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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 29,
2001
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
COMMISSION FILE NUMBER:
333-22155
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THE WILLIAM CARTER COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1156680
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
THE PROSCENIUM
1170 PEACHTREE STREET NE, SUITE 900
ATLANTA, GEORGIA 30309
(Address of principal executive offices, including zip code)
(404) 745-2700
(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
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PART I
ITEM 1. BUSINESS
GENERAL
The William Carter Company ("Carter's," "we," "our" and "us") is the
largest branded marketer of baby apparel and a leading marketer of young
children's apparel. Over our 137 years of operation, CARTER'S has become one
of the most highly recognized and trusted brand names in the children's
apparel industry. We sell our products under the CARTER'S, CARTER'S CLASSICS
and TYKES brand names to more than 8,200 department, national chain,
specialty and discount stores, representing over 420 accounts, as well as
through our 151 retail outlet stores. Our wholesale channel represented 56%
of our total sales and our retail outlet channel represented 44% for the
fiscal year ended December 29, 2001. In the department, national chain,
specialty and outlet store distribution channels, we are the leading provider
of layette, baby sleepwear and young children's sleepwear. Our market share
in fiscal 2001 in the department, national chain, specialty and outlet store
distribution channels was approximately 27% for layette, approximately 45%
for baby sleepwear and approximately 34% for young children's sleepwear. Our
top wholesale customers include Kohl's, Kids R Us, JCPenny, Sears, Federated,
May Company, Mervyn's and Target. Our market share data is based on
information provided by the NPD Group, Inc. In the past year, NPD Group, Inc.
has improved the way it collects its data, and therefore while our market
share data is not directly comparable to market share data we have reported
for prior years, it is more representative of consumer behavior. In each
of these categories, our market share in these channels was more than five
times that of our nearest branded competitor. We focus on marketing
high-volume, core products, such as bodysuits, pajamas and blanket sleepers
that are insulated from changes in fashion trends and generate consistent
demand from season to season.
The William Carter Company is a wholly-owned subsidiary of Carter
Holdings, Inc. ("Holdings"). Holdings has no significant assets or investments
other than the shares of stock of The William Carter Company.
We are a Massachusetts corporation. Our principal executive office is
located at The Proscenium, 1170 Peachtree Street NE, Suite 900, Atlanta, Georgia
30309, and our telephone number is (404) 745-2700.
PRODUCTS AND MARKETS
We design, manufacture, source and market a broad array of baby and young
children's apparel. We have three strategic business units focused on baby,
sleepwear and playclothes. We are the leader in the baby and sleepwear portions
of the market and have a strong presence in the young children's playclothes
market. We also license our brand names to other companies to create a complete
collection of coordinating products including bedding, strollers, underwear,
shoes, room decor, toys and more. Our brand positioning is based on our strategy
of creating quality core products that are differentiated through imaginative
and creative artistic application.
BABY
We are the leading brand in baby for the following products: layette, baby
sleepwear and baby playclothes. In fiscal 2001, we generated $177.7 million in
sales of these products. 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. We are
the leading supplier of layette products within the department, specialty,
national chain and outlet store distribution channels. We attribute our leading
market position to our distinctive print designs, unique embroideries and our
reputation for quality. We tier our products through marketing programs targeted
toward three consumer groups: gift-givers, experienced mothers and first-time
mothers. JUST ONE YEAR, or JOY,
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LIMITED EDITIONS and CARTER'S CLASSICS are complete nursery programs designed
for first-time mothers and gift-givers. CARTER'S STARTERS, the core component of
our layette business, provides the experienced mother with the essentials in
value-focused multi-packs. Our primary competitors in the layette market are
private label manufacturers and manufacturers of licensed-character products.
SLEEPWEAR
Sleepwear includes pajamas, cotton long underwear and blanket sleepers in
sizes 12 months to 7. In fiscal 2001, we generated $142.5 million in sales of
these products. We are the leading supplier of sleepwear products within the
department, specialty, national chain and outlet store distribution channels. As
in layette, we try to differentiate our sleepwear products from the competition
by offering high volume core products with creative artwork in consumer-tested
prints and embroideries with an emotional appeal. In addition, we believe our
sleepwear product line features more functional, higher quality products than
those of our competitors. When we introduced flame-retardant cotton sleepwear in
2000, we strengthened our leading position in the sleepwear industry. Our
primary competitors in the sleepwear market are private label manufacturers and
licensed character products.
PLAYCLOTHES
Playclothes includes knit and woven cotton apparel for everyday use. In
fiscal 2001, we generated $130.9 million in sales of these products. The market
for baby and young children's playclothes apparel, sizes 0-7, in fiscal 2001 was
almost six times the size of the layette and sleepwear markets combined. We
continue to focus on strengthening playclothes products by introducing original
print designs and innovative artistic applications in order to increase sales
and market share. We believe that this product focus, in addition to our high
brand name awareness, strong wholesale customer relationships and expanded
global sourcing capabilities, will increase our playclothes sales. The young
children's playclothes market is highly fragmented, with no one branded
competitor having more than a 4.5% share of the market.
OTHER PRODUCTS
Other products include bedding, outerwear, shoes, socks, diaper bags, gift
sets, toys, room decor and hair accessories, including products for which we
license the CARTER'S, CARTER'S CLASSICS and TYKES names. In fiscal 2001, we
generated $55.5 million in sales of these products through our retail outlet
stores.
DISCOUNT STORE PRODUCT LINE
Carter's launched a line for baby and toddler products at Target stores
in the fourth quarter of 2000 representing our initial entry into the
discount channel of distribution. This product line includes layette,
sleepwear and baby playclothes along with a range of licensed products,
including hosiery, bedding, toys and room decor products. We launched the
line with a nationwide floor set in December 2000, using the TYKES brand
name. We believe that our presence in Target stores, along with our
comprehensive in-store signage and fixture program, will firmly establish our
products in the discount store market. In fiscal 2001, we generated $25.4
million in baby and toddler apparel sales of the TYKES brand through Target
and our retail outlet stores.
LICENSING
We license the CARTER'S, CARTER'S CLASSICS and TYKES names to other
companies for use on baby and young children's products including bedding,
outerwear, shoes, socks, room decor, toys, stationery, strollers and hair
accessories and related products. In fiscal 2001, we earned $7.6 million in
royalty income on licensed products. In 1998, we entered into a license
agreement for the rights to John
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Lennon's Real Love artwork collection for use on children's apparel, accessories
and related products. In 1999, we 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 our LIMITED EDITIONS
program which utilizes partnerships with outside artists and concepts to further
distinguish our brand from our competitors.
PRODUCT DESIGN AND DEVELOPMENT
Our product strategy is built on developing and marketing high-volume core
products that are differentiated by creative application. Basic, high-volume
core products are designed with simple and cost-effective construction. A high
percentage of the products continue from season to season with the same fabric
and construction, and are varied only through color and the artistic application
of embroideries and prints. We have three strategic business teams focused on
baby, sleepwear and playclothes. These business teams are skilled in identifying
and developing high-volume, core products. Each team follows a disciplined
approach to fabric use, color rationalization and productivity and is supported
by a dedicated art department and state-of-the-art design systems. This
disciplined approach to product design is meant to reduce risk and large
seasonal fluctuations. We have a validation process for testing and introducing
products. Artwork, color and product silhouettes are tested with consumer
panels, key wholesale accounts and an internal creative steering committee.
Additional quantitative measurements include pre-season bookings, weekly
over-the-counter selling results and weekly re-order rates on baby products.
DISTRIBUTION AND SALES
We sell our products to wholesale accounts and through our retail outlet
stores. In fiscal 2001, sales through the wholesale channel, including discount
channel revenues, accounted for 56% of total sales, while the retail outlet
channel accounted for 44% of total sales. No one wholesale customer accounts for
more than 10% of consolidated net sales.
WHOLESALE OPERATIONS
We sell our products in the United States through a network of approximately
30 sales professionals. Sales professionals work with their respective
department or specialty store account to establish annual plans for "basics"
(primarily layette and certain baby apparel) within the CARTER'S, CARTER'S
CLASSICS and TYKES lines. Once an annual plan has been established with an
account, we place the account on our semi-monthly automatic reorder plan for
"basics". Automatic reorder allows us to plan our sourcing requirements and
benefits both us and our wholesale customers by maximizing our customers'
in-stock positions, thereby improving sales and profitability. Our sleepwear and
playclothes products are planned and ordered seasonally as new products are
introduced.
RETAIL OPERATIONS
We currently operate 151 retail outlet stores in 39 states featuring our
quality merchandise, complemented by select brand accessories, apparel and
licensed products. Our stores, which average 5,025 square feet per location,
offer a broad assortment of baby, toddler and young children's apparel including
layette, sleepwear, underwear, playclothes, swimwear, outerwear and related
accessories.
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.
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MARKETING
Our strategy has been to promote our brand image as the leader in baby
apparel and to consistently provide quality products at a great value to
consumers. To this end, we employ a disciplined marketing strategy which
identifies and focuses on core products through consumer product testing. The
market strategy focuses on brand and product presentation at the consumer
point-of-purchase providing consistent, premium service, including delivering
and replenishing products on time to fulfill customer and consumer needs.
We believe that we have strengthened our brand image with the consumer
through our marketing focus on core products along with emphasis on creative
artwork in prints and embroideries. We also attempt to differentiate our
products through fixturing, store-in-store shops and advertising with wholesale
customers. We believe that frequent meetings between our executives and senior
representatives from our key wholesale customers help maintain account
relationships and further strengthen our brand's image in the marketplace.
PRODUCT SOURCING
We continue to expand our global supply chain capabilities. Consistent
with this strategy, since 1999 we have closed our remaining domestic
manufacturing operations, including textile, printing, cutting, embroidery
and sewing facilities. We also closed one offshore sewing facility. Fabric we
previously produced is currently purchased from third-party manufacturers. In
the United States, we currently operate three distribution centers. We
operate two sewing facilities in Costa Rica and two sewing facilities in
Mexico. We also source our products through contractual arrangements
throughout the world.
We believe that our sourcing arrangements are sufficient to meet current and
planned operating requirements and that significant additional opportunities
exist to further optimize our supply chain. Such opportunities include the
reduction of product costs, cycle times and inventories. We will attempt to
realize these reductions through investments in advanced information systems,
the expansion of global sourcing relationships, reductions in stock-keeping
units and product complexity and our continued focus on core product offerings.
DEMOGRAPHIC TRENDS
Demographic and psychographic trends support strong and growing baby and
young children's apparel markets and help insulate us from seasonal and fashion
fluctuations. Highlights of these trends include:
- a strong birth rate;
- more money being spent on babies than ever before;
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- multiple births at record levels;
- 40% of all births are first children; and
- grandparents as a growing and more affluent market.
In 2000 (the most current data available supplied by National Center for
Health Statistics), 4.1 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 and have more income to spend on her children's apparel. In
addition, new families are being formed and higher levels of spending are
required for a first child's wardrobe.
COMPETITION
The baby 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 young children's markets. Our primary
branded competitors include Health-Tex and Oshkosh B'Gosh, together with Disney
licensed playclothes and sleepwear products, and numerous smaller branded
companies. Although we believe that we do not compete directly with most private
label manufacturers in sleepwear and playclothes, certain retailers, including
several of our customers, have significant private label product offerings of
these products. We do not believe that we have any significant branded
competitors in our layette market because most of the alternative products are
offered by private label manufacturers. Because of the highly fragmented nature
of the industry, we also compete with several small, local manufacturers and
retailers. Certain of our competitors have greater financial resources, larger
customer bases and are less financially leveraged.
ENVIRONMENTAL MATTERS
We are 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, our operations have
resulted or may result in noncompliance with or liability pursuant to
environmental laws. In 1998, the Lamar County (Georgia) Regional Solid Waste
Authority asserted environmental claims against us related to the disposal of
waste generated by one of our plants. The waste, which allegedly was
contaminated, was allegedly deposited in unlined trenches at a local municipal
solid waste landfill in Lamar County, Georgia during the 1970s. We paid $244,000
to settle certain of these claims in an agreement reached with the Authority on
May 9, 2001. Generally, compliance with environmental laws has not had a
material impact on our operations, but there can be no assurance that future
compliance with such laws will not have a material adverse effect on our
operations.
PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
We own many trademarks and tradenames, including
Carter's-Registered Trademark-, Carter's Growbody-Registered Trademark-,
Carter-Set-Registered Trademark-, Jamakins-Registered Trademark- and Today's
Classics-Registered Trademark- as well as copyrights, most of which are
registered in the United States and in 60 foreign countries. Under an agreement
with The Little Tikes Company, we have licensed the right to use and to
sublicense the TYKES trademark for use on our products sold at Target stores.
Our rights to use this trademark on our clothing products on a royalty-free
basis will expire on December 31, 2003 and on toys and other products will
expire on December 31, 2001. After 2003, we may continue to sell clothing
products and after 2001, we may continue to sell toys and other products using
the TYKES brands, although these sales will be subject to a royalty agreement
with The Little Tikes Company.
We license the CARTER'S, CARTER'S CLASSICS and TYKES names along with many
of our trademarks and tradenames to third-party manufacturers to produce and
distribute children's apparel and related
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products such as diaper bags, lamps, socks, strollers, hair accessories,
outerwear, underwear, bedding, plush toys and shoes. We license the rights to
John Lennon's Real Love artwork collection and the artwork of Emu Namae under
agreements which expire December 31, 2003 and December 1, 2002. We have the
right to exercise renewal options for the John Lennon artwork upon reaching
licensing fee targets for the artwork.
EMPLOYEES
As of December 29, 2001, we had 6,083 employees, 1,824 of whom were employed
on a full-time basis in our domestic operations, 1,291 of which were employed on
a part-time basis in our domestic operations and 2,968 of which were employed on
a full-time basis in our offshore operations. None of our employees are
unionized. We have had no labor-related work stoppages and believe that our
labor relations are good.
RISKS RELATING TO OUR BUSINESS
OUR DEPENDENCE ON FOREIGN SUPPLY SOURCES MAY RESULT IN DISRUPTIONS TO OUR
OPERATIONS IN THE EVENT OF POLITICAL INSTABILITY OR FOREIGN REGULATIONS.
We currently source all of our sewing, embroidery, cutting and a substantial
portion of our fabric production through our offshore facilities and other
contractual arrangements throughout the world. We expect to continue to source
more of our manufacturing and fabrics offshore over time. We may be adversely
affected by:
- political instability resulting in the disruption of trade from foreign
countries in which our manufacturing facilities are located; and
- the imposition of additional regulations relating to imports, duties,
taxes and other charges on imports.
These and other factors could result in the interruption of production in
offshore facilities or a delay in our receipt of the products in the United
States. These factors may be beyond our control and may have a material adverse
effect on our financial condition and results of operations.
THE LOSS OF ONE OR MORE OF OUR MAJOR SUPPLIERS FOR RAW MATERIALS MAY RESULT IN
AN INTERRUPTION OF OUR SUPPLIES.
We purchase the majority of the fabrics we now source in the United States
from a few vendors of each material. The loss of one or more of these suppliers
could result in an interruption of supply, which could have an adverse effect on
our results of operations.
WE DEPEND ON A SMALL NUMBER OF WHOLESALE CUSTOMERS AND THE LOSS OF ONE OR MORE
COULD RESULT IN A MATERIAL LOSS OF REVENUES.
Approximately 74% of our total wholesale sales, excluding our off-price and
discount channel sales, for fiscal 2001 were derived from sales to our top seven
customers, with no one customer accounting for more than 18.0% of such sales (or
more than 9.0% of our total sales) in the period. We expect that these customers
will continue to represent a significant portion of our wholesale sales in the
future. A significant decrease in business from one or more of these customers
could result in a material adverse effect on our financial condition and results
of operations.
VARIOUS GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL RISKS APPLICABLE TO OUR
BUSINESS MAY REQUIRE US TO TAKE ACTIONS WHICH LIMIT OUR BUSINESS AND INCREASE
OUR COSTS.
Our business is subject to numerous federal, state, provincial, local and
foreign laws and regulations, including regulations with respect to air
emissions, wastewater discharges and the generation, handling, storage,
transportation, treatment and disposal of waste materials. Although we
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believe we are in substantial compliance with all applicable laws and
regulations, legal requirements are frequently changed and subject to
interpretation, and we are unable to predict the ultimate cost of compliance
with these requirements or their effect on our operations. We have identified
past non-compliance with environmental laws, including wastewater discharge and
the possible discharge of other manufacturing byproducts at our textile
manufacturing facility in Barnesville, Georgia. We may be required to make
significant expenditures to comply with governmental laws and regulations. We
cannot be certain that existing laws or regulations, as currently interpreted or
reinterpreted in the future, or future laws or regulations, will not have a
material adverse effect on our results of operations and financial condition.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET AND OUR BUSINESS WILL SUFFER IF WE ARE
UNABLE TO COMPETE EFFECTIVELY.
We operate in a highly competitive industry. The baby and young children's
apparel markets are highly competitive. Competition generally is based upon
product quality, brand name recognition, price, selection, service and
convenience. Both branded and private label manufacturers compete in the baby
and young children's apparel markets. Our primary branded competitors include
Health-Tex, Baby Gap and Oshkosh B'Gosh together with Disney-licensed products
in playclothes, and numerous smaller branded companies, as well as
Disney-licensed products in sleepwear. Some retailers, including several that
are our customers, have significant private label product offerings in
playclothes. Because of the highly fragmented nature of the industry, we also
compete with many small, local manufacturers and retailers. Some of our
competitors have greater financial resources than we do, have larger customer
bases and are less financially leveraged. As a result, these competitors or
others may be able to:
- adapt to changes in customer requirements more quickly;
- take advantage of acquisition and other opportunities more readily; and
- devote greater resources to the marketing and sale of their products and
adopt more aggressive pricing policies than we can.
WE MAY NOT BE ABLE TO CONTINUE TO COMPETE SUCCESSFULLY IN OUR MARKET IF WE ARE
UNABLE TO ACHIEVE WIDESPREAD MARKET ACCEPTANCE OF OUR NEW PRODUCTS.
If we are unable to introduce new and innovative products that are
attractive to our customers, or are unable to allocate sufficient resources to
effectively market and advertise our products so that they achieve widespread
market acceptance, we may not be able to compete effectively and our operating
results and financial condition will be adversely affected.
THE CURRENT AND FUTURE ECONOMIC DOWNTURNS MAY ADVERSELY AFFECT OUR SALES.
A downturn in the economy may affect consumer purchases of discretionary
items, which could adversely affect our sales. Our success depends on the
sustained demand for our products. Many factors affect the level of consumer
spending on our products, including, among others, general business conditions,
interest rates, the availability of consumer credit, taxation and consumer
confidence in future economic conditions. Consumer purchases of discretionary
items, such as our products, tend to decline during recessionary periods when
disposable income is lower. These downturns have been characterized by
diminished product demand and subsequent accelerated erosion of average selling
prices. A general slowdown in the economies in which we sell our products or
even an uncertain economic outlook could adversely affect consumer spending on
our products and, in turn, our sales and results of operations.
Since the third quarter of 2000, the U.S. economy has shown signs of a
downturn, and the recent political and social turmoil, including terrorist and
military actions, have put further pressure on economic conditions in the U.S.
and worldwide. If this general economic slowdown continues, it may adversely
impact our future business and operating results.
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RETAIL TRENDS COULD RESULT IN INCREASED DOWNWARD PRESSURE ON OUR PRICES.
With the growing trend toward retail trade consolidation, we are
increasingly dependent upon a reduced number of key retailers whose bargaining
strength is growing. We may be negatively affected by changes in the policies of
our retail trade customers, such as inventory de-stocking, limitations on access
to shelf space, scan-based trading and other conditions. Further consolidations
in the retail industry could result in price and other competition that could
damage our business.
THE LOSS OF KEY MEMBERS OF OUR SENIOR MANAGEMENT TEAM COULD ADVERSELY AFFECT OUR
BUSINESS.
Our success depends largely on the efforts and abilities of our current
senior management team. Their experience and industry contacts significantly
benefit us. If we were to lose the benefit of their experience and contacts, our
business could be adversely affected. See "Management--Employment Arrangements."
SEASONAL FLUCTUATIONS IN THE CHILDREN'S APPAREL MARKET MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS.
We experience seasonal fluctuations in our sales and profitability, with
generally lower sales and gross profit in the first and second quarters of our
fiscal year. We believe that the seasonality of sales and profitability is a
factor that affects the baby and young children's apparel industry generally and
is due to retailer's emphasis on price reductions in the first quarter and
promotional retailers' and manufacturers' emphasis on closeouts of the prior
year's product line.
OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE SENIOR SUBORDINATED NOTES.
We are highly leveraged. As of December 29, 2001, we had total debt of
approximately $298.7 million (of which $173.7 million consisted of the senior
subordinated notes, net of unamortized discount of $1.3 million, and
$125.0 million consisted of secured borrowings) and common stockholder's equity
of approximately $157.7 million. For the fiscal year ended December 29, 2001,
our ratio of earnings to fixed charges was 1.4 to 1. In addition, we and our
subsidiaries are permitted to incur substantial additional indebtedness in the
future.
Our substantial indebtedness could have important consequences. For example,
it could:
- make it more difficult for us to satisfy our obligations with respect to
the senior subordinated notes;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to obtain additional financing to fund future working
capital, capital expenditures and other general corporate requirements, or
to carry out other aspects of our business plan;
- require us to dedicate a substantial portion of our cash flow from
operations to the payment of principal of, and interest on, our
indebtedness, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures or other general corporate purposes,
or to carry out other aspects of our business plan;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry; and
- place us at a competitive disadvantage compared to our competitors that
have less debt.
In addition, the indenture and our new senior credit facility contain
financial and other restrictive covenants that limit our ability to engage in
activities that may be in our long-term best interests. Our failure to comply
with those covenants could result in an event of default which, if not cured or
waived, could result in the acceleration of all of our debts.
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ITEM 2. PROPERTIES
We operate 151 leased retail outlet stores located primarily in outlet
centers across the United States, having an average size of 5,025 square feet.
Our leases have an average term of approximately five years with additional
five-year renewal options. Domestically, we own three distribution facilities,
two in Georgia and one in Pennsylvania. We also own three manufacturing
facilities, two of which are idle and currently held for sale. We own an office
building in Georgia and lease office space in four buildings--two in Georgia,
one in Connecticut and one in New York. In February 2001, we entered into a
ten-year lease agreement for a new corporate office in Atlanta, Georgia.
Internationally, we lease two sewing facilities in Costa Rica, one in the
Dominican Republic and two in Mexico. In the fourth quarter of 2001, we closed
the Dominican Republic sewing facility, and our lease obligation will terminate
at the end of June 2002.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we have been involved in various legal proceedings. We
believe that all of such litigation is routine in nature and incidental to the
conduct of our business, and we believe that no such litigation, if resolved
adversely to us, would have a material adverse effect on our financial condition
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for any class of our capital
stock. All of our issued and outstanding capital stock is owned by Holdings.
Our parent company, Holdings, and all of its stockholders entered into a
stock purchase agreement on July 12, 2001 with a special purpose entity formed
by Berkshire Partners LLC, ("Berkshire") its affiliates and associated investors
to sell substantially all of the stock of Holdings (the "Acquisition"). The
Acquisition closed on August 15, 2001.
We paid dividends on our common stock held by our parent, Holdings, in the
amount of approximately $60,000 during the period from December 31, 2000 through
August 14, 2001 ("Predecessor"). Proceeds from the dividends were used by
Holdings to repurchase shares of Holdings' stock owned by one of our former
employees. In addition, during the Predecessor period from December 31, 2000
through August 14, 2001, Holdings made $60,000 in capital contributions to us in
connection with the issuance of shares of Holdings' stock to one of our
employees. On August 15, 2001, we paid a dividend of approximately
$128.6 million to Holdings. Holdings used these funds to repay debt and
partially fund other payments in connection with the Acquisition, including
payment to selling stockholders and option holders. Other than as described
above, we have paid no dividends in fiscal years 2001 and 2000 on our common
stock. We intend to retain all of our future earnings to finance our operations
and do not anticipate paying cash dividends to common equity stockholders in
the foreseeable future. Any decision made by our Board of Directors to declare
dividends in the future will depend upon our future earnings, capital
requirements, financial condition and other factors deemed relevant.
In addition, certain agreements to which we are a party restrict our ability
to pay dividends on common equity (see Note 5 to the Consolidated Financial
Statements).
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and other data as of
and for the five fiscal years ended December 29, 2001. As a result of certain
adjustments made in connection with the Acquisition, the results of
operations for the period from August 15, 2001 through December 29, 2001 (the
"Successor" period) are not comparable to prior periods. The selected
financial data for the five fiscal years ended December 29, 2001 were derived
from our Audited Consolidated Financial Statements. Our fiscal year ends on
the Saturday in December or January nearest to the last day of December.
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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".
SUCCESSOR(A) PREDECESSOR
------------------ --------------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FROM FROM
AUGUST 15, 2001 DECEMBER 31, 2000 FISCAL YEARS
THROUGH THROUGH -----------------------------------------
DECEMBER 29, 2001 AUGUST 14, 2001 2000 1999 1998 1997
------------------ ------------------ -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Wholesale sales........................... $136,167 $160,646 $256,094 $231,284 $236,486 $219,535
Retail sales.............................. 108,091 127,088 215,280 183,312 171,696 143,419
-------- -------- -------- -------- -------- --------
Total net sales....................... 244,258 287,734 471,374 414,596 408,182 362,954
Cost of goods sold........................ 149,352 182,863 293,340 271,844 256,482 227,332
-------- -------- -------- -------- -------- --------
Gross profit.............................. 94,906 104,871 178,034 142,752 151,700 135,622
Selling, general and administrative
expenses................................ 66,465 93,902 143,321 125,006 126,788 114,321
Acquisition-related non-recurring
charges(b).............................. -- 11,289 -- -- -- --
Writedown of long-lived assets(c)......... -- 3,156 -- 7,124 -- --
Non-recurring charges-plant closure
costs(d)................................ (268) 1,116 -- -- -- --
Royalty income............................ (2,624) (4,993) (5,808) (4,233) (2,510) (1,790)
-------- -------- -------- -------- -------- --------
Operating income.......................... 31,333 401 40,521 14,855 27,422 23,091
Interest income........................... (207) (73) (303) -- -- --
Interest expense.......................... 11,307 10,133 16,294 17,748 18,525 17,571
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary item and cumulative effect
of change in accounting principle....... 20,233 (9,659) 24,530 (2,893) 8,897 5,520
Provision for (benefit from) income
taxes................................... 7,395 (1,404) 9,731 (869) 3,616 2,429
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle.................... 12,838 (8,255) 14,799 (2,024) 5,281 3,091
Extraordinary item, net of tax benefit of
$4,115(e)............................... -- 6,173 -- -- -- --
Cumulative effect of change in accounting
principle, net of income tax benefit of
$217(f)................................. -- -- 354 -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss)......................... $ 12,838 $(14,428) $ 14,445 $ (2,024) $ 5,281 $ 3,091
======== ======== ======== ======== ======== ========
Net (loss) income available to common
stockholder............................. $(16,099) $ 11,792 $ (4,677) $ 2,628 $ 416
======== ======== ======== ======== ========
Pro forma net income (loss) assuming
accounting change is applied
retroactively........................... $ 12,838 $(14,428) $ 14,799 $ (1,608) $ 5,119 $ 3,063
======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (END OF PERIOD):
Working capital(g)........................ $110,525 $ 84,336 $ 81,508 $ 99,480 $ 87,482
Total assets.............................. 604,162 325,988 313,133 349,228 331,899
Total debt, including current
maturities.............................. 298,742 141,400 142,300 167,600 157,100
Redeemable preferred stock(h)............. -- 19,116 18,902 18,682 18,462
Common stockholder's equity............... 157,715 65,397 53,615 58,739 56,721
CASH FLOW DATA:
Net cash provided by operating
activities.............................. $ 32,656 $ 1,375 $ 26,637 $ 38,891 $ 9,497 $ 4,089
Net cash used in investing activities..... (13,223) (9,266) (19,217) (12,362) (17,960) (13,965)
Net cash provided by (used in) financing
activities.............................. 4,735 4,718 (7,138) (27,100) 8,190 12,174
OTHER DATA:
EBITDA, as defined(i)..................... $ 37,983 $ 28,207 $ 58,041 $ 38,834 $ 43,021 $ 36,926
Gross margin.............................. 38.9% 36.4% 37.8% 34.4% 37.2% 37.4%
Depreciation and amortization............. $ 6,918 $ 12,245 $ 17,520 $ 16,855 $ 15,599 $ 13,835
Capital expenditures...................... 9,556 9,480 17,179 12,726 17,991 14,013
See Notes to Selected Financial Data.
12
NOTES TO SELECTED FINANCIAL DATA
(a) As a result of the Acquisition, our assets and liabilities were adjusted
to their estimated fair values as of August 15, 2001. In addition, we entered
into new financing arrangements and changed our capital structure in connection
with the Acquisition. At the time of the Acquisition, we also adopted the
provisions of Statements of Financial Accounting Standards ("SFAS") No. 141
"Business Combinations" ("SFAS 141") and No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142"), which affect the amortization of goodwill and other
intangibles. Accordingly, the results of operations for the Successor period
from August 15, 2001 through December 29, 2001 are not comparable to prior
periods.
(b) The Acquisition-related non-recurring charges for the Predecessor period
from December 31, 2000 through August 14, 2001 includes $4.5 million in
management bonuses and $6.8 million in other seller expenses.
(c) The $3.2 million writedown of long-lived assets for the Predecessor
period from December 31, 2000 through August 14, 2001 relates to the closure
of two domestic manufacturing facilities closed in that period. The writedown
for the 1999 fiscal year represents the $6.9 million writedown in the
carrying value of our 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.
(d) The $1.1 million plant closure non-recurring charge for the Predecessor
period from December 31, 2000 through August 14, 2001 relates to closure costs
associated with the two domestic manufacturing facilities closed in that period.
(e) The extraordinary item for the Predecessor period December 31, 2000
through August 14, 2001 reflects the write-off of debt issuance costs of
approximately $3.3 million, net of a tax benefit of approximately $1.3 million,
and a debt prepayment penalty of approximately $7.0 million, net of tax benefit
of approximately $2.8 million.
(f) In fiscal 2000, we recorded the cumulative effect of a change in
accounting principle in order to comply with guidance provided by the Securities
and Exchange Commission ("SEC") Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements."
(g) Represents total current assets less total current liabilities.
(h) We issued redeemable preferred stock in connection with the 1996
Investcorp acquisition of Holdings for $20.0 million, net of $2.2 million of
fees associated with its issuance. This preferred stock was cancelled as part of
the Acquisition as described in (a) above.
(i) As defined for presentation in the selected financial data table,
EBITDA represents earnings before interest, income tax expense, depreciation
and amortization and also excludes the items referred to in notes (b), (c)
and (d) above. Included in EBITDA for the Successor period from August 15,
2001 through December 29, 2001, is a $4.5 million charge related to the
amortization of the step-up in the inventory valuation as of the Acquisition.
Included in EBITDA for the Predecessor period from December 31, 2000 through
August 14, 2001, are $1.3 million of costs incurred in connection with
activities leading up to the Acquisition. EBITDA, as defined above, is
presented because we believe it is helpful to securities analysts, investors
and other interested parties in the evaluation of companies in our industry.
It is not a measurement of financial performance under generally accepted
accounting principles and should not be considered as an alternative to cash
flow from operating activities or as a measure of liquidity or an alternative
to net income as an indicator of our operating performance or any other
measures of performance derived in accordance with generally accepted
accounting principles. See the "Statements of Cash Flow" included in our
financial statements.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of our results of operations and current
financial position. You should read this discussion in conjunction with our
consolidated historical financial statements and notes included elsewhere in
this annual report. Our discussion of our results of operations and financial
condition includes various forward-looking statements about our markets, the
demand for our products and services and our future results. We based these
statements on certain assumptions that we consider reasonable. For information
about risks and exposures relating to our business and our company, you should
read the section entitled "Risk Factors" in Item 1 of this annual report. Actual
results may differ materially from those suggested by our forward-looking
statements for various reasons including those discussed in the "Risk Factors"
section. Those risk factors expressly qualify all subsequent oral and written
forward-looking statements attributable to us or persons acting on our behalf.
Except for any ongoing obligations to disclose material information as required
by the federal securities laws, we do not have any intention or obligation to
update forward-looking statements after we file this annual report.
GENERAL
We are the largest branded marketer of baby apparel and a leading marketer
of young children's apparel. We sell our products to over 420 department,
specialty and discount store customers, which together accounted for 56% of our
sales during fiscal 2001. We also sell our products through our 151 retail
outlet stores, which accounted for 44% of our sales during fiscal 2001.
Consolidated net sales have increased from $363.0 million in 1997 to
$532.0 million in 2001. This represents an average annual growth rate of
10.0%. During this period, wholesale sales have increased on average 7.8%
annually, from $219.5 million to $296.8 million and retail sales have
increased on average 13.2% annually, from $143.4 million to $235.2 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 (stores
open more than 12 months) sales increases.
Our parent company, Holdings, and all of its stockholders entered into a
stock purchase agreement on July 12, 2001 with a special purpose entity formed
by Berkshire Partners LLC, its affiliates and associated investors to sell
substantially all of the stock of Holdings. The Acquisition closed on
August 15, 2001.
In connection with the Acquisition, we issued $175.0 million of notes under
a new senior subordinated loan facility and entered into an agreement for a new
senior credit facility, including $125.0 million of new term loan borrowings and
capacity to borrow up to $60.0 million under a revolving credit facility. In
addition, Berkshire Partners and the other buyers invested capital of
$145.5 million into Holdings, including an $18.3 million rollover of equity by
our management. The Acquisition was accounted for as a purchase and has been
reflected in our financial statements using pushdown accounting (See Note 1 to
the Consolidated Financial Statements).
The 2001 results discussed below represent the mathematical addition of the
historical results for the Predecessor period from December 31, 2000 through
August 14, 2001 and the Successor period from August 15, 2001 through
December 29, 2001 for purposes of the discussion below only. While this approach
is not consistent with generally accepted accounting principles, due to the new
basis of accounting established at the Acquisition date, management believes it
is the most practical way to comment on the results of operations.
As a result of the Acquisition, our assets and liabilities were adjusted to
their estimated fair values as of August 15, 2001. In addition, we entered into
new financing arrangements and had a change in our capital structure. The seven
and one-half month period prior to the Acquisition includes certain
Acquisition-related non-recurring charges, principally sellers' expenses, such
as management bonuses and professional fees, and an extraordinary charge for
debt prepayment penalties and the write-off of
14
deferred debt issuance costs on debt retired as a result of the Acquisition and
refinancing. All Predecessor periods presented included amortization expense on
our tradename and goodwill. The period subsequent to the Acquisition reflects
increased interest expense, the amortization of licensing agreements and
cessation of amortization on our tradename and goodwill due to the adoption of
SFAS 141 and 142. Accordingly, the results of operations for the Predecessor and
Successor periods are not comparable.
RESULTS OF OPERATIONS
The following table sets forth certain components of our Consolidated
Statements of Operations data expressed as a percentage of net sales:
FISCAL YEARS
------------------------------
2001 2000 1999
-------- -------- --------
STATEMENTS OF OPERATIONS:
-------------------------
Wholesale sales........................................ 55.8% 54.3% 55.8%
Retail sales........................................... 44.2 45.7 44.2
----- ----- -----
Net sales.............................................. 100.0 100.0 100.0
Cost of goods sold..................................... 62.4 62.2 65.6
----- ----- -----
Gross profit........................................... 37.6 37.8 34.4
Selling, general and administrative expenses........... 30.1 30.4 30.1
Non-recurring charges.................................. 2.9 -- 1.7
Royalty income......................................... (1.4) (1.2) (1.0)
----- ----- -----
Operating income....................................... 6.0 8.6 3.6
Interest expense, net.................................. 4.0 3.4 4.3
----- ----- -----
Income (loss) before income taxes, extraordinary item
and cumulative effect of change in accounting
principle............................................ 2.0 5.2 (0.7)
Provision for (benefit from) income taxes.............. 1.1 2.1 (0.2)
----- ----- -----
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle............. 0.9% 3.1% (0.5)%
===== ===== =====
FISCAL YEAR ENDED DECEMBER 29, 2001 COMPARED WITH FISCAL YEAR ENDED DECEMBER 30,
2000
NET SALES. Consolidated net sales for fiscal 2001 were $532.0 million, an
increase of $60.6 million, or 12.9%, compared to $471.4 million in fiscal 2000.
This revenue growth was generated by strong performance across all distribution
channels of our major product markets which are baby, sleepwear and playclothes.
Total wholesale sales increased $40.7 million, or 15.9%, to $296.8 million in
fiscal 2001 from $256.1 million in fiscal 2000. In fiscal 2001, wholesale sales,
excluding discount channel and off-price sales, increased $28.3 million, or
12.1%, to $263.5 million from $235.2 million in fiscal 2000. The increase in
wholesale sales during fiscal 2001 reflects the growth of baby, sleepwear and
playclothes product lines of $7.5 million, or 6.3%, $9.5 million, or 10.3%, and
$11.4 million, or 47.6% as compared to fiscal 2000. Strong product performance
reflects improvements in fabrics, garment construction, embroideries and prints
made possible through our global sourcing capabilities. Over the past two years,
we have been transitioning from a domestic, vertically-integrated manufacturing
company to a global sourcing company. In addition to operating leased sewing
facilities in Central America and Mexico, we have built full-package sourcing
capabilities, which has enabled us to source better products at lower costs than
we believe are available domestically. We entered the discount channel in the
fourth quarter of 2000 by launching the TYKES brand, the revenues from which
were $20.9 million for fiscal 2001. This contributed to the overall increase in
total wholesale sales for this period. Off-price sales, which are merchandise
sold at more than 25% off regular wholesale selling prices, for fiscal 2001
decreased $4.5 million to $12.4 million from $17.0 million in fiscal 2000.
Off-price sales were 2.3% of total sales in fiscal 2001 compared to 3.6% in
fiscal 2000. Retail outlet store sales
15
increased $19.9 million, or 9.2%, in fiscal 2001 to $235.2 million from
$215.3 million in fiscal 2000. This increase was attributed to strong growth of
baby, sleepwear and playclothes product lines of $6.5 million, or 15.9%,
$3.8 million, or 11.1%, and $10.5 million, or 12.5% as compared to 2000. Product
performance was also the driving force behind our comparable store sales
increase of 6.5% in fiscal 2001. During fiscal 2001, we opened nine stores and
we closed five stores. There were 151 outlet stores in operation at
December 29, 2001 compared to 147 at December 30, 2000.
GROSS PROFIT. In fiscal 2001, gross profit increased $21.7 million, or
12.2%, to $199.8 million compared to $178.0 million in fiscal 2000. Gross profit
as a percentage of net sales in fiscal 2001 decreased to 37.6% compared to 37.8%
in fiscal 2000. The decrease in gross profit as a percentage of net sales in
fiscal 2001 reflects a $4.5 million charge related to the amortization of the
step-up in the inventory valuation as of the Acquisition. Excluding this
Acquisition adjustment, gross profit as a percentage of net sales would have
been 38.4% in fiscal 2001. This improvement in gross profit as a percentage of
net sales in fiscal 2001 reflects the benefit from the change in product
sourcing strategies mentioned above partially offset by a higher mix of discount
channel revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In fiscal 2001, selling,
general and administrative expenses increased $17.0 million, or 11.9%, to
$160.4 million from $143.3 million in fiscal 2000. As a percentage of net
sales, selling, general and administrative expenses decreased to 30.1% in
fiscal 2001 from 30.4% in fiscal 2000. Included in selling, general and
administrative expenses are $1.3 million of costs incurred in connection with
activities leading up to the Acquisition. Excluding such costs, selling,
general and administrative expenses relative to sales was 29.9% in fiscal
2001. The decrease in selling, general and administrative expenses as a
percentage of net sales is attributed to the benefit from continued increases
in comparable retail outlet store growth and lower distribution costs
relative to net sales, partially offset by investments in brand marketing.
NON-RECURRING CHARGES / WRITEDOWN OF LONG-LIVED ASSETS. As described in
Note 1 to the accompanying financial statements for the fiscal year ended
December 29, 2001, we incurred Predecessor Acquisition-related, non-recurring
charges in connection with the sale of our company including $4.5 million in
management bonuses and $6.8 million in seller expenses.
As described in Note 17 to the accompanying financial statements, we closed
two of our manufacturing facilities during the Predecessor period of fiscal
2001. In the first quarter of fiscal 2001, we closed our Harlingen, Texas sewing
facility and recognized a non-recurring charge of approximately $582,000 related
to certain closure costs and involuntary termination benefits. Additionally, we
recorded a non-cash charge of approximately $742,000 related to the writedown of
the asset value to the sewing facility's estimated net realizable value. In the
second quarter of fiscal 2001, we closed our fabric printing operations located
in Barnesville, Georgia and recognized a non-recurring charge of approximately
$534,000 related to certain closure costs and involuntary termination benefits.
Additionally, we recorded a non-cash charge of approximately $2,414,000 related
to the writedown of the asset value to the printing facility's estimated net
realizable value. During the Successor period, we recorded $268,000 in
reductions to the estimates of closure and termination costs.
ROYALTY INCOME. Royalty income was $7.6 million and $5.8 million in fiscal
years 2001 and 2000. We attribute the increase in royalty income to the
extension of our brands through new licensing arrangements and an increase in
average royalty rates.
OPERATING INCOME. Operating income for fiscal 2001 decreased $8.8 million,
or 21.7%, to $31.7 million compared to $40.5 million in fiscal 2000. Operating
income as a percentage of net sales decreased to 6.0% in fiscal 2001 from 8.6%
in fiscal 2000. The decrease primarily reflects the effects of the Predecessor
non-recurring Acquisition-related charges, plant closure costs and other costs
incurred in connection with the Acquisition.
16
INTEREST EXPENSE. Interest expense for fiscal 2001 increased $5.1 million,
or 31.6%, to $21.4 million from $16.3 million in fiscal 2000. Average daily
revolver borrowings in fiscal 2001 were $5.9 million compared to $5.0 million in
fiscal 2000. We attribute these increases primarily to additional borrowings
resulting from the Acquisition and refinancing. Prior to the Acquisition,
interest expense for the Predecessor period from December 31, 2000 through
August 14, 2001 was approximately $10.1 million, an amount comparable to similar
periods in 2000. At December 29, 2001, outstanding debt aggregated
$298.7 million compared to $141.4 million at December 30, 2000. Included in the
outstanding debt at December 29, 2001 of $298.7 million was $125.0 million which
bore interest at a variable rate, so that an increase of 1% in the applicable
rate would increase our annual interest cost by $1,250,000. At December 29,
2001, there were no borrowings under our $60.0 million revolving credit
facility. We had outstanding letters of credit totaling $6.5 million as of
December 29, 2001.
INCOME TAXES. Our effective tax rate was 36.5% for the Successor period
from August 15, 2001 through December 29, 2001; 14.5% for the Predecessor period
from December 31, 2000 through August 14, 2001; and 39.7% for fiscal 2000. The
14.5% benefit against our pretax loss for the Predecessor period is primarily a
result of goodwill amortization and certain seller's expenses incurred in
connection with the Acquisition that are not deductible for tax purposes. We
expect our future effective tax rate to approximate that of the Successor
period.
EXTRAORDINARY ITEM. As described in Note 1 to the accompanying financial
statements, in connection with the Acquisition and refinancing, we incurred an
extraordinary loss of $6.2 million (net of tax) during the Predecessor period
from December 31, 2000 through August 14, 2001 due to the write-off of deferred
debt issuance costs and debt prepayment penalties.
NET (LOSS) INCOME. Our fiscal 2001 pre-tax income was $10.6 million, as
compared to $24.5 million in fiscal 2000. As noted above, fiscal 2001
includes a $4.5 million charge related to amortization of the step-up in the
inventory valuation as of the Acquisition, $1.3 million of costs incurred in
connection with activities leading up to the Acquisition, $11.3 million of
Acquisition-related non-recurring charges and $4.0 million of non-recurring
plant closure and asset impairment charges. Excluding these items, our fiscal
2001 pre-tax income would have been $31.7 million. As noted above, our fiscal
2001 net loss was $1.6 million and included an Acquisition-related
extraordinary charge of $6.2 million, net of tax. Excluding these
non-recurring and Acquisition-related charges, our 2001 net income would have
been approximately $20.4 million, as compared to net income of $14.4 million
in fiscal 2000.
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 our
major product markets, which are baby, sleepwear and playclothes, increased
$18.8 million, or 12.0%, $20.4 million, or 18.2%, and $8.6 million, or 8.7%,
from 1999 to 2000. Our 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, or 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, or 14.1%, and
$17.0 million, or 22.7%, as compared to fiscal 1999. Our continued success with
these lines results from improvements made through our new product sourcing
strategy and our focus on product innovation through creative prints and
embroideries. Included in 2000 wholesale sales was $4.0 million in sales of
TYKES products sold in an initial launch in the discount channel. 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. This decrease in off-price sales reflects the benefit achieved
from improved product development and inventory management disciplines. Our
retail sales for fiscal 2000 increased to $215.3 million from $183.3 million in
fiscal 1999. We attribute this increase to the strong performance of our
playclothes product line. Product performance was also the driving force behind
the comparable store sales increase in retail store sales of 14.3% in 2000. In
2000, we opened seven stores and closed six stores. We had 147 stores in
operation at December 30, 2000 compared to 146 in operation at January 1, 2000.
GROSS PROFIT. Our 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. We
attribute the improvement in gross profit to a higher mix of retail revenues, a
lower mix of off-price sales and the benefit from cost reduction achieved
through increased
17
levels of global sourcing. In 1999, we curtailed production and ultimately
closed our textile facility, which had produced substantially all of our
fabrics. Gross profit in 1999 was negatively impacted by costs associated with
this closure and the closure of three of our sewing facilities in the United
States. We achieved a favorable impact on our fiscal 2000 numbers as a result of
the successful transition to outsourcing 100% of our fabric requirements and the
further movement of sewing production to our offshore facilities and to various
third parties.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses for fiscal 2000 increased 14.7% to $143.3 million from
$125.0 million in fiscal 1999. Selling, general and administrative expenses as a
percentage of our net sales were 30.4% in fiscal 2000 compared to 30.1% 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.
ROYALTY INCOME. Royalty income was $5.8 million and $4.2 million in fiscal
years 2000 and 1999. We attribute the increase in royalty income to the
extension of our brands through new licensing arrangements and an increase in
average royalty rates.
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. This increase reflects the net effect of changes in gross profit and
selling, general and administrative expenses as described above.
INTEREST EXPENSE. Our interest expense for fiscal 2000 decreased to
$16.3 million from $17.7 million in fiscal 1999. This decrease reflects our
lower interest expense on lower average borrowings under our revolving credit
facility. Average daily revolver borrowings in 2000 decreased to $5.0 million
from $25.3 million in 1999. Lower average borrowings were due primarily to lower
average gross inventory levels, which resulted from improved inventory
management disciplines. In fiscal 2000, we earned approximately $303,000 in
interest income from overnight investments. At December 30, 2000, our
outstanding debt aggregated $141.4 million, of which $41.4 million bore interest
at a variable rate, so that an increase of 1% in the applicable rate would
increase our annual interest cost by $414,000. At December 30, 2000, there were
no borrowings under our $65.0 million revolving credit facility. We had
outstanding letters of credit totaling $6.0 million as of December 30, 2000.
INCOME TAXES. Our 2000 effective tax rate of 39.7% was more than the prior
year's effective tax rate of 30.0% 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, we
reported net income of $14.4 million in fiscal 2000 compared to a net loss of
$(2.0) million in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash needs are working capital, capital expenditures and debt
service. Historically, we have financed these needs primarily through internally
generated cash flow and funds borrowed under a senior credit facility. Our
primary source of liquidity will continue to be cash flow from operations and
borrowings under our credit facilities, and we expect that these sources will
fund our ongoing requirements for debt service and capital expenditures. These
sources of liquidity may be impacted by continued demand for our products and
our ability to meet debt covenants under our credit facility.
Net accounts receivable at December 29, 2001 were $35.4 million compared to
$33.8 million at December 30, 2000. This increase reflects a higher level of
wholesale shipments in the latter part of the fourth quarter ended December 29,
2001 compared to the comparable period in 2000.
Net cash provided by operating activities during fiscal 2001 and fiscal 2000
was approximately $34.0 million and $26.6 million. This increase is primarily
attributed to net changes in inventory balances offset by the payments of
certain Acquisition-related expenses. Inventory levels decreased to
18
$89.1 million at December 29, 2001 from $92.4 million at fiscal year end 2000.
Net cash provided by our operating activities in fiscal year 1999 was
$38.9 million. The decrease in net cash flow provided by operating activities in
fiscal 2000 from fiscal 1999 is attributed to investments in inventory required
to support higher revenue levels.
We invested $19.0 million, $17.2 million and $12.7 million in capital
expenditures during fiscal years 2001, 2000 and 1999. We plan to invest
approximately $20.0 million in capital expenditures in fiscal 2002. Major areas
for investment include retail outlet store openings and remodeling and fixturing
programs for wholesale customers.
Concurrent with the Acquisition, we repaid all of our outstanding
$51.6 million of borrowings under our old senior credit facility and redeemed
all $100.0 million principal amount of our outstanding senior subordinated
notes. We issued $175.0 million of 10.875% senior subordinated notes due 2011
(the "Notes") for $173.7 million in proceeds and entered into a new senior
credit facility with term loan and revolving loan facilities. The term loan
facility provides for a term loan in the principal amount of $125.0 million. The
revolving credit facility will provide revolving loans in an aggregate amount of
up to $60.0 million. Upon consummation of the Acquisition, we increased our
level of indebtedness by borrowing the full amount available under the term loan
facility and $24.0 million under the revolving credit facility. At December 29,
2001, we had approximately $298.7 million of debt outstanding, consisting of
$173.7 million of Notes, $125.0 million in term loan borrowings and no revolver
borrowings under the senior credit facility, exclusive of approximately
$6.5 million of outstanding letters of credit. At December 29, 2001 we had
approximately $53.5 million of financing available under our revolving loan
facility. The borrowings under the revolving credit facility will be available
to fund our working capital requirements, capital expenditures and other general
corporate purposes.
Principal borrowings under the term loan are due and payable in twenty-four
quarterly installments of approximately $.313 million beginning December 31,
2001 through September 30, 2007 and four quarterly payments of approximately
$29.4 million from December 31, 2007 through September 30, 2008. Interest on the
term loan is payable at the end of interest rate reset periods, which vary in
length but in no case exceed six months. The outstanding balance of the
revolving credit facility is payable in full on August 15, 2006, and interest is
payable quarterly. No principal payments are required on the Notes prior to
their scheduled maturity. Interest is payable semi-annually on the Notes in
February and August of each year, commencing February 15, 2002, in the amount of
$9.5 million for each payment.
In connection with the Acquisition, we entered into a management agreement
with Berkshire Partners LLC. Under this agreement, we will pay Berkshire
Partners an annual management fee of $1.65 million commencing on the first
anniversary of the Acquisition. We will pay this fee quarterly in advance. In
addition, upon consummation of the Acquisition, we paid Berkshire Partners an
acquisition fee of $2.0 million. We have agreed to pay Berkshire Partners an
acquisition fee of 1% of any future financing or 1% of the value of any
acquisition for their advice in connection with any future financing or
acquisition.
19
The following table summarizes the maturity or expiration dates of financial
obligations and commitments for the following fiscal years ($000):
2002 2003 2004 2005 2006 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------
Long-term debt....................... $ 1,250 $ 1,563 $ 1,250 $ 1,250 $ 937 $293,750 $300,000
Capital lease obligations (see Note
11 to the Consolidated Financial
Statements)........................ 501 -- -- -- -- -- 501
Operating leases (see Note 11 to the
Consolidated Financial
Statements)........................ 16,311 13,614 11,275 8,808 5,166 14,939 70,113
------- ------- ------- ------- ------ -------- --------
Total financial obligations........ 18,062 15,177 12,525 10,058 6,103 308,689 370,614
Letters of credit.................... 6,506 -- -- -- -- -- 6,506
Management fee....................... 619 2,063 1,650 1,650 618 -- 6,600
------- ------- ------- ------- ------ -------- --------
Total financial obligations and
commitments...................... $25,187 $17,240 $14,175 $11,708 $6,721 $308,689 $383,720
======= ======= ======= ======= ====== ======== ========
On May 1, 2001 we paid a semi-annual dividend of 12% on $20.0 million of
redeemable preferred stock, or approximately $1.2 million, to Holdings. This
preferred stock was cancelled in connection with the Acquisition.
At the Acquisition, we also paid a dividend of approximately $128.6 million
to Holdings. Holdings used these funds to repay debt and partially fund other
payments in connection with the Acquisition, including payments to selling
stockholders and option holders.
Based on our current level of operations and anticipated cost savings and
operating improvements, we believe that cash generated from operations and
available cash, together with amounts available under the revolving credit
portion of our new senior credit facility, will be adequate to meet our debt
service requirements, capital expenditures and working capital needs for the
foreseeable future, although no assurance can be given in this regard. We may,
however, need to refinance all or a portion of the principal amount of the Notes
on or prior to maturity.
The senior credit facility imposes certain covenants, requirements and
restrictions on actions by us and our subsidiaries that, among other things,
restrict the payment of dividends (see Note 5 to the Consolidated Financial
Statements).
IMPACT OF THE ACQUISITION
As a result of the Acquisition, we adjusted our assets and liabilities to
their fair value as of the Acquisition date. We also increased our aggregate
borrowings in connection with our new financing arrangements. Accordingly, our
depreciation expense will be lower and our amortization and interest expenses
will be higher in periods following the Acquisition. We allocated a significant
portion of the purchase price to our tradename. As an asset with an indefinite
life, we will not amortize this asset unless and until we determine it has a
definite life, but it will be subject to an annual impairment review. We have
allocated the excess of the total purchase price over the value of our net
assets at closing to goodwill, and it will be subject to an annual impairment
review.
In connection with the Acquisition, we reevaluated the requirements for
certain manufacturing operations, which we had previously planned to maintain to
support our long-term revenue growth plans. After a thorough assessment of
alternative sourcing opportunities, we decided to exit certain manufacturing
operations. We made this decision in connection with our new ownership in
advance of the Acquisition. Accordingly, we have closed one offshore and two
domestic manufacturing facilities at the end of fiscal 2001. In addition to
lowering inventory levels, we expect our sourcing strategy to further streamline
operations by allowing us to take advantage of sources of supply nearer to our
current offshore locations, as well as to expand the use of lower cost
third-party full-packaging suppliers. Also in connection with the Acquisition
and new ownership, we have determined to abandon an initiative to open a new
line of retail stores. This has led us to dismiss some of our employees and
20
to terminate a major consulting contract. The allocation of the purchase price
includes approximately $2.9 million in exit costs associated with the above
decisions.
EFFECTS OF INFLATION
We are affected by inflation and changing prices primarily through the
purchase of raw materials, increased operating costs and expenses and higher
interest rates. The effects of inflation in changing prices on our net sales,
revenues and operations have not been material in recent years.
SEASONALITY
We experience seasonal fluctuations in our sales and profitability, with
generally lower sales and gross profit in the first and second quarters of our
fiscal year. We believe that the 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to bad debts, inventories, intangible assets, income taxes,
restructuring, pensions and other post-retirement benefits, and contingencies
and litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 to the Consolidated Financial Statements, included
elsewhere in this Form 10-K, includes a summary of the significant accounting
policies and methods used in the preparation of our consolidated financial
statements. The following is a brief discussion of the more significant
accounting policies and methods used by us.
REVENUE RECOGNITION: We recognize wholesale revenue after shipment of
products to customers, when title passes and when all risks and rewards of
ownership have transferred. As discussed in Note 1 to the Consolidated
Financial Statements, in certain cases, this does not occur until the goods
reach the specified customer. We consider revenue realized or realizable and
earned when the product has been shipped, the sales price is fixed or
determinable and collectibility is reasonably assured. In the normal course
of business, we grant certain accommodations and allowances to our wholesale
customers. Such amounts are included in selling, general and administrative
expenses. Retail store revenues are recognized at the point of sale. We
reduce revenue for customer returns and deductions. We also maintain an
allowance for doubtful accounts for estimated losses resulting from the
inability of our customers to make payments. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their
ability to make payments, an additional allowance could be required.
INVENTORY: We write down our inventory for estimated excess and
obsolescence equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those
projected by us, additional write-downs may be required.
GOODWILL AND TRADENAME: As of December 29, 2001, we have recorded
approximately $359 million in goodwill and tradename assets. The fair value
of the Carter's tradename was estimated to be
21
approximately $220 million using a discounted cash flow analysis which
examined the hypoythetical cost savings that accrue as a result of our
ownership of the tradename. The cash flows, which incorporated both
historical and projected financial performance, were discounted using a
discount rate of ten percent. The tradename was determined to have an
indefinite life. The carrying value of these assets will be subject to
annual impairment reviews based on the estimated fair values of the
underlying businesses. These estimated fair values are based on
estimates of the future cash flows of the businesses. Factors affecting
these future cash flows include the continued market acceptance of our
offered products and the development of new products. Impairment reviews
may also be triggered by any significant events or changes in
circumstances.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
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 were 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 did not have a material impact on our financial position or
our results of operations at the required adoption date or as of December 29,
2001 and the period then ended.
In July 2001, the FASB issued SFAS 141 "Business Combinations" and SFAS 142
"Goodwill and Other Intangible Assets." SFAS 141 supercedes Accounting
Principles Board Opinion ("APB") No. 16, "Business Combinations." The most
significant changes made by SFAS 141 are: (1) requiring that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001, (2) establishing specific criteria for the recognition of intangible
assets separately from goodwill and (3) requiring unallocated negative goodwill
to be written off immediately as an extraordinary gain (instead of being
deferred and amortized).
SFAS 142 supercedes APB No. 17, "Intangible Assets." SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition (i.e., the post-acquisition accounting). The most significant
changes made by SFAS 142 are: (1) goodwill and indefinite lived intangible
assets will no longer be amortized, (2) goodwill will be tested for impairment
at least annually at the reporting unit level, (3) intangible assets deemed to
have an indefinite life will be tested for impairment at least annually and
(4) the amortization period of intangible assets with finite lives will no
longer be limited to forty years. The provisions of SFAS 142 are effective for
fiscal years beginning after December 15, 2001 and must be adopted at the
beginning of a fiscal year. However, goodwill and intangible assets acquired
after June 30, 2001 are subject immediately to the non-amortization and
amortization provisions of this statement.
Prior to the Aquisition, our tradename and goodwill arising from the 1996
acquisition were being amortized on a straight-line basis over estimated lives
of 40 years. However, in connection with the Acquisition, we have adopted the
provisions of SFAS 141 and have applied the required provisions of SFAS 142.
Accordingly, our tradename and goodwill have now been deemed to have indefinite
lives and are no longer being amortized in the Successor period. Our licensing
agreements, however, have been recognized in the allocation of the Acquisition
purchase price and will be amortized over the average three-year life of such
agreements, as it has been determined that these agreements have finite lives.
We adopted the remaining provisions of SFAS 142 effective December 30, 2001
(fiscal 2002). In accordance with SFAS 142, we are required to measure our
goodwill for impairment on at least an annual basis by comparing the fair value
of our reporting units, as defined by SFAS 142, to their
22
respective carrying value. We are required to identify our reporting units by
the end of the first quarter of fiscal 2002 and complete the initial impairment
analysis by the end of the second quarter of fiscal 2002. In accordance with
SFAS 142, we are required to assess the carrying value of our tradename for
impairment by the end of the first quarter of fiscal 2002. In addition to the
annual tests, our goodwill and tradename will be tested for impairment if events
or changes in circumstances indicate that either of these assets might be
impaired.
Prior to the implementation of SFAS 142, amortization of our tradename and
goodwill amounted to approximately $3.2 million on an annual basis. Accumulated
amortization of the tradename at December 30, 2000 was $10,417,000. Accumulated
amortization of goodwill at December 30, 2000 was $3,478,000.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires recording the fair
market value of an asset retirement obligation as a liability in the period in
which a legal obligation associated with the retirement of tangible long-lived
assets is incurred. The statement also requires recording the contra asset to
the initial obligation as an increase to the carrying amount of the related
long-lived asset and depreciation of that cost over the life of the asset. We
would be required to adopt the provisions of SFAS 143 in fiscal 2003; however,
SFAS 143 is not expected to have an impact on our financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The statement also extends the reporting requirements to report separately, as
discontinued operations, components of an entity that have either been disposed
of or classified as held for sale. We will adopt the provisions of SFAS 144 as
of the beginning of fiscal 2002. Such adoption is not expected to have a
significant effect on our financial statements.
In November 2001, the Financial Accounting Standards Board's Emerging Issues
Task Force ("EITF") issued EITF Issue No. 01-09 ("EITF 01-09"), "Accounting for
Consideration Given by a Vendor to a Customer/Reseller," which addresses the
accounting for consideration given by a vendor to a customer including both a
reseller of the vendor's products and an entity that purchases the vendor's
products from a reseller. EITF 01-09 also codifies and reconciles related
guidance issued by the EITF including EITF Issue No. 00-25, "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products," and EITF Issue No. 00-14, "Accounting for Certain Sales Incentives."
EITF 01-09 outlines the presumption that consideration given by a vendor to a
customer, a reseller or a customer of a reseller is to be treated as a reduction
of revenue. Treatment of such payments as an expense would only be appropriate
if two conditions are met: (a) the vendor receives an identifiable benefit in
return for the consideration paid that is sufficiently separable from the sale
such that the vendor could have entered into an exchange transaction with a
party other than the purchaser of its products in order to receive that benefit
and (b) the vendor can reasonably estimate the fair value of that benefit. We
currently account for accommodations and cooperative advertising allowances
made to wholesale customers as selling expenses at the point at which we
enter into such commitments. Adoption of EITF 01-09 guidance will require us
to reclassify certain expenses from selling, general and administrative
expenses to a reduction of sales. These reclassifications will take place in
the first quarter of 2002, and prior periods will be reclassified for
comparative purposes. The effect of these reclassifications as it relates to
customer accommodations is expected to decrease net sales by approximately
$5,873,000 in the Successor period from August 15, 2001 through December 29,
2001, approximately $1,625,000 in the Predecessor period from December 31,
2000 through August 14, 2001, $3,690,000 in the Predecessor year ended
December 30, 2000 and $2,993,000 in the Predecessor year ended January 1,
2000. Cooperative advertising amounted to approximately $2,605,000 in the
Successor period from August 15, 2001 through December 29, 2001,
approximately $3,382,000 in the Predecessor period from December 31, 2000
through August 14, 2001, $4,309,000 in the Predecessor year ended December
30, 2000 and $4,679,000 in the Predecessor year ended January 1, 2000. We are
in the
23
process of determining the appropriate classification of such expenses as
required by EITF 01-09. These reclassifications will not impact net income.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the operation of our business, we have market risk exposures to global
sourcing, raw material prices and interest rates. Each of these risks and our
strategies to manage the exposure is discussed below.
We currently source substantially all of our production from our offshore
operations and third-party manufacturers located in foreign countries. As a
result, we may be adversely affected by political instability resulting in the
disruption of trade from foreign countries, 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 our receipt
of the products in the United States. Our future performance may be subject to
such factors, which are beyond our control, and there can be no assurance that
such factors would not have a material adverse effect on our financial condition
and results of operations.
Additionally, we enter into various purchase order commitments with full
package suppliers. We can cancel these arrangements, although in some instances,
we may be subject to a termination charge reflecting a percentage of work
performed prior to cancellation.
The principal raw materials we use are finished fabrics and trim materials.
These materials are available from a number of suppliers. Changes in market
demand affect prices for these materials, and there can be no assurance that
prices for these and other raw materials will not increase in the near future.
Our operating results are subject to risk from interest rate fluctuations on
debt, which carries variable interest rates. At December 29, 2001, outstanding
debt aggregated $298.7 million, of which $125.0 million bore interest at a
variable rate, so that an increase of 1% in the applicable rate would increase
our annual interest cost by $1,250,000 and could have an adverse effect on our
net income and cash flow.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Accountants........................... 26
Consolidated Balance Sheets at December 29, 2001 (Successor)
and December 30, 2000 (Predecessor)....................... 27
Consolidated Statements of Operations for the periods
August 15, 2001 through December 29, 2001 (Successor) and
December 31, 2000 through August 14, 2001 (Predecessor)
and for the fiscal years ended December 30, 2000
(Predecessor) and January 1, 2000 (Predecessor)........... 28
Consolidated Statements of Cash Flows for the periods
August 15, 2001 through December 29, 2001 (Successor) and
December 31, 2000 through August 14, 2001 (Predecessor)
and for the fiscal years ended December 30, 2000
(Predecessor) and January 1, 2000 (Predecessor)........... 29
Consolidated Statements of Changes in Common Stockholder's
Equity for the periods August 15, 2001 through
December 29, 2001 (Successor) and December 31, 2000
through August 14, 2001 (Predecessor) and for the fiscal
years ended December 30, 2000 (Predecessor) and
January 1, 2000 (Predecessor)............................. 30
Notes to Consolidated Financial Statements.................. 31
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
The William Carter Company:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows and changes in
common stockholder's equity present fairly, in all material respects, the
consolidated financial position of The William Carter Company and its
subsidiaries (the "Company") as of December 29, 2001 ("Successor," as defined
in Note 1) and December 30, 2000 ("Predecessor," as defined in Note 1), and
the consolidated results of their operations and their cash flows for the
period from August 15, 2001 through December 29, 2001 (Successor) and the
period from December 31, 2000 through August 14, 2001 (Predecessor) and for
the years ended December 30, 2000 (Predecessor) and January 1, 2000
(Predecessor), 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 explained in Note 1 to the financial statements, controlling ownership of
the Company's parent, Carter Holdings, Inc., was acquired in a purchase
transaction as of August 15, 2001. The acquisition was accounted for as a
purchase and, accordingly, the purchase price was allocated to the assets and
liabilities of the Predecessor based upon their estimated fair value at
August 15, 2001. Accordingly, the financial statements of the Successor are not
comparable to those of the Predecessor.
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
February 20, 2002
26
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SUCCESSOR, AT PREDECESSOR, AT
DECEMBER 29, DECEMBER 30,
2001 2000
-------- ----------
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 24,692 $ 3,697
Accounts receivable, net of allowance for doubtful accounts of $1,673 in 2001
and $2,045 in 2000.......................................................... 35,386 33,788
Inventories, net.............................................................. 89,069 92,435
Prepaid expenses and other current assets..................................... 5,585 4,971
Assets held for sale.......................................................... 875 373
Deferred income taxes......................................................... 9,371 9,184
-------- ----------
Total current assets...................................................... 164,978 144,448
Property, plant and equipment, net.............................................. 46,503 54,441
Assets held for sale............................................................ 600 950
Tradename, net in 2000.......................................................... 220,233 89,583
Cost in excess of fair value of net assets acquired, net in 2000................ 139,472 26,606
Licensing agreements, net....................................................... 13,125 --
Deferred debt issuance costs, net............................................... 12,879 4,167
Other assets.................................................................... 6,372 5,793
-------- ----------
Total assets.............................................................. $604,162 $ 325,988
======== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt.......................................... $ 1,250 $ 5,400
Accounts payable.............................................................. 18,765 19,223
Other current liabilities..................................................... 34,438 35,489
-------- ----------
Total current liabilities................................................. 54,453 60,112
Long-term debt.................................................................. 297,492 136,000
Deferred income taxes........................................................... 84,375 35,125
Other long-term liabilities..................................................... 10,127 10,238
-------- ----------
Total liabilities......................................................... 446,447 241,475
-------- ----------
Commitments and contingencies
Redeemable preferred stock, par value $.01 per share; $4,000 per share
liquidation and redemption value, 5,000 shares authorized, issued and
outstanding in 2000........................................................... -- 19,116
-------- ----------
Common stockholder's equity:
Common stock, par value $.01 per share; 200,000 shares authorized, 1,000
shares issued and outstanding at December 29, 2001 (Successor); 300,000
shares authorized, 1,000 shares issued and outstanding at December 30, 2000
(Predecessor)............................................................... -- --
Additional paid-in capital.................................................... 144,877 53,771
Retained earnings............................................................. 12,838 11,626
-------- ----------
Total common stockholder's equity............................................. 157,715 65,397
-------- ----------
Total liabilities and stockholder's equity................................ $604,162 $ 325,988
======== ==========
27
The accompanying notes are an integral part of the consolidated financial
statements.
28
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
SUCCESSOR PREDECESSOR
-------------- ------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FROM FROM
AUGUST 15, DECEMBER 31,
2001 2000 FOR THE YEARS ENDED
THROUGH THROUGH -------------------------
DECEMBER 29, AUGUST 14, DECEMBER 30, JANUARY 1,
2001 2001 2000 2000
-------------- -------------- ------------ ----------
Net sales.................................... $244,258 $287,734 $471,374 $414,596
Cost of goods sold........................... 149,352 182,863 293,340 271,844
-------- -------- -------- --------
Gross profit................................. 94,906 104,871 178,034 142,752
Selling, general and administrative
expenses................................... 66,465 93,902 143,321 125,006
Acquisition-related non-recurring charges.... -- 11,289 -- --
Writedown of long-lived assets............... -- 3,156 -- 7,124
Non-recurring charges-plant closure costs.... (268) 1,116 -- --
Royalty income............................... (2,624) (4,993) (5,808) (4,233)
-------- -------- -------- --------
Operating income............................. 31,333 401 40,521 14,855
Interest income.............................. (207) (73) (303) --
Interest expense............................. 11,307 10,133 16,294 17,748
-------- -------- -------- --------
Income (loss) before income taxes,
extraordinary item and cumulative effect of
change in accounting principle............. 20,233 (9,659) 24,530 (2,893)
Provision for (benefit from) income taxes.... 7,395 (1,404) 9,731 (869)
-------- -------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.................................. 12,838 (8,255) 14,799 (2,024)
Extraordinary item, net of tax benefit of
$4,115..................................... -- 6,173 -- --
Cumulative effect of change in accounting
principle, net of income tax benefit of
$217....................................... -- -- 354 --
-------- -------- -------- --------
Net income (loss)............................ $ 12,838 (14,428) 14,445 (2,024)
========
Dividend requirements and accretion on
redeemable preferred stock................. (1,671) (2,653) (2,653)
-------- -------- --------
Net (loss) income applicable to common
stockholder................................ $(16,099) $ 11,792 $ (4,677)
======== ======== ========
Pro forma amounts assuming the accounting
change is applied retroactively:
Net income (loss)............................ $ 12,838 $(14,428) $ 14,799 $ (1,608)
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
28
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SUCCESSOR PREDECESSOR
------------------ ----------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FROM FROM FOR THE YEARS ENDED
AUGUST 15, 2001 DECEMBER 31, 2000 -------------------------
THROUGH THROUGH DECEMBER 30, JANUARY 1,
DECEMBER 29, 2001 AUGUST 14, 2001 2000 2000
------------------ ------------------ ------------ ----------
Cash flows from operating activities:
Net income (loss).................................. $ 12,838 $(14,428) $14,445 $ (2,024)
Extraordinary loss, net of taxes................... -- 6,173 -- --
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 6,918 12,245 17,520 16,855
Amortization of debt issuance costs.............. 593 848 1,347 1,336
Amortization of debt discount.................... 49 -- -- --
(Payment of) provision for Acquisition-related
non-recurring charges.......................... (11,289) 11,289 -- --
Non-recurring charges-plant closure costs........ (268) 1,116 -- --
Writedown of long-lived assets................... -- 3,156 -- 7,124
(Gain) loss on disposal of assets................ (38) -- (21) 59
Deferred tax provision (benefit)................. 2,911 (1,659) (413) (2,676)
Effect of changes in operating assets and
liabilities:
Decrease (increase) in accounts receivable..... 4,184 (5,782) 617 429
Decrease (increase) in inventories............. 21,150 (13,253) (12,799) 21,772
(Increase) decrease in prepaid expenses and
other assets................................. (3,000) 1,807 (1,129) (1,769)
(Decrease) increase in accounts payable and
other liabilities............................ (1,392) (137) 7,070 (2,215)
-------- -------- ------- --------
Net cash provided by operating activities.... 32,656 1,375 26,637 38,891
-------- -------- ------- --------
Cash flows from investing activities:
Capital expenditures............................... (9,556) (9,480) (17,179) (12,726)
Proceeds from sale of property, plant and
equipment........................................ 218 10 252 364
Proceeds from assets held for sale................. -- 204 546 --
Payment of buyer's Acquisition costs............... (3,885) -- -- --
Issuance of loan................................... -- -- (4,336) --
Proceeds from loan................................. -- -- 1,500 --
-------- -------- ------- --------
Net cash used in investing activities........ (13,223) (9,266) (19,217) (12,362)
-------- -------- ------- --------
Cash flows from financing activities:
Proceeds from Predecessor revolving line of
credit........................................... -- 53,500 62,900 89,850
Payments of Predecessor revolving line of credit... (12,900) (40,600) (62,900) (114,250)
Proceeds from Successor revolving line of credit... 35,350 -- -- --
Payments of Successor revolving line of credit..... (35,350) -- -- --
Proceeds from Successor term loan.................. 125,000 -- -- --
Payments of Predecessor term loan.................. (38,700) (2,700) (900) (900)
Proceeds from issuance of Successor 10.875% Senior
Subordinated Notes............................... 173,693 -- -- --
Payment of Predecessor 10 3/8% Senior Subordinated
Notes............................................ (100,000) -- -- --
Borrowings on capital leases....................... -- -- -- 558
Payments of capital lease obligation............... (328) (642) (925) (458)
Acquisition-related dividend to Holdings........... (128,559) -- -- --
Payments of other dividends to Holdings............ -- (60) (70) (507)
Payments of preferred stock dividends.............. -- (1,207) (2,440) (2,433)
Payments of Successor debt issuance costs.......... (13,471) -- -- --
Other.............................................. -- (3,573) (2,803) 1,040
-------- -------- ------- --------
Net cash provided by (used in) financing
activities................................. 4,735 4,718 (7,138) (27,100)
-------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents........................................ 24,168 (3,173) 282 (571)
Cash and cash equivalents at beginning of period..... 524 3,697 3,415 3,986
-------- -------- ------- --------
Cash and cash equivalents at end of period........... $ 24,692 $ 524 $ 3,697 $ 3,415
======== ======== ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
29
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT)
-------- ---------- ------------
PREDECESSOR:
-----------
BALANCE AT JANUARY 2, 1999................................ $ -- $ 56,811 $ 1,928
Capital contributions from Holdings....................... 60
Accrued dividends and accretion on redeemable preferred
stock................................................... (2,653)
Other dividends........................................... (507)
Net loss.................................................. (2,024)
------ -------- -------
BALANCE AT JANUARY 1, 2000................................ -- 53,711 (96)
Capital contributions from Holdings....................... 60
Accrued dividends and accretion on redeemable preferred
stock................................................... (2,653)
Other dividends........................................... (70)
Net income................................................ 14,445
------ -------- -------
BALANCE AT DECEMBER 30, 2000.............................. -- 53,771 11,626
Capital contributions from Holdings....................... 60
Accrued dividends and accretion on redeemable preferred
stock................................................... (1,671)
Other dividends........................................... (60)
Net loss.................................................. (14,428)
------ -------- -------
BALANCE AT AUGUST 14, 2001................................ $ -- $ 52,100 $(2,802)
====== ======== =======
SUCCESSOR:
---------
BALANCE AT AUGUST 15, 2001................................ $ -- $144,877 $ --
Net income................................................ 12,838
------ -------- -------
BALANCE AT DECEMBER 29, 2001.............................. $ -- $144,877 $12,838
====== ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
30
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY:
The William Carter Company ("Carter's," "we," "us" and "our") is a
wholly-owned subsidiary of Carter Holdings, Inc. ("Holdings"). Holdings has no
significant assets or investments other than the shares of stock of The William
Carter Company. On July 12, 2001, a special purpose entity formed by Berkshire
Partners LLC and affiliates ("Berkshire") entered into a stock purchase
agreement with Holdings and all of Holdings' stockholders to acquire
substantially all of the stock of Holdings except for some equity interests held
by our management (the "Acquisition"). The Acquisition was consummated on
August 15, 2001. Financing for the Acquisition and related transactions totaled
$468.2 million and was provided by: $24.0 million in new revolving credit
facility borrowings; $125.0 million in new term loan borrowings (both the
revolver and term loan are part of a $185.0 million new senior credit facility
entered into by us); $173.7 million of borrowings under a new senior
subordinated loan facility (issued by us in connection with an August 15, 2001
private placement); and $145.5 million of capital invested by affiliates of
Berkshire and other investors, which includes rollover equity by our management
of $18.3 million.
The proceeds of the Acquisition and financing were used to purchase existing
equity of Holdings ($252.5 million), pay for selling stockholders transaction
expenses ($19.1 million, including $0.8 million in debt prepayment penalties
recorded on Holdings), pay for buyers' transaction expenses ($4.0 million), pay
debt issuance costs ($13.4 million) and to retire all outstanding balances on
ours and Holdings' previously outstanding long-term debt including accrued
interest thereon ($174.8 million). In addition, $4.4 million of proceeds were
held as cash for temporary working capital purposes. Portions of these payments
were accomplished via an intercompany dividend of $128.6 million from us to
Holdings. Also in connection with the Acquisition, our redeemable preferred
stock held by Holdings was cancelled.
For purposes of identification and description, we are referred to as the
"Predecessor" for the period prior to the Acquisition, the "Successor" for the
period subsequent to the Acquisition and "we" or "us" for both periods.
The Acquisition was accounted for as a purchase and has been reflected in
our financial statements using pushdown accounting. Accordingly, the purchase
price for the Acquisition, including related fees and expenses, has been
allocated to our tangible and identifiable intangible assets and liabilities
based upon their estimated fair values with the remainder allocated to goodwill.
31
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY: (CONTINUED)
A summary of the total purchase price is as follows ($000):
Total purchase price........................................ $468,193
Less-amounts retained at Holdings......................... (623)
--------
$467,570
========
Allocated to:
Cash and cash equivalents................................. $ 7,333
Accounts receivable, net.................................. 39,570
Inventories, net.......................................... 110,219
Prepaid expenses and other current assets................. 3,525
Property, plant and equipment............................. 42,569
Assets held for sale...................................... 930
Licensing agreements...................................... 15,000
Tradename................................................. 220,233
Cost in excess of fair value of net assets acquired....... 139,472
Deferred debt issuance costs.............................. 13,427
Other assets.............................................. 5,432
Accounts payable.......................................... (18,340)
Other current liabilities................................. (25,936)
Closure and exit liabilities.............................. (2,921)
Other long-term liabilities............................... (10,850)
Net deferred tax liabilities.............................. (72,093)
--------
$467,570
========
As a result of the above, our initial capitalization as of the Acquisition
date consisted of ($000):
Borrowings on new revolving credit facility................. $ 24,000
Borrowings on new term loan................................. 125,000
Borrowings under new senior subordinated note............... 173,693
Additional paid-in capital.................................. 144,877
--------
Total Capitalization...................................... $467,570
========
The Acquisition related non-recurring charges in the Predecessor period
December 31, 2000 through August 14, 2001 reflect special compensation of
$4.5 million paid to management at the closing of the Acquisition and
$6.8 million for sellers' transaction costs and fees.
The extraordinary charge in the Predecessor period December 31, 2000 through
August 14, 2001 reflects the write-off of deferred debt issuance costs of
approximately $1,991,000, net of a tax benefit of approximately $1,327,000, and
a debt prepayment penalty of approximately $4,182,000, net of a tax benefit of
approximately $2,788,000.
32
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY: (CONTINUED)
Subsequent to the Acquisition, our results of operations are expected to be
significantly impacted by changes in interest expense and amortization. (See
below and Notes 2 and 5)
The following unaudited pro forma operating data presents the results of
operations for the fiscal years ended December 29, 2001 and December 30, 2000 as
if the Acquisition had occurred on January 2, 2000, with financing obtained as
described above and assumes that there were no other changes in our operations.
The pro forma results are not necessarily indicative of the financial results
that might have occurred had the transaction actually taken place on January 2,
2000, or of future results of operations ($000):
PREDECESSOR PERIOD SUCCESSOR PERIOD
FROM FROM
DECEMBER 31, 2000 AUGUST 15, 2001 PRO FORMA FOR THE
THROUGH THROUGH PRO FORMA YEAR ENDED
AUGUST 14, 2001 DECEMBER 29, 2001 ADJUSTMENTS DECEMBER 29, 2001
------------------ ----------------- ----------- -----------------
Net sales............................................. $287,734 $244,258 $ -- $531,992
Gross profit.......................................... 104,871 94,906 335 (a) 204,643
4,531 (b)
Selling, general and administrative expenses.......... 93,902 66,465 (2,058)(c) 161,476
3,167 (d)
Acquisition-related non-recurring charges............. 11,289 -- (11,289)(e) --
Writedown of long-lived assets........................ 3,156 -- -- 3,156
Non-recurring charges-plant closure costs............. 1,116 (268) -- 848
Royalty income........................................ (4,993) (2,624) -- (7,617)
-------- -------- ---------- --------
Operating income...................................... 401 31,333 15,046 46,780
Interest expense, net................................. 10,060 11,100 9,282 (f) 30,442
-------- -------- ---------- --------
(Loss) income before income taxes and extraordinary
item................................................ (9,659) 20,233 5,764 16,338
(Benefit from) provision for income taxes............. (1,404) 7,395 122 (g) 6,113
-------- -------- ---------- --------
(Loss) income before extraordinary item............... (8,255) 12,838 5,642 10,225
Extraordinary item, net of tax benefit of $4,115...... (6,173) -- 6,173 (h) --
-------- -------- ---------- --------
Net (loss) income..................................... $(14,428) $ 12,838 $ 11,815 $ 10,225
======== ======== ========== ========
33
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY: (CONTINUED)
PREDECESSOR,
FOR THE PRO FORMA FOR THE
YEAR ENDED PRO FORMA YEAR ENDED
DECEMBER 30, 2000 ADJUSTMENTS DECEMBER 30, 2000
----------------- ----------- -----------------
Net sales........................................ $471,374 $ -- $471,374
Gross profit..................................... 178,034 512 (a) 178,546
Selling, general and administrative expenses..... 143,321 (3,239)(c) 145,082
5,000 (d)
Royalty income................................... (5,808) -- (5,808)
-------- --------- --------
Operating income................................. 40,521 (1,249) 39,272
Interest expense, net............................ 15,991 14,218 (f) 30,209
-------- --------- --------
Income before income taxes and cumulative effect
of change in accounting principle.............. 24,530 (15,467) 9,063
Provision for income taxes....................... 9,731 (6,187)(g) 3,544
-------- --------- --------
Income before cumulative effect of change in
accounting principle........................... 14,799 (9,280) 5,519
Cumulative effect of change in accounting
principle, net of income tax benefit of $217... 354 -- 354
-------- --------- --------
Net income....................................... $ 14,445 $ (9,280) $ 5,165
======== ========= ========
Pro forma adjustments represent ($000): (a) the decrease in depreciation
expense resulting from decreased basis of property, plant and equipment,
primarily buildings and related leasehold improvements, having an average useful
life of 15 years. The decrease in basis of $7,676 is based upon an independent
valuation and reflects, in part, the decision to exit certain facilities;
(b) the reversal of $4,531 non-recurring charge related to fair value step-up in
inventory recorded at Acquisition and consumed in cost of goods sold during the
period from August 15, 2001 through December 29, 2001; (c) the reversal of
goodwill amortization and amortization of tradename having an indefinite life in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142");
(d) amortization expense of licensing agreements. The licensing agreements
totaling $15,000 were established at the time of the Acquisition and based upon
an independent valuation. The estimated useful life is three years, which
represents the average remaining term of the licensing agreements; (e) the
reversal of Acquisition-related non-recurring charges, consisting of $4,525 of
management bonuses and $6,764 in other seller expenses; (f) increases in
interest expense resulting from the change in our debt structure; (g) income tax
effects of pro forma adjustments; and (h) the reversal of an extraordinary item
resulting from the write-off of deferred debt issue costs and debt prepayment
penalties.
On October 30, 1996, Holdings was organized on behalf of affiliates of
Investcorp S.A. (Investcorp), management and certain other investors to acquire
100% of our previously outstanding common and preferred stock (the 1996
acquisition) from MBL Life Assurance Corporation, CHC Charitable Irrevocable
Trust and certain management stockholders for a total financed purchased price
of $226.1 million. The 1996 acquisition was also accounted for by the purchase
method. Accordingly, our assets and liabilities had been adjusted at the 1996
acquisition date, to reflect the allocation of that purchase price based on
estimated fair values.
34
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2-- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
We design, manufacture, source and market premier branded childrenswear
under the CARTER'S, CARTER'S CLASSICS and TYKES labels. Our products are sourced
internationally through internal production at plants located in Costa Rica and
Mexico and through contractual arrangements with numerous manufacturers
throughout the world. Our sewing operation in the Dominican Republic and our
remaining domestic manufacturing operations located in the southern United
States were closed in the fourth quarter of fiscal 2001. Products are
manufactured for wholesale distribution to major domestic retailers and for our
151 retail outlet stores that market our 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 our accounts and those of our
wholly-owned subsidiaries. Our international subsidiaries represented
approximately 96%, 85% and 78% of our sewing production for fiscal years 2001,
2000 and 1999. Total net assets (primarily property, plant and equipment and
inventory) at our international subsidiaries were approximately $10.2 million at
December 29, 2001 and $16.0 million at December 30, 2000. All intercompany
transactions and balances have been eliminated in consolidation.
FISCAL YEAR:
Our fiscal year ends on the Saturday in December or January nearest the last
day of December. The accompanying consolidated financial statements reflect our
financial position as of December 29, 2001 and December 30, 2000 and results of
operations for the Successor period August 15, 2001 through December 29, 2001,
for the Predecessor period December 31, 2000 through August 14, 2001 and for the
Predecessor fiscal years ended December 30, 2000 and January 1, 2000. The fiscal
2001 Successor and Predecessor periods, collectively (fiscal 2001), as well as
the Predecessor fiscal years ended December 30, 2000 (fiscal 2000) and
January 1, 2000 (fiscal 1999) each contain 52 weeks.
CASH AND CASH EQUIVALENTS:
We consider all highly liquid investments that have original maturities of
three months or less to be cash equivalents. We had cash deposits, in excess of
deposit insurance limits, in five banks at December 29, 2001 and four banks at
December 30, 2000.
ACCOUNTS RECEIVABLE:
Approximately 87% of our gross accounts receivable at December 29, 2001 and
75% at December 30, 2000 were from our ten largest wholesale customers,
primarily major retailers. Of these customers, three have individual receivable
balances in excess of 10% of gross accounts receivable (but not more than 17%)
at December 29, 2001 and four had such balances at December 30, 2000. Sales to
these customers represent comparable percentages to total wholesale revenues.
35
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2-- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
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 26 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. We
capitalize the cost of our fixtures designed and purchased for use at major
wholesale accounts. The cost of these fixtures is amortized over a three-year
period.
GOODWILL AND OTHER INTANGIBILE ASSETS:
Cost in excess of fair value of net assets acquired ("goodwill") represents
the excess of the cost of the Acquisition (or the 1996 acquisition) over the
fair value of the net assets acquired.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 "Business Combinations" ("SFAS 141") and SFAS 142 "Goodwill and Other
Intangible Assets." SFAS 141 supercedes Accounting Principles Board Opinion
("APB") No. 16, "Business Combinations." The most significant changes made by
SFAS 141 are: (1) requiring that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001, (2) establishing
specific criteria for the recognition of intangible assets separately from
goodwill and (3) requiring unallocated negative goodwill to be written off
immediately as an extraordinary gain (instead of being deferred and amortized).
SFAS 142 supercedes APB No. 17, "Intangible Assets." SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition (i.e., the post-acquisition accounting). The most significant
changes made by SFAS 142 are: (1) goodwill and indefinite lived intangible
assets will no longer be amortized, (2) goodwill will be tested for impairment
at least annually at the reporting unit level, (3) intangible assets deemed to
have an indefinite life will be tested for impairment at least annually and
(4) the amortization period of intangible assets with finite lives will no
longer be limited to forty years. The provisions of SFAS 142 are effective for
fiscal years beginning after December 15, 2001 and must be adopted at the
beginning of a fiscal year. However, goodwill and intangible assets acquired
after June 30, 2001 are subject immediately to the non-amortization and
amortization provisions of this statement.
Prior to the Acquisition, our tradename and goodwill arising from the 1996
acquisition were being amortized on a straight-line basis over estimated lives
of 40 years. However, in connection with the Acquisition, we have adopted the
provisions of SFAS 141 and have applied the required provisions of SFAS 142.
Accordingly, our tradename and goodwill have now been deemed to have indefinite
lives
36
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2-- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
and are no longer being amortized in the Successor period. Our licensing
agreements, however, have been recognized in the allocation of the Acquisition
purchase price and will be amortized over the average three-year life of such
agreements, as it has been determined that these agreements have finite lives.
We adopted the remaining provisions of SFAS 142 effective December 30, 2001
(fiscal 2002). In accordance with SFAS 142, we are required to measure our
goodwill for impairment on at least an annual basis by comparing the fair value
of our reporting units, as defined by this statement, to their respective
carrying value. We are required to identify our reporting units by the end of
the first quarter of fiscal 2002 and complete the initial impairment analysis by
the end of the second quarter of fiscal 2002. In accordance with SFAS 142, we
are required to assess the carrying value of our tradename for impairment by the
end of the first quarter of fiscal 2002. In addition to the annual tests, our
goodwill and tradename will be tested for impairment if events or changes in
circumstances indicate that either of these assets might be impaired.
Prior to the implementation of SFAS 142, amortization of our tradename and
goodwill amounted to approximately $3.2 million on an annual basis. Accumulated
amortization of the tradename at December 30, 2000 was $10,417,000. Accumulated
amortization of goodwill at December 30, 2000 was $3,478,000.
IMPAIRMENT OF OTHER LONG-LIVED ASSETS:
We review other long-lived assets, including property, plant and equipment
and licensing agreements, for impairment whenever events or changes in
circumstances indicate that the carrying amount of such an asset may not be
recoverable. Management will determine 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. 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 $593,000 for the Successor
period from August 15, 2001 through December 29, 2001, $848,000 for the
Predecessor period from December 31, 2000 through August 14, 2001, $1,347,000
for the Predecessor year ended December 30, 2000 and $1,336,000 for the
Predecessor year ended January 1, 2000.
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.
We
37
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2-- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
adopted the provisions of SAB 101 in the fourth quarter of fiscal 2000.
Accordingly, we revised our method of accounting for revenue recognition
retroactive to the beginning of fiscal 2000. Previously, we had recognized
revenue at the point of shipment for all wholesale customers. However, for
certain shipments, although title has passed, we effectively retain the risks
and rewards of ownership until the goods have reached the specified customer.
Under the new accounting method, we now recognize 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
point of sale, as the earnings process is then complete.
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 and 1999 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.
STOCK-BASED EMPLOYEE COMPENSATION ARRANGEMENTS:
We account for stock-based compensation under the intrinsic value method,
whereby compensation expense is recorded to the extent that the fair market
value of the stock at the date of a stock option grant exceeds the exercise
price of the stock option. For disclosure purposes only, we also estimate the
impact on our net income of applying the fair value method of measuring
compensation cost on stock options.
ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS:
We classify shipping and handling fees billed to customers as revenue and
include the corresponding cost in cost of goods sold. Shipping and handling
costs that are absorbed by us are included in selling, general and
administrative expenses and amounted to approximately $6,206,000 in the
Successor period from August 15, 2001 through December 29, 2001, $10,344,000 in
the Predecessor period from December 31, 2000 through August 14, 2001,
$14,289,000 for the Predecessor fiscal year 2000 and $13,675,000 for the
Predecessor fiscal year 1999.
ROYALTIES AND LICENSE FEES:
We license the CARTER'S, CARTER'S CLASSICS and TYKES names to other
companies for use on baby and young children's products including bedding,
outerwear, shoes, socks, room decor, toys, stationery, strollers and hair
accessories and related products. These royalties are recorded as earned, based
upon the sales of licensed products by our licensees.
38
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2-- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
INCOME TAXES:
We are included in the consolidated federal tax return of Holdings. The
accompanying financial statements reflect current and deferred tax provisions
calculated as if we were a separate taxpayer. 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 our 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 $10,667,000 for the Successor period
August 15, 2001 through December 29, 2001, $9,284,000 in the Predecessor period
from December 31, 2000 through August 14, 2001, $14,947,000 for the Predecessor
year ended December 30, 2000 and $16,368,000 for the Predecessor year ended
January 1, 2000. Income taxes (refunded) paid in cash approximated ($62,000) for
the Successor period August 15, 2001 through December 29, 2001, $2,272,000 for
the Predecessor period from December 31, 2000 through August 14, 2001,
$6,774,000 for the Predecessor year ended December 30, 2000 and $756,000 for the
Predecessor year ended January 1, 2000. 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 our management 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 FASB issued SFAS 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 were 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 did not
have a material impact on our financial position or our results of operations at
the required adoption date or as of December 29, 2001 and the period then ended.
39
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2-- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires recording the fair
market value of an asset retirement obligation as a liability in the period in
which a legal obligation associated with the retirement of tangible long-lived
assets is incurred. The statement also requires recording the contra asset to
the initial obligation as an increase to the carrying amount of the related
long-lived asset and depreciation of that cost over the life of the asset. We
would be required to adopt the provisions of SFAS 143 in fiscal 2003; however,
SFAS 143 is not expected to have an impact on our financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The statement also extends the reporting requirements to report separately, as
discontinued operations, components of an entity that have either been disposed
of or classified as held for sale. We will adopt the provisions of SFAS 144 as
of the beginning of fiscal 2002. Such adoption is not expected to have a
significant effect on our financial statements.
In November 2001, the Financial Accounting Standards Board's Emerging Issues
Task Force ("EITF") issued EITF Issue No. 01-09 ("EITF 01-09"), "Accounting for
Consideration Given by a Vendor to a Customer/Reseller," which addresses the
accounting for consideration given by a vendor to a customer including both a
reseller of the vendor's products and an entity that purchases the vendor's
products from a reseller. EITF 01-09 also codifies and reconciles related
guidance issued by the EITF including EITF Issue No. 00-25, "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products," and EITF Issue No. 00-14, "Accounting for Certain Sales Incentives."
EITF 01-09 outlines the presumption that consideration given by a vendor to a
customer, a reseller or a customer of a reseller is to be treated as a reduction
of revenue. Treatment of such payments as an expense would only be appropriate
if two conditions are met: (a) the vendor receives an identifiable benefit in
return for the consideration paid that is sufficiently separable from the sale
such that the vendor could have entered into an exchange transaction with a
party other than the purchaser of its products in order to receive that benefit
and (b) the vendor can reasonably estimate the fair value of that benefit. We
currently account for accommodations and cooperative advertising allowances made
to wholesale customers as selling expenses at the point at which we enter into
such commitments. Adoption of EITF 01-09 guidance will require us to reclassify
certain expenses from selling, general and administrative expenses to a
reduction of sales. These reclassifications will take place in the first quarter
of 2002, and prior periods will be reclassified for comparative purposes. The
effect of these reclassifications as it relates to customer accommodations is
expected to decrease net sales by approximately $5,873,000 in the Successor
period from August 15, 2001 through December 29, 2001, approximately $1,625,000
in the Predecessor period from December 31, 2000 through August 14, 2001,
$3,690,000 in the Predecessor year ended December 30, 2000 and $2,993,000 in the
Predecessor year ended January 1, 2000. Cooperative advertising amounted to
approximately $2,605,000 in the Successor period from August 15, 2001 through
December 29, 2001, approximately $3,382,000 in the Predecessor period from
December 31, 2000 through August 14, 2001, $4,309,000 in the Predecessor year
ended December 30, 2000 and $4,679,000 in the Predecessor year ended January 1,
2000. We are in the process of determining the appropriate classification of
such expenses as required by EITF 01-09. These reclassifications will not impact
net income.
40
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INVENTORIES:
Inventories consisted of the following ($000):
SUCCESSOR, PREDECESSOR,
AT AT
DECEMBER DECEMBER
29, 30,
2001 2000
------- -------
Finished goods..................................... $72,320 $70,713
Work in process.................................... 13,227 14,508
Raw materials and supplies......................... 3,522 7,214
------- -------
$89,069 $92,435
======= =======
NOTE 4--PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following ($000):
SUCCESSOR, PREDECESSOR,
AT AT
DECEMBER DECEMBER
29, 30,
2001 2000
------- -------
Land, buildings and improvements................... $16,809 $20,305
Machinery and equipment............................ 22,744 62,677
Marketing fixtures................................. 10,702 10,366
Equipment under capital leases..................... 1,239 2,854
------- -------
51,494 96,202
Accumulated depreciation and amortization.......... (4,991) (41,761)
------- -------
$46,503 $54,441
======= =======
Depreciation and amortization expense ($000) was $5,043 for the Successor
period August 15, 2001 through December 29, 2001, $10,186 for the Predecessor
period December 31, 2000 through August 14, 2001, $14,281 for the Predecessor
year ended December 30, 2000 and $12,420 for the Predecessor year ended
January 1, 2000.
41
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM DEBT:
Long-term debt consisted of the following ($000):
SUCCESSOR, AT PREDECESSOR, AT
DECEMBER 29, DECEMBER 30,
2001 2000
----------- -----------
Successor senior credit facility term loan...................................... $ 125,000 $ --
Predecessor senior credit facility term loan.................................... -- 41,400
10 3/8% Series A Senior Subordinated Notes due 2006............................. -- 100,000
10.875% Series B Senior Subordinated Notes due 2011, net of unamortized discount
of $1,258..................................................................... 173,742 --
----------- -----------
298,742 141,400
Current maturities.............................................................. (1,250) (5,400)
----------- -----------
$ 297,492 $ 136,000
=========== ===========
In connection with the Acquisition, approximately $151.6 million in
Predecessor debt was retired, consisting of the previously outstanding
$100.0 million of 10 3/8% Series A Senior Subordinated Notes due 2006,
$38.7 million in term loan debt outstanding under the Predecessor senior credit
facility and $12.9 million of borrowings under the revolving credit portion of
the Predecessor senior credit facility. Additionally, we incurred an
extraordinary charge in the Predecessor period from December 31, 2000 through
August 14, 2001 in the amount of approximately $6.2 million (net of tax benefit
of approximately $4.1 million) related to the write-off of associated debt
issuance costs and prepayment penalties. The effective interest rate on variable
rate senior credit facility borrowings outstanding was 7.2% at August 14, 2001,
8.7% at December 30, 2000 and 8.7% at January 1, 2000.
In connection with the Acquisition, we also entered into a new senior credit
facility with Goldman, Sachs & Co., as the lead arranger, Fleet National Bank,
as the administrative agent, and other lenders. The senior credit facility
provides for aggregate borrowings by us of up to $185.0 million, including a
$125.0 million term loan and a $60.0 million revolving credit facility. As of
December 29, 2001, there was outstanding $125.0 million in term loan borrowings
and no borrowings under the revolving credit facility (excluding approximately
$6.5 million in outstanding letters of credit) and approximately $53.5 million
of unused commitment under the senior credit facility for working capital and
other purposes.
Amounts outstanding under the senior credit facility accrue interest, at
our option, at a rate per annum equal to either: (1) the base rate, as
defined in the senior credit facility, or (2) an adjusted Eurodollar rate, as
defined in the senior credit facility, in each case plus an applicable
interest margin. The applicable interest margin for the term loan is
initially 3.50% for Eurodollar rate loans and 2.50% for base rate loans. The
applicable interest margin for the revolving credit facility is initially
3.00% for Eurodollar rate loans and 2.00% for base rate loans. After March
31, 2002, the applicable interest margins for the term loan and the revolving
credit facility will be subject to quarterly reductions based on our
achievement of certain leverage ratios. The interest rate otherwise payable
under the senior credit facility will increase by 2.00% per annum during the
continuance of a payment default. Interest on the term loan is payable at the
end of interest rate reset periods, which vary in length but in no case
exceed six months. Interest on the revolving credit facility is payable
quarterly. The effective interest rate on variable rate senior credit
facility borrowings outstanding at December 29, 2001 was 5.8%.
42
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM DEBT: (CONTINUED)
Principal borrowings under the term loan are due and payable in twenty-four
quarterly installments of approximately $.313 million beginning December 31,
2001 through September 30, 2007 and four quarterly payments of approximately
$29.4 million from December 31, 2007 through September 30, 2008. The outstanding
balance of the revolving credit facility is payable in full on August 15, 2006.
We are required to prepay borrowings under the senior credit facility in
specified amounts and under specified circumstances such as certain asset sales,
cash insurance proceeds, cash proceeds from our issuance of equity and excess
cash flows, all as defined in the senior credit facility agreement. Subject to
certain conditions, we may make optional prepayments of senior credit facility
loans without premium or penalty.
The senior credit facility is collateralized by substantially all of our
personal property, some of our real property and a pledge of all the issued and
outstanding stock issued by us and our domestic subsidiaries, as well as 65% of
the issued and outstanding stock of our foreign subsidiaries. All of our
obligations under the senior credit facility are guaranteed by Holdings and all
of our present and future domestic subsidiaries.
The senior credit facility contains certain covenants which, among other
things, limit: the incurrence of additional indebtedness; mergers, acquisitions
and sales of assets; the incurrence of liens or other encumbrances, guarantees
or pledges; the payment of dividends and repurchases of common stock;
prepayments of equity and subordinated debt instruments, including the 10.875%
senior subordinated notes; investments; and certain transactions with
affiliates. The senior credit facility requires us to meet financial tests,
including, without limitation: maximum leverage; minimum interest coverage;
maximum capital expenditures; and minimum fixed charge coverage.
The senior credit facility contains customary events of default, including,
among other things: payment defaults; breaches of representations and
warranties; covenant defaults; cross-defaults to certain other debt, including
the 10.875% senior subordinated notes; events of bankruptcy and insolvency;
judgment defaults; invalidity of any guarantee or impairment of any collateral
interests supporting the senior credit facility; and a change in our control, as
defined in the senior credit facility.
We are also required to pay a periodic administrative agent's fee, a letter
of credit fee equal to the applicable interest margin for Eurodollar rate loans
under the revolving credit facility and letter of credit fronting fees.
As required under the senior credit facility, we purchased for $198,000 an
interest rate cap as an economic hedge against approximately $31.3 million of
variable rate debt. The cap rate is 7% and terminates on December 7, 2004. The
cap is recognized on the December 29, 2001 balance sheet at its fair value of
approximately $188,000.
Also, in connection with the Acquisition, we issued $175.0 million of
10.875% senior subordinated notes (less a discount of $1.3 million), which we
subsequently exchanged for notes in the same principal amount and with identical
terms (the "Notes"). Interest on the Notes accrues at the rate of 10.875% per
annum and is payable semi-annually in arrears on February 15 and August 15,
commencing on February 15, 2002. Unless redeemed earlier, principal on the Notes
is due in full on August 15, 2011. At any time prior to August 15, 2004, we may
on any one or more occasions redeem up to 35% of the aggregate principal amount
of the Notes at a redemption price of 110.875% of the principal amount
43
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM DEBT: (CONTINUED)
thereof, plus accrued and unpaid interest, if any, to the redemption date, with
the net cash proceeds of one or more equity offerings; provided that:
(1) at least 65% of the aggregate principal amount of the Notes remains
outstanding immediately after the occurrence of such redemption
(excluding the Notes held by us and our subsidiaries); and
(2) the redemption occurs within 90 days of the date of the closing of such
equity offering.
Except pursuant to the preceding paragraph, the Notes are not redeemable at
our option prior to August 15, 2006.
After August 15, 2006, we may redeem all or part of the Notes upon not less
than 30 nor more than 60 days notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest, if any, on the Notes redeemed, to the applicable redemption date, if
redeemed during the twelve-month period beginning on August 15 of the years
indicated below:
YEAR PERCENTAGE
---- ----------
2006....................................................... 105.438%
2007....................................................... 103.625%
2008....................................................... 101.813%
2009 and thereafter........................................ 100.000%
The Notes contain provisions and covenants including limitations on other
indebtedness, restricted payments and distributions, sales of assets, subsidiary
stock, liens and certain other transactions.
The fair value of our long-term debt was approximately $13.0 million greater
than the book value as of December 29, 2001 and $3.0 million lower than the
book value as of December 30, 2000. The fair values were estimated based on
similar issues or on current rates offered to us for debt of the same
remaining maturities.
NOTE 6--REDEEMABLE PREFERRED STOCK:
In connection with the 1996 acquisition, we authorized and issued 5,000
shares of Preferred Stock, par value $.01 per share, to Holdings.
Dividends on the Preferred Stock accrued at a rate of 12% per annum.
Dividends were cumulative and payable when and as declared by our Board of
Directors, out of assets legally available, on May 1 and November 1 of each
year. During the Predecessor period December 31, 2000 through August 14, 2001,
dividends totaling $1,207,000 were declared and paid pursuant to these
provisions, $2,440,000 were paid in the Predecessor fiscal year 2000 and
$2,433,000 were paid in the Predecessor fiscal year 1999.
The shares of Preferred Stock had no voting rights, other than as provided
by Massachusetts law.
The Preferred Stock was issued for $20.0 million and was recorded net of
issuance costs of $2.2 million. The carrying amount was increased by periodic
accretion, using the interest method with charges to retained earnings or
paid-in capital, so that the carrying amount would equal the mandatory
redemption amount, including accrued but undeclared or unpaid dividends, at the
mandatory redemption date of December 15, 2007. All of this preferred stock was
cancelled at the Acquisition, and none remains outstanding.
44
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--COMMON STOCK:
At December 29, 2001, our authorized common stock consists of 200,000 shares
of common stock, (300,000 shares at December 30, 2000) par value $.01 per share.
We have 1,000 shares of common stock issued and outstanding, all of which are
held by Holdings. All outstanding shares of common stock are pledged to
collateralize our obligations under the new senior credit facility. Each share
of common stock entitles the holder thereof to one vote on all matters to be
voted on by our shareholders. Pursuant to the restrictions contained in the
senior credit facility and the indenture governing the Notes, we do not expect
to be able to pay dividends on our common stock for the foreseeable future,
other than certain limited dividends permitted by the senior credit facility and
the indenture. In the event we have a liquidation, dissolution or winding-up,
the holders of the common stock are entitled to share in our remaining assets
after payment of all liabilities and after satisfaction of all liquidation
preferences payable to the holders of all shares of stock ranking senior to the
common stock. The common stock has no pre-emptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of the common stock are
fully paid and non-assessable.
NOTE 8--EMPLOYEE BENEFIT PLANS:
We offer 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. We also offer 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 our liabilities
are net of these employee contributions.
The following is a reconciliation of the Accumulated Post-Retirement Benefit
Obligations ("APBO") under this plan ($000):
SUCCESSOR PREDECESSOR
-------------- ---------------------------
FOR THE PERIOD FOR THE PERIOD
FROM FROM FOR THE
AUGUST 15, DECEMBER 31, YEAR
2001 2000 ENDED
THROUGH THROUGH DECEMBER
DECEMBER 29, AUGUST 14, 30,
2001 2001 2000
-------------- -------------- ----------
Benefit Obligation (APBO) at beginning of
period................................... $ 9,448 $ 9,878 $ 9,347
Service cost............................... 35 58 140
Interest cost.............................. 251 418 672
Plan participants' contributions........... 353 589 768
Actuarial loss (gain)...................... 523 (398) 598
Benefits paid.............................. (658) (1,097) (1,647)
------- ------- -------
APBO at end of period...................... $ 9,952 $ 9,448 $ 9,878
======= ======= =======
Our contribution for these post-retirement benefit obligations was $304,681
for the Successor period from August 15, 2001 through December 29, 2001,
$507,801 for the Predecessor period December 31, 2000 through August 14, 2001
and $878,644 in the Predecessor fiscal year 2000.
45
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--EMPLOYEE BENEFIT PLANS: (CONTINUED)
The funded status of the plan is reconciled to the accrued post-retirement
benefit liability recognized in the accompanying consolidated balance sheets, as
follows ($000):
SUCCESSOR, AT PREDECESSOR, AT
DECEMBER 29, DECEMBER 30,
2001 2000
------ ------
Funded status (unfunded APBO)............................. $9,952 $9,878
Unrecognized net loss from past experience different from
that assumed and from changes in assumptions............ (523) (1,110)
------ ------
Accrued benefit cost...................................... $9,429 $8,768
====== ======
The discount rate used in determining the APBO as of both December 29, 2001
and December 30, 2000 was 7.0%.
The components of post-retirement benefit expense charged to operations are
as follows ($000):
SUCCESSOR PREDECESSOR
----------- -----------------------------------
FOR THE FOR THE
PERIOD PERIOD
FROM FROM
AUGUST 15, DECEMBER FOR THE YEARS ENDED
2001 31, 2000 ---------------------
THROUGH THROUGH DECEMBER JANUARY
DECEMBER AUGUST 14, 30, 1,
29, 2001 2001 2000 2000
----------- ----------- ---------- --------
Service cost--benefits attributed to service
during the period......................... $ 35 $ 58 $140 $166
Interest cost on accumulated post-retirement
benefit obligation........................ 251 418 672 639
Amortization of net actuarial loss.......... -- 13 -- 56
---- ---- ---- ----
Total net periodic post-retirement benefit
cost...................................... $286 $489 $812 $861
==== ==== ==== ====
The effects on our 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 our future financial results.
We have an obligation under a defined benefit plan covering certain former
officers. At both December 29, 2001 and December 30, 2000, the present value of
the estimated remaining payments under this plan was approximately $1.4 million
and is included in other current and long-term liabilities.
We also sponsor 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 we
match up to 2.5% of the employee contribution, at a rate of 75% on the first 2%
and 50% on the second 2%. Effective January 1, 2002, we have increased our match
up to 4% of the employee contribution at a rate of 100% on the first 3% and 50%
of the second 2%. Our expense for the defined contribution plan totaled
approximately ($000): $275 for the Successor period August 15, 2001 through
December 29, 2001, $594 for the Predecessor period December 31, 2000 through
August 14,
46
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--EMPLOYEE BENEFIT PLANS: (CONTINUED)
2001, $1,017 for the Predecessor fiscal year ended December 30, 2000 and $997
for the Predecessor fiscal year ended January 1, 2000.
NOTE 9--MANAGEMENT STOCK INCENTIVE PLANS:
At Acquisition, Holdings adopted the 2001 Equity Incentive Plan (the
"Plan") in order to provide incentives to our employees and directors and
those of Holdings. Awards under the plan provide the recipients with options
to purchase shares of Holdings' common stock. There were 986,049 shares of
Holdings common stock made available for this plan. Three different types of
option awards have been issued under the Plan--Basic options, Performance
options and options retained by management that were issued before the
Acquisition. Basic options vest ratably over a five year period, but
immediately vest upon a change in control as defined. Up to 246,998 Basic
options may be granted to certain employees under the Plan, of which 53,882
remain available for grant at December 29, 2001. The exercise price of the
Basic options is $24.62 per share, which is deemed to be the fair market
value of the Holdings common stock at the time the options were granted (fair
market value is based upon the recent Acquisition of Holdings as described in
Note 1). Since the number of shares and the exercise price per share are
known at the time of grant, the Basic Options qualify for fixed plan
accounting. Accordingly, no compensation expense has been recognized on the
Basic options granted during 2001. These options expire in ten years. The
fair value of each granted Basic option, at the date of the grant, has been
estimated to be $18.84. This fair value was estimated using a minimum value
method at an assumed risk free interest rate of 5.5% and with an expected
term of five years. No dividends were assumed.
Performance options will vest after eight years, but may vest earlier
depending on a number of events, including a change of control (as defined)
or reaching certain defined performance objectives as of December 31, 2006.
Up to 394,145 Performance options may be granted to certain employees under
the Plan, of which 89,308 remain available for grant at December 29, 2001.
The exercise price of the Performance options is $24.62 per share, which is
deemed to be the fair market value of the stock at the time the options were
granted. These options are subject to fixed accounting and no compensation
expense has been recognized on the Performance options granted during 2001.
These options expire in ten years. The fair value of each granted Performance
option, at the date of the grant, has been estimated to be $16.04. This fair
value was estimated using a minimum value method at an assumed risk free
interest rate of 5.5%. The expected life of the options was estimated to be
eight years. No dividends were assumed.
A summary of stock option activity under this plan (in number of shares
that may be purchased) is as follows (excluding options issued under the
Former Plan-see below):
BASIC PERFORMANCE
OPTIONS OPTIONS
-------- -----------
Outstanding, August 15, 2001............................ -- --
Granted................................................. 193,116 304,837
Exercised............................................... -- --
Forfeited............................................... -- --
Expired................................................. -- --
------- -------
Outstanding, December 29, 2001.......................... 193,116 304,837
======= =======
Exercisable, December 29, 2001.......................... -- --
47
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--MANAGEMENT STOCK INCENTIVE PLANS: (CONTINUED)
Prior to the Acquisition, Holdings had an existing Management Stock
Incentive Plan (the "Former Plan") in order to provide incentives to
employees and directors of Holdings and Carter's. Options awarded under this
plan entitle recipients to purchase Holdings Common Stock (previously
Holdings Class C Stock). Shares subject to options issued under the Former
Plan have been restated to reflect a 10 for 1 stock split that occurred on
August 15, 2001. Options for up to 752,680 shares of Holdings Common Stock
were able to be granted to certain employees under the Former Plan, of which
2,864 had not been granted at August 14, 2001 and December 30, 2000. The
exercise price of all options granted under the Former Plan was $6 per share,
which was deemed to be the fair market value of the stock at the time the
options were granted. Accordingly, no compensation expense was recognized on
the options granted. All the options granted under the Former Plan vested
ratably over five years (contingent upon our meeting specific earnings
targets) or would immediately vest upon certain events. All stock options
granted under the Former Plan vested immediately upon the Acquisition. The
Former Plan was terminated at the time of the Acquisition and all outstanding
options are susequently covered by the new Basic plan and expire on August
15, 2011. In connection with the Acquisition, 318,675 options were exercised
and 431,141 remained outstanding. Additionally, after the Acquisition, 86,226
options were forfeited by management.
The fair value of each granted option, at the date of the grant, has been
estimated to be $1.90 for the options granted during fiscal 1999, $1.98 for
the options granted during fiscal 1998, $2.36 for the options granted during
fiscal 1997 and $2.95 for the options granted during the two-month period
ended December 28, 1996. The fair value of the options granted was estimated
using a minimum value method at an assumed risk free interest rate of 5.5%
for options granted in 1999, 5.0% in 1998, 6.25% in 1997 and 7.0% in the
two-month period ended December 28, 1996.
A summary of stock option activity (in number of shares that may be
purchased) under the Former Plan is as follows:
SUCCESSOR PREDECESSOR
----------- -----------------------------------
FOR THE FOR THE
PERIOD PERIOD
FROM FROM
AUGUST 15, DECEMBER 31,
2001 2000 FOR THE YEARS ENDED
THROUGH THROUGH ------------------------
DECEMBER 29, AUGUST 14, DECEMBER 30, JANUARY 1,
2001 2001 2000 2000
----------- ----------- ----------- ----------
Outstanding, beginning of period............ 431,141 749,816 749,816 712,552
Granted..................................... -- -- -- 57,500
Exercised................................... -- (318,675) -- --
Forfeited................................... (86,226) -- -- (20,236)
------- -------- ------- -------
Outstanding, end of period.................. 344,915 431,141 749,816 749,816
======= ======== ======= =======
Exercisable, end of period.................. 344,915 431,141 568,900 428,890
======= ======== ======= =======
If the fair value based method had been applied, estimated compensation
expense would have been approximately $167,000 for the Successor period from
August 15, 2001 through December 29, 2001, $477,000 for the Predecessor
period from December 31, 2000 through August 14, 2001, $418,000 for the
Predecessor year ended December 30, 2000 and $418,000 for the Predecessor
year ended January 1, 2000, resulting in pro forma net income (loss) of
approximately $12,732,000, $(14,714,000), $14,196,000 and $(2,287,000). Under
the Former Plan, a portion of the fair value method compensation
48
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--MANAGEMENT STOCK INCENTIVE PLANS: (CONTINUED)
expense reflects the immediate vesting of the unvested options based upon the
fair value of each granted option at grant date.
NOTE 10--INCOME TAXES:
The provision for income taxes consisted of the following ($000):
SUCCESSOR PREDECESSOR
----------- -----------------------------------
FOR THE FOR THE
PERIOD PERIOD
FROM FROM
AUGUST 15, DECEMBER FOR THE YEARS ENDED
2001 31, 2000 ---------------------
THROUGH THROUGH DECEMBER JANUARY
DECEMBER AUGUST 14, 30, 1,
29, 2001 2001 2000 2000
----------- ----------- ---------- --------
CURRENT TAX PROVISION (BENEFIT):
--------------------------------
Federal................................. $3,575 $ (213) $8,293 $1,239
State................................... 630 72 1,285 275
Foreign................................. 279 396 566 293
------ ------- ------ ------
Total current provision............... 4,484 255 10,144 1,807
------ ------- ------ ------
DEFERRED TAX PROVISION (BENEFIT):
---------------------------------
Federal................................. 2,594 (1,478) (367) (2,372)
State................................... 317 (181) (46) (304)
------ ------- ------ ------
Total deferred provision (benefit).... 2,911 (1,659) (413) (2,676)
------ ------- ------ ------
Total provision (benefit)........... $7,395 $(1,404) $9,731 $ (869)
====== ======= ====== ======
Components of deferred tax assets and liabilities were as follows ($000):
SUCCESSOR, PREDECESSOR,
AT AT
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
DEFERRED TAX ASSETS:
--------------------
Accounts receivable allowance............................. $ 2,005 $ 1,840
Inventory valuation....................................... 4,445 4,314
Liability accruals........................................ 3,038 3,196
Deferred employee benefits................................ 4,060 3,973
Other..................................................... 476 542
------- -------
Total deferred tax assets............................... $14,024 $13,865
======= =======
DEFERRED TAX LIABILITIES:
-------------------------
Tradename and licensing agreements........................ $86,343 $33,146
Depreciation.............................................. 2,092 6,018
Deferred employee benefits................................ 593 642
------- -------
Total deferred tax liabilities.......................... $89,028 $39,806
======= =======
49
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES: (CONTINUED)
The difference between our effective income tax rate and the federal
statutory tax rate is reconciled below:
SUCCESSOR PREDECESSOR
----------------- ---------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FROM FROM FOR THE YEARS ENDED
AUGUST 15, 2001 DECEMBER 31, 2000 -------------------------
THROUGH THROUGH DECEMBER 30, JANUARY 1,
DECEMBER 29, 2001 AUGUST 14, 2001 2000 2000
----------------- ----------------- ------------ ----------
Statutory federal income tax rate..... 35.0% 34.0% 35.0% 34.0%
State income taxes, net of Federal
income tax benefit.................. 3.1 0.7 3.3 0.7
Goodwill amortization................. -- (1.7) 1.1 (9.5)
Non-deductible Acquisition costs...... -- (12.5) -- --
Foreign income, net of tax............ (1.9) (4.3) 0.1 (1.9)
Other................................. 0.3 (1.7) 0.2 6.7
---- ----- ---- ----
Total............................. 36.5% 14.5% 39.7% 30.0%
==== ===== ==== ====
The portion of income before income taxes attributable to foreign income was
approximately $1,895,000 for the Successor period from August 15, 2001 through
December 29, 2001, ($46,000) for the Predecessor period from December 31, 2000
through August 14, 2001, $1,589,000 for the Predecessor year ended December 30,
2000 and $704,000 for the Predecessor year ended January 1, 2000.
NOTE 11--LEASE COMMITMENTS:
Rent expense ($000) under operating leases was $7,384 for the Successor
period August 15, 2001 through December 29, 2001, $12,321 for the Predecessor
period from December 31, 2000 through August 14, 2001, $19,232 for the
Predecessor year ended December 30, 2000 and $18,108 for the Predecessor year
ended January 1, 2000.
Minimum annual rental commitments under current noncancelable operating
leases as of December 29, 2001 were as follows ($000):
BUILDINGS, DATA TOTAL
PRIMARILY TRANSPORTATION PROCESSING MANUFACTURING NONCANCELABLE
FISCAL YEAR RETAIL STORES EQUIPMENT EQUIPMENT EQUIPMENT LEASES
----------- ------------- -------------- ---------- ------------- -------------
2002............................. $15,362 $146 $ 504 $299 $16,311
2003............................. 12,975 49 438 152 13,614
2004............................. 10,867 10 305 93 11,275
2005............................. 8,586 -- 156 66 8,808
2006............................. 5,153 -- -- 13 5,166
Thereafter....................... 14,939 -- -- -- 14,939
------- ---- ------ ---- -------
Total.......................... $67,882 $205 $1,403 $623 $70,113
======= ==== ====== ==== =======
50
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--LEASE COMMITMENTS: (CONTINUED)
In February 2001, we entered into a ten-year lease agreement for a new
corporate office in Atlanta, Georgia. Payments on this lease began 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
-----------
2002 $ 509
Thereafter.................................................. --
-----
Total minimum obligations................................... 509
Interest.................................................... (8)
-----
Present value of net minimum obligations.................... 501
Current portion, included in other current liabilities...... (501)
-----
Long-term obligations, included in other long-term
liabilities at December 29, 2001.......................... $ --
=====
NOTE 12--CONTINGENCIES:
We are 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, our operations have
resulted or may result in noncompliance with or liability pursuant to
environmental laws. In 1998, the Lamar County (Georgia) Regional Solid Waste
Authority asserted environmental claims against us related to the disposal of
waste generated by one of our plants. The waste, which allegedly was
contaminated, was allegedly deposited in unlined trenches at a local municipal
solid waste landfill in Lamar County, Georgia during the 1970s. We paid $244,000
to settle certain of these claims in an agreement reached with the Authority on
May 9, 2001. Generally, compliance with environmental laws has not had a
material impact on our operations, but there can be no assurance that future
compliance with such laws will not have a material adverse effect on our
operations.
Additionally, we enter into various purchase order commitments with full
package suppliers. We can cancel these arrangements, although in some instances,
we may be subject to a termination charge reflecting a percentage of work
performed prior to cancellation.
51
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--OTHER CURRENT LIABILITIES:
Other current liabilities consisted of the following ($000):
SUCCESSOR,
AT PREDECESSOR,
DECEMBER AT
29, DECEMBER 30,
2001 2000
------- -------
Accrued interest............................................ $ 7,729 $ 1,276
Accrued income taxes........................................ 7,388 11,658
Accrued incentive compensation.............................. 4,863 5,025
Accrued workers compensation................................ 3,050 3,178
Other current liabilities................................... 11,408 14,352
------- -------
$34,438 $35,489
======= =======
NOTE 14--VALUATION AND QUALIFYING ACCOUNTS:
Information regarding valuation and qualifying accounts is as follows
($000):
ALLOWANCE FOR
DOUBTFUL INVENTORY
ACCOUNTS VALUATION
------------- ---------
PREDECESSOR:
------------
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
Additions, charged to expense........................... 1,317 1,482
Writeoffs............................................... (1,525) (1,112)
------- -------
BALANCE, AUGUST 14, 2001.................................. $ 1,837 $ 4,452
======= =======
SUCCESSOR:
----------
BALANCE, AUGUST 15, 2001.................................. $ 1,837 $ --
Additions, charged to expense........................... 604 1,681
Writeoffs............................................... (768) --
------- -------
BALANCE, DECEMBER 29, 2001................................ $ 1,673 $ 1,681
======= =======
NOTE 15--RELATED PARTY TRANSACTIONS:
In 1996, in connection with the closing of the acquisition of Holdings by
Investcorp S.A., we entered into an agreement for management advisory and
consulting services under which we agreed to pay Investcorp $1.35 million per
year for a five-year term. This agreement was terminated upon the consummation
of the Acquisition.
52
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--RELATED PARTY TRANSACTIONS: (CONTINUED)
In connection with the Acquisition, we entered into a management agreement
with Berkshire Partners LLC. Under this agreement, we will pay Berkshire
Partners an annual management fee of $1.65 million commencing on the first
anniversary of the Acquisition. We will pay this fee quarterly in advance. In
addition, upon consummation of the Acquisition, we paid Berkshire Partners an
acquisition fee of $2.0 million. We have agreed to pay Berkshire Partners an
acquisition fee of 1% of any future financing or 1% of the value of any
acquisition for their advice in connection with any future financing or
acquisition.
In January 2000, we issued a loan to an officer in the amount of $4.3
million, the proceeds of which were used by the officer to repay a previous
loan from us in the amount of $1.5 million. In connection with the
Acquisition, we amended the terms of this loan. As amended, the $4.3 million
loan will be payable in annual installments of $600,000 commencing on March
31, 2003, and thereafter on each anniversary thereof until such principal
amount and all accrued and unpaid interest thereon has been repaid. The loan
will become due if the officer is no longer our employee, if we close a
public offering of our equity securities, upon a change in voting control of
Holdings or upon other customary events of default. The loan is
collateralized by the officer's equity in Holdings. The loan bears interest
at the average rate paid by us under the revolving portion of our senior
credit facility. The loan is prepayable with proceeds of any disposition of
the officer's stock in Holdings. The loan balance and related accrued interest
is included in other long-term assets on the accompanying balance sheets.
We paid dividends on our common stock held by our parent, Holdings, in the
amounts of approximately $60,000 for the Predecessor period from December 31,
2000 through August 14, 2001, $70,000 for the Predecessor fiscal year ended
December 30, 2000 and $507,000 for the Predecessor fiscal year ended January 1,
2000. Proceeds from these dividends were used by Holdings to repurchase shares
of Holdings' stock owned by certain of our former employees in the amounts of
$60,000 for the Predecessor period from December 31, 2000 through August 14,
2001, $70,000 for the Predecessor fiscal year ended December 30, 2000 and
$507,000 for the Predecessor fiscal year ended January 1, 2000.
In addition, during the Predecessor period from December 31, 2000 through
August 14, 2001 and each of the Predecessor fiscal years 2000 and 1999, Holdings
made $60,000 in capital contributions to us in connection with the issuance of
shares of Holdings' stock to certain of our employees. Each of the fiscal 2001,
2000 and 1999 transactions of $60,000 involved no cash proceeds, and we
recognized these amounts as compensation expense.
On August 15, 2001, we paid a dividend of approximately $128.6 million to
Holdings. Holdings used these funds to repay debt and partially fund other
payments in connection with the Acquisition, including payment to selling
stockholders and option holders. Other than as described above and in Note 6,
we have paid no dividends in fiscal years 2001 and 2000.
NOTE 16--SEGMENT INFORMATION:
We report segment information in accordance with the provisions of SFAS
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
53
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SEGMENT INFORMATION: (CONTINUED)
performance of our reportable segments. SFAS 131 also requires disclosure about
products and services, geographic areas and major customers. For purposes of
complying with SFAS 131, we have identified our two reportable segments as
"Wholesale" and "Retail." We generally sell the same products in each business
segment. Wholesale products are offered through our Wholesale distribution
channel while the Retail segment reflects the operations of our 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, we reassessed our 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 the relationship to consolidated net sales or
units produced to support each segment's revenue. Prior to December 30, 2000, we
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
our other revenue and expenses 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 $3,416,000 for the Successor period from August 15, 2001
through December 29, 2001, $(3,728,000) for the Predecessor period from
December 31, 2000 through August 14, 2001, $414,000 for the Predecessor fiscal
year ended December 30, 2000 and $(1,132,000) for the Predecessor fiscal year
ended January 1, 2000. Under the old method, EBITDA for the Retail segment would
have been approximately $34,567,000 for the Successor period from August 15,
2001 through December 29, 2001, $31,935,000 for the Predecessor period from
December 31, 2000 through August 14, 2001, $57,627,000 for the Predecessor
fiscal year ended December 30, 2000 and $39,966,000 for the Predecessor fiscal
year ended January 1, 2000.
54
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SEGMENT INFORMATION: (CONTINUED)
The table below presents certain segment information for the periods
indicated ($000):
WHOLESALE RETAIL TOTAL
--------- -------- --------
SUCCESSOR FOR THE PERIOD FROM AUGUST 15, 2001 THROUGH
DECEMBER 29, 2001:
Sales................................................... $136,167 $108,091 $244,258
EBITDA.................................................. $ 13,543 $ 24,440 $ 37,983
PREDECESSOR FOR THE PERIOD FROM DECEMBER 31, 2000 THROUGH
AUGUST 14, 2001:
Sales................................................... $160,646 $127,088 $287,734
EBITDA.................................................. $ 12,853 $ 15,354 $ 28,207
PREDECESSOR FISCAL YEAR ENDED DECEMBER 30, 2000:
Sales................................................... $256,094 $215,280 $471,374
EBITDA.................................................. $ 26,524 $ 31,517 $ 58,041
PREDECESSOR FISCAL YEAR ENDED JANUARY 1, 2000:
Sales................................................... $231,284 $183,312 $414,596
EBITDA.................................................. $ 20,773 $ 18,061 $ 38,834
A reconciliation of total segment EBITDA to total consolidated income (loss)
before income taxes is presented below ($000):
SUCCESSOR PREDECESSOR
----------- ------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FROM FROM FOR
AUGUST 15, DECEMBER FISCAL
2001 31, FOR FISCAL YEAR
THROUGH 2000 YEAR ENDED ENDED
DECEMBER THROUGH DECEMBER JANUARY
29, AUGUST 14, 30, 1,
2001 2001 2000 2000
----------- ----------- ---------- ---------
Total EBITDA for reportable segments...... $ 37,983 $ 28,207 $ 58,041 $ 38,834
Depreciation and amortization expense..... (6,918) (12,245) (17,520) (16,855)
Acquisition-related non-recurring
charges................................. -- (11,289) -- --
Writedown of long-lived assets............ -- (3,156) -- (7,124)
Non-recurring charges-plant closure
costs................................... 268 (1,116) -- --
Interest expense, net..................... (11,100) (10,060) (15,991) (17,748)
-------- -------- -------- --------
Consolidated income (loss) before income
taxes................................... $ 20,233 $ (9,659) $ 24,530 $ (2,893)
======== ======== ======== ========
The table below represents inventory by segment at ($000):
SUCCESSOR, PREDECESSOR, AT
AT ---------------------
DECEMBER DECEMBER JANUARY
29, 30, 1,
2001 2000 2000
----------- ---------- --------
Wholesale........................................ $66,191 $72,114 $58,269
Retail........................................... 22,878 20,321 21,367
------- ------- -------
$89,069 $92,435 $79,636
======= ======= =======
Wholesale inventories include inventory produced and warehoused for the
Retail segment.
55
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SEGMENT INFORMATION: (CONTINUED)
The following represents property, plant and equipment, net, by geographic
area as of ($000):
SUCCESSOR, PREDECESSOR, AT
AT ---------------------
DECEMBER DECEMBER JANUARY
29, 30, 1,
2001 2000 2000
----------- ---------- --------
United States.................................... $40,603 $45,226 $41,417
International.................................... 5,900 9,215 10,359
------- ------- -------
$46,503 $54,441 $51,776
======= ======= =======
Our international operations consist primarily of sewing facilities and,
accordingly, no revenues are recorded at these locations.
NOTE 17--CLOSURE OF MANUFACTURING FACILITIES:
Historically, we met most of our fabric requirements through our textile
operations located in Barnesville, Georgia. During 1999, we developed a plan to
take advantage of alternative fabric sourcing opportunities and, in the third
quarter of 1999, began to phase-down production in our 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 non-recurring 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 2001, $449,000 and fiscal 2000, $627,000 of these assets
were sold. The remaining asset value was adjusted in connection with the
Acquisition.
During 1999, we 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 non-recurring charge.
In the first quarter of fiscal 2001, we announced our plans to close our
sewing facility located in Harlingen, Texas, which subsequently closed and
ceased operations on May 11, 2001. Approximately 460 employees, primarily sew
operators, were located at this facility. In the first quarter of 2001, we
recorded a non-recurring charge of approximately $582,000 for closure costs and
involuntary termination benefits. As of December 29, 2001, approximately $5,000
of the costs provided for in the first quarter of 2001 for lease obligations
have not yet been paid and are included in other current liabilities in the
accompanying balance sheet. The components of the liability established for the
costs associated with this plant closure are as follows:
MARCH 31, DECEMBER 29,
2001 PAYMENTS ADJUSTMENTS 2001
--------- -------- ----------- ------------
Severance and other termination benefits......... $346,000 $343,000 $ 3,000 $ --
Lease obligations................................ 167,000 85,000 77,000 5,000
Other closure costs.............................. 69,000 36,000 33,000 --
-------- -------- -------- ------
Total........................................ $582,000 $464,000 $113,000 $5,000
======== ======== ======== ======
56
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--CLOSURE OF MANUFACTURING FACILITIES: (CONTINUED)
In the second quarter of fiscal 2001, we announced our plans to close our
fabric printing operations located in Barnesville, Georgia, which subsequently
closed and ceased operations on June 29, 2001. Approximately 110 employees,
primarily print operators, were located at this facility. In the second quarter
of 2001, we recorded a non-recurring charge of approximately $534,000 for
closure costs and involuntary termination benefits. As of December 29, 2001,
approximately $71,000 of the costs provided for in the second quarter of 2001
for severance and other termination benefits have not yet been paid and are
included in other current liabilities in the accompanying balance sheet. The
components of the liability established for the costs associated with this plant
closure are as follows:
JUNE 30, DECEMBER 29,
2001 PAYMENTS ADJUSTMENTS 2001
-------- -------- ----------- ------------
Severance and other termination benefits......... $328,000 $183,000 $ 74,000 $71,000
Other closure costs.............................. 206,000 125,000 81,000 --
-------- -------- -------- -------
Total........................................ $534,000 $308,000 $155,000 $71,000
======== ======== ======== =======
Additionally, in accordance with the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," we recorded in the first quarter of fiscal 2001 a
non-cash charge of approximately $742,000 related to the writedown of the
asset value of our Harlingen, Texas facility to its estimated net realizable
value. In the second quarter of 2001, we recorded a non-cash charge of
approximately $2,414,000 related to the writedown of the asset value of our
fabric printing operations in Barnesville, Georgia to its estimated net
realizable value. The assets from the Barnesville facility and land
associated with the Harlingen facility are included in assets held for sale
on the accompanying balance sheet as of December 29, 2001.
In connection with the Acquisition, we reevaluated the requirements for
certain manufacturing operations, which we had previously planned to maintain
to support our long-term revenue growth plans. After a thorough assessment of
alternative sourcing opportunities, we decided to exit certain manufacturing
operations. We made this decision in connection with our new ownership in
advance of the Acquisition. Accordingly, on October 23, 2001, we announced
our plans to close our cutting and fabric warehouse operations located in
Griffin, Georgia, our embroidery operation located in Milner, Georgia, our
bed and bath sewing and finishing operation located in Barnesville, Georgia,
and our sewing facility located in San Pedro, Dominican Republic before the
end of fiscal 2001. At Acquisition, we established a liability for these
plant closures. The number of employees affected by these closures is as
follows:
NUMBER OF
FACILITY EMPLOYEES
-------- ----------
San Pedro, Dominican Republic (sewing operators)............ 468
Griffin, Georgia (cutting and warehouse operators).......... 170
Milner, Georgia (embroidery operators)...................... 90
Barnesville, Georgia (sewing operators)..................... 60
57
THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--CLOSURE OF MANUFACTURING FACILITIES: (CONTINUED)
The components of the liability established for the costs associated with
these plant closures are as follows:
ADJUSTMENTS
(RECORDED TO
AUGUST 15, PURCHASE DECEMBER 29,
2001 PAYMENTS ACCOUNTING) 2001
---------- -------- ------------ ------------
Severance and other termination benefits....... $1,277,000 $687,000 $186,000 $404,000
Lease obligations.............................. 947,000 103,000 449,000 395,000
Other closure costs............................ 128,000 25,000 (44,000) 147,000
---------- -------- -------- --------
Total...................................... $2,352,000 $815,000 $591,000 $946,000
========== ======== ======== ========
The remaining obligations related to the above closures are expected to be
paid by the end of the second quarter of 2002. The assets associated with these
closures are included in assets held for sale on the accompanying balance sheet
as of December 29, 2001.
NOTE 18--OTHER EXIT COSTS:
In connection with the Acquisition and our new ownership, we announced our
decision to terminate an initiative to open full price retail stores. At
Acquisition, we established a liability related to terminating three employees,
exiting a full price retail consulting contract and providing for related lease
obligations. The components of the liability established to terminate this
initiative are as follows:
ADJUSTMENTS
(RECORDED TO
AUGUST 15, PURCHASE DECEMBER 29,
2001 PAYMENTS ACCOUNTING) 2001
---------- -------- ------------ ------------
Severance and other termination benefits....... $ 490,000 $262,000 $ -- $228,000
Professional fees.............................. 670,000 331,000 -- 339,000
Lease obligations.............................. 2,413,000 -- 2,413,000 --
---------- -------- ---------- --------
Total...................................... $3,573,000 $593,000 $2,413,000 $567,000
========== ======== ========== ========
Subsequent to the establishment of the above liabilities, we have determined
that the leased space previously obtained for the full price retail initiative
will be utilized for other aspects of our operations and accordingly, have
reversed this liability through purchase accounting.
The remaining obligations related to the above exit costs are expected to be
paid by the end of the second quarter of 2002.
ITEM 9. CHANGE IN ACCOUNTANTS
Not applicable.
58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each of our
directors and executive officers. Each of our directors will hold office until
the next annual meeting of our shareholders or until his Successor has been
elected and qualified. Our officers are elected by our Board of Directors and
serve at the discretion of the Board of Directors.
NAME AGE POSITIONS
---- -------- ---------------------------------------------------
Frederick J. Rowan, II.................... 62 Chairman of the Board of Directors, President and
Chief Executive Officer
Joseph Pacifico........................... 52 President-Marketing and Director
Charles E. Whetzel, Jr.................... 51 Executive Vice President-Global Sourcing
David A. Brown............................ 44 Executive Vice President-Operations and Director
Michael D. Casey.......................... 41 Senior Vice President and Chief Financial Officer
Bradley M. Bloom.......................... 48 Director
Ross M. Jones............................. 36 Director
David Pulver.............................. 60 Director
FREDERICK J. ROWAN, II joined us in 1992 as President and Chief Executive
Officer and became Chairman of our Board of Directors in October 1996. Prior to
joining us, 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 37 years, has been in senior
executive positions for nearly 25 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 us in 1992 as Executive Vice President--Sales and
Marketing and was named President--Marketing in 1997. Mr. Pacifico became a
director in 2001 upon the consummation of the Acquisition. 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 us 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 our 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. 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 us in 1992 as Senior Vice President--Business Planning
and Administration and became a director in October 1996. In 1997, Mr. Brown was
named Executive Vice President--Operations. 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 us 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 us, Mr. Casey was a
Senior Manager with Price Waterhouse LLP.
59
BRADLEY M. BLOOM became a director upon the closing of the Acquisition.
Mr. Bloom is a Managing Director of Berkshire Partners LLC, which he
co-founded in 1986. He has been a director of several of Berkshire Partners'
retailing and manufacturing companies including, among others, Weigh-Tronix,
LLC and Miami Cruiseline Services.
ROSS M. JONES became a director upon the closing of the Acquisition. Mr.
Jones is a Managing Director of Berkshire Partners LLC, which he joined in
1993. He has been a director of several of Berkshire Partners' retailing,
manufacturing and business services companies including, among others, AVW/
TELAV, Sterling Collision Centers, Inc. and Thomas Built Buses, Inc.
DAVID PULVER of Cornerstone Capital, Inc. became a director effective
January 9, 2002. Mr. Pulver has been a private investor for approximately 20
years and is a current board member of Hearst Argyle-Television and Casual
Male, Inc. and was a board member of Costco Wholesale, Inc. Mr. Pulver was a
founder of The Children's Place and served as its Chairman and Co-Chief
Executive Officer until 1982.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation earned in fiscal years
2001, 2000 and 1999 by our Chief Executive Officer and each of the other four
most highly compensated executive officers (collectively, the "Named Executive
Officers"). The current compensation arrangements for each of these officers are
described in "Employment Arrangements."
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ -------------
SECURITIES
FISCAL INCENTIVE OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION COMPENSATION (A) OPTIONS COMPENSATION (B)
--------------------------- -------- -------- ------------ ---------------- ------------ ----------------
Frederick J. Rowan, II ....... 2001 $650,000 $ 812,500 $ 682,546 149,959 $2,375,000
Chairman of the Board of 2000 600,000 1,080,000 1,144,477 -- --
Directors, President and 1999 595,833 -- 442,290 -- --
Chief Executive Officer
Joseph Pacifico .............. 2001 $420,000 $ 341,250 $ 257,318 48,711 $ 325,000
President-Marketing and 2000 390,000 456,300 251,707 -- --
Director 1999 387,500 -- 197,399 -- --
Charles E. Whetzel, Jr. ...... 2001 $285,000 $ 231,563 $ 146,454 48,711 $ 325,000
Executive Vice President- 2000 262,500 307,100 140,809 -- --
Global Sourcing 1999 260,417 -- 110,238 -- --
David A. Brown ............... 2001 $285,000 $ 231,563 $ 118,538 48,711 $ 325,000
Executive Vice President- 2000 262,500 307,100 166,166 -- --
Operations and Director 1999 260,417 -- 75,372 -- --
Michael D. Casey ............. 2001 $250,000 $ 203,125 $ 116,278 48,711 $1,175,000
Senior Vice President and 2000 210,000 245,700 100,097 -- --
Chief Financial Officer 1999 208,333 -- 115,471 -- --
------------------------
(a) Other annual compensation includes supplemental retirement plan benefits,
automobile allowances and medical cost reimbursement. In fiscal 2000, other
annual compensation for Mr. Rowan included relocation assistance. In fiscal
1999, other annual compensation for Mr. Casey included relocation
assistance.
(b) All other compensation includes Acquisition-related management bonuses.
60
EMPLOYMENT ARRANGEMENTS
Frederick J. Rowan, II, Chairman of the Board of Directors, President and
Chief Executive Officer, entered into a restated employment agreement with us in
August 2001. Mr. Rowan's employment agreement is for a three-year term, which
extends automatically for successive one-year terms, subject to termination upon
notice. Pursuant to this agreement, Mr. Rowan is entitled to receive:
- a base salary, currently $683,000 for fiscal year 2002, subject to annual
cost of living adjustments and any increases approved by the Board of
Directors;
- annual cash bonuses based upon a bonus plan to be determined each year by
the Board of Directors in conjunction with our achievement of targeted
performance levels as defined in the plan; and
- specified fringe benefits, including a retirement trust.
If we terminate Mr. Rowan's employment without cause, he will continue to
receive his then-current salary and specified bonuses, and we will maintain
fringe benefits on his behalf, for three years following his termination.
Mr. Rowan has agreed not to compete with us for the two-year period following
the end of his employment with us, unless he is terminated without cause, in
which case the duration of such period is one year.
Joseph Pacifico, Charles E. Whetzel, Jr., David A. Brown and Michael D.
Casey each entered into a restated employment agreement with us in August 2001.
The employment agreement of each of these executives is for a two-year term,
which automatically extends annually for successive one-year terms, subject to
termination upon notice. Pursuant to such agreements, Messrs. Pacifico, Whetzel,
Brown and Casey are entitled to receive:
- a base salary, currently $441,000, $314,000, $314,000 and $299,000 for
fiscal year 2002, subject to annual cost of living adjustments and any
increases approved by the Board of Directors;
- annual cash bonuses based upon a bonus plan to be determined each year by
the Board of Directors in conjunction with our achievement of targeted
performance levels as defined in the plan; and
- specified fringe benefits, including a retirement trust.
If we terminate any of these executives' employment without cause as
defined, he will continue to receive his then-current salary and specified
bonuses for two years following termination, and we will maintain fringe
benefits on his behalf until the earlier of the end of the two-year period
following termination or his 65th birthday. Each of these executives has agreed
not to compete with us for a one-year period following the end of his employment
with us, unless we terminate him without cause as defined, in which case the
duration of such period is six months.
MANAGEMENT STOCK INCENTIVE PLAN
Holdings has adopted a management stock incentive plan to provide incentives
to our employees and directors and those of Holdings by granting them awards
tied to the common stock of Holdings. Including the shares and options being
retained by management in the Acquisition, our employees will be able to earn up
to approximately 21% of Holdings through their participation in this plan.
Options will vest and become exercisable based on time and performance
measurements.
61
DIRECTOR COMPENSATION
David Pulver receives annual compensation of approximately $30,000 for
serving as a director. We pay no additional remuneration to our employees or to
executives of Berkshire 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
All of our issued and outstanding capital stock is owned by Holdings.
Immediately after the Acquisition and as of February 28, 2002, there were
764,098 shares of Holdings' Common Stock beneficially owned by members of our
management. Holdings owns 1,000 shares of our common stock, representing all of
our outstanding capital stock. Holdings also has a single class of capital stock
outstanding. The following table sets forth, as of February 28, 2002, the number
and percentage of shares of Holdings common stock beneficially owned by
(i) each person known by us to own beneficially more than 5% of the outstanding
shares of Holdings common stock, (ii) each of our directors, (iii) each named
executive officer and (iv) all our directors and executive officers as a group.
Unless otherwise indicated in a footnote, each person possesses sole voting and
investment power with respect to the shares indicated as beneficially owned.
Notwithstanding the beneficial ownership of common stock presented below, the
stockholders agreement entered into upon consummation of the Acquisition governs
the stockholders' exercise of their voting rights with respect to the election
of directors and other material events. The parties to the stockholders
agreement have agreed to vote their shares to elect the Board of Directors as
set forth therein. See Item 13 "Certain Relationships and Related Transactions."
As used in the table, beneficial ownership has the meaning set forth in
Rule 13d-3(d)(1) of the Exchange Act.
PRINCIPAL STOCKHOLDERS
SHARES OF HOLDINGS
COMMON STOCK
BENEFICIALLY OWNED
-----------------------
BENEFICIAL OWNER NUMBER PERCENT
---------------- ------------ --------
Berkshire Partners LLC(1)................................... 5,082,616.23 91.0%
Frederick J. Rowan, II(2)................................... 268,606.45 4.6%
Joseph Pacifico............................................. 85,286.11 1.5%
Charles E. Whetzel, Jr...................................... 85,286.11 1.5%
David A. Brown.............................................. 85,286.11 1.5%
Michael D. Casey............................................ 25,788.90 0.5%
Bradley M. Bloom(3)......................................... -- --
Ross M. Jones(3)............................................ -- --
David Pulver................................................ -- --
All directors and officers as a group(2)(3)................. 550,253.68 9.4%
------------------------
(1) Includes 3,233,290.33 shares of common stock held by Berkshire Fund V,
Limited Partnership; 1,525,997.23 shares of common stock held by Berkshire
Fund V Coinvestment Fund, Limited Partnership; 323,328.68 shares of common
stock held by Berkshire Investors LLC. The address of Berkshire Partners LLC
is One Boston Place, Suite 3300, Boston, Massachusetts 02108.
(2) Includes 251,954.25 shares subject to currently exercisable options.
(3) Messrs. Bloom and Jones are Managing Directors of Berkshire Partners LLC. By
virtue of their positions as managing members of each of Berkshire Investors
LLC, the general partner of Berkshire Fund V and the general partner of
Berkshire Fund V Coinvestment Fund, Messrs. Bloom and Jones may be deemed to
possess beneficial ownership of 5,082,616.23 shares of common stock
beneficially owned by these entities, which represents 91.0% of our
outstanding
62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
common stock. However, neither Mr. Bloom nor Mr. Jones, acting alone, has
voting or investment power with respect to the shares beneficially owned by
these entities.
OPTION GRANTS IN LAST YEAR
The following table shows for fiscal 2001, certain information
regarding options for Holdings Common Stock granted to our named
executive officers.
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM
------------------------------------------------------------ ----------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE PRICE
OPTIONS EMPLOYEES IN OF OPTIONS
NAME GRANTED(#) FISCAL YEAR ($/SHARE) EXPIRATION DATE 5%($) 10%($)
---- ---------- ------------- -------------- ----------------- ------------- -------------
Frederick J. Rowan, II............... 149,959(a) 30.12% $24.62 November 15, 2011 $2,321,873.04 $5,884,082.15
Joseph Pacifico...................... 48,711(b) 9.78% $24.62 November 15, 2011 $ 754,211.20 $1,911,319.26
Charles E. Whetzel, Jr............... 48,711(b) 9.78% $24.62 November 15, 2011 $ 754,211.20 $1,911,319.26
David A. Brown....................... 48,711(b) 9.78% $24.62 November 15, 2011 $ 754,211.20 $1,911,319.26
Michael D. Casey..................... 48,711(b) 9.78% $24.62 November 15, 2011 $ 754,211.20 $1,911,319.26
--------------------------
(a) 75,054 of Mr. Rowan's options will vest at the rate of 20% per year on each
anniversary of August 15, 2001 as long as Mr. Rowan is still employed by us.
The remaining 74,905 of Mr. Rowan's options will vest on the eighth
anniversary of August 15, 2001 as long as Mr. Rowan is still employed by us,
but these options may vest earlier in the event that we reach certain
defined performance objectives.
(b) 18,764 of each of Messrs. Pacifico, Whetzel, Brown and Casey's options will
vest at the rate of 20% per year on each anniversary of August 15, 2001 as
long as such executive is still employed by us. The remaining 29,947 of each
executive's options will vest on the eighth anniversary of August 15, 2001
as long as he is still employed by us, but these options may vest earlier in
the event that we reach certain defined performance objectives.
OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
The following table sets forth the number of shares of Holdings Common Stock
subject to options and the value of such options held by each of our named
executive officers on the last day of our fiscal year 2001. This table
assumes a per share price on that date of $246.23, which was the price per
share paid in the Acquisition. The share
63
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
numbers in this table do not reflect the 10-for-1 stock split, which occurred
after the closing of the Acquisition.
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END (#) AT FISCAL YEAR END ($)
SHARES --------------------------- ---------------------------
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
Frederick J. Rowan, II.... -- -- 251,954 149,959 $4,691,388 --
Joseph Pacifico........... 78,730(a) $1,466,195 -- 48,711 -- --
Charles E. Whetzel, Jr.... 78,730(a) $1,466,195 -- 48,711 -- --
David A. Brown............ 78,730(a) $1,466,195 -- 48,711 -- --
Michael D. Casey.......... 40,000(a) $ 744,920 -- 48,711 -- --
------------------------
(a) Represents payments made to option holders in consideration for cancellation
of existing options in connection with the Acquisition.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1996, in connection with the closing of the acquisition of Holdings by
Investcorp S.A., we entered into an agreement for management advisory and
consulting services under which we agreed to pay Investcorp $1.35 million per
year for a five-year term. This agreement was terminated upon the consummation
of the Acquisition.
In recognition of their contribution to our growth, upon completion of the
Acquisition, we paid one-time bonuses to our senior management team in the
following amounts: Fred Rowan--$2,375,000; Michael Casey--$1,175,000; Joseph
Pacifico, David Brown and Charles Whetzel--each $325,000.
In January 2000, we issued a loan to an officer in the amount of $4.3
million, the proceeds of which were used by the officer to repay a previous
loan from us in the amount of $1.5 million. In connection with the
Acquisition, we amended the terms of this loan. As amended, the $4.3 million
loan will be payable in annual installments of $600,000 commencing on March
31, 2003, and thereafter on each anniversary thereof until such principal
amount and all accrued and unpaid interest thereon has been repaid. The loan
will become due if the officer is no longer our employee, if we close a
public offering of our equity securities, upon a change in voting control of
Holdings or upon other customary events of default. The loan is
collateralized by the officer's equity in Holdings. The loan bears interest
at the average rate paid by us under the revolving portion of our senior
credit facility. The loan is prepayable with proceeds of any disposition of
the officer's stock in Holdings.
In connection with the Acquisition, we entered into a management agreement
with Berkshire Partners LLC. Under this agreement, we will pay Berkshire
Partners an annual management fee of $1.65 million commencing on the first
anniversary of the Acquisition. We will pay this fee quarterly in advance. In
addition, upon consummation of the Acquisition, we paid Berkshire Partners an
acquisition fee of $2.0 million. We have agreed to pay Berkshire Partners an
acquisition fee of 1% of any future financing or 1% of the value of any
acquisition for their advice in connection with any future financing or
acquisition.
In connection with the Acquisition, Holdings entered into a stockholders
agreement with each of its stockholders that provides for, among other things,
restrictions and rights related to the transfer, sale or purchase of Holdings'
stock and agreements related to the voting of shares of Holdings' stock.
64
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 Atlanta, Georgia on
March 14, 2002.
THE WILLIAM CARTER COMPANY
By: /s/ FREDERICK J. ROWAN, II
-----------------------------------------
Frederick J. Rowan, II
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 14, 2002
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
Frederick J. Rowan, II Chief Executive Officer
/s/ DAVID A. BROWN
------------------------------------------- Executive Vice President--
David A. Brown Operations and Director
/s/ MICHAEL D. CASEY
------------------------------------------- Senior Vice President and
Michael D. Casey Chief Financial Officer
/s/ JOSEPH PACIFICO
------------------------------------------- President--Marketing and
Joseph Pacifico Director
/s/ BRADLEY M. BLOOM
------------------------------------------- Director
Bradley M. Bloom
/s/ ROSS M. JONES
------------------------------------------- Director
Ross M. Jones
/s/ DAVID PULVER
------------------------------------------- Director
David Pulver
65
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 29, 2001 (Successor)
and December 30, 2000 (Predecessor)
Consolidated Statements of Operations for the periods
August 15, 2001 through December 29, 2001 (Successor) and
December 31, 2000 through August 14, 2001 (Predecessor)
and for the fiscal years ended December 30, 2000
(Predecessor) and January 1, 2000 (Predecessor)
Consolidated Statements of Cash Flows for the periods
August 15, 2001 through December 29, 2001 (Successor) and
December 31, 2000 through August 14, 2001 (Predecessor)
and for the fiscal years ended December 30, 2000
(Predecessor) and January 1, 2000 (Predecessor)
Consolidated Statements of Changes in Common Stockholder's
Equity for the periods August 15, 2001 through
December 29, 2001 (Successor) and December 31, 2000
through August 14, 2001 (Predecessor) and for the fiscal
years ended December 30, 2000 (Predecessor) and
January 1, 2000 (Predecessor)
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: None
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
2.1 Stock Purchase Agreement dated July 12, 2001 by and among
Carter Holdings, Inc., the selling stockholders of Carter
Holdings, Inc. and CH Acquisitions LLC., incorporated herein
by reference to Exhibit 2.1 to our Registration Statement on
Form S-4.
2.2 Amendment No. 1 to the Stock Purchase Agreement dated August
15, 2001, by and among CH Acquisitions LLC and the
Management Stockholders, incorporated herein by reference to
Exhibit 2.2 to our Registration Statement on Form S-4.
3.1 Restated Articles of Organization of The William Carter
Company, incorporated herein by reference to Exhibit 3.1 to
our Registration Statement on Form S-4.
3.2 By-laws of The William Carter Company, incorporated herein
by reference to Exhibit 3.2 to our Registration Statement on
Form S-4.
4.1 Indenture dated as of August 15, 2001 between The William
Carter Company, the Guarantors named therein and State
Street Bank and Trust Company, as Trustee, incorporated
herein by reference to Exhibit 4.1 to our Registration
Statement on Form S-4.
4.2 Exchange and Registration Rights Agreement dated August 15,
2001 between The William Carter Company, Goldman, Sachs &
Co., Fleet Securities, Inc. and BNP Paribas Securities Corp,
incorporated herein by reference to Exhibit 4.2 to our
Registration Statement on Form S-4.
66
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
4.3 Form of 10.875% senior subordinated note, incorporated
herein by reference to Exhibit 4.6 to our Registration
Statement on Form S-4.
10.1 Amended and Restated Employment Agreement between Carter
Holdings, Inc., The William Carter Company and Frederick J.
Rowan, II, dated as of August 15, 2001, incorporated herein
by reference to Exhibit 10.1 to our Registration Statement
on Form S-4.
10.2 Amended and Restated Employment Agreement between The
William Carter Company and Joseph Pacifico, dated as of
August 15, 2001, incorporated herein by reference to Exhibit
10.2 to our Registration Statement on Form S-4.
10.3 Amended and Restated Employment Agreement between The
William Carter Company and Charles E. Whetzel, Jr., dated as
of August 15, 2001, incorporated herein by reference to
Exhibit 10.3 to our Registration Statement on Form S-4.
10.4 Amended and Restated Employment Agreement between The
William Carter Company and David A. Brown, dated as of
August 15, 2001, incorporated herein by reference to
Exhibit 10.4 to our Registration Statement on Form S-4.
10.5 Amended and Restated Employment Agreement between The
William Carter Company and Michael D. Casey, dated as of
August 15, 2001, incorporated herein by reference to
Exhibit 10.5 to our Registration Statement on Form S-4.
10.6 The Purchase Agreement, dated as of August 8, 2001, by and
among CH Acquisitions LLC and Goldman, Sachs & Co., Fleet
Securities, Inc. and BNP Paribas Securities Corp. and joined
as of the Closing Date by The William Carter Company and
Carter's de San Pedro, Inc. and Carter's Imagination, Inc.
with respect to the $175,000,000 aggregate principal amount
of 10.875% Senior Subordinated Notes due 2011, incorporated
herein by reference to Exhibit 10.7 to our Registration
Statement on Form S-4.
10.7 Credit and Guaranty Agreement dated August 15, 2001 among
the The William Carter Company, as Borrower, Carter
Holdings, Inc. and certain subsidiaries of The William
Carter Company, as Guarantors, various lenders, Goldman
Sachs Credit Partners L.P., as Lead Arranger and Syndication
Agent, Fleet National Bank, as Administrative Agent and
Collateral Agent, and BNP Paribas, as Documentation Agent,
incorporated herein by reference to Exhibit 10.8 to our
Registration Statement on Form S-4.
10.8 Amended and Restated Promissory Note dated August 15, 2001
between The William Carter Company and Frederick J. Rowan,
II, incorporated herein by reference to Exhibit 10.9 to our
Registration Statement on Form S-4.
10.9 Amended and Restated Stock Pledge Agreement dated August 15,
2001 between The William Carter Company and Frederick J.
Rowan, II, incorporated herein by reference to
Exhibit 10.10 to our Registration Statement on Form S-4.
10.10 Lease Agreement dated February 16, 2001 between The William
Carter Company and Proscenium, L.L.C., incorporated herein
by reference to Exhibit 10.12 to our Registration Statement
on Form S-4.
21 Subsidiaries of The William Carter Company, incorporated
herein by reference to Exhibit 21 to our Registration
Statement on Form S-4.
(b) Reports on Form 8-K: None
67