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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED OCTOBER 2, 1999 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER:
333-51447
-----------------------
CARTER HOLDINGS, INC.
(Exact name of registrant as specified in charter)
MASSACHUSETTS 13-3912933
-------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1590 ADAMSON PARKWAY, SUITE 400
MORROW, GEORGIA 30260
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(770) 961-8722
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Applicable only to corporate issuers:
As of November 16, 1999, there were 752,808 shares of Class A Common Stock,
211,959 Class C Common Stock and 5,000 shares of Class D Common Stock
outstanding.
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FORM 10-Q
CARTER HOLDINGS, INC.
INDEX
PAGE
----
PART I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of October 2, 1999 (unaudited)
and January 2, 1999 ........................................................ 3
Unaudited Condensed Consolidated Statements of Operations for the
three-month periods ended October 2, 1999 and October 3, 1998 .............. 4
Unaudited Condensed Consolidated Statements of Operations for
the nine-month periods ended October 2, 1999 and October 3, 1998 ........... 5
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended October 2, 1999 and October 3, 1998 ............... 6
Notes to Condensed Consolidated Financial Statements (unaudited) ........... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................ 11
PART II Other Information .......................................................... 16
2
CARTER HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
OCTOBER 2, JANUARY 2,
1999 1999
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 4,913 $ 3,986
Accounts receivable, net ......................................................... 36,498 34,834
Inventories ...................................................................... 93,018 101,408
Prepaid expenses and other current assets ........................................ 3,785 3,433
Deferred income taxes ............................................................ 11,175 11,725
--------- ---------
Total current assets ........................................................... 149,389 155,386
Property, plant and equipment, net ................................................. 58,078 59,674
Tradename, net ..................................................................... 92,708 94,583
Cost in excess of fair value of net assets acquired, net ........................... 29,460 30,191
Deferred debt issuance costs, net .................................................. 7,743 8,917
Other assets ....................................................................... 2,710 2,544
--------- ---------
Total assets ................................................................... $ 340,088 $ 351,295
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ............................................. $ 900 $ 900
Accounts payable ................................................................. 18,109 18,887
Other current liabilities ........................................................ 40,002 35,075
--------- ---------
Total current liabilities ...................................................... 59,011 54,862
Long-term debt ..................................................................... 173,050 186,700
Deferred income taxes .............................................................. 37,740 38,964
Other long-term liabilities ........................................................ 9,860 9,569
--------- ---------
Total liabilities .............................................................. 279,661 290,095
--------- ---------
Commitments and contingencies
Stockholders' equity:
Class A Stock, nonvoting; par value $.01 per share; 775,000 shares authorized;
752,808 shares issued and outstanding; liquidation value of $.001 per share ... 45,168 45,168
Class C Stock, nonvoting; par value $.01 per share; 500,000 shares authorized;
242,192 shares issued; liquidation value of $.001 per share .................. 14,532 14,532
Class C Treasury Stock, 30,233 shares at cost at October 2, 1999, 23,537 shares
at cost at January 2, 1999 .................................................. (1,814) (1,413)
Class D Stock, voting; par value $.01 per share; 5,000 shares authorized, issued
and outstanding .............................................................. 300 300
Common stock, voting; par value $.01 per share; 1,280,000 shares authorized;
none issued or outstanding .................................................... -- --
Retained earnings ................................................................ 2,241 2,613
--------- ---------
Total stockholders' equity ..................................................... 60,427 61,200
--------- ---------
Total liabilities and stockholders' equity ..................................... $ 340,088 $ 351,295
--------- ---------
--------- ---------
See accompanying notes to the condensed consolidated financial statements
3
CARTER HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
THREE-MONTH PERIODS ENDED
-------------------------
OCTOBER 2, OCTOBER 3,
1999 1998
---------- ----------
Net sales ........................................ $124,678 $127,243
Cost of goods sold ............................... 80,536 78,547
-------- --------
Gross profit ..................................... 44,142 48,696
Selling, general and administrative expenses ..... 33,945 34,183
-------- --------
Operating income ................................. 10,197 14,513
Interest expense ................................. 5,265 5,523
-------- --------
Earnings before income taxes ..................... 4,932 8,990
Income tax provision ............................. 2,076 3,866
-------- --------
Net income ....................................... $ 2,856 $ 5,124
-------- --------
-------- --------
See accompanying notes to the condensed consolidated financial statements
4
CARTER HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
NINE-MONTH PERIODS ENDED
------------------------
OCTOBER 2, OCTOBER 3,
1999 1998
---------- ----------
Net sales ........................................ $ 302,431 $300,171
Cost of goods sold ............................... 197,705 188,691
--------- --------
Gross profit ..................................... 104,726 111,480
Selling, general and administrative expenses ..... 89,647 92,639
--------- --------
Operating income ................................. 15,079 18,841
Interest expense ................................. 15,808 15,971
--------- --------
(Loss) earnings before income taxes .............. (729) 2,870
Income tax (benefit) provision ................... (357) 1,234
--------- --------
Net (loss) income ................................ $ (372) $ 1,636
--------- --------
--------- --------
See accompanying notes to the condensed consolidated financial statements
5
CARTER HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
NINE-MONTH PERIODS ENDED
--------------------------
OCTOBER 2, OCTOBER 3,
1999 1998
---------- ----------
Cash flows from operating activities:
Net (loss) income ................................................ $ (372) $ 1,636
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................... 14,063 12,539
Deferred tax (benefit) provision ................................ (674) 745
Effect of changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable .......................................... (1,664) (9,820)
Inventories .................................................. 8,390 (19,603)
Prepaid expenses and other assets ............................ (1,407) 891
Increase in liabilities:
Accounts payable and other liabilities ....................... 3,481 8,969
-------- --------
Net cash provided by (used in) operating activities .......... 21,817 (4,643)
-------- --------
Cash flows from investing activities:
Capital expenditures ............................................. (8,090) (10,414)
Proceeds from sale of fixed assets ............................... 275 23
-------- --------
Net cash used in investing activities ........................ (7,815) (10,391)
-------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit ........................... 73,150 94,350
Payments of revolving line of credit ............................. (86,350) (80,150)
Payment of other debt ............................................ (450) (450)
Proceeds from sale of Class C Treasury stock ..................... -- 60
Repurchase of Capital stock ...................................... (460) (320)
Other ............................................................ 1,035 2,222
-------- --------
Net cash (used in) provided by financing activities .......... (13,075) 15,712
-------- --------
Net increase in cash and cash equivalents .......................... 927 678
Cash and cash equivalents, beginning of period ..................... 3,986 4,259
-------- --------
Cash and cash equivalents, end of period ........................... $ 4,913 $ 4,937
-------- --------
-------- --------
See accompanying notes to the condensed consolidated financial statements
6
CARTER HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1--BASIS OF PREPARATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Carter Holdings, Inc. and its subsidiaries
(the "Company") contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of October 2, 1999, the results of its operations for the three-month and
nine-month periods ended October 2, 1999 and October 3, 1998 and cash flows for
the nine-month periods ended October 2, 1999 and October 3, 1998. Operating
results for the three-month and nine-month periods ended October 2, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending January 1, 2000. The accompanying condensed consolidated balance sheet of
the Company as of January 2, 1999 has been derived from the audited consolidated
financial statements included in the Company's fiscal 1998 Annual Report on Form
10-K.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission and the instructions to Form 10-Q. The
accounting policies followed by the Company are set forth in its Annual Report
on Form 10-K in the Notes to the Company's consolidated financial statements for
the fiscal year ended January 2, 1999.
NOTE 2--THE COMPANY
Carter Holdings, Inc. is a holding company whose primary asset consists of
an investment in 100% of the outstanding capital stock of The William Carter
Company, Inc. ("Carter's").
The Company is a manufacturer and marketer of premier branded childrenswear
under the CARTER'S and CARTER'S CLASSICS labels. The Company manufactures its
products in plants located in the United States, Costa Rica, the Dominican
Republic and Mexico. The Company also sources its products from various
manufacturers throughout the world. Products are manufactured for wholesale
distribution to major domestic retailers and for the Company's 149 retail outlet
stores that market its brand name merchandise and certain products manufactured
by other companies. The Company's retail operations represented approximately
44% and 40% of its consolidated net sales in the third quarters of 1999 and
1998, respectively, and approximately 43% and 41% in the first nine months of
1999 and 1998, respectively.
NOTE 3--INVENTORIES
Inventories consisted of the following ($000):
OCTOBER 2, JANUARY 2,
1999 1999
---------- ----------
Finished goods.............. $62,284 $ 68,236
Work in process............. 19,986 21,286
Raw materials............... 10,748 11,886
------- --------
Total ...................... $93,018 $101,408
------- --------
------- --------
7
CARTER HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 4--TREASURY STOCK TRANSACTIONS
During the quarters ended October 2, 1999 and October 3, 1998 the Company
repurchased 1,510 and 2,289 shares, respectively, of its Class C Stock owned by
former employees of Carter's for cash payments of approximately $90,000 and
$136,000, respectively. During the nine-month periods ended October 2, 1999 and
October 3, 1998 the Company repurchased 7,696 and 5,357 shares, respectively, of
its Class C stock owned by former employees of Carter's for cash payments of
approximately $460,000 and $320,000, respectively. In addition, during each of
the nine-month periods ended October 2, 1999 and October 3, 1998, employees of
the Company were issued 1,000 shares of Class C stock from shares repurchased
for $60.00 per share. The 1999 transaction involved no cash proceeds, and the
Company recognized $60,000 as compensation expense.
NOTE 5--ENVIRONMENTAL MATTERS
The Company is in the process of investigating a potential claim under
environmental laws in Lamar County, Georgia. Based on the information available
at this time, the ultimate outcome of this matter is uncertain, and therefore,
the Company is unable to determine the amount of its liability, if any.
Accordingly, no accrual has been recorded in the accompanying financial
statements for this matter.
NOTE 6--SEGMENT INFORMATION
The Company's two reportable segments are "Retail" and "Wholesale and
Other". The Company generally sells the same products in each business segment.
The Company evaluates the performance of its Retail segment based on, among
other things, its earnings before interest, taxes, depreciation and amortization
expenses ("EBITDA"). The Retail segment's EBITDA is determined on a direct
contribution basis only and does not include allocations of all costs incurred
to support Retail operations. Retail EBITDA, therefore, does not reflect the
actual results which would be derived if such allocations were made. EBITDA
shown in the accompanying table for the Wholesale and Other segment is an amount
determined by deduction based on consolidated EBITDA and includes all other
revenue and expenses of the Company not directly related to the Retail segment.
Therefore, EBITDA shown in the accompanying table for the Wholesale and Other
segment is not a measurement used by management in its decision-making process.
8
CARTER HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 6--SEGMENT INFORMATION (CONTINUED)
The table below presents certain segment information for the periods
indicated ($000):
WHOLESALE
RETAIL AND OTHER TOTAL
------ --------- -----
THREE-MONTHS ENDED OCTOBER 2, 1999:
Sales ........................... $ 54,691 $ 69,987 $124,678
EBITDA .......................... $ 13,587 $ 1,040 $ 14,627
THREE-MONTHS ENDED OCTOBER 3, 1998:
Sales ........................... $ 50,566 $ 76,677 $127,243
EBITDA .......................... $ 13,176 $ 5,148 $ 18,324
NINE-MONTHS ENDED OCTOBER 2, 1999:
Sales ........................... $128,719 $173,712 $302,431
EBITDA .......................... $ 27,651 $ 329 $ 27,980
NINE-MONTHS ENDED OCTOBER 3, 1998:
Sales ........................... $121,862 $178,309 $300,171
EBITDA .......................... $ 25,456 $ 4,797 $ 30,253
A reconciliation of total segment EBITDA to total consolidated earnings
(loss) before income taxes is presented below ($000):
THREE-MONTHS ENDED NINE-MONTHS ENDED
----------------------- ----------------------
OCT 2, OCT 3, OCT 2, OCT 3,
1999 1998 1999 1998
--------- -------- -------- -------
Total EBITDA for reportable segments ................. $ 14,627 $18,324 $ 27,980 $30,253
Depreciation and amortization expense ................ (4,430) (3,811) (12,901) (11,412)
Interest expense ..................................... (5,265) (5,523) (15,808) (15,971)
-------- ------- -------- -------
Consolidated earnings (loss) before income taxes ..... $ 4,932 $ 8,990 $ (729) $ 2,870
-------- ------- -------- -------
-------- ------- -------- -------
9
CARTER HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 7--TEXTILE PLANT PHASE-DOWN
Historically, the Company had sourced most of its fabric requirements
through its textile operations located in Barnesville, Georgia. In recent years,
the domestic textile knit industry has experienced increasing levels of
overcapacity caused by consolidation and higher levels of global sourcing.
Overcapacity has resulted in lower prices offered by the company's fabric
suppliers which, in turn, has reduced the cost advantages previously gained by
Carter's through vertical integration.
The Company has developed a plan to take advantage of alternative fabric
sourcing opportunities and, in the third quarter of 1999, began to phase-down
production in its textile operations. All textile processes, with the exception
of printing, will be discontinued by the end of fiscal 1999. The Company has
negotiated supply arrangements with its fabric vendors, which the Company
believes will meet current and future fabric requirements.
During the fourth quarter, the level of textile production at the
Barnesville facility will decrease to a point substantially below full capacity;
accordingly, at that point, the Company will record a non-cash impairment loss
on the Company's assets of approximately $13.0 million to reflect the partial
abandonment of the facility.
Included in the third quarter 1999 financial results are approximately $0.8
million in manufacturing inefficiencies directly related to phasing down textile
operations. Other non-recurring expenses to be incurred in the fourth quarter of
1999 related to the phase-down are estimated to be approximately $6.0 million,
including approximately $1.0 million of employee-related payments and $5.0
million of manufacturing inefficiencies.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. THE COMPANY
UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS.
RESULTS OF OPERATIONS
THREE AND NINE-MONTH PERIODS ENDED OCTOBER 2, 1999 COMPARED TO THREE AND
NINE-MONTH PERIODS ENDED OCTOBER 3, 1998
Consolidated net sales for the third quarter of 1999 decreased $2.6 million
(2.0%) to $124.7 million from $127.3 million in the third quarter of fiscal
1998. Consolidated net sales for the first nine months of 1999 were $302.4
million, an increase of $2.3 million (0.8%) compared with the first nine months
of 1998.
Wholesale sales decreased $6.7 million (8.7%) to $70.0 million in the third
quarter of 1999 from $76.7 million in the third quarter of 1998 and decreased
$4.6 million (2.6%) to approximately $173.7 million in the first nine months of
1999 from $178.3 million in the first nine months of 1998.
The decrease in wholesale sales reflects:
-- lower 1999 sleepwear revenue compared to increases generated
from the successful launch of the Dreamakers sleepwear
product line in May 1998
-- underperformance of the CARTER'S CLASSICS and playwear product
lines, and
-- lower layette product revenues resulting from the
expiration of the BABY DIOR license in December 1998.
In this increasingly competitive marketplace, revenue gains are achieved
through the frequent introduction of products which are distinctive in fabric
and creative application (i.e., embroidery and prints) and which provide value
to the consumer. The decline in 1999 revenue reflects the Company's previously
insufficient ability to source better products from lower cost manufacturers
throughout the world.
In 1998, the Company developed the infrastructure necessary to source
products globally. Although 1999 revenues are expected to be comparable to 1998,
the Company plans to achieve future growth in revenue and profitability by
sourcing products at lower costs from manufacturers throughout the world. This
strategy is designed to build on the Company's core business strengths in
layette and sleepwear product markets and will improve product performance in
the highly fragmented children's playwear market.
Wholesale sales in the third quarter and first nine months of 1999 included
a higher mix of off-price sales (merchandise promoted at more than 25% off
regular wholesale selling prices) to the secondary market. Off-price sales as a
percentage of consolidated sales in the third quarter and first nine months of
1999 were 4.4% and 5.8% in each period compared to 3.1% and 3.8% in the third
quarter and first nine months of 1998, respectively. The higher level of
off-price sales reflects management's efforts to reduce excess inventory levels.
Prospectively, management has developed a more conservative revenue forecast for
the balance of 1999 and has reduced production cycle times to attempt to
mitigate exposure to excess inventories.
The Company's retail store sales were $54.7 million for the third quarter
of 1999, which represented an increase of $4.1 million (8.2%) compared to the
third quarter of 1998. Comparable store sales increased 4.5% in the third
quarter of 1999 compared to the third quarter of 1998. Retail sales in the first
nine months of 1999 were $128.7 million, an increase of $6.9 million (5.6%)
compared with the first nine months of 1998. Comparable store sales increased
2.1% in the first nine months of 1999 compared with the first nine
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (CONTINUED)
months of 1998. During the first nine months of 1999, the Company opened six
outlet stores and closed one outlet store. There were 149 outlet stores
operating as of October 2, 1999 compared to 148 as of October 3, 1998.
The Company's gross profit decreased $4.6 million (9.4%) to $44.1 million
in the third quarter of 1999 from $48.7 million in the third quarter of 1998.
Gross profit as a percentage of net sales in the third quarter of 1999 decreased
to 35.4% from 38.3% in the third quarter of 1998. In the first nine months of
1999, gross profit decreased $6.8 million (6.1%) to $104.7 million compared with
the first nine months of 1998. Gross profit as a percentage of net sales in the
first nine months of 1999 decreased to 34.6% compared to 37.1% in the first nine
months of 1998. The decrease in gross profit is attributed primarily to a higher
mix of off-price sales to the secondary market, costs incurred to close sewing
facilities in Georgia and Mississippi, curtailment of production to lower
inventory levels and the phase-down of production in the Company's textile
facility.
In the first nine months of 1999, the Company closed three sewing
facilities in the United States. Such closures and expansion of sewing capacity
in Mexico, Costa Rica and the Dominican Republic have enabled the Company to
decrease costs in the most labor intensive component of the supply chain.
In 1998, the Company expanded its ability to source its products from
contractors throughout the world. Such products are manufactured, labeled and
packaged to Carter's specifications. The Company's global sourcing strategy
provides the opportunity to source a broader range of products at lower costs
and has reduced the requirements for internal textile capacity. Lower levels of
throughput in the Company's textile facility in Barnesville, Georgia and related
unabsorbed manufacturing costs have negatively impacted 1999 financial results.
In recent years, the domestic textile knit industry has experienced
increasing levels of overcapacity caused by consolidation and higher levels of
global sourcing. Overcapacity has resulted in lower prices offered by the
Company's fabric suppliers which, in turn, has reduced the cost advantages
previously gained by Carter's through vertical integration.
As more fully described in Note 7 to the accompanying financial
statements, the Company began to phase-down production in its textile
facility in the third quarter of 1999. All textile processes, with the
exception of printing, will be discontinued by the end of fiscal 1999. The
Company has negotiated fabric-sourcing arrangements with its suppliers, which
will meet current and future fabric requirements. While there may be no
near-term cost reduction by sourcing fabrics externally, the Company expects
to purchase lower cost fabrics from Mexican-based suppliers within the next
two to three years.
Selling, general and administrative expenses decreased $0.2 million (0.7%)
to $33.9 million in the third quarter of 1999 from $34.2 million in the third
quarter of 1998. Selling, general and administrative expenses as a percentage of
net sales increased to 27.2% in the third quarter of 1999 from 26.9% in the
third quarter of 1998. In the first nine months of 1999, these expenses
decreased $3.0 million (3.2%) to $89.6 million from $92.6 million in the first
nine months of 1998. As a percentage of net sales, selling, general and
administrative expenses decreased to 29.6% in the first nine months of 1999 from
30.9% in the first nine months of 1998. The improvement in selling, general and
administrative expenses as a percentage of net sales is attributed to a
reduction in discretionary spending to levels necessary to support current
levels of demand for the Company's products and to mitigate the impact of
manfacturing plant closing costs and production curtailment.
Operating income for the third quarter of 1999 decreased $4.3 million
(29.7%) to $10.2 million from $14.5 million in the third quarter of 1998.
Operating income in the first nine months of 1999 decreased $3.8 million (20.0%)
to $15.1 million from $18.8 million in the first nine months of 1998. Such
variances reflect the net effect of changes in gross profit and selling, general
and administrative expenses described above.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Interest expense in the third quarter of 1999 decreased $0.2 million (4.7%)
to $5.3 million from $5.5 million in the third quarter of 1998. Interest expense
in the first nine months of 1999 decreased $0.2 million (1.0%) to $15.8 million
from $16.0 million in the first nine months of 1998. The decrease reflects the
results of management's inventory reduction initiatives and related impact on
seasonal borrowing requirements. At October 2, 1999, outstanding debt decreased
$16.9 million (8.9%) to $174.0 million compared to $190.9 million at October 3,
1998. Such decrease reflects the $16.0 million (58.8%) reduction in borrowings
under the Company's revolving credit facility which were $11.2 million at
October 2, 1999 compared to $27.2 million at October 3, 1998.
The Company recorded a provision for income taxes of $2.1 million in the
third quarter of 1999 compared to a provision for income taxes of $3.9 million
in the third quarter of 1998. For the first nine months of 1999, the Company
recorded a benefit from income taxes of $0.4 million compared to a provision for
income taxes of $1.2 million for the first nine months of 1998. The Company's
effective tax rate was approximately 49% during the first nine months of 1999,
an estimated tax rate higher than the first nine months of 1998, due
primarily to a lower projected pretax income for 1999.
As a result of the factors described above, the Company reported net income
of approximately $2.9 million in the third quarter of 1999 compared to net
income of approximately $5.1 million in the third quarter of 1998. A net loss of
approximately $0.4 million was reported for the first nine months of 1999
compared to a net income of approximately $1.6 million in the first nine months
of 1998.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
The Company has financed its working capital, capital expenditures and
debt service requirements primarily through internally generated cash flow and
funds borrowed under the Company's revolving credit facility.
Net accounts receivable at October 2, 1999 were $36.5 million compared to
$40.0 million at October 3, 1998. This decrease reflects lower wholesale
shipments during the third quarter of 1999. Due to the seasonal nature of the
Company's operations, the net accounts receivable balance at October 2, 1999 is
not comparable to the net accounts receivable balance at January 2, 1999.
Inventories at October 2, 1999 were $93.0 million compared to $107.2
million at October 3, 1998. This decrease reflects management's efforts to
reduce production cycle times and inventory levels. Due to the seasonal nature
of the Company's operations, inventories at October 2, 1999 are not comparable
to inventories at January 2, 1999.
The Company invested $8.1 million and $10.4 million in capital
expenditures during the first nine months of 1999 and 1998, respectively. The
Company plans to invest approximately $16.0 million in capital expenditures in
1999. In the fourth quarter of 1999, investments will be made primarily in
outlet store remodeling and information technology.
As of October 2, 1999 and October 3, 1998 debt consisted of (in millions):
1999 1998
---- ----
Senior Credit Facility term loan ............... $ 42.8 $ 43.7
Senior Credit Facility revolving credit ........ 11.2 27.2
12% Series B Senior Subordinated Notes ......... 20.0 20.0
10 3/8% Series A Senior Subordinated Notes ..... 100.0 100.0
------- -------
Total debt ..................................... $ 174.0 $ 190.9
------- -------
------- -------
The reduction in debt in 1999 was driven primarily by a reduction in
inventory levels through production curtailment, reduced cycle times and sale of
excess inventories. Letters of credit outstanding at October 2, 1999 and October
3, 1998 were $8.3 million and $7.8 million, respectively. Availability under the
revolving credit portion of the Senior Credit Facility as of October 2, 1999 and
October 3, 1998 was $45.5 million and $30.0 million, respectively.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company believes that cash generated from operations, together with
availability under the revolving credit portion of the Senior Credit Facility,
will be adequate to meet its debt service requirements, capital expenditures and
working capital needs for the foreseeable future, although no assurance can be
given in this regard.
EFFECTS OF INFLATION
The Company is affected by inflation primarily through the purchase of raw
material, increased operating costs and expenses and higher interest rates. The
effects of inflation on the Company's operations have not been material in
recent years.
SEASONALITY
The Company experiences seasonal fluctuations in its sales and
profitability, with generally lower sales and gross profit in the first and
second quarters of its fiscal year. Accordingly, the results of operations for
the three-month and nine-month periods ended October 2, 1999 are not indicative
of the results to be expected for the full year.
MARKET RISKS
In the operation of its business, the Company has market risk exposures to
foreign sourcing, raw material prices and interest rates. Each of these risks
and the Company's strategies to manage the exposure is discussed below.
The Company currently sources approximately 85% of its sewing production
through its offshore facilities. As a result, the Company may be adversely
affected by political instability resulting in the disruption of trade from
foreign countries in which the Company's manufacturing facilities are located,
the imposition of additional regulations relating to imports, duties, taxes and
other charges on imports, any significant decreases in the value of the dollar
against foreign currencies and restrictions on the transfer of funds. These and
other factors could result in the interruption of production in offshore
facilities or a delay in the receipt of the products by the Company in the
United States. The Company's future performance may be subject to such factors,
which are beyond the Company's control, and there can be no assurance that such
factors would not have a material adverse effect on the Company's financial
condition and results of operations.
The principal raw materials used by the Company are cotton and polyester
yarns and chemicals, dyes and pastes used in textile manufacturing, as well as
finished fabrics and trim materials. These materials are available from a number
of suppliers. Prices for these materials are affected by changes in market
demand and there can be no assurance that prices for these and other raw
materials will not increase in the near future.
The Company's operating results are subject to risk from interest rate
fluctuations on debt which carries variable interest rates. At October 2, 1999,
outstanding debt aggregated $174.0 million, of which $54.0 million bore interest
at a variable rate, so that an increase of 1% in the applicable rate would
increase the Company's annual interest expense by $540,000.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
YEAR 2000 READINESS
The Company utilizes electronic technology that processes information and
performs calculations that are date and time dependent. Virtually every computer
operation, encompassing all information systems as well as manufacturing
equipment and plant facilities with embedded logic, unless it is already Year
2000 ("Y2K") ready, will be affected in some way by the rollover of the
two-digit year value from "99" to "00" and the inadvertent recognition by
electronic technology of "00" as the year 1900 rather than 2000. The Company is
aware that it may not only be negatively affected by the failure of its own
systems to be Y2K ready, but may also be adversely impacted by the Y2K
non-readiness of its vendors, customers, service providers and any other party
with which the Company transacts business.
The Company has completed its assessment of all systems (hardware and
software), facilities, suppliers and service providers for all locations.
Through this process, the Company has identified remedial steps necessary to be
Y2K ready. Because the Company primarily uses software provided by third party
vendors, it has not incurred substantial internal programming costs associated
with modifying code and data to handle dates past the Year 2000. The latest
software releases provided by major third-party vendors to the Company have all
been certified to be Y2K ready.
The replacement/upgrade of affected hardware and software supporting the
Company's manufacturing and administrative locations has been completed. In
addition, full integration testing and validation of all the Company's systems
was completed during the third quarter of 1999.
All major customers, outside vendors and service providers have been
contacted regarding their Y2K readiness. Appropriate steps and follow-up
measures have been instituted to ensure their readiness. Because of the concerns
regarding the Y2K issue and the potential for disruption of business operations,
the Company has established a comprehensive contingency planning process. The
scope of the Y2K contingency plans include, but are not limited to, failures or
disruptions in: information systems, plant facilities, equipment, utilities,
transportation, voice/data communications, material supplies and/or key support
services. A comprehensive set of contingency plans was developed during the
second quarter of 1999. Implementation of the backup portion of the contingency
plans commenced in the third quarter and will be fully implemented by the end of
the fourth quarter of 1999.
The Company has incurred internal staffing and other costs as a result of
modifying existing systems to be Y2K ready. Such costs will continue to be
expensed as incurred and funded through internally generated cash flow, while
costs to acquire new equipment and software will be capitalized and depreciated
over their useful lives. The hardware replacements and software upgrades were
principally planned to improve operating controls and their implementation was
not significantly accelerated as a result of Y2K issues. To date, the Company
has incurred $3.7 million of costs in connection with Y2K readiness. The Company
plans to spend approximately $400,000 in the remainder of 1999 to complete its
readiness, substantially all of which represents investments in new equipment.
The costs to date and the estimated costs to complete do not include internal
payroll costs, which are not tracked separately.
Management recognizes that the failure of the Company, or any party with
which the Company conducts business, to be Y2K ready in a timely manner could
have a material adverse impact on the operations of the Company. If the
Company's systems were to fail because they were not Y2K ready, the Company
could incur significant costs and inefficiencies. Manual systems for sales,
manufacturing, retail operations and/or financial controls would have to be
implemented and staffed. If the Company is not Y2K ready, some customers might
decide to cease doing business with the Company. Disruptions in electric power,
in other critical services or in the delivery of raw materials could cause
significant business interruptions. Similarly, business interruptions incurred
by the Company's customers could result in deferred or canceled orders.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The dates on which the Company believes Y2K readiness will be complete are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, or that there will not be
a delay in, or increased costs associated with the implementation of Y2K
readiness. Specific factors that might cause differences between the estimates
and actual results include, but are not limited to, the lack of availability of
skilled personnel, increased costs for outside resources and untimely responses
by key service providers.
Due to the general uncertainty of the Y2K risk, resulting, in part, from the
uncertainty about the Y2K readiness of third-parties, the Company cannot ensure
its ability to resolve problems associated with the Y2K issue or to limit
exposure to third-party liability that may affect its operations and business,
in a timely or cost-effective manner.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company has been involved in various legal
proceedings. Management believes that all such litigation is routine in nature
and incidental to the conduct of its business, and that none of such litigation,
if resolved adversely to the Company, would have a material adverse effect on
the financial condition or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
*27 Financial Data Schedule.
- ---------------
* Filed herewith
(b) Reports on Form 8-K
No report was filed by the Registrant during the quarter ended
October 2, 1999.
17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARTER HOLDINGS, INC.
Date: November 16, 1999 /s/ FREDERICK J. ROWAN, II
-----------------------------------
Frederick J. Rowan, II
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 16, 1999 /s/ MICHAEL D. CASEY
-----------------------------------
Michael D. Casey
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
18