UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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 SEPTEMBER 30, 2006 OR

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM        TO        

Commission file number:

001-31829

CARTER’S, INC.

(Exact name of Registrant as specified in its charter)

 

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)

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 o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one)

Large Accelerated Filer x  Accelerated Filer o  Non-Accelerated Filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock		Outstanding Shares at November 9, 2006
Common stock, par value $0.01 per share		58,868,080

 

CARTER’S, INC.

INDEX

			Page
Part I.	Financial Information
	Item 1.	Financial Statements
		Unaudited Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005	3
		Unaudited Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2006 and October 1, 2005	4
		Unaudited Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2006 and October 1, 2005	5
		Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine-month period ended September 30, 2006	6
		Notes to the Unaudited Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38
	Item 4.	Controls and Procedures	39
Part II.	Other Information
	Item 1.	Legal Proceedings	40
	Item 1A.	Risk Factors	40
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
	Item 3.	Defaults upon Senior Securities	40
	Item 4.	Submission of Matters to a Vote of Security Holders	40
	Item 5.	Other Information	40
	Item 6.	Exhibits	41
Signatures			42
Certifications

 

2

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARTER’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except for share data)

(unaudited)

		September 30, 2006			December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents		$	29,956		$	84,276
Accounts receivable, net		150,835			96,144
Inventories, net		199,849			188,454
Prepaid expenses and other current assets		9,696			6,262
Deferred income taxes		19,739			23,909
Total current assets		410,075			399,045
Property, plant, and equipment, net		79,863			79,458
Tradenames		322,233			322,233
Cost in excess of fair value of net assets acquired		279,756			284,172
Deferred debt issuance costs, net		6,797			8,257
Licensing agreements, net		13,959			17,150
Leasehold interests, net		1,268			1,619
Other assets		5,144			4,793
Total assets		$	1,119,095		$	1,116,727
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt		$	2,984		$	3,241
Accounts payable		44,395			63,735
Other current liabilities		79,151			89,627
Total current liabilities		126,530			156,603
Long-term debt		389,915			426,791
Deferred income taxes		126,145			124,439
Other long-term liabilities		22,111			22,250
Total liabilities		664,701			730,083
Commitments and contingencies
Stockholders’ equity:
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at September 30, 2006 and December 31, 2005		—			—
Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 58,179,118 shares issued and outstanding at September 30, 2006; 40,000,000 shares authorized, 28,909,729 shares issued and outstanding at December 31, 2005		582			289
Additional paid-in capital		265,345			260,414
Deferred compensation		—			(2,749		)
Accumulated other comprehensive income		1,350			1,354
Retained earnings		187,117			127,336
Total stockholders’ equity		454,394			386,644
Total liabilities and stockholders’ equity		$	1,119,095		$	1,116,727

 

See accompanying notes to the unaudited condensed consolidated financial statements

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CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except for share data)

 (unaudited)

		For the three-month periods ended						For the nine-month periods ended
		September 30, 2006			October 1, 2005			September 30, 2006			October 1, 2005
Net sales		$	391,977		$	372,158		$	966,001		$	770,865
Cost of goods sold		244,757			243,497			613,382			500,374
Gross profit		147,220			128,661			352,619			270,491
Selling, general, and administrative expenses		93,496			89,303			258,944			192,542
Closure costs		—			1,509			91			6,078
Royalty income		(7,782		)	(7,208		)	(21,610		)	(13,544		)
Operating income		61,506			45,057			115,194			85,415
Loss on extinguishment of debt		—			20,137			—			20,137
Interest expense, net		6,554			7,444			20,367			15,902
Income before income taxes		54,952			17,476			94,827			49,376
Provision for income taxes		19,975			6,898			35,046			19,499
Net income		$	34,977		$	10,578		$	59,781		$	29,877
Basic net income per common share		$	0.60		$	0.18		$	1.03		$	0.52
Diluted net income per common share		$	0.57		$	0.17		$	0.98		$	0.49
Basic weighted-average number of shares outstanding		57,949,783			57,439,850			57,845,521			57,177,740
Diluted weighted-average number of shares outstanding		61,094,141			60,932,056			61,173,247			60,672,620

 

See accompanying notes to the unaudited condensed consolidated financial statements

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CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

		For the nine-month periods ended
		September 30, 2006			October 1, 2005
Cash flows from operating activities:
Net income		$	59,781		$	29,877
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		18,272			16,207
Loss on extinguishment of debt		—			20,137
Amortization of inventory step-up		—			10,370
Amortization of debt issuance costs		1,460			1,892
Accretion of debt discount		—			40
Income tax benefit from exercised stock options		(2,472		)	5,184
Non-cash stock-based compensation expense		4,349			1,108
Non-cash closure costs		—			113
Loss (gain) on sale of property, plant, and equipment		197			(109		)
Deferred income taxes		5,666			(3,134		)
Effect of changes in operating assets and liabilities:
Accounts receivable		(54,691		)	(36,289		)
Inventories		(11,395		)	(14,627		)
Prepaid expenses and other assets		(3,090		)	(1,938		)
Accounts payable and other liabilities		(23,310		)	5,328
Net cash (used in) provided by operating activities		(5,233		)	34,159
Cash flows from investing activities:
Acquisition of OshKosh B’Gosh, Inc., net of cash acquired		—			(309,910		)
Capital expenditures		(15,861		)	(10,650		)
Proceeds from sale of property, plant, and equipment		348			528
Sale of investments		—			60,100
Purchase of investments		—			(50,175		)
Collections on loan		—			2,954
Net cash used in investing activities		(15,513		)	(307,153		)
Cash flows from financing activities:
Proceeds from new term loan		—			500,000
Payments on new term loan		(37,133		)	(31,250		)
Payments on former term loan		—			(71,326		)
Borrowings from revolving loan facility		5,000			—
Payments on revolving loan facility		(5,000		)	—
Repayment of 10.875% Senior Subordinated Notes		—			(113,750		)
Payment of debt redemption premium		—			(14,015		)
Payment of debt issuance costs		—			(10,780		)
Income tax benefit from exercised stock options		2,472			—-
Proceeds from exercise of stock options		1,087			1,593
Net cash (used in) provided by financing activities		(33,574		)	260,472
Net decrease in cash and cash equivalents		(54,320		)	(12,522		)
Cash and cash equivalents, beginning of period		84,276			33,265
Cash and cash equivalents, end of period		$	29,956		$	20,743

 

See accompanying notes to the unaudited condensed consolidated financial statements

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CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(dollars in thousands, except for share data)

(unaudited)

		Common stock			Additional paid-in capital			Deferred compensation			Accumulated other comprehensive income			Retained earnings			Total stockholders’ equity
Balance at December 31, 2005		$	289		$	260,414		$	(2,749	)	$	1,354		$	127,336		$	386,644
Tax benefit from exercise of stock options		—			2,472			—			—			—			2,472
Exercise of stock options (252,288 shares)		2			1,085			—			—			—			1,087
Stock-based compensation expense		—			3,874			—			—			—			3,874
Issuance of common stock (17,172 shares)		—			540			—			—			—			540
Reversal of deferred compensation (see Note 9)		—			(2,749		)	2,749			—			—			—
Two-for-one common stock split (see Note 8)		291			(291		)	—			—			—			—
Comprehensive income:
Net income		—			—			—			—			59,781			59,781
Unrealized gain on interest rate swap, net of taxes of $242		—			—			—			452			—			452
Unrealized loss on interest rate collar, net of tax benefit of $32		—			—			—			(456		)	—			(456		)
Total comprehensive income		—			—			—			(4		)	59,781			59,777
Balance at September 30, 2006		$	582		$	265,345		—			$	1,350		$	187,117		$	454,394

 

See accompanying notes to the unaudited condensed consolidated financial statements

6

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – THE COMPANY:

Carter’s, Inc., and its wholly-owned subsidiaries (collectively, the “Company,” “we,” “us,” “its,” and “our”) design, source, and market branded childrenswear under the Carter’s, Child of Mine, Just One Year, OshKosh B’Gosh, and related labels.  Our products are sourced through contractual arrangements with manufacturers worldwide.  Products are sourced for wholesale distribution to major domestic retailers, including the mass channel, and for our 205 Carter’s brand and 146 OshKosh brand retail stores that market our brand name merchandise and other licensed products manufactured by other companies.

On July 14, 2005, Carter’s, Inc., through its wholly-owned subsidiary, The William Carter Company (“TWCC”), acquired all of the outstanding common stock of OshKosh B’Gosh, Inc. for a purchase price of $312.1 million, which included payment for vested stock options (the “Acquisition”).  The accompanying unaudited condensed consolidated financial statements include the operations of OshKosh for the three and nine-month periods ended September 30, 2006.  Financial results for the three and nine-month periods ended October 1, 2005 include the operations of OshKosh for the period from July 14, 2005 through October 1, 2005.

NOTE 2 – BASIS OF PREPARATION:

The accompanying unaudited condensed consolidated financial statements comprise the consolidated financial statements of Carter’s, Inc. and its subsidiaries.  All intercompany accounts and transactions have been eliminated in consolidation.

In our opinion, the Company’s accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair statement of our financial position as of September 30, 2006, the results of our operations for the three and nine-month periods ended September 30, 2006 and October 1, 2005, cash flows for the nine-month periods ended September 30, 2006 and October 1, 2005 and changes in stockholders’ equity for the nine-month period ended September 30, 2006.  Except as otherwise noted, all such adjustments consist only of those of a normal recurring nature.  Operating results for the nine-month period ended September 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending December 30, 2006.  Our accompanying condensed consolidated balance sheet as of December 31, 2005 is from our audited consolidated financial statements included in our most recently filed Annual Report on Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America 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 we follow are set forth in our most recently filed Annual Report on Form 10-K in the notes to our consolidated financial statements for the fiscal year ended December 31, 2005.

Our fiscal year ends on the Saturday in December or January nearest to the last day of December.  The accompanying unaudited condensed consolidated financial statements for the third quarter and first nine months of fiscal 2006 reflect our financial position as of September 30, 2006.  The third quarter and first nine months of fiscal 2005 ended on October 1, 2005.

Certain prior year amounts have been reclassified for comparative purposes.

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NOTE 3 – BUSINESS COMBINATION AND REFINANCING:

As noted above, on July 14, 2005, we acquired all of the outstanding common stock of OshKosh.  The Acquisition was accounted for under the purchase method of accounting.  The purchase price for the Acquisition, including related fees and expenses, was allocated to the fair value of tangible and identifiable intangible assets and liabilities acquired with the remainder allocated to cost in excess of fair value of net assets acquired.  As part of financing the Acquisition, the Company refinanced its existing debt (the “Refinancing”), including its senior credit facility (“former senior credit facility”) and repurchased $113.8 million of 10.875% Senior Subordinated Notes due 2011 (the “Notes”).  The repurchase of the Notes together with the Refinancing and Acquisition is referred to as the “Transaction.”

Financing for the Transaction was provided by a new $500 million Term Loan 1 (see Note 6) and a $125 million revolving credit facility (including a sub-limit for letters of credit of $80 million, the “Revolver”) entered into by TWCC with Bank of America, N.A., as administrative agent, Credit Suisse, and certain other financial institutions (the “Senior Credit Facility”).  The term of the Revolver extends to July 14, 2011 and the term of the Term Loan 1 extends to July 14, 2012.

The proceeds from the Refinancing were used to purchase the outstanding common stock and vested stock options of OshKosh ($312.1 million), pay transaction expenses ($6.2 million), refinance the Company’s former senior credit facility ($36.2 million), repurchase the Notes ($113.8 million), pay a redemption premium on the Company’s Notes ($14.0 million), along with accrued and unpaid interest ($5.1 million), and pay debt issuance costs ($10.6 million).  Other Transaction expenses paid prior and subsequent to the closing of the Transaction totaled $1.4 million, including $0.2 million in debt issuance costs.

As a result of the Refinancing, we expensed $4.5 million in unamortized debt issuance costs related to the former senior credit facility and Notes and expensed $0.5 million related to the debt discount on the Notes.  Additionally, we expensed approximately $1.1 million of debt issuance costs associated with the Senior Credit Facility in accordance with Emerging Issues Task Force (“EITF”) No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.”

The Senior Credit Facility requires us to hedge at least 25% of our variable rate debt under the Term Loan 1.  On September 22, 2005, we entered into a swap agreement to receive floating interest and pay fixed interest.  This swap agreement is designated as a cash flow hedge of the variable interest payments on a portion of our variable rate Term Loan 1 debt.  The swap agreement matures on July 30, 2010.  The unrealized (loss) gain, net of taxes, related to the interest rate swap was ($1.3) million and $0.5 million, respectively, for the three and nine-month periods ended September 30, 2006 and is included within accumulated other comprehensive income on the accompanying unaudited condensed consolidated balance sheet.  During the three and nine-month periods ended September 30, 2006, we reclassified approximately $0.5 million and $0.9 million, respectively, related to the swap agreement into earnings.

On May 25, 2006, we entered into an interest rate collar agreement (the “collar”) with a floor of 4.3% and a ceiling of 5.5%.  The collar covers $100 million of our variable rate Term Loan 1 debt and is designated as a cash flow hedge of the variable interest payments on such debt.  The collar matures on January 31, 2009.  The unrealized loss, net of tax benefit, related to the collar was ($0.6) million and ($0.5) million, respectively, for the three and nine-month periods ended September 30, 2006 and is included within accumulated other comprehensive income on the accompanying unaudited condensed consolidated balance sheet.

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A summary of the Acquisition purchase price allocation is as follows:

(dollars in thousands)
Cash and cash equivalents		$	9,500
Investments		18,355
Accounts receivable		15,979
Inventory		86,201
Deferred tax assets		13,453
Property, plant, and equipment		26,107
Tradename		102,000
Licensing agreements		19,100
Leasehold interests		1,833
Other assets		5,075
Accounts payable		(19,052		)
Severance and relocation (Note 11)		(9,733		)
Other exit costs (Note 11)		(2,167		)
Lease termination costs (Note 11)		(7,200		)
Contract termination costs (Note 11)		(1,533		)
Deferred tax liabilities		(41,800		)
Accrued and other liabilities		(39,820		)
Cost in excess of fair value of net assets acquired		143,186
		$	319,484

 

The following unaudited pro forma summary presents information as if the Transaction occurred on the first day of fiscal 2005 and assumes that there were no other changes in our operations.  This pro forma information does not necessarily reflect the actual results that would have occurred had the Transaction occurred on that date, nor is it necessarily indicative of the future results of operations of the combined Company.

The unaudited pro forma summary reflects the combined Company for the three and nine-month periods ended October 1, 2005, adjusted to reflect increased interest expense, amortization of the capitalized value of OshKosh licensing agreements and leasehold interests, and incremental depreciation expense.

(dollars in thousands, except share data)		For the three-month period ended October 1, 2005			For the nine-month period ended October 1, 2005
Pro forma net sales		$	383,065		$	944,191
Pro forma net income		$	9,892		$	20,909
Pro forma basic earnings per share		$	0.17		$	0.37
Pro forma diluted earnings per share		$	0.16		$	0.34

 

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NOTE 4 – COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS:

In connection with the Acquisition, the Company recorded the cost in excess of fair value of net assets acquired and other intangible assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.”

As of September 30, 2006, cost in excess of fair value of net assets acquired and other intangible assets resulting from the Acquisition were as follows:

(dollars in thousands)		Weighted- average useful life		Gross amount			Accumulated amortization
Cost in excess of fair value of net assets acquired		Indefinite		$	143,186		$	—
OshKosh tradename		Indefinite		$	102,000		$	—
OshKosh licensing agreements		4.7 years		$	19,100		$	5,141
Leasehold interests		4.1 years		$	1,833		$	565

 

During the three-month period ended September 30, 2006, approximately $0.7 million related to pre-Acquisition tax contingencies were reversed due to the closure of certain tax periods.  This reversal resulted in a corresponding adjustment to cost in excess of fair value of net assets acquired of $0.7 million in accordance with EITF 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination” (“EITF 93-7”).

Amortization expense for intangible assets subject to amortization was approximately $1.2 million and $3.5 million for the three and nine-month periods ended September 30, 2006.  Annual amortization expenses for the OshKosh licensing agreements and leasehold interests are expected to be as follows:

		Estimated
(dollars in thousands)		amortization
Fiscal Year		expense
2006 (period from October 1 through December 30)		$	1,180
2007		4,447
2008		4,106
2009		3,717
2010		1,777
Total		$	15,227

 

As described in Note 2 to our consolidated financial statements in our most recently filed Annual Report on Form 10-K, our existing Carter’s tradename and cost in excess of fair value of net assets acquired have been deemed to have indefinite lives and are not being amortized.  During the three-month period ended September 30, 2006, approximately $2.7 million related to tax contingencies established in connection with the 2001 Acquisition of the Company by Berkshire Partners LLC (the “2001 Acquisition”) were reversed due to the closure of certain tax periods.  This reversal resulted in a corresponding adjustment to cost in excess of fair value of net assets acquired of $2.7 million in accordance with EITF 93-7.

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NOTE 5 – INVENTORIES:

Inventories consisted of the following:

(dollars in thousands)		September 30, 2006			December 31, 2005
Finished goods		$	199,849		$	185,472
Work in process		—			2,336
Raw materials and supplies		—			646
Total		$	199,849		$	188,454

 

NOTE 6 – CREDIT FACILITY AMENDMENT:

On April 28, 2006, the Company entered into Amendment No. 1 (“Amendment No. 1”) to the Senior Credit Facility.  Amendment No. 1 reduced the Company’s interest rate by refinancing the existing Term Loan B (initially priced at LIBOR + 1.75% with a leverage-based pricing grid ranging from LIBOR + 1.50% to LIBOR + 1.75%) with a new Term Loan 1 having an applicable rate of LIBOR + 1.50% with no leverage-based pricing grid.  If the Company makes any optional prepayments of its Term 1 Loans prior to the one-year anniversary of Amendment No. 1 in connection with any repricing transaction, the Company will be required to pay a prepayment premium of 1% of the amount of such Term 1 Loans being prepaid.

Amendment No. 1 also lowered the threshold for permitting restricted payments by raising the required leverage ratio (as defined) from 1.5 times to 2.5 times provided the Company has revolving loan commitments of $75.0 million available.

NOTE 7 – EMPLOYEE BENEFIT PLANS:

Under a defined benefit plan, which was frozen in 1991, 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.

The components of post-retirement life and medical benefit expense charged to operations are as follows:

		For the three-month periods ended						For the nine-month periods ended
(dollars in thousands)		September 30, 2006			October 1, 2005			September 30, 2006			October 1, 2005
Service cost – benefits attributed to service during the period		$	42		$	25		$	126		$	75
Interest cost on accumulated post-retirement benefit obligation		160			171			477			504
Amortization of prior service cost		23			—			69			—
Total net periodic pension benefit cost		$	225		$	196		$	672		$	579

 

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We also have an obligation under a defined benefit plan covering certain former officers.  The components of pension expense charged to operations related to this plan are as follows:

		For the three-month periods ended						For the nine-month periods ended
(dollars in thousands)		September 30, 2006			October 1, 2005			September 30, 2006			October 1, 2005
Interest cost on accumulated pension benefit obligation		$	19		$	20		$	57		$	60

 

The Company maintains two defined benefit pension plans acquired in connection with the Acquisition.  The benefits under these pension plans were frozen as of December 31, 2005, and cover certain current and former employees of OshKosh.

The Company’s net periodic pension benefit related to these plans is comprised of the following components:

		For the three-month periods ended						For the nine-month periods ended
(dollars in thousands)		September 30, 2006			October 1, 2005			September 30, 2006			October 1, 2005
Service cost		$	—-		$	56		$	—-		$	56
Interest cost		650			735			1,951			735
Expected return on assets		(1,035		)	(926		)	(3,104		)	(926		)
Net periodic pension benefit		$	(385	)	$	(135	)	$	(1,153	)	$	(135	)

 

See Note 7 “Employee Benefit Plans” to our consolidated financial statements in our most recently filed Annual Report on Form 10-K for further information.

NOTE 8 – COMMON STOCK:

On May 12, 2006, the Company amended Article V of its certificate of incorporation.  The amendment increased the number of authorized shares of the Company’s common stock from 40,000,000 to 150,000,000.

On June 6, 2006, the Company effected a two-for-one stock split (the “stock split”) through a stock dividend to stockholders of record as of May 23, 2006, of one share of our common stock for each share of common stock outstanding.  Earnings per share for all prior periods presented have been adjusted to reflect the stock split.

During the first nine months of fiscal 2006, we issued 17,172 shares of common stock to our non-management board members.

NOTE 9 – STOCK-BASED COMPENSATION:

Under our Amended and Restated 2003 Equity Incentive Plan (the “Plan”), the compensation committee of our Board of Directors may award incentive stock options (ISOs and non-ISOs), stock appreciation rights (SARs), restricted stock, unrestricted stock, stock deliverable on a deferred basis, performance-based stock awards, and cash payments intended to help defray the cost of awards.  All share and per share amounts have been adjusted to reflect the stock split discussed in Note 8 above.

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On May 12, 2005, our Board of Directors implemented, and our stockholders approved an amendment to the Plan to increase the number of shares available to be delivered under the Plan by 2,800,000 to 11,488,392, with no more than 1,260,000 of such additional shares able to be used for awards other than stock options and to reduce the number of shares for which stock options may be granted to any individual or which can be subject to SARs granted to any individual in any calendar year from 8,000,000 to 2,000,000.  As of September 30, 2006, there were 2,192,284 shares available for grant under the Plan.  The Plan makes provision for the treatment of awards upon termination of service or in the case of a merger or similar corporate transaction.  Participation in the Plan is limited to Directors and those key employees selected by the compensation committee.  The limit on shares available under the Plan, the individual limits, and other award terms are subject to adjustment to reflect stock splits or stock dividends, combinations, and certain other events.  All stock options issued under the Plan expire no later than ten years from the date of grant.  The Company believes that the current level of authorized shares is sufficient to satisfy future option exercises.

There are currently three types of stock options outstanding under the Plan:  basic, performance, and retained options.  Basic options issued prior to May 12, 2005 vest in equal annual installments over a five-year period.  Basic options granted on and subsequently to May 12, 2005 vest in equal annual installments over a four-year period.  Performance options vest upon the achievement of pre-determined performance criteria.  Retained stock options are options that were outstanding prior to the Company’s 2001 acquisition by Berkshire Partners LLC and became fully vested in connection with the 2001 acquisition.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaced SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS 148”), and supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”).  SFAS 123R requires companies to expense the fair value of employee stock options and similar awards.  Effective January 1, 2006, the Company adopted SFAS 123R and began recognizing compensation expense for its share-based payments based on the fair value of the awards at the grant date.  Under SFAS 123R, the pro forma disclosures previously permitted under SFAS 123 are no longer an alternative to financial statement recognition.

The Company adopted SFAS 123R using the modified prospective application method of transition.  Therefore, prior period financial statements have not been restated.  Under the modified prospective application method, for awards granted prior to January 1, 2006, compensation expense is recorded as options vest subsequent to January 1, 2006 based upon the grant-date fair value estimated in accordance with the original provisions of SFAS 123, adjusted for estimated forfeitures.  For stock options granted subsequent to January 1, 2006, compensation expense will be recorded as options vest based upon the grant-date fair value estimated in accordance with SFAS 123R, with forfeitures estimated at the time of grant.  Forfeiture estimates will be adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from previous estimates.

The fair value of stock options under SFAS 123R is determined using the Black-Scholes option pricing model, which is consistent with our valuation techniques previously utilized for stock options in pro forma footnote disclosure required under SFAS 123.  Prior to the filing of our first Registration Statement on Form S-1 on August 23, 2002 in connection with our initial public offering, we used the minimum value method to value stock options, as provided by SFAS 123, as amended by SFAS 148.  Under SFAS 123R, no compensation expense has been recorded for options recorded under the minimum value method.

The fair value of restricted stock is determined based on the number of shares granted and the quoted closing price of our common stock on the date of grant, consistent with our treatment of such awards under APB 25 prior to the adoption of SFAS 123R.

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In connection with the adoption and provisions of SFAS 123R, the Company reversed its deferred compensation balance of $2,749,000 on January 1, 2006 related to restricted stock awards.

The adoption of SFAS 123R has resulted in additional pre-tax, share-based compensation expense (a component of selling, general, and administrative expenses) in the amount of approximately $984,000 and $2.9 million related to stock options for the three and nine-month periods ended September 30, 2006, than if the Company had continued to account for share-based compensation under APB 25.  The impact on net income for the three-month period ended September 30, 2006 was a reduction of approximately $612,000, or $0.01, on both basic and diluted earnings per share.  The impact on net income for the nine-month period ended September 30, 2006 was a reduction of approximately $1.8 million, or $0.03, on both basic and diluted earnings per share.  For the fiscal year ended December 30, 2006, the adoption of SFAS 123R is expected to result in a reduction in net income of approximately $2.4 million, or $0.04 per basic and diluted earnings per share.

Prior to the adoption of SFAS 123R, we presented all tax benefits resulting from the exercise of stock options as operating cash inflows in the consolidated statements of cash flows, in accordance with the provisions of EITF Issue No. 00-15, “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option.”  SFAS 123R requires the benefit of tax deductions in excess of the compensation cost recognized for exercised options and restricted stock that vests to be classified as financing cash inflows rather than operating cash inflows, on a prospective basis.  This amount is now shown as “Income tax benefit from exercised stock options” on the accompanying unaudited condensed consolidated statement of cash flows.  The income tax benefit from exercised stock options during the nine-month period ended September 30, 2006 was approximately $2.5 million.  Prior periods have not been restated.

Prior to the adoption of SFAS 123R, we accounted for stock-based compensation on stock options under the intrinsic value method consistent with APB 25.  Under this method, we recorded compensation expense equal to the difference between the exercise price of the stock option and the fair market value of the underlying stock as of the date of the option grant.  Forfeitures on stock option awards with expense recorded in accordance with APB 25 were accounted for as they occurred, rather than based on estimates of future forfeitures.  There was no material impact or cumulative effect adjustment required as a result of estimating the impact of future forfeitures on awards previously expensed in accordance with APB 25.  For disclosure purposes only, we also estimated the impact on our net income of applying the fair value method of measuring compensation cost on stock options with the fair value of the Company’s common stock.  In our pro forma disclosure we accounted for forfeitures as they occurred, rather than based on estimates of future forfeitures.

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The following table provides supplemental information for the three and nine-month periods ended October 1, 2005 as if stock-based compensation had been computed under SFAS 123, as amended by SFAS 148:

(dollars in thousands, except per share data)		For the three-month period ended October 1, 2005			For the nine-month period ended October 1, 2005
Net income, as reported		$	10,578		$	29,877
Add:
Stock-based employee compensation (under APB 25) included in reported net income, net of related tax effects		278			755
Deduct:
Total stock-based employee compensation expense determined under the fair value based method (under SFAS 123 and SFAS 148) for all awards, net of related tax effects		(669		)	(1,850		)
Pro forma net income		$	10,187		$	28,782
Net income per common share:
Basic-as reported		$	0.18		$	0.52
Basic-pro forma		$	0.18		$	0.50
Diluted-as reported		$	0.17		$	0.49
Diluted-pro forma		$	0.17		$	0.47

 

A summary of stock option activity under the Plan (in number of shares that may be purchased) is as follows for the nine-month period ended September 30, 2006:

Basic Stock Options

		Basic stock options		Weighted- average exercise price per share			Weighted- average grant-date fair value
Outstanding, December 31, 2005		4,844,128		$	6.23		$	2.76
Granted		184,600		$	33.73		$	15.34
Exercised		(252,288	)	$	4.31		$	2.09
Forfeited		(17,000	)	$	31.43		$	12.66
Expired		—		$	—		$	—
Outstanding, September 30, 2006		4,759,440		$	7.30		$	3.25
Exercisable, September 30, 2006		3,728,300		$	4.21		$	1.86

 

During the nine months ended September 30, 2006, the Company granted 184,600 basic stock options.  In connection with this grant of basic stock options, the Company recognized approximately $350,000 in compensation expense during the nine-month period ended September 30, 2006.

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A summary of basic stock options outstanding and exercisable at September 30, 2006 is as follows:

		Outstanding										Exercisable
Range of exercise prices		Number		Weighted- average remaining contractual life		Weighted- average exercise price			Weighted- average grant-date fair value			Number		Weighted- average remaining contractual life		Weighted- average exercise price			Weighted- average grant-date fair value
$  3 -$  5		3,373,128		5.02 years		$	3.14		$	1.29		3,299,688		4.99 years		$	3.11		$	1.29
$  6 -$  7		317,392		6.96 years		$	6.98		$	4.88		159,632		6.96 years		$	6.98		$	4.88
$13 -$17		619,920		7.60 years		$	14.88		$	6.71		228,480		7.58 years		$	14.81		$	6.66
$22 -$27		240,000		8.80 years		$	23.82		$	9.52		35,000		8.63 years		$	22.10		$	8.75
$31 -$35		209,000		9.36 years		$	33.47		$	15.03		5,500		8.83 years		$	31.43		$	12.66
		4,759,440		5.87 years		$	7.30		$	3.25		3,728,300		5.28 years		$	4.21		$	1.86

 

At September 30, 2006, the aggregate intrinsic value of all outstanding basic options was approximately $92.3 million and the aggregate intrinsic value of currently exercisable basic options was approximately $82.7 million.  The intrinsic value of basic options exercised during the three and nine-month periods ended September 30, 2006 was approximately $277,000 and $7.0 million.  At September 30, 2006, the total estimated compensation cost related to non-vested basic options not yet recognized was approximately $6.8 million with a weighted-average expense recognition period of 2.83 years.

Performance Stock Options

		Performance stock options		Weighted- average exercise price per share			Weighted- average grant-date fair value
Outstanding, December 31, 2005		600,000		$	25.06		$	9.40
Granted		20,000		$	24.20		$	11.19
Exercised		—		$	—		$	—
Forfeited		—		$	—		$	—
Expired		—		$	—		$	—
Outstanding, September 30, 2006		620,000		$	25.04		$	9.46
Exercisable, September 30, 2006		—		$	—		$	—

 

During the three and nine months ended September 30, 2006, the Company granted 20,000 performance stock options. In connection with this grant of performance stock options, the Company recognized approximately $2,900 in compensation expense during the three and nine-month periods ended September 30, 2006.

A summary of performance stock options outstanding and exercisable at September 30, 2006 is as follows:

		Outstanding										Exercisable
Range of exercise prices		Number		Weighted- average remaining contractual life		Weighted- average exercise price			Weighted- average grant-date fair value			Number		Weighted- average remaining contractual life		Weighted- average exercise price			Weighted- average grant-date fair value
$22-$32		620,000		8.82 years		$	25.04		$	9.46		—		—		$	—		$	—

 

At September 30, 2006, the aggregate intrinsic value of all outstanding performance options was approximately $1.8 million.  No performance options are currently exercisable.  At September 30, 2006, the total estimated compensation cost related to non-vested performance options not yet recognized was approximately $4.2 million with a weighted-average expense recognition period of 2.90 years.

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Retained Stock Options

		Retained stock options		Weighted- average exercise price per share
Outstanding, December 31, 2005		1,708,270		$	0.75
Granted		—		$	—
Exercised		—		$	—
Forfeited		—		$	—
Expired		—		$	—
Outstanding, September 30, 2006		1,708,270		$	0.75
Exercisable, September 30, 2006		1,708,270		$	0.75

 

The weighted-average contractual life of the 1,708,270 retained stock options outstanding and exercisable as of September 30, 2006 is 4.88 years.  At September 30, 2006, the aggregate intrinsic value of all outstanding retained options, which are all currently exercisable, was approximately $43.8 million.

The weighted-average contractual life for the basic, performance, and retained stock options in aggregate as of September 30, 2006 was approximately 5.89 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing method with the following weighted-average assumptions used for grants issued during the nine-month period ended September 30, 2006:

		For the
		nine-month
		period ended
		September 30, 2006
Volatility		38.97	%
Risk-free interest rate		4.70	%
Expected term (years)		6.0
Dividend yield		—

 

Volatility – This is a measure of the amount by which a stock price has fluctuated or is expected to fluctuate.  The Company uses actual monthly historical changes in the market value of our stock since the Company’s initial public offering on October 29, 2003, supplemented by peer company data for periods prior to our initial public offering covering the expected life of options being valued.  An increase in the expected volatility will increase compensation expense.

Risk-free interest rate – This is the U.S. Treasury rate as of the grant date having a term equal to the expected term of the option.  An increase in the risk-free interest rate will increase compensation expense.

Expected term – This is the period of time over which the options granted are expected to remain outstanding and is based on historical experience and estimated future exercise behavior.  Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.  An increase in the expected term will increase compensation expense.

Dividend yield – The Company does not have plans to pay dividends in the foreseeable future.  An increase in the dividend yield will decrease compensation expense.

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Restricted Stock

All restricted stock awards issued under the Plan vest based upon continued service.  Restricted stock awards vest in equal annual installments over a four-year period or cliff vest after a three or four-year period.  As noted above, the fair value of restricted stock is determined based on the number of shares granted and the quoted closing price of our common stock on the date of grant.

The following table summarizes our restricted stock award activity during the nine-month period ended September 30, 2006:

		Restricted
		stock
Outstanding, December 31, 2005		134,270
Granted		100,200
Vested		(4,750	)
Forfeited		(8,000	)
Outstanding, September 30, 2006		221,720

 

During the three-month period ended September 30, 2006, the Company granted 10,000 shares of restricted stock to an employee.  In connection with this issuance, we recorded approximately $3,300 of compensation expense.

During the nine-month period ended September 30, 2006, the Company granted 100,200 shares of restricted stock to employees.   Compensation expense recorded during the nine-month period ended September 30, 2006 for all restricted stock awards totaled approximately $987,000.  The total amount of estimated compensation expense related to unvested restricted stock awards is approximately $4.6 million as of September 30, 2006.

Unrecognized stock-based compensation expense related to outstanding stock options and restricted stock awards is expected to be recorded as follows:

(dollars in thousands)		Basic options			Performance options			Restricted stock			Total
2006 (period from October 1 through December 30)		$	626		$	378		$	389		$	1,393
2007		2,496			1,516			1,554			5,566
2008		2,383			1,516			1,526			5,425
2009		1,218			740			1,059			3,017
2010		103			90			115			308
Total		$	6,826		$	4,240		$	4,643		$	15,709

 

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NOTE 10 – SEGMENT INFORMATION:

We report segment information in accordance with the provisions of SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” which requires segment information to be disclosed based upon a “management approach.”  The management approach refers to the internal reporting that is used by management for making operating decisions and assessing the performance of our operating segments.

The table below presents certain segment information for the periods indicated:

		For the three-month periods ended										For the nine-month periods ended
		September 30, 2006			% of Total		October 1, 2005 (a)			% of Total		September 30, 2006			% of Total		October 1, 2005 (a)			% of Total
Net sales:
Wholesale-Carter’s		$	143,624		36.6	%	$	130,757		35.1	%	$	330,080		34.2	%	$	315,757		41.0	%
Wholesale-OshKosh		25,778			6.6	%	32,644			8.8	%	74,870			7.8	%	32,644			4.2	%
Retail-Carter’s		93,493			23.9	%	87,664			23.5	%	233,956			24.2	%	222,925			28.9	%
Retail-OshKosh		62,739			16.0	%	63,500			17.1	%	155,754			16.1	%	63,500			8.2	%
Mass Channel-Carter’s		66,343			16.9	%	57,593			15.5	%	171,341			17.7	%	136,039			17.7	%
Total net sales		$	391,977		100.0	%	$	372,158		100.0	%	$	966,001		100.0	%	$	770,865		100.0	%

 

					% of net sales					% of net sales					% of net sales					% of net sales
Operating income:
Wholesale-Carter’s		$	32,750		22.8	%	$	28,093		21.5	%	$	66,170		20.0	%	$	61,070		19.3	%
Wholesale-OshKosh		3,806			14.8	%	1,231		(b)	3.8	%	8,396			11.2	%	1,231		(b)	3.8	%
Retail-Carter’s		17,435			18.6	%	20,941			23.9	%	37,780			16.1	%	43,589			19.6	%
Retail-OshKosh		7,444			11.9	%	949		(c)	1.5	%	10,276			6.6	%	949		(c)	1.5	%
Mass Channel-Carter’s		10,746			16.2	%	7,302			12.7	%	24,644			14.4	%	14,117			10.4	%
Mass Channel-OshKosh (d)		604			—		63			—		1,440			—		63			—
Segment operating Income		72,785			18.6	%	58,579			15.7	%	148,706			15.4	%	121,019			15.7	%
Other reconciling items		(11,279		)	(2.9	)%	(13,522		)(e)	(3.6	)%	(33,512		)	(3.5	)%	(35,604		)(e)	(4.6	)%
Total operating Income		$	61,506		15.7	%	$	45,057		12.1	%	$	115,194		11.9	%	$	85,415		11.1	%

 

(a)          Financial results for the three and nine-month periods ended October 1, 2005 include the operations of OshKosh for the period from July 14, 2005 through October 1, 2005.

(b)         The three and nine-month periods ended October 1, 2005 include a charge of $3.3 million related to the amortization of a fair value step-up for wholesale inventory acquired from OshKosh.

(c)          The three and nine-month periods ended October 1, 2005 include a charge of $7.1 million related to the amortization of a fair value step-up for retail store inventory acquired from OshKosh.

(d)         OshKosh mass channel consists of a licensing agreement with Target Stores.  Operating income consists of royalty income, net of related expenses.

(e)          The three and nine-month periods ended October 1, 2005 include $1.5 million and $6.1 million, respectively, of charges related to the closure of the Company’s sewing facilities in Mexico.

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NOTE 11 – RESTRUCTURING AND CLOSURE COSTS:

In connection with the Acquisition, management has developed a plan to restructure and integrate the operations of OshKosh.  In accordance with EITF No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” liabilities have been established for OshKosh severance and relocation, lease termination costs associated with the closure of OshKosh’s 15 Lifestyle stores and 14 outlet stores in fiscal 2005, one outlet store closure in fiscal 2006, contract termination costs, and other exit costs.  These liabilities also cover costs related to the closure of the OshKosh Choloma, Honduras sewing facility, Uman, Mexico sewing facility, and Liberty, Kentucky distribution center.  The Choloma, Honduras and Liberty, Kentucky facilities were closed during the fourth quarter of fiscal 2005.  The Uman, Mexico facility was closed during the first quarter of fiscal 2006.  We expect to pay these liabilities during fiscal 2006 and the first half of fiscal 2007.

The following table summarizes restructuring activity related to the Acquisition:

(dollars in thousands)		Severance and relocation			Other exit costs			Lease termination costs			Contract termination costs			Total
Balance at July 14, 2005		$	9,840		$	2,075		$	7,020		$	2,000		$	20,935
Payments		(2,304		)	(71		)	(468		)	(934		)	(3,777		)
Adjustments to cost in excess of fair value of net assets acquired		673			(78		)	—			(168		)	427
Balance at December 31, 2005		8,209			1,926			6,552			898			17,585
Payments		(4,687		)	(1,349		)	(4,068		)	(399		)	(10,503		)
Adjustments to cost in excess of fair value of net assets acquired		(780		)	170			180			(299		)	(729		)
Balance at September 30, 2006		$	2,742		$	747		$	2,664		$	200		$	6,353

 

In May 2005, we decided to exit two sewing facilities in Mexico.  The total number of employees initially terminated was approximately 1,124.  Production at these facilities ceased on August 5, 2005.  As a result of these closures, in fiscal 2005, we recorded total charges of $8.4 million, including $4.6 million of severance charges, $1.3 million of lease termination charges, $1.6 million of accelerated depreciation (included in cost of goods sold), $0.1 million of asset impairment charges, and $0.8 million of other exit costs.  During the first nine months of fiscal 2005, we recorded total charges of $7.6 million, including $4.2 million of severance charges, $1.3 million of lease termination costs, $1.6 million of accelerated depreciation (included in cost of goods sold), $0.1 million of asset impairment charges, and $0.4 million of other exit costs.  During the first nine months of fiscal 2006, we recorded total charges of $91,000, including $74,000 of severance charges and $17,000 of other exit costs.

Restructuring provisions recorded as a result of these closures are as follows and are included in other current liabilities on the accompanying unaudited condensed consolidated balance sheet:

(dollars in thousands)		December 31, 2005 reserves			Provisions			Payments			September 30, 2006 reserves
Severance and other termination benefits		$	370		$	74		$	(266	)	$	178
Lease termination costs		813			—			(752		)	61
Other exit costs		150			17			(167		)	—
Total		$	1,333		$	91		$	(1,185	)	$	239

 

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NOTE 12 – EARNINGS PER SHARE:

In accordance with SFAS No. 128, “Earnings Per Share,” basic earnings per share is based on the weighted-average number of common shares outstanding during the year, whereas diluted earnings per share also gives effect to all potentially dilutive shares of common stock, including basic and retained stock options and unvested restricted stock, that were outstanding during the period.  Share and per share amounts for prior periods have been adjusted to reflect the stock split described in Note 8.  All such stock options are reflected in the denominator using the treasury stock method.  This method assumes that shares are issued for stock options that are “in the money,” but that we use the proceeds of such stock option exercises (generally, cash to be paid plus future compensation expense to be recognized and the amount of tax benefits, if any, that will be credited to additional paid-in capital assuming exercise of the stock options) to repurchase shares at the average market value of Carter’s, Inc.’s stock for the respective periods.  Unvested shares of restricted stock are reflected in the denominator using the treasury stock method with proceeds of the amount, if any, the employees must pay upon vesting, the amount of compensation cost attributed to future services and not yet recognized in earnings, and the amount of tax benefits, if any, that would be credited to additional paid-in capital (i.e., the amount of the tax deduction in excess of recognized compensation cost) assuming vesting of the shares at the current market price.

For the three and nine-month periods ended September 30, 2006, anti-dilutive shares of 545,950 and 315,750, respectively, and performance-based options of 620,000, were excluded from the computations of diluted earnings per share.  For the three and nine-month periods ended October 1, 2005, anti-dilutive shares of 56,000 and 148,000 respectively, and performance based options of 400,000, were excluded from the computation of diluted earnings per share.

The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:

		For the three-month periods ended						For the nine-month periods ended
		September 30, 2006			October 1, 2005			September 30, 2006			October 1, 2005
Net income		$	34,977,000		$	10,578,000		$	59,781,000		$	29,877,000
Weighted-average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding		57,949,783			57,439,850			57,845,521			57,177,740
Diluted effect of unvested restricted stock		35,400			20,554			65,310			1,868
Dilutive effect of stock options		3,108,958			3,471,652			3,262,416			3,493,012
Diluted number of common and common equivalent shares outstanding		61,094,141			60,932,056			61,173,247			60,672,620
Basic net income per common share		$	0.60		$	0.18		$	1.03		$	0.52
Diluted net income per common share		$	0.57		$	0.17		$	0.98		$	0.49

 

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NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS:

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of a tax position in accordance with this interpretation begins with a determination as to whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position.  A tax position that meets the more-likely-than-not recognition threshold is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement for recognition in the financial statements.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is assessing FIN 48 and has not determined the impact, if any, of the adoption of FIN 48.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The provisions of SFAS 157 are effective as of the beginning of our 2008 fiscal year.  We are currently evaluating the impact of adopting SFAS 157 on our financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132 (R)” (“SFAS 158”).  SFAS 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions.  The provisions of SFAS 158 are effective for the Company as of December 30, 2006, except for the measurement date provisions, which are effective for the Company beginning December 31, 2006.  Based on the Company’s previously reported unfunded obligation as of December 31, 2005, the adoption of SFAS 158 would reduce total stockholders’ equity by approximately $1.4 million.  The adoption of SFAS 158 will not affect our results of operations.  By the time of the adoption at December 31, 2006, plan performance and actuarial assumptions could have a significant impact on the actual amounts recorded.  The Company does not believe the adoption of SFAS 158 will have an impact on the Company’s financial covenants.

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