================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------
FORM 10-K
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER:
333-51447
----------------------------------------
CARTER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 13-3912933
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1590 ADAMSON PARKWAY, SUITE 400
MORROW, GEORGIA 30260
(Address of principal executive offices, including zip code)
(770) 961-8722
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
Aggregate market value of voting and non-voting common equity held by
non-affiliates: None
Documents incorporated by reference: None
================================================================================
PART I
ITEM 1. BUSINESS
GENERAL
For purposes of this Report, "Holdings" refers to Carter Holdings, Inc.
and "Carter's" refers to The William Carter Company and its subsidiaries. On
October 30, 1996, Holdings acquired 100% of the outstanding capital stock of
Carter's. Holdings has substantially no assets or investments other than those
related to its investment in Carter's. The consolidated entity of Holdings and
Carter's is collectively hereinafter referred to as the "Company".
Carter's is the largest branded marketer and manufacturer of baby and
toddler apparel and a leading marketer and manufacturer of young children's
apparel. Over Carter's 136 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 484 department, specialty and discount store accounts, with an
estimated 7,997 store fronts, and through its 147 retail outlet stores. In
the fourth quarter of 2000, Carter's entered the discount channel by
launching its TYKES and BABY TYKES brands within the Target stores division
of Target Corporation ("Target").
Carter's generates a majority of its sales in the baby and toddler apparel
market which was approximately an $8.0 billion market in 2000. 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, 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 Carter's (the
"Acquisition"). Financing for the Acquisition was provided by (i) $56.1 million
of borrowings under a $100.0 million senior credit facility among Carter's,
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 Carter's, 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 12% Senior Subordinated Notes to
affiliates of Investcorp and certain other investors.
Carter's and Holdings are Massachusetts corporations. The principal
executive office of the Company is located at 1590 Adamson Parkway, Suite 400,
Morrow, Georgia 30260 and its telephone number is (770) 961-8722.
PRODUCTS AND MARKETS
The Company designs, manufactures, sources and markets a broad array of
baby, toddler and young children's apparel. The Company also licenses its brand
names to other companies to create a complete collection of coordinating
lifestyle products including bedding, strollers, underwear, shoes, room decor,
toys and more.
The Company's brand positioning is based on Celebrating Imagination which
is expressed through creative artwork in prints, colors and embroideries on
Carter's products. This positioning supports the Company's strategy of creating
quality core products that are differentiated through imaginative and creative
artistic application. Celebrating Imagination continues to provide growth
opportunities for the brand and is widely embraced by both retailers and
consumers.
BABY AND TODDLER
In 2000, total industry sales of baby and toddler apparel (newborn through
size 5T) were approximately $8.0 billion (industry sales, reported by The NPD
Group, Inc., are stated in retail sales dollars and therefore are not comparable
to the Company's sales which are reported in wholesale shipment dollars and
retail outlet store sales). Department and chain stores, which represent
Carter's primary distribution, account for approximately half this market.
Carter's is currently the leading supplier of branded baby and toddler apparel
in the United States with a 12% market share in its primary distribution
channels, more than twice that of its nearest branded competitor. In 2000,
total industry discount channel sales of baby and toddler apparel were
approximately $3.1 billion, approximately 39% of the total market.
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 2000,
Carter's generated $179.0 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 its distinctive print
designs, unique embroideries and the reputation
2
for quality Carter's has developed over its 136 year history. In 2000, Carter's
continued to introduce new layette programs targeted toward three consumer
groups: gift-givers, experienced mothers and first-time mothers. Just One Year
("JOY"), Limited Editions and Carter's Classics are complete nursery programs
designed for the first-time mother and gift-givers. Baby Basics, the core
component of Carter's layette business, provides the experienced mother with the
essentials in value-focused multi-packs. Carter'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 2000, Carter's generated $103.5 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 2000 introduction of flame retardant cotton sleepwear strengthened Carter's
leading position through product innovation. Carter's primary competitors in the
baby and toddler sleepwear market are private label manufacturers and licensed
character products.
PLAYWEAR. Baby and toddler playwear includes knit and woven cotton apparel
for everyday use. In fiscal 2000, Carter's generated $86.7 million in sales of
these products. Carter's continues to focus on strengthening its playwear
product offerings by introducing original print designs and innovative artistic
applications to drive sales growth and increase market share. Carter's
Celebrating Imagination brand theme has continued to create a strong competitive
differentiation for the brand in this marketplace. Management believes that this
focus, in addition to Carter's high brand name awareness, strong wholesale
customer relationships and expanded global sourcing capabilities will propel
Carter's sales and market share growth in this category. The baby and toddler
playwear market is highly fragmented, with no one branded competitor having more
than a 7% share of the market.
OTHER PRODUCTS. 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,
CARTER'S CLASSICS, TYKES and BABY TYKES name. In fiscal 2000, Carter's generated
$46.5 million in sales of these products.
TYKES AND BABY TYKES
Carter's launched the TYKES and BABY TYKES brands for baby and toddler
at Target in the fourth quarter of 2000. This comprehensive lifestyle brand
includes layette, sleepwear, baby and playwear along with a range of licensed
products. Such licensed products include hosiery, bedding, toys and room
decor products. The January 2001 introduction was launched with a nationwide
floor set that management believes will establish the TYKES and BABY TYKES
brands through a substantial presentation at Target stores along with a
comprehensive in store sign and fixture program. This program was shipped
into Target stores nationwide and represents Carter's initial entry into the
discount channel of distribution.
YOUNG CHILDREN'S
In 2000, total industry sales of young children's apparel (girls' sizes
4-6x and boys' sizes 4-7) were approximately $5.7 billion. Department and chain
stores, which represent Carter's primary distribution, account for approximately
half of this market. Carter's is the largest branded supplier of young
children's sleepwear products and also has a growing share of the branded young
children's playwear market.
SLEEPWEAR. Young children's sleepwear product offerings include basic
two-piece pajamas, long underwear and polyester blanket-fleece one-piece
sleepers. In fiscal 2000, Carter's generated $28.6 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 knit and
woven cotton apparel for everyday use. In fiscal 2000, Carter's generated $23.1
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 creative designs to increase its sales of young children's
playwear. The young children's playwear market is highly fragmented among
private label, licensed characters and branded competitors.
3
LICENSING
The Company licenses the CARTER'S, CARTER'S CLASSICS, TYKES and BABY TYKES
names to other companies for use on baby, toddler and young children's products
including bedding, outerwear, shoes, socks, room decor, toys, stationery,
strollers and hair accessories and related products. In 1998, the Company
entered into a license agreement for the rights to John Lennon's Real Love
artwork collection for use on children's apparel, accessories and related
products. In 1999, Carter's entered into an artwork agreement with Emu Namae, a
Japanese artist, to use his art on children's apparel, accessories and licensed
products. These artwork agreements are part of Carter's Limited Editions program
which utilizes partnerships with outside artists and concepts to further
differentiate the Carter's brand. In fiscal 2000, Carter's earned $5.8 million
in royalty income from the sale of licensed products.
PRODUCT DESIGN AND DEVELOPMENT
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 business and design staff to develop new business opportunities
specifically for its respective market. A separate art team that creates
exclusive prints, embroideries and other artistic applications for each product
team further strengthens the creative process. 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. Extensive 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, colors and embroideries are used to provide originality and
depth with a sophisticated graphic computer network which enhances artistic
talent.
Due to the importance of creative art, Carter's devotes particular effort
to consumer preference testing for colors, prints, artwork and silhouettes. Each
year, over 1,000 concepts are consumer-tested in focus groups in Carter'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
groups from the Company's merchandising team coordinate plans with the global
sourcing managers to ensure cost-effective execution and quality of the entire
line.
DISTRIBUTION AND SALES
The Company sells its products to wholesale accounts and through Carter's
retail outlet stores. In fiscal 2000, sales through the wholesale channel,
including discount channel revenues, accounted for 54% of total sales, while the
retail outlet channel accounted for 46% 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 sourcing requirements and benefits both the Company and its wholesale
customers by maximizing customers' in-stock positions, thereby improving sales
and profitability. The automatic reorder process has also been established with
Target, which began receiving TYKES and BABY TYKES products in the fourth
quarter of 2000. Carter's sleepwear and playwear products are planned and
ordered seasonally as new products are introduced.
RETAIL OPERATIONS
The Company currently operates 147 retail outlet stores in 39 states
featuring Carter's quality merchandise, complemented by select brand
accessories, apparel and licensed products. 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.
4
Business segment financial information for the wholesale and retail
segments is contained in ITEM 8 "Financial Statements and Supplementary Data",
Note 16 --"Segment Information" to the Consolidated Financial Statements, and is
incorporated herein by reference.
MARKETING
Management's strategy has been to promote Carter's brand image as the
leader in baby apparel and to consistently provide quality products at a value
to consumers. To this end, management employs a comprehensive four-step
marketing strategy which incorporates identifying core products through
extensive consumer preference testing; brand and product presentation at the
consumer point-of-purchase; mass marketing the brand name; and providing
consistent, premium service, including delivering and replenishing products on
time to fulfill customer and consumer needs.
Management believes that the Company has strengthened its brand image with
the consumer through its Celebrating Imagination brand theme that attempts to
capture the essence of childhood and a child's imagination as expressed through
creative artwork in prints and embroideries. The Company also attempts to
differentiate its products through innovative product designs, lifestyle
positioning, advertising with wholesale customers, store-in-store shops and
fixturing. Management believes that frequent meetings between Carter's
executives and senior representatives from its key wholesale customers help
maintain account relationships and further strengthen the brand's image in the
marketplace.
PRODUCT SOURCING
The Company continues to expand its global supply chain capabilities.
Consistent with this strategy, the Company closed its textile operations in
Barnesville, Georgia in December 1999 and fabric previously produced by the
Company is currently 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. 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 sourcing
arrangements are sufficient to meet current and planned operating requirements.
Management believes significant additional opportunities exist to further
optimize its supply chain. Such opportunities include the reduction of product
costs, cycle times and inventories. The Company will attempt to realize these
reductions through investments in advanced information systems, the expansion of
global sourcing relationships, reductions in SKUs and product complexity and the
focus on core product offerings.
DEMOGRAPHIC TRENDS
Demographic and psychographic trends support a strong and growing baby and
toddler market and help insulate the Company from seasonal and fashion
fluctuations. Highlights of these trends include:
- a strong birth market;
- more money being spent on babies than ever before;
- multiple births at record levels;
- 40% of all births are first births; and
- the number of grandparents as a growing and more affluent market.
In 1998 (the most current data available), 3.9 million births were
reported and demographers project a progressive increase in births over the next
20 years that will ultimately surpass the original baby boom. Today's mother is
more likely to be working outside the home, thus is more affluent and spending
more on her children's apparel. New families are being formed and higher levels
of spending are required for the child's first wardrobe.
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. Carter'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 Carter's does not compete
5
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
several 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 final stages of resolving an
environmental matter 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. These costs 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.
PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
The Company owns many trademarks and tradenames, including Carter's(R),
Carter's Growbody(R), Carter-Set(R), Jamakins(R), Today's Classics(R), Tykes(R)
and Baby Tykes(TM) as well as patents and copyrights, most of which are
registered in the United States and in 60 foreign countries. The Company
licenses the CARTER'S, CARTER'S CLASSICS, TYKES and BABY TYKES names and many of
its trademarks, tradenames and patents to third-party manufacturers to produce
and distribute children's apparel and related products such as diaper bags,
lamps, socks, strollers, hair accessories, outerwear, underwear, bedding, plush
toys and shoes. The Company licenses, under an agreement which expires at the
end of 2002, the rights to John Lennon's Real Love artwork collection for use on
children's apparel, accessories and related products. The Company's artwork
agreement with Emu Namae also expires in 2002. The Company has the right to
exercise renewal options.
EMPLOYEES
As of December 30, 2000, the Company had approximately 6,948 employees,
2,761 of which were employed on a full-time basis in the Company's domestic
operations, 997 of which were employed on a part-time basis in the Company's
domestic operations and 3,190 of which were employed on a full-time basis in the
Company's offshore operations. None of the Company's employees are unionized.
The Company has had no labor-related work stoppages and believes that its labor
relations are good.
ITEM 2. PROPERTIES
The Company operates 147 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 three 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 four buildings - two in Georgia, one in Connecticut
and one in New York. In February 2001, the Company entered into a ten-year lease
agreement for a new corporate office in Atlanta, Georgia. 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.
6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public trading market for Holdings Class A, Class C, Class D
or Common Stock. There were approximately 11, 22 and 11 holders of Holdings
Class A, Class C and Class D Stock at March 29, 2001, respectively. No Common
Stock was outstanding at March 29, 2001. Holdings has not paid dividends on any
class of stock to date and does not currently intend to pay dividends on any
class of stock in the future. The payment of dividends is restricted by the
Senior Credit Facility and by the provisions of the Series A and Series B Senior
Subordinated Notes.
During fiscal 2000, 1999 and 1998, Holdings repurchased 1,169, 8,450 and
5,358 shares, respectively, of its Class C Stock owned by former Company
employees for cash payments totaling approximately $70,000, $507,000 and
$320,000, respectively. In addition, during each of fiscal 2000 and 1999,
Holdings issued 1,000 shares of its Class C Stock to employees at a fair value
of $60,000. During fiscal 1998, Holdings sold 1,000 shares of Class C Stock
to an employee of the Company for $60,000 and issued 500 shares to another
employee at a fair value of $30,000.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and other data of Carter
Holdings, Inc. and its subsidiaries (the "Company") as of December 30, 2000,
January 1, 2000, January 2, 1999, January 3, 1998 and December 28, 1996 and for
the fiscal years ended December 30, 2000 ("fiscal 2000"), January 1, 2000
("fiscal 1999"), January 2, 1999 ("fiscal 1998") and January 3, 1998 ("fiscal
1997") and for the period from October 30, 1996 (inception) through December 28,
1996. On October 30, 1996, Carter Holdings, Inc. acquired 100% of the
outstanding capital stock of The William Carter Company ("Carter's"). For
purposes of identification, Carter's and its subsidiaries are also referred to
as "Predecessor" for periods prior to the Acquisition. Also set forth below is
selected financial and other data of the Predecessor for the period from
December 31, 1995 through October 29, 1996.
As a result of the Acquisition and certain adjustments made in connection
therewith, the results of operations of the Company are not comparable to those
of the Predecessor.
The selected financial data of the Company for fiscal 2000, 1999, 1998,
1997 and for the period from October 30, 1996 (inception) through December 28,
1996 were derived from the Company's audited Consolidated Financial Statements.
The selected financial data of the Predecessor were derived from the
Predecessor's audited Consolidated Financial Statements.
7
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".
(DOLLARS IN THOUSANDS)
THE COMPANY(a) PREDECESSOR
--------------------------------------------------------------------- -----------
OCT. 30, 1996
FISCAL YEARS (INCEPTION) DEC. 31, 1995
--------------------------------------------------- THROUGH THROUGH
2000 1999 1998 1997 DEC. 28, 1996 OCT. 29, 1996
--------- --------- --------- --------- ------------- -------------
OPERATING DATA:
Wholesale sales ............................ $ 256,094 $ 231,284 $ 236,486 $ 219,535 $ 28,506 $ 160,485
Retail sales ............................... 215,280 183,312 171,696 143,419 22,990 106,254
--------- --------- --------- --------- --------- ---------
Net sales .................................. 471,374 414,596 408,182 362,954 51,496 266,739
Cost of goods sold ......................... 293,340 271,844 256,482 227,332 31,631 169,167
--------- --------- --------- --------- --------- ---------
Gross profit ............................... 178,034 142,752 151,700 135,622 19,865 97,572
Selling, general and administrative ........ 137,513 120,773 124,278 112,531 16,749 80,156
Nonrecurring charges (b)(e) ................ -- 7,124 -- -- -- 8,834
--------- --------- --------- --------- --------- ---------
Operating income ........................... 40,521 14,855 27,422 23,091 3,116 8,582
Interest income ............................ (303) -- -- -- -- --
Interest expense ........................... 18,982 20,437 21,215 20,246 3,065 7,075
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes,
extraordinary item and cumulative effect
of change in accounting principle ........ 21,842 (5,582) 6,207 2,845 51 1,507
Provision for (benefit from)income taxes ... 8,835 (1,782) 2,697 1,391 51 1,885
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle ..................... 13,007 (3,800) 3,510 1,454 -- (378)
Extraordinary item, net of tax (c) ......... -- -- -- -- 2,351 --
Cumulative effect of change in accounting
principle, net of income tax
benefit of $217 (f) ...................... 354 -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss) .......................... $ 12,653 $ (3,800) $ 3,510 $ 1,454 $ (2,351) $ (378)
========= ========= ========= ========= ========= ==========
Net income (loss) available to
stockholders ............................... $ 12,653 $ (3,800) $ 3,510 $ 1,454 $ (2,351) $ (1,510)
========= ========= ========= ========= ========= ==========
Pro forma net income (loss) assuming
accounting change is applied
retroactively ............................ $ 13,007 $ (3,384) $ 3,348 $ 1,426 $ (2,639) $ (498)
========= ========= ========= ========= ========= ==========
BALANCE SHEET DATA (END OF PERIOD):
Working capital (d) ........................ $ 87,862 $ 83,471 $ 100,524 $ 88,273 $ 70,553
Total assets ............................... 327,545 314,944 351,295 334,565 321,036
Total debt, including current maturities ... 161,400 162,300 187,600 177,100 165,000
Stockholders' equity ....................... 69,596 56,953 61,200 57,920 57,649
CASH FLOW DATA:
Net cash provided by operating activities .. $ 24,197 $ 36,458 $ 7,064 $ 1,642 $ 7,095 $ 24,405
Net cash used in investing activities ...... (19,217) (12,362) (17,960) (13,965) (143,227) (4,007)
Net cash (used in) provided by financing
activities ............................... (4,698) (24,667) 10,623 14,621 134,263 (19,433)
OTHER DATA:
EBITDA, as defined (e) ..................... $ 58,041 $ 38,834 $ 43,021 $ 36,926 $ 5,530 $ 25,628
Gross margin ............................... 37.8% 34.4% 37.2% 37.4% 38.6% 36.6%
Depreciation and amortization .............. $ 17,520 $ 16,855 $ 15,599 $ 13,835 $ 2,414 $ 6,612
Capital expenditures ....................... 17,179 12,726 17,991 14,013 3,749 4,007
See Notes to Selected Financial Data.
8
NOTES TO SELECTED FINANCIAL DATA
(a) As a result of the Acquisition, Carter'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
December 30, 2000, 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 December 30, 2000, 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
Carter's incurred in connection with the Acquisition.
(c) The extraordinary item for the period October 30, 1996 (inception)
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 10 3/8% Notes in November 1996, net of income tax
effects.
(d) Represents total current assets less total current liabilities.
(e) 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 $1.0 million
for the period December 31, 1995 through October 29, 1996; and
(2) Management Equity Participation Plan expenses of $0.6
million for the period December 31, 1995 through October 29,
1996.
The Company has reported EBITDA as it is relevant for covenant analysis
under the $100.0 million 10 3/8% Notes 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.
(f) In fiscal 2000, the Company recorded the cumulative effect of a change
in accounting principle in order to comply with guidance provided by the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements."
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Consolidated Financial Statements of the Company and the
notes thereto. This report contains, in addition to historical information,
forward-looking statements that include risks and other uncertainties. The
Company's actual results may differ materially from those anticipated in these
forward-looking statements. Factors that might cause such a difference include
those discussed below, as well as general economic and business conditions,
competition and other factors discussed elsewhere in this report. The Company
undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of anticipated or unanticipated events.
GENERAL
The Company is a leading marketer and manufacturer of baby, toddler and
young children's apparel. The Company sells its products to 484 department,
specialty and discount store customers (54% of fiscal 2000 sales) and through
its 147 retail outlet stores (46% of fiscal 2000 sales).
Consolidated net sales have increased from $318.2 million in 1996 to
$471.4 million in 2000. During this period, wholesale sales have increased from
$189.0 million to $256.1 million and retail sales have increased from $129.2
million to $215.3 million. The increase in wholesale sales resulted primarily
from the success of product introductions and the strength of the Carter's brand
in the market place relative to branded and private label competitors. 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:
FISCAL YEARS
-----------------------
2000 1999 1998
---- ----- ----
STATEMENTS OF OPERATIONS:
Wholesale sales............................. 54.3% 55.8% 57.9%
Retail sales................................ 45.7 44.2 42.1
----- ----- -----
Net sales................................... 100.0 100.0 100.0
Cost of goods sold.......................... 62.2 65.6 62.8
----- ----- -----
Gross profit................................ 37.8 34.4 37.2
Selling, general and administrative expenses 29.2 29.1 30.5
Nonrecurring charge......................... -- 1.7 --
----- ----- -----
Operating income............................ 8.6 3.6 6.7
Interest expense, net....................... 4.0 4.9 5.2
----- ----- -----
Income (loss) before income taxes and
cumulative effect of change in accounting
principle................................. 4.6 (1.3) 1.5
Provision for (benefit from) income taxes... 1.9 (0.4) 0.7
----- ----- -----
Income (loss) before cumulative effect of
change in accounting principle............ 2.7% (0.9)% 0.9%
===== ===== =====
10
FISCAL YEAR ENDED DECEMBER 30, 2000 COMPARED WITH FISCAL YEAR ENDED JANUARY 1,
2000
NET SALES. Net sales for fiscal 2000 increased 13.7% to $471.4 million
from $414.6 million in fiscal 1999. This increase includes a 10.7% increase in
wholesale sales and a 17.4% increase in retail sales. Revenues from each of the
Company's major product markets, which are baby, sleepwear and playwear,
increased $18.8 million (12.0%), $20.4 million (18.2%) and $8.6 million (8.7%),
respectively, from 1999 to 2000.
The Company's total wholesale sales for fiscal 2000 increased to $256.1
million from $231.3 million in fiscal 1999. Excluding off-price and Tykes
sales, wholesale sales increased $26.3 million (12.6%) to $235.2 million in
2000 from $208.9 million in 1999. The increase in wholesale sales reflects
the growth of baby and sleepwear product lines of $14.7 million (14.1%) and
$17.0 million (22.7%), respectively, as compared to fiscal 1999. The
continued success of these lines reflects the benefit from improvements made
to the Company's products through its new product sourcing strategy and the
Company's focus on product innovation through creative prints and
embroideries. Included in 2000 wholesale sales are the sales of TYKES and
BABY TYKES products sold to Target in the fourth quarter of 2000 in an
initial launch in Target stores nationwide.
Wholesale sales in 2000 included a lower 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
2000 were 3.6% compared to 5.4% in 1999. The decrease in off-price sales
reflects the benefit from improved product development and inventory management
disciplines.
Retail sales for fiscal 2000 increased to $215.3 million from $183.3
million in fiscal 1999. Such increase was primarily attributed to the strong
performance of the playwear product line. Product performance was also the
driving force behind the Company's comparable retail store sales increase of
14.3% in 2000. In 2000, the Company opened seven stores and closed six stores.
There were 147 stores in operation at December 30, 2000 compared to 146 at
January 1, 2000.
GROSS PROFIT. Gross profit for fiscal 2000 increased 24.7% to $178.0
million from $142.8 million in fiscal 1999. Gross profit as a percentage of net
sales in fiscal 2000 increased to 37.8% from 34.4% in fiscal 1999. The
improvement in gross profit is attributed to a higher mix of retail revenues, a
lower mix of off-price sales and the benefit from cost reduction achieved
through increased levels of global sourcing.
In 1999, the Company curtailed production and ultimately closed its
textile facility, which produced substantially all of the Company's fabrics.
Gross profit in 1999 was negatively impacted by costs associated with this
closure and the closure of three sewing facilities in the United States. Fiscal
2000 was impacted favorably as a result of the successful transition to sourcing
100% of the Company's fabric requirements following the closure of the textile
facility and further movement of sewing production to the Company's offshore
facilities and third parties.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 2000 increased 13.9% to $137.5 million from
$120.8 million in fiscal 1999. Selling, general and administrative expenses as a
percentage of net sales were 29.2% in fiscal 2000 compared to 29.1% in fiscal
1999. The increase in selling, general and administrative expenses includes the
variable costs required to support higher revenue levels, investments in brand
marketing and retail partnerships and provisions for incentive compensation
partially offset by increased levels of royalty and licensing income.
OPERATING INCOME. Operating income for fiscal 2000 increased to $40.5
million from $14.9 million in fiscal 1999. Operating income as a percentage of
net sales increased to 8.6% in fiscal 2000 from 3.6% in fiscal 1999. Such
increase reflects the net effect of changes in gross profit and selling, general
and administrative expenses described above.
INTEREST EXPENSE, NET. Interest expense for fiscal 2000 decreased to $19.0
million from $20.4 million in fiscal 1999. This decrease reflects lower interest
expense on lower average borrowings under the Company's revolving credit
facility. Average daily revolver borrowings in 2000 decreased to $5.0 million
from $25.3 million in 1999. Lower average borrowings are primarily due to lower
average gross inventory levels resulting from improved inventory management
disciplines. In fiscal 2000, the Company earned approximately $303,000 in
interest income from overnight investments. At December 30, 2000, outstanding
debt aggregated $161.4 million, of which $41.4 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 $414,000. At December 30, 2000, there were
no borrowings under the Company's $65.0 million revolving credit facility. The
Company had outstanding letters of credit totaling $6.0 million as of December
30, 2000.
11
INCOME TAXES. The Company's 2000 effective tax rate of 40% was more than
the prior year's effective tax rate of 32% due to the effect of permanent tax
differences, primarily goodwill amortization. In 1999, such permanent
differences reduced the tax benefit related to the pre-tax operating loss.
NET INCOME (LOSS). Primarily as a result of the factors described above,
the Company reported net income of $12.7 million in fiscal 2000 compared to a
net loss of $(3.8) million in fiscal 1999.
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 have been
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 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.
In recent years, the domestic textile knit industry experienced increasing
levels of overcapacity caused by consolidation and higher levels of global
sourcing. Overcapacity 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.
12
As more fully described in Note 16 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 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 $20.4
million from $21.2 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 $162.3 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
totaling $6.0 million as of January 1, 2000.
INCOME TAXES. The Company's 1999 effective tax rate of 32% was less than
the prior year's effective tax rate of 43% 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 $(3.8) million in fiscal 1999 compared to net income of
$3.5 million in fiscal 1998.
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. Holdings is dependent upon dividends and other payments from
Carter's to fund its obligations and meet its cash needs. Accordingly, Holdings'
ability to pay interest on the $20.0 million of 12% Senior Subordinated Notes
and to repay the Notes at maturity will be dependent upon earnings and cash
flows of Carter's and payment of funds by Carter's to Holdings in the form of
dividends or loans. 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 by Carter's to
Holdings except under certain specified conditions. The Company does not expect
this to negatively impact Holdings' ability to meet its cash obligations.
Likewise at December 30, 2000 and January 1, 2000, Holdings was effectively
precluded from declaring or paying dividends on its capital stock.
Net cash provided by operating activities in fiscal years 2000, 1999 and
1998 was $24.2 million, $36.5 million and $7.1 million, respectively.
Net cash flow provided by operating activities in fiscal 2000 was $24.2
million, a decrease of $12.3 million compared to fiscal year 1999. This decrease
is attributed to the investments required to support higher revenue levels.
Year-end inventory levels grew to $92.4 million at fiscal year end 2000 from
$79.6 million at fiscal year end 1999. Average net inventory levels were $92.1
million in fiscal 2000 compared to $103.1 million in fiscal 1999.
13
The Company invested $17.2 million, $12.7 million and $18.0 million in
capital expenditures during fiscal years 2000, 1999 and 1998, respectively.
Although there are no material commitments for capital expenditures, the Company
plans capital expenditures of approximately $23.0 million in fiscal 2001.
At December 30, 2000, the Company had approximately $161.4 million of
indebtedness outstanding, consisting of $20.0 million of Holdings 12% Series B
Senior Subordinated Notes (due 2008), $100.0 million of 10 3/8% Series A Senior
Subordinated Notes (due 2006), $41.4 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 December 30,
2000, the Company had approximately $59.0 million of financing available under
the revolving credit portion of the Senior Credit Facility.
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. The Company is in
the process of negotiating the terms of the revolving credit portion of the
Senior Credit Facility to include an extension of the maturity date and to
increase the limitation for annual capital expenditures. No principal payments
are required on the $20.0 million or $100.0 million Notes prior to their
scheduled maturity in 2008 and 2006, respectively.
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. Holdings will fund its debt service requirements through
permitted dividend payments from Carter's.
EFFECTS OF INFLATION
The Company is affected by inflation primarily through the purchase of raw
materials, increased operating costs and expenses and higher interest rates. The
effects of inflation on the Company's operations have not been material in
recent years.
SEASONALITY
The Company experiences seasonal fluctuations in its sales and
profitability, with generally lower sales and gross profit in the first and
second quarters of its fiscal year. The Company believes that 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 December 30,
2000, outstanding debt aggregated $161.4 million, of which $41.4 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 $414,000.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CARTER HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants......................................... 16
Consolidated Balance Sheets at December 30, 2000 and January 1, 2000...... 17
Consolidated Statements of Operations for the fiscal years ended
December 30, 2000, January 1, 2000 and January 2, 1999................. 18
Consolidated Statements of Cash Flows for the fiscal years
ended December 30, 2000, January 1, 2000 and January 2, 1999........... 19
Consolidated Statements of Changes in Stockholders'
Equity for the fiscal years ended December 30, 2000,
January 1, 2000 and January 2, 1999.................................... 20
Notes to Consolidated Financial Statements................................ 21
15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Carter Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity present fairly, in all material respects, the
consolidated financial position of Carter Holdings, Inc. and its subsidiaries
(the "Company") as of December 30, 2000 and January 1, 2000 and the
consolidated results of their operations and their cash flows for the years
ended December 30, 2000, January 1, 2000 and January 2, 1999, in conformity
with accounting principles generally accepted in the United States of
America. 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
of America 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 our opinion.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for revenue recognition in fiscal 2000.
/s/ PricewaterhouseCoopers LLP
Stamford, Connecticut
March 12, 2001
16
CARTER HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 30, JANUARY 1,
2000 2000
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 3,697 $ 3,415
Accounts receivable, net of allowance for
doubtful accounts of $2,045 in 2000 and
$2,765 in 1999............................... 33,788 34,405
Inventories...................................... 92,435 79,636
Prepaid expenses and other current assets........ 4,971 3,863
Assets held for sale............................. 373 1,000
Deferred income taxes............................ 9,184 10,276
---------- ----------
Total current assets........................... 144,448 132,595
Property, plant and equipment, net................. 54,441 51,776
Assets held for sale............................... 950 950
Tradename, net..................................... 89,583 92,083
Cost in excess of fair value of net assets
acquired, net................................ 26,606 27,457
Deferred debt issuance costs, net.................. 5,724 7,325
Other assets....................................... 5,793 2,758
---------- ----------
Total assets................................... $ 327,545 $ 314,944
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............. $ 5,400 $ 900
Accounts payable................................. 19,223 19,532
Other current liabilities........................ 31,963 28,692
---------- ----------
Total current liabilities...................... 56,586 49,124
Long-term debt..................................... 156,000 161,400
Deferred income taxes.............................. 35,125 35,902
Other long-term liabilities........................ 10,238 11,565
---------- ----------
Total liabilities.............................. 257,949 257,991
---------- ----------
Commitments and contingencies
Stockholders' equity:
Class A Stock, nonvoting; par value $.01 per
share; 775,000 shares authorized; 752,808
shares issued and outstanding; liquidation
value of $.001 per share..................... 45,168 45,168
Class C Stock, nonvoting; par value $.01 per
share; 500,000 shares authorized; 242,192
shares issued; liquidation value of $.001
per share.................................... 14,532 14,532
Class C Treasury Stock, 31,186 shares at cost at
December 30, 2000; 31,017 shares at cost at
January 1, 2000.............................. (1,870) (1,860)
Class D Stock, voting; par value $.01 per share;
5,000 shares authorized, issued and
outstanding.................................. 300 300
Common Stock, voting; par value $.01 per share;
1,280,000 shares authorized; none issued or
outstanding.................................. -- --
Retained earnings (accumulated deficit)......... 11,466 (1,187)
---------- ----------
Total stockholders' equity................... 69,596 56,953
---------- ----------
Total liabilities and stockholders' equity... $ 327,545 $ 314,944
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements
17
CARTER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED
-------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
2000 2000 1999
------------ ---------- ---------
Net sales.............................. $ 471,374 $ 414,596 $ 408,182
Cost of goods sold..................... 293,340 271,844 256,482
---------- ---------- ---------
Gross profit........................... 178,034 142,752 151,700
Selling, general and administrative.... 137,513 120,773 124,278
Nonrecurring charge.................... -- 7,124 --
---------- ---------- ---------
Operating income....................... 40,521 14,855 27,422
Interest income........................ (303) -- --
Interest expense....................... 18,982 20,437 21,215
---------- ---------- ---------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle................. 21,842 (5,582) 6,207
Provision for (benefit from) income
taxes................................ 8,835 (1,782) 2,697
---------- ---------- ---------
Income (loss) before cumulative effect
of change in accounting principle.... 13,007 (3,800) 3,510
Cumulative effect of change in
accounting principle, net of income
tax benefit of $217.................. 354 -- --
---------- ---------- ---------
Net income (loss)..................... $ 12,653 $ (3,800) $ 3,510
========== ========== =========
Pro forma amounts assuming the
accounting change is
applied retroactively:
Net income (loss) ..................... $ 13,007 $ (3,384) $ 3,348
========== ========== =========
The accompanying notes are an integral part of the consolidated
financial statements
18
CARTER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED
-------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
2000 2000 1999
------------ ---------- ---------
Cash flows from operating activities:
Net income (loss) .......................................................... $ 12,653 $ (3,800) $ 3,510
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ............................................. 17,520 16,855 15,599
Amortization of debt issuance costs ....................................... 1,601 1,592 1,606
(Gain) loss and writedown on property, plant and equipment and other....... (21) 7,183 387
Deferred tax provision (benefit) .......................................... 248 (2,670) 1,092
Effect of changes in operating assets and liabilities:
Decrease (increase) in accounts receivable .............................. 617 429 (4,700)
(Increase) decrease in inventories ...................................... (12,799) 21,772 (13,769)
(Increase) decrease in prepaid expenses and other assets................. (1,129) (1,769) 111
Increase (decrease) in accounts payable and other liabilities ........... 5,507 (3,134) 3,228
-------- -------- --------
Net cash provided by operating activities............................ 24,197 36,458 7,064
-------- -------- --------
Cash flows from investing activities:
Capital expenditures ....................................................... (17,179) (12,726) (17,991)
Proceeds from sale of property, plant and equipment ........................ 252 364 31
Proceeds from assets held for sale ......................................... 546 -- --
Issuance of loan ........................................................... (4,336) -- --
Proceeds from loan.......................................................... 1,500 -- --
-------- -------- --------
Net cash used in investing activities................................ (19,217) (12,362) (17,960)
-------- -------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit ..................................... 62,900 89,850 114,750
Payments of revolving line of credit ....................................... (62,900) (114,250) (103,350)
Payments of other debt ..................................................... (900) (900) (900)
Payments of financing costs ................................................ -- -- (597)
Borrowings on capital leases ............................................... -- 558 --
Payments of capital lease obligation ....................................... (925) (458) --
Proceeds from sale of Class C Treasury Stock ............................... -- -- 60
Repurchase of capital stock ................................................ (70) (507) (320)
Other ...................................................................... (2,803) 1,040 980
-------- -------- --------
Net cash (used in) provided by financing activities.................. (4,698) (24,667) 10,623
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ......................... 282 (571) (273)
Cash and cash equivalents at beginning of period.............................. 3,415 3,986 4,259
-------- -------- --------
Cash and cash equivalents at end of period ................................... $ 3,697 $ 3,415 $ 3,986
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements
19
CARTER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(ACCUMULATED
CLASS C DEFICIT)
COMMON CLASS A CLASS C TREASURY CLASS D RETAINED
STOCK STOCK STOCK STOCK STOCK EARNINGS
------- --------- -------- --------- ---------- ------------
BALANCE AT JANUARY 3, 1998 ................................ $ -- $ 45,168 $ 14,532 $ (1,183) $ 300 $ (897)
Issuance of Class C Treasury Stock (1,500 shares)........ 90
Purchase of Class C Treasury Stock (5,358 shares)........ (320)
Net income............................................... 3,510
-------- ------- -------- -------- -------- ----------
BALANCE AT JANUARY 2, 1999 ................................ -- 45,168 14,532 (1,413) 300 2,613
Issuance of Class C Treasury Stock (1,000 shares)........ 60
Purchase of Class C Treasury Stock (8,450 shares)........ (507)
Net loss................................................. (3,800)
-------- ------- -------- -------- -------- ----------
BALANCE AT JANUARY 1, 2000 ................................ -- 45,168 14,532 (1,860) 300 (1,187)
Issuance of Class C Treasury Stock (1,000 shares)........ 60
Purchase of Class C Treasury Stock (1,169 shares)........ (70)
Net income .............................................. 12,653
-------- ------- -------- -------- -------- ----------
BALANCE AT DECEMBER 30, 2000 .............................. $ -- $45,168 $ 14,532 $ (1,870) $ 300 $ 11,466
======== ======= ======== ======== ======== ==========
The accompanying notes are an integral part of the consolidated
financial statements
20
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY:
Carter Holdings, Inc. ("Holdings") is a holding company whose primary
asset consists of an investment in 100% of the outstanding capital stock of The
William Carter Company, Inc. ("Carter's"). On October 30, 1996, Holdings, a
company organized on behalf of affiliates of INVESTCORP S.A. ("Investcorp"),
management and certain other investors, acquired 100% of the previously
outstanding common and preferred stock of Carter's (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, Carter's 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:
Carter's designs, manufactures, sources and markets premier branded
childrenswear under the CARTER'S, CARTER'S CLASSICS, TYKES and BABY TYKES
labels. Carter's manufactures its products in its plants located in the
southern United States, Costa Rica, the Dominican Republic and Mexico.
Carter's also sources its products through contractual arrangements
throughout the world. Products are manufactured for wholesale distribution to
major domestic retailers and for Carter's 147 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 Holdings,
Carter's and Carter's wholly-owned subsidiaries (all together the "Company").
These subsidiaries consist of operations in Costa Rica, the Dominican Republic
and Mexico. These operations represented approximately 85%, 78% and 59% of the
Company's sewing production for fiscal years 2000, 1999 and 1998, respectively.
Total net assets (primarily property, plant and equipment and inventory) of the
international subsidiaries were approximately $15.2 million and $15.5 million at
December 30, 2000 and January 1, 2000, respectively. All intercompany
transactions and balances have been eliminated in consolidation.
FISCAL YEAR:
The Company's fiscal year ends on the Saturday in December or January
nearest the last day of December. The accompanying consolidated financial
statements reflect the Company's financial position as of December 30, 2000 and
January 1, 2000 and results of operations for the fiscal years ended December
30, 2000, January 1, 2000 and January 2, 1999. Each of the fiscal years ended
December 30, 2000 (fiscal 2000), January 1, 2000 (fiscal 1999) and January 2,
1999 (fiscal 1998) contain 52 weeks.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments that have original
maturities of three months or less to be cash equivalents. The Company had cash
deposits, in excess of deposit insurance limits, in four and nine banks at
December 30, 2000 and January 1, 2000, respectively.
ACCOUNTS RECEIVABLE:
Approximately 75% of the Company's gross accounts receivable at December
30, 2000 and January 1, 2000 were from its ten largest wholesale customers,
primarily major retailers. Of these customers, four and three have individual
receivable balances in excess of 10% of gross accounts receivable at December
30, 2000 and January 1, 2000, respectively, but not more than 20%. Sales to
these customers represent comparable percentages to total wholesale revenues.
21
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out basis for
wholesale inventories and retail method for retail inventories) or market.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost 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 December 30, 2000 and January 1, 2000 was $10,417,000 and
$7,917,000, respectively. Accumulated amortization of goodwill at December 30,
2000 and January 1, 2000 was $3,478,000 and $2,739,000, 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 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 $1,601,000, $1,592,000
and $1,606,000 for the years ended December 30, 2000, January 1, 2000 and
January 2, 1999, respectively.
REVENUE RECOGNITION:
Revenues consist of sales to customers, net of returns and markdowns. The
Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB 101") in December 1999.
SAB 101 summarizes certain SEC staff views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company adopted the provisions of SAB 101 in the fourth quarter of fiscal 2000.
Accordingly, the Company revised its method of accounting for revenue
recognition retroactive to the beginning of fiscal 2000. Previously, the Company
had recognized revenue at the point of shipment for all wholesale customers.
However, for certain shipments, although title has passed, the Company
effectively retains the risks and rewards of ownership until the goods reach the
specified customer. Under the new accounting method, the Company now recognizes
revenue on wholesale sales at the point where both title has passed and all the
risks and rewards of ownership have been transferred. Retail store revenues
continue to be recognized at the time of sale, as the earnings process is then
complete.
22
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
REVENUE RECOGNITION:(CONTINUED)
The cumulative effect of the accounting change on prior years resulted in
a charge to income of approximately $354,000 (net of income tax benefit of
approximately $217,000), which is presented as a separate component of net
income for fiscal 2000. The effect of the change on fiscal 2000 operating
results was to decrease income before the cumulative effect of the accounting
change by $160,000 (which is net of income tax benefit of $98,000).
The pro forma amounts presented on the accompanying consolidated
statements of operations for fiscal 2000, 1999 and 1998 were calculated assuming
the accounting change was made retroactively to prior years.
Under the new accounting method, fiscal 2000 includes $2.2 million of net
sales that were included in the cumulative effect adjustment as of January 2,
2000, all of which would have been recognized in the first quarter of fiscal
2000. The impact of the accounting change on amounts previously reported for the
interim periods of fiscal 2000 is as follows ($000):
FIRST QUARTER SECOND QUARTER THIRD QUARTER
----------------------- ------------------------- ------------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
------------- -------- ------------- -------- ------------- --------
Net sales ................................ $ 98,123 $ 97,823 $ 97,070 $ 95,851 $145,457 $145,639
Gross profit ............................. $ 36,569 $ 36,355 $ 36,250 $ 35,798 $ 56,372 $ 56,477
Income (loss) before cumulative effect
of change in accounting principle ..... $ 547 $ 425 $ (88) $ (330) $ 7,531 $ 7,591
Cumulative effect of change in accounting
principle, net of income tax benefit of
$217 .................................. -- 354 -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss) ........................ $ 547 $ 71 $ (88) $ (330) $ 7,531 $ 7,591
======== ======== ======== ======== ======== ========
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 8).
ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS:
The Company has adopted the provisions of the consensus on Emerging
Issues Task Force Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs" ("Issue 00-10") during the fourth quarter of fiscal 2000. The Company
classifies shipping and handling fees billed to customers as revenue and
includes the corresponding cost in cost of goods sold. Shipping and handling
costs that are absorbed by the Company are included in selling, general and
administrative expenses and amounted to approximately $14,289,000,
$13,675,000 and $12,412,000 in fiscal 2000, fiscal 1999 and fiscal 1998,
respectively.
ROYALTIES AND LICENSE FEES:
The Company receives royalties and license fees, which are recognized as
earned. Royalties and license fees amounted to approximately $5.8 million, $4.2
million and $2.5 million for fiscal years 2000, 1999 and 1998, respectively, and
are included as a reduction of selling, general and administrative expenses in
the accompanying consolidated statements of operations.
23
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
INCOME TAXES:
The Company accounts for income taxes in accordance with 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 $17,380,000, $18,801,000 and
$19,614,000 for the years ended December 30, 2000, January 1, 2000 and January
2, 1999, respectively. Income taxes paid in cash approximated $6,774,000,
$756,000 and $2,345,000 for the years ended December 30, 2000, January 1, 2000
and January 2, 1999, respectively. Equipment acquired under capital leases
approximated $2,296,000 for the year ended January 1, 2000.
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.
RECENT ACCOUNTING PRONOUNCEMENTS:
In 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", ("SFAS 133"). In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - An Amendment of FASB
Statement No. 133". Provisions of SFAS 133 are effective as of the beginning of
fiscal 2001. SFAS 133 establishes accounting and reporting standards requiring
that all derivative instruments, including certain derivative instruments
embedded in other contracts, be recorded in the balance sheet as either assets
or liabilities measured at fair value. SFAS 133 requires that changes in the
derivative instrument's fair value be recognized currently in earnings, unless
specific hedge accounting criteria are met. SFAS 133 is not expected to have a
material impact on the financial position or results of operations of the
Company.
NOTE 3--INVENTORIES:
Inventories consisted of the following ($000):
DECEMBER 30, JANUARY 1,
2000 2000
------------ ----------
Finished goods............................. $ 70,713 $ 57,695
Work in process............................ 14,508 13,842
Raw materials and supplies................. 7,214 8,099
------------ ----------
$ 92,435 $ 79,636
============ ==========
24
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following ($000):
DECEMBER 30, JANUARY 1,
2000 2000
------------ ----------
Land, buildings and improvement............ $ 20,305 $ 17,443
Machinery and equipment.................... 73,043 60,778
Equipment under capital leases............. 2,854 2,854
------------ ----------
96,202 81,075
Accumulated depreciation and amortization.. (41,761) (29,299)
------------ ----------
$ 54,441 $ 51,776
============ ==========
Depreciation and amortization expense ($000) was $14,281, $12,420 and
$10,940 for the years ended December 30, 2000, January 1, 2000 and January 2,
1999, respectively.
NOTE 5--LONG-TERM DEBT:
Long-term debt consisted of the following ($000):
DECEMBER 30, JANUARY 1,
2000 2000
----------- ----------
Senior Credit Facility term loan.................. $ 41,400 $ 42,300
Senior Credit Facility revolving credit........... -- --
10 3/8% Series A Senior Subordinated Notes due
2006............................................ 100,000 100,000
12% Series B Senior Subordinated Notes due 2008... 20,000 20,000
----------- ----------
161,400 162,300
Current maturities................................ (5,400) (900)
----------- ----------
$ 156,000 $ 161,400
=========== ==========
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 (the "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. 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
of which $6.0 million was used for letters of credit as of December 30, 2000 and
January 1, 2000. A commitment fee of 1/2 of 1% per annum is charged on the
unused portion of the revolving credit facility. The Company is in the process
of negotiating the terms of the revolving credit portion of the Senior Credit
Facility to include an extension of the maturity date and to increase the
limitation for annual capital expenditures.
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 that accrue interest at the Eurodollar Rate is 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
25
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM DEBT: (CONTINUED)
interest margin with respect to Tranche B term loans is 2.50% per annum for
loans that accrue interest at the Eurodollar Rate and is 2.00% per annum for
loans that accrue interest at the Alternate Base Rate. The amendment provides
for additional reductions in the interest margin based on the achievement of
certain leverage ratios. The effective interest rate on variable rate Senior
Credit Facility borrowings outstanding at December 30, 2000, January 1, 2000 and
January 2, 1999 was 8.7%, 8.7% and 8.0%, respectively. Interest on the Senior
Credit Facility is payable quarterly.
The Senior Credit Facility requires that upon a public offering by
Holdings or any subsidiary of Holdings, of its common or other voting stock, 50%
of the net proceeds from such offering (only after satisfaction of certain
specified obligations) 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) 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 Carter's
and a pledge of all the issued and outstanding stock of Carter's, as well as
65% of the issued and outstanding stock of Carter's foreign subsidiaries.
The Senior Credit Facility imposes certain covenants, requirements and
restrictions on actions by Carter's 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
Carter's 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, Carter's 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, Carter's 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 10 3/8% Senior
Subordinated Notes issued in a November 1996 private placement. The terms and
provisions of the Notes were essentially unchanged.
Interest on the 10 3/8% Notes is to be paid semi-annually on June 1 and
December 1 of each year. The 10 3/8% 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:
YEAR REDEMPTION PRICE
---- ----------------
2001.................................. 105.188%
2002.................................. 103.458%
2003.................................. 101.729%
2004 and thereafter................... 100.000%
26
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM DEBT: (CONTINUED)
The 10 3/8% Notes are uncollateralized. The 10 3/8% 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.
The 12% Senior Subordinated Notes ("Holdings Notes") were originally
issued by Holdings to Investcorp affiliates on October 30, 1996 in connection
with the Acquisition.
In March 1997, pursuant to a Private Placement for $16,350,000 of the
$20,000,000 outstanding Holdings Notes, Holdings agreed to register the Holdings
Notes with the Securities and Exchange Commission. In July 1998, the Company
completed a registration with the Securities and Exchange Commission related to
an Exchange Offer for $20.0 million of Series B 12% Senior Subordinated Notes
for a like amount of the Holdings Notes. The terms and provisions of the
Holdings Notes were essentially unchanged.
Interest on the Holdings notes is to be paid semi-annually on May 1 and
November 1 of each year. The Holdings Notes are redeemable, in whole or in part,
at the option of the Company on or after the dates indicated, at the following
redemption prices, plus accrued interest to the date of redemption:
YEAR REDEMPTION PRICE
---- ----------------
December 31, 1996..................... 109.000%
October 1, 1999....................... 107.000%
October 1, 2000....................... 105.000%
October 1, 2001....................... 103.000%
October 1, 2002....................... 101.000%
October 1, 2003 and thereafter........ 100.000%
Upon a "Change in Control", (as defined in the indenture pursuant to which
the Holdings Notes were issued (the "Subordinated Note Indenture")), each holder
shall have the rights to require that Holdings repurchase all or any part of
such Holdings Notes at a purchase price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
purchase.
The Holdings Notes are general uncollaterized obligations of Holdings and
are subordinated in right of payment to all existing and future Senior
Indebtedness (as defined in the Subordinated Notes Indenture) of Holdings. In
addition, the Holdings Notes are subordinated to all debts, liabilities, and
obligations of Carter's. The Holdings Notes contain provisions and convenants,
including limitations on other indebtedness, dividends and distributions,
transactions with affiliates, sales of assets and subsidiary stock, liens and
certain other transactions.
As noted above, provisions of Carter's and Holdings' debt agreements
contain restrictions and limitations which effectively preclude dividends,
distribution, or advances from Carter's to Holdings, except under certain
specified conditions. Restricted net assets of Carter's at December 30, 2000 and
January 1, 2000 totaled approximately $65.4 million and $53.6 million,
respectively. Likewise, at December 30, 2000 and January 1, 2000, Holdings was
effectively precluded from declaring or paying dividends on its Capital Stock.
Aggregate minimum scheduled maturities of long-term debt subsequent to
December 30, 2000 are as follows ($000): 2001--$5,400; 2002--$13,500;
2003--$22,500; 2004--$0; 2005--$0; 2006--$100,000; 2007--$0 and 2008--$20,000.
The fair value of the Company's 12% Notes was deemed even with and was
approximately $2.0 million lower than the book value at December 30, 2000 and
January 1, 2000, respectively. The fair value of the 10 3/8% Notes was
approximately $3.0 million and $11.0 million lower than book value at
December 30, 2000 and January 1, 2000, 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. The fair value of the Company's
other long-term debt was deemed to approximate its carrying value as of
December 30, 2000 and January 1, 2000.
27
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--CAPITAL STOCK:
Features of Holdings' various classes of capital stock are specified in a
Certificate of Designation (the "Certificate"). The Certificate specifies, among
other things, restrictions on transfers of shares; certain "tag along rights" of
the Class A and Class C shares pursuant to certain transfers of Class D shares;
and redemptions required in connection with tag-along transfers or warrant
exercises (see below).
In the event of an initial public offering or sale of Holdings, as defined
in the Certificate, all issued and outstanding shares of Class A, Class C and
Class D Stock not otherwise redeemed by Holdings shall automatically convert
into shares of Common Stock on a one-for-one basis.
Holders of shares of Class D Stock and Common Stock shall be entitled to
one vote per share of such stock held, on all matters. Until a change in control
of the Company, as defined, holders of Class A or Class C stock shall not have
any voting rights except that the holders of the Class A and Class C Stock shall
have the right to one vote for each share of such stock held as to (i) the
approval of any amendments, or the alteration or repeal, whether by merger,
consolidation or otherwise, of any provision of the Certificate or the Articles
of Organization that would increase or decrease the par value of those shares of
the Class A or Class C Stock, or alter or change the powers, preferences, or
special rights of the shares of the Class A or Class C Stock, so as to affect
such holders adversely; and (ii) matters as required under law.
Effective upon a change in control, holders of shares of Class A or Class
C Stock shall be entitled to one vote for each share of stock held, on all
matters.
In the event of liquidation of Holdings, each holder of Class A or Class C
Stock shall be entitled to receive out of the net assets of the Company or the
proceeds thereof available for distribution to stockholders, before any payment
or distribution shall be made or set aside for payment on the Class D or Common
Stock upon such liquidation, the amount of $.001 per share. Such distribution
shall be allocated on a pro rata basis according to the number of shares of
Class A or Class C Stock held by each stockholder.
Certain officers and employees of the Company held 119,863 and 120,032
shares of Class C Stock as of December 30, 2000 and January 1, 2000,
respectively. Under certain circumstances, these officers and employees have the
right to require an affiliate of Investcorp to purchase their Class C shares. In
such cases, the Company has a right of first refusal to purchase such shares.
In connection with the Acquisition, Holdings issued a Class A Warrant to
an affiliate of Investcorp. Upon an initial public offering or sale of Holdings,
as defined, the Class A Warrant entitles its holder to purchase, at a specified
price, a specified number of shares of Holdings Common Stock. This will be
accomplished via a redemption by Holdings of a corresponding number of Class A
shares and issuance by Holdings to the Warrant holder of a corresponding number
of common shares.
28
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT PLANS:
The Company offers a comprehensive post-retirement medical plan to current
and certain future retirees and their spouses until they become eligible for
Medicare or a Medicare Supplement plan. The Company also offers life insurance
to current and certain future retirees. Employee contributions are required as a
condition of participation for both medical benefits and life insurance and the
Company's liabilities are net of these employee contributions.
The following is a reconciliation of the Accumulated Post-Retirement
Benefit Obligations ("APBO") under this plan ($000):
YEARS ENDED
------------------------
DECEMBER 30, JANUARY 1,
2000 2000
----------- ----------
Benefit Obligation (APBO) at beginning of year...... $ 9,347 $ 10,589
Service cost........................................ 140 166
Interest cost....................................... 672 639
Plan participants' contribution..................... 768 615
Actuarial loss (gain)............................... 598 (1,216)
Benefits paid....................................... (1,647) (1,446)
--------- ----------
APBO at end of year................................. $ 9,878 $ 9,347
========= ==========
The Company's contribution for these post-retirement benefit obligations
was $878,644 in fiscal 2000 and $831,448 in fiscal 1999.
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):
DECEMBER 30, JANUARY 1,
2000 2000
----------- ----------
Funded status (unfunded APBO)................... $ 9,878 $ 9,347
Unrecognized net loss from past experience
different from that assumed and from changes
in assumptions............................... (1,110) (511)
----------- ---------
Accrued benefit cost............................ $ 8,768 $ 8,836
=========== =========
The discount rates used in determining the APBO as of December 30, 2000
and January 1, 2000 were 7.00% and 7.50%, respectively.
29
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT PLANS: (CONTINUED)
The components of post-retirement benefit expense charged to operations
are as follows ($000):
YEARS ENDED
------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
2000 2000 1999
----------- ---------- ----------
Service cost - benefits attributed to service
during the period ........................ $140 $166 $169
Interest cost on accumulated post-retirement
benefit obligation ....................... 672 639 649
Amortization of net actuarial loss .......... -- 56 34
---- ---- ----
Total net periodic post-retirement benefit
cost ..................................... $812 $861 $852
==== ==== ====
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 December 30, 2000 and January 1, 2000, the present
value of the estimated remaining payments under this plan was approximately $1.4
million and $1.5 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): $1,017 for the
fiscal year ended December 30, 2000, $997 for the fiscal year ended January 1,
2000 and $906 for the fiscal year ended January 2, 1999.
NOTE 8--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 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 remained ungranted at December 30, 2000 and January 1, 2000. The exercise
price of all options granted since inception 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 six years at
December 30, 2000.
30
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--MANAGEMENT STOCK INCENTIVE PLAN: (CONTINUED)
A summary of stock options (in number of shares that may be purchased) is
presented below:
YEARS ENDED
--------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
2000 2000 1999
------- ------- -------
Outstanding, beginning of year 74,982 71,255 67,302
Granted ...................... -- 5,751 4,976
Exercised .................... -- -- --
Forfeited .................... -- (2,024) (1,023)
Expired ...................... -- -- --
------- ------- -------
Outstanding, end of year ..... 74,982 74,982 71,255
======= ======= =======
Exercisable, end of year ..... 56,890 42,889 26,511
======= ======= =======
The fair value of each granted option, at the date of grant, has been
estimated to be $19.04 for options granted during fiscal 1999 and $19.78 for
options granted during fiscal 1998. 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 fiscal 1999 and 5.0% for options granted during
fiscal 1998. The expected life of the options was estimated to be 7.13 years for
options granted during fiscal 1999 and eight years for fiscal 1998. No dividends
were assumed.
If the fair value based method required by SFAS 123 had been applied,
estimated compensation expense for the years ended December 30, 2000, January 1,
2000 and January 2, 1999 would have been approximately $418,000, $418,000 and
$414,000, respectively, resulting in pro forma net income (loss) of
approximately $12,404,000, $(4,063,000) and $3,260,000, respectively.
NOTE 9--INCOME TAXES:
The provision for income taxes consisted of the following ($000):
YEARS ENDED
------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
2000 2000 1999
------- ------- -------
CURRENT TAX PROVISION:
Federal ............................ $ 6,678 $ 341 $ 1,085
State .............................. 1,343 254 438
Foreign ............................ 566 293 82
------- ------- -------
Total current provision .......... 8,587 888 1,605
------- ------- -------
DEFERRED TAX PROVISION (BENEFIT):
Federal ............................ 222 (2,366) 978
State .............................. 26 (304) 114
------- ------- -------
Total deferred provision (benefit) 248 (2,670) 1,092
------- ------- -------
Total provision (benefit) ........ $ 8,835 $(1,782) $ 2,697
======= ======= =======
31
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--INCOME TAXES: (CONTINUED)
Components of deferred tax assets and liabilities were as follows ($000):
DECEMBER 30, JANUARY 1,
2000 2000
----------- ----------
DEFERRED TAX ASSETS:
Accounts receivable allowance...... $ 1,840 $ 1,886
Inventory valuation................ 4,314 5,108
Liability accruals................. 3,196 3,273
Deferred employee benefits......... 3,973 4,039
Loss and tax credit carryforwards.. -- 425
Other.............................. 542 797
---------- ----------
Total deferred tax assets........ $ 13,865 $ 15,528
========== ==========
DEFERRED TAX LIABILITIES:
Tradename.......................... $ 33,146 $ 34,071
Depreciation....................... 6,018 6,615
Deferred employee benefits......... 642 468
---------- ----------
Total deferred tax liabilities... $ 39,806 $ 41,154
========== ==========
The difference between the Company's effective income tax rate and the
federal statutory tax rate is reconciled below:
YEARS ENDED
--------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
2000 2000 1999
---- ---- ----
Statutory federal income
tax rate ................. 35% (34)% 34%
State income taxes, net of
Federal income tax
benefit .................. 4 (1) 6
Goodwill amortization ...... 1 5 4
Other permanent items ...... -- (3) 1
Foreign income, net of tax . -- 1 (3)
Other ...................... -- -- 1
--- --- ---
Total .................. 40% (32)% 43%
=== === ===
The portion of income before income taxes attributable to foreign income
was approximately $1,589,000, $704,000 and $735,000 for the years ended December
30, 2000, January 1, 2000 and January 2, 1999, respectively.
32
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--LEASE COMMITMENTS:
Annual rent expense ($000) under operating leases was $19,232, $18,108 and
$16,739 for the years ended December 30, 2000, January 1, 2000 and January 2,
1999, respectively.
Minimum annual rental commitments under current noncancelable operating
leases as of December 30, 2000 were as follows ($000):
BUILDINGS, DATA TOTAL
PRIMARILY TRANSPORTATION PROCESSING MANUFACTURING NONCANCELABLE
FISCAL YEAR RETAIL STORES EQUIPMENT EQUIPMENT EQUIPMENT LEASES
----------- ------------- --------- --------- --------- ------
2001......... $ 13,092 $ 436 $ 704 $ 430 $ 14,662
2002......... 10,311 301 266 328 11,206
2003......... 8,300 49 64 142 8,555
2004......... 6,058 10 -- 78 6,146
2005......... 3,923 -- -- 50 3,973
Thereafter... 3,852 -- -- 7 3,859
------------- --------- ---------- ---------- ---------
Total.... $ 45,536 $ 796 $ 1,034 $ 1,035 $ 48,401
============= ========= ========== ========== =========
In February 2001, the Company entered into a ten-year lease agreement for
a new corporate office in Atlanta, Georgia. Payments on this lease will begin in
October 2001. The ten year commitment will total approximately $18.0 million.
Future annual lease commitments under capital lease obligations are as
follows ($000):
FISCAL YEAR
2001...................................................... $1,016
2002...................................................... 509
Thereafter................................................ --
------
Total minimum obligations................................. 1,525
Interest.................................................. (54)
------
Present value of net minimum obligations.................. 1,471
Current portion, included in other current liabilities.... (970)
------
Long-term obligations, included in other long-term $ 501
liabilities at December 30, 2000........................ ======
NOTE 11--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. Carter's is in the final stages of resolving an
environmental matter 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. These costs 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.
NOTE 12--OTHER CURRENT LIABILITIES:
Other current liabilities consisted of the following ($000):
DECEMBER 30, JANUARY 1,
2000 2000
---- ----
Accrued income taxes........................ $ 7,732 $ 6,158
Accrued incentive compensation.............. 5,025 134
Accrued workers compensation................ 3,178 2,913
Accrued interest............................ 1,675 1,749
Accrued health insurance.................... 1,650 1,907
Other current liabilities................... 12,703 15,831
-------- --------
$ 31,963 $ 28,692
======== ========
33
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--VALUATION AND QUALIFYING ACCOUNTS:
Information regarding valuation and qualifying accounts is as follows
($000):
ALLOWANCE
FOR DOUBTFUL INVENTORY
ACCOUNTS VALUATION
----------- ----------
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
Additions, charged to expense.................. 1,840 3,408
Writeoffs...................................... (2,560) (4,563)
------ ------
BALANCE, DECEMBER 30, 2000....................... $2,045 $4,082
====== ======
NOTE 14--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 $4.3 million 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 has recourse and is
collateralized by the officer's stock in 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.
During fiscal 2000, 1999 and 1998, Holdings repurchased 1,169, 8,450 and
5,358 shares, respectively, of its Class C Stock owned by former Company
employees for cash payments totaling approximately $70,000, $507,000 and
$320,000, respectively. In each of fiscal 2000 and 1999, Holdings issued 1,000
shares to employees at a fair value of $60,000. During fiscal 1998, Holdings
sold 1,000 shares of Class C Stock to an employee of the Company for $60,000
and issued 500 shares to another employee at a fair value of $30,000.
34
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENT INFORMATION:
The Company reports segment information in accordance with the provisions
of Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131") which 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. For purposes of complying with
SFAS 131, the Company has identified its two reportable segments as "Wholesale"
and "Retail". The Company generally sells the same products in each business
segment. Wholesale products are offered through the Company's wholesale
distribution channel while the retail segment reflects the operations of the
Company's outlet stores. The Accounting policies of the segments are the same as
those described in Note 2--"Nature of Business and Summary of Significant
Accounting Policies".
In fiscal 2000, the Company reassessed its process for evaluating the
financial results of each reportable segment. Effective December 30, 2000, each
segment's results include the costs directly related to the segment's revenue
and all other costs are allocated based on relationship to consolidated net
sales or units produced to support each segment's revenue. Prior to December 30,
2000, the Company determined the Retail segment's earnings before interest,
taxes, depreciation and amortization expenses ("EBITDA") on a direct
contribution basis only and did not include allocations of all costs incurred to
support Retail operations. The wholesale segment, previously referred to as
"Wholesale and Other", included all other revenue and expenses of the Company
not directly related to the Retail segment. Management believes that its revised
process for measurement provides a more meaningful analysis of each segment's
financial results. Prior year amounts have been reclassified to conform to the
current year presentation. Under the old method, EBITDA for the Wholesale and
Other segment would have been approximately $414,000, $(1,132,000) and
$5,056,000 for fiscal years 2000, 1999 and 1998, respectively, and EBITDA for
the Retail segment would have been approximately $57,627,000, $39,966,000 and
$37,965,000 for fiscal years 2000, 1999 and 1998, respectively.
The table below presents certain segment information for the periods indicated
($000):
RETAIL WHOLESALE TOTAL
------ --------- -----
FISCAL YEAR 2000:
Sales................................... $215,280 $256,094 $471,374
EBITDA.................................. $ 31,517 $ 26,524 $ 58,041
FISCAL YEAR 1999:
Sales................................... $183,312 $231,284 $414,596
EBITDA.................................. $ 18,061 $ 20,773 $ 38,834
FISCAL YEAR 1998:
Sales................................... $171,696 $236,486 $408,182
EBITDA.................................. $ 17,852 $ 25,169 $ 43,021
A reconciliation of total segment EBITDA to total consolidated income
(loss) before income taxes is presented below ($000):
YEARS ENDED
-----------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
2000 2000 1999
---- ---- ----
Total EBITDA for reportable segments $58,041 $38,834 $43,021
Depreciation and amortization
expense.......................... (17,520) (16,855) (15,599)
Interest income.................... 303 -- --
Interest expense................... (18,982) (20,437) (21,215)
Nonrecurring charge................ -- (7,124) --
------- ------- -------
Consolidated income (loss) before
income taxes..................... $21,842 $(5,582) $ 6,207
======= ======= =======
35
CARTER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENT INFORMATION: (CONTINUED)
The table below represents inventory by segment at ($000):
DECEMBER 30, JANUARY 1, JANUARY 2,
2000 2000 1999
------------ ---------- ----------
Wholesale................... $ 72,114 $ 58,269 $ 81,817
Retail...................... 20,321 21,367 19,591
------------ ---------- ----------
$ 92,435 $ 79,636 $ 101,408
============ ========== ==========
Wholesale inventories include inventory produced and warehoused for the Retail
segment.
The following represents property, plant and equipment, net, by geographic
area as of ($000):
DECEMBER 30, JANUARY 1, JANUARY 2,
2000 2000 1999
------------ ---------- ----------
United States.............. $ 45,226 $ 41,417 $ 49,178
International.............. 9,215 10,359 10,496
------------ ---------- ----------
$ 54,441 $ 51,776 $ 59,674
============ ========== ==========
The Company's international operations consist primarily of sewing
facilities and, accordingly, no revenues are recorded at these locations.
NOTE 16--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.
Financial results for fiscal 1999 included 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, Georgia to their estimated net realization value of
$1,950,000. In fiscal 2000, $627,000 of these assets were sold. The remaining
assets are presented as assets held for sale on the accompanying December 30,
2000 balance sheet. It is estimated that approximately $373,000 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 was included in the 1999 nonrecurring charge.
36
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.
NAME AGE POSITIONS
- ----------------- --- ---------------------------------------------------
Frederick J. Rowan, II 61 Chairman of the Board of Directors, President and
Chief Executive Officer.
Joseph Pacifico 51 President-Marketing.
Charles E. Whetzel, Jr. 50 Executive Vice President-Global Sourcing.
David A. Brown 43 Executive Vice President-Business Planning &
Administration and Director of Carter's.
Michael D. Casey 40 Senior Vice President and Chief Financial Officer.
Christopher J. O'Brien 42 Director.
Thomas J. Sullivan 38 Director.
William C. McCollum 29 Director.
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 36 years, has been
in senior executive positions for nearly 24 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. In 2000, Mr. Whetzel's title became Executive Vice President-Global
Sourcing consistent with the Company's focus on expansion of global sourcing
capabilities. 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 Carter's
in October 1996. In 1997, Mr. Brown was named Executive Vice President-Business
Planning and Administration. Prior to 1992, Mr. Brown held various positions at
VF Corporation including Vice President-Human Resources for both the H.D. Lee
Company and Bassett-Walker, Inc. Mr. Brown also held personnel focused positions
with Blue Bell, Inc. and Milliken & Company earlier in his career.
MICHAEL D. CASEY joined the Company in 1993 as Vice President-Finance and
was named Senior Vice President-Finance in 1997. 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.
Mr. O'Brien 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
Corporation, NationsRent, Inc. and IWO Holdings, Inc. (Independent Wireless One
Corporation).
37
THOMAS J. SULLIVAN became a Director of the Company in 2000. Mr. Sullivan
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.
Sullivan was Vice President and Treasurer of the Leslie Fay Companies, Inc. (now
Leslie Fay Company, Inc.). Mr. Sullivan is a Director of Werner Holding Co.
(DE), Inc. and IWO Holdings, Inc. (Independent Wireless One Corporation).
WILLIAM C. MCCOLLUM became a Director of the Company in 2000. Mr. McCollum
has been an executive of Investcorp, its predecessor or one or more of its
wholly-owned subsidiaries since May 1996. Prior to joining Investcorp, Mr.
McCollum was a financial analyst with Chase Securities Inc. Mr. McCollum is a
Director of Harborside Healthcare Corporation.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation earned in fiscal
years 2000, 1999 and 1998 by the Company's Chief Executive Officer and each of
the other four most highly compensated executive officers whose remuneration
exceeded $100,000 (collectively, the "Named Executive Officers"). The current
compensation arrangements for each of these officers are described in
"Employment Arrangements".
SUMMARY COMPENSATION TABLE
FISCAL INCENTIVE OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION COMPENSATION(a)
--------------------------- ------ ------ ------------ ---------------
Frederick J. Rowan, II.................. 2000 $600,000 $1,080,000 $1,144,477
Chairman of the Board of Directors, 1999 595,833 -- 442,290
President and Chief Executive Officer 1998 560,750 632,500 394,074
Joseph Pacifico......................... 2000 $390,000 $ 456,300 $ 251,707
President-Marketing 1999 387,500 -- 197,399
1998 375,000 268,200 439,572
Charles E. Whetzel, Jr.................. 2000 $262,500 $ 307,100 $ 140,809
Executive Vice President-Global Sourcing 1999 260,417 -- 110,238
1998 250,000 178,800 109,019
David A. Brown.......................... 2000 $262,500 $ 307,100 $ 166,166
Executive Vice President-Business 1999 260,417 -- 75,372
Planning & Administration and Director 1998 247,500 178,800 74,721
of Carter's
Michael D. Casey........................ 2000 $210,000 $ 245,700 $ 100,097
Senior Vice President and Chief 1999 208,333 -- 115,471
Financial Officer 1998 190,208 143,000 126,080
- ----------
(a) Other annual compensation includes Holdings' Class C Stock, supplemental
retirement plan benefits, automobile allowances, insurance premiums and
medical cost reimbursement. In fiscal 2000, other annual compensation for
Mr. Rowan includes relocation assistance. In fiscal 1999 and 1998, other
annual compensation for Mr. Casey included relocation assistance. In
fiscal 1998, other annual compensation for Messrs. Pacifico and Whetzel
included 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 65th birthday. Mr. Rowan has
agreed not to compete
38
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. 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 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. 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 65th birthday. Each Executive has agreed not to compete
with the Company for a one-year period following the end of his employment with
the Company, unless he is terminated without cause, in which case the duration
of such period is six months.
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 December
30, 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
was 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.
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 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Class D Stock, par value $.01 share, is the only class of Holdings' stock
that currently possess voting rights. At December 30, 2000 there were 5,000
shares of Holdings' Class D Stock issued and outstanding. As of December 30,
2000, members of the Company's management owned 119,863 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 February 28, 2001,
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.
39
CLASS D VOTING STOCK:
NUMBER OF PERCENT OF
NAME SHARES (a) CLASS (a)
- ---- ---------- ---------
INVESTCORP S.A.(b)(c)........................... 5,000 100.0%
SIPCO Limited(d)................................ 5,000 100.0
CIP Limited(e)(f)............................... 4,600 92.0
Ballet Limited(e)(f)............................ 460 9.2
Denary Limited(e)(f)............................ 460 9.2
Gleam Limited(e)(f)............................. 460 9.2
Highlands Limited(e)(f)......................... 460 9.2
Noble Limited(e)(f)............................. 460 9.2
Outrigger Limited(e)(f)......................... 460 9.2
Quill Limited(e)(f)............................. 460 9.2
Radial Limited(e)(f)............................ 460 9.2
Shoreline Limited(e)(f)......................... 460 9.2
Zinnia Limited(e)(f)............................ 460 9.2
INVESTCORP Investment Equity Limited(c)......... 400 8.0
- ----------
(a) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of, or the sole or shared power to
dispose of, or direct the disposition of, a security.
(b) INVESTCORP S.A. ("Investcorp") does not directly own any stock in
Holdings. The number of shares shown as owned by Investcorp includes all
of the shares owned by INVESTCORP Investment Equity Limited (see (c)
below). Investcorp owns no stock in Ballet Limited, Denary Limited, Gleam
Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill
Limited, Radial Limited, Shoreline Limited, Zinnia Limited, or in the
beneficial owners of these entities (see (f) below). Investcorp may be
deemed to share beneficial ownership of the shares of voting stock held by
these entities because the entities have entered into revocable management
services or similar agreements with an affiliate of Investcorp, pursuant
to which each of such entities has granted such affiliate the authority to
direct the voting and disposition of the Holdings voting stock owned by
such entity for so long as such agreement is in effect. Investcorp is a
Luxembourg corporation with its address at 37 rue Notre-Dame, Luxembourg.
(c) INVESTCORP Investment Equity Limited is a Cayman Islands corporation, and
a wholly-owned subsidiary of Investcorp, with its address at P.O. Box
1111, West Wind Building, George Town, Grand Cayman, Cayman Islands.
(d) SIPCO Limited may be deemed to control Investcorp through its ownership of
a majority of a company's stock that indirectly owns a majority of
Investcorp's shares. SIPCO Limited's address is P.O. Box 1111, West Wind
Building, George Town, Grand Cayman, Cayman Islands.
(e) CIP Limited ("CIP") owns no stock in Holdings. CIP indirectly owns less
than 0.1% of the stock in each of Ballet Limited, Denary Limited, Gleam
Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill
Limited, Radial Limited, Shoreline Limited and Zinnia Limited (see (f)
below). CIP may be deemed to share beneficial ownership of the shares of
voting stock of Holdings held by such entities because CIP acts as a
Director of such entities and the ultimate beneficial shareholders of each
of those entities have granted to CIP revocable proxies in companies that
own those entities' stock. None of the ultimate beneficial owners of such
entities beneficially owns individually more than 5% of Holdings' voting
stock.
(f) Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinnia Limited is a Cayman Islands
corporation with its address at P.O. Box 2197, West Wind Building, George
Town, Grand Cayman, Cayman Islands.
40
CLASS C NON-VOTING STOCK:
PERCENT
NUMBER OF OF
NAME SHARES (a) CLASS
- ---- ---------- -------
Frederick J. Rowan, II................................... 81,844 (b) 30.6%
Joseph Pacifico.......................................... 21,350 (c) 8.6%
Charles E. Whetzel, Jr................................... 21,350 (d) 8.6%
David A. Brown........................................... 21,350 (e) 8.6%
Michael D. Casey......................................... 5,489 (f) 2.2%
Christopher J. O'Brien................................... -- --
Thomas J. Sullivan....................................... -- --
William C. McCollum...................................... -- --
----- ---
All directors and executive officers of the Company as a
group (8 persons)...................................... 151,383 58.6%
======= ====
- ----------
(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) Includes an aggregate of 25,195 shares of Holdings' Class C Stock issuable
pursuant to options that are currently exercisable or are exercisable
within 60 days as of February 28, 2001.
(c) Includes an aggregate of 6,298 shares of Holdings' Class C Stock issuable
pursuant to options that are currently exercisable or are exercisable
within 60 days as of February 28, 2001.
(d) Includes an aggregate of 6,298 shares of Holdings' Class C Stock issuable
pursuant to options that are currently exercisable or are exercisable
within 60 days as of February 28, 2001.
(e) Includes an aggregate of 6,298 shares of Holdings' Class C Stock issuable
pursuant to options that are currently exercisable or are exercisable
within 60 days as of February 28, 2001.
(f) Includes an aggregate of 3,200 shares of Holdings' Class C Stock issuable
pursuant to options that are currently exercisable or are exercisable
within 60 days as of February 28, 2001.
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 $4.3 million 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 has recourse and is
collateralized by the officer's stock in 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.
41
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 29, 2001.
CARTER HOLDINGS, INC.
By: /s/ FREDERICK J. ROWAN, II
-------------------------------
Frederick J. Rowan, II
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
NAME TITLE
---- -----
/s/ FREDERICK J. ROWAN, II Chairman of the Board of Directors, President
- ---------------------------- and Chief Executive Officer (Principal
Frederick J. Rowan, II Executive Officer)
/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/ THOMAS J. SULLIVAN Director
- --------------------------
Thomas J. Sullivan
/s/ WILLIAM C. McCOLLUM Director
- --------------------------
William C. McCollum
42
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 December 30, 2000 and January
1, 2000
Consolidated Statements of Operations for the fiscal years ended
December 30, 2000, January 1, 2000 and January 2, 1999
Consolidated Statements of Cash Flows for the fiscal years ended
December 30, 2000, January 1, 2000 and January 2, 1999
Consolidated Statements of Changes in Stockholders' Equity for
the fiscal years ended December 30, 2000, January 1, 2000 and January
2, 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Report of Independent Accountants
Schedule I - Condensed Financial Information of Carter
Holdings, Inc.
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
-------- -----------------------
2 Agreement of Merger dated September 18, 1996 between TWCC Acquisition
Corp. and the Company, incorporated herein by reference to Exhibit 2
to the Company's Registration Statement on Form S-4.
3.1 Amended and Restated Articles of Organization of the Company,
incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4.
3.2 Articles of Merger of the Company, incorporated herein by
reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-4.
3.3 By-laws of the Company, incorporated herein by reference to
Exhibit 3.3 to the Company's Registration Statement on Form S-4.
3.4 Certificate of Designation relating to the Preferred Stock of the
Company dated October 30, 1996 (included in Exhibit 3.2).
4.1 Indenture dated as of 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.
43
10.1 Employment Agreement between the Company and Frederick J. Rowan,
II, incorporated herein by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-4.
10.2 Employment Agreement between the Company and Joseph Pacifico,
incorporated herein by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-4.
10.3 Employment Agreement between the Company and Charles E. Whetzel, Jr.
incorporated herein by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-4.
10.4 Employment Agreement between the Company and David A. Brown
incorporated herein by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-4.
10.5 Employment Agreement between the Company and Michael D. Casey
incorporated herein by reference to Exhibit 10.8 to the Carter
Holdings, Inc. Registration Statement on Form S-4.
10.6 Credit Agreement dated October 30, 1996 among the Company, certain
lenders and The Chase Manhattan Bank, as administrative agent,
incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-4.
10.7 Purchase Agreement dated November 20, 1996 between the Company and BT
Securities Corporation, Bankers Trust International plc, Chase
Securities Inc. and Goldman, Sachs & Co., incorporated herein by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-4.
10.8 Amendment to Employment Agreement between the Company and Michael
D. Casey 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 incorporated herein by reference to Exhibit
10.9 to the Company's 1999 Annual Report on Form 10-K.
10.10 Stock Pledge Agreement dated January 1, 2000 between the Company
and Frederick J. Rowan, II incorporated herein by reference to
Exhibit 10.10 to the Company's 1999 Annual Report on Form 10-K.
10.11 Receipt and Promissory Note Termination Agreement dated January 1,
2000 between the Company and Frederick J. Rowan, II incorporated
herein by reference to Exhibit 10.11 to the Company's 1999 Annual
Report on Form 10-K.
10.12 Lease Agreement dated February 16, 2001 between the Company and
Proscenium, L.L.C.
21 Subsidiaries of Carter Holdings, Inc. incorporated herein by reference
to Exhibit 21 filed with Carter Holdings, Inc.'s Registration
Statement Form S-4.
(b) Reports on Form 8-K: None
44
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Carter Holdings, Inc.:
Our audits of the consolidated financial statements of Carter Holdings,
Inc. referred to in our report dated March 12, 2001, also included an audit of
the financial statement schedule listed in ITEM 14(a)(2) of this Form 10-K. In
our opinion, the financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Stamford, Connecticut
March 12, 2001
S-1
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CARTER HOLDINGS, INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 30, JANUARY 1,
2000 2000
----------- ----------
ASSETS
Income tax receivable.................................................... $ 3,927 $ 2,369
Deferred tax asset....................................................... -- 662
Investment in Carter's at equity......................................... 84,513 72,517
Deferred debt issuance costs, net ....................................... 1,556 1,811
------- -------
Total assets......................................................... $89,996 $77,359
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued interest......................................................... $ 400 $ 406
12% Senior Subordinated Notes............................................ 20,000 20,000
------- -------
Total liabilities.................................................... 20,400 20,406
------- -------
Stockholders' equity:
Class A Stock, nonvoting; par value $.01 per share; 775,000 shares
authorized; 752,808 shares issued and outstanding; liquidation value of
$.001 per share........................................................ 45,168 45,168
Class C Stock, nonvoting; par value $.01 per share; 500,000 shares
authorized; 242,192 shares issued; liquidation value of $.001 per share 14,532 14,532
Class C Treasury Stock, 31,186 shares, at cost at December 30, 2000;
31,017 shares, at cost at January 1, 2000;............................. (1,870) (1,860)
Class D Stock, voting; par value $.01 per share; 5,000 shares authorized,
issued and outstanding................................................. 300 300
Common stock, voting; par value $.01 per share; 1,280,000 shares
authorized; none issued or outstanding................................. -- --
Retained earnings (accumulated deficit).................................. 11,466 (1,187)
------- -------
Total stockholders' equity........................................... 69,596 56,953
------- -------
Total liabilities and stockholders' equity........................... $89,996 $77,359
======= =======
See accompanying note
S-2
CARTER HOLDINGS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED
----------------------------------------------------------
DECEMBER 30, 2000 JANUARY 1, 2000 JANUARY 2, 1999
----------------- --------------- ---------------
Interest expense............................... $(2,688) $(2,689) $(2,690)
Income tax benefit............................. 896 913 919
------- ------- -------
Loss before equity interest in Carter's........ (1,792) (1,776) (1,771)
Equity in net income (loss) of Carter's........ 14,445 (2,024) 5,281
------- ------- -------
Net income (loss).............................. $12,653 $(3,800) $ 3,510
======= ======= =======
See accompanying note
S-3
CARTER HOLDINGS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED
------------------------------------------------------------
DECEMBER 30, 2000 JANUARY 1, 2000 JANUARY 2, 1999
----------------- --------------- ---------------
Cash flows from operating activities:
Net income (loss).......................................... $ 12,653 $(3,800) $ 3,510
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity in net (income) loss of Carter's.............. (14,445) 2,024 (5,281)
Dividend received from earnings of Carter's.......... 2,510 2,940 3,133
Amortization of debt issuance costs.................. 254 256 259
Deferred tax expense................................. 662 6 52
Increase in tax receivable........................... (1,558) (919) (971)
Decrease in accrued interest......................... (6) -- (2)
-------- ------- -------
Net cash provided by operating activities............ 70 507 700
-------- ------- -------
Cash flows from investing activities:
Capital contribution to Carter's.......................... -- -- (60)
Additional dividends received from Carter's............... -- -- --
-------- ------- -------
Net cash used in investing activities................ -- -- (60)
-------- ------- -------
Cash flows from financing activities:
Repurchase of Class C stock............................... (70) (507) (320)
Proceeds from sale of Class C Treasury stock.............. -- -- 60
Payment of financing costs................................ -- -- (380)
-------- ------- -------
Net cash used in financing activities................ (70) (507) (640)
-------- ------- -------
Net increase in cash and cash equivalents...................... -- -- --
Cash and cash equivalents at the beginning of the period....... -- -- --
-------- ------- -------
Cash and cash equivalents at end of period..................... $ -- $ -- $ --
======== ======= =======
Supplemental disclosure of noncash investing and financing activity:
Increase in investment in Carter's as a result of treasury
shares issued to an employee............................... $ 60 $ 60 $ 30
======== ======= =======
See accompanying note
S-4
CARTER HOLDINGS, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(ACCUMULATED
CLASS C DEFICIT)
COMMON CLASS A CLASS C TREASURY CLASS D RETAINED
STOCK STOCK STOCK STOCK STOCK EARNINGS
------------ ------------ ----------- ------------- ----------- --------------
BALANCE AT JANUARY 3, 1998............. $-- $45,168 $14,532 $(1,183) $300 $(897)
Sale of Class C Treasury Stock
(1,000 shares).................... 60
Issuance of Class C Treasury Stock
(500 shares)...................... 30
Purchase of Class C Treasury Stock
(5,358 shares).................... (320)
Net income......................... 3,510
------------ ------------ ----------- ------------- ----------- --------------
BALANCE AT JANUARY 2, 1999............. -- 45,168 14,532 (1,413) 300 2,613
Issuance of Class C Treasury Stock
(1,000 shares).................... 60
Purchase of Class C Treasury Stock
(8,450 shares).................... (507)
Net loss........................... (3,800)
------------ ------------ ----------- ------------- ----------- --------------
BALANCE AT JANUARY 1, 2000............. -- 45,168 14,532 (1,860) 300 (1,187)
Issuance of Class C Treasury Stock
(1,000 shares).................... 60
Purchase of Class C Treasury Stock
(1,169 shares).................... (70)
Net income......................... 12,653
------------ ------------ ----------- ------------- ----------- --------------
BALANCE AT DECEMBER 30, 2000.......... $-- $45,168 $14,532 $(1,870) $300 $11,466
============ ============ =========== ============= =========== ==============
See accompanying note
S-5
CARTER HOLDINGS, INC.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
NOTE 1--THE COMPANY:
Carter Holdings, Inc. ("Holdings") is a holding company whose primary asset
consists of an investment in 100% of the outstanding capital stock of The
William Carter Company, Inc. ("Carter's"). On October 30, 1996 (inception),
Holdings, 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 Carter's from MBL Life Assurance
Corporation, CHC Charitable Irrevocable Trust and certain management
stockholders for a total financed purchase price of $226.1 million. For further
information, reference should be made to the Notes to Consolidated Financial
Statements of Carter Holdings, Inc. included in the accompanying Form 10-K.
S-6
