<PAGE>
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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                            ------------------------

                                   FORM 10-K

<TABLE>
<C>        <S>
   /X/     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 30,
           2000
</TABLE>

<TABLE>
<C>        <S>
   / /     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
           ACT
</TABLE>

                            COMMISSION FILE NUMBER:
                                   333-22155

                            ------------------------

                           THE WILLIAM CARTER COMPANY

             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                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)
</TABLE>

Securities registered pursuant to Section 12 (b) of the Act:  None

Securities registered pursuant to Section 12 (g) of the Act:  None

    Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/    No / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

Aggregate market value of voting and non-voting common equity held by
non-affiliates:  None

Documents incorporated by reference:  None

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<PAGE>
                                     PART I

ITEM 1. BUSINESS

GENERAL

    The William Carter Company (the "Company" or "Carter's") is the largest
branded marketer and manufacturer of baby and toddler apparel and a leading
marketer and manufacturer of young children's apparel. Over the Company's
136 years of operation, Carter's has become one of the most highly recognized
brand names in the children's apparel industry. Carter's sells its products
under the brand names of CARTER'S and CARTER'S CLASSICS to 484 department,
specialty and discount store accounts, with an estimated 7,997 store fronts, and
through its 147 retail outlet stores. In the fourth quarter of 2000, Carter's
entered the discount channel by launching its TYKES and BABY TYKES brands within
the Target stores division of Target Corporation ("Target").

    Carter's generates a majority of its sales in the baby and toddler apparel
market which was approximately an $8.0 billion market in 2000. Management
believes that the baby and toddler market is insulated from changes in fashion
trends and less sensitive to general economic conditions and offers strong
prospects for continued growth. The growth in this market is being driven by a
number of factors, including: (i) a strong and growing birth market; (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
increase in the percentage of births to first time mothers.

    On October 30, 1996, 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"). 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; 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"). In November 1996, the Company offered and sold in
a private placement $100.0 million of Subordinated Notes (the "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 substantially 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

    Carter's designs, manufactures, sources and markets a broad array of baby,
toddler and young children's apparel. The Company also licenses its brand names
to other companies to create a complete collection of coordinating lifestyle
products including bedding, strollers, underwear, shoes, room decor, toys and
more.

    The Company's brand positioning is based on Celebrating Imagination which is
expressed through creative artwork in prints, colors and embroideries on
Carter's products. This positioning supports the

                                       2
<PAGE>
Company's strategy of creating quality core products that are differentiated
through imaginative and creative artistic application. Celebrating Imagination
continues to provide growth opportunities for the brand and is widely embraced
by both retailers and consumers.

BABY AND TODDLER

    In 2000, total industry sales of baby and toddler apparel (newborn through
size 5T) were approximately $8.0 billion (industry sales, reported by The NPD
Group, Inc., are stated in retail sales dollars and therefore are not comparable
to the Company's sales which are reported in wholesale shipment dollars and
retail outlet store sales). Department and chain stores, which represent
Carter's primary distribution, account for approximately half this market.
Carter's is currently the leading supplier of branded baby and toddler apparel
in the United States with a 12% market share in its primary distribution
channels, more than twice that of its nearest branded competitor. In 2000, total
industry discount channel sales of baby and toddler apparel were approximately
$3.1 billion, approximately 39% of the total market.

    LAYETTE.  Layette includes a complete range of products primarily made of
cotton for newborns, including bodysuits, undershirts, towels, washcloths,
receiving blankets, layette gowns, bibs, caps and booties. In fiscal 2000,
Carter's generated $179.0 million in sales of these products. Carter's is the
leading supplier of layette products within its distribution channels.
Management attributes Carter's leading market position to its distinctive print
designs, unique embroideries and the reputation for quality Carter's has
developed over its 136 year history. In 2000, the Company continued to introduce
new layette programs targeted toward three consumer groups: gift-givers,
experienced mothers and first-time mothers. Just One Year ("JOY"), Limited
Editions and Carter's Classics are complete nursery programs designed for the
first-time mother and gift-givers. Baby Basics, the core component of Carter's
layette business, provides the experienced mother with the essentials in
value-focused multi-packs. The Company's primary competitors in the layette
market are private label manufacturers.

    SLEEPWEAR.  Baby and toddler sleepwear includes pajamas, long underwear and
one-piece footed sleepers. In fiscal 2000, Carter's generated $103.5 million in
sales of these products. Carter's is the leading supplier of baby sleepwear
products within its distribution channels. As in layette, management attempts to
differentiate its sleepwear products from its competition by offering creative
artwork in consumer-tested prints and embroideries with an emotional appeal. In
addition, management believes Carter's baby and toddler sleepwear product line
features more functional, higher quality products than those of its competitors.
The 2000 introduction of flame retardant cotton sleepwear strengthened Carter's
leading position through product innovation. The Company's primary competitors
in the baby and toddler sleepwear market are private label manufacturers and
licensed character products.

    PLAYWEAR.  Baby and toddler playwear includes knit and woven cotton apparel
for everyday use. In fiscal 2000, Carter's generated $86.7 million in sales of
these products. The Company continues to focus on strengthening its playwear
product offerings by introducing original print designs and innovative artistic
applications to drive sales growth and increase market share. The Company's
Celebrating Imagination brand theme has continued to create a strong competitive
differentiation for the brand in this marketplace. Management believes that this
focus, in addition to Carter's high brand name awareness, strong wholesale
customer relationships and expanded global sourcing capabilities will propel the
Company's sales and market share growth in this category. The baby and toddler
playwear market is highly fragmented, with no one branded competitor having more
than a 7% share of the market.

    OTHER PRODUCTS.  Other baby and toddler products include bedding, outerwear,
shoes, socks, diaper bags, gift sets, toys, room decor and hair accessories,
including products for which the Company licenses the CARTER'S, CARTER'S
CLASSICS, TYKES and BABY TYKES name. In fiscal 2000, Carter's generated
$46.5 million in sales of these products.

                                       3
<PAGE>
TYKES AND BABY TYKES

    Carter's launched the TYKES and BABY TYKES brands for baby and toddler at
Target in the fourth quarter of 2000. This comprehensive lifestyle brand
includes layette, sleepwear, baby and playwear along with a range of licensed
products. Such licensed products include hosiery, bedding, toys and room decor
products. The January 2001 introduction was launched with a nationwide floor set
that management believes will establish the TYKES and BABY TYKES brands through
a substantial presentation at Target stores along with a comprehensive in store
sign and fixture program. This program was shipped into Target stores nationwide
and represents Carter's initial entry into the discount channel of distribution.

YOUNG CHILDREN'S

    In 2000, total industry sales of young children's apparel (girls' sizes 4-6x
and boys' sizes 4-7) were approximately $5.7 billion. Department and chain
stores, which represent Carter's primary distribution, account for approximately
half of this market. The Company is the largest branded supplier of young
children's sleepwear products and also has a growing share of the branded young
children's playwear market.

    SLEEPWEAR.  Young children's sleepwear product offerings include basic
two-piece pajamas, long underwear and polyester blanket-fleece one-piece
sleepers. In fiscal 2000, Carter's generated $28.6 million in sales of these
products. As with baby and toddler sleepwear, Carter's attempts to differentiate
its young children's sleepwear products from those of its competitors by
offering creative artwork through consumer-tested prints and embroideries with
an emotional appeal. Carter's primary competitors in the young children's
sleepwear market are private label manufacturers and licensed character
products.

    PLAYWEAR.  Young children's playwear product offerings include knit and
woven cotton apparel for everyday use. In fiscal 2000, Carter's generated
$23.1 million in sales of these products. Carter's strategy is to leverage its
high brand awareness and leading market shares in layette and sleepwear in
combination with its creative designs to increase its sales of young children's
playwear. The young children's playwear market is highly fragmented among
private label, licensed characters and branded competitors.

LICENSING

    The Company licenses the CARTER'S, CARTER'S CLASSICS, TYKES and BABY TYKES
names to other companies for use on baby, toddler and young children's products
including bedding, outerwear, shoes, socks, room decor, toys, stationery,
strollers and hair accessories and related products. In 1998, the Company
entered into a license agreement for the rights to John Lennon's Real Love
artwork collection for use on children's apparel, accessories and related
products. In 1999, Carter's entered into an artwork agreement with Emu Namae, a
Japanese artist, to use his art on children's apparel, accessories and licensed
products. These artwork agreements are part of Carter's Limited Editions program
which utilizes partnerships with outside artists and concepts to further
differentiate the Carter's brand. In fiscal 2000, Carter's earned $5.8 million
in royalty income from the sale of licensed products.

PRODUCT DESIGN AND DEVELOPMENT

    The Company's product design and development organization is comprised of
teams that focus on each of the Company's primary product markets. Each team has
its own business and design staff to develop new business opportunities
specifically for its respective market. A separate art team that creates
exclusive prints, embroideries and other artistic applications for each product
team further strengthens the creative process. Management believes that this
organizational structure provides the

                                       4
<PAGE>
Company greater flexibility and allows it to introduce products more quickly and
with a greater success rate.

    The Company's design staff continuously strives toward product innovation
and distinctive artistic applications. Extensive consumer preference testing
drives the product offerings and defines the look for the brand, while a few
showpieces are developed each season to add variety and interest. Generally,
graphics, prints, colors and embroideries are used to provide originality and
depth with a sophisticated graphic computer network which enhances artistic
talent.

    Due to the importance of creative art, the Company devotes particular effort
to consumer preference testing for colors, prints, artwork and silhouettes. Each
year, over 1,000 concepts are consumer-tested in focus groups in the Company's
outlet stores as well as in geographically-diverse malls and baby fairs.

    After consumer preference testing of a fabric or product occurs and internal
review committees approve selections, retailers are often shown a color drawing
in "board form" to provide market feedback. Finally, product development groups
from the Company's merchandising team coordinate plans with the global sourcing
managers to ensure cost-effective execution and quality of the entire line.

DISTRIBUTION AND SALES

    The Company sells its products to wholesale accounts and through the
Company's retail outlet stores. In fiscal 2000, sales through the wholesale
channel, including discount channel revenues, accounted for 54% of total sales,
while the retail outlet channel accounted for 46% of total sales. No one
wholesale customer accounts for more than 10% of consolidated net sales.

WHOLESALE OPERATIONS

    The Company sells its products in the United States through a network of
approximately 30 sales professionals. Sales professionals work with each
department or specialty store account in his/her jurisdiction to establish
annual plans for "basics" (primarily layette and certain baby apparel) within
the CARTER'S and CARTER'S CLASSICS 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". Automatic reorder allows the Company to
plan its sourcing requirements and benefits both the Company and its wholesale
customers by maximizing customers' in-stock positions, thereby improving sales
and profitability. The automatic reorder process has also been established with
Target, which began receiving TYKES and BABY TYKES products in the fourth
quarter of 2000. Carter's sleepwear and playwear products are planned and
ordered seasonally as new products are introduced.

RETAIL OPERATIONS

    The Company currently operates 147 retail outlet stores in 39 states
featuring Carter's quality merchandise, complemented by select brand
accessories, apparel and licensed products. The stores, which average 5,100
square feet per location, offer a broad assortment of baby, toddler and young
children's apparel including layette, sleepwear, underwear, playwear, swimwear,
outerwear and related accessories.

    Business segment financial information for the wholesale and retail segments
is contained in ITEM 8, "Financial Statements and Supplementary Data",
Note 16 --"Segment Information" to the Consolidated Financial Statements, and is
incorporated herein by reference.

MARKETING

    Management's strategy has been to promote Carter's brand image as the leader
in baby apparel and to consistently provide quality products at a value to
consumers. To this end, management employs

                                       5
<PAGE>
a comprehensive four-step marketing strategy which incorporates identifying core
products through extensive consumer preference testing; brand and product
presentation at the consumer point-of-purchase; mass marketing the brand name;
and providing consistent, premium service, including delivering and replenishing
products on time to fulfill customer and consumer needs.

    Management believes that the Company has strengthened its brand image with
the consumer through its Celebrating Imagination brand theme that attempts to
capture the essence of childhood and a child's imagination as expressed through
creative artwork in prints and embroideries. The Company also attempts to
differentiate its products through innovative product designs, lifestyle
positioning, advertising with wholesale customers, store-in-store shops and
fixturing. Management believes that frequent meetings between Carter's
executives and senior representatives from its key wholesale customers help
maintain account relationships and further strengthen the brand's image in the
marketplace.

PRODUCT SOURCING

    The Company continues to expand its global supply chain capabilities.
Consistent with this strategy, the Company closed its textile operations in
Barnesville, Georgia in December 1999 and fabric previously produced by the
Company is currently purchased from third-party manufacturers. The Company
prints, cuts, sews, finishes and embroiders a majority of the products it sells.
In the United States, the Company currently operates one print facility, one
cutting facility, one sewing facility, one embroidery facility and three
distribution centers. The Company operates two sewing facilities in Costa Rica,
one sewing facility in the Dominican Republic and two sewing facilities in
Mexico. The Company also sources its products through contractual arrangements
throughout the world. Management believes that the Company's sourcing
arrangements are sufficient to meet current and planned operating requirements.

    Management believes significant additional opportunities exist to further
optimize its supply chain. Such opportunities include the reduction of product
costs, cycle times and inventories. The Company will attempt to realize these
reductions through investments in advanced information systems, the expansion of
global sourcing relationships, reductions in SKUs and product complexity and the
focus on core product offerings.

DEMOGRAPHIC TRENDS

    Demographic and psychographic trends support a strong and growing baby and
toddler market and help insulate the Company from seasonal and fashion
fluctuations. Highlights of these trends include:

    - a strong birth market;

    - more money being spent on babies than ever before;

    - multiple births at record levels;

    - 40% of all births are first births; and

    - the number of grandparents as a growing and more affluent market.

    In 1998 (the most current data available), 3.9 million births were reported
and demographers project a progressive increase in births over the next
20 years that will ultimately surpass the original baby boom. Today's mother is
more likely to be working outside the home, thus is more affluent and spending
more on her children's apparel. New families are being formed and higher levels
of spending are required for the child's first wardrobe.

                                       6
<PAGE>
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 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 several
small, local manufacturers and retailers. Certain competitors of the Company
have greater financial resources, larger customer bases and are less financially
leveraged.

ENVIRONMENTAL MATTERS

    The Company is subject to various federal, state and local laws that govern
activities or operations that may have adverse environmental effects.
Noncompliance with these laws and regulations can result in significant
liabilities, penalties and costs. From time to time, operations of the Company
have resulted or may result in noncompliance with or liability pursuant to
environmental laws. The Company is in the final stages of resolving an
environmental matter associated with waste deposited at or near a landfill in
Lamar County, Georgia in the 1970's. In 1999, the Company established a reserve
to provide for its share of the total estimated costs required to resolve this
matter. These costs are estimated to be less than $1.0 million. However, there
can be no assurance that this estimate will prove accurate. Generally,
compliance with environmental laws has not had a material impact on the
Company's operations, but there can be no assurance that future compliance with
such laws will not have a material adverse effect on the Company or its
operations.

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-, Tykes-Registered Trademark- and Baby Tykes-TM-
as well as patents and copyrights, most of which are registered in the United
States and in 60 foreign countries. The Company licenses the CARTER'S, CARTER'S
CLASSICS, TYKES and BABY TYKES names 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, bedding, plush toys and shoes. The Company
licenses, under an agreement which expires at the end of 2002, the rights to
John Lennon's Real Love artwork collection for use on children's apparel,
accessories and related products. The Company's artwork agreement with Emu Namae
also expires in 2002. The Company has the right to exercise renewal options.

EMPLOYEES

    As of December 30, 2000, the Company had approximately 6,948 employees,
2,761 of which were employed on a full-time basis in the Company's domestic
operations, 997 of which were employed on a part-time basis in the Company's
domestic operations and 3,190 of which were employed on a full-time basis in the
Company's offshore operations. None of the Company's employees are unionized.
The Company has had no labor-related work stoppages and believes that its labor
relations are good.

                                       7
<PAGE>
ITEM 2. PROPERTIES

    The Company operates 147 leased retail outlet stores located primarily in
outlet centers across the United States, having an average size of 5,100 square
feet. Typically, the leases have an average term of approximately five years
with additional five-year renewal options. Domestically, the Company owns three
distribution facilities, two in Georgia and one in Pennsylvania. The Company
also owns three manufacturing facilities as well as an office building in
Georgia, has a ground lease on one additional manufacturing facility in Texas
and leases office space in four buildings--two in Georgia, one in Connecticut
and one in New York. In February 2001, the Company entered into a ten-year lease
agreement for a new corporate office in Atlanta, Georgia. Internationally, the
Company leases two sewing facilities in Costa Rica, one in the Dominican
Republic and two in Mexico.

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 resolved adversely to the Company, would have a material adverse
effect on the financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    Not applicable.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    All of the Company's issued and outstanding capital stock is owned by
Holdings.

    The Company paid dividends on its common stock to Holdings in the amount of
approximately $70,000 for the fiscal year ended December 30, 2000. Proceeds from
the dividends were used by Holdings to repurchase shares of Holdings' stock
owned by a former employee of the Company. In fiscal 2000, Holdings made $60,000
in capital contributions to the Company in connection with the issuance of
shares of Holdings' stock to an employee of the Company. The Company intends to
retain all of its future earnings to finance its operations and does not
anticipate paying cash dividends to common equity stockholders 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. In
addition, certain agreements to which the Company is a party restrict the
Company's ability to pay dividends on common equity (see Note 5 to the
Consolidated Financial Statements).

ITEM 6. SELECTED FINANCIAL DATA

    The following table sets forth selected financial and other data of the
Company as of and for the five fiscal years ended December 30, 2000. As a result
of certain adjustments made in connection with the Acquisition, the results of
operations for the fiscal years ended December 30, 2000 ("fiscal year 2000"),
January 1, 2000 ("fiscal year 1999"), January 2, 1999 ("fiscal year 1998"),
January 3, 1998 ("fiscal year 1997") and the period October 30, 1996 through
December 28, 1996 (together, the "Successor" periods) are not comparable to
prior periods (the "Predecessor" periods). The selected financial data for the
five fiscal years ended December 30, 2000 were derived from the Company's
Audited Consolidated Financial Statements.

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

<TABLE>
<CAPTION>
                                                                                  (DOLLARS IN THOUSANDS)
                                                                              SUCCESSOR (a)                         PREDECESSOR
                                                         -------------------------------------------------------  ---------------
                                                                      FISCAL YEARS                OCT. 30, 1996    DEC. 31, 1995
                                                         --------------------------------------      THROUGH          THROUGH
                                                           2000      1999      1998      1997     DEC. 28, 1996    OCT. 29, 1996
                                                         --------  --------  --------  --------  ---------------  ---------------
<S>                                                      <C>       <C>       <C>       <C>       <C>              <C>
OPERATING DATA:
Wholesale sales........................................  $256,094  $231,284  $236,486  $219,535     $  28,506        $160,485
Retail sales...........................................   215,280   183,312   171,696   143,419        22,990         106,254
                                                         --------  --------  --------  --------     ---------        --------
Net sales..............................................   471,374   414,596   408,182   362,954        51,496         266,739
Cost of goods sold.....................................   293,340   271,844   256,482   227,332        31,631         169,167
                                                         --------  --------  --------  --------     ---------        --------
Gross profit...........................................   178,034   142,752   151,700   135,622        19,865          97,572
Selling, general and administrative....................   137,513   120,773   124,278   112,531        16,749          80,156
Nonrecurring charges (b)(f)............................        --     7,124        --        --            --           8,834
                                                         --------  --------  --------  --------     ---------        --------
Operating income.......................................    40,521    14,855    27,422    23,091         3,116           8,582
Interest income........................................      (303)       --        --        --            --              --
Interest expense.......................................    16,294    17,748    18,525    17,571         2,631           7,075
                                                         --------  --------  --------  --------     ---------        --------
Income (loss) before income taxes, extraordinary item
  and cumulative effect of change in accounting
  principle............................................    24,530    (2,893)    8,897     5,520           485           1,507
Provision for (benefit from) income taxes..............     9,731      (869)    3,616     2,429           212           1,885
                                                         --------  --------  --------  --------     ---------        --------
Income (loss) before extraordinary item and cumulative
  effect of change in accounting principle.............    14,799    (2,024)    5,281     3,091           273            (378)
Extraordinary item, net of tax (c).....................        --        --        --        --         2,351              --
Cumulative effect of change in accounting principle,
  net of income tax benefit of $217 (g)................       354        --        --        --            --              --
                                                         --------  --------  --------  --------     ---------        --------
Net income (loss)......................................  $ 14,445  $ (2,024) $  5,281  $  3,091     $  (2,078)       $   (378)
                                                         ========  ========  ========  ========     =========        ========
Net income (loss) available to common stockholder......  $ 11,792  $ (4,677) $  2,628  $    416     $  (2,512)       $ (1,510)
                                                         ========  ========  ========  ========     =========        ========
Pro forma net income (loss) assuming the accounting
  change is applied retroactively......................  $ 14,799  $ (1,608) $  5,119  $  3,063     $  (2,366)       $   (498)
                                                         ========  ========  ========  ========     =========        ========

BALANCE SHEET DATA (END OF PERIOD):
Working capital (d)....................................  $ 84,336  $ 81,508  $ 99,480  $ 87,482     $  70,792
Total assets...........................................   325,988   313,133   349,228   331,899       318,709
Total debt, including current maturities...............   141,400   142,300   167,600   157,100       145,000
Redeemable preferred stock (e).........................    19,116    18,902    18,682    18,462        18,234
Common stockholder's equity............................    65,397    53,615    58,739    56,721        57,488

CASH FLOW DATA:
Net cash provided by operating activities..............  $ 26,637  $ 38,891  $  9,497  $  4,089     $   7,095        $ 24,405
Net cash used in investing activities..................   (19,217)  (12,362)  (17,960)  (13,965)     (143,227)         (4,007)
Net cash (used in) provided by financing activities....    (7,138)  (27,100)    8,190    12,174       134,263         (19,433)

OTHER DATA:
EBITDA, as defined (f).................................  $ 58,041  $ 38,834  $ 43,021  $ 36,926     $   5,530        $ 25,628
Gross margin...........................................      37.8%     34.4%     37.2%     37.4%         38.6%           36.6%
Depreciation and amortization..........................  $ 17,520  $ 16,855  $ 15,599  $ 13,835     $   2,414        $  6,612
Capital expenditures...................................    17,179    12,726    17,991    14,013         3,749           4,007
</TABLE>

                     See Notes to Selected Financial Data.

                                       9
<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 fiscal years
ended December 30, 2000, January 1, 2000, January 2, 1999 and January 3, 1998
and the period from October 30, 1996 through December 28, 1996 are not
comparable to prior periods. The fiscal years ended December 30, 2000,
January 1, 2000, January 2, 1999 and January 3, 1998 and the period October 30,
1996 through December 28, 1996 reflect increased depreciation, amortization and
interest expenses.

    (b)  The nonrecurring charge for the fiscal year ended January 1, 2000
represents the $6.9 million writedown in the carrying value of the Company's
textile facility assets, for which the operations were closed in December 1999,
and a $0.2 million loss on property, plant and equipment related to the closures
of three domestic sewing facilities. 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, respectively, 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 and income tax expense (i.e.
operating income) excluding the following charges:

         (i) the $7.1 million nonrecurring charge in 1999 related to the closure
             of textile and sewing facilities, and, in fiscal 1996, the
             nonrecurring charge of $8.8 million related to the Acquisition;

        (ii) depreciation and amortization expense including prepaid management
             fee amortization of $1.125 million, $1.35 million and
             $1.35 million for the fiscal years ended January 1, 2000,
             January 2, 1999 and January 3, 1998, respectively, and
             $0.23 million for the period October 30, 1996 through December 28,
             1996 incurred in connection with the Acquisition; and

       (iii) 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 $1.0 million for the
             period December 31, 1995 through October 29, 1996; and
             (2) Management Equity Participation Plan expenses of $0.6 million
             for the period December 31, 1995 through October 29, 1996.

    The Company has reported 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. The EBITDA amounts presented herein may
not be comparable to other similarly titled measures presented by other
companies.

    (g)  In fiscal 2000, the Company recorded the cumulative effect of a change
in accounting principle in order to comply with guidance provided by the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements".

                                       10
<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 484 department,
specialty and discount store customers (54% of fiscal 2000 sales) and through
its 147 retail outlet stores (46% of fiscal 2000 sales).

    Consolidated net sales have increased from $318.2 million in 1996 to
$471.4 million in 2000. During this period, wholesale sales have increased from
$189.0 million to $256.1 million and retail sales have increased from
$129.2 million to $215.3 million. The increase in wholesale sales resulted
primarily from the success of product introductions and the strength of the
Carter's brand in the market place relative to branded and private label
competitors. The increase in retail sales resulted from new store openings and
comparable store sales increases (stores open more than 12 months).

RESULTS OF OPERATIONS

    The following table sets forth certain components of the Company's
Consolidated Statements of Operations data expressed as a percentage of net
sales:

<TABLE>
<CAPTION>
                                                                       FISCAL YEARS
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Statements of Operations:
Wholesale sales.............................................    54.3%      55.8%      57.9%
Retail sales................................................    45.7       44.2       42.1
                                                               -----      -----      -----
Net sales...................................................   100.0      100.0      100.0
Cost of goods sold..........................................    62.2       65.6       62.8
                                                               -----      -----      -----
Gross profit................................................    37.8       34.4       37.2
Selling, general and administrative expenses................    29.2       29.1       30.5
Nonrecurring charge.........................................      --        1.7         --
                                                               -----      -----      -----
Operating income............................................     8.6        3.6        6.7
Interest expense, net.......................................     3.4        4.3        4.5
                                                               -----      -----      -----
Income (loss) before income taxes and cumulative effect of
  change in accounting principle............................     5.2       (0.7)       2.2
Provision for (benefit from) income taxes...................     2.1       (0.2)       0.9
                                                               -----      -----      -----
Income (loss) before cumulative effect of change in
  accounting principle......................................     3.1%      (0.5)%      1.3%
                                                               =====      =====      =====
</TABLE>

                                       11
<PAGE>
FISCAL YEAR ENDED DECEMBER 30, 2000 COMPARED WITH FISCAL YEAR ENDED
  JANUARY 1, 2000

    NET SALES.  Net sales for fiscal 2000 increased 13.7% to $471.4 million from
$414.6 million in fiscal 1999. This increase includes a 10.7% increase in
wholesale sales and a 17.4% increase in retail sales. Revenues from each of the
Company's major product markets, which are baby, sleepwear and playwear,
increased $18.8 million (12.0%), $20.4 million (18.2%) and $8.6 million (8.7%),
respectively, from 1999 to 2000.

    The Company's total wholesale sales for fiscal 2000 increased to
$256.1 million from $231.3 million in fiscal 1999. Excluding off-price and Tykes
sales, wholesale sales increased $26.3 million (12.6%) to $235.2 million in 2000
from $208.9 million in 1999. The increase in wholesale sales reflects the growth
of baby and sleepwear product lines of $14.7 million (14.1%) and $17.0 million
(22.7%), respectively, as compared to fiscal 1999. The continued success of
these lines reflects the benefit from improvements made to the Company's
products through its new product sourcing strategy and the Company's focus on
product innovation through creative prints and embroideries. Included in 2000
wholesale sales are the sales of TYKES and BABY TYKES products sold to Target in
the fourth quarter of 2000 in an initial launch in Target stores nationwide.

    Wholesale sales in 2000 included a lower mix of off-price sales (merchandise
promoted at more than 25% off regular wholesale selling prices) to the secondary
market. Off-price sales as a percentage of consolidated sales in 2000 were 3.6%
compared to 5.4% in 1999. The decrease in off-price sales reflects the benefit
from improved product development and inventory management disciplines.

    Retail sales for fiscal 2000 increased to $215.3 million from
$183.3 million in fiscal 1999. Such increase was primarily attributed to the
strong performance of the playwear product line. Product performance was also
the driving force behind the Company's comparable retail store sales increase of
14.3% in 2000. In 2000, the Company opened seven stores and closed six stores.
There were 147 stores in operation at December 30, 2000 compared to 146 at
January 1, 2000.

    GROSS PROFIT.  Gross profit for fiscal 2000 increased 24.7% to
$178.0 million from $142.8 million in fiscal 1999. Gross profit as a percentage
of net sales in fiscal 2000 increased to 37.8% from 34.4% in fiscal 1999. The
improvement in gross profit is attributed to a higher mix of retail revenues, a
lower mix of off-price sales and the benefit from cost reduction achieved
through increased levels of global sourcing.

    In 1999, the Company curtailed production and ultimately closed its textile
facility, which produced substantially all of the Company's fabrics. Gross
profit in 1999 was negatively impacted by costs associated with this closure and
the closure of three sewing facilities in the United States. Fiscal 2000 was
impacted favorably as a result of the successful transition to sourcing 100% of
the Company's fabric requirements following the closure of the textile facility
and further movement of sewing production to the Company's offshore facilities
and third parties.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses for fiscal 2000 increased 13.9% to $137.5 million from
$120.8 million in fiscal 1999. Selling, general and administrative expenses as a
percentage of net sales were 29.2% in fiscal 2000 compared to 29.1% in fiscal
1999. The increase in selling, general and administrative expenses includes the
variable costs required to support higher revenue levels, investments in brand
marketing and retail partnerships and provisions for incentive compensation
partially offset by increased levels of royalty and licensing income.

    OPERATING INCOME.  Operating income for fiscal 2000 increased to
$40.5 million from $14.9 million in fiscal 1999. Operating income as a
percentage of net sales increased to 8.6% in fiscal

                                       12
<PAGE>
2000 from 3.6% in fiscal 1999. Such increase reflects the net effect of changes
in gross profit and selling, general and administrative expenses described
above.

    INTEREST EXPENSE, NET.  Interest expense for fiscal 2000 decreased to
$16.3 million from $17.7 million in fiscal 1999. This decrease reflects lower
interest expense on lower average borrowings under the Company's revolving
credit facility. Average daily revolver borrowings in 2000 decreased to
$5.0 million from $25.3 million in 1999. Lower average borrowings are primarily
due to lower average gross inventory levels resulting from improved inventory
management disciplines. In fiscal 2000, the Company earned approximately
$303,000 in interest income from overnight investments. At December 30, 2000,
outstanding debt aggregated $141.4 million, of which $41.4 million bore interest
at a variable rate, so that an increase of 1% in the applicable rate would
increase the Company's annual interest cost by $414,000. At December 30, 2000,
there were no borrowings under the Company's $65.0 million revolving credit
facility. The Company had outstanding letters of credit totaling $6.0 million as
of December 30, 2000.

    INCOME TAXES.  The Company's 2000 effective tax rate of 40% was more than
the prior year's effective tax rate of 30% due to the effect of permanent tax
differences, primarily goodwill amortization. In 1999, such permanent
differences reduced the tax benefit related to the pre-tax operating loss.

    NET INCOME (LOSS).  Primarily as a result of the factors described above,
the Company reported net income of $14.4 million in fiscal 2000 compared to a
net loss of $(2.0) million in fiscal 1999.

FISCAL YEAR ENDED JANUARY 1, 2000 COMPARED WITH FISCAL YEAR ENDED
  JANUARY 2, 1999

    NET SALES.  Net sales for fiscal 1999 increased 1.6% to $414.6 million from
$408.2 million in fiscal 1998. This increase includes a 2.2% decrease in
wholesale sales offset by a 6.8% increase in retail sales. Wholesale sales for
fiscal 1999 decreased to $231.3 million from $236.5 million in fiscal 1998.
Retail sales for fiscal 1999 increased to $183.3 million from $171.7 million in
fiscal 1998.

    The decrease in wholesale sales reflects:

    - lower 1999 sleepwear revenue compared to increases generated from the
      successful launch of the Dreamakers sleepwear product line in May 1998;

    - underperformance of the CARTER'S CLASSICS and playwear product lines; and

    - lower layette product revenues resulting from the expiration of the BABY
      DIOR license in December 1998.

    In this increasingly competitive marketplace, revenue gains have been
achieved through the frequent introduction of products which are distinctive in
fabric and creative application (i.e., embroidery and prints) and which provide
value to the consumer. The decline in 1999 revenue reflects the Company's
previous insufficient ability to source better products from lower cost
manufacturers. As discussed below, the Company made changes in its product
sourcing strategy.

    In late 1998, the Company began to develop the infrastructure necessary to
source products globally. The Company plans to achieve future growth in revenue
and profitability by sourcing products at lower costs from manufacturers
throughout the world. This strategy is designed to build on the Company's core
business strengths in layette and sleepwear product markets and will improve
product performance in the highly fragmented children's playwear market.

    Wholesale sales in 1999 included a higher mix of off-price sales
(merchandise promoted at more than 25% off regular wholesale selling prices) to
the secondary market. Off-price sales as a percentage

                                       13
<PAGE>
of consolidated sales in 1999 were 5.4% compared to 4.0% in 1998. The higher
level of off-price sales reflects management's efforts to reduce excess
inventory levels.

    The Company's retail comparable store sales increased 3.2% in 1999. In 1999,
the Company opened ten stores and closed eight stores. There were 146 stores in
operation at January 1, 2000 compared with 144 at January 2, 1999.

    GROSS PROFIT.  Gross profit for fiscal 1999 decreased 5.9% to
$142.8 million from $151.7 million in fiscal 1998. Gross profit as a percentage
of net sales in fiscal 1999 decreased to 34.4% from 37.2% in fiscal 1998. The
reduction in gross profit percentage reflects the higher mix of off-price sales
to the secondary market, costs incurred to close sewing facilities in Georgia
and Mississippi, the costs to phase-down and close the Company's textile
facility in Georgia and the curtailment of production to lower inventory levels.

    In 1999, the Company closed three sewing facilities in the United States.
Such closures and expansion of sewing capacity in Mexico, Costa Rica and the
Dominican Republic have enabled the Company to decrease costs in the most
labor-intensive component of its supply chain.

    In 1998, the Company expanded its ability to source its products from
manufacturers throughout the world. Such products are manufactured, labeled and
packaged to Carter's specifications. The Company's global sourcing strategy
provides the opportunity to source a broader range of products at lower costs
and eliminates the requirement for internal textile capacity. Lower levels of
throughput in the Company's textile facility in Barnesville, Georgia and related
unabsorbed manufacturing costs negatively impacted 1999 financial results.

    In recent years, the domestic textile knit industry experienced increasing
levels of overcapacity caused by consolidation and higher levels of global
sourcing. Overcapacity resulted in lower prices offered by the Company's fabric
suppliers, which in turn, reduced the cost advantages previously gained by
Carter's through vertical integration.

    As more fully described in Note 17 to the accompanying financial statements,
the Company began to phase-down production in its textile facility in the third
quarter of 1999. All textile processes, with the exception of printing, were
closed by the end of fiscal 1999. The Company has negotiated fabric-sourcing
arrangements with its suppliers which will meet current and future fabric
requirements. While there may be no near-term cost reduction by sourcing fabrics
externally, the Company expects to purchase lower cost fabrics from Mexico and
Central America within the next two to three years.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses for fiscal 1999 decreased 2.8% to $120.8 million from
$124.3 million in fiscal 1998. Selling, general and administrative expenses as a
percentage of net sales decreased to 29.1% in fiscal 1999 from 30.5% in fiscal
1998. The improvement in selling, general and administrative expenses as a
percentage of net sales is attributed to a reduction in discretionary spending,
including marketing expenditures and incentive compensation to mitigate the
impact of manufacturing plant closing costs and production curtailment.

    NONRECURRING CHARGE.  The nonrecurring charge of $7.1 million in fiscal 1999
represents the $6.9 million writedown in the carrying value of assets related to
the closure of the textile facility, and the $0.2 million loss on property,
plant and equipment related to closures of the three domestic sewing facilities.

    OPERATING INCOME.  Operating income for fiscal 1999 decreased to
$14.9 million from $27.4 million in fiscal 1998 as a result of the net effect of
lower margins earned on wholesale sales, the cost of exiting certain
manufacturing facilities and the reduction of selling, general and
administrative expenses. Operating income as a percentage of net sales decreased
to 3.6% in fiscal 1999 from 6.7% in fiscal 1998.

                                       14
<PAGE>
    INTEREST EXPENSE.  Interest expense for fiscal 1999 decreased to
$17.7 million from $18.5 million in fiscal 1998. This decrease reflects lower
interest expense on lower average borrowings under the Company's revolving
credit facility. At January 1, 2000, outstanding debt aggregated
$142.3 million, of which $42.3 million 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 $423,000. At January 1, 2000, there were no borrowings under
the Company's $65.0 million revolving credit facility. The Company had
outstanding letters of credit totaling $6.0 million as of January 1, 2000.

    INCOME TAXES.  The Company's 1999 effective tax rate of 30% was less than
the prior year's effective tax rate of 41% due to the effect of permanent tax
differences, primarily goodwill amortization, in relation to the change in
pre-tax income (loss).

    NET (LOSS) INCOME.  As a result of the factors described above, the Company
reported a net loss of $(2.0) million in fiscal 1999 compared to net income of
$5.3 million in fiscal 1998.

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 years 2000, 1999 and
1998 was $26.6 million, $38.9 million and $9.5 million, respectively.

    Net cash flow provided by operating activities in fiscal 2000 was
$26.6 million, a decrease of $12.3 million compared to fiscal year 1999. This
decrease is attributed to the investments required to support higher revenue
levels. Year-end inventory levels grew to $92.4 million at fiscal year end 2000
from $79.6 million at fiscal year end 1999. Average net inventory levels were
$92.1 million in fiscal 2000 compared to $103.1 million in fiscal 1999.

    The Company invested $17.2 million, $12.7 million and $18.0 million in
capital expenditures during fiscal years 2000, 1999 and 1998, respectively.
Although there are no material commitments for capital expenditures, the Company
plans capital expenditures of approximately $23.0 million in fiscal 2001.

    At December 30, 2000, the Company had approximately $141.4 million of
indebtedness outstanding, consisting of $100.0 million of Notes (due 2006),
$41.4 million in term loan borrowings under the Senior Credit Facility and no
borrowings outstanding under the $65.0 million revolving credit portion of the
Senior Credit Facility (exclusive of approximately $6.0 million of outstanding
letters of credit). At December 30, 2000, the Company had approximately
$59.0 million of financing available under the revolving credit portion of the
Senior Credit Facility.

    The term loan has a final scheduled maturity date of October 31, 2003 and is
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 million in fiscal year 2002 and $22.5 million in fiscal year
2003. The revolving credit portion of the Senior Credit Facility will mature on
October 31, 2001 and has no scheduled interim amortization. The Company is in
the process of negotiating the terms of the revolving credit portion of the
Senior Credit Facility to include an extension of the maturity date and to
increase the limitation for annual capital expenditures. 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.

                                       15
<PAGE>
    The Senior Credit Facility imposes certain covenants, requirements and
restrictions on actions by the Company and its subsidiaries that, among other
things, restrict the payment of dividends.

EFFECTS OF INFLATION

    The Company is affected by inflation primarily through the purchase of raw
materials, increased operating costs and expenses and higher interest rates. The
effects of inflation on the Company's operations have not been material in
recent years.

SEASONALITY

    The Company experiences seasonal fluctuations in its sales and
profitability, with generally lower sales and gross profit in the first and
second quarters of its fiscal year. The Company believes that seasonality of
sales and profitability is a factor that affects the baby and children's apparel
industry generally and is primarily due to retailers' emphasis on price
reductions in the first quarter and promotional retailers' and manufacturers'
emphasis on closeouts of the prior year's product lines.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    In the operation of its business, the Company has market risk exposures to
foreign sourcing, raw material prices and interest rates. Each of these risks
and the Company's strategies to manage the exposure is discussed below.

    The Company currently sources over 90% of its sewing production from its
offshore operations as well as contractors. As a result, the Company may be
adversely affected by political instability resulting in the disruption of trade
from foreign countries in which the Company's manufacturing facilities are
located, the imposition of additional regulations relating to imports, duties,
taxes and other charges on imports, any significant decreases in the value of
the dollar against foreign currencies and restrictions on the transfer of funds.
These and other factors could result in the interruption of production in
offshore facilities or a delay in the receipt of the products by the Company in
the United States. The Company's future performance may be subject to such
factors, which are beyond the Company's control, and there can be no assurance
that such factors would not have a material adverse effect on the Company's
financial condition and results of operations.

    The Company's operating results are subject to risk from interest rate
fluctuations on debt which carries variable interest rates. At December 30,
2000, outstanding debt aggregated $141.4 million, of which $41.4 million bore
interest at a variable rate, so that an increase of 1% in the applicable rate
would increase the Company's annual interest cost by $414,000.

                                       16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
Report of Independent Accountants...........................     18

Consolidated Balance Sheets at December 30, 2000 and January
  1, 2000...................................................     19

Consolidated Statements of Operations for the fiscal years
  ended December 30, 2000, January 1, 2000 and January 2,
  1999......................................................     20

Consolidated Statements of Cash Flows for the fiscal years
  ended December 30, 2000, January 1, 2000 and January 2,
  1999......................................................     21

Consolidated Statements of Changes in Common Stockholder's
  Equity for the fiscal years ended December 30, 2000,
  January 1, 2000 and January 2, 1999.......................     22

Notes to Consolidated Financial Statements..................     23
</TABLE>

                                       17
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholder of
The William Carter Company:

    In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and changes in common
stockholder's equity present fairly, in all material respects, the consolidated
financial position of The William Carter Company and its subsidiaries (the
"Company") as of December 30, 2000 and January 1, 2000 and the consolidated
results of their operations and their cash flows for the years ended
December 30, 2000, January 1, 2000 and January 2, 1999, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

    As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for revenue recognition in fiscal 2000.

/s/ PricewaterhouseCoopers LLP

Stamford, Connecticut
March 12, 2001

                                       18
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

                          CONSOLIDATED BALANCE SHEETS

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              DECEMBER 30,   JANUARY 1,
                                                                  2000          2000
                                                              ------------   ----------
<S>                                                           <C>            <C>
ASSETS

Current assets:
  Cash and cash equivalents.................................    $  3,697      $  3,415
  Accounts receivable, net of allowance for doubtful
    accounts of $2,045 in 2000 and $2,765 in 1999...........      33,788        34,405
  Inventories...............................................      92,435        79,636
  Prepaid expenses and other current assets.................       4,971         3,863
  Assets held for sale......................................         373         1,000
  Deferred income taxes.....................................       9,184        10,276
                                                                --------      --------
      Total current assets..................................     144,448       132,595
Property, plant and equipment, net..........................      54,441        51,776
Assets held for sale........................................         950           950
Tradename, net..............................................      89,583        92,083
Cost in excess of fair value of net assets acquired, net....      26,606        27,457
Deferred debt issuance costs, net...........................       4,167         5,514
Other assets................................................       5,793         2,758
                                                                --------      --------
      Total assets..........................................    $325,988      $313,133
                                                                ========      ========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
  Current maturities of long-term debt......................    $  5,400      $    900
  Accounts payable..........................................      19,223        19,532
  Other current liabilities.................................      35,489        30,655
                                                                --------      --------
      Total current liabilities.............................      60,112        51,087
Long-term debt..............................................     136,000       141,400
Deferred income taxes.......................................      35,125        36,564
Other long-term liabilities.................................      10,238        11,565
                                                                --------      --------
      Total liabilities.....................................     241,475       240,616
                                                                --------      --------

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........................      19,116        18,902
                                                                --------      --------
Common stockholder's equity:
  Common stock, par value $.01 per share, 1,000 shares
    authorized, issued and outstanding......................          --            --
  Additional paid-in capital................................      53,771        53,711
  Retained earnings (accumulated deficit)...................      11,626           (96)
                                                                --------      --------
  Common stockholder's equity...............................      65,397        53,615
                                                                --------      --------
      Total liabilities and stockholder's equity............    $325,988      $313,133
                                                                ========      ========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                   statements

                                       19
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                       FOR THE YEARS ENDED
                                                              --------------------------------------
                                                              DECEMBER 30,   JANUARY 1,   JANUARY 2,
                                                                  2000          2000         1999
                                                              ------------   ----------   ----------
<S>                                                           <C>            <C>          <C>
Net sales...................................................    $471,374      $414,596     $408,182
Cost of goods sold..........................................     293,340       271,844      256,482
                                                                --------      --------     --------

Gross profit................................................     178,034       142,752      151,700
Selling, general and administrative.........................     137,513       120,773      124,278
Nonrecurring charge.........................................          --         7,124           --
                                                                --------      --------     --------
Operating income............................................      40,521        14,855       27,422
Interest income.............................................        (303)           --           --
Interest expense............................................      16,294        17,748       18,525
                                                                --------      --------     --------

Income (loss) before income taxes and cumulative effect of
  change in accounting principle............................      24,530        (2,893)       8,897
Provision for (benefit from) income taxes...................       9,731          (869)       3,616
                                                                --------      --------     --------

Income (loss) before cumulative effect of change in
  accounting principle......................................      14,799        (2,024)       5,281
Cumulative effect of change in accounting principle, net of
  income tax benefit of $217................................         354            --           --
                                                                --------      --------     --------

Net income (loss)...........................................      14,445        (2,024)       5,281
Dividend requirements and accretion on redeemable preferred
  stock.....................................................      (2,653)       (2,653)      (2,653)
                                                                --------      --------     --------

Net income (loss) applicable to common stockholder..........    $ 11,792      $ (4,677)    $  2,628
                                                                ========      ========     ========

Pro forma amounts assuming the accounting change is applied
  retroactively:
Net income (loss)...........................................    $ 14,799      $ (1,608)    $  5,119
                                                                ========      ========     ========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                   statements

                                       20
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                       FOR THE YEARS ENDED
                                                              --------------------------------------
                                                              DECEMBER 30,   JANUARY 1,   JANUARY 2,
                                                                  2000          2000         1999
                                                              ------------   ----------   ----------
<S>                                                           <C>            <C>          <C>
Cash flows from operating activities:
  Net income (loss).........................................     $14,445     $  (2,024)   $   5,281
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
    Depreciation and amortization...........................      17,520        16,855       15,599
    Amortization of debt issuance costs.....................       1,347         1,336        1,347
    (Gain) loss and writedown on property, plant and
    equipment and other.....................................         (21)        7,183          387
    Deferred tax (benefit) provision........................        (413)       (2,676)       1,040
    Effect of changes in operating assets and liabilities:
      Decrease (increase) in accounts receivable............         617           429       (4,700)
      (Increase) decrease in inventories....................     (12,799)       21,772      (13,769)
      (Increase) decrease in prepaid expenses and other
        assets..............................................      (1,129)       (1,769)         111
      Increase (decrease) in accounts payable and other
        liabilities.........................................       7,070        (2,215)       4,201
                                                                 -------     ---------    ---------
        Net cash provided by operating activities...........      26,637        38,891        9,497
                                                                 -------     ---------    ---------
Cash flows from investing activities:
  Capital expenditures......................................     (17,179)      (12,726)     (17,991)
  Proceeds from sale of property, plant and equipment.......         252           364           31
  Proceeds from assets held for sale........................         546            --           --
  Issuance of loan..........................................      (4,336)           --           --
  Proceeds from loan........................................       1,500            --           --
                                                                 -------     ---------    ---------
        Net cash used in investing activities...............     (19,217)      (12,362)     (17,960)
                                                                 -------     ---------    ---------
Cash flows from financing activities:
  Proceeds from revolving line of credit....................      62,900        89,850      114,750
  Payments of revolving line of credit......................     (62,900)     (114,250)    (103,350)
  Payments of other debt....................................        (900)         (900)        (900)
  Payments of financing costs...............................          --            --         (217)
  Borrowings on capital leases..............................          --           558           --
  Payments of capital lease obligation......................        (925)         (458)          --
  Capital contributions from Holdings.......................          --            --           60
  Payments of preferred stock dividends.....................      (2,440)       (2,433)      (2,433)
  Payments of other dividends to Holdings...................         (70)         (507)        (700)
  Other.....................................................      (2,803)        1,040          980
                                                                 -------     ---------    ---------
        Net cash (used in) provided by financing
        activities..........................................      (7,138)      (27,100)       8,190
                                                                 -------     ---------    ---------
Net increase (decrease) in cash and cash equivalents........         282          (571)        (273)
Cash and cash equivalents at beginning of period............       3,415         3,986        4,259
                                                                 -------     ---------    ---------
Cash and cash equivalents at end of period..................     $ 3,697     $   3,415    $   3,986
                                                                 =======     =========    =========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                   statements

                                       21
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

       CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER'S EQUITY

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                            RETAINED
                                                                             ADDITIONAL     EARNINGS
                                                                 COMMON       PAID-IN     (ACCUMULATED
                                                                 STOCK        CAPITAL       DEFICIT)
                                                              ------------   ----------   ------------
<S>                                                           <C>            <C>          <C>
BALANCE AT JANUARY 3, 1998..................................  $        --      $56,721       $    --
Capital contributions from Holdings.........................                        90
Accrued dividends and accretion on redeemable preferred
  stock.....................................................                                  (2,653)
Other dividends.............................................                                    (700)
Net income..................................................                                   5,281
                                                              ------------     -------       -------
BALANCE AT JANUARY 2, 1999..................................           --       56,811         1,928
Capital contributions from Holdings.........................                        60
Accrued dividends and accretion on redeemable preferred
  stock.....................................................                    (2,653)
Other dividends.............................................                      (507)
Net loss....................................................                                  (2,024)
                                                              ------------     -------       -------
BALANCE AT JANUARY 1, 2000..................................           --       53,711           (96)
Capital contributions from Holdings.........................                        60
Accrued dividends and accretion on redeemable preferred
  stock.....................................................                                  (2,653)
Other dividends.............................................                                     (70)
Net income..................................................                                  14,445
                                                              ------------     -------       -------
BALANCE AT DECEMBER 30, 2000................................  $        --      $53,771       $11,626
                                                              ============     =======       =======
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                   statements

                                       22
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--THE COMPANY:

    The William Carter Company, Inc. (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 (the "Acquisition") from
MBL Life Assurance Corporation, CHC Charitable Irrevocable Trust and certain
management stockholders for a total financed purchase price of $226.1 million.
For purposes of identification and description, the Company is referred to as
the "Predecessor" for the period prior to the Acquisition.

    The Acquisition was accounted for by the purchase method. Accordingly, the
assets and liabilities of the Predecessor were adjusted, at the Acquisition
date, to reflect the allocation of the purchase price based on estimated fair
values.

NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

    The Company designs, manufactures, sources and markets premier branded
childrenswear under the CARTER'S, CARTER'S CLASSICS, TYKES and BABY TYKES
labels. The Company manufactures its products in its plants located in the
southern United States, Costa Rica, the Dominican Republic and Mexico. The
Company also sources its products through contractual arrangements throughout
the world. Products are manufactured for wholesale distribution to major
domestic retailers and for the Company's 147 retail outlet stores that market
its brand name merchandise and certain products manufactured by other companies.

RECLASSIFICATIONS:

    Certain prior year amounts have been reclassified for comparative purposes.

PRINCIPLES OF CONSOLIDATION:

    The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. These subsidiaries consist of operations in
Costa Rica, the Dominican Republic and Mexico. These operations represented
approximately 85%, 78% and 59% of the Company's sewing production for fiscal
years 2000, 1999 and 1998, respectively. Total net assets (primarily property,
plant and equipment and inventory) of the international subsidiaries were
approximately $15.2 million and $15.5 million at December 30, 2000 and
January 1, 2000, respectively. 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 30, 2000 and
January 1, 2000 and results of operations for the fiscal years ended
December 30, 2000, January 1, 2000 and January 2, 1999. Each of the fiscal years
ended December 30, 2000 (fiscal 2000), January 1, 2000 (fiscal 1999) and
January 2, 1999 (fiscal 1998) contain 52 weeks.

                                       23
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
  (CONTINUED)

CASH AND CASH EQUIVALENTS:

    The Company considers all highly liquid investments that have original
maturities of three months or less to be cash equivalents. The Company had cash
deposits, in excess of deposit insurance limits, in four and nine banks at
December 30, 2000 and January 1, 2000, respectively.

ACCOUNTS RECEIVABLE:

    Approximately 75% of the Company's gross accounts receivable at
December 30, 2000 and January 1, 2000 were from its ten largest wholesale
customers, primarily major retailers. Of these customers, four and three have
individual receivable balances in excess of 10% of gross accounts receivable at
December 30, 2000 and January 1, 2000, respectively, but not more than 20%.
Sales to these customers represent comparable percentages to total wholesale
revenues.

INVENTORIES:

    Inventories are stated at the lower of cost (first-in, first-out basis for
wholesale inventories and retail method for retail inventories) or market.

PROPERTY, PLANT AND EQUIPMENT:

    Property, plant and equipment are stated at cost less accumulated
depreciation and amortization which includes the amortization of assets recorded
under capital leases. When fixed assets are sold or otherwise disposed, the
accounts are relieved of the original costs of the assets and the related
accumulated depreciation and any resulting profit or loss is credited or charged
to income. For financial reporting purposes, depreciation and amortization are
computed on the straight-line method over the estimated useful lives of the
assets as follows: buildings--15 to 50 years and machinery and equipment--3 to
10 years. Leasehold improvements and fixed assets purchased under capital leases
are amortized over the lesser of the asset life or related lease term.

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.

    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 at December 30, 2000 and January 1, 2000 was $10,417,000 and
$7,917,000, respectively. Accumulated amortization of goodwill at December 30,
2000 and January 1, 2000 was $3,478,000 and $2,739,000, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS:

    The Company reviews long-lived assets, including property, plant and
equipment and certain intangibles (tradename and goodwill), for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such an asset may not be recoverable. Intangibles are also

                                       24
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
  (CONTINUED)

IMPAIRMENT OF LONG-LIVED ASSETS: (CONTINUED)
reviewed at least annually. Management determines whether there has been a
permanent impairment on such assets held for use in the business by comparing
anticipated undiscounted future cash flows from operating activities involving
the asset to the carrying value of the asset. The amount of any resulting
impairment will be calculated using the present value of the same cash flows.
The factors considered in this assessment would include operating results,
trends and prospects, as well as the effects of demand, competition and other
economic factors. Long-lived assets to be disposed of are valued at the lower of
carrying amount or net realizable value.

DEFERRED DEBT ISSUANCE COSTS:

    Debt issuance costs are deferred and amortized to interest expense using the
straight-line method, which approximates the effective interest method, over the
lives of the related debt. Amortization approximated $1,347,000, $1,336,000 and
$1,347,000 for the years ended December 30, 2000, January 1, 2000 and
January 2, 1999, respectively.

REVENUE RECOGNITION:

    Revenues consist of sales to customers, net of returns and markdowns. The
Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") in
December 1999. SAB 101 summarizes certain SEC staff views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company adopted the provisions of SAB 101 in the fourth quarter of fiscal
2000. Accordingly, the Company revised its method of accounting for revenue
recognition retroactive to the beginning of fiscal 2000. Previously, the Company
had recognized revenue at the point of shipment for all wholesale customers.
However, for certain shipments, although title has passed, the Company
effectively retains the risks and rewards of ownership until the goods reach the
specified customer. Under the new accounting method, the Company now recognizes
revenue on wholesale sales at the point where both title has passed and all the
risks and rewards of ownership have been transferred. Retail store revenues
continue to be recognized at the time of sale, as the earnings process is then
complete.

    The cumulative effect of the accounting change on prior years resulted in a
charge to income of approximately $354,000 (net of income tax benefit of
approximately $217,000), which is presented as a separate component of net
income for fiscal 2000. The effect of the change on fiscal 2000 operating
results was to decrease income before the cumulative effect of the accounting
change by $160,000 (which is net of income tax benefit of $98,000).

    The pro forma amounts presented on the accompanying consolidated statements
of operations for fiscal 2000, 1999 and 1998 were calculated assuming the
accounting change was made retroactively to prior years.

    Under the new accounting method, fiscal 2000 includes $2.2 million of net
sales that were included in the cumulative effect adjustment as of January 2,
2000, all of which would have been recognized in

                                       25
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
  (CONTINUED)

REVENUE RECOGNITION: (CONTINUED)
the first quarter of fiscal 2000. The impact of the accounting change on amounts
previously reported for the interim periods of fiscal 2000 is as follows ($000):

<TABLE>
<CAPTION>
                                           FIRST QUARTER              SECOND QUARTER             THIRD QUARTER
                                      ------------------------   ------------------------   ------------------------
                                      AS PREVIOUSLY      AS      AS PREVIOUSLY      AS      AS PREVIOUSLY      AS
                                        REPORTED      RESTATED     REPORTED      RESTATED     REPORTED      RESTATED
                                      -------------   --------   -------------   --------   -------------   --------
<S>                                   <C>             <C>        <C>             <C>        <C>             <C>
Net sales...........................     $98,123      $97,823       $97,070      $95,851      $145,457      $145,639
Gross profit........................     $36,569      $36,355       $36,250      $35,798      $ 56,372      $ 56,477
Income before cumulative effect of
  change in accounting principle....     $   955      $   833       $   307      $    65      $  8,058      $  8,118
Cumulative effect of change in
  accounting principle, net of
  income tax benefit of $217........          --          354            --           --            --            --
                                         -------      -------       -------      -------      --------      --------
Net income..........................     $   955      $   479       $   307      $    65      $  8,058      $  8,118
                                         =======      =======       =======      =======      ========      ========
</TABLE>

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,"
("SFAS 123") was adopted in 1996 for disclosure purposes only (see Note 9).

ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS:

    The Company has adopted the provisions of the consensus on Emerging Issues
Task Force Issue 00-10, "Accounting for Shipping and Handling Fees and Costs"
("Issue 00-10") during the fourth quarter of fiscal 2000. The Company classifies
shipping and handling fees billed to customers as revenue and includes the
corresponding cost in cost of goods sold. Shipping and handling costs that are
absorbed by the Company are included in selling, general and administrative
expenses and amounted to approximately $14,289,000, $13,675,000 and $12,412,000
in fiscal 2000, fiscal 1999 and fiscal 1998, respectively.

ROYALTIES AND LICENSE FEES:

    The Company receives royalties and license fees, which are recognized as
earned. Royalties and license fees amounted to approximately $5.8 million,
$4.2 million and $2.5 million for fiscal years 2000, 1999 and 1998,
respectively, and are included as a reduction of selling, general and
administrative expenses in the accompanying consolidated statements of
operations.

                                       26
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
  (CONTINUED)

INCOME TAXES:

    The Company is included in the consolidated federal and state tax returns of
Holdings. The accompanying financial statements reflect current and deferred tax
provisions of the Company calculated as if the Company were a separate taxpayer
in accordance with 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
generally the sum of the amount of income taxes paid or payable for the year as
determined by applying the provisions of enacted tax laws to the taxable income
for that year, the net change during the year in the Company's deferred tax
assets and liabilities and the net change during the year in any valuation
allowances.

SUPPLEMENTAL CASH FLOWS INFORMATION:

    Interest paid in cash approximated $14,947,000, $16,368,000 and $17,178,000
for the years ended December 30, 2000, January 1, 2000 and January 2, 1999,
respectively. Income taxes paid in cash approximated $6,774,000, $756,000 and
$2,345,000 for the years ended December 30, 2000, January 1, 2000 and
January 2, 1999, respectively. Equipment acquired under capital leases
approximated $2,296,000 for the year ended January 1, 2000.

USE OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS:

    The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires 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.

RECENT ACCOUNTING PRONOUNCEMENTS:

    In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", ("SFAS 133"). In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--An
Amendment of FASB Statement No. 133". Provisions of SFAS 133 are effective as of
the beginning of fiscal 2001. SFAS 133 establishes accounting and reporting
standards requiring that all derivative instruments, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either assets or liabilities measured at fair value. SFAS 133 requires
that changes in the derivative instrument's fair value be recognized currently
in earnings, unless specific hedge accounting criteria are met. SFAS 133 is not
expected to have a material impact on the financial position or results of
operations of the Company.

                                       27
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--INVENTORIES:

    Inventories consisted of the following ($000):

<TABLE>
<CAPTION>
                                                              DECEMBER 30,   JANUARY 1,
                                                                  2000          2000
                                                              ------------   ----------
<S>                                                           <C>            <C>
Finished goods..............................................     $70,713       $57,695
Work in process.............................................      14,508        13,842
Raw materials and supplies..................................       7,214         8,099
                                                                 -------       -------
                                                                 $92,435       $79,636
                                                                 =======       =======
</TABLE>

NOTE 4--PROPERTY, PLANT AND EQUIPMENT:

    Property, plant and equipment consisted of the following ($000):

<TABLE>
<CAPTION>
                                                              DECEMBER 30,   JANUARY 1,
                                                                  2000          2000
                                                              ------------   ----------
<S>                                                           <C>            <C>
Land, buildings and improvement.............................     $20,305       $17,443
Machinery and equipment.....................................      73,043        60,778
Equipment under capital leases..............................       2,854         2,854
                                                                 -------       -------
                                                                  96,202        81,075
Accumulated depreciation and amortization...................     (41,761)      (29,299)
                                                                 -------       -------
                                                                 $54,441       $51,776
                                                                 =======       =======
</TABLE>

    Depreciation and amortization expense ($000) was $14,281, $12,420 and
$10,940 for the years ended December 30, 2000, January 1, 2000 and January 2,
1999, respectively.

NOTE 5--LONG-TERM DEBT:

    Long-term debt consisted of the following ($000):

<TABLE>
<CAPTION>
                                                              DECEMBER 30,   JANUARY 1,
                                                                  2000          2000
                                                              ------------   ----------
<S>                                                           <C>            <C>
Senior Credit Facility term loan............................    $ 41,400      $ 42,300
Senior Credit Facility revolving credit.....................          --            --
10 3/8% Series A Senior Subordinated Notes due 2006.........     100,000       100,000
                                                                --------      --------
                                                                 141,400       142,300
Current maturities..........................................      (5,400)         (900)
                                                                --------      --------
                                                                $136,000      $141,400
                                                                ========      ========
</TABLE>

    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 million in fiscal year 2002 and $22.5 million in fiscal year 2003. In
November 1996, proceeds of the 10 3/8% Senior

                                       28
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--LONG-TERM DEBT: (CONTINUED)
Subordinated Notes (the "Notes") were used to repay $5.0 million of the term
loan. The repayment schedule has been adjusted ratably for this payment.

    In June 1998, Carter's amended its Senior Credit Facility to benefit from
favorable changes in the interest rate environment since the Acquisition and to
support higher levels of demand for the Company's products than had been
anticipated at Acquisition. As amended, the Senior Credit Facility provides for
a $65.0 million revolving credit facility. The revolving credit facility will
expire on the earlier of (a) October 31, 2001 or (b) such other date as the
revolving credit commitments thereunder shall terminate in accordance with the
terms of the Senior Credit Facility. There is no scheduled interim amortization
of principal. The facility has a sublimit of $15.0 million for letters of credit
of which $6.0 million was used for letters of credit as of December 30, 2000 and
January 1, 2000. A commitment fee of 1/2 of 1% per annum is charged on the
unused portion of the revolving credit facility. The Company is in the process
of negotiating the terms of the revolving credit portion of the Senior Credit
Facility to include an extension of the maturity date and to increase the
limitation for annual capital expenditures.

    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 (as defined in the Credit Agreement) plus 1% per annum; or
(iii) The Chase Manhattan Bank's Prime Rate. The applicable interest margin for
loans that accrue interest at the Eurodollar Rate is 2.25% per annum for the
revolving credit facility and is 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 2.50% per annum for loans that accrue interest at the
Eurodollar Rate and is 2.00% per annum for loans that accrue interest at the
Alternate Base Rate. The amendment provides for additional reductions in the
interest margin based on the achievement of certain leverage ratios. The
effective interest rate on variable rate Senior Credit Facility borrowings
outstanding at December 30, 2000, January 1, 2000 and January 2, 1999 was 8.7%,
8.7% and 8.0%, respectively. Interest on the Senior Credit Facility is payable
quarterly.

    The Senior Credit 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, repurchase or cancellation of the Redeemable Preferred Stock and the
redemption of up to 35% of the 10 3/8% Senior Subordinated 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 applied. In addition, the
Senior Credit Facility requires that either 75% or 50% (depending on certain
circumstances) of 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 so 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.

                                       29
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--LONG-TERM DEBT: (CONTINUED)
    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, 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.

    In November 1996, the Company issued 10 3/8% Senior Subordinated Notes. 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.

    In April 1997, the Company completed a registration with the Securities and
Exchange Commission related to an Exchange Offer for $100.0 million of 10 3/8%
Series A Senior Subordinated Notes for a like amount of 10 3/8% Senior
Subordinated Notes issued in a November 1996 private placement. The terms and
provisions of the Notes were essentially unchanged.

    Interest on the Notes is to be paid semi-annually on June 1 and December 1
of each year. 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 are uncollateralized. 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 subsequent to
December 30, 2000 are as follows ($000): 2001--$5,400; 2002--$13,500;
2003--$22,500; 2004--$0; 2005--$0 and 2006--$100,000.

    The fair value of the Company's long-term debt was approximately
$3.0 million and $11.0 million lower than the book value as of December 30, 2000
and January 1, 2000, respectively. The fair values were estimated based on
similar issues or on current rates offered to the Company for debt of the same
remaining maturities.

                                       30
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 30, 2000 and January 1,
2000 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, on May 1 and
November 1 of each year. 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. During fiscal 2000,
1999 and 1998, dividends totaling $2,440,000, $2,433,000 and $2,433,000,
respectively, were declared and paid pursuant to these provisions.

    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, 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.

    The Preferred Stock was issued for $20.0 million and was recorded net of
issuance costs of $2.2 million. 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 30, 2000 and January 1, 2000, the authorized Common Stock of the
Company consisted of 1,000 shares of Common Stock, par value $.01 per share. At
December 30, 2000 and January 1, 2000, there were 1,000 shares of Common Stock
issued and outstanding, all of which were 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. In the event of a liquidation, the
holders of the Common

                                       31
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--COMMON STOCK: (CONTINUED)
Stock are entitled to share in the remaining assets of the Company after payment
of all liabilities and after satisfaction of all liquidation preferences payable
to the holders of Preferred Stock.

NOTE 8--EMPLOYEE BENEFIT PLANS:

    The Company offers a comprehensive post-retirement medical plan to current
and certain future retirees and their spouses until they become eligible for
Medicare or a Medicare Supplement plan. 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 is a reconciliation of the Accumulated Post-Retirement Benefit
Obligations ("APBO") under this plan ($000):

<TABLE>
<CAPTION>
                                                               YEARS ENDED
                                                        -------------------------
                                                        DECEMBER 30,   JANUARY 1,
                                                            2000          2000
                                                        ------------   ----------
<S>                                                     <C>            <C>
Benefit Obligation (APBO) at beginning of year........     $ 9,347       $10,589
Service cost..........................................         140           166
Interest cost.........................................         672           639
Plan participants' contributions......................         768           615
Actuarial loss (gain).................................         598        (1,216)
Benefits paid.........................................      (1,647)       (1,446)
                                                           -------       -------
APBO at end of year...................................     $ 9,878       $ 9,347
                                                           =======       =======
</TABLE>

    The Company's contribution for these post-retirement benefit obligations was
$878,644 in fiscal 2000 and $831,448 in fiscal 1999.

    The funded status of the plan is reconciled to the accrued post-retirement
benefit liability recognized in the accompanying consolidated balance sheets, as
follows ($000):

<TABLE>
<CAPTION>
                                                        DECEMBER 30,   JANUARY 1,
                                                            2000          2000
                                                        ------------   ----------
<S>                                                     <C>            <C>
Funded status (unfunded APBO).........................     $ 9,878       $9,347
Unrecognized net loss from past experience different
  from that assumed and from changes in assumptions...      (1,110)        (511)
                                                           -------       ------
Accrued benefit cost..................................     $ 8,768       $8,836
                                                           =======       ======
</TABLE>

    The discount rates used in determining the APBO as of December 30, 2000 and
January 1, 2000 were 7.00% and 7.50%, respectively.

                                       32
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--EMPLOYEE BENEFIT PLANS: (CONTINUED)

    The components of post-retirement benefit expense charged to operations are
as follows ($000):

<TABLE>
<CAPTION>
                                                           YEARS ENDED
                                              --------------------------------------
                                              DECEMBER 30,   JANUARY 1,   JANUARY 2,
                                                  2000          2000         1999
                                              ------------   ----------   ----------
<S>                                           <C>            <C>          <C>
Service cost--benefits attributed to service
  during the period.........................      $140          $166         $169
Interest cost on accumulated post-retirement
  benefit obligation........................       672           639          649
Amortization of net actuarial loss..........        --            56           34
                                                  ----          ----         ----
Total net periodic post-retirement benefit
  cost......................................      $812          $861         $852
                                                  ====          ====         ====
</TABLE>

    The effects on the Company's plan of all future increases in health care
costs are borne by employees; accordingly, increasing medical costs are not
expected to have any material effect on the Company's future financial results.

    The Company has an obligation under a defined benefit plan covering certain
former officers. At December 30, 2000 and January 1, 2000, the present value of
the estimated remaining payments under this plan was approximately $1.4 million
and $1.5 million, respectively, and is included in other current and long-term
liabilities.

    The Company also sponsors a defined contribution plan within the U.S. The
plan covers employees who are at least 21 years of age and have completed three
months of service, during which at least 257 hours were served. The plan
provides for the option for employee contributions of between 1% and 15% of
salary, of which the Company matches up to 2.5% of the employee contribution, at
a rate of 75% on the first 2% and 50% on the second 2%. The Company's expense
for the defined contribution plan totaled approximately ($000): $1,017 for the
fiscal year ended December 30, 2000, $997 for the fiscal year ended January 1,
2000 and $906 for the fiscal year ended January 2, 1999.

NOTE 9--MANAGEMENT STOCK INCENTIVE PLAN:

    At 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 Class C stock of Holdings.
Options for up to 75,268 shares may be granted to certain employees under the
Plan, of which 286 remained ungranted at December 30, 2000 and January 1, 2000.
The exercise price of all options granted since inception 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 stock at the time
the options were granted. Accordingly, no compensation expense has been
recognized on the options granted. All options granted vest ratably over five
years (contingent upon the Company meeting specific earnings targets) and expire
in ten years, with weighted average remaining contractual lives of approximately
six years at December 30, 2000.

                                       33
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--MANAGEMENT STOCK INCENTIVE PLAN: (CONTINUED)
    A summary of stock options (in number of shares that may be purchased) is
presented below:

<TABLE>
<CAPTION>
                                                           YEARS ENDED
                                              --------------------------------------
                                              DECEMBER 30,   JANUARY 1,   JANUARY 2,
                                                  2000          2000         1999
                                              ------------   ----------   ----------
<S>                                           <C>            <C>          <C>
Outstanding, beginning of year..............     74,982        71,255       67,302
Granted.....................................         --         5,751        4,976
Exercised...................................         --            --           --
Forfeited...................................         --        (2,024)      (1,023)
Expired.....................................         --            --           --
                                                 ------        ------       ------
Outstanding, end of year....................     74,982        74,982       71,255
                                                 ======        ======       ======
Exercisable, end of year....................     56,890        42,889       26,511
                                                 ======        ======       ======
</TABLE>

    The fair value of each granted option, at the date of grant, has been
estimated to be $19.04 for options granted during fiscal 1999 and $19.78 for
options granted during fiscal 1998. The fair value of the options granted was
estimated using a minimum value method, at an assumed risk free interest rate of
5.5% for options granted during fiscal 1999 and 5.0% for options granted during
fiscal 1998. The expected life of the options was estimated to be 7.13 years for
options granted during fiscal 1999 and eight years for fiscal 1998. No dividends
were assumed.

    If the fair value based method required by SFAS 123 had been applied,
estimated compensation expense for the years ended December 30, 2000,
January 1, 2000 and January 2, 1999 would have been approximately $418,000,
$418,000 and $414,000, respectively, resulting in pro forma net income (loss) of
approximately $14,196,000, $(2,287,000) and $5,037,000, respectively.

                                       34
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--INCOME TAXES:

    The provision for income taxes consisted of the following ($000):

<TABLE>
<CAPTION>
                                                           YEARS ENDED
                                              --------------------------------------
                                              DECEMBER 30,   JANUARY 1,   JANUARY 2,
                                                  2000          2000         1999
                                              ------------   ----------   ----------
<S>                                           <C>            <C>          <C>
Current tax provision:
  Federal...................................     $ 8,293       $ 1,239      $1,999
  State.....................................       1,285           275         495
  Foreign...................................         566           293          82
                                                 -------       -------      ------
    Total current provision.................     $10,144       $ 1,807      $2,576
                                                 -------       -------      ------
Deferred tax (benefit) provision:
  Federal...................................        (367)       (2,372)        926
  State.....................................         (46)         (304)        114
                                                 -------       -------      ------
    Total deferred (benefit) provision......        (413)       (2,676)      1,040
                                                 -------       -------      ------
    Total provision (benefit)...............     $ 9,731       $  (869)     $3,616
                                                 =======       =======      ======
</TABLE>

    Components of deferred tax assets and liabilities were as follows ($000):

<TABLE>
<CAPTION>
                                                        DECEMBER 30,   JANUARY 1,
                                                            2000          2000
                                                        ------------   ----------
<S>                                                     <C>            <C>
Deferred tax assets:
  Accounts receivable allowance.......................     $ 1,840       $ 1,886
  Inventory valuation.................................       4,314         5,108
  Liability accruals..................................       3,196         3,273
  Deferred employee benefits..........................       3,973         4,039
  Other...............................................         542           560
                                                           -------       -------
    Total deferred tax assets.........................     $13,865       $14,866
                                                           =======       =======
Deferred tax liabilities:
  Tradename...........................................     $33,146       $34,071
  Depreciation........................................       6,018         6,615
  Deferred employee benefits..........................         642           468
                                                           -------       -------
    Total deferred tax liabilities....................     $39,806       $41,154
                                                           =======       =======
</TABLE>

                                       35
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--INCOME TAXES: (CONTINUED)
    The difference between the Company's effective income tax rate and the
federal statutory tax rate is reconciled below:

<TABLE>
<CAPTION>
                                                                           YEARS ENDED
                                                              --------------------------------------
                                                              DECEMBER 30,   JANUARY 1,   JANUARY 2,
                                                                  2000          2000         1999
                                                              ------------   ----------   ----------
<S>                                                           <C>            <C>          <C>
Statutory federal income tax rate...........................       35%           (34)%        34%
State income taxes, net of Federal income tax benefit.......        4             (1)          5
Goodwill amortization.......................................        1              9           3
Other permanent items.......................................        -             (6)          1
Foreign income, net of tax..................................        -              2          (2)
                                                                   --            ---          --
  Total.....................................................       40%           (30)%        41%
                                                                   ==            ===          ==
</TABLE>

    The portion of income before income taxes attributable to foreign income was
approximately $1,589,000, $704,000 and $735,000 for the years ended
December 30, 2000, January 1, 2000 and January 2, 1999, respectively.

NOTE 11--LEASE COMMITMENTS:

    Annual rent expense ($000) under operating leases was $19,232, $18,108 and
$16,739 for the years ended December 30, 2000, January 1, 2000 and January 2,
1999, respectively.

    Minimum annual rental commitments under current noncancelable operating
leases as of December 30, 2000 were as follows ($000):

<TABLE>
<CAPTION>
                                 BUILDINGS,                         DATA                          TOTAL
                                  PRIMARILY     TRANSPORTATION   PROCESSING   MANUFACTURING   NONCANCELABLE
FISCAL YEAR                     RETAIL STORES     EQUIPMENT      EQUIPMENT      EQUIPMENT        LEASES
-----------                     -------------   --------------   ----------   -------------   -------------
<S>                             <C>             <C>              <C>          <C>             <C>
2001..........................     $13,092           $436          $  704         $  430         $14,662
2002..........................      10,311            301             266            328          11,206
2003..........................       8,300             49              64            142           8,555
2004..........................       6,058             10              --             78           6,146
2005..........................       3,923             --              --             50           3,973
Thereafter....................       3,852             --              --              7           3,859
                                   -------           ----          ------         ------         -------
  Total.......................     $45,536           $796          $1,034         $1,035         $48,401
                                   =======           ====          ======         ======         =======
</TABLE>

    In February 2001, the Company entered into a ten-year lease agreement for a
new corporate office in Atlanta, Georgia. Payments on this lease will begin in
October 2001. The ten year commitment will total approximately $18.0 million.

                                       36
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--LEASE COMMITMENTS: (CONTINUED)

    Future annual lease commitments under capital lease obligations are as
follows ($000):

<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S>                                                           <C>
2001........................................................   $1,016
2002........................................................      509
Thereafter..................................................       --
                                                               ------
Total minimum obligations...................................    1,525
Interest....................................................      (54)
                                                               ------
Present value of net minimum obligations....................    1,471
Current portion, included in other current liabilities......     (970)
                                                               ------
Long-term obligations, included in other long-term
  liabilities at December 30, 2000..........................   $  501
                                                               ======
</TABLE>

NOTE 12--CONTINGENCIES:

    The Company is subject to various federal, state and local laws that govern
activities or operations that may have adverse environmental effects.
Noncompliance with these laws and regulations can result in significant
liabilities, penalties and costs. From time to time, operations of the Company
have resulted or may result in noncompliance with or liability pursuant to
environmental laws. The Company is in the final stages of resolving an
environmental matter associated with waste deposited at or near a landfill in
Lamar County, Georgia in the 1970's. In 1999, the Company established a reserve
to provide for its share of the total estimated costs required to resolve this
matter. These costs are estimated to be less than $1.0 million. However, there
can be no assurance that this estimate will prove accurate. Generally,
compliance with environmental laws has not had a material impact on the
Company's operations, but there can be no assurance that future compliance with
such laws will not have a material adverse effect on the Company or its
operations.

NOTE 13--OTHER CURRENT LIABILITIES:

    Other current liabilities consisted of the following ($000):

<TABLE>
<CAPTION>
                                                            DECEMBER 30,   JANUARY 1,
                                                                2000          2000
                                                            ------------   ----------
<S>                                                         <C>            <C>
Accrued income taxes......................................     $11,658       $ 8,528
Accrued incentive compensation............................       5,025           134
Accrued workers compensation..............................       3,178         2,913
Accrued health insurance..................................       1,650         1,907
Other current liabilities.................................      13,978        17,173
                                                               -------       -------
                                                               $35,489       $30,655
                                                               =======       =======
</TABLE>

                                       37
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--VALUATION AND QUALIFYING ACCOUNTS:

    Information regarding valuation and qualifying accounts is as follows
($000):

<TABLE>
<CAPTION>
                                                             ALLOWANCE FOR
                                                               DOUBTFUL      INVENTORY
                                                               ACCOUNTS      VALUATION
                                                             -------------   ---------
<S>                                                          <C>             <C>
BALANCE, JANUARY 3, 1998...................................     $2,374        $2,766
  Additions, charged to expense............................      1,427         2,947
  Writeoffs................................................     (1,301)       (2,595)
                                                                ------        ------
BALANCE, JANUARY 2, 1999...................................      2,500         3,118
  Additions, charged to expense............................      2,435         5,306
  Writeoffs................................................     (2,170)       (3,187)
                                                                ------        ------
BALANCE, JANUARY 1, 2000...................................      2,765         5,237
  Additions, charged to expense............................      1,840         3,408
  Writeoffs................................................     (2,560)       (4,563)
                                                                ------        ------
BALANCE, DECEMBER 30, 2000.................................     $2,045        $4,082
                                                                ======        ======
</TABLE>

NOTE 15--RELATED PARTY TRANSACTIONS:

    In connection with the closing of the Acquisition, the Company entered into
an agreement for management advisory and consulting services (the "Management
Agreement") with Investcorp International, Inc. ("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 January 2000, a loan to an officer in the amount of $4.3 million was
issued, the proceeds of which were used by the officer to repay a previous loan
from the Company in the amount of $1.5 million. The $4.3 million loan is payable
in annual installments of $600,000 commencing on March 31, 2002, and thereafter
on each anniversary thereof until such principal amount and all accrued and
unpaid interest thereon has been repaid. The loan has recourse and is
collateralized by the officer's stock in Holdings and bears interest at the
average rate paid by the Company under the revolving portion of its Senior
Credit Facility. The loan is prepayable with proceeds of any disposition of the
officer's stock in Holdings.

    The Company paid dividends on its common stock held by its parent, Holdings,
in the amounts of approximately $70,000, $507,000 and $700,000 for the fiscal
years ended December 30, 2000, January 1, 2000 and January 2, 1999,
respectively. Proceeds from these dividends were used by Holdings to repurchase
shares of Holdings' stock owned by certain former employees of the Company in
the amounts of $70,000, $507,000 and $320,000 for the fiscal years ended
December 30, 2000, January 1, 2000 and January 2, 1999, respectively. In the
fiscal year ended January 2, 1999, proceeds were also used by Holdings to pay
$380,000 of debt issuance costs in connection with the filing of a Registration
Statement on Form S-4, for Holdings' $20.0 million of 12% Senior Subordinated
Notes due 2008.

    In addition during fiscal 2000, 1999 and 1998, Holdings made $60,000,
$60,000 and $90,000, respectively, in capital contributions to the Company in
connection with the issuance of shares of

                                       38
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15--RELATED PARTY TRANSACTIONS: (CONTINUED)
Holdings' stock to certain employees of the Company. Each of the fiscal 2000 and
1999 transactions of $60,000 and $30,000 of the fiscal 1998 transaction involved
no cash proceeds, and the Company recognized these amounts as compensation
expense.

NOTE 16--SEGMENT INFORMATION:

    The Company reports segment information in accordance with the provisions of
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS 131") which requires segment
information to be disclosed based on a "management approach". The management
approach refers to the internal reporting that is used by management for making
operating decisions and assessing the performance of the Company's reportable
segments. SFAS 131 also requires disclosure about products and services,
geographic areas and major customers. For purposes of complying with SFAS 131,
the Company has identified its two reportable segments as "Wholesale" and
"Retail". The Company generally sells the same products in each business
segment. Wholesale products are offered through the Company's wholesale
distribution channel while the retail segment reflects the operations of the
Company's outlet stores. The Accounting policies of the segments are the same as
those described in Note 2--"Nature of Business and Summary of Significant
Accounting Policies".

    In fiscal 2000, the Company reassessed its process for evaluating the
financial results of each reportable segment. Effective December 30, 2000, each
segment's results include the costs directly related to the segment's revenue
and all other costs are allocated based on relationship to consolidated net
sales or units produced to support each segment's revenue. Prior to
December 30, 2000, the Company determined the Retail segment's earnings before
interest, taxes, depreciation and amortization expenses ("EBITDA") on a direct
contribution basis only and did not include allocations of all costs incurred to
support Retail operations. The wholesale segment, previously referred to as
"Wholesale and Other", included all other revenue and expenses of the Company
not directly related to the Retail segment. Management believes that its revised
process for measurement provides a more meaningful analysis of each segment's
financial results. Prior year amounts have been reclassified to conform to the
current year presentation. Under the old method, EBITDA for the Wholesale and
Other segment would have been approximately $414,000, $(1,132,000) and
$5,056,000 for fiscal years 2000, 1999 and 1998, respectively, and EBITDA for
the Retail segment would have been approximately $57,627,000, $39,966,000 and
$37,965,000 for fiscal years 2000, 1999 and 1998, respectively.

                                       39
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 16--SEGMENT INFORMATION: (CONTINUED)
    The table below presents certain segment information for the periods
indicated ($000):

<TABLE>
<CAPTION>
                                                 RETAIL    WHOLESALE    TOTAL
                                                --------   ---------   --------
<S>                                             <C>        <C>         <C>
Fiscal year 2000:
  Sales.......................................  $215,280   $256,094    $471,374
  EBITDA......................................  $ 31,517   $ 26,524    $ 58,041
Fiscal year 1999:
  Sales.......................................  $183,312   $231,284    $414,596
  EBITDA......................................  $ 18,061   $ 20,773    $ 38,834
Fiscal year 1998:
  Sales.......................................  $171,696   $236,486    $408,182
  EBITDA......................................  $ 17,852   $ 25,169    $ 43,021
</TABLE>

    A reconciliation of total segment EBITDA to total consolidated income (loss)
before income taxes is presented below ($000):

<TABLE>
<CAPTION>
                                                           YEARS ENDED
                                              --------------------------------------
                                              DECEMBER 30,   JANUARY 1,   JANUARY 2,
                                                  2000          2000         1999
                                              ------------   ----------   ----------
<S>                                           <C>            <C>          <C>
Total EBITDA for reportable segments........    $ 58,041      $ 38,834     $ 43,021
Depreciation and amortization expense.......     (17,520)      (16,855)     (15,599)
Interest income.............................         303            --           --
Interest expense............................     (16,294)      (17,748)     (18,525)
Nonrecurring charge.........................          --        (7,124)          --
                                                --------      --------     --------
Consolidated income (loss) before income
  taxes.....................................    $ 24,530      $ (2,893)    $  8,897
                                                ========      ========     ========
</TABLE>

    The table below represents inventory by segment at ($000):

<TABLE>
<CAPTION>
                                              DECEMBER 30,   JANUARY 1,   JANUARY 2,
                                                  2000          2000         1999
                                              ------------   ----------   ----------
<S>                                           <C>            <C>          <C>
Wholesale...................................     $72,114       $58,269     $ 81,817
Retail......................................      20,321        21,367       19,591
                                                 -------       -------     --------
                                                 $92,435       $79,636     $101,408
                                                 =======       =======     ========
</TABLE>

    Wholesale inventories include inventory produced and warehoused for the
Retail segment.

                                       40
<PAGE>
                           THE WILLIAM CARTER COMPANY

              (A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 16--SEGMENT INFORMATION: (CONTINUED)
    The following represents property, plant and equipment, net, by geographic
area as of ($000):

<TABLE>
<CAPTION>
                                              DECEMBER 30,   JANUARY 1,   JANUARY 2,
                                                  2000          2000         1999
                                              ------------   ----------   ----------
<S>                                           <C>            <C>          <C>
United States...............................     $45,226       $41,417      $49,178
International...............................       9,215        10,359       10,496
                                                 -------       -------      -------
                                                 $54,441       $51,776      $59,674
                                                 =======       =======      =======
</TABLE>

    The Company's international operations consist primarily of sewing
facilities and, accordingly, no revenues are recorded at these locations.

NOTE 17--TEXTILE PLANT PHASE-DOWN:

    Historically, the Company met most of its fabric requirements through its
textile operations located in Barnesville, Georgia. During 1999, the Company
developed a plan to take advantage of alternative fabric sourcing opportunities
and, in the third quarter of 1999, began to phase-down production in its textile
operations. All textile processes, with the exception of printing, were
discontinued by the end of fiscal 1999.

    Financial results for fiscal 1999 included a nonrecurring charge of
$6,865,000 representing the impairment adjustment required to reduce the
carrying value of land, buildings and equipment associated with the textile
facility in Barnesville, Georgia to their estimated net realization value of
$1,950,000. In fiscal 2000, $627,000 of these assets were sold. The remaining
assets are presented as assets held for sale on the accompanying December 30,
2000 balance sheet. It is estimated that approximately $373,000 of equipment
will be sold during the current year with the remaining $950,000 of land,
buildings and equipment sold in future years.

    During 1999, the Company also closed three domestic sew plants. The net loss
on property, plant and equipment related to the closures totaled $259,000 and
was included in the 1999 nonrecurring charge.

                                       41
<PAGE>
ITEM 9. CHANGE IN ACCOUNTANTS

    Not applicable.

                                    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.

<TABLE>
<CAPTION>
NAME                            AGE                             POSITIONS
----                          --------   --------------------------------------------------------
<S>                           <C>        <C>
Frederick J. Rowan, II......     61      Chairman of the Board of Directors, President and Chief
                                         Executive Officer.

Joseph Pacifico.............     51      President-Marketing.

Charles E. Whetzel, Jr......     50      Executive Vice President-Global Sourcing.

David A. Brown..............     43      Executive Vice President-Business Planning &
                                         Administration and Director.

Michael D. Casey............     40      Senior Vice President and Chief Financial Officer.

Christopher J. O'Brien......     42      Director.

Thomas J. Sullivan..........     38      Director.

William C. McCollum.........     29      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 36 years, has been
in senior executive positions for nearly 24 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 and was named President-Marketing in 1997. Mr. Pacifico began his
career with VF Corporation in 1981 as a sales representative for the H.D. Lee
Company and was promoted to the position of Vice President of Marketing in 1989,
a position he held until 1992.

    CHARLES E. WHETZEL, JR. joined the Company in 1992 as Executive Vice
President-Operations and was named Executive Vice President-Manufacturing in
1997. In 2000, Mr. Whetzel's title became Executive Vice President-Global
Sourcing consistent with the Company's focus on expansion of global sourcing
capabilities. Mr. Whetzel began his career at Aileen Inc. in 1971 in the Quality
function and was later promoted to Vice President of Apparel. Following
Aileen Inc., Mr. Whetzel held positions of increased responsibility with Mast
Industries, Health-Tex and Wellmade Industries, respectively. In 1988,
Mr. Whetzel joined Bassett-Walker, Inc. and was later promoted to Vice President
of Manufacturing for the H.D. Lee Company.

                                       42
<PAGE>
    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. In 1997, Mr. Brown was named Executive Vice President-Business
Planning and Administration. Prior to 1992, Mr. Brown held various positions at
VF Corporation including Vice President-Human Resources for both the H.D. Lee
Company and Bassett-Walker, Inc. Mr. Brown also held personnel focused positions
with Blue Bell, Inc. and Milliken & Company earlier in his career.

    MICHAEL D. CASEY joined the Company in 1993 as Vice President-Finance and
was named Senior Vice President-Finance in 1997. In 1998, Mr. Casey was named
Senior Vice President and Chief Financial Officer. Prior to joining the Company,
Mr. Casey was a Senior Manager with Price Waterhouse LLP.

    CHRISTOPHER J. O'BRIEN became a Director of the Company in October 1996.
Mr. O'Brien has been an executive of Investcorp, its predecessor or one or more
of its wholly-owned subsidiaries since December 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 CSK Auto Corporation, Harborside Healthcare
Corporation, NationsRent, Inc. and IWO Holdings, Inc. (Independent Wireless One
Corporation).

    THOMAS J. SULLIVAN became a Director of the Company in 2000. Mr. Sullivan
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. Sullivan was Vice President and Treasurer of the Leslie Fay Companies, Inc.
(now Leslie Fay Company, Inc.). Mr. Sullivan is a Director of Werner Holding Co.
(DE), Inc. and IWO Holdings, Inc. (Independent Wireless One Corporation).

    WILLIAM C. MCCOLLUM became a Director of the Company in 2000. Mr. McCollum
has been an executive of Investcorp, its predecessor or one or more of its
wholly-owned subsidiaries since May 1996. Prior to joining Investcorp,
Mr. McCollum was a financial analyst with Chase Securities Inc. Mr. McCollum is
a Director of Harborside Healthcare Corporation.

                                       43
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION

    The following table sets forth all cash compensation earned in fiscal years
2000, 1999 and 1998 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".

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                       OTHER ANNUAL
                                                   FISCAL                INCENTIVE     COMPENSATION
NAME AND PRINCIPAL POSITION                         YEAR      SALARY    COMPENSATION        (a)
---------------------------                       --------   --------   ------------   -------------
<S>                                               <C>        <C>        <C>            <C>
Frederick J. Rowan, II..........................    2000     $600,000    $1,080,000     $1,144,477
  Chairman of the Board of Directors, President     1999      595,833            --        442,290
  and Chief Executive Officer                       1998      560,750       632,500        394,074

Joseph Pacifico ................................    2000     $390,000    $  456,300     $  251,707
  President-Marketing                               1999      387,500            --        197,399
                                                    1998      375,000       268,200        439,572

Charles E. Whetzel, Jr. ........................    2000     $262,500    $  307,100     $  140,809
  Executive Vice President-Global Sourcing          1999      260,417            --        110,238
                                                    1998      250,000       178,800        109,019

David A. Brown .................................    2000     $262,500    $  307,100     $  166,166
  Executive Vice President-Business Planning &      1999      260,417            --         75,372
  Administration and Director                       1998      247,500       178,800         74,721

Michael D. Casey ...............................    2000     $210,000    $  245,700     $  100,097
  Senior Vice President and Chief Financial         1999      208,333            --        115,471
  Officer                                           1998      190,208       143,000        126,080
</TABLE>

------------------------

(a) Other annual compensation includes Holdings' Class C Stock, supplemental
    retirement plan benefits, automobile allowances, insurance premiums and
    medical cost reimbursement. In fiscal 2000, other annual compensation for
    Mr. Rowan includes relocation assistance. In fiscal 1999 and 1998, other
    annual compensation for Mr. Casey included relocation assistance. In fiscal
    1998, other annual compensation for Messrs. Pacifico and Whetzel included
    relocation assistance.

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 $600,000 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

                                       44
<PAGE>
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. and David A. Brown entered into
two-year employment agreements with the Company as of October 30, 1996. Michael
D. Casey entered into a two-year employment agreement effective October 28,
1998. Pursuant to such agreements, Messrs. Pacifico, Whetzel, Brown and Casey
(each an "Executive") are entitled to receive (i) a base salary, currently
$390,000, $262,500, $262,500 and $210,000, 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 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. The employment agreements automatically
extend annually for successive one-year terms, subject to termination upon
notice. 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.

MANAGEMENT STOCK INCENTIVE PLAN

    At 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 72,199 shares of its Class C Stock to certain members of the Company's senior
management, other officers and employees of the Company. As of December 30,
2000, options to purchase up to 74,982 shares of Class C stock were outstanding.
The exercise price of each such option is $60.00 per share, which was 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 Holdings' Class C 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.

DIRECTOR COMPENSATION

    The Company pays no additional remuneration to its employees or to
executives of Investcorp for serving as directors. There are no family
relationships among any of the directors or executive officers.

                                       45
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    All of the Company's issued and outstanding capital stock is owned by
Holdings. At the Acquisition, there were 151,049 shares of Holdings' Class C
Stock issued to members of the Company's management. As of December 30, 2000,
members of the Company's management owned 119,863 shares of Class C Stock of
Holdings. This 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 February 28, 2001,
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

<TABLE>
<CAPTION>
                                                                          Percent
                                                              NUMBER OF      of
                                                               SHARES      Class
NAME                                                             (a)        (a)
----                                                          ---------   --------
<S>                                                           <C>         <C>
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
</TABLE>

    ----------------------------

(a) As used in this table, beneficial ownership means the sole or shared power
    to vote, or to direct the voting of, or the sole or shared power to dispose
    of, or direct the disposition of, a security.

(b) INVESTCORP S.A. ("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
    Building, George Town, Grand Cayman, Cayman Islands.

                                       46
<PAGE>
(e) CIP Limited ("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.

                            CLASS C NON-VOTING STOCK

<TABLE>
<CAPTION>
                                                              NUMBER OF   Percent
                                                               SHARES        of
NAME                                                             (a)       Class
----                                                          ---------   --------
<S>                                                           <C>         <C>
Frederick J. Rowan, II......................................    81,844(b)   30.6%
Joseph Pacifico.............................................    21,350(c)    8.6%
Charles E. Whetzel, Jr......................................    21,350(d)    8.6%
David A. Brown..............................................    21,350(e)    8.6%
Michael D. Casey............................................     5,489(f)    2.2%
Christopher J. O'Brien......................................        --        --
Thomas J. Sullivan..........................................        --        --
William C. McCollum.........................................        --        --
                                                               -------      ----
All directors and executive officers of the Company as a
  group (8 persons).........................................   151,383      58.6%
                                                               =======      ====
</TABLE>

    ----------------------------

(a) As used in this table, beneficial ownership means the sole or shared power
    to vote, or to direct the voting of, or the sole or shared power to dispose
    of, or direct the disposition of, a security.

(b) Includes an aggregate of 25,195 shares of Holdings' Class C Stock issuable
    pursuant to options that are currently exercisable or are exercisable within
    60 days as of February 28, 2001.

(c) Includes an aggregate of 6,298 shares of Holdings' Class C Stock issuable
    pursuant to options that are currently exercisable or are exercisable within
    60 days as of February 28, 2001.

(d) Includes an aggregate of 6,298 shares of Holdings' Class C Stock issuable
    pursuant to options that are currently exercisable or are exercisable within
    60 days as of February 28, 2001.

(e) Includes an aggregate of 6,298 shares of Holdings' Class C Stock issuable
    pursuant to options that are currently exercisable or are exercisable within
    60 days as of February 28, 2001.

(f) Includes an aggregate of 3,200 shares of Holdings' Class C Stock issuable
    pursuant to options that are currently exercisable or are exercisable within
    60 days as of February 28, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    In connection with the closing of the Acquisition, the Company entered into
an agreement for management advisory and consulting services with Investcorp
International, Inc. ("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

                                       47
<PAGE>
members of management, including payments under the Management Equity
Participation Plan and the Long-Term Incentive Plan.

    In January 2000, a loan to an officer in the amount of $4.3 million was
issued, the proceeds of which were used by the officer to repay a previous loan
from the Company in the amount of $1.5 million. The $4.3 million loan is payable
in annual installments of $600,000 commencing on March 31, 2002, and thereafter
on each anniversary thereof until such principal amount and all accrued and
unpaid interest thereon has been repaid. The loan has recourse and is
collateralized by the officer's stock in Holdings and bears interest at the
average rate paid by the Company under the revolving portion of its Senior
Credit Facility. The loan is prepayable with proceeds of any disposition of the
officer's stock in Holdings.

                                       48
<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 27, 2001.

<TABLE>
<S>                    <C>  <C>                                                  <C>
                       THE WILLIAM CARTER COMPANY

                       By:              /s/ FREDERICK J. ROWAN, II
                                 ----------------------------------------
                                          Frederick J. Rowan, II
                                    Chairman of the Board of Directors,
                                   President and Chief Executive Officer
</TABLE>

Date: March 27, 2001

    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.

<TABLE>
<CAPTION>
                        NAME                                               TITLE
                        ----                                               -----
<C>                                                    <S>
             /s/ FREDERICK J. ROWAN, II                Chairman of the Board of Directors, President
     -------------------------------------------         and Chief Executive Officer (Principal
               Frederick J. Rowan, II                    Executive Officer)

                 /s/ DAVID A. BROWN
     -------------------------------------------       Executive Vice President-Business Planning &
                   David A. Brown                        Administration and Director

                /s/ MICHAEL D. CASEY
     -------------------------------------------       Senior Vice President and Chief Financial
                  Michael D. Casey                       Officer

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

               /s/ THOMAS J. SULLIVAN
     -------------------------------------------       Director
                 Thomas J. Sullivan

               /s/ WILLIAM C. MCCOLLUM
     -------------------------------------------       Director
                 William C. McCollum
</TABLE>

                                       48
<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 Sheets at December 30, 2000 and January 1,
               2000

               Consolidated Statements of Operations for the fiscal years ended
               December 30, 2000, January 1, 2000 and January 2, 1999

               Consolidated Statements of Cash Flows for the fiscal years ended
               December 30, 2000, January 1, 2000 and January 2, 1999

               Consolidated Statements of Changes in Common Stockholder's Equity
               for the fiscal years ended December 30, 2000, January 1, 2000 and
               January 2, 1999

               Notes to Consolidated Financial Statements

       2.  Financial Statement Schedules: None

       3.  Exhibits:

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER           DESCRIPTION OF EXHIBITS
---------------------   -----------------------
<C>                     <S>
         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 Statement on 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 March 25, 1997 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 March 25,
                        1997 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.
</TABLE>

                                       49
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER           DESCRIPTION OF EXHIBITS
---------------------   -----------------------
<C>                     <S>
        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 Michael D.
                        Casey incorporated herein by reference to Exhibit 10.8 to
                        the Carter Holdings, Inc. 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.

        10.8            Amendment to Employment Agreement between the Company and
                        Michael D. Casey incorporated herein by reference to Exhibit
                        10.8 to the Company's 1998 Annual Report on Form 10-K.

        10.9            Promissory Note dated January 1, 2000 between the Company
                        and Frederick J. Rowan, II incorporated herein by reference
                        to Exhibit 10.9 to the Company's 1999 Annual Report on Form
                        10-K.

        10.10           Stock Pledge Agreement dated January 1, 2000 between the
                        Company and Frederick J. Rowan, II incorporated herein by
                        reference to Exhibit 10.10 to the Company's 1999 Annual
                        Report on Form 10-K.

        10.11           Receipt and Promissory Note Termination Agreement dated
                        January 1, 2000 between the Company and Frederick J. Rowan,
                        II incorporated herein by reference to Exhibit 10.11 to the
                        Company's 1999 Annual Report on Form 10-K.

        10.12           Lease Agreement dated February 16, 2001 between the Company
                        and Proscenium, L.L.C.

        21              Subsidiaries of the Company incorporated herein by reference
                        to Exhibit 21 filed with Carter Holdings, Inc.'s
                        Registration Statement Form S-4.
</TABLE>

    (b) Reports on Form 8-K: None

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