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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 JULY 3, 1999 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number:
333-51447
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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
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(Address of principal executive offices, including zip code)
(770) 961-8722
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(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 August 16, 1999, there were 752,808 shares of Class A Common Stock,
213,469 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
Part I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of July 3,
1999 (unaudited) and January 2, 1999 ...................... 3
Unaudited Condensed Consolidated Statements of
Operations for the three-month periods ended
July 3, 1999 and July 4, 1998 ............................. 4
Unaudited Condensed Consolidated Statements of
Operations for the six-month periods ended
July 3, 1999 and July 4, 1998 ............................. 5
Unaudited Condensed Consolidated Statements of Cash
Flows for the six-month periods ended July 3, 1999
and July 4, 1998 .......................................... 6
Notes to Condensed Consolidated Financial Statements
(unaudited) ............................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 10
Part II. Other Information ......................................... 15
2
CARTER HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
July 3, January 2,
1999 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 2,751 $ 3,986
Accounts receivable, net ....................................................... 36,689 34,834
Inventories .................................................................... 114,465 101,408
Prepaid expenses and other current assets ...................................... 4,221 3,433
Deferred income taxes .......................................................... 10,747 11,725
--------- ---------
Total current assets ......................................................... 168,873 155,386
Property, plant and equipment, net ............................................... 57,806 59,674
Tradename, net ................................................................... 93,333 94,583
Cost in excess of fair value of net assets acquired, net ......................... 29,663 30,191
Deferred debt issuance costs, net ................................................ 8,100 8,917
Other assets ..................................................................... 2,682 2,544
--------- ---------
Total assets ................................................................. $ 360,457 $ 351,295
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ........................................... $ 900 $ 900
Accounts payable ............................................................... 16,932 18,887
Other current liabilities ...................................................... 30,929 35,075
--------- ---------
Total current liabilities .................................................... 48,761 54,862
Long-term debt ................................................................... 205,850 186,700
Deferred income taxes ............................................................ 38,324 38,964
Other long-term liabilities ...................................................... 9,860 9,569
--------- ---------
Total liabilities ............................................................ 302,795 290,095
--------- ---------
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, 28,723 shares at cost at July 3, 1999, 23,537 shares at
cost at January 2, 1999 ....................................................... (1,723) (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 .................................................... -- --
(Accumulated deficit) retained earnings ........................................ (615) 2,613
--------- ---------
Total stockholders' equity ................................................... 57,662 61,200
--------- ---------
Total liabilities and stockholders' equity ................................... $ 360,457 $ 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
-------------------------
July 3, July 4,
1999 1998
---- ----
Net sales ...................................... $ 91,170 $ 87,784
Costs of goods sold ............................ 60,625 56,060
-------- --------
Gross profit ................................... 30,545 31,724
Selling, general and administrative expenses ... 27,660 28,656
-------- --------
Operating income ............................... 2,885 3,068
Interest expense ............................... 5,303 5,316
-------- --------
Loss before benefit from income taxes .......... (2,418) (2,248)
Benefit from income taxes ...................... 1,072 732
-------- --------
Net loss ....................................... $ (1,346) $ (1,516)
======== ========
See accompanying notes to the condensed consolidated financial statements
4
CARTER HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
Six-month periods ended
-----------------------
July 3, July 4,
1999 1998
---- ----
Net sales ...................................... $ 177,753 $ 172,928
Costs of goods sold ............................ 117,169 110,141
--------- ---------
Gross profit ................................... 60,584 62,787
Selling, general and administrative expenses ... 55,702 58,459
--------- ---------
Operating income ............................... 4,882 4,328
Interest expense ............................... 10,543 10,448
--------- ---------
Loss before benefit from income taxes .......... (5,661) (6,120)
Benefit from income taxes ...................... 2,433 2,632
--------- ---------
Net loss ....................................... $ (3,228) $ (3,488)
========= =========
See accompanying notes to the condensed consolidated financial statements
5
CARTER HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Six-month periods ended
-----------------------
July 3, July 4,
1999 1998
---- ----
Cash flows from operating activities:
Net loss ...................................................... $ (3,228) $ (3,488)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................ 9,289 8,349
Deferred tax provision (benefit) ............................. 338 (350)
Effect of changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ....................................... (1,855) (1,991)
Inventories ............................................... (13,057) (28,124)
Prepaid expenses and other assets ......................... (1,476) 999
(Decrease) increase in liabilities:
Accounts payable and other liabilities .................... (6,704) 889
-------- --------
Net cash used in operating activities ..................... (16,693) (23,716)
-------- --------
Cash flows from investing activities:
Capital expenditures .......................................... (4,301) (5,457)
Proceeds from sale of fixed assets ............................ 25 20
-------- --------
Net cash used in investing activities ..................... (4,276) (5,437)
-------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit ........................ 60,800 71,250
Payments of revolving line of credit .......................... (41,200) (40,650)
Payment of other debt ......................................... (450) (450)
Proceeds from sale of Class C Treasury stock .................. 60
Repurchase of Capital stock ................................... (370) (184)
Other ......................................................... 954 (1,826)
-------- --------
Net cash provided by financing activities ................. 19,734 28,200
-------- --------
Net decrease in cash and cash equivalents ....................... (1,235) (953)
Cash and cash equivalents, beginning of period .................. 3,986 4,259
-------- --------
Cash and cash equivalents, end of period ........................ $ 2,751 $ 3,306
======== ========
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 July 3, 1999, the results of its operations for the three-month and
six-month periods ended July 3, 1999 and July 4, 1998 and cash flows for the
six-month periods ended July 3, 1999 and July 4, 1998. Operating results for the
three-month and six-month periods ended July 3, 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 southern United States, Costa
Rica, the Dominican Republic and Mexico. Products are manufactured for wholesale
distribution to major domestic retailers and for the Company's 145 retail outlet
stores that market its brand name merchandise and certain products manufactured
by other companies. The Company's retail operations represented approximately
43% of its consolidated net sales in the second quarters of 1999 and 1998 and
approximately 42% and 41% in the first half of 1999 and 1998, respectively.
NOTE 3--INVENTORIES:
Inventories consisted of the following ($000):
July 3, January 2,
1999 1999
---- ----
Finished goods ........... $ 84,238 $ 68,236
Work in process .......... 19,479 21,286
Raw materials ............ 10,748 11,886
-------- --------
Total .................... $114,465 $101,408
======== ========
7
CARTER HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 4--TREASURY STOCK TRANSACTIONS:
During the quarters ended July 3, 1999 and July 4, 1998 the Company
repurchased 3,897 and 779 shares, respectively, of its Class C stock owned by
former employees of Carter's for cash payments of approximately $233,000 and
$47,000, respectively. During the six-month periods ended July 3, 1999 and July
4, 1998 the Company repurchased 6,186 and 3,068 shares, respectively, of its
Class C stock owned by former employees of Carter's for cash payments of
approximately $370,000 and $184,000, respectively. In addition, during each of
the six-month periods ended July 3, 1999 and July 4, 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 has been named as a third-party defendant in an action
involving environmental claims relating to property located near its previously
owned facility in Needham, Massachusetts. In February 1999, the Company and the
plaintiff reached a tentative settlement by which the Company would pay the
plaintiff $2,500. Such settlement is subject to the approval of other parties
involved in this litigation. The Company is also in the process of investigating
a potential claim under environmental laws in Lamar County, Georgia. Based on
the information available at this time, the ultimate outcome of these matters is
uncertain, and therefore, the Company is unable to determine the amount of its
liability, if any. Accordingly, no accrual has been recorded in the accompanying
financial statements for these matters.
NOTE 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. The Wholesale and Other
segment includes all other revenue and expenses of the Company not directly
related to the Retail segment and EBITDA of 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 July 3, 1999:
Sales ........................... $ 38,821 $ 52,349 $ 91,170
EBITDA .......................... $ 7,844 $ (550) $ 7,294
Three-months ended July 4, 1998:
Sales ........................... $ 37,708 $ 50,076 $ 87,784
EBITDA .......................... $ 7,385 $ (515) $ 6,870
Six-months ended July 3, 1999:
Sales ........................... $ 74,028 $ 103,725 $ 177,753
EBITDA .......................... $ 14,063 $ (709) $ 13,354
Six-months ended July 4, 1998:
Sales ........................... $ 71,297 $ 101,631 $ 172,928
EBITDA .......................... $ 12,280 $ (351) $ 11,929
A reconciliation of total segment EBITDA to total consolidated loss before
benefit from income taxes is presented below ($000):
Three-months ended Six-months ended
------------------ ----------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
---- ---- ---- ----
Total EBITDA for reportable segments ............. $ 7,294 $ 6,870 $ 13,354 $ 11,929
Depreciation and amortization expense ............ (4,409) (3,802) (8,472) (7,601)
Interest expense ................................. (5,303) (5,316) (10,543) (10,448)
-------- -------- -------- --------
Consolidated loss before benefit from income taxes $ (2,418) $ (2,248) $ (5,661) $ (6,120)
======== ======== ======== ========
NOTE 7 - TEXTILE PLANT PHASE-DOWN
In its continuous efforts to provide the best quality products at
competitive prices to its customers, the Company has evaluated alternative
sources of supply for fabric. Overcapacity in the textile knit industry has
resulted in lower prices being offered by the Company's fabric suppliers and has
reduced the cost advantages previously gained by Carter's through vertical
integration.
The Company has developed a plan to take advantage of these alternative
sourcing opportunities and, in the third quarter of 1999, will begin to
phase-down production in its textile operations located in Barnesville, Georgia.
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
current fabric vendors, which the Company believes will meet current and future
fabric requirements.
During the phase-down period, 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 facility's assets of approximately $11.0 million to reflect the partial
abandonment of the facility.
Other non-recurring expenses to be incurred in the second half of 1999
related to the phase-down are estimated to be approximately $7.0 million,
including approximately $1.0 million of severance-related payments and $6.0
million of manufacturing inefficiencies.
9
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 six-month periods ended July 3, 1999 compared to three and six-month
periods ended July 4, 1998
Consolidated net sales for the second quarter of 1999 increased $3.4
million (3.9%) to $91.2 million from $87.8 million in the second quarter of
fiscal 1998. Consolidated net sales for the first half of 1999 were $177.8
million, an increase of $4.8 million (2.8%) compared with the first half of
1998.
Wholesale sales increased $2.3 million (4.5%) to approximately $52.4
million in the second quarter of 1999 from $50.1 million in the second quarter
of 1998 and increased $2.1 million (2.1%) to approximately $103.7 million in the
first half of 1999 from $101.6 million in the first half of 1998. The increase
in wholesale sales included growth in playwear product revenues which increased
approximately 22% and 7% in the second quarter and first half of 1999,
respectively.
Sales at regular wholesale selling prices increased 0.9% in the second
quarter of 1999 and decreased 2.8% in the first half of 1999 due primarily to
lower unit shipments in the baby and sleepwear product categories. Sales at
regular wholesale selling prices are expected to increase approximately 4% in
the second half of 1999 compared to the second half of 1998.
Wholesale sales in the second quarter and first half 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 second quarter and first half of 1999
were approximately 7% in each period compared to approximately 5% and 4% in the
second quarter and first half of 1998, respectively. The higher level of
off-price sales reflects management's efforts to reduce excess inventory levels.
Management has developed a more conservative revenue forecast for the second
half of 1999 and has reduced production cycle times to mitigate exposure to
excess inventories prospectively.
The Company's retail store sales were $38.8 million for the second quarter
of 1999, which represented an increase of $1.1 million (3.0%) compared to the
second quarter of 1998. Comparable store sales decreased 0.1% in the second
quarter of 1999 compared to the second quarter of 1998. Retail sales in the
first half of 1999 were $74.0 million, an increase of $2.7 million (3.8%)
compared with the first half of 1998. Comparable store sales increased 0.4% in
the first half of 1999 compared with the first half of 1998. During the second
quarter of 1999, the Company opened two outlet stores and closed one outlet
store. There were 145 outlet stores operating as of July 3, 1999 compared to 142
as of July 4, 1998.
The Company's gross profit decreased $1.2 million (3.7%) to $30.5 million
in the second quarter of 1999 from $31.7 million in the second quarter of 1998.
Gross profit as a percentage of net sales in the second quarter of 1999
decreased to 33.5% from 36.1% in the second quarter of 1998. In the first half
of 1999, gross profit decreased $2.2 million (3.5%) to $60.6 million compared
with the first half of 1998. Gross profit as a percentage of net sales in the
first half of 1999 decreased to 34.1% compared to 36.3%. The decrease in gross
profit is attributed primarily to a higher mix of off-price sales to the
secondary market, costs incurred to close three sewing facilities in Georgia and
Mississippi and curtailment of production in the Company's textile facility, as
described below.
In the first half 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 lower the cost
of its most labor intensive component of its supply chain.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (Continued)
In 1998, the Company expanded its ability to full-package source certain
products. Full-package sourcing involves purchasing finished products from
contractors throughout the world which 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
negatively impacted second quarter and first half 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 from the Far East. Overcapacity resulted in lower prices offered
by the Company's fabric suppliers which, in turn, reduced the cost advantages
previously gained by Carter's through vertical integration.
As more fully described in Note 7, the Company will begin 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 all current and future fabric requirements.
While there may be no near-term cost advantage of 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 for the second quarter of
1999 decreased to $27.7 million (3.5%) from $28.7 million in the second quarter
of 1998. Selling, general and administrative expenses as a percentage of net
sales decreased to 30.3% in the second quarter of 1999 from 32.6% in the second
quarter of 1998. In the first half of 1999, these expenses decreased to $55.7
million (4.7%) from $58.5 million in the first half of 1998. As a percentage of
net sales, selling, general and administrative expenses decreased to 31.3% in
the first half of 1999 from 33.8% in the first half 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 manufacturing plant closing costs and production curtailment.
Operating income for the second quarter of 1999 decreased to $2.9 million
(6.0%) compared to operating income of $3.1 million in the second quarter of
1998. Operating income in the first half of 1999 increased $0.6 million (12.8%)
to $4.9 million compared with the first half of 1998. Such variances reflect the
net effect of changes in gross profit and selling, general and administrative
expenses described above.
Interest expense for both the second quarter of 1999 and 1998 was $5.3
million. Interest expense for the first half of 1999 increased to $10.5 million
(0.9%) from $10.4 million for the first half of 1998. Average revolver
borrowings during the first half of 1999 were $32.5 million compared to $22.0
million in the first half of 1998. At July 3, 1999, outstanding debt aggregated
$206.8 million compared to $207.3 million at July 4, 1998.
The Company recorded an income tax benefit of $1.1 million in the second
quarter of 1999 compared to an income tax benefit of $0.7 million in the second
quarter of 1998. For the first half of 1999, the Company recorded an income tax
benefit of $2.4 million compared to an income tax benefit of $2.6 million for
the first half of 1998. The Company's effective tax rate was approximately 43%
during the first half of 1999, a rate comparable to the first half of 1998.
As a result of the factors described above, the Company reported a net
loss of approximately $1.3 million in the second quarter of 1999 compared to a
net loss of approximately $1.5 million in the second quarter of 1998. The net
loss for the first half of 1999 was $3.2 million compared to a net loss of $3.5
million in the first half of 1998.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (Continued)
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 July 3, 1999 were $36.7 million compared to
$32.1 million at July 4, 1998. Due to the seasonal nature of the Company's
operations, the net accounts receivable balance at July 3, 1999 is not
comparable to the net accounts receivable balance at January 2, 1999.
Inventories at July 3, 1999 were $114.5 million compared to $115.8 million
at July 4, 1998. This decrease reflects management's efforts to reduce
production cycle times and excess inventory levels. Due to the seasonal nature
of the Company's operations, inventories at July 3, 1999 are not comparable to
inventories at January 2, 1999.
The Company invested $4.3 million and $5.5 million in capital expenditures
during the first half of 1999 and 1998, respectively. The Company plans to
invest a total of $16.0 million in capital expenditures in 1999. In the second
half of 1999, investments will be made primarily in outlet store remodeling and
information technology.
At July 3, 1999, the Company had $206.8 million of debt outstanding,
consisting of $100.0 million of 10 3/8% Series A Senior Subordinated Notes,
$20.0 million of 12% Senior Subordinated Notes, $42.8 million in term loan
borrowings and $44.0 million in revolver borrowings under the Senior Credit
Facility, exclusive of approximately $3.4 million of outstanding letters of
credit. At July 3, 1999, the Company had approximately $17.6 million of
financing available under the revolving credit portion of the Senior Credit
Facility.
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.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (Continued)
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. The Company believes that seasonality of
sales and profitability is a factor that affects the baby and children's apparel
industry generally and is primarily due to retailers' emphasis on price
reductions in the first quarter and promotional retailers' and manufacturers'
emphasis on closeouts of prior year's product lines. Accordingly, the results of
operations for the three-month and six-month periods ended July 3, 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 70% 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 July 3, 1999,
outstanding debt aggregated $206.8 million, of which $86.8 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 $868,000.
13
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 been
certified to be Y2K ready.
The replacement/upgrade of affected hardware and software supporting the
Company's manufacturing and administrative locations is substantially complete.
The Company expects to complete the remaining replacements/upgrades in the third
quarter of 1999. Integrated testing and validation of all the Company's systems
is planned to be 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 includes, but is not limited to, failures or
disruptions in: information systems, plant facilities, equipment, utilities,
transportation, voice/data communications, material supplies and/or key support
services. A comprehensive set of contingency plans was developed during the
second quarter of 1999 which will be implemented, as required, during the second
half of 1999.
The Company has incurred and expects to continue to incur internal
staffing and other costs as a result of modifying existing systems to be Y2K
ready. Such costs will continue to be expensed as incurred and funded through
internally generated cash flow, while costs to acquire new equipment and
software will be capitalized and depreciated over their useful lives. The
hardware replacements and software upgrades were principally planned to improve
operating controls and their implementation was not significantly accelerated as
a result of Y2K issues. To date, the Company has incurred $3.1 million of costs
in connection with Y2K readiness. The Company plans to spend approximately $1.0
million 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.
14
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, untimely responses by
key service providers and the inability to implement interfaces between the new
systems and the existing systems on a timely basis.
Due to the general uncertainty of the Y2K risk, resulting, in part, from
the uncertainty about the Y2K readiness of third-parties, the Company cannot
ensure its ability to resolve problems associated with the Y2K issue or to limit
exposure to third-party liability that may affect its operations and business,
in a timely 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
15
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 July 3,
1999.
16
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: August 16, 1999 /s/ FREDERICK J. ROWAN, II
--------------------------
Frederick J. Rowan, II
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: August 16, 1999 /s/ MICHAEL D. CASEY
--------------------
Michael D. Casey
Senior Vice President and
Chief Financial Officer