitments under current noncancelable operating
leases as of January 1, 2000 were as follows ($000):
<TABLE>
<CAPTION>
BUILDINGS, DATA TOTAL
PRIMARILY TRANSPORTATION PROCESSING MANUFACTURING NONCANCELABLE
FISCAL YEAR RETAIL STORES EQUIPMENT EQUIPMENT EQUIPMENT LEASES
- ----------- ------------- -------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
2000............................. $12,618 $ 496 $ 808 $ 555 $14,477
2001............................. 10,343 444 597 355 11,739
2002............................. 8,192 288 142 254 8,876
2003............................. 5,713 37 -- 72 5,822
2004............................. 3,564 11 -- 9 3,584
Thereafter....................... 5,299 -- -- -- 5,299
------- ------ ------ ------ -------
Total............................ $45,729 $1,276 $1,547 $1,245 $49,797
======= ====== ====== ====== =======
</TABLE>
Future annual lease commitments under capital lease obligations are as
follows ($000):
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
2000...................................................... $1,006
2001...................................................... 1,006
2002...................................................... 525
Thereafter................................................ --
------
Total minimum obligations................................. 2,537
Interest.................................................. (141)
------
Present value of net minimum obligations.................. 2,396
Current portion included in other current liabilities..... (919)
------
Long-term obligations, included in other long-term
liabilities at January 1, 2000.......................... $1,477
======
</TABLE>
NOTE 12--CONTINGENCIES:
The Company is subject to various federal, state and local laws that govern
activities or operations that may have adverse environmental effects.
Noncompliance with these laws and regulations can result in significant
liabilities, penalties and costs. From time to time, operations of the Company
have resulted or may result in noncompliance with or liability pursuant to
environmental laws. The Company is in the process of resolving a potential
environmental claim associated with waste deposited at or near a landfill in
Lamar County, Georgia in the 1970's. In 1999, the Company established a reserve
to provide for its share of the total estimated costs required to resolve this
matter which are estimated to be less than $1.0 million. However, there can be
no assurance that this estimate will prove accurate. Generally, compliance with
environmental laws has not had a material impact on the Company's operations,
but there can be no assurance that future compliance with such laws will not
have a material adverse effect on the Company or its operations.
35
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--OTHER CURRENT LIABILITIES:
Other current liabilities consisted of the following ($000):
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
<S> <C> <C>
Accrued income taxes.................................... $ 8,528 $ 7,453
Accrued workers compensation............................ 2,913 4,157
Accrued health insurance................................ 1,907 1,771
Accrued incentive compensation.......................... 134 3,593
Other current liabilities............................... 17,173 19,145
------- -------
$30,655 $36,119
======= =======
</TABLE>
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>
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
Additions, charged to expense........................ 2,435 5,306
Writeoffs............................................ (2,170) (3,187)
------- -------
Balance, January 1, 2000............................... $ 2,765 $ 5,237
======= =======
</TABLE>
NOTE 15--RELATED PARTY TRANSACTIONS:
In connection with the closing of the Acquisition, the Company entered into
an agreement for management advisory and consulting services (the "Management
Agreement") with Investcorp International, Inc. ("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 January 2000, a loan to an officer in the amount of $4.3 million was
issued, the proceeds of which were used by the officer to repay a previous loan
from the Company in the amount of $1.5 million. The $1.5 million loan was
scheduled to be repaid in October 2001. The January 2000 loan is payable in
annual installments of $600,000 commencing on March 31, 2002, and thereafter on
each anniversary thereof until such principal amount and all accrued and unpaid
interest thereon has been
36
<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)
repaid. The loan is collateralized by the officer's stock of Holdings and bears
interest at the average rate paid by the Company under the revolving portion of
its senior credit facility. The loan is prepayable with 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 $507,000, $700,000 and $1,183,000 for the fiscal
years ended January 1, 2000, 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 amount
of $507,000, $320,000 and $1,183,000 for the fiscal years ended January 1, 2000,
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 1999 and 1998, Holdings made $60,000 and $90,000,
respectively, in capital contributions to the Company in connection with the
issuance of shares of Holdings' stock to certain employees of the Company. The
$60,000 1999 transaction and $30,000 of the 1998 transaction involved no cash
proceeds, and the Company recognized these amounts as compensation expense.
NOTE 16--SEGMENT INFORMATION:
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 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 146, 144 and 138 at January 1, 2000, January 2, 1999 and January 3,
1998, 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 manufacturing 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.
37
<PAGE>
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SEGMENT INFORMATION: (CONTINUED)
Retail results do not include allocations 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.
The table below presents certain segment information for the periods
indicated ($000):
<TABLE>
<CAPTION>
WHOLESALE
RETAIL AND OTHER TOTAL
-------- --------- --------
<S> <C> <C> <C>
Year ended January 1, 2000:
Sales....................................... $183,312 $231,284 $414,596
EBITDA...................................... $ 39,966 $ (1,132) $ 38,834
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
</TABLE>
A reconciliation of total segment EBITDA to total consolidated (loss) income
before income taxes is presented below ($000):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 1, 2000 JANUARY 2, 1999 JANUARY 3, 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Total EBITDA for reportable
segments......................... $ 38,834 $ 43,021 $ 36,926
Depreciation and amortization
expense.......................... (16,855) (15,599) (13,835)
Interest expense................... (17,748) (18,525) (17,571)
Nonrecurring charge................ (7,124) -- --
-------- -------- --------
Consolidated (loss) income before
income taxes..................... $ (2,893) $ 8,897 $ 5,520
======== ======== ========
</TABLE>
The table below represents inventory by segment at ($000):
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2, JANUARY 3,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Wholesale and Other........................... $58,269 $ 81,817 $73,097
Retail........................................ 21,367 19,591 14,542
------- -------- -------
$79,636 $101,408 $87,639
======= ======== =======
</TABLE>
Wholesale and Other inventories include inventory produced and warehoused
for the Retail segment.
38
<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 following represents property, plant and equipment, net, by geographic
area as of ($000):
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2, JANUARY 3,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
United States................................. $41,417 $49,178 $45,836
International................................. 10,359 10,496 7,175
------- ------- -------
$51,776 $59,674 $53,011
======= ======= =======
</TABLE>
The Company's international operations consist primarily of sewing
facilities and, accordingly, no revenues are recorded at these locations.
NOTE 17--TEXTILE PLANT PHASE-DOWN
Historically, the Company met most of its fabric requirements through its
textile operations located in Barnesville, Georgia.
During 1999, the Company developed a plan to take advantage of alternative
fabric sourcing opportunities and, in the third quarter of 1999, began to
phase-down production in its textile operations. All textile processes, with the
exception of printing, were discontinued by the end of fiscal 1999. The Company
has negotiated supply arrangements with its fabric vendors.
Financial results for 1999 include a nonrecurring charge of $6,865,000
representing the impairment adjustment required to reduce the carrying value of
land, buildings and equipment associated with the textile facility in
Barnesville, GA to their estimated net realization value of $1,950,000. These
assets are presented as assets held for sale on the accompanying January 1, 2000
balance sheet. It is estimated that approximately $1,000,000 of equipment will
be sold during the current year with the remaining $950,000 of land, buildings
and equipment sold in future years.
During 1999, the Company also closed three domestic sew plants. The net loss
on property, plant and equipment related to the closures totaled $259,000 and is
included in the 1999 nonrecurring charge.
39
<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............................... 60 Chairman of the Board of Directors, President and
Chief Executive Officer.
Joseph Pacifico...................................... 50 President-Marketing.
Charles E. Whetzel, Jr............................... 49 Executive Vice President-Manufacturing.
David A. Brown....................................... 42 Executive Vice President-Business Planning &
Administration and Director.
Michael D. Casey..................................... 39 Senior Vice President and Chief Financial Officer.
Christopher J. O'Brien............................... 41 Director.
Charles J. Philippin................................. 49 Director.
Christopher J. Stadler............................... 35 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 35 years, has been
in senior executive positions for nearly 23 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
40
<PAGE>
Company and Bassett-Walker, Inc. Mr. Brown also held personnel focused positions
with Blue Bell, Inc. and Milliken & Company earlier in his career.
MICHAEL D. CASEY joined the Company in 1993 as Vice President--Finance and
was named Senior Vice President--Finance in 1997. 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 CSK Auto Corporation, Harborside Healthcare, Inc.,
NationsRent, Independent Wireless One and Synthetic Industries (SIND
Holdings, 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 Carvel Holdings, Werner Holding Co. Inc., CSK Auto Corporation,
Harborside Healthcare, Inc., Stratus Computer Inc., Burnham, NationsRent and
Saks, Incorporated.
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, Stratus Computer, Inc. and
Independent Wireless One.
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 1999
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".
41
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY COMPENSATION (a)
- ----------------------------------------------------------------------------------- ---------- ----------------
<S> <C> <C>
Frederick J. Rowan, II.............................................................
Chairman of the Board of Directors, President and Chief Executive Officer $ 595,833 $ 442,290
Joseph Pacifico....................................................................
President--Marketing $ 387,500 $ 197,399
Charles E. Whetzel, Jr.............................................................
Executive Vice President--Manufacturing $ 260,417 $ 110,238
David A. Brown.....................................................................
Executive Vice President-Business Planning & Administration and Director $ 260,417 $ 75,372
Michael D. Casey...................................................................
Senior Vice President and Chief Financial Officer $ 208,333 $ 115,471
</TABLE>
- ------------------------
(a) There were no bonuses earned in 1999. Other annual compensation includes
supplemental retirement plan benefits, automobile allowances, insurance
premiums and medical cost reimbursement. Other compensation for Mr. Casey
includes 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 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
42
<PAGE>
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 1, 2000,
options to purchase up to 74,982 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 1, 2000,
members of the Company's management owned 120,037 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.
43
<PAGE>
CLASS D VOTING STOCK:
<TABLE>
<CAPTION>
NUMBER OF Percent of
NAME SHARES (a) Class (a)
- ------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
INVESTCORP S.A.(b)(c)................................................... 5,000 100.0%
SIPCO Limited(d)........................................................ 5,000 100.0
CIP Limited(e)(f)....................................................... 4,600 92.0
Ballet Limited(e)(f).................................................... 460 9.2
Denary Limited(e)(f).................................................... 460 9.2
Gleam Limited(e)(f)..................................................... 460 9.2
Highlands Limited(e)(f)................................................. 460 9.2
Noble Limited(e)(f)..................................................... 460 9.2
Outrigger Limited(e)(f)................................................. 460 9.2
Quill Limited(e)(f)..................................................... 460 9.2
Radial Limited(e)(f).................................................... 460 9.2
Shoreline Limited(e)(f)................................................. 460 9.2
Zinnia Limited(e)(f).................................................... 460 9.2
INVESTCORP Investment Equity Limited(c)................................. 400 8.0
</TABLE>
- ------------------------
(a) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of, 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.
44
<PAGE>
(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.
45
<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
In connection with the closing of the Acquisition, the Company entered into
an agreement for management advisory and consulting services with Investcorp
International, Inc. ("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 January 2000, a loan to an officer in the amount of $4.3 million was
issued, the proceeds of which were used by the officer to repay a previous loan
from the Company in the amount of $1.5 million. The $1.5 million loan was
scheduled to be repaid in October 2001. The January 2000 loan is payable in
annual installments of $600,000 commencing on March 31, 2002, and thereafter on
each anniversary thereof until such principal amount and all accrued and unpaid
interest thereon has been repaid. The loan is collateralized by the officer's
stock of Holdings and bears interest at the average rate paid by the Company
under the revolving portion of its senior credit facility. The loan is
prepayable with proceeds of any disposition of the officer's stock in Holdings.
46
<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 27, 2000.
<TABLE>
<S> <C> <C>
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
</TABLE>
Date: March 27, 2000
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.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ FREDERICK J. ROWAN, II Chairman of the Board of Directors, President
------------------------------------------- and Chief Executive Officer (Principal
Frederick J. Rowan, II Executive Officer)
/s/ DAVID A. BROWN Executive Vice President-Business Planning &
------------------------------------------- Administration and Director
David A. Brown
/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
</TABLE>
46
<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 1, 2000 and January 2,
1999
Consolidated Statements of Operations for the fiscal years ended
January 1, 2000, January 2, 1999 and January 3, 1998
Consolidated Statements of Cash Flows for the fiscal years ended
January 1, 2000, January 2, 1999 and January 3, 1998
Consolidated Statements of Changes in Common Stockholder's Equity
for the fiscal years ended January 1, 2000, January 2, 1999 and
January 3, 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: None
3. Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C>
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 on March 25, 1997 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 March 25,
1997 between the Company and BT Securities Corporation,
Bankers Trust International plc, Chase Securities Inc. and
Goldman, Sachs & Co., incorporated herein by reference to
Exhibit 4.2 to the Company's Registration Statement on
Form S-4.
10.1 Employment Agreement between the Company and Frederick J.
Rowan, II, incorporated herein by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-4.
10.2 Employment Agreement between the Company and Joseph
Pacifico, incorporated herein by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-4.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C>
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 incorporated herein by reference to
Exhibit 10.8 to the Company's 1998 Annual Report on
Form 10-K.
10.9 Promissory Note dated January 1, 2000 between the Company
and Frederick J. Rowan, II.
10.10 Stock Pledge Agreement dated January 1, 2000 between the
Company and Frederick J. Rowan, II.
10.11 Receipt and Promissory Note Termination Agreement dated
January 1, 2000 between the Company and Frederick J.
Rowan, II.
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>
48
<PAGE>
Exhibit 10.9
PROMISSORY NOTE
$4,336,445 New York, New York
January 1, 2000
FOR VALUE RECEIVED, the undersigned, Frederick J. Rowan II (the
"Payor"), hereby promises to pay to the order of The William Carter Company, or
its successor or assign (the "Holder"), at the office of The William Carter
Company, 1590 Adamson Parkway, Suite 400, Morrow, Georgia 30260, Attn: Michael
D. Casey, in lawful money of the United States of America in immediately
available funds, the principal sum of FOUR MILLION THREE HUNDRED THIRTY-SIX
THOUSAND FOUR HUNDRED FORTY-FIVE DOLLARS ($4,336,445), together with any accrued
and unpaid interest on such principal amount from time to time outstanding,
which sum shall be due and payable in installments of $600,000 (or such lesser
amount as remains outstanding) commencing on March 31, 2002 and thereafter on
each anniversary thereof until such principal amount and all accrued and unpaid
interest thereon has been repaid.
From the date hereof, interest (i) shall accrue on the outstanding
principal amount hereof at a rate which shall be calculated for each quarter of
part thereof of the Holder's fiscal year, and (ii) shall equal the average rate
paid by The William Carter Company under the revolving portion of its senior
credit facility during such period (or if there are no borrowings outstanding
during such period, the average rate that would have been paid thereunder), and
(iii) shall be calculated on the basis of the actual number of days elapsed over
365, from the date hereof to the date of payment.
The Payor hereby promises to pay interest, on demand, on any overdue
principal and, to the extent permitted by law, on any overdue interest, and on
any overdue amount under any instrument now or hereafter evidencing or securing
the indebtedness evidenced hereby, at a rate equal to the rate of interest set
forth above, plus 2%, calculated on the basis of the actual number of days
elapsed over 365, from the date such principal or interest was due to the date
of payment.
The Payor shall have the right at any time and from time to time on any
business day to prepay the principal amount of this Note, together with accrued
and unpaid interest thereon, in whole or in part, without penalty or premium,
upon at least two business days' prior written notice to the Holder hereof, such
notice to specify the prepayment date and the principal amount hereof to be
prepaid. In the event the Payor decides not to so prepay this Note in accordance
with any such notice delivered to the Holder hereof, the Payor shall so notify
the Holder hereof, not less than one business day before such prepayment would
otherwise have been made.
All amounts paid or prepaid by Payor hereunder shall be applied first to
the accrued and unpaid interest, and then to reduce the outstanding principal
amount under this Note.
All payment and prepayment of the principal hereof and interest hereon
and the respective dates thereof shall be endorsed by the Holder hereof on the
schedule attached hereto and made a part hereof, or on a continuation thereof
which shall be attached hereto and made a part hereof; PROVIDED, HOWEVER, that
the failure of the Holder hereof to make such a notation or any error in such a
notation shall not affect the obligations of the Payor under this Note.
<PAGE>
This Promissory Note is secured by that certain Stock Pledge Agreement,
dated as of even date herewith, between the Holder and the Payor (the "Stock
Pledge Agreement").
Notwithstanding anything to the contrary contained herein, in case of
the happening of any of the following events ("Events of Default"):
(i) default shall be made in the payment of the principal of or
interest on this Note when and as the same shall become due and payable,
whether at the due date thereof or at a date fixed for prepayment
thereof or otherwise;
(ii) a breach of any covenant contained in this Note, other than
the covenant to pay the principal of and interest on this Note, which
breach shall continue unremedied for thirty days after written notice by
the Holder;
(iii) the Payor shall (a) voluntarily commence any proceeding or
file any petition seeking relief under Title 11 of the United States
Code or any other Federal or state bankruptcy, insolvency, liquidation
or similar law, (b) consent to the institution of, or fail to controvert
in a timely and appropriate manner, any such proceeding or the filing of
any such petition, (c) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator or similar official for him
or for a substantial part of his property, (d) file an answer admitting
the material allegations of a petition filed against him in any such
proceeding, (e) make a general assignment for the benefit of creditors
or (f) become unable, admit in writing his inability or fail generally
to pay his debts as they become due;
(iv) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed in a court of competent jurisdiction
seeking (a) relief in respect of the Payor, or of a substantial part of
the property of the Payor, under Title 11 of the United States Code or
any other Federal or state bankruptcy, insolvency, receivership or
similar law or (b) the appointment of a receiver, trustee, Custodian,
sequestrator or similar official for the Payor or for a substantial part
of the property of the Payor; and such proceeding or petition shall
continue undismissed for 60 days or an order or decree approving or
ordering any of the foregoing shall continue unstayed and in effect for
60 days;
(v) an Approved Sale or an Initial Public Offering (each as
defined in the Stock Acquisition Agreement, dated as of October 30, 1996
between Carter Holdings, Inc. and the Payor (the "Stock Acquisition
Agreement")) of Carter Holdings, Inc., a Massachusetts corporation, or
The William Carter Company, a Massachusetts corporation, shall be
consummated;
(vi) an Event of Default (as defined in the Stock Pledge
Agreement) shall have occurred under the Stock Pledge Agreement;
(vii) Payor shall, for any reason, cease to be an employee of
Holder and the date set for repurchase of the Pledged Shares (as defined
in the Stock Pledge Agreement) pursuant to Section 4(a), 4(b) or 4(c) of
the Stock Acquisition Agreement, as the case may be, shall have passed;
2
<PAGE>
then, in any such event (other than an event described in paragraph (iii) or
(iv) above), the Holder hereof may declare the principal amount of this Note
then outstanding to be forthwith due and payable, whereupon the principal
hereof, together with accrued and unpaid interest thereon, shall become
forthwith due and payable both as to principal and interest, without
presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived by the Payor (to the extent permitted by law), anything
contained herein to the contrary notwithstanding; and, in any event described in
paragraph (iii) or (iv) above, the principal amount of this Note, together with
accrued and unpaid interest thereon, shall automatically become due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by the Payor.
If any payment under this Note is not made when due, whether at maturity
or by acceleration, Payor shall pay all costs of collection whether or not suit
is filed hereon, on the Stock Pledge Agreement or otherwise, including, but not
limited to, reasonable attorneys' fees and all expenses incurred in connection
with the protection or realization of any collateral.
Payor hereby certifies and declares that all acts, conditions and things
required to be done and performed and to have happened precedent to the creation
and issuance of this Note, and to constitute this Note the legal, valid and
binding obligation of Payor, enforceable in accordance with the terms hereof,
have been done and performed and happened in due and strict compliance with all
applicable laws.
The Payor hereby waives (to the extent permitted by law) diligence,
presentment, demand, protest and notice of any kind whatsoever except as
expressly required herein. The nonexercise by the Holder of any of its rights
hereunder or under the Stock Pledge Agreement in any particular instance shall
not constitute a waiver thereof in that or any subsequent instance. The Holder
shall at all times have the right to proceed against any portion of the security
held herefor in such order and in such manner as the Holder may select, without
waiving any rights with respect to any other security. No delay or omission on
the part of the Holder in exercising any right hereunder or under the Stock
Pledge Agreement or other agreement shall operate as a waiver of such right or
of any other right under this Note.
This Note may be assigned, pledged, hypothecated or otherwise
transferred by the Holder hereof.
Any notice to be given hereunder shall be in writing and shall be deemed
to have been given (i) when presented personally or (ii) three business days
after being deposited in a regularly maintained receptacle for the United States
Postal Service, postage prepaid, registered or certified, return receipt
requested addressed to the respective party at the address specified herein or
such other address as any party may from time to time designate by written
notice to the other as herein required.
The Payor irrevocably submits to the jurisdiction of (a) the Supreme
Court of the State of New York, New York County, and (b) the United States
District Court for the Southern District of New York, for the purposes of any
suit, action or other proceeding arising out of or relating to this Note.
Pledgor expressly waives any objection which he may have now or hereafter to the
laying of the venue or to the jurisdiction of any such suit, action or
proceedings.
3
<PAGE>
All agreements between Payor and the Holder hereof are expressly limited
so that in no contingency or event whatsoever, whether by reason of advancement
of the proceeds of the loan evidenced hereby, acceleration of maturity of the
unpaid principal balance hereof, or otherwise, shall the interest contracted
for, charged or received by the Holder exceed the maximum amount permissible
under applicable law. If, from any circumstance whatsoever, interest would
otherwise be payable to the Holder hereof in excess of the maximum lawful
amount, then IPSO FACTO, the interest payable to the Holder shall be reduced to
the maximum amount permitted under applicable law, and the amount of interest
for any subsequent period, to the extent less than that permitted by applicable
law, shall to that extent be increased by the amount of such reduction. If from
any circumstance the Holder hereof shall ever receive anything of value deemed
interest by applicable law in excess of the maximum lawful amount, an amount
equal to any excessive interest shall be applied to the reduction of the unpaid
principal balance due hereunder and not to the payment of interest, or if such
excessive interest exceeds the unpaid principal balance due hereunder, such
excess shall be refunded to Payor. All interest paid or agreed to be paid to the
Holder hereof shall, to the extent permitted by applicable law, be amortized,
prorated, allocated or spread throughout the full period until payment in full
of the principal balance due hereunder (including the period of any renewal or
extension) so that interest thereon for such period shall not exceed the maximum
amount permitted by applicable law. The provisions of this paragraph shall
control all agreements between the Payor and the Holder hereof.
Any provision of this Note that is declared invalid, illegal or
unenforceable in any jurisdiction shall not affect in any way the remaining
provisions hereof in such jurisdiction or render that or any other provision of
this Note invalid, illegal or unenforceable in any other jurisdiction.
This Note has been executed and delivered in the State of New York and
shall be governed and construed, and all rights and obligation hereunder shall
be determined, in accordance with the laws of the State of New York.
Executed and delivered by the undersigned as of this 1st day of January,
2000 in the County, City and State of New York.
Address for notices Payor
to the Payor:
/s/ FREDERICK J. ROWAN, II
- ------------------------------------------ --------------------------------
Frederick J. Rowan, II
- ------------------------------------------
<PAGE>
SCHEDULE OF PAYMENTS AND PREPAYMENTS
<PAGE>
Exhibit 10.10
STOCK PLEDGE AGREEMENT
This Stock Pledge Agreement (the "Agreement") is entered into as of
January 1, 2000 by and between Frederick J. Rowan, II ("Pledgor") and THE
WILLIAM CARTER COMPANY, a Massachusetts corporation (the "Secured Party").
W I T N E S S E T H
WHEREAS, the Secured Party has agreed to make a loan to Pledgor in the
aggregate amount of $4,336,445.00 and, as evidence thereof, Pledgor has executed
and delivered to the Secured Party a Promissory Note dated as of even date
herewith (the "Note");
WHEREAS, Pledgor holds an aggregate of 56,649.455 shares (the "Pledged
Shares") of the Class C Stock, par value $0.01 per share, of CARTER HOLDINGS,
Inc., a Massachusetts corporation ("CARTER HOLDINGS"); and
WHEREAS, as a condition to the making of the loan evidenced by the
Note, the parties contemplate that the Pledged Shares will be pledged and
delivered by the Pledgor to the Secured Party, with duly endorsed instruments of
transfer, as security for such loan.
NOW, THEREFORE, in consideration of the mutual covenants, conditions
and provisions contained herein and in the Note and for other good and valuable
consideration, the parties hereto agree as follows:
Section 1. DEFINITIONS. Capitalized terms used herein without
definition, which are defined in or by reference in the Note, shall have the
respective meanings specified therein.
Section 2. PLEDGE. Pledgor hereby conveys, pledges, assigns
and transfers to the Secured Party, and hereby grants to the Secured Party, a
valid, first priority security interest (the "Security Interest") in Pledgor's
right, title, interest in and to the following (the "Pledged Collateral"):
(a) the Pledged Shares and the certificates representing the Pledged
Shares, all dividends, cash, securities, instruments and other property from
time to time paid, payable or otherwise distributed in respect of or in exchange
for all or any part of the Pledged Shares and all proceeds thereof; and
(b) all securities issued by CARTER HOLDINGS, or any successor thereto,
from time to time acquired by Pledgor in substitution for or in addition to any
of the foregoing, whenever and however acquired, including without limitation
all stock of CARTER HOLDINGS, all securities convertible into or exchangeable
for such stock and all options, warrants and other rights to purchase such
stock, all certificates and instruments representing such securities, together
with the interest coupons (if any) attached thereto, and all dividends, cash,
securities, instruments and other property from time to time paid, payable or
otherwise distributed in respect of or in exchange for any or all of such
securities and all proceeds thereof.
<PAGE>
Section 3. SECURED OBLIGATIONS. The Security Interest shall secure for
the benefit of the Secured Party the following (collectively, the "Secured
Obligations"):
(a) payment and performance of each and every obligation, covenant and
agreement of the Pledgor now, or hereafter existing contained herein or in the
Note, whether for principal, interest, fees, expenses or otherwise, and any
amendments or supplements thereto, extensions or renewals thereof or
replacements therefor; and
(b) payment of all sums advanced upon an Event of Default or in
accordance herewith by Secured Party to protect the Pledged Collateral, with
interest thereon at the rate equal to the highest interest rate under the Note
as in effect from time to time;
in each case whether direct or indirect, joint or several, absolute or
contingent, liquidated or unliquidated, now or hereafter existing, renewed or
restructured, whether or not from time to time decreased or extinguished (except
as provided in Section 17 hereof) and later increased, created or incurred, and
including all indebtedness, obligations and liabilities of the Pledgor under any
instrument now or hereafter evidencing or securing any of the foregoing.
Section 4. DELIVERY OF COLLATERAL; ISSUANCE OF ADDITIONAL SHARES.
(a) All certificates or instruments representing or evidencing the
Pledged Shares shall be delivered to the Secured Party on the date hereof, and
shall be held by the Secured Party pursuant hereto at all times hereafter, and
all certificates and instruments representing or evidencing stock or other
securities acquired by the Pledgor after the date hereof and constituting
Pledged Collateral hereunder shall be delivered to the Secured Party immediately
upon, and held by the Secured Party at all times after, acquisition thereof by
Pledgor. All such certificates or instruments shall be in suitable form for
transfer by delivery, or shall be accompanied by duly executed instruments of
transfer or assignment in blank, all in form and substance satisfactory to the
Secured Party.
(b) Upon the occurrence and during the continuance of an Event of
Default hereunder, the Secured Party shall have the right, at any time in its
discretion, to transfer to or to cause to be registered on the books of CARTER
HOLDINGS in the name of the Secured Party or any of its nominees any or all of
the Pledged Collateral (with, in the discretion of the Secured Party, such
transfer or registration expressly empowering the Secured Party to vote shares
of stock included in the Pledged Collateral), subject only to the revocable
rights specified in Section 7(a). In addition, the Secured Party shall have the
right at any time to exchange certificates or instruments representing or
evidencing Pledged Collateral for certificates or instruments of smaller or
larger denominations.
Section 5. REPRESENTATIONS AND WARRANTIES; CERTAIN COVENANTS.
(a) Pledgor hereby represents and warrants that Pledgor is the legal
and equitable owner of the Pledged Collateral free and clear of all liens,
charges, encumbrances and security interests of every kind and nature, other
than Permitted Encumbrances (as defined below).
2
<PAGE>
(b) Pledgor covenants that:
(i) except for the Security Interest granted hereby and the
security interests permitted under or otherwise contemplated hereby
("Permitted Encumbrances"), Pledgor will not create, assume, incur or
permit to exist or to be created, assumed or incurred, directly, or
indirectly, any lien of any kind on, or any repurchase agreement with
respect to, the Pledged Collateral, and will defend the Pledged
Collateral against, and take such action as is necessary to remove, any
such lien, and will defend the Security Interest against the claims and
demands of all persons; and
(ii) Pledgor shall advise the Secured Party promptly, in
reasonable detail, of any lien or claim made or asserted against any of
the Pledged Collateral; and of the occurrence of any other event which
would have a material adverse effect on the enforceability of the
Security Interest created hereunder.
(c) Pledgor may, upon thirty (30) days prior notice to Secured Party,
transfer a part of the Pledged Collateral to one or more persons if: (i) the
person(s) acquiring such Pledged Collateral grant(s) to Secured Party a pledge
of such Pledged Collateral, on terms and conditions reasonably acceptable to
Secured Party; (ii) the ownership of such Pledged Collateral by such person(s)
would not cause Pledgor to breach any of his covenants set forth herein or cause
any Event of Default (or event that with giving of notice, lapse of time or both
could constitute an Event of Default); and (iii) each such person is otherwise
reasonably acceptable to Secured Party. Pledgor shall not otherwise transfer, or
consent to the transfer of, any of the Pledged Collateral.
Section 6. FURTHER ASSURANCES. Pledgor agrees that at any time and from
time to time, at the expense of Pledgor, Pledgor will promptly execute and
deliver all further instruments and documents, and take all further action that
the Secured Party may reasonably request, in order to perfect and protect the
Security Interest granted or intended to be granted hereby or to enable the
Secured Party to exercise and enforce its rights and remedies hereunder with
respect to any Pledged Collateral.
Section 7. VOTING RIGHTS; DIVIDENDS; ETC.
(a) So long as no Event of Default hereunder shall have occurred and be
continuing:
(i) Pledgor shall be entitled to exercise any and all voting
and other consensual rights (if any) pertaining to the Pledged
Collateral or any part thereof for any purpose not prohibited by the
terms of this Agreement; and
(ii) except as otherwise provided in Sections 4(b) and 7(c)
hereof, Pledgor shall be entitled to receive and retain any dividends,
cash and other property from time to time paid, payable or otherwise
distributed in respect of the Pledged Collateral.
3
<PAGE>
(b) Pledgor hereby irrevocably appoints the Secured Party as Pledgor's
proxyholder with respect to the Pledged Shares and any other voting securities
forming a part of the Pledged Collateral with full power and authority to vote
such Pledged Shares and other voting securities and to otherwise act with
respect to such Pledged Shares or other voting securities on behalf of such
Pledgor, PROVIDED that this proxy shall only be operative upon the occurrence of
an Event of Default and so long as such Event of Default continues. Such proxy
shall be irrevocable for so long as any of the Secured Obligations remain in
existence. Pledgor shall execute and deliver (or cause to be executed and
delivered) to the Secured Party all proxies and other instruments as the Secured
Party may reasonably request for the purpose of enabling the Secured Party to
exercise the voting and other rights which it is entitled to exercise pursuant
to this Section 7(b); and
(c) Upon the occurrence and during the continuance of an Event of
Default hereunder, all rights of the Pledgor to receive and retain dividends,
cash and other property, which they would otherwise be authorized to receive and
retain pursuant to Section 7(a)(ii), shall cease and all such rights shall
thereupon be vested in the Secured Party, who shall thereupon have the sole
right to receive and hold as Pledged Collateral such dividends, cash and other
property. All cash and other property received by Pledgor contrary to the
provisions of this Section 7(c) shall be received in trust for the benefit of
the Secured Party, shall be segregated from other property or funds of Pledgor
and shall be forthwith delivered to the Secured Party as Pledged Collateral in
the same form as so received (with any necessary transfer documents or
endorsements).
Section 8. DISPOSITIONS AND RELEASE OF COLLATERAL. Pledgor covenants
that Pledgor shall not enter into or perform any agreement to sell, lease,
transfer or otherwise dispose of all or any part of the Pledged Collateral
unless the Security Interest in such Pledged Collateral shall have been released
prior to the time such agreement is entered into.
Section 9. REASONABLE CARE. The Secured Party shall be deemed to have
exercised reasonable care in the custody and preservation of the Pledged
Collateral in its possession if the Pledged Collateral is accorded treatment
substantially equal to that which the Secured Party accords its own property, it
being understood that the Secured Party shall have no responsibility for (a)
ascertaining or taking action with respect to calls, conversions, exchanges,
maturities, tenders or other matters relative to any Pledged Collateral, whether
or not the Secured Party has or is deemed to have knowledge of such matters,
unless reasonably requested in writing to do so by Pledgor, or (b) taking any
necessary steps (other than steps taken in accordance with the standard of care
set forth above to maintain possession of the Pledged Collateral) to preserve
rights against any parties with respect to any Pledged Collateral.
Section 10. SECURED PARTY APPOINTED ATTORNEY-IN-FACT. Pledgor hereby
irrevocably appoints the Secured Party Pledgor's attorney-in-fact, with full
authority in the place and stead of Pledgor and in Pledgor's name or otherwise,
if Secured Party elects, upon an Event of Default, to take any action and to
execute any instrument which the Secured Party may deem reasonably necessary or
advisable to accomplish the purposes of this Agreement, including, without
limitation, to receive, endorse and collect all instruments made payable to
Pledgor representing any dividend, interest payment or other distribution in
respect of the Pledged
4
<PAGE>
Collateral or any part thereof and to give full discharge for the same, when and
to the extent permitted by this Agreement.
Section 11. SECURED PARTY MAY PERFORM. Upon the occurrence and during
the continuance of an Event of Default hereunder (including an Event of Default
resulting from a failure to perform any agreement contained herein), if Pledgor
fails to perform any agreement contained herein, the Secured Party may itself
perform, or cause performance of, such agreement, and the expenses of the
Secured Party incurred in connection therewith shall be payable by Pledgor.
Section 12. EVENTS OF DEFAULT; REMEDIES.
(a) The occurrence of any of the following events shall constitute an
event of default ("Event of Default") hereunder:
(i) Any Event of Default (as defined in the Note) shall have
occurred, which Event of Default shall not be waived or, if capable of
being cured, shall not be cured within the respective periods provided
in such Note;
(ii) Pledgor fails, breaches or defaults in the payment or
performance of any of the obligations, covenants or conditions
contained in this Agreement; or
(iii) Any statement, representation or warranty made or
furnished by Pledgor in connection with this Agreement or any other
writing delivered to the Secured Party in connection with this
Agreement and the transactions contemplated herein is false, misleading
or erroneous in any material respect when made.
(b) Upon or after the occurrence of an Event of Default:
(i) The Secured Party may exercise (in compliance with all
applicable securities laws) in respect of the Pledged Collateral, in
addition to other rights, powers and remedies provided for herein or
otherwise available to it, all the rights, powers and remedies of a
secured party after default under the Uniform Commercial Code in force
and effect in each state in which such rights, powers and remedies are
asserted, all of which rights, powers and remedies shall be cumulative
and not exclusive, to the extent permitted by applicable law.
(ii) The Secured Party may also, without notice except as
specified below, sell the Pledged Collateral or any part thereof in one
or more parcels at public or private sale, at any exchange, over the
counter or at any of the Secured Party's offices or elsewhere, for
cash, on credit or for future delivery, and at such price or prices and
upon such other terms as may be commercially reasonable or otherwise in
such manner as necessary to comply with applicable federal and state
securities laws. Pledgor agrees that the Secured Party shall not be
required to register or qualify any of the Pledged Collateral under
applicable state or federal securities laws in connection with any such
sale if the sale is effected in a manner that complies with all
applicable federal and state securities laws. The Secured
5
<PAGE>
Party shall be authorized at any such sale (if it deems it advisable to
do so) to restrict the prospective bidders or purchasers to persons who
will represent and agree that they are purchasing the Pledged
Collateral for their own account, for investment and not with a view to
the distribution thereof. Upon consummation of any such sale the
Secured Party shall have the right to assign, transfer and deliver to
the purchaser or purchasers at any such sale, and such purchasers shall
hold, the property sold absolutely free from any claim or right on the
part of the Pledgor, and Pledgor hereby waives (to the extent permitted
by law) all rights of redemption, stay or appraisal which he now has or
may have at any time in the future under applicable law now existing or
hereafter enacted.
(iii) The Secured Party shall give the Pledgor at least ten
(10) days' (or such longer period as shall be specified by applicable
law) notice of the time and place of any public sale or the time after
which any private sale is to be made, which Pledgor agrees shall
constitute commercially reasonable notification. At any such public
sale and (to the extent permitted by law) at any such private sale, the
Secured Party may bid, in whole or in part, in the form of cancellation
of Secured Obligations, and the Secured Party may purchase the whole or
any part of the Pledged Collateral. The Secured Party shall not be
obligated to make any sale of Pledged Collateral regardless of notice
of sale having been given. The Secured Party may adjourn any public or
private sale from time to time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned.
(iv) If a sale of all or any part of the Pledged Collateral is
made on credit or for future delivery, the Pledged Collateral so sold
may be retained by the Secured Party until the sale price is paid by
the purchaser or purchasers thereof, but the Secured Party shall not
incur any liability in case any such purchaser or purchasers shall fail
to take up and pay for the Pledged Collateral so sold and, in case of
any such failure, such Pledged Collateral may be sold again upon like
notice. Pledgor agrees to the maximum extent permitted by applicable
law that any sale of the Pledged Collateral conducted by the Secured
Party in accordance with the foregoing provisions of this Section shall
be deemed to be a commercially reasonable sale under applicable law.
(v) As an alternative to exercising the power of sale herein
conferred upon it, the Secured Party may proceed by a suit or suits at
law or in equity to foreclose the Security Interest and to sell the
Pledged Collateral, or any portion thereof, pursuant to a judgment or
decree of a court or courts of competent jurisdiction.
(vi) Any cash held by the Secured Party as Pledged Collateral
and all cash proceeds received by the Secured Party in respect of any
sale of, collection from, or other realization upon all or any part of
the Pledged Collateral shall be applied as follows: (a) first, to the
payment to the Secured Party of the costs and expenses of retaking,
holding and preparing for sale of the Pledged Collateral and any other
fees, expenses, claims, demands, losses, judgments, damages and
6
<PAGE>
liabilities payable to the Secured Party pursuant to any provision
hereof; and (b) second, in accordance with the provisions of the Note.
(vii) Any surplus of such cash or cash proceeds held by the
Secured Party and remaining after payment in full of all the Secured
Obligations shall be reassigned and redelivered as provided in Section
17 hereof.
Section 13. SECURITY INTEREST ABSOLUTE. All rights of the Secured Party
hereunder, the Security Interest, and all obligations of the Pledgor hereunder,
shall be absolute and unconditional irrespective of:
(a) any lack of validity or enforceability of the Note, any agreement
with respect to any of the Secured Obligations, or any other agreement or
instrument relating to any of the foregoing;
(b) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Secured Obligations, or any other amendment or
waiver of or any consent to and departure from the Note or any other agreement
or instrument;
(c) any exchange, release or non-perfection of any other collateral, or
any release of, amendment to, waiver of, consent to or departure from any
guaranty, for all or any of the Secured Obligations; and
(d) any other circumstance which might otherwise constitute a defense
available to, or a discharge of, Pledgor in respect of the Secured Obligations
or in respect of this Agreement.
Section 14. NOTICES. All notices, demands, requests, and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been given (i) when presented personally or (ii) three (3)
business days after being deposited in a regularly maintained receptacle for the
United States Postal Service, postage prepaid, registered or certified, return
receipt requested, addressed to the respective party, as the case may be, at the
following address, or such other address as any party may from time to time
designate by written notice to the others as herein required.
If to the Secured Party: The William Carter Company
1590 Adamson Parkway
Suite 400
Morrow, Georgia 30260
Attn: David A. Brown
If to Pledgor: Frederick J. Rowan, II
1835 Balleybunion Drive
Duluth, GA 30136
Section 15. AMENDMENTS AND WAIVERS. This Agreement may only be amended
by a document signed by the Secured Party and the Pledgor. No waiver of any
provision of this Agreement nor consent by the Secured Party to any departure by
Pledgor therefrom shall in any
7
<PAGE>
event be effective unless the same shall be in writing and signed by the Secured
Party. Any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given. No failure on the part of
the Secured Party to exercise, and no delay in exercising, any right hereunder
shall operate as a waiver thereof (except as provided above) nor shall any
single or partial exercise of any right hereunder preclude any other or further
exercise thereof or the exercise of any other right.
Section 16. ELECTION OF REMEDIES. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law. The Secured Party
shall have all of the rights and remedies granted herein and available at law or
in equity, and these same rights and remedies may be pursued separately,
successively or concurrently against Pledgor, at the sole discretion of the
Secured Party. In the event of a breach by any party to this Agreement of its
obligations under this Agreement, any party injured by such breach, in addition
to being entitled to exercise all rights granted by law, including recovery of
damages, shall be entitled to specific performance of its rights under this
Agreement. The parties agree that the provisions of this Agreement shall be
specifically enforceable, it being agreed by the parties that the remedy at law,
including monetary damages, for breach of any such provision will be inadequate
compensation for any loss and that any defense in any action for specific
performance that a remedy at law would be adequate is hereby waived.
Section 17. RELEASE OF PLEDGED COLLATERAL AND TERMINATION. Unless an
Event of Default shall have occurred and be continuing, the Pledged Collateral
shall be released from the pledge of this Agreement, and the Secured Party shall
reassign and redeliver (or cause to be reassigned and redelivered) to Pledgor,
or, subject to compliance with applicable law, to each person or persons as
Pledgor shall designate or to whoever may be lawfully entitled to receive such
surplus, against receipt, certificates representing the Pledged Shares (if any)
or such Pledged Collateral other than Pledged Shares (if any) as shall not have
been sold or otherwise applied by the Secured Party pursuant to the terms hereof
and shall still be held by it hereunder, together with appropriate instruments
of reassignment and release as follows: promptly after payment of any optional
prepayment of principal in respect of the Note, that number of Pledged Shares
(to the nearest whole share) and that amount of Pledged Collateral other than
Pledged Shares (to the nearest whole unit) determined by multiplying (i) the
fraction equaling the amount of such optional prepayment divided by the unpaid
principal amount of the Note immediately prior to such optional prepayment, by
(ii) the number of Pledged Shares or the amount of such other Pledged
Collateral, as the case may be, then subject to this Agreement. Upon payment in
full of the principal of and interest on the Note, the Secured Party shall
transfer or reassign and redeliver all remaining Pledged Collateral in such
manner and to such persons as provided for above in respect of partial
prepayments. Any transfer, redelivery or reassignment provided for above shall
be without recourse upon or warranty by the Secured Party (other than a warranty
that the Secured Party has not assigned its rights and interests hereunder to
any other person) and at the expense of Pledgor.
Section 18. CONTINUING SECURITY INTEREST; ASSIGNMENTS. This Agreement
shall create a continuing security interest in the Pledged Collateral and shall
(a) remain in full force and effect until termination as provided in Section 17,
(b) be binding upon the Pledgor, the Secured Party and their respective
successors and assigns, and (c) inure, together with the rights, powers and
remedies of the Pledgor and the Secured Party hereunder, to the benefit of the
8
<PAGE>
Pledgor and the Secured Party and their respective successors, transferees and
assigns, as the case may be. Notwithstanding the foregoing clause (b), Pledgor
shall not be permitted to assign this Agreement or any interest herein.
Section 19. APPLICABLE LAW AND JURISDICTION.
(a) The parties hereto expressly acknowledge and agree that this
Agreement shall be governed by and construed in accordance with the laws of the
State of New York. Pledgor hereby expressly and irrevocably agrees and consents
that any suit, action or proceeding arising out of or relating to this Agreement
arid the transactions contemplated herein may be instituted by the Secured Party
in any State or Federal court sitting in the County of New York, State of New
York, United States of America and, by the execution and delivery of this
Agreement, Pledgor expressly waives any objection which he may have now or
hereafter to the laying of the venue or to the jurisdiction of any such suit,
action or proceeding, and irrevocably submits generally and unconditionally to
the jurisdiction of any such court in any such suit, action or proceeding.
(b) Nothing contained in subsection (a) hereof shall preclude the
Secured Party from bringing any suit, action or proceeding arising out of or
relating to this Agreement or the Note in the courts of any place where Pledgor
or any of Pledgor's property or assets may be found or located. To the extent
permitted by the applicable laws of any such jurisdiction, Pledgor hereby
irrevocably submits to the jurisdiction of any such court and expressly waives,
in respect of any such suit, action or proceeding, the jurisdiction of any court
or courts which now or hereafter, by reason of his present or future domicile,
or otherwise, may be available to him. PLEDGOR AND THE SECURED PARTY HEREBY
WAIVE THE RIGHT TO A TRIAL BY JURY.
Section 20. SEVERABILITY. Any provision of this Agreement which is
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or non-authorization, without invalidating the remaining
provisions hereof or affecting the validity, enforceability or legality of such
provision in any other jurisdiction.
Section 2l. NUMBER AND GENDER. Whenever used herein, the singular
number shall include the plural and the plural the singular, and the use of any
gender shall be applicable to all genders.
Section 22. CAPTIONS. The captions, headings, and arrangements used in
this Agreement are for convenience only and do not and shall not be deemed to
affect, limit, amplify or modify the terms and provisions hereof.
Section 23. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered by their respective officers thereunto duly authorized,
as of the date first above written.
"PLEDGOR"
/s/ FREDERICK J. ROWAN, II
------------------------------
Frederick J. Rowan, II
"SECURED PARTY"
THE WILLIAM CARTER COMPANY
By: /s/ DAVID A. BROWN
--------------------------
Name: David A. Brown
Title: Executive Vice President
and Secretary
10
<PAGE>
Exhibit 10.11
RECEIPT AND TERMINATION AGREEMENT
This Receipt and Termination Agreement (this "Agreement") is entered
into on this January 1, 2000 by and between Frederick J. Rowan, II ("Rowan")
and THE WILLIAM CARTER COMPANY, a Massachusetts corporation (the "Company").
W I T N E S S E T H
WHEREAS, Rowan holds an aggregate of 56,649.455 shares (the "Pledged
Shares") of the Class C Stock, par value $0.01 per share, of CARTER HOLDINGS,
Inc., a Massachusetts corporation;
WHEREAS, the Company made a loan to Rowan in the aggregate amount of
$1,500,000 as of November 1, 1996, and, as evidence thereof, Rowan executed and
delivered to the Company a Promissory Note dated as of even date therewith (the
"1996 Note");
WHEREAS, as a condition to the making of the loan evidenced by the 1996
Note, the Pledged Shares were pledged and delivered by Rowan to the Company,
with duly endorsed instruments of transfer, as security for such loan, pursuant
to the terms of a Stock Pledge Agreement, dated as of November 1, 1996 (the
"1996 Pledge Agreement");
WHEREAS, Rowan wishes to borrow additional funds and to refinance the
loan made pursuant to the 1996 Note;
WHEREAS, the Company has agreed to make an additional loan to Rowan in
the aggregate amount of $4,336,445, with a portion of which Rowan will repay the
loan made pursuant to the 1996 Note, together with all accrued and unpaid
interest thereon, pursuant to the terms of a Promissory Note dated as of January
1, 2000 (the "New Note"); and
WHEREAS, as a condition to the making of the loan evidenced by the New
Note, the Rowan must execute a Stock Pledge Agreement, dated as of January 1,
2000 (the "New Pledge Agreement"), pursuant to which the Pledged Shares will
remain pledged and be retained by the Company, with duly endorsed instruments of
transfer, as security for such loan;
NOW, THEREFORE, in consideration of the mutual covenants, conditions
and provisions contained herein and in the Notes and for other good and valuable
consideration, the parties hereto agree as follows:
Section 1. AGREEMENTS.
(a) Rowan hereby acknowledges receipt of $4,336,445.
(b) The Company hereby acknowledges receipt of the executed
New Note.
(c) The Company hereby acknowledges receipt of all amounts due
and owing under the 1996 Note, and the 1996 Note is hereby surrendered to Rowan
for cancellation.
<PAGE>
(d) Each of the Company and Rowan hereby acknowledges receipt
of an executed counterpart of the New Pledge Agreement, and agree that the 1996
Pledge Agreement shall be of no further force and effect.
Section 2. APPLICABLE LAW AND JURISDICTION. The parties hereto
expressly acknowledge and agree that this Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
Section 3. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized, on the date first above written.
/s/ FREDERICK J. ROWAN, II
------------------------------
Frederick J. Rowan, II
THE WILLIAM CARTER COMPANY
By: /s/ DAVID A. BROWN
--------------------------
Name: David A. Brown
Title: Executive Vice President
and Secretary
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JAN-01-2000
<CASH> 3,415
<SECURITIES> 0
<RECEIVABLES> 37,170
<ALLOWANCES> 2,765
<INVENTORY> 79,636
<CURRENT-ASSETS> 132,595
<PP&E> 81,075
<DEPRECIATION> 29,299
<TOTAL-ASSETS> 313,133
<CURRENT-LIABILITIES> 51,087
<BONDS> 141,400
18,902
0
<COMMON> 0
<OTHER-SE> 53,615
<TOTAL-LIABILITY-AND-EQUITY> 313,133
<SALES> 414,596
<TOTAL-REVENUES> 414,596
<CGS> 271,844
<TOTAL-COSTS> 271,844
<OTHER-EXPENSES> 127,897
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,748
<INCOME-PRETAX> (2,893)
<INCOME-TAX> (869)
<INCOME-CONTINUING> (2,024)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,024)
<EPS-BASIC> 0
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</TABLE>
