<PAGE>

                        SECURITIES AND EXCHANGE COMMISSION                   
                              Washington, DC 20549
 
                                   FORM 10-K
 
   X   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE 
  --- SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended
       December 28, 1996

  ---  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE 
       EXCHANGE ACT
 
                       Commission file number: 333-22155
 
                         THE WILLIAM CARTER COMPANY 
                         --------------------------
           (Exact name of registrant as specified in its charter)
 
           Massachusetts                            04-1156680
           -------------                            ----------
     (State or other jurisdiction of      (IRS Employer Identification No.)
     incorporation or organization)

                       1590 Adamson Parkway, Suite 400
                       -------------------------------
                            Morrow, Georgia 30260
                            ---------------------
        (Address of principal executive offices, including zip code)

                               (770) 961-8722
                               --------------
            (Registrant's telephone number, including area code)
 
       Securities registered pursuant to Section 12 (b) of the Act: None
 
       Securities registered pursuant to Section 12 (g) of the Act: None
 
Indicate by check whether the registrant (1) has filed all reports required 
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 
during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.

                               X
          Yes ------      No ------
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 
405 of Regulation S-K is not contained herein, and will not be contained, to 
the best of the registrant's knowledge, in definitive proxy or information 
statements incorporated by reference in Part III of this report or any 
amendment to this Report [X].
 
                                       1
<PAGE>

                                    PART 1
Item 1. Business
 
GENERAL
 
    The William Carter Company (the "Company" or "Carter's") is the largest
marketer of baby and toddler apparel and a leading marketer of young 
children's apparel. Over the Company's more than 130 years of operation, 
Carter's has become one of the most highly recognized brand names in the 
children's apparel industry. The Company is a vertically-integrated 
manufacturer which sells its products under the CARTER'S, CARTER'S CLASSICS 
and BABY DIOR brand names to more than 300 department and specialty store 
accounts (with an estimated 4,600 store fronts) and through its 135 retail 
outlet stores.
 
    Carter's generates a majority of its sales in the baby and toddler 
apparel market, a $5.6 billion market. Management believes that the baby and 
toddler market is well-insulated from changes in fashion trends and less 
sensitive to general economic conditions, while offering strong prospects for 
continued growth. The growth in this market is being driven by a number of 
factors, including: (i) women having children later, resulting in more 
disposable income available for expenditures on children; (ii) more women 
returning to the workplace after having children, resulting in more 
disposable income and increased day care apparel needs; (iii) the increasing 
number of grandparents, a demographic segment with high per capita 
discretionary income and an important consumer base for children's apparel; 
and (iv) an increasing social emphasis on attractive children's apparel.
 
    On October 30, 1996 (the "Acquisition Closing Date"), Carter Holdings, 
Inc. ("Holdings"), a company organized on behalf of affiliates of INVESTCORP
S.A. ("Investcorp"), management and certain other investors, acquired 100% of 
the outstanding preferred and common stock of the Company (the "Acquisition") 
from MBL Life Assurance Corporation, CHC Charitable Irrevocable Trust and 
certain management stockholders (collectively, the "Sellers") for total 
consideration of $208.0 million, which amount includes the base purchase 
price of $194.7 million (including refinancing of indebtedness and certain 
payments to management but excluding fees and expenses), the issuance of 
shares of non-voting stock of Holdings valued at $9.1 million to certain 
members of management and a payment of $4.2 million to the Sellers 
representing the estimated future tax benefit to the Company resulting from 
certain payments. The Company also incurred additional financing and 
transaction fees and expenses of $18.1 million related to the Acquisition. 
Financing for the Acquisition was provided by (i) $56.1 million of borrowings 
under a $100.0 million senior credit facility among the Company, certain 
lenders and The Chase Manhattan Bank, as administrative agent (the "Senior 
Credit Facility"), (ii) $90.0 million of borrowings under a subordinated loan 
facility among the Company, certain lenders, and Bankers Trust Company, as 
administrative agent (the "Subordinated Loan Facility"), (iii) $50.9 million 
of equity investments in Holdings by affiliates of Investcorp and certain 
other investors (which excludes the exchange of management stock described 
below) and (iv) the issuance by Holdings of $20.0 million of senior 
subordinated notes to affiliates of Investcorp and certain other investors 
which Holdings used to purchase $20.0 million of the Company's redeemable 
preferred stock (the "Preferred Stock"). Holdings has no assets or 
investments other than the shares of capital stock of the Company.
 
    The Company is a Massachusetts corporation.  The principal executive 
office of the Company is located at 1590 Adamson Parkway, Suite 400, Morrow, 
Georgia 30260 and its telephone number is (770) 961-8722.
 
PRODUCTS AND MARKETS
 
    The Company markets and manufactures a broad array of baby, toddler and
young children's apparel under the CARTER'S, CARTER'S CLASSICS and BABY DIOR
brand names. The Company's product offerings can be broadly grouped into two
primary categories: (i) "baby and toddler," which includes newborns through
toddlers approximately age three (up to size 4T); and (ii) "young children,"
which 

                                      2
<PAGE>
includes children approximately age three through approximately age six
(boys' sizes 4-7 and girls' sizes 4-6x). The Company's product offerings in
these categories include layette, sleepwear and playwear for the baby and
toddler market, and sleepwear and playwear for the young children's market. In
addition, the Company sells products such as diaper bags, lamps, socks,
strollers, hair accessories, outerwear, underwear and shoes, including 
products for which the Company licenses the CARTER'S name.
 
    From 1991 through 1995, total industry sales of baby and toddler apparel 
increased from $4.4 billion to $5.6 billion, a compound annual rate of 6.1%, 
making it one of the fastest growing sectors of the apparel industry. 
Carter's target distribution channels, which include department and specialty 
stores, account for approximately half of this market. Carter's is currently 
the leading supplier of baby and toddler apparel in the United States, with a 
7.1% market share in its target distribution channels, nearly twice that of 
its nearest branded competitor.
 
PRODUCT DESIGN AND DEVELOPMENT
 
    The Company's management team has significantly improved the Company's
product design and development process by investing in advanced design systems,
improving its design staff and introducing proven customer marketing tools. The
Company's product design and development organization is now comprised of teams
that focus on each of the Company's primary product markets. Each team has its
own artistic and design staff to develop new ideas specifically for its
respective market. Management believes that this organizational structure
provides the Company greater flexibility and allows it to introduce products
more quickly and with a greater success rate.
 
                                      3

<PAGE>

DISTRIBUTION AND SALES
 
    The Company sells its products to wholesale accounts and through the
Company's retail outlet stores. In fiscal 1996, sales through the wholesale
channel accounted for 59.4% of total sales, while the retail channel accounted
for 40.6% of total sales.
 
WHOLESALE OPERATIONS
 
    In fiscal 1996, more than 90% of the Company's wholesale business was 
generated from department and specialty stores. The Company sells its products
in the United States through a network of 35 sales professionals. Sales
professionals work with each account in his/her jurisdiction to establish
annual plans for "basics" (primarily layette and certain baby apparel) within
the CARTER'S line, as well as all products in the CARTER'S CLASSICS and BABY
DIOR lines. Once an annual plan has been established with an account, Carter's
places the account on its semi-monthly automatic reorder plan for "basics."
Management intends to increase the number of accounts on this program to help
better manage inventories, control costs and increase sales. Automatic reorder
allows the Company to plan its manufacturing further in advance and benefits
both the Company and its wholesale customers by  maximizing customers' in-stock
positions, thereby maximizing sales and profitability. Currently, Carter's
non-basics sleepwear and playwear are planned and ordered seasonally as new
products are introduced.

RETAIL OPERATIONS
 
    The Company operates 135 retail outlet stores nationwide averaging 5,300
square feet, making it the fifteenth largest retail outlet store operator as
measured by number of stores. These stores sell all of CARTER'S products, as
well as accessories and certain items purchased from outside manufacturers 
which are sold under the CARTER'S brand name.
 
    Although total retail sales increased at a compound annual rate of 5.7% from
fiscal 1993 through fiscal 1996 (due to new store openings), comparable store
sales have declined since 1993. In an effort to stem declining same store sales,
improve profitability and better leverage the Carter's brand name, management
has recently integrated the retail division with the wholesale division under
the same marketing leadership and upgraded management and retailing skills at
the corporate, regional and store levels. To improve the value, quality and
convenience of products offered in the Company's retail outlet stores,
management has: (i) enhanced the CARTER'S CLASSICS offerings; (ii) shifted the
product mix more toward sleepwear, baby and core volume products; (iii) reduced
the complexity and assortment of products offered; and (iv) further developed
the gift business through pre-assembled gift assortments.
 
    In addition, to make the consumer's shopping experience easier and more 
convenient, the Company has redesigned its store layout by widening aisles, 
improving signage and creating distinct product departments, with an 
increased focus on the Company's core baby products. Since the beginning of 
the fourth quarter of fiscal 1995, the Company has implemented these new 
store layouts in 24 of its 135 retail outlet stores (17 of which were new 
store openings), and expects to have the new store layout implemented in 100 
of its stores by the end of 1997.
 
MARKETING
 
    Management's fundamental strategy has been to promote the Company's brand
image as the absolute leader in baby apparel products and to consistently
provide high quality, attractive products at a strong perceived value to
consumers. To this end, management employs a comprehensive four-step marketing
strategy which incorporates identifying core products through extensive consumer
preference testing; superior brand and product presentation at the consumer
point-of-purchase; marketing the brand name through dominant communications; and
providing consistent, premium service, including delivering and replenishing
products at the right time to fulfill customer and consumer needs. 

                                      4
<PAGE>
Management believes that the Company has further strengthened its brand image 
to the consumer through innovative product designs, national print 
advertising, joint mailers with wholesale customers, meetings between senior 
account representatives and Carter's executives, trade show participation and
store-in-store shops.
 
MANUFACTURING
 
    The Company is a vertically-integrated manufacturer that knits, dyes,
finishes, prints, cuts, sews and embroiders a majority of the products it sells.
The Company believes that its vertical integration allows it to maintain a
competitive cost structure, accelerate speed to market and provide consistent,
premium quality. Domestically, the Company currently operates five sewing
facilities, as well as one combination distribution and sewing facility, one
textile facility, two other stand-alone distribution centers, a cutting facility
and an embroidery facility. Internationally, the Company operates two sewing
facilities in Costa Rica and one sewing facility in the Dominican Republic.
 
DEMOGRAPHIC TRENDS
 
    The total U.S. apparel industry generated more than $150 billion in sales 
in 1995, of which approximately $23 billion was spent on children's apparel. 
Of the $23 billion spent on children's apparel, approximately $5.6 billion 
was spent on baby and toddler apparel, and approximately $5.3 billion was 
spent on young children's apparel. From 1991 through 1995, sales of baby and 
toddler apparel grew at a compound annual rate of 6.1% and sales of young 
children's apparel grew at a compound annual rate of 2.9%.
 
    Management believes that numerous demographic trends have contributed to a
particularly strong baby, toddler and young children's apparel market during the
1990s, including the following:
 
  - WOMEN HAVING CHILDREN LATER. In 1992, more than 32% of the births which
    took place in the U.S. were to women over the age of 30, which represents
    a 52% increase since 1980. Of these births, 25% were first children.
    Management believes these trends have led to increased spending per child
    as parents tend to spend more money on their first born child and older
    parents generally have more disposable income.
 
  - MORE WOMEN RETURNING TO THE WORKPLACE AFTER HAVING CHILDREN. In 1992, 54%
    of women returned to work after having a baby, a 58% increase since 1980.
    Management believes this trend has had a positive effect on sales of
    children's apparel as dual income families tend to have more discretionary
    income and greater day care apparel needs.
 
  - GRANDPARENT BOOM. According to the U.S. Bureau of the Census, people in
    the U.S. age 45 or older numbered approximately 85.7 million in 1995. The
    U.S. Bureau of the Census projects this number to increase by
    approximately 25% to approximately 107.3 million by the year 2005.
    Management expects that this will result in an increase in the total
    number of grandparents in the U.S., which is an important demographic
    segment for children's apparel manufacturers.
 
  - INCREASED FOCUS ON CHILDREN'S CLOTHING. Management believes that there is
    an increasing social emphasis on attractive children's apparel, which is
    resulting in increased spending per child. As a result of this, as well as
    the other factors discussed above, from 1993 through 1995, when the
    population of children from ages one to six was increasing at a 0.9%
    compound annual rate, sales of baby and infant apparel increased at a 4.6%
    compound annual rate.
 
    Although total births are expected to remain relatively flat through the 
end of the 1990s, management believes the aforementioned demographic trends, 
in addition to other non-population growth 

                                       5
<PAGE>
factors, will continue to drive increased spending per child for the 
foreseeable future and will lead to increased sales of children's apparel in 
the Company's primary markets.
 
COMPETITION
 
    The baby and toddler and young children's apparel markets are highly 
competitive. Competition is generally based upon product quality, brand name 
recognition, price, selection, service and convenience. Both branded and 
private label manufacturers compete in the baby and toddler and young 
children's markets. The Company's primary branded competitors include 
Health-Tex and Oshkosh B'Gosh, together with Disney licensed products, in 
playwear and numerous smaller branded companies, as well as Disney licensed 
products, in sleepwear. Although management believes that the Company does 
not compete as directly with most private label manufacturers in sleepwear 
and playwear, certain retailers, including several which are customers of the 
Company, have significant private label product offerings. The Company does 
not believe that it has any significant branded competitors in its layette 
market in which most of the alternative products are offered by private label 
manufacturers. Because of the highly fragmented nature of the industry, the 
Company also competes with many small, local manufacturers and retailers. 
Certain of the Company's competitors have greater financial resources than 
the Company, have larger customer bases and are less financially leveraged.
 
ENVIRONMENTAL MATTERS
 
    The Company is subject to federal, state and local laws, regulations and 
ordinances that (i) govern activities or operations that may have adverse 
environmental effects, such as discharges to air and water, as well as 
handling and disposal practices for solid and hazardous wastes, and (ii) 
impose liability for response costs and certain damages resulting from past 
and current spills, disposals or other releases of hazardous materials 
(together, the "Environmental Laws"). The Company believes that it currently 
conducts its operations, and in the past has operated its business, in 
substantial compliance with applicable Environmental Laws. From time to time, 
operations of the Company have resulted or may result in noncompliance with 
or liability pursuant to Environmental Laws. In July and August 1996, the 
Company had Phase I Environmental Site Assessment and Regulatory Compliance 
Reviews (the "Reports") conducted by an environmental consultant for 13 
facilities. Based on available information, including the Reports, the 
Company has identified certain non-compliance with Environmental Laws. The 
Company has also identified certain actions which may be required in the 
future. However, the Company believes that any existing noncompliance or 
liability or future requirements under the Environmental Laws would not have 
a material adverse effect on its results of operations and financial 
condition.
 
PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
 
    The Company owns many trademarks and tradenames, including 
Carter's-Registered Trademark-, Carter's Growbody-Registered Trademark-, 
Carter-Set-Registered Trademark-, Jamakins-Registered Trademark-, Today's 
Classics-Registered Trademark- and Tykes-Registered Trademark-, as well as 
patents and copyrights, most of which are registered in the United States and 
in 46 foreign countries. The Company licenses the Carter's name and many of 
its trademarks, tradenames and patents to third-party manufacturers to 
produce and distribute children's apparel and related products such as diaper 
bags, lamps, socks, strollers, hair accessories, outerwear, underwear and 
shoes. Baby Dior-Registered Trademark- is a registered trademark sub-licensed 
to, but not owned by, the Company.
 
EMPLOYEES 

    As of December 28, 1996, the Company had approximately 6,910 employees, 
4,422 of which were employed on a full-time basis in the Company's domestic 
operations, 1,080 of which were employed on a part-time basis in the 
Company's domestic operations and 1,408 of which were employed on a full-time 
basis in the Company's foreign operations. None of the Company's employees is 
unionized. The Company has had no labor-related work stoppages and believes 
that its labor relations are good.
 
                                       6
<PAGE>
ITEM 2. PROPERTIES
 
    The Company operates 135 leased retail outlet stores located primarily in 
outlet centers across the United States, having an average size of 5,300 
square feet. The leases have an average term of approximately five years 
until final expiration with additional five-year renewal options. 
Domestically, the Company also owns three distribution and five manufacturing 
facilities in Georgia and Pennsylvania, and has ground leases on three 
additional manufacturing facilities in Texas and Mississippi. 
Internationally, the Company leases two sewing facilities in Costa Rica and 
one in the Dominican Republic.
 
ITEM 3. LEGAL PROCEEDINGS
 
    From time to time, the Company has been involved in various legal
proceedings. Management believes that all of such litigation is routine in
nature and incidental to the conduct of its business, and that none of such
litigation, if determined adversely to the Company, would have a material
adverse effect on the financial condition or results of operations of the
Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    On October 21, 1996, a special meeting of the security holders of all 
classes of common stock of the Company was held to approve: (i) the merger of 
the Company with TWCC Acquisition Corp. pursuant to the terms of that certain 
Agreement and Plan of Merger, dated as of September 28,1996 by and between 
the Company and TWCC Acquisition Corp. and (ii) the Amendment and Restatement 
of the Articles of Organization of the Company. The holders of all shares of 
Class A Common Stock and the holders of all shares of Class B Common Stock 
voted as a single class and the holders of all shares of Class C Common Stock 
voted as a single class. The holders of all shares of Class A Common Stock 
and the holders of all shares of Class B Common Stock cast their votes in 
favor of the proposals. The holders of 2,213 shares of Class C Common Stock 
cast their votes in favor of the proposals. The holders of 556 shares of 
Class C Common Stock either abstained or did not vote their shares, and a 
further 431 shares of Class C Common Stock were unissued.

 
                                       7
<PAGE>
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
    In September 1996, the Company allocated to seven members of its senior 
management an aggregate of 431 shares of its Class C Common Stock pursuant to
the Company's Master Executive Stock Plan dated as of January 1, 1995 and the
Executive Stock Purchase Agreements dated as of September 18, 1996 by and
between the Company and each individual.
 
    On October 30, 1996, in connection with the Acquisition, Holdings 
acquired 100% of the outstanding common and preferred stock of the Company 
for aggregate consideration of $208.0 million. Certain members of senior 
management and other employees of the Company exchanged 3,101 shares of 
Class C Common Stock for 151,049 of Class C shares of Holdings. In connection 
with the Acquisition, the Company issued 5,000 shares of preferred stock, par 
value $.01, and 1,000 shares of common stock, par value $.01, to Holdings.
 
    In November, 1996, the Company issued $100,000,000 of 10-3/8% Senior 
Subordinated Notes due 2006 ("the Notes") in a private placement, pursuant to 
a Purchase Agreement dated November 20, 1996 with BT Securities Corp., 
Bankers Trust International plc, Chase Securities Inc. and Goldman, Sachs & 
Co. (collectively, the "Initial Purchasers"). The issuance of Notes was 
exempt from registration under the Securities Act by virtue of Rule 144A. In 
accordance with an Exchange and Registration Rights Agreement dated as of 
November 25, 1996 by and between the Company and the Initial Purchasers, the 
Company will offer to exchange 100% of the Notes for 10-3/8% Series A Senior 
Subordinated Notes due 2006 which exchange will be registered with the 
Securities and Exchange Commission.

    At Acquisition, the Company paid a $4.3 million dividend on the 
Predecessor (as defined) Common Stock. The Company intends to retain all of 
its future earnings to finance its operations and does not anticipate paying 
cash dividends in the foreseeable future. Any decision made by the Company's 
Board of Directors to declare dividends in the future will depend upon the 
Company's future earnings, capital requirements, financial condition and 
other factors deemed relevant by the Company's Board of Directors. In 
addition, certain agreements to which the Company is a party restrict the 
Company's ability to pay dividends on common equity.

                                       8

<PAGE>
 
Item 6. SELECTED FINANCIAL DATA
 
    The following table sets forth selected financial and other 
data of the Company as of and for the five fiscal years ended December 28, 
1996. As a result of certain adjustments made in connection with the 
Acquisition, the results of operations for the period October 30, 1996 
through December 28, 1996 are not comparable to prior periods. The selected 
financial data for the five fiscal years ended December 28, 1996 
were derived from the Company's audited Consolidated Financial Statements.

    The following table should be read in conjunction with and Item 7 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations and Item 8 "Financial Statement and Supplementory Data."
 
                                       9
<PAGE>

                          (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                        ||                              PREDECESSOR
                                           SUCCESSOR    ||   DEC. 31,
                                         OCT. 30, 1996  ||     1995
                                            THROUGH     ||   THROUGH                      FISCAL YEAR
                                           DEC. 28,     ||   OCT. 29,    ----------------------------------------------
                                            1996(a)     ||     1996         1995        1994        1993        1992
                                        --------------- || ------------  ----------  ----------  ----------  ----------
<S>                                     <C>             || <C>           <C>         <C>         <C>         <C>         <C>
OPERATING DATA:                                         ||
Wholesale sales.......................     $  28,506    ||  $  160,485   $  166,884  $  150,175  $  127,457  $  142,694
Retail sales..........................        22,990    ||     106,254      128,547     121,374     109,554      85,417
                                                        ||                                                                      --
                                             -------    || ------------  ----------  ----------  ----------  ----------
Net sales.............................        51,496    ||     266,739      295,431     271,549     237,011     228,111
Cost of goods sold....................        31,708    ||     170,027      191,105     175,244     156,525     164,366
                                                        ||                                                                      --
                                             -------    || ------------  ----------  ----------  ----------  ----------
Gross profit..........................        19,788    ||      96,712      104,326      96,305      80,486      63,745
Selling, general and administrative...        16,672    ||      79,296       83,223      77,472      67,699      57,975
Nonrecurring charges(b)(f)............        --        ||       8,834       --          --          --           8,194
                                                        ||                                                                      --
                                             -------    || ------------  ----------  ----------  ----------  ----------
Operating income (loss)...............         3,116    ||       8,582       21,103      18,833      12,787      (2,424)
Interest expense......................         2,631    ||       7,075        7,849       6,445       5,957       7,368
                                                        ||                                                                      --
                                             -------    || ------------  ----------  ----------  ----------  ----------
Income (loss) before income taxes and                   ||
  extraordinary item..................           485    ||       1,507       13,254      12,388       6,830      (9,794)
Provision for income taxes............           212    ||       1,885        5,179       4,000       3,000         270
                                                        ||                                                                      --
                                             -------    || ------------  ----------  ----------  ----------  ----------
Income (loss) before extraordinary                      ||
  item................................           273    ||        (378)       8,075       8,388       3,830     (10,062)
Extraordinary item, net of tax (c)....         2,351    ||      --           --          --          --          --
                                                        ||                                                                      --
                                             -------    || ------------  ----------  ----------  ----------  ----------
Net income (loss).....................     $  (2,078)   ||  $     (378)  $    8,075  $    8,388  $    3,830  $  (10,602)
                                                        ||                                                                      --
                                                        ||                                                                      --
                                             -------    || ------------  ----------  ----------  ----------  ----------
                                             -------    || ------------  ----------  ----------  ----------  ----------
Net income (loss) available to common                   ||              
  stockholders........................     $  (2,512)   ||  $   (1,510)  $    6,460  $    6,710  $  (10,602  $    3,830)
                                             -------    || ------------  ----------  ----------  ----------  ----------
                                             -------    || ------------  ----------  ----------  ----------  ----------
BALANCE SHEET DATA                                      ||
(end of period):                                        ||
Working capital (d)...................     $  70,792    ||              $   84,593   $   68,595  $   66,670  $   63,345
Total assets..........................       318,709    ||                 167,216      135,471     123,938     127,506
Total debt, including current                           ||
  maturities..........................       145,000    ||                  87,495       71,660      73,406      81,332
Redeemable Preferred Stock (e)........        18,234    ||                      --           --          --          --
Preferred stock.......................        --        ||                  50,000       50,000      50,000      50,000
Common stockholders' equity...........        57,488    ||                  (4,678)     (11,351)    (19,739)    (23,569)
                                                        ||
OTHER DATA:                                             ||
EBITDA (f)............................     $   5,530    ||  $   25,628   $   30,562  $   27,098  $   20,647  $   12,437
Gross margin..........................          38.4%   ||        36.3%        35.3%       35.5%       34.0%       27.9%
Depreciation and amortization.........     $   2,414    ||  $    6,612   $    7,337  $    6,515  $    6,431  $    6,667
Capital expenditures..................         3,749    ||       4,007       13,715      10,996       7,941       4,991
</TABLE>

                      See Notes to Selected Financial Data.
 
                                       10

<PAGE>

                      NOTES TO SELECTED FINANCIAL DATA
 
    (a) As a result of the Acquisition, the Company's assets and liabilities 
were adjusted to their estimated fair values as of October 30, 1996. In 
addition, the Company entered into new financing arrangements and changed its 
capital structure. Accordingly, the results of operations for the period 
October 30, 1996 through December 28, 1996 are not comparable to prior 
periods. The period October 30, 1996 to December 28, 1996 reflects increased 
depreciation, amortization, management fee and interest expenses.
 
    (b) The nonrecurring charge for the period December 31, 1995 through 
October 29, 1996 includes: (1) compensation-related charges of $5.3 million 
for amounts paid to management in connection with the Acquisition; and (2) 
other expense charges of $3.5 million for costs and fees the Company incurred 
in connection with the Acquisition. 
 
    (c) The extraordinary item for the period October 30, 1996 through 
December 28, 1996 reflects the write-off of $3.4 million and $0.2 million of 
deferred debt issuance costs related to the Subordinated Loan Facility and 
the portion of the Senior Credit Facility repaid with the proceeds of the 
Notes in November 1996, net of income tax effects. 

    (d) Represents total current assets less total current liabilities.
 
    (e) The Company issued redeemable preferred stock at the closing of the 
Acquisition to Holdings for $20.0 million (its estimated fair value, which 
equals its redemption value), net of $2.2 million of fees associated with its 
issuance.
 
    (f) EBITDA represents earnings before interest expense and income tax 
expense (i.e., operating income (loss)) excluding the following charges:
 
        (i) depreciation and amortization expense including prepaid 
management fee amortization of $0.23 million for the period October 30, 1996 
through December 28, 1996;
 
       (ii) in fiscal 1992, $8.2 million of restructuring charges related to 
new management establishing a strategy to rationalize SKUs within its product 
lines, decrease product complexity and improve manufacturing operations; a 
reduction in the carrying value of a facility held for sale; and costs 
associated with certain plant closings;
 
      (iii) recurring costs associated with certain benefit plans that were 
terminated as a result of the Acquisition and not replaced, as follows: (1) 
Long-Term Incentive Plan expenses of $0.8 million, $1.2 million, $1.1 million 
and $1.0 million for fiscal 1993, 1994, 1995 and the period December 31, 1995 
through October 29, 1996, respectively; (2) Management Equity Participation 
Plan expenses of $0.6 million, $0.6 million, $0.6 million and $0.6 million 
for fiscal 1993, 1994, 1995 and the period December 31, 1995 through October 
29, 1996, respectively; and (3) Stock Compensation Plan expense of $0.4 
million in fiscal 1995; and
 
       (iv) in fiscal 1996, the nonrecurring charge of $8.3 million related 
to the Acquisition.
 
    The Company has included information concerning EBITDA as it is relevant 
for covenant analysis under the Indenture, which defines EBITDA as set forth 
above for the periods shown. In addition, management believes that EBITDA is 
generally accepted as providing useful information regarding a company's 
ability to service and/or incur debt. EBITDA should not be considered in 
isolation or as a substitute for net income, cash flows or other consolidated 
income or cash flow data prepared in accordance with generally accepted 
accounting principles or as a measure of a company's profitability or 
liquidity.


                                       11

<PAGE>

 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
    THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED 
FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND 
THE NOTES THERETO. THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL 
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INCLUDE RISKS AND OTHER 
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE 
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE 
SUCH A DIFFERENCE INCLUDE THOSE DISCUSSED BELOW, AS WELL AS GENERAL ECONOMIC 
AND BUSINESS CONDITIONS, COMPETITION AND OTHER FACTORS DISCUSSED ELSEWHERE IN 
THIS REPORT. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY ANY 
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR 
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF 
ANTICIPATED OR UNANTICIPATED EVENTS.
 
GENERAL
 
    The Company is a leading marketer and manufacturer of baby, toddler and 
young children's apparel. The Company sells its products to more than 300 
department and specialty store customers (59.4% of fiscal 1996 sales) and 
through its 135 retail outlet stores (40.6% of fiscal 1996 sales).
 
    Consolidated net sales have increased from $271.5 million in 1994 to $318.2
million in 1996. During this period, wholesale sales have increased from $150.2
million to $183.8 million, and retail sales have increased from $121.4 million
to $129.2 million.

    The increase in wholesale sales resulted primarily from new product 
introductions and the opening of new wholesale accounts, including Sears and 
JCPenney, partially offset by the removal of certain product lines, such as 
outerwear, boys' and girls' underwear and certain Baby Dior seasonal lines. 
The increase in retail sales resulted primarily from new store openings, 
partially offset by comparable store sales declines since the beginning of 
fiscal 1993. Management believes the comparable store sales declines were due 
to a soft retailing environment and to certain operational and merchandising 
problems, which have recently been addressed.
 
    Notwithstanding the substantial improvements in operating results 
achieved over the past three years, the Company's financial results in 1996 
were adversely affected by the performance of its retail outlet stores. 
Comparable store sales in 1996 decreased 8.8%.

                                       12

<PAGE>

RESULTS OF OPERATIONS
 
    The following table sets forth certain components of the Company's 
Consolidated Statement of Operations data expressed as a percentage of net 
sales:
 
<TABLE>
<CAPTION>
                                                                                                        FISCAL YEAR
                                                                                              -------------------------------
<S>                                                                                           <C>        <C>        <C>
                                                                                                1996       1995       1994
                                                                                              ---------  ---------  ---------
Statement of Operations:
Wholesale sales.............................................................................       59.4%      56.5%      55.3%
Retail sales................................................................................       40.6       43.5       44.7
                                                                                                    ---        ---        ---
  Net sales.................................................................................      100.0      100.0      100.0
Cost of goods sold..........................................................................       63.4       64.7       64.5
                                                                                                    ---        ---        ---
Gross profit................................................................................       36.6       35.3       35.5
Selling, general and administrative expenses................................................       30.2       28.2       28.5
Nonrecurring charge.........................................................................        2.8         --         --
                                                                                                    ---        ---        ---
Operating income............................................................................        3.6        7.1        6.9
Interest expense............................................................................        3.0        2.7        2.4
Income before income taxes and extraordinary item...........................................        0.6        4.5        4.6
Provision for income taxes..................................................................        0.7        1.8        1.5
Extraordinary item, net.....................................................................        0.7         --         --
                                                                                                    ---        ---        ---
Net income (loss)...........................................................................       (0.8%)       2.7%       3.1%
                                                                                                    ---        ---        ---
                                                                                                    ---        ---        ---
</TABLE>
 
FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED WITH FISCAL YEAR ENDED DECEMBER
30, 1995
 
    The 1996 results discussed below represent the mathematical addition of 
the historical results for the period from December 31, 1995 through October 
29, 1996 (the "Predecessor" period) and the period from October 30, 1996 
through December 28, 1996 (the "Successor" period) for purposes of the 
discussion below only and are not indicative of results that would actually 
have been obtained if the Acquisition had occurred on December 31, 1995 (the 
first day of fiscal 1996).
 
    As a result of the Acquisition, the Company's assets and liabilities were 
adjusted to their estimated fair values as of October 30, 1996. In addition, 
the Company entered into new financing arrangements and had a change in its 
capital structure. Certain nonrecurring charges and an extraordinary loss 
were recorded in connection with the Acquisition and financing. Accordingly, 
the results of operations for 1996 are not comparable to prior periods. The 
period prior to the Acquisition reflects nonrecurring charges, principally 
Company and Sellers' expenses, such as accelerated compensation plan payments 
to management and professional fees. The period subsequent to the Acquisition 
reflects increased cost of sales due to higher depreciation expense for 
assets revalued at the Acquisition, increased interest expense, the 
amortization of goodwill and tradename and certain prepaid expenses, and an 
extraordinary loss resulting from the early extinguishment of debt.
 
    NET SALES.  Net sales for fiscal 1996 increased 7.7% to $318.2 million 
from $295.4 million in fiscal 1995. This increase was due to a 13.2% increase 
in wholesale sales and a 0.5% increase in retail sales. Wholesale sales for 
fiscal 1996 increased to $189.0 million from $166.9 million in fiscal 1995. 
This increase was due primarily to continued strong sales to wholesale 
customers and improved average pricing, as well as to increased clearance and 
off-price merchandise sales resulting from the Company's efforts to reduce 
the high inventory levels experienced at the end of fiscal 1995. In addition, 
the Company continued to rationalize its product lines by scaling back 
certain products and by continuing to reduce the overall number of SKUs. 
Retail sales for fiscal 1996 increased to $129.2 million from $128.5 million 
in fiscal 1995. This increase was a result of the incremental volume provided 
by 36 new stores opened since the beginning of fiscal 1995, reduced by 
comparable store sales (stores open more than 12 months) declines of 8.8%. 
Management believes 

                                       13

<PAGE>

that the comparable store sales declines were due primarily to certain 
operational and merchandising problems, as well as to a soft retailing 
environment. Although the soft retailing environment negatively affected the 
financial performance of all stores, its impact is more measurable when 
analyzing the performance of comparable stores. 

    Comparable store sales declines were also affected by the removal of 
certain product categories that were sold in the Company's retail outlet 
stores in fiscal 1995. Management currently is addressing the comparable 
store sales declines by improving product mix; emphasizing core layette and 
sleepwear products; improving store layouts; assessing locations, 
demographics and store sizes; and upgrading management and retailing skills 
at the corporate, regional and store levels.

    GROSS PROFIT.  Gross profit for fiscal 1996 increased 11.7% to $116.5 
million from $104.3 million in fiscal 1995. Gross profit as a percentage of 
net sales in fiscal 1996 increased to 36.6% from 35.3% in fiscal 1995. This 
increase resulted primarily from pricing improvements in the Company's 
wholesale and retail businesses, the maturing effect of the Company's three 
off-shore sewing plants, one of which was opened in 1995, and the change in 
the retail store product mix toward higher margin sleepwear and layette 
products, partially offset by an increase in depreciation expense and lower 
margins in the first quarter of 1996 as a result of actions taken to decrease 
inventories that had built up at the end of fiscal 1995.
 
    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and 
administrative expenses for fiscal 1996 increased 15.3% to $96.0 million from 
$83.2 million in fiscal 1995. Selling, general and administrative expenses as 
a percentage of net sales increased to 30.2% in fiscal 1996 from 28.2% in 
fiscal 1995. This increase in selling, general and administrative expenses as 
a percentage of net sales resulted from the comparable store sales declines 
experienced by the Company's retail outlet stores and higher retail store 
expenses associated with the 36 new stores opened since the beginning of 
fiscal 1995.
 
    NONRECURRING CHARGE. In connection with the Acquisition, the Company 
recorded an $8.8 million nonrecurring charge. This charge includes $3.5 
million of Company and Sellers' expenses and $5.3 million of expenses related 
to management payments, including the unaccrued costs associated with 
accelerated compensation plan payments. 
 
    OPERATING INCOME.  Operating income for fiscal 1996 decreased 44.6% to 
$11.7 million from $21.1 million in fiscal 1995 as a result of the changes in 
selling, general and administrative expenses, gross profit and the 
nonrecurring charges described above. Operating income as a percentage of net 
sales decreased to 3.6% in fiscal 1996 from 7.1% in fiscal 1995.
 
    INTEREST EXPENSE.  Interest expense for fiscal 1996 increased 23.7% to 
$9.7 million from $7.8 million in fiscal 1995. This increase reflects higher 
interest expense on additional indebtedness resulting from the Acquisition, 
and higher average borrowings under the Company's revolving credit facility 
in place prior to the Acquisition. At December 28, 1996, outstanding debt 
aggregated $145.0 million, of which a $45.0 million term loan bore interest 
at a variable rate, so that an increase of 1% in the applicable rate would 
increase the Company's annual interest cost by $450,000. At December 28, 
1996, there were no borrowings under the Company's $50.0 million revolving 
credit facility, except for $4.2 million of outstanding letters of credit. 
Any borrowings under the revolving credit facility would bear interest at a 
variable rate.
 
    EXTRAORDINARY LOSS. In November 1996, the Company used the proceeds from 
the issuance of the Notes to prepay $90.0 million of Acquisition-related 
borrowings under the Subordinated Loan Facility and $5.0 million of the term 
loan portion of the Senior Credit Facility. As a result, the Company recorded 
an after-tax loss of $2.4 million, which has been reflected in the Company's 
Consolidated Statement of Operations as an extraordinary item.
 
    NET LOSS.  As a result of the factors described above, the Company 
reported a net loss of $2.5 million in fiscal 1996 compared with net income 
of $8.1 million in fiscal 1995.

                                       14

<PAGE>
 
FISCAL YEAR ENDED DECEMBER 30, 1995 COMPARED WITH FISCAL YEAR ENDED DECEMBER 
31, 1994
 
    NET SALES.  Net sales for fiscal 1995 increased 8.8% to $295.4 million 
from $271.5 million in fiscal 1994. This increase was due to an 11.1% 
increase in wholesale sales and a 5.9% increase in retail sales. Wholesale 
sales for fiscal 1995 increased to $166.9 million from $150.2 million in 
fiscal 1994. This increase was due to the continued success of the Company's 
business strategy, which included increased wholesale volume in its core 
layette and sleepwear product categories, as well as the full year impact of 
sales to Sears, a new wholesale customer for the Company in 1994. The Company 
also continued to scale back its total product offerings and continued to 
reduce the overall number of SKUs. Retail sales for fiscal 1995 increased to 
$128.5 million from $121.4 million. This increase was primarily due to the 
incremental volume provided by 20 new stores opened in 1995, partially offset 
by comparable store sales declines of 7.1%. The comparable store sales 
declines were due to certain operational and merchandising problems which 
management believes have recently been addressed, as well as to a soft 
retailing environment.
 
    GROSS PROFIT.  Gross profit for fiscal 1995 increased 8.3% to $104.3 
million from $96.3 million in fiscal 1994. Gross profit as a percentage of 
net sales decreased slightly to 35.3% in fiscal 1995 from 35.5% in fiscal 
1994. This moderate decline reflects $0.5 million of start-up costs in 1995 
associated with the opening of a new off-shore sewing plant in the Dominican 
Republic and a $1.8 million increase in retail markdowns, partially offset by 
improved overhead absorption, lower yarn cost and the initial benefits of the 
second off-shore plant in Costa Rica.
 
    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and 
administrative expenses for fiscal 1995 increased 7.4% to $83.2 million from 
$77.5 million in fiscal 1994. Selling, general and administrative expenses as 
a percentage of net sales declined to 28.2% in fiscal 1995 from 28.5% in 
fiscal 1994 primarily due to a reduction in retail sales administration costs 
as a percentage of net sales.
 
    OPERATING INCOME.  As a result of the changes in selling, general and 
administrative expenses and gross profit discussed above, operating income 
for fiscal 1995 increased 12.1% to $21.1 million from $18.8 million in fiscal 
1994. Operating income as a percentage of net sales increased to 7.1% in 
fiscal 1995 from 6.9% in fiscal 1994.
 
    INTEREST EXPENSE.  Interest expense for fiscal 1995 increased 21.8% to 
$7.8 million from $6.4 million in fiscal 1994 due to higher average 
borrowings under the Company's revolving credit facility.
 
    NET INCOME.  As a result of the factors discussed above, net income for 
fiscal 1995 decreased 3.7% to $8.1 million from $8.4 million in fiscal 1994.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    The Company's primary cash needs are working capital, capital 
expenditures and debt service. The Company has financed its working capital, 
capital expenditures and debt service requirements primarily through 
internally generated cash flow, in addition to funds borrowed under the 
Company's credit facilities.
 
    Net cash provided by operating activities in fiscal 1996 was $31.5 
million as compared with net cash used in operating activities of $5.5 
million in the prior year. This increase reflects the reduction in inventory 
balances resulting from management's efforts in this regard described below. 
Operating cash flow for fiscal 1996 also reflects a significant increase in 
accounts payable and other liabilities, such increases resulting primarily 
from expenses incurred in connection with the Acquisition. Net cash provided 
by (used in) operating activities in fiscal 1995 decreased to $(5.5) million 
from $14.6 million in fiscal 1994. This decrease resulted primarily from the 
increase in the Company's inventory levels during fiscal 1995.

                                       15

<PAGE>
 
    At the end of fiscal 1995, the Company's inventory levels exceeded its 
prior year-end inventories by $28.1 million. Management attributes the 
inventory build-up during fiscal 1995 to a number of items which include: (i) 
aggressive production plans reflecting stronger anticipated demand; (ii) 
historically inadequate production planning and monitoring systems; (iii) 
high levels of "open market goods" purchased for the retail outlet stores; 
(iv) extra basics fabric manufactured late in 1995 to reduce the Company's 
reliance on expensive contracting in 1996; (v) excessive seasonal fabric due 
to a mid-year shift in merchandise mix; and (vi) excessive seconds inventory.
 
    The Company believes that each of these items has been successfully 
addressed in fiscal 1996. First, the Company moderated production plans in 
the first quarter of fiscal 1996, mitigating additional build-up and allowing 
much of the excess inventory to be sold. Second, excess basics fabric was 
quickly worked through the system and most of the Company's excess seasonal 
fabric was sold to third parties at a loss. Third, the Company significantly 
increased its capacity in embroidery in 1996 in order to reduce the 
requirements for contracting, thus reducing its work-in-process inventory. 
Finally, most of the excessive seconds inventories created from the new 
off-shore sewing facilities were eliminated through an aggressive sell-off of 
goods to off-price customers and temporary retail clearance stores set up by 
the Company.
 
    Management believes that improvements in production planning and 
reporting have been made possible with new information systems installed in 
the first quarter of fiscal 1996, as well as with the implementation of an 
automatic replenishment system which was fully functioning at its retail 
stores as of August 1996. In addition, the Company is continuing to 
aggressively reduce the scope of its product offerings (since 1992, wholesale 
and retail style-colors have been reduced by approximately 60% and 30%, 
respectively) and reduce the amount of open-market purchases, which 
management believes will help mitigate the Company's exposure to excess 
finished goods and will allow the Company to continue moderating inventory 
levels going forward. As a result of these factors, the Company's inventory 
levels at fiscal year-end 1996 were lower than those at fiscal year-end 1995 
despite higher sales.
 
    The Company invested $11.0 million, $13.7 million and $7.8 million in 
capital expenditures during fiscal years 1994, 1995 and 1996, respectively. 
The Company's budgeted capital expenditures for fiscal 1997 are approximately 
$14.0 million.
 
    The Company incurred significant indebtedness in connection with the 
Acquisition. At December 28, 1996, the Company had approximately $145.0 
million of indebtedness outstanding, consisting of $100.0 million of Notes 
and $45.0 million in term loan borrowings under the Senior Credit Facility, 
with no other debt or capital lease obligations. In addition, the Company has 
approximately $50.0 million in availability under the revolving credit 
portion of the Senior Credit Facility (exclusive of approximately $3.9 
million of outstanding letters of credit). The term loan portion of the 
Senior Credit Facility will mature on October 31, 2003 and requires 
semi-annual principal payments totaling $0.0 in 1996, $0.9 million in each of 
1997, 1998, 1999 and 2000, and $5.4 million, $13.5 million and $22.5 million 
in 2001, 2002 and 2003, respectively. In November 1996, the term loan was 
reduced by $5.0 million with proceeds from the issuance of the Notes. The 
future scheduled payments under the Senior Credit Facility have been reduced 
ratably for this payment. The revolving credit portion of the Senior Credit 
Facility will mature on October 31, 2001 and has no scheduled interim 
amortization. No principal payments are required on the Notes prior to their 
scheduled maturity.
 
    The Company believes that cash generated from operations, together with 
amounts available under the revolving portion of the Senior Credit Facility, 
will be adequate to meet its debt service requirements, capital expenditures 
and working capital needs for the foreseeable future, although no assurance 
can be given in this regard.

                                       16

<PAGE>

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 in the 
first quarter on price reductions, and promotional retailers' and 
manufacturers' emphasis on closeouts of the prior year's product lines.
 
ACCOUNTING PRONOUNCEMENT
 
    In October 1995, the Financial Accounting Standards Board issued SFAS No. 
123, Accounting for Stock-Based Compensation, which the Company has been 
required to adopt in 1996. SFAS No. 123 establishes optional alternative 
accounting methods for stock-based compensation as well as new required 
disclosures. The Company will account for stock-based compensation under 
previously existing accounting guidance. As such, SFAS No. 123 has been 
adopted for disclosure purposes only and will not impact the Company's 
financial position, annual operating results or cash flows.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                        THE WILLIAM CARTER COMPANY 
               INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 
 
<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                             ---------
<S>                                                                                                         <C>
Report of Independent Accountants.............................................................................  18
Consolidated Balance Sheet at December 28, 1996...............................................................  19
Consolidated Statement of Operations for the periods October 30, 1996 through December 28, 1996 
  (Successor) and December 31, 1995 through October 29, 1996 (Predecessor)....................................  20
Consolidated Statement of Cash Flows for the periods October 30, 1996 through December 28, 1996 
  (Successor) and December 31, 1995 through October 29, 1996 (Predecessor)....................................  21
Consolidated Statement of Changes in Common Stockholders' Equity for the periods October 30, 1996 
  through December 28, 1996 (Successor) and December 31, 1995 through October 29, 1996 (Predecessor)..........  22

Notes to Consolidated Financial Statements....................................................................  23

Report of Independent Accountants.............................................................................  35
Consolidated Balance Sheet at December 30, 1995...............................................................  36
Consolidated Statement of Income for the fiscal years ended 
  December 30, 1995 and December 31, 1994.....................................................................  37
Consolidated Statement of Cash Flows for the fiscal years ended December 30, 1995 and December 31, 1994.......  38
Consolidated Statement of Changes in Stockholders' Equity for the fiscal years ended December 30, 1995 and 
  December 31, 1994...........................................................................................  39
Notes to Consolidated Financial Statements....................................................................  40

</TABLE>

                                       17

<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholder of 
The William Carter Company:
 
    We have audited the accompanying consolidated balance sheet of The 
William Carter Company and its subsidiaries (the "Company") as of December 
28, 1996 and the related consolidated statements of operations, cash flows 
and changes in common stockholders' equity for the period from October 30, 
1996 through December 28, 1996 ("Successor," as defined in Note 1) and the 
period from December 31, 1995 through October 29, 1996 ("Predecessor," as 
defined in Note 1). These financial statements are the responsibility of the 
Company's management. Our responsibility is to express an opinion on these 
financial statements based on our audit.
 
    We conducted our audit in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement. An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements. 
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audit provides a 
reasonable basis for our opinion.
 
    As explained in Note 1 to the financial statements, controlling ownership 
of the Predecessor was acquired by the Company's parent in a purchase 
transaction as of October 30, 1996. The acquisition was accounted for as a 
purchase and, accordingly, the purchase price was allocated to the assets and 
liabilities of the Predecessor based upon their estimated fair value at 
October 30, 1996. Accordingly, the financial statements of the Successor are 
not comparable to those of the Predecessor.
 
    In our opinion, the financial statements referred to above present 
fairly, in all material respects, the consolidated financial position of The 
William Carter Company and its subsidiaries as of December 28, 1996, and the 
consolidated results of their operations and their cash flows for the 
Successor period from October 30, 1996 through December 28, 1996 and the 
consolidated results of their operations and their cash flows for the 
Predecessor period from December 31, 1995 through October 29, 1996 in 
conformity with generally accepted accounting principles.
 
                                      /s/ Coopers & Lybrand L.L.P.


 
Stamford, Connecticut 
February 20, 1997
 
                                       18
<PAGE>

                          THE WILLIAM CARTER COMPANY
                          CONSOLIDATED BALANCE SHEET
                            (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                               SUCCESSOR, AT
                                                                             DECEMBER 28, 1996
                                                                             -----------------
<S>                                                                          <C>
ASSETS
Current assets:
  Cash and cash equivalents..............................................     $     1,961
  Accounts receivable, net of allowance for doubtful accounts of $2,691..          19,259
  Inventories............................................................          76,540
  Prepaid expenses and other current assets..............................           6,378
  Deferred income taxes..................................................          14,502
                                                                                 --------
    Total current assets.................................................         118,640
Property, plant and equipment, net.......................................          48,221
Tradename, net...........................................................          99,583
Cost in excess of fair value of net assets acquired, net.................          38,363
Deferred debt issuance costs, net........................................           8,618
Other assets.............................................................           5,284
                                                                                 --------
                                                                              $   318,709
                                                                                 --------
                                                                                 --------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
  Current maturities of long-term debt...................................     $       900
  Accounts payable.......................................................          14,593
  Other current liabilities..............................................          32,355
                                                                                 --------
    Total current liabilities............................................          47,848
Long-term debt...........................................................         144,100
Deferred income taxes....................................................          40,861
Other long-term liabilities..............................................          10,178
                                                                                 --------
Total liabilities........................................................         242,987
                                                                                 --------
Commitments and contingencies
Redeemable preferred stock, par value $.01 per share, 
  $4,000 per share liquidation and redemption value, 
  5,000 shares authorized, issued and outstanding........................          18,234
                                                                                 --------
Common stockholder's equity:
Common stock, par value $.01 per share, 
  1,000 shares authorized, issued and outstanding........................              --
  Additional paid-in capital.............................................          59,566
  Accumulated deficit....................................................          (2,078)
                                                                                  --------
    Common stockholder's equity..........................................           57,488
                                                                                  --------
                                                                                  --------
     Total liabilities and stockholder's equity..........................      $   318,709
                                                                                  --------
                                                                                  --------
</TABLE>
 
    The accompanying notes are an integral part of the consolidated financial
statements

                                      19
<PAGE>


                          THE WILLIAM CARTER COMPANY
                     CONSOLIDATED STATEMENT OF OPERATIONS
                            (dollars in thousands)
 
<TABLE>
<CAPTION>
                                                           SUCCESSOR FOR     PREDECESSOR FOR
                                                          THE PERIOD FROM    THE PERIOD FROM
                                                         OCTOBER 30, 1996   DECEMBER 31, 1995
                                                              THROUGH            THROUGH
                                                         DECEMBER 28, 1996  OCTOBER 29, 1996
                                                         -----------------  -----------------
<S>                                                      <C>                <C>
Net sales..............................................      $  51,496         $   266,739
Cost of goods sold.....................................         31,708             170,027
                                                               -------            --------
Gross profit...........................................         19,788              96,712
Selling, general and administrative....................         16,672              79,296
Nonrecurring charge....................................         --                   8,834
                                                               -------            --------
Operating income.......................................          3,116               8,582
Interest expense.......................................          2,631               7,075
                                                               -------            --------
Income before income taxes and extraordinary item......            485               1,507
Provision for income taxes.............................            212               1,885
                                                               -------            --------
Income (loss) before extraordinary item................            273                (378)
Extraordinary item, net of income tax benefit of
  $1,270...............................................          2,351             --
                                                               -------            --------
Net loss...............................................         (2,078)               (378)
  Dividend requirements on preferred/redeemable 
    preferred and accretion on redeemable 
    preferred stock....................................           (434)             (1,132)
                                                               -------            --------
Net loss applicable to common stockholder..............      $  (2,512)        $    (1,510)
                                                               -------            --------
                                                               -------            --------
</TABLE>
 
    The accompanying notes are an integral part of the consolidated financial
statements

                                       20
<PAGE>


                        THE WILLIAM CARTER COMPANY
                  CONSOLIDATED STATEMENT OF CASH FLOWS
                         (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                   SUCCESSOR FOR THE
                                                         PERIOD          PREDECESSOR FOR THE
                                                 FROM OCTOBER 30, 1996   PERIOD FROM DECEMBER
                                                        THROUGH            31, 1995 THROUGH
                                                   DECEMBER 28, 1996       OCTOBER 29, 1996
                                                 ----------------------  --------------------
<S>                                              <C>                     <C>
Cash flows from operating activities:
  Net loss.....................................        $   (2,078)            $     (378)
  Extraordinary loss, net of taxes.............             2,351                     --
  Adjustments to reconcile net income to 
   net cash provided by operating activities:
     Depreciation and amortization.............             2,588                  6,979
     Deferred tax provision....................               212                  2,381
     Effect of changes in operating assets and
          liabilities:
       Decrease (increase) in accounts 
        receivable.............................             7,975                (12,540)
       (Increase) decrease in inventories......              (704)                 8,392
       (Increase) decrease in prepaid expenses 
          and other assets.....................            (4,432)                 2,759
       Increase in accounts payable and other
          liabilities..........................             1,183                 16,812
                                                         --------                -------
       Net cash provided by operating 
          activities...........................             7,095                 24,405
                                                         --------                -------
  Cash flow from investing activities:
       Capital expenditures....................            (3,749)                (4,007)
       Payment to Sellers for the Acquisition..          (117,773)                   --
       Payments of Acquisition costs...........           (21,705)                   --
                                                         --------                -------
       Net cash used in investing activities...          (143,227)                (4,007)
                                                         --------                -------
  Cash flows from financing activities:
       Proceeds from Successor revolving 
         line of credit........................             6,100                     --
       Payments of Successor revolving 
         line of credit........................            (6,100)                    --
       Proceeds from other Successor debt......           240,000                     --
       Payments of other Successor debt........           (95,000)                    --
       Payments of Predecessor revolving 
         line of credit........................                --                (19,000)
       Payment of other Predecessor debt.......           (68,062)                  (433)
       Payment of Predecessor accrued interest.            (1,059)                    --        
       Payments of financing costs.............           (12,432)
       Proceeds from issuance of Successor 
         common stock..........................            60,000                     --
       Proceeds from issuance of Successor 
         preferred stock.......................            20,000                     --
       Stock issuance costs of Successor 
         preferred stock.......................            (2,200)                    --
       Payment of Predecessor preferred 
         stock dividends.......................            (2,747)                    --
       Payment of Predecessor's guaranteed 
         yield dividends on common stock.......            (4,237)
                                                         --------                -------
          Net cash provided by (used in) 
            financing activities...............           134,263                (19,433)
                                                         --------                -------
       Net (decrease) increase in cash 
         and cash equivalents..................            (1,869)                   965
Cash and cash equivalents at beginning of
  period.......................................             3,830                  2,865
                                                         --------                -------
Cash and cash equivalents at end of period.....        $    1,961             $    3,830
                                                         --------                -------
                                                         --------                -------
</TABLE>
    The accompanying notes are an integral part of the consolidated financial
statements
                                      21

<PAGE>
 

                          THE WILLIAM CARTER COMPANY
        CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
                            (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                CLASS A     CLASS B     CLASS C     ADDITIONAL
                                      COMMON    COMMON      COMMON      COMMON        PAID-IN     ACCUMULATED
                                       STOCK     STOCK       STOCK       STOCK        CAPITAL       DEFICIT
                                     --------  ---------   ---------   --------     -----------   ------------
<S>                                  <C>       <C>         <C>         <C>          <C>           <C>
Predecessor:
  Balance at December 30, 1995..                 $  --       $  --       $  --        $92,379      $ (97,057)  
  Net loss......................                                                                        (378)  
  Preferred stock dividend......                                                                      (2,747)  
  Common stock guaranteed-                                                                        
    yield dividend..............                                                                      (4,237)
                                                 -----       -----       -----        -------      ---------
Balance at October 29, 1996.....                 $  --       $  --       $  --        $92,379      $(104,419)
                                                 -----       -----       -----        -------      ---------   
                                                 -----       -----       -----        -------                  
Successor:                                                                                   
Balance at October 30, 1996.....      $    --                                         $    --      $      -- 
Sale of Common Stock on                                                                                        
  October 30, 1996..............           --                                          60,000                  
Accrued dividends and                                                                              
  accretion on redeemable                                                                          
  preferred stock...............           --                                            (434)     
Net loss........................           --                                                         (2,078)
                                      -------                                         -------      --------- 
Balance at December 28, 1996....      $    --                                         $59,566      $  (2,078)
                                      -------                                         -------      --------- 
                                      -------                                         -------      ---------
 
</TABLE>
 
    The accompanying notes are an integral part of the consolidated financial
statements

                                      22
<PAGE>

                           THE WILLIAM CARTER COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1-THE COMPANY
 
    The William Carter Company (the "Company") is a wholly-owned subsidiary 
of Carter Holdings, Inc. ("Holdings"). On October 30, 1996, Holdings, a 
company organized on behalf of affiliates of INVESTCORP S.A. ("Investcorp"), 
management and certain other investors, acquired 100% of the previously 
outstanding common and preferred stock of the Company from MBL Life Assurance 
Corporation, CHC Charitable Irrevocable Trust and certain management 
stockholders (collectively, the "Sellers"). Financing for the acquisition 
totaled $226.1 million and was provided by (i) $56.1 million borrowings under 
a $100.0 million senior credit facility; (ii) $90.0 million of borrowings 
under a subordinated loan facility; (iii) $70.9 million of capital invested 
by affiliates of Investcorp and certain other investors in Holdings, which 
included a $20.0 million investment by Holdings in the Company's newly issued 
redeemable preferred stock; and (iv) issuance of non-voting stock of Holdings 
valued at $9.1 million to certain members of management.
 
    In addition to purchasing or exchanging and retiring the previously 
issued capital stock of the Company, the proceeds of the acquisition and 
financing were used to make certain contractual payments to management ($11.3 
million), pay for costs of the transactions ($20.9 million), and to retire 
all outstanding balances on the Company's previously outstanding long-term 
debt along with accrued interest thereon ($69.1 million). In November 1996, 
the Company offered and sold in a private placement $100.0 million of Senior 
Subordinated Notes, the net proceeds of which were used to retire the $90.0 
million of subordinated loan facility borrowings and $5.0 million of 
borrowings under the Senior Credit Facility. Holdings has no assets or 
investments other than the shares of stock of The William Carter Company.
 
    For purposes of identification and description, the Company is referred 
to as the "Predecessor" for the period prior to the Acquisition, the 
"Successor" for the period subsequent to the Acquisition and the "Company" 
for both periods.

    The Acquisition was accounted for by the purchase method.  Accordingly, 
the assets and liabilities of the Predecessor were adjusted to reflect the 
allocation of the purchase price based on estimated fair values. While actual 
results may differ from these estimates, such differences are not expected to 
be material. A summary of the purchase price allocation is as follows ($000):
 

Total financed purchase price....................  $ 226,100
Less, amounts applied to pay Predecessor 
 dividends and expenses..........................    (14,915)
                                                   ---------
                                                   $ 211,185
                                                   ---------
                                                   ---------
Allocated to:
Cash and cash equivalents........................  $   3,830
Accounts receivable, net.........................     27,234
Inventories......................................     75,836
Prepaid expenses and other current assets........      4,696
Property, plant and equipment, net...............     46,081
Tradename........................................    100,000
Cost in excess of fair value.....................     38,522
Deferred debt issuance costs.....................      8,283
Other assets.....................................      1,303
Accounts payable.................................    (13,393)
Other current liabilities........................    (47,797)
Other long-term liabilities......................     (9,590)
Net deferred tax liabilities.....................    (26,020)
Preferred stock issuance costs...................      2,200
                                                   ---------
                                                   $ 211,185
                                                   ---------
                                                   ---------

                                      23

<PAGE>
 
                      THE WILLIAM CARTER COMPANY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    A $14.9 million portion of the purchase price was applied to pay certain 
Predecessor dividends and expenses. This consisted of $2.8 million and $4.2
million, respectively, in dividends triggered on the Predecessor's preferred 
and common stock, plus portions of compensation-related charges ($5.1 
million) and other expense charges ($2.8 million) of the Predecessor incurred 
in connection with the Aquisition.
 
    The nonrecurring charge in the Predecessor period December 31, 1995 
through October 29, 1996 reflects total compensation-related charges of $5.3 
million for amounts paid to management in connection with the Acquisition and 
total other expense charges of $3.5 million for costs and fees that the 
Company incurred in connection with the Acquisition.
 
    The following unaudited pro forma statement of operations presents the 
results of operations for the fiscal year ended December 28, 1996 as though 
the controlling ownership of the Predecessor had been acquired on December 
31, 1995, with financing established through the private placement, and 
assumes that there were no other changes in the operations of the 
Predecessor. The pro forma results are not necessarily indicative of the 
financial results that might have occurred had the transaction included in 
the pro forma statement actually taken place on December 31, 1995, or of 
future results of operations ($000).
 
<TABLE>
<CAPTION>
                                                                    PREDECESSOR FOR
                                                   SUCCESSOR FOR    THE PERIOD FROM
                                                  THE PERIOD FROM    DECEMBER 31,                    PRO FORMA FOR 
                                                    OCTOBER 30,      1995 THROUGH                    THE YEAR ENDED
                                                   1996 THROUGH       OCTOBER 29,     PRO FORMA       DECEMBER 28, 
                                                 DECEMBER 28, 1996       1996        ADJUSTMENTS          1996     
                                                 -----------------  ---------------  -----------     --------------
<S>                                              <C>                <C>              <C>             <C>           
Net sales......................................      $  51,496        $   266,739     $      --        $  318,235  
Gross profit...................................         19,788             96,712          (282)(a)       116,218
Selling, general and administrative............         16,672             79,296         3,668(b)         99,636  
Nonrecurring charge............................             --              8,834        (8,834)(c)            --  
Operating income...............................          3,116              8,582         4,884            16,582  
Interest expense...............................          2,631              7,075         7,172(d)         16,878  
Income (loss) before income taxes and                                                                              
  extraordinary item...........................            485              1,507        (2,288)             (296) 
Provision for income taxes.....................            212              1,885        (1,848)(e)           249
Income (loss) before extraordinary item........            273               (378)         (440)             (545) 
Extraordinary item, net........................          2,351                 --        (2,351((f)            --      
Net income (loss)..............................      $  (2,078)       $      (378)    $   1,911        $      (545) 
Dividend and accretion on redeemable preferred
  stock........................................      $    (434)                       $  (2,186)(g)    $    (2,620)
Net loss applicable to common stockholder......                                                        $    (3,165)
</TABLE>
 
    Pro forma adjustments represent: (a) increase in depreciation expenses 
relating to revaluation of property, plant and equipment; (b) amortization of 
tradename and cost in excess of fair value of net assets acquired; decrease 
to periodic expense for postretirement benefits; and management fee expense 
in accordance with the terms of the Company's new management agreement with 
Holdings; (c) elimination of nonrecurring charges directly related to the 
transactions; (d) increases in interest expense resulting from the change in 
the Company's debt structure; (e) income tax effects of pro forma 
adjustments; (f) elimination of extraordinary charges directly related to the 
transactions; and (g) dividend and accretion requirements on redeemable 
preferred stock.

                                      24

<PAGE>
 
                      THE WILLIAM CARTER COMPANY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2-NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
    The Company is a United States based manufacturer and marketer of premier 
branded childrenswear under the Carter's and Baby Dior labels. The Company 
manufactures its products in plants located in the southern United States, 
Costa Rica and the Dominican Republic. Products are manufactured for 
wholesale distribution to major domestic retailers, and for the Company's 135 
retail outlet stores that market its brand name merchandise and certain 
products manufactured by other companies. The retail operations represent 
approximately 40.6% of consolidated net sales.
 
PRINCIPLES OF CONSOLIDATION:
 
    The consolidated financial statements include the accounts of the Company 
and its wholly owned subsidiaries. These subsidiaries consist of facilities 
in Costa Rica and the Dominican Republic and represent approximately 40% of 
the Company's sewing production. All intercompany transactions and balances 
have been eliminated in consolidation.
 
    FISCAL YEAR:
 
    The Company's fiscal year ends on the Saturday in December or January 
nearest the last day of December. The accompanying consolidated financial 
statements reflect the Company's financial position as of December 28, 1996 
and results of operations for the ten month period prior to the Acquisition, 
December 31, 1995 through October 29, 1996 (the "Predecessor period") and the 
two month period subsequent to the Acquisition, October 30, 1996 through 
December 28, 1996 (the "Successor period"). Collectively, the fiscal 1996 
Predecessor and Successor periods contain 52 weeks.
 
    REVENUE RECOGNITION:
 
    Revenues from the Company's wholesale operations are recognized upon 
shipment; revenues from retail operations are recognized at point of sale.
 
    CASH AND CASH EQUIVALENTS:
 
    The Company considers all highly liquid investments that have original 
maturities of three months or less to be cash equivalents. At December 28, 
1996, approximately $1.2 million of the Company's cash and cash equivalents 
were held in three banks in excess of deposit insurance limits.
 
    ACCOUNTS RECEIVABLE:
 
    Approximately 75% of the Company's gross accounts receivable at December 
28, 1996 were from its ten largest wholesale customers, primarily major 
department store chains.
 
    INVENTORIES:
 
    Inventories are stated at the lower of cost (first-in, first-out basis 
for wholesale inventories and retail method for retail inventories) or market.
 
    PROPERTY, PLANT AND EQUIPMENT:
 
    Property, plant and equipment are stated at cost. When fixed assets are 
sold or otherwise disposed, the accounts are relieved of the original costs 
of the assets and the related accumulated depreciation and any resulting 
profit or loss is credited or charged to income. For financial reporting 
purposes, depreciation is computed on the straight-line method over the 
estimated useful lives of the assets 

                                      25

<PAGE>
 
                      THE WILLIAM CARTER COMPANY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

as follows: buildings-15 to 50 years; and machinery and equipment-3 to 10 
years. Leasehold improvements are amortized over the lesser of the asset life 
or related lease term.
 
    TRADENAME AND COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED:

    Cost in excess of fair value of net assets acquired ("goodwill") 
represents the excess of the cost of the Acquisition over the fair value of 
the net assets acquired. At each balance sheet date, management will assess 
whether there has been a permanent impairment of the value of the tradename 
and goodwill by comparing anticipated undiscounted future cash flows from 
operating activities with the carrying value of these intangibles. The amount 
of any resulting impairment will be calculated using the present value of the 
same cash flows from operating activities. The factors considered in this 
assessment will include operating results, trends, and prospects, as well as 
the effects of demand, competition and other economic factors.

    The tradename and goodwill are each being amortized on a straight-line 
basis over their estimated lives of 40 years. Accumulated amortization of the 
tradename and goodwill at December 28, 1996 was $417,000 and $159,000, 
respectively.
 
    DEFERRED DEBT ISSUANCE COSTS:
 
    Debt issuance costs are deferred and amortized to interest expense using 
the effective interest method over the lives of the related debt. 
Amortization approximated $174,000 and $367,000 for the Successor and 
Predecessor periods, respectively. An extraordinary item for the Successor 
period reflects the write-off of $3.4 million and $0.2 million of deferred 
debt issuance costs related to the $90 million Subordinated Loan Facility and 
portion of the Senior Credit Facility repaid with the proceeds of the $100 
million Senior Subordinated Notes in November 1996, net of income tax effects.
 
    STOCK-BASED EMPLOYEE COMPENSATION ARRANGEMENTS:
 
    The Company accounts for stock-based compensation in accordance with the 
provisions of Accounting Principles Board Opinion No. 25, "Accounting for 
Stock Issued to Employees," and related interpretations. Statement of 
Financial Accounting Standards No. 123, "Accounting for Stock-Based 
Compensation," which the Company was required to adopt in fiscal 1996, has 
been adopted for disclosure purposes only. See Note 10.
 
    INCOME TAXES:
 
    The Company accounts for income taxes under the provisions of Statement 
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" 
("SFAS 109"). In accordance with SFAS 109, the deferred tax provision is 
determined under the liability method. Deferred tax assets and liabilities 
are recognized based on differences between the book and tax bases of assets 
and liabilities using presently enacted tax rates. Valuation allowances are 
established when it is more likely than not that a deferred tax asset will 
not be recovered. The provision for income taxes is the sum of the amount of 
income taxes paid or payable for the year as determined by applying the 
provisions of enacted tax laws to the taxable income for that year; the net 
change during the year in the Company's deferred tax assets and liabilities; 
and the net change during the year in any valuation allowances.

                                      26

<PAGE>
                        THE WILLIAM CARTER COMPANY
       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    SUPPLEMENTAL CASH FLOWS INFORMATION:
 
    Interest paid in cash approximated $2,463,000 and $6,708,000 for the 
Successor and Predecessor periods, respectively. Income taxes (received) paid 
in cash approximated $(771,000) and $903,000 for the Successor and 
Predecessor periods, respectively.
 
    USE OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL 
STATEMENTS:
 
    The preparation of these consolidated financial statements in conformity 
with generally accepted accounting principles requires management of the 
Company to make estimates and assumptions that affect the reported amounts of 
assets and liabilities and disclosures of contingent assets and liabilities, 
at the date of the financial statements, and the reported amounts of revenues 
and expenses during the reporting period. Actual results could differ from 
those estimates.

NOTE 3-INVENTORIES:
 
    Inventories at December 28, 1996 consisted of the following ($000):

Finished goods.....................................................  $  51,700
Work in process....................................................     15,884
Raw materials and supplies.........................................      8,956
                                                                     ---------
                                                                     $  76,540
                                                                     ---------
                                                                     ---------

NOTE 4-FIXED ASSETS:
 
    Fixed assets at December 28, 1996 consisted of the following ($000):

Land, buildings and improvements...................................  $  12,679
Machinery and equipment............................................     37,155
                                                                     ---------
                                                                        49,834
Accumulated depreciation and amortization..........................     (1,613)
                                                                     ---------
                                                                     $  48,221
                                                                     ---------
                                                                     ---------

    Depreciation expense ($000) was $1,613 and $6,612 for the Successor and 
Predecessor periods, respectively.
 
NOTE 5-LONG-TERM DEBT:
 
    Long-term debt at December 28, 1996 consisted of the following ($000):

Senior Credit Facility term loan..................................  $ 45,000
Senior Credit Facility revolving credit...........................        --
10 3/8% Senior Subordinated Notes due 2006........................   100,000
                                                                    --------
Current maturities................................................   145,000
                                                                        (900)
                                                                    --------
                                                                    $144,100

    The Senior Credit Facility provides for a $50.0 million Tranche B term 
loan facility. The Tranche B term loans have a final scheduled maturity date 
of October 31, 2003. The principal amounts of the Tranche B term loans are 
required to be repaid in 14 consecutive semi-annual installments totaling 
$0.9 million in each of fiscal years 1997 through 2000, $5.4 million in 
fiscal year 2001, $13.5

                                   27
<PAGE>
 
                      THE WILLIAM CARTER COMPANY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

million in fiscal year 2002 and $22.5 million in fiscal year 2003. In November
1996, proceeds of the 10-3/8% Senior Subordinated Notes were used to repay $5.0
million of the term loan. The repayment schedule has been adjusted ratably for
this payment.
 
    The Senior Credit Facility also provides for a $50.0 million revolving 
credit facility. The revolving credit facility will expire on the earlier of 
(a) October 31, 2001 and (b) such other date as the revolving credit 
commitments thereunder shall terminate in accordance with the terms of the 
Senior Credit Facility. The facility has a sublimit of $5.0 million for 
letters of credit of which $3.9 million were used for letters of credit as of 
December 28, 1996. A commitment fee of 1/2 of 1% per annum is charged on the 
unused portion of the revolving credit facility.
 
    Borrowings under the Senior Credit Facility accrue interest at either the 
Alternate Base Rate (the "Alternate Base Rate") or an adjusted Eurodollar 
Rate (the "Eurodollar Rate"), at the option of the Company, plus the 
applicable interest margin. The Alternate Base Rate at any time is determined 
to be the highest of (i) the Federal Effective Funds Rate plus 1/2 of 1% per 
annum, (ii) the Base CD Rate plus 1% per annum and (iii) The Chase Manhattan 
Bank's Prime Rate. The applicable interest margin with respect to loans made 
under the revolving credit facility is 2.50% per annum with respect to loans 
that accrue interest at the Eurodollar Rate and 1.50% per annum for loans 
that accrue interest at the Alternate Base Rate. The applicable interest 
margin with respect to Tranche B term loans is 3.00% per annum for loans that 
accrue interest at the Eurodollar Rate and 2.00% per annum for loans that 
accrue interest at the Alternate Base Rate. The effective interest rate on 
borrowings outstanding at December 28, 1996 was 8.5%.
 
    The Senior Facility requires that upon a public offering by the Company, 
Holdings or any subsidiary of the Company, of its common or other voting 
stock, 50% of the net proceeds from such offering (only after the redemption 
or repurchase or cancellation of the Redeemable Preferred Stock and the 
redemption of up to 35% of the Notes) is required to be applied toward the 
prepayment of indebtedness under the Senior Credit Facility. Upon the 
incurrence of any additional indebtedness (other than indebtedness permitted 
under the Senior Credit Facility), or upon the receipt of proceeds from 
certain asset sales and exchanges, 100% of the net proceeds from such 
incurrence, sale or exchange is required to be so applied. In addition, the 
Senior Credit Facility requires Excess Cash Flow (as defined in the Senior 
Credit Facility) be applied toward the prepayment of indebtedness under the 
Senior Credit Facility. Such prepayments are required to be applied first to 
the prepayment of the term loans and, second, to reduce permanently the 
revolving credit commitments. Subject to certain conditions, the Company may, 
from time to time, make optional prepayments of loans without premium or 
penalty.
 
    The loans are collateralized by a first priority interest in 
substantially all the personal property and certain real property of the 
Company and a pledge of all the issued and outstanding stock of the Company 
and its domestic subsidiary, as well as 65% of the issued and outstanding 
stock of the Company's foreign subsidiaries.
 
    The Senior Credit Facility imposes certain covenants, requirements, and 
restrictions on actions by the Company and its subsidiaries that, among other 
things, restrict: (i) the incurrence and existence of indebtedness; (ii) 
consolidations, mergers and sales of assets; (iii) the incurrence and 
existence of liens or other encumbrances; (iv) the incurrence and existence 
of contingent obligations; (v) the payment of dividends and repurchases of 
common stock; (vi) prepayments and amendments of certain subordinated debt 
instruments and equity; (vii) investments, loans and advances; (viii) capital 
expenditures; (ix) changes in fiscal year; (x) certain transactions with 
affiliates; and (xi) changes in lines of business. In addition, the Senior 
Credit Facility requires that the Company comply with specified financial 
ratios and tests, including minimum cash flow, a maximum ratio of 
indebtedness to cash flow and a minimum interest coverage ratio.

                                      28
<PAGE>

                        THE WILLIAM CARTER COMPANY
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


    The 10 3/8% Senior Subordinated Notes were issued in November 1996. The 
proceeds from the Notes were used to repay $90.0 million of 
Acquisition-related financing and $5.0 million of the Senior Credit Facility 
term loan. The Notes are uncollateralized.
 
    Interest will be paid semi-annually on June 1 and December 1 of each 
year, commencing on June 1, 1997. The Notes will be redeemable, in whole or 
in part, at the option of the Company on or after December 1, 2001 at the 
following redemption prices, plus accrued interest to the date of redemption:
 
<TABLE>
<CAPTION>
YEAR                    REDEMPTION PRICE
----------------------  ----------------
<S>                     <C>
2001..................        105.188%
2002..................        103.458%
2003..................        101.729%
2004 and thereafter...        100.000%
</TABLE>
 
    The Notes contain provisions and covenants, including limitations on 
other indebtedness, restricted payments and distributions, sales of assets 
and subsidiary stock, liens, and certain other transactions.
 
    Aggregate minimum scheduled maturities of long-term debt during each of 
the next five fiscal years are as follows ($000): fiscal year ended December 
28, 1997-$900; 1998-$900; 1999-$900; 2000-$900; and 2001-$5,400.
 
NOTE 6-REDEEMABLE PREFERRED STOCK
 
    On October 30, 1996, the Company authorized and issued 5,000 shares of 
preferred stock, par value $.01 per share. At December 28, 1996, there were 
5,000 shares of Preferred Stock outstanding, all of which were held by 
Holdings.
 
    Dividends on the Preferred Stock accrue at a rate of 12% per annum. 
Dividends are cumulative and are payable when and as declared by the Board of 
Directors of the Company, out of assets legally available therefor, on May 1 
and November 1 of each year, commencing on May 1, 1997. To the extent that 
dividends are accrued, but have not been declared and paid, such undeclared 
and unpaid dividends will accrue additional dividends from the date upon 
which such dividends accrued until the date upon which they are paid at the 
rate of 14% per annum.
 
    The shares of Preferred Stock are redeemable at the option of the Company 
at a redemption price of $4,000 per share plus accrued and unpaid dividends 
thereon to the date fixed for redemption. If permitted under the Senior 
Credit Facility and the Indenture dated as of November 25, 1996 between the 
Company and State Street Bank and Trust Company, as Trustee (the 
"Indenture"), the shares of Preferred Stock may be redeemed in whole, or in 
not more than two partial redemptions, provided that in the first of such two 
partial redemptions not less than 50% of the number of shares of Preferred 
Stock then outstanding shall be redeemed, and that in the second of such two 
partial redemptions all of the shares of Preferred Stock then outstanding 
shall be redeemed. On December 15, 2007, the Company is required to redeem 
all outstanding shares of Preferred Stock at a redemption price of $4,000 per 
share plus accrued and unpaid dividends. All outstanding shares of Preferred 
Stock are pledged to collateralize the Company's obligations under the Senior 
Credit Facility.
 
    The shares of Preferred Stock have no voting rights, other than as 
provided by Massachusetts law.
 
    In the event of liquidation, the holders of the Preferred Stock are 
entitled to receive out of the assets of the Company available for 
distribution to shareholders, on a priority basis, the amount of $4,000 per 
share, plus a sum equal to all dividends on such shares accrued and unpaid.

                                     29

<PAGE>


                        THE WILLIAM CARTER COMPANY
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    The Preferred Stock was issued for $20,000,000 and was recorded net of 
issuance costs of $2,200,000. The carrying amount is increased by periodic 
accretion, using the interest method with charges to retained earnings or 
paid-in capital, so that the carrying amount will equal the mandatory 
redemption amount, including accrued but undeclared or unpaid dividends, at 
the mandatory redemption date.

NOTE 7-COMMON STOCK
 
    At December 28, 1996, the authorized common stock of the Company consists 
of 1,000 shares of common stock, par value $.01 per share. At December 28, 
1996, there were 1,000 shares of Common Stock issued and outstanding, all of 
which are held of record by Holdings. All outstanding shares of Common Stock 
are pledged to collateralize the Company's obligations under the Senior 
Credit Facility. Pursuant to the restrictions contained in the Senior Credit 
Facility and the Indenture, the Company is not expected to be able to pay 
dividends on its Common Stock for the foreseeable future, other than certain 
limited dividends or winding up of the Company. Each share of Common Stock 
entitles the holder thereof to one vote on all matters to be voted on by 
shareholders of the Company.
 
NOTE 8-PREDECESSOR CAPITAL STOCK:
 
    At December 30, 1995 and until October 30, 1996, the Company had outstanding
50,000 shares of Series A preferred stock, $.01 par value per share, carried at
$50.0 million; 10,000 shares of Class A Common, $.01 par value per share; 10,000
shares of Class B Common, $.01 par value per share; 2,785 shares of Class C
Common; and $92.4 million of additional paid-in-capital. In conjunction with the
Acquisition, cumulative dividends totaling $2.8 million on the Series A
preferred, and $4.2 million guaranteed-yield dividends on the common were
required to be paid to the respective stockholders, and all shares were acquired
and retired.
 
NOTE 9-EMPLOYEE BENEFIT PLANS:
 
    The Company offers a comprehensive plan to current and certain future
retirees and their spouses until they become eligible for Medicare and a
Medicare Supplement plan. The Company also offers life insurance to current and
certain future retirees. Employee contributions are required as a condition of
participation for both medical benefits and life insurance, and the Company's
liabilities are net of these employee contributions.
 
    The following table sets forth the components of the accumulated
postretirement benefit obligation (APBO) at December 28, 1996 ($000):
 
<TABLE>
<S>                                                                   <C>
Retirees............................................................  $   5,527
Actives ineligible to retire........................................      2,552
Actives eligible to retire..........................................        406
                                                                      ---------
Total APBO..........................................................  $   8,485
                                                                      ---------
                                                                      ---------
</TABLE>
 
    The funded status of the plan is reconciled to the accrued postretirement
benefit liability recognized in the accompanying consolidated balance sheet at
December 28, 1996 as follows ($000):
 
<TABLE>
<S>                                                                   <C>
Total APBO..........................................................  $   8,485
Plan assets at fair value...........................................     --
Unrecognized net loss...............................................         56
                                                                      ---------
Accrued postretirement benefit liability............................  $   8,541
                                                                      ---------
                                                                      ---------
</TABLE>

                                           30 

<PAGE>


                        THE WILLIAM CARTER COMPANY
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    Net periodic postretirement benefit cost (NPPBC) charged to operations for
the predecessor period from December 31, 1995 through October 29, 1996 and
successor period from October 30, 1996 through December 28, 1996 included the
following components ($000):
 
<TABLE>
<CAPTION>
                                                           SUCCESSOR              PREDECESSOR
                                                      PERIOD FROM OCTOBER    PERIOD FROM DECEMBER
                                                       30, 1995 THROUGH        31, 1995 THROUGH
                                                       DECEMBER 28, 1996       OCTOBER 29, 1996
                                                     ---------------------  -----------------------
<S>                                                  <C>                    <C>
Service cost.......................................        $      21               $     100
Interest cost......................................               95                     482
Amortization of transition obligation..............           --                         318
Amortization of net loss...........................           --                          45
                                                               -----                   -----
Total NPPBC........................................        $     116               $     945
                                                               -----                   -----
                                                               -----                   -----
</TABLE>
 
    The discount rate used in determining the APBO was 7.0% as of December 28,
1996. In conjunction with purchase accounting for the Acquisition, the Company
was required to record a liability on its balance sheet for the accumulated
postretirement benefit obligation at the Acquisition date. Accordingly, net
periodic postretirement benefit cost for the Successor is not comparable to that
for the Predecessor. The effects on the Company's plan of all future increases
in health care cost are borne by employees; accordingly, increasing medical
costs are not expected to have any material effect on the Company's future
financial results.
 
    The Company has an obligation under a defined benefit plan covering certain
former officers. At December 28, 1996, the present value of the estimated
remaining payments under this plan was approximately $1.8 million and is
included in other long-term liabilities.
 
    Prior to the Acquisition, the Company also maintained a Management Equity
Participation Plan and a Long Term Incentive Plan for executive and other key
salaried employees. These plans were terminated in conjunction with the
Acquisition. Expense related to these two plans for the Predecessor period
totaled $4.9 million, including $3.3 million triggered as a result of the
Acquisition.
 
NOTE 10-MANAGEMENT STOCK INCENTIVE PLAN:
 
    Upon consummation of the Acquisition, Holdings adopted a Management Stock
Incentive Plan in order to provide incentives to employees and directors of
Holdings and the Company by granting them awards tied to Class C stock of
Holdings. In October 1996, Holdings granted options to purchase up to 75,268
shares of its Class C stock to certain employees of the Company, all of which
remain outstanding as of December 28, 1996. The exercise price of each such
option is $60.00 per share, which is the same price per share paid by existing
holders of Holdings' Class C stock, and which is deemed to be the fair market
value of the Company's common stock at the time the options were granted.
Accordingly, no compensation expense has been recognized on these options in the
statement of operations for the Successor period. The options granted vest
ratably over the next five years and contingent upon the Company meeting
specific earnings targets, with weighted average remaining contractual lives of
approximately ten years at December 28, 1996. No options were exercisable as of
December 28, 1996.
 
    The fair value of each granted option, at the date of grant, has been
estimated to be $29.50. This was estimated using a minimum value method, at a
risk free interest rate assumption of 7.0%, expected life of ten years, and no
expected dividends.
 
    If the fair value based method required by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," had been applied,
there would have been no compensation

                                          31

<PAGE>


                        THE WILLIAM CARTER COMPANY
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

cost associated with these option grants for the Successor period and the 
Company's net income for the Successor period would have been unchanged. 

NOTE 11-INCOME TAXES:
 
    The provision for income taxes consisted of the following ($000):
 
<TABLE>
<CAPTION>
                                                           SUCCESSOR             PREDECESSOR
                                                      PERIOD FROM OCTOBER   PERIOD FROM DECEMBER
                                                       30, 1996 THROUGH       31, 1995 THROUGH
                                                       DECEMBER 28, 1996      OCTOBER 29, 1996
                                                     ---------------------  ---------------------
<S>                                                  <C>                    <C>
Current tax provision (benefit):
  Federal..........................................        $  --                  $    (484)
  State............................................           --                        (12)
                                                               -----                 ------
Total current provision (benefit):.................           --                       (496)
                                                               -----                 ------
Deferred tax provision:
  Federal..........................................              188                  2,121
  State............................................               24                    260
                                                               -----                 ------
    Total deferred provision:......................              212                  2,381
                                                               -----                 ------
    Total provision................................        $     212              $   1,885
                                                               -----                 ------
                                                               -----                 ------
</TABLE>
 
    Components of net deferred tax assets and liabilities are as follows, at
December 28, 1996 ($000):
 
<TABLE>
<S>                                                                  <C>
Deferred tax assets:
  Accounts receivable allowance....................................  $   1,279
  Inventory valuation..............................................      7,740
  Liability accruals...............................................      6,659
  Deferred employee benefits.......................................      3,820
  Loss and tax credit carryforwards................................      1,149
                                                                     ---------
  Other............................................................        808
                                                                     ---------
                                                                     ---------
    Total deferred tax assets......................................  $  21,455
Deferred tax liabilities
  Tradename........................................................  $  36,846
  Depreciation.....................................................      8,788
  Deferred employee benefits.......................................      1,733
  Other............................................................        447
                                                                     ---------
    Total deferred tax liabilities.................................  $  47,814
                                                                     ---------
                                                                     ---------
</TABLE>

                                             32

<PAGE>

                            THE WILLIAM CARTER COMPANY
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    The difference between the Company's effective income tax rate and the
federal statutory tax rate is reconciled below:
 
<TABLE>
<CAPTION>
                                              SUCCESSOR                PREDECESSOR
                                         PERIOD FROM OCTOBER      PERIOD FROM DECEMBER
                                          30, 1996 THROUGH          31, 1995 THROUGH
                                          DECEMBER 28, 1996         OCTOBER 29, 1996
                                         -------------------      --------------------
<S>                                       <C>                      <C>
Statutory federal income tax rate......           34%                       34%
State income taxes, net of federal 
  income tax benefit...................           3                         11
Non-deductible Acquisition costs.......           --                        77
Goodwill amortization..................           11                        --
Non-taxable foreign income.............           (2)                       (3)
Other..................................           (2)                        6
                                                  --                       ---
Total..................................           44%                      125%
                                                  --                       --- 
                                                  --                       --- 
</TABLE>

 
NOTE 12-LEASE COMMITMENTS:
 
    Annual rent expense under operating leases was $2,148 and $10,902 in the
Successor and Predecessor periods, respectively. Minimum annual rental
commitments under current noncancelable operating leases as of December 28, 1996
were as follows ($000):

<TABLE>
<CAPTION>

                   BUILDINGS,
                   PRIMARILY                                         TOTAL
                    RETAIL     TRANSPORTATION   DATA PROCESSING  NONCANCELLABLE
YEAR                STORES       EQUIPMENT         EQUIPMENT        LEASES
-----              ---------   --------------   ---------------  --------------
<S>                <C>         <C>              <C>              <C>
1997               $10,905         $  544            $180           $11,629
1998                 8,254            262             180             8,696
1999                 6,359            157              --             6,516
2000                 4,125             96              --             4,221
2001                 2,193             40              --             2,233
Thereafter.....      2,445             --              --             2,445
                   -------         ------            ----           -------
Total..........    $34,281         $1,099            $360           $35,740
                   -------         ------            ----           -------
                   -------         ------            ----           -------
</TABLE>

NOTE 13-OTHER CURRENT LIABILITIES:
 
    Other current liabilities as of December 28, 1996 consisted of the following
($000):
 
<TABLE>
<S>                                                                  <C>
Accrued liability for retail store closures........................  $   6,000
Accrued liability for plant closures...............................      3,000
Accrued income taxes...............................................      4,477
Accrued workers compensation.......................................      3,000
Accrued incentive compensation.....................................      2,400
Other current liabilities..........................................     13,478
                                                                     ---------
                                                                     $  32,355
                                                                     ---------
                                                                     ---------
</TABLE>
 
                                       33
<PAGE>

                            THE WILLIAM CARTER COMPANY
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 14-VALUATION AND QUALIFYING ACCOUNTS:
 
    Information regarding valuation and qualifying accounts for the Predecessor
and Successor periods are as follows ($000):
 
<TABLE>
<CAPTION>
                                                                             ALLOWANCE FOR
                                                                               DOUBTFUL
                                                                               ACCOUNTS
                                                                         ---------------------
<S>                                                                      <C>
Predecessor:
Balance, December 30, 1995.............................................        $   2,888
Additions, charged to expense..........................................              408
Writeoffs..............................................................             (772)
                                                                                  ------
Balance, October 29, 1996..............................................        $   2,524
                                                                                  ------
                                                                                  ------
Successor:
Balance, October 30, 1996..............................................        $   2,524
Additions, charged to expense..........................................              156
Recoveries.............................................................               11
                                                                                  ------
Balance, December 28, 1996.............................................        $   2,691
                                                                                  ------
                                                                                  ------
</TABLE>
 
NOTE 15-RELATED PARTY TRANSACTIONS:
 
    In connection with the Acquisition, Invifin SA ("Invifin"), an affiliate of
Investcorp, received a fee of $2.2 million. Also in connection with the
Acquisition, the Company paid Investcorp International, Inc. ("International")
advisory fees aggregating $2.25 million. Holdings also paid $1.5 million to
Invifin in fees in connection with providing a standby commitment to fund the
Acquisition. In connection with the closing of the Acquisition, the Company
entered into an agreement for management advisory and consulting services (the
"Management Agreement") with International pursuant to which the Company agreed
to pay International $1.35 million per annum for a five-year term. At the
closing of the Acquisition, the Company prepaid International $4.05 million for
the first three years of the term of the Management Agreement in accordance with
its terms.
 
    In October 1996, the Company made a $1.5 million loan to an officer of the
Company. The loan has a term of five years, is collateralized by the officer's
stock of Holdings and bears interest at 6.49%, compounded semi-annually. The
loan is prepayable with the proceeds of any disposition of his stock in
Holdings.
 
NOTE 16-DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
 
    At December 28, 1996, the carrying value of the Company's debt is deemed to
approximate its fair value, since the terms of such debt, including interest
rates, are variable with market rates and/or were recently negotiated.
 
NOTE 17-SUBSEQUENT EVENT:
 
    In February 1997, the Company filed a registration statement on Form S-4
with the Securities and Exchange Commission related to an Exchange Offer for
$100,000,000 of 10 3 8% Series A Senior Subordinated Notes for a like amount of
the 10 3 8% Senior Subordinated Notes issued in the November 1996 private
placement.
 
                                       34

<PAGE>

                             Report to Independent Accountants

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
THE WILLIAM CARTER COMPANY
 
    In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in stockholders'
equity present fairly, in all material respects, the financial position of The
William Carter Company and its subsidiaries at December 30, 1995 and the results
of their operations and their cash flows for the fiscal years ended December 31,
1994 and December 30, 1995 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
 
/s/ PRICE WATERHOUSE LLP
 
Stamford, Connecticut

February 16, 1996
 
                                       35
<PAGE>
                            THE WILLIAM CARTER COMPANY
                            CONSOLIDATED BALANCE SHEET
                              (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 30, 1995
                                                                             -----------------
<S>                                                                          <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................     $     2,865
Accounts receivable, net of allowances for doubtful accounts of $2,888.....          14,694
Inventories................................................................          94,428
Prepaid expenses and other current assets..................................           6,206
                                                                                   --------
    Total current assets...................................................         118,193
Property, plant and equipment, net.........................................          46,785
Other assets...............................................................           2,238
                                                                                   --------
                                                                                $   167,216
                                                                                   --------
                                                                                   --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term debt.....................................     $     5,143
  Accounts payable.........................................................          10,947
  Other current liabilities................................................          17,510
                                                                                   --------
    Total current liabilities..............................................          33,600
Long-term debt.............................................................          82,352
Other long-term liabilities................................................           5,942
                                                                                   --------
    Total liabilities......................................................         121,894
                                                                                   --------
                                                                                   --------
Stockholders' equity:
  Preferred stock, Series A, par value $.01 per share, 50,000 shares
    authorized and outstanding.............................................          50,000
  Common stock, Class A, 100,000 shares authorized, 10,000 shares issued
    and outstanding, par value $.01 per sha................................         --
  Common stock, Class B, 100,000 shares authorized, 10,000 shares issued
    and outstanding, par value $.01 per share..............................         --
  Common stock, Class C, 100,000 shares authorized, 2,785 issued and
    outstanding............................................................         --
  Capital in excess of par value...........................................          92,379
  Accumulated deficit......................................................         (97,057)
                                                                                   --------
    Total stockholders' equity.............................................          45,322
                                                                                   --------
                                                                                $   167,216
                                                                                   --------
                                                                                   --------
</TABLE>
 
                   The accompanying notes are an integral part of the
                         consolidated financial statements
 
                                       36
<PAGE>
                           THE WILLIAM CARTER COMPANY
                        CONSOLIDATED STATEMENT OF INCOME
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                   FOR THE FISCAL YEAR ENDED
                                                                   --------------------------
                                                                   DECEMBER 30,  DECEMBER 31,
                                                                       1995          1994
                                                                   ------------  ------------
<S>                                                                <C>           <C>
Net sales........................................................   $  295,431    $  271,549
Cost of goods sold...............................................      191,105       175,244
                                                                   ------------  ------------
Gross profit.....................................................      104,326        96,305
Selling, general and administrative..............................       83,223        77,472
                                                                   ------------  ------------
Operating income.................................................       21,103        18,833
Interest expense.................................................        7,849         6,445
                                                                   ------------  ------------
Income before income taxes.......................................       13,254        12,388
Provision for income taxes.......................................        5,179         4,000
                                                                   ------------  ------------
Net income.......................................................   $    8,075    $    8,388
                                                                   ------------  ------------
                                                                   ------------  ------------
</TABLE>
 
                          The accompanying notes are an integral part of the
                                 consolidated financial statements
 
                                       37
<PAGE>

                            THE WILLIAM CARTER COMPANY
                        CONSOLIDATED STATEMENT OF CASH FLOWS
                               (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                   FOR THE FISCAL YEAR ENDED
                                                                 -----------------------------
                                                                  DECEMBER 30,    DECEMBER 31,
                                                                      1995            1994
                                                                 ---------------  ------------
<S>                                                              <C>              <C>
Cash flows from operating activities:
  Net income...................................................  $         8,075   $    8,388
  Adjustments to reconcile net income to net cash provided by
   operating activities:
     Depreciation and amortization.............................            7,737        6,915
     Deferred income tax benefit...............................             (465)      (1,407)
     (Gain) loss on disposal of assets.........................              (40)         189
     Compensation charge on stock issued to employees..........              276       --
  Changes in assets and liabilities:
   (Increase) decrease in assets:
     Accounts receivable.......................................           (3,878)         744
     Inventories...............................................          (28,099)      (5,459)
     Prepaid expenses and other current assets.................            1,641          382
   Increase in liabilities:
     Accounts payable..........................................            3,981        1,914
     Other current liabilities.................................            3,431        1,131
     Other long-term liabilities...............................            1,825        1,846
                                                                 ---------------  ------------
       Net cash (used in) provided by operating activities.....           (5,516)      14,643 
                                                                 ---------------  ------------
Cash flows from investing activities:
  Proceeds from sale of assets.................................              346           70
  Capital expenditures.........................................          (13,715)     (10,996)
                                                                 ---------------  ------------
       Net cash used in investing activities...................          (13,369)     (10,926)
                                                                 ---------------  ------------
Cash flows from financing activities:
  Borrowings under revolving credit facility...................           19,000       --
                                                                          
  Payments under term loan and subordinated note agreements....           (2,732)       1,243) 
  Payments of industrial revenue bond..........................             (433)        (503)
  Preferred stock dividend.....................................           (1,678)      --       
                                                                 ---------------  ----------- 
       Net cash provided by (used in) financing activities.....           14,157       (1,746)
                                                                 ---------------  -----------
  Net (decrease) increase in cash and cash equivalents.........           (4,728)       1,971
  Cash and cash equivalents at beginning of period.............            7,593        5,622
                                                                 ---------------  -----------
  Cash and cash equivalents at end of period...................  $         2,865   $    7,593
                                                                 ---------------  -----------
                                                                 ---------------  -----------
</TABLE>
 
                    The accompanying notes are an integral part of the
                         consolidated financial statements
 
                                       38

<PAGE>
                            THE WILLIAM CARTER COMPANY
                 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                            (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                 SERIES A     CLASS A      CLASS B      CLASS C    CAPITAL IN
                                                 PREFERRED    COMMON       COMMON       COMMON      EXCESS OF   ACCUMULATED
                                                   STOCK       STOCK        STOCK        STOCK      PAR VALUE     DEFICIT
                                                 ---------  -----------  -----------  -----------  -----------  ------------
<S>                                              <C>        <C>          <C>          <C>          <C>          <C>
Balance at January 1, 1994.....................  $  50,000      --           --           --        $  92,103    $ (111,842)
Net income.....................................     --          --           --           --           --             8,388
                                                 ---------  -----------  -----------  -----------  -----------  ------------
Balance at December 31, 1994...................     50,000      --           --           --           92,103      (103,454)
Preferred stock dividend.......................     --          --           --           --           --            (1,678)
Issuance of Class C common stock to
  employees....................................     --          --           --           --              276        --
Net income.....................................     --          --           --           --           --             8,075
                                                 ---------  -----------  -----------  -----------  ----------   -----------
Balance at December 30, 1995...................  $  50,000   $  --        $  --        $  --        $  92,379    $  (97,057)
                                                 ---------  -----------  -----------  -----------  ----------   -----------
                                                 ---------  -----------  -----------  -----------  ----------   -----------
  
<CAPTION>
 
                                                   TOTAL
                                                 ---------
<S>                                              <C>
Balance at January 1, 1994.....................  $  30,261
Net income.....................................      8,388
                                                 ---------
Balance at December 31, 1994...................     38,649
Preferred stock dividend.......................     (1,678)
Issuance of Class C common stock to
  employees....................................        276
Net income.....................................      8,075
                                                 ---------
Balance at December 30, 1995...................  $  45,322
                                                 ---------
                                                 ---------
</TABLE>
 
  The accompanying notes are an integral part of the consolidated
                        financial statements
 
                                       39
<PAGE>

                        THE WILLIAM CARTER COMPANY 
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          (DOLLARS IN THOUSANDS) 

NOTE 1-NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING 
POLICIES:
 
    The William Carter Company (the "Company") is a United States based 
manufacturer and marketer of premier branded childrenswear under the CARTER'S 
and BABY DIOR labels. The Company manufactures its products in plants located 
in the southern United States, Costa Rica and the Dominican Republic. 
Products are manufactured for wholesale distribution to major domestic 
retailers, and for the Company's more than 120 retail outlet stores that 
market its brand name merchandise and certain products manufactured by other 
companies. Approximately 56.5% of the Company's 1995 net sales were wholesale 
and 43.5% were retail.
 
     PRINCIPLES OF CONSOLIDATION:
 
    Effective January 1, 1995, Carter Holdings Corp., the former parent 
company, was merged into the Company. The consolidated financial statements 
include the accounts of the Company and its wholly owned subsidiaries. All 
intercompany transactions and balances have been eliminated in consolidation.
 
     FISCAL YEAR:
 
    The Company's fiscal year ends on the Saturday in December or January 
nearest the last day of December. The fiscal years ended December 31, 1994 
and December 30, 1995 each contain 52 weeks.
 
     REVENUE RECOGNITION:
 
    Revenues from the Company's wholesale operations are recognized upon 
shipment; revenues from retail operations are recognized at point of sale.
 
     CASH AND CASH EQUIVALENTS:
 
    The Company considers all highly liquid investments that have original 
maturities of three months or less to be cash equivalents.
 
     INVENTORIES:
 
    Inventories are stated at the lower of cost (first-in, first-out basis 
for wholesale inventories and retail method for retail inventories) or market.
 
     PROPERTY, PLANT AND EQUIPMENT:
 
    Property, plant and equipment are stated at cost. When fixed assets are 
sold or otherwise disposed, the accounts are relieved of the original costs 
of the assets and the related accumulated depreciation and any resulting 
profit or loss is credited or charged to income. For financial reporting 
purposes, depreciation is computed on the straight-line method over the 
estimated useful lives of the assets as follows: buildings-15 to 50 years; 
and machinery and equipment-4 to 10 years. Leasehold improvements are 
amortized over the lesser of the asset life or related lease term.
 
     DEBT ISSUE COSTS:
 
    Debt issue costs are deferred and amortized over a five year period 
ending in fiscal year 1996. Amortization approximated $400 in fiscal 1994 and 
1995.

                                       40

<PAGE>

                         THE WILLIAM CARTER COMPANY 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                          (DOLLARS IN THOUSANDS) 

     INCOME TAXES:
 
    The Company accounts for income taxes under the provisions of FASB 
Statement No. 109, "Accounting for Income Taxes" (FAS 109). In accordance 
with FAS 109, the deferred tax provision is determined under the liability 
method. Deferred tax assets and liabilities are recognized based on 
differences between the book and tax bases of assets and liabilities using 
presently enacted tax rates. The provision for income taxes is the sum of the 
amount of income taxes paid or payable for the year as determined by applying 
the provisions of enacted tax laws to the taxable income for that year and 
the net change during the year in the Company's deferred tax assets and 
liabilities.
 
     SUPPLEMENTAL CASH FLOWS INFORMATION:
 
    Interest paid in cash approximated $7,323 and $5,840 for the fiscal years 
ended December 30, 1995 and December 31, 1994, respectively. Income taxes 
paid in cash approximated $4,212 and $5,342 in fiscal 1995 and 1994 
respectively.
 
    USE OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL 
STATEMENTS:
 
    The preparation of these consolidated financial statements in conformity 
with generally accepted accounting principles requires management of the 
Company to make estimates and assumptions that affect the reported amounts of 
assets and liabilities and disclosures of contingent assets and liabilities, 
at the date of the financial statements, and the reported amounts of revenues 
and expenses during the reporting period. Actual results could differ from 
those estimates.
 
NOTE 2-INVENTORIES:
 
Inventories at December 30, 1995 consisted of the following:
 
<TABLE>
<CAPTION>
<S>                                                                  <C>

Finished goods.....................................................  $  61,032
Work in process....................................................     20,402
Raw materials and supplies.........................................     12,994
                                                                     ---------
                                                                     $  94,428
                                                                     ---------
                                                                     ---------
</TABLE>
 
NOTE 3-FIXED ASSETS:
 
    Fixed assets at December 30, 1995 consisted of the following:
 
<TABLE>
<CAPTION>
<S>                                                                  <C>

Land, buildings and improvements...................................  $  19,218
Machinery and equipment............................................     64,476
                                                                     ---------
                                                                        83,694
Accumulated depreciation and amortization..........................    (36,909)
                                                                     ---------
                                                                     $  46,785
                                                                     ---------
                                                                     ---------
</TABLE>
 
                                       41

<PAGE>

                         THE WILLIAM CARTER COMPANY 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                          (DOLLARS IN THOUSANDS) 

NOTE 4-LONG-TERM DEBT:
 
 Long-term debt at December 30, 1995 consisted of the following:
 
<TABLE>
<CAPTION>
                                                                                  DECEMBER 30,
                                                                                      1995
                                                                                  ------------
<S>                                                                               <C>
Term loan.......................................................................   $   46,962
Revolving credit facility.......................................................       19,000
Senior subordinated note-prime plus 1%..........................................        4,485
Subordinated note-prime plus 1%.................................................       15,702
Industrial revenue bond, interest at 90-day CD rate, payable in installments
  through 1999..................................................................        1,346
                                                                                  ------------
                                                                                       87,495
Current maturities..............................................................       (5,143)
                                                                                  ------------
                                                                                   $   82,352
                                                                                  ------------
                                                                                  ------------
</TABLE>

 
    The revolving credit facility provides for maximum borrowings of $30,000, 
of which $19,000 was outstanding as of December 30, 1995. The facility has a 
sublimit of $5,000 for letters of credit, of which $3,306 and $3,868 were 
used for letters of credit as of December 30, 1995 and December 31, 1994, 
respectively. Interest on the term loan and revolving credit facilities is 
payable at the greater of the lender's prime rate or the federal funds rate 
plus 50 basis points, plus an additional margin percentage. Each $5,000 
repayment of the term loan facility results in a 20 basis point reduction in 
the margin until the margin reaches zero. As of December 30, 1995, the 
interest rate on the term loan and revolving credit facility was equal to the 
prime rate plus 60 basis points.
 
    Amounts drawn under the revolving credit facility may not exceed the 
borrowing base (as defined) calculated by reference to certain percentages of 
eligible accounts receivable and eligible inventory. Prepayments of the term 
loan are required to be made from the net cash proceeds realized from sales 
of assets, other than inventory sold in the normal course of business.
 
    The facilities agreement contains various covenants which require the 
Company to meet certain defined financial tests including net worth, current 
ratio, capital expenditures, interest coverage ratio, a debt to worth ratio 
and dividend restrictions. The agreement is collateralized by all assets of 
the Company.
 
    Interest on the senior subordinated note and the subordinated note is 
payable on a semi-annual basis. Interest on the subordinated note is payable 
at the rate of prime plus 1%, but may not exceed 14%.
 
    Principal payments on the term loan, senior subordinated note and the 
subordinated note are required to be made in fiscal 1994 through 1996 from 
the excess cash flows (as defined) generated in each of the preceding fiscal 
years. Cash flow payments will be allocated on a pro rata basis based on the 
outstanding balances of the three classes of debt. Principal payments equal 
to 75% of defined excess cash flows for the preceding fiscal year are 
required to be made on or before April 30 of the subsequent year. There was 
no defined excess cash flow generated in fiscal 1995.
 
    The term loan must be reduced by a minimum of $5,000 each year from 1994 
to 1996. As of December 30, 1995, the term loan has been reduced by payments 
of $12,790, of which $10,290 qualifies toward minimum payments due under the 
agreement. If in any one year the Company is unable to meet its minimum 
payment, it will be given credit toward the shortfall for any defined excess 
cash flow payments made in prior years above minimum payments for those 
years. The Company can, at any time, prepay without penalty indebtedness 
under the term loan and revolving credit facilities. 

                                       42

<PAGE>

                          THE WILLIAM CARTER COMPANY 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                          (DOLLARS IN THOUSANDS) 

The revolving credit and term loan facilities agreement expires on December 
31, 1996, by which time management expects to have refinancing in place. The 
subordinated notes are due on December 31, 2001.
 
    Aggregate minimum scheduled maturities of long-term debt during each of 
the next five fiscal years are as follows: fiscal year ended December 28, 
1996-$5,143; 1997-$61,685; 1998-$433; 1999-$47, and 2000-$0.
 
    Industrial revenue bond financing was obtained in connection with the 
construction of a distribution facility. Financing of $6,500 originally 
available under this agreement has been expended and the obligation is 
secured by the related building, machinery and equipment.
 
    FASB Statement No. 107, "Disclosure about Fair Value of Financial 
Instruments," requires the Company to estimate and disclose, if practicable, 
the fair value of its long-term debt. The Company has disclosed the carrying 
amounts, interest rates and maturity dates of its long-term debt. Management 
estimates that the aggregate fair value of these obligations and other 
financial instruments approximates their aggregate carrying value.
 
NOTE 5-CAPITAL STOCK:
 
    For each of Class A and Class B common stock, 100,000 shares of stock, 
par value $.01 per share, are authorized. There were 10,000 shares each of 
Class A and Class B common stock issued and outstanding at the end of fiscal 
1995. The holders of Class A and Class B common stock are entitled to four 
votes per share and one vote per share, respectively.
 
    In January 1995, 100,000 shares of Class C non-voting common stock, par 
value $.01 per share, were authorized of which 2,785 shares were issued to 
participants in the Management Equity Participation Plan (see Note 6).
 
    As of the end of fiscal 1995, 50,000 shares of non-voting Series A 
preferred stock, par value $.01 per share, were authorized, issued and 
outstanding. Dividends on Series A preferred stock are payable on May 31 of 
each year, commencing May 31, 1995, and will be equal to the lesser of (1) 
20% of consolidated net income for the preceding fiscal year or (2) 5% of the 
liquidation value of all preferred stock; such dividends are cumulative. The 
dividend payable on May 31, 1996, calculated based on 1995 consolidated net 
income, will be $1,615. The dividend paid on May 31, 1995 was $1,678.
 
NOTE 6-EMPLOYEE BENEFIT PLANS:
 
    The Company offers a comprehensive plan to current and certain future 
retirees and their spouses until they become eligible for Medicare and a 
Medicare Supplement plan. The Company also offers life insurance to current 
and certain future retirees. Employee contributions are required as a 
condition of participation for both medical benefits and life insurance, and 
the Company's liabilities are net of these employee contributions.

                                       43

<PAGE>

                         THE WILLIAM CARTER COMPANY 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                          (DOLLARS IN THOUSANDS) 

    The following table sets forth the components of the accumulated 
postretirement benefit obligation (APBO) as of December 30, 1995:
 
<TABLE>
<CAPTION>
                                                                                     DECEMBER 30,
                                                                                        1995
                                                                                     -----------
<S>                                                                                  <C>
Retirees...........................................................................   $   5,748
Actives ineligible to retire.......................................................       2,300
Actives eligible to retire.........................................................         590
Disableds..........................................................................      --
                                                                                      ---------
Total APBO.........................................................................   $   8,638
                                                                                      ---------
                                                                                      ---------

</TABLE>
 
    The funded status of the plan is reconciled to the accrued postretirement 
benefit liability recognized in the accompanying consolidated balance sheet:
 
<TABLE>
<CAPTION>
                                                                                     DECEMBER 30,
                                                                                        1995
                                                                                     -----------
<S>                                                                                  <C>
Total APBO.........................................................................   $   8,638
Plan assets at fair value..........................................................      --
Unrecognized net loss..............................................................      (6,485)
Unrecognized net loss..............................................................      (1,353)
                                                                                     -----------
Accrued postretirement benefit liability...........................................   $     800
                                                                                     -----------
                                                                                     -----------
</TABLE>
 
    Net periodic postretirement benefit cost (NPPBC) charged to operations 
for fiscal 1995 and 1994 included the following components:
 
<TABLE>
<CAPTION>
                                                                               1995       1994
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
Service cost...............................................................  $     121  $     116
Interest cost..............................................................        577        539
Amortization of transition obligations.....................................        381        381
Amortization of net loss...................................................         54     --
                                                                             ---------  ---------
Total NPPBC................................................................  $   1,133  $   1,036
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>
 
    The discount rate used in determining the APBO was 7.0% as of December 
30, 1995. The effects on the Company's plan of all future increases in health 
care cost are borne by employees; accordingly, increasing medical costs are 
not expected to have any material effect on the Company's future financial 
results.
 
    The Company has an obligation under a defined benefit plan covering certain
former officers. At December 30, 1995, the present value of the estimated
remaining payments under this plan was approximately $1,934.
 
    The Company also maintains a Management Equity Participation Plan 
("MEPP") and Long Term Incentive Plan ("LTIP") for executive and other key 
salaried employees. Long-term liabilities under these plans as of December 
30, 1995 were $1,976 and $2,908, respectively. In 1995, the Board of 
Directors capped the amount payable under the MEPP at $5,000, and approved 
the issuance to plan participants of 2,785 shares of Class C common stock of 
the Company (see Note 5). 

                                       44

<PAGE>

                           THE WILLIAM CARTER COMPANY 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                          (DOLLARS IN THOUSANDS) 

    Distributions under the MEPP are payable upon a "trigger event" (as 
defined) which includes, among other things, the sale of the Company. In the 
absence of a trigger event, distributions to MEPP participants are payable 
upon the later of age 62 or January 1, 2002. LTIP awards are determined 
annually based on five percent of the Company's earnings before interest and 
taxes. The LTIP provides for payment of awards in 1997.
 
NOTE 7-INCOME TAXES:
 
The provision for income taxes for fiscal years 1995 and 1994 consisted of 
the following:
 

<TABLE>
<CAPTION>
                                                                    FOR THE FISCAL YEAR ENDED
                                                                   ----------------------------
<S>                                                                <C>            <C>
                                                                   DECEMBER 30,   DECEMBER 31,
                                                                       1995           1994
                                                                   -------------  -------------
Current tax provision (benefit):
  Federal..........................................................  $   4,612      $   4,387
  State............................................................      1,032          1,020
                                                                        ------         ------
     Total current.................................................       5,644          5,407

Deferred tax provision (benefit):
  Federal..........................................................       (372)        (1,407)
  State............................................................        (93)        --

Deferred tax benefit...............................................       (465)        (1,407)
                                                                        ------         ------
    Total provision................................................  $   5,179      $   4,000
                                                                        ------         ------
                                                                        ------         ------
</TABLE>
 
    Temporary differences which give rise to deferred tax assets and 
liabilities at December 30, 1995 are as follows:
 
<TABLE>
<S>                                                                   <C>
Deferred tax assets:
 Inventory valuation................................................. $   4,801
 Accrued liabilities.................................................     2,426
 Accounts receivable allowance.......................................     1,376
 State taxes.........................................................       481
 Debt issue costs....................................................       265
 Deferred compensation...............................................     2,459
                                                                      ---------
  Total deferred tax assets..........................................    11,808
                                                                      ---------
Deferred tax liabilities:
 Depreciation........................................................     7,746
 Deferred employee benefits..........................................     2,190
                                                                      ---------
  Total deferred tax liabilities.....................................     9,936
                                                                      ---------
  Net deferred tax assets............................................ $   1,872
                                                                      ---------
                                                                      ---------
</TABLE>
 
    Deferred tax assets are included in the accompanying consolidated balance 
sheet under the caption "other assets." The deferred tax asset at the 
beginning of 1994 was fully offset by a valuation allowance. The valuation 
allowance was released during 1994 based on the Company's sustained 
profitability.
 
                                       45

<PAGE>

                         THE WILLIAM CARTER COMPANY 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                          (DOLLARS IN THOUSANDS) 

    The difference between the Company's effective income tax rate and the 
federal statutory tax rate is reconciled below:
 
<TABLE>
<CAPTION>
                                                                      FOR THE FISCAL YEAR ENDED
                                                                   --------------------------------
<S>                                                                <C>              <C>
                                                                    DECEMBER 30,     DECEMBER 31,
                                                                        1995             1994
                                                                   ---------------  ---------------
Statutory federal income tax rate................................          35.0%            35.0%
State income taxes, net of federal income tax benefit............           4.6              5.4
Alternative minimum tax..........................................        --                 (1.7)
Valuation allowance reversal, net................................        --                 (5.4)
Jobs tax credit..................................................          (0.7)            (1.6)
Other............................................................           0.2              0.6
                                                                            ---              ---
Total............................................................          39.1%            32.3%
                                                                            ---              ---
                                                                            ---              ---
</TABLE>
 
NOTE 8-LEASE COMMITMENTS:
 
    Annual rent expense under operating leases was $11,228 and $9,653 in fiscal
1995 and 1994, respectively. Minimum annual rental commitments under current
noncancelable operating leases as of December 30, 1995 were as follows:
 
<TABLE>
<CAPTION>
                                           BUILDINGS,
                                            PRIMARILY                                          TOTAL
                                             RETAIL     TRANSPORTATION   DATA PROCESSING   NONCANCELLABLE
YEAR                                         STORES       EQUIPMENT         EQUIPMENT         LEASES
-----------------------------------------  -----------  --------------  -----------------  -------------
<S>                                        <C>          <C>             <C>                <C>
1996                                       $   10,893        $     490        $     262    $  11,645
1997                                            9,388              469           --            9,857
1998                                            7,057              206           --            7,263
1999                                            5,122              110           --            5,232
2000                                            2,878               50           --            2,928
Thereafter...............................       3,806               --           --              3,806
                                           -----------           -------        -----      -------------
Total....................................   $  39,144        $    1,325     $     262        $  40,731
                                           -----------           -------        -----      -------------
                                           -----------           -------        -----      -------------
</TABLE>
 
NOTE 9-OTHER CURRENT LIABILITIES:
 
Other current liabilities at December 30, 1995 consisted of the following:
 
<TABLE>
<S>                                                                  <C>
Accrued income taxes payable.......................................  $   5,962
Accrued health insurance...........................................      3,082
Accrued incentive compensation.....................................      1,753
Other current liabilities..........................................      6,713
                                                                     ---------
                                                                     $  17,510
                                                                     ---------
                                                                     ---------
</TABLE>

                                       46

<PAGE>
 
                         THE WILLIAM CARTER COMPANY 
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                          (DOLLARS IN THOUSANDS) 

NOTE 10-VALUATION AND QUALIFYING ACCOUNTS:
 
    Information regarding valuation and qualifying accounts for fiscal years 
1995 and 1994 are as follows:
 
<TABLE>
<CAPTION>
                                                                                     ALLOWANCE FOR
                                                                                   DOUBTFUL ACCOUNTS
                                                                                   -----------------
<S>                                                                                <C>
Balance at December 31, 1994.....................................................     $   2,151
Additions, charged to expense....................................................           653
Recoveries.......................................................................            84
                                                                                      ---------
Balance at December 30, 1995.....................................................     $   2,888
                                                                                      ---------
                                                                                      ---------
Balance at January 1, 1994.......................................................     $   2,535
Additions, charged to expense                                                               622
Writeoffs........................................................................        (1,006)
                                                                                       ---------
Balance at December 31, 1994.....................................................      $   2,151
                                                                                       ---------
                                                                                       ---------
</TABLE>
 

<PAGE>

ITEM 9. CHANGE IN ACCOUNTANTS
 
    In connection with the Acquisition, on November 1,1996, the Company 
dismissed Price Waterhouse LLP ("Price Waterhouse") as its principal 
independent accountant and engaged Coopers & Lybrand L.L.P. as its principal 
independent accountant. The decision to change accountants was approved by 
the Company's Board of Directors. In connection with the audits of the 
Company's financial statements for the two most recent completed fiscal years 
prior to the Acquisition and during the interim period up until the date of 
the change in accountants, there were no disagreements with Price Waterhouse 
on any matter of accounting principles or practices, financial statement 
disclosure or auditing scope or procedure. Price Waterhouse's report on the 
financial statements for such years did not contain an adverse opinion or 
disclaimer of opinion, nor was it modified as to uncertainty, audit scope or 
accounting principles.
 
                                  PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
    The following table sets forth the name, age and position of each of the 
directors and executive officers of the Company. Each director of the Company 
will hold office until the next annual meeting of shareholders of the Company 
or until his successor has been elected and qualified. Officers of the 
Company are elected by the Board of Directors of the Company and serve at the 
discretion of the Board of Directors.

                                       47

<PAGE>
 

<TABLE>
<CAPTION>
  NAME                            AGE                               POSITIONS
-----------                       ---          --------------------------------------------------
<S>                               <C>          <C>
Frederick J. Rowan, II.........   57           President, Chief Executive Officer and Chairman of
                                               the Board of Directors.

Joseph Pacifico................   47           Executive Vice President-Marketing.
 
Charles E. Whetzel, Jr.........   46           Executive Vice President-Manufacturing & Operations.
 
David A. Brown.................   39           Senior Vice President-Business Planning &
                                               Administration and Director.
 
Jay A. Berman..................   46           Senior Vice President, Chief Financial Officer,
                                               Treasurer and Director.
 
Christopher J. O'Brien.........   38           Director.
 
Charles J. Philippin...........   46           Director.
 
Christopher J. Stadler.........   32           Director.

</TABLE>
 

    FREDERICK J. ROWAN, II joined the Company in 1992 as President and Chief 
Executive Officer and became Chairman of the Board of Directors of the 
Company in October 1996. Prior to joining the Company, Mr. Rowan was Group 
Vice President of VF Corporation, a multi-division apparel company and, among 
other positions, served as President and Chief Executive Officer of both the 
H.D. Lee Company and Bassett-Walker, Inc., divisions of VF Corporation. Mr. 
Rowan, who has been involved in the textile and apparel industries for 32 
years, has been in senior executive positions for nearly 20 of those years. 
Mr. Rowan began his career at the DuPont Corporation and later joined Aileen 
Inc., a manufacturer of women's apparel, where he subsequently became 
President and Chief Operating Officer.
 
    JOSEPH PACIFICO joined the Company in 1992 as Executive Vice 
President-Sales and Marketing. Mr. Pacifico began his career with VF 
Corporation in 1981 as a sales representative for the H.D. Lee Company and 
was promoted ultimately to the position of Vice President of Marketing in 
1989, a position he held until 1992.
 
    CHARLES E. WHETZEL, JR. joined the Company in 1992 as Executive Vice 
President-Operations. Mr. Whetzel began his career at Aileen Inc. in 1971 in 
the Quality function and was later promoted to Vice President of Apparel. 
Following Aileen Inc., Mr. Whetzel held positions of increasing 
responsibility with Mast Industries, Health-Tex and Wellmade Industries, 
respectively. In 1988, Mr. Whetzel joined Bassett-Walker, Inc. and was later 
promoted to Vice President of Manufacturing for the H.D. Lee Company.
 
    DAVID A. BROWN joined the Company in 1992 as Senior Vice 
President-Business Planning and Administration and became a director of the 
Company in October 1996. Prior to 1992, Mr. Brown held various positions at 
VF Corporation including Vice President-Human Resources for both the H.D. Lee 
Company and Bassett-Walker, Inc. Mr. Brown also held personnel-focused 
positions with Blue Bell, Inc. and Milliken & Company earlier in his career.
 
    JAY A. BERMAN joined the Company in 1988 as Treasurer and was named Chief 
Financial Officer and Senior Vice President in 1989. Mr. Berman became a 
director of the Company in October 1996. Prior to joining the Company, Mr. 
Berman was employed by Warnaco, Inc., where he served in various capacities 
from 1981 to 1988 including Treasurer and head of Financial Planning. Prior 
to 1981, Mr. Berman was employed by Coopers & Lybrand and the Connecticut 
Savings Bank.
 
    CHRISTOPHER J. O'BRIEN became a director of the Company in October 1996. 
He has been an executive of Investcorp, its predecessor or one or more of its 
wholly owned subsidiaries since December 

                                       48
<PAGE>


1993. Prior to joining Investcorp, Mr. O'Brien was a Managing Director of 
Mancuso & Company for four years. Mr. O'Brien is a director of Simmons 
Holdings, Inc., Star Markets Holdings, Inc., Prime Service, Inc. and CSK 
Auto, Inc.
 
    CHARLES J. PHILIPPIN became a director of the Company in October 1996. He 
has been an executive of Investcorp, its predecessor or one or more of its 
wholly owned subsidiaries since July 1994. Prior to joining Investcorp, Mr. 
Philippin was a partner of Coopers & Lybrand L.L.P. Mr. Philippin is a 
director of Saks Holdings, Inc., Prime Service, Inc. and CSK Auto, Inc.
 
    CHRISTOPHER J. STADLER became a director of the Company in October 1996. 
He has been an executive of Investcorp, its predecessor or one or more of its 
wholly owned subsidiaries since April 1996. Prior to joining Investcorp, Mr. 
Stadler was a Director with CS First Boston Corporation. Mr. Stadler is a 
director of Prime Service, Inc. and CSK Auto, Inc.
 
DIRECTOR COMPENSATION
 
    The Company pays no additional remuneration to its employees or to 
executives of Investcorp for serving as driectors. There are no family 
relationships among any of the directors or executive officers.
 
ITEM 11. EXECUTIVE COMPENSATION
 
    The following table sets forth all cahs compensation earned in fiscal 
1996 by the Company's Chief Executive Officer and each of the other four most 
highly compensated executive officers whose remuneration exceeded $100,000 
(collectively, the "Named Executive Officers"). The current compensation 
arrangements for each of these officers are described in "Employment 
Arrangements" below.
 
SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>                                                                                     OTHER ANNUAL
   NAME AND PRINCIPAL                                               SALARY    BONUS (A)      COMPENSATION(b)
       POSITION                                                       ($)        ($)               ($)
--------------------------                                         ---------  ----------     ----------------
<S>                                                                <C>        <C>            <C>
 
Frederick J. Rowan, II........................................      475,200    469,300          6,007,875
 
President, Chief Executive Officer and Chairman of the Board
  of Directors Joseph Pacifico................................      315,000    202,100          1,418,172
 
Executive Vice President-Marketing Charles E. Whetzel, Jr.....      208,000    169,000          1,421,962
 
Executive Vice President-Manufacturing & Operations David A.
  Brown.......................................................      197,000    126,400          1,416,526
 
Senior Vice President-Business Planning & Administration and
  Director
 
Jay A. Berman.................................................      177,000     67,300          1,420,446
 
Senior Vice President, Chief Financial Officer, Treasurer and
  Director
</TABLE>
 
------------------------
 
(a) Earned in 1996 but paid in 1997.
 
(b) Includes Management Equity Participation Plan and Long-Term Incentive Plan
    distributions, Holdings' Class C Stock compensation, supplemental 
    retirement plan benefits, automobile allowances, insurance premiums, and 
    medical cost reimbursement.
 
                                       49
<PAGE>

EMPLOYMENT ARRANGEMENTS
 
    Frederick J. Rowan, II, President and Chief Executive Officer, and the 
Company entered into a three-year employment agreement as of October 30, 
1996, which automatically extends annually for successive one-year terms, 
subject to termination upon notice. Pursuant to such agreement, Mr. Rowan is 
entitled to receive (i) a base salary, currently $475,200 per year (subject 
to annual cost of living adjustments and any increases approved by the Board 
of Directors), (ii) annual cash bonuses based upon a bonus plan to be 
determined each year by the Board of Directors in conjunction with the 
Company's achievement of targeted performance levels as defined in the plan 
and (iii) certain specified fringe benefits, including a retirement trust. If 
Mr. Rowan's employment with the Company is terminated without cause (as 
defined), he will continue to receive his then current salary for the 
remainder of the employment term and the Company will maintain certain fringe 
benefits on his behalf until either the expiration of the remainder of the 
employment term or his 65th birthday. Mr. Rowan has agreed not to compete 
with the Company for the two-year period following the end of his employment 
with the Company, unless he is terminated without cause, in which case the 
duration of such period is one year.
 
    Joseph Pacifico, Charles E. Whetzel, Jr., David A. Brown and Jay A. 
Berman (each, an "Executive") entered into two-year employment agreements 
with the Company as of October 30, 1996, which automatically extend annually 
for successive one-year terms, subject to termination upon notice. Pursuant 
to such agreements, Messrs. Pacifico, Whetzel, Brown and Berman are entitled 
to receive (i) a base salary, currently $315,000, $208,000, $197,000 and 
$177,000, respectively (subject to annual cost of living adjustments and any 
increases approved by the Board of Directors), (ii) annual cash bonuses based 
upon a bonus plan to be determined each year by the Board of Directors and 
(iii) certain specified fringe benefits. If an Executive's employment with 
the Company is terminated without cause (as defined), he will continue to 
receive his then current salary for the remainder of the employment term and 
the Company will maintain certain fringe benefits on his behalf until either 
the expiration of the remainder of the employment term or his 65th birthday. 
Each Executive has agreed not to compete with the Company for a one-year 
period following the end of his employment with the Company, unless he is 
terminated without cause, in which case the duration of such period is six 
months. All executive officers are eligible to participate in the Company's 
Annual Cash Bonus Plan, payments under which are based upon the Company's 
achievement of targeted performance levels as determined by the Board of 
Directors.
 
MANAGEMENT STOCK INCENTIVE PLAN
 
    Upon the consummation of the Acquisition, Holdings adopted a Management 
Stock Incentive Plan (the "Plan"), in order to provide incentives to 
employees and directors of Holdings and the Company by granting them awards 
tied to the Class C Stock of Holdings. The Plan is administered by a 
committee of the Board of Directors of Holdings (the "Compensation 
Committee"), which has broad authority to administer and interpret the Plan. 
Awards to employees are not restricted to any specified form or structure and 
may include, without limitation, restricted stock, stock options, deferred 
stock or stock appreciation rights (collectively, "Awards"). Options granted 
under the Plan may be options intended to qualify as incentive stock options 
under Section 422 of the Code or options not intended to so qualify. An Award 
granted under the Plan to an employee may include a provision terminating the 
Award upon termination of employment under certain circumstances or 
accelerating the receipt of benefits upon the occurrence of specified events, 
including, at the discretion of the Compensation Committee, any change of 
control of the Company.
 
    In connection with the Acquisition, Holdings granted options to purchase 
up to 75,268 shares of its Class C Stock to certain members of the Company's 
senior management, other officers and employees of the Company. The exercise 
price of each such option is $60.00 per share, which is the same price per 
share paid by existing holders of Class C Stock of Holdings to acquire such 
Class C Stock. The exercise price of each option granted in the future will 
be equal to the fair market value of the Company's common

                                      50
<PAGE>



stock at the time of the grant. Each option will be subject to certain 
vesting provisions. To the extent not earlier vested or terminated, all 
options will vest on the tenth anniversary of the date of grant and will 
expire 30 days thereafter if not exercised.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    All of the Company's issued and outstanding capital stock is owned by 
Holdings. Class D Stock, par value $.01 per share, is the only class of 
Holdings' stock that currently possesses voting rights. At January 31, 1997, 
there were 5,000 shares of Holdings' Class D Stock issued and outstanding. 
Members of the Company's management own 143,490 shares of Class C Stock of 
Holdings, which stock has no voting rights except in certain limited 
circumstances. The following table sets forth the beneficial ownership of 
each class of issued and outstanding securities of Holdings, as of the date 
hereof, by each director of the Company, each of the executive officers of 
the Company, the directors and executive officers of the Company as a group 
and each person who beneficially owns more than 5% of the outstanding shares 
of any class of voting securities of Holdings.
 
    CLASS D VOTING STOCK:
 
                                              NUMBER OF   PERCENT OF
NAME                                          SHARES (A)    CLASS (A)
-------------------------------------------  -----------  -----------
INVESTCORP S.A.(b)(c)......................       5,000        100.0%
SIPCO Limited(d)...........................       5,000        100.0
CIP Limited(e)(f)..........................       4,600         92.0
Ballet Limited(e)(f).......................         460          9.2
Denary Limited(e)(f).......................         460          9.2
Gleam Limited(e)(f)........................         460          9.2
Highlands Limited(e)(f)....................         460          9.2
Noble Limited(e)(f)........................         460          9.2
Outrigger Limited(e)(f)....................         460          9.2
Quill Limited(e)(f)........................         460          9.2
Radial Limited(e)(f).......................         460          9.2
Shoreline Limited(e)(f)....................         460          9.2
Zinnia Limited(e)(f).......................         460          9.2
INVESTCORP Investment Equity Limited(c)....         400          8.0
 
------------------------
 
(a) As used in this table, beneficial ownership means the sole or shared power
    to vote, or to direct the voting of a security, or the sole or shared power
    to dispose, or direct the disposition of, a security.
 
(b) Investcorp does not directly own any stock in Holdings. The number of shares
    shown as owned by Investcorp includes all of the shares owned by INVESTCORP
    Investment Equity Limited (see (c) below). Investcorp owns no stock in
    Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble
    Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline
    Limited, Zinnia Limited, or in the beneficial owners of these entities (see
    (f) below). Investcorp may be deemed to share beneficial ownership of the
    shares of voting stock held by these entities because the entities have
    entered into revocable management services or similar agreements with an
    affiliate of Investcorp, pursuant to which each of such entities has granted
    such affiliate the authority to direct the voting and disposition of the
    Holdings voting stock owned by such entity for so long as such agreement is
    in effect. Investcorp is a Luxembourg corporation with its address at 37 rue
    Notre-Dame, Luxembourg.
 
(c) INVESTCORP Investment Equity Limited is a Cayman Islands corporation, and a
    wholly-owned subsidiary of Investcorp, with its address at P.O. Box 1111,
    West Wind Building, George Town, Grand Cayman, Cayman Islands.

(d) SIPCO Limited may be deemed to control Investcorp through its ownership of a
    majority of a company's stock that indirectly owns a majority of
    Investcorp's shares. SIPCO Limited's address is P.O. Box 1111, West Wind

                                      51
<PAGE>



    Building, George Town, Grand Cayman, Cayman Islands.
 
(e) CIP ("CIP") owns no stock in Holdings. CIP indirectly owns less than 0.1 %
    of the stock in each of Ballet Limited, Denary Limited, Gleam Limited,
    Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
    Limited, Shoreline Limited and Zinnia Limited (see (f) below). CIP may be
    deemed to share beneficial ownership of the shares of voting stock of
    Holdings held by such entities because CIP acts as a director of such
    entities and the ultimate beneficial shareholders of each of those entities
    have granted to CIP revocable proxies in companies that own those entities'
    stock. None of the ultimate beneficial owners of such entities beneficially
    owns individually more than 5% of Holdings' voting stock.
 
(f) Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited,
    Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
    Limited, Shoreline Limited and Zinnia Limited is a Cayman Islands
    corporation with its address at P.O. Box 2197, West Wind Building, George
    Town, Grand Cayman, Cayman Islands.
 








                                     52
<PAGE>


    CLASS C NON-VOTING STOCK:
 
                                                 NUMBER OF
NAME                                            SHARES (A)
----------------------------------------------  -----------
Frederick J. Rowan, II(b).....................    56,649
Joseph Pacifico(b)............................    15,051
Charles E. Whetzel, Jr.(b)....................    15,051
David A. Brown(b).............................    15,051
Jay A. Berman(c)..............................    15,051
All directors and executive officers 
  of the Company as a group (8 persons).......    116,854
 
------------------------
 
(a) As used in this table, beneficial ownership means the sole or shared power
    to vote, or to direct the voting of a security, or the sole or shared power
    to dispose, or direct the disposition of, a security.
 
(b) The address of each of Messrs. Rowan, Pacifico, Whetzel and Brown is c/o the
    Company, 1590 Adamson Parkway, Suite 400, Morrow, Georgia 30260.
 
(c) The address of Mr. Berman is c/o the Company, 1000 Bridgeport Avenue, P.O.
    Box 879, Shelton, Connecticut 06484.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    Holdings was formed to consummate the Acquisition on behalf of affiliates 
of Investcorp, management and certain other investors. Financing for the 
Acquisition was provided in part by $70.9 million of capital provided by 
affiliates of Investcorp and other investors. In addition, certain employees 
of the Company exchanged capital stock of the Company with an aggregate value 
of $9.1 million for non-voting stock of Holdings, representing approximately 
15% of the outstanding equity of Holdings.
 
    In connection with the issuance by Holdings of $20.0 million of senior 
subordinated debt, Invifin SA ("Invifin"), an affiliate of Investcorp, 
received a fee of $2.2 million. In connection with the Acquisition, the 
Company paid Investcorp International Inc. advisory fees aggregating $2.25 
million. Holdings also paid $1.5 million to Invifin in fees in connection 
with providing a standby commitment for up to $100.0 million to fund the 
Acquisition. In connection with the closing of the Acquisition, the Company 
entered into an agreement for management advisory and consulting services 
with International pursuant to which the Company agreed to pay International 
$1.35 million per annum for a five-year term. At the closing of the 
Acquisition, the Company paid International $4.05 million for the first three 
years of the term of the Management Agreement in accordance with its terms. 
Upon the Acquisition, the Company was required to pay an aggregate amount of 
approximately $11.3 million to certain members of management, including 
payments under the MEPP and LTIP.
 
    In October 1996, the Company made a $1.5 million loan to an officer. The 
loan has a term of five years, is secured by the officer's stock of Holdings 
and bears interest at 6.49%, compounded semi-annually. The loan is prepayable 
with the proceeds of any disposition by the officer of his stock in Holdings.


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<PAGE>


                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
     (a) Documents filed as part of this report:
 
         1. Financial Statements: included in Item 8.
 
            Report of Independent Accountants
 
            Consolidated Balance Sheet at December 28, 1996
 
            Consolidated Statement of Operations for the periods October 30,
              1996 through December 28, 1996 (Successor) and December 31, 
              1995 through October 29, 1996 (Predecessor)
 
            Consolidated Statement of Cash Flows for the periods October 30,
              1996 through December 28, 1996 (Successor) and  December 31, 
              1995 through October 29, 1996 (Predecessor)
 
            Consolidated Statement of Changes in Common Stockholders' Equity 
              for the periods October 30, 1996 through December 28, 1996 
              (Successor) and December 31, 1995 through October 29, 1996 
              (Predecessor).
 
            Notes to Consolidated Financial Statements
 
            Report of Independent Accountants
 
            Consolidated Balance Sheet at December 30, 1995
 
            Consolidated Statement of Income for the fiscal years ended 
              December 30, 1995 and December 31, 1994
 
            Consolidated Statement of Cash Flows for the fiscal years ended 
              December 30, 1995 and December 31, 1994
 
            Consolidated Statement of Changes in Stockholders' Equity for the 
              fiscal years ended December 30, 1995 and December 31, 1994
 
            Notes to Consolidated Financial Statements
 
         2. Financial Statement Schedules: None
 

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<PAGE>


    3. Exhibits:
 
EXHIBIT
NUMBER   DESCRIPTION OF EXHIBITS
-------  ---------------------------------------------------------------------
    2    Agreement of Merger dated September 18, 1996 between TWCC Acquisition 
         Corp. and the Company, incorporated herein by reference to Exhibit 2 
         to the Company's Registration Statement on Form S-4.
  3.1    Amended and Restated Articles of Organization of the Company, 
         incorporated herein by reference to Exhibit 3.1 to the Company's
         Registration Statement on Form S-4.
  3.2    Articles of Merger of the Company, incorporated herein by reference 
         to Exhibit 3.2 to the Company's Registration Statement on Form S-4.
  3.3    By-laws of the Company, incorporated herein by reference to Exhibit 
         3.3 to the Company's Registration Statementon Form S-4.
  3.4    Certificate of Designation relating to the Preferred Stock of the 
         Company dated October 30, 1996 (included in Exhibit 3.2).
  4.1    Indenture dated as of November 25, 1996 between the Company and State 
         Street Bank and Trust Company, as Trustee, incorporated herein by 
         reference to Exhibit 4.1 to the Company's Registration Statement
         on Form S-4.
  4.2    Exchange and Registration Rights Agreement dated November 25, 1996 
         between the Company and BT Securities Corporation, Bankers Trust 
         International plc, Chase Securities Inc. and Goldman, Sachs & Co.,
         incorporated herein by reference to Exhibit 4.2 to the Company's
         Registration Statement on Form S-4.
 10.1    Employment Agreement between the Company and Frederick J. Rowan, II, 
         incorporated herein by reference to Exhibit 10.1 to the Company's 
         Registration Statement on Form S-4.
 10.2    Employment Agreement between the Company and Joseph Pacifico, 
         incorporated herein by reference to Exhibit 10.2 to the Company's 
         Registration Statement on Form S-4.
 10.3    Employment Agreement between the Company and Charles E. Whetzel, Jr. 
         incorporated herein by reference to Exhibit 10.3 to the Company's 
         Registration Statement on Form S-4.
 10.4    Employment Agreement between the Company and David A. Brown 
         incorporated herein by reference to Exhibit 10.4 to the Company's 
         Registration Statement on Form S-4.
 10.5    Employment Agreement between the Company and Jay A. Berman incorporated
         herein by reference to Exhibit 10.5 to the Company's Registration 
         Statement on Form S-4.
 10.6    Credit Agreement dated October 30, 1996 among the Company, certain 
         lenders and The Chase Manhattan Bank, as administrative agent, 
         incorporated herein by reference to Exhibit 10.6 to the Company's 
         Registration Statement on Form S-4.
 10.7    Purchase Agreement dated November 20, 1996 between the Company and BT
         Securities Corporation, Bankers Trust International plc, Chase 
         Securities Inc. and Goldman, Sachs & Co., incorporated herein by 
         reference to Exhibit 10.7 to the Company's Registration Statement on 
         Form S-4.
  *16    Letter of Price Waterhouse LLP. 
   21    Subsidiaries of the Company, incorporated herein by reference to 
         Exhibit 21 to the Company's Registration Statement on Form S-4.
 27.1    Financial Data Schedule, incorporated herein by reference to 
         Exhibit 27.1 to the Company's Registration Statement on Form S-4.

-------------------------- 
* Filed herewith
 
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<PAGE>


                                 SIGNATURES

   Pursuant to the requirements of section 13 or 15(a) of the Securities 
Exchange Act of 1934, the registrant has duly caused this report to be signed 
on its behalf by the undersigned, thereunto duly authorized, in Morrow, 
Georgia on March 28, 1997.

                                  THE WILLIAM CARTER COMPANY




                                   By:    /s/ Frederick J. Rowan II
                                      -------------------------------
                                              Frederick J. Rowan II
                                       Chairman of the Board, President and
                                             Chief Executive Officer
Date:  March 28, 1997


    Pursuant to the requirements of the Securities Exchange Act of 1934, this 
Report has been signed below by the following persons on behalf of the 
Registrant and in the capacities indicated.


            Name                                 Title
            ----                                 -----
 /s/ Frederick J. Rowan II         Chairman of the Board of Directors,
 ------------------------------       President, Chief Executive Officer 
     Frederick J. Rowan II            and Director (Principal Executive Officer)


 /s/ David A. Brown                Senior Vice President--Business
------------------------------        Planning & Administration and
     David A. Brown                   Director


 /s/ Jay A. Berman                 Senior Vice President, Chief
 ------------------------------       Financial Officer and Director
     Jay A. Berman                    (Principal Accounting Officer)

 /s/ Christopher J. O'Brien
-----------------------------      Director
     Christopher J. O'Brien


/s/ Charles J. Philippin
------------------------------      Director
    Charles J. Philippin


/s/ Christopher J. Stadler
------------------------------      Director
    Christopher J. Stadler


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