**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 

| **ý**                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 5, 2003  OR** |
|----------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|                                   |
| **o**                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                 |
|                                   |
| **Commission file number:  333-22155** |

 

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**THE WILLIAMCARTER COMPANY**

(Exact name ofregistrant as specified in charter)

 

| **Massachusetts**                                                                     |   | **04-1156680**                     |
|---------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                      |   | (IRS Employer  Identification No.) |
|                                                                                  |   |                               |
| **The Proscenium  1170 Peachtree Street NE, Suite 900  Atlanta, Georgia  30309** |
| (Address of  principal executive offices, including zip code)                         |
|                                                                                  |   |                               |
| **(404) 745-2700**                                                                    |
| (Registrant’s  telephone number, including area code)                            |

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.   Yes ý      No o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).    Yes  o      No ý

 

Applicable only tocorporate issuers:

 

As of May 16,2003, there were 1,000 shares of Common Stock outstanding.

 

 

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# **FORM10-Q**

 

**THE WILLIAM CARTER COMPANY**

**(A WHOLLY-OWNED SUBSIDIARY OF CARTERHOLDINGS, INC.)**

**INDEX**

 
| **Part I.**  |     | Financial Information                                                                                                          |
|--------------|----------|--------------------------------------------------------------------------------------------------------------------------------|
|         |     |                                                                                                                           |
|         | Item 1.  | Financial Statements                                                                                                           |
|         |     |                                                                                                                           |
|         |     | Condensed Consolidated Balance Sheets as  of April 5, 2003 (unaudited) and December 28, 2002                                   |
|         |     |                                                                                                                           |
|         |     | Unaudited  Condensed Consolidated Statements of Operations for the three-month periods  ended April 5, 2003 and March 30, 2002 |
|         |     |                                                                                                                           |
|         |     | Unaudited  Condensed Consolidated Statements of Cash Flows for the three-month periods  ended April 5, 2003 and March 30, 2002 |
|         |     |                                                                                                                           |
|         |     | Notes to the  Unaudited Condensed Consolidated Financial Statements                                                            |
|         |     |                                                                                                                           |
|         | Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                    |
|         |     |                                                                                                                           |
|         | Item 3.  | Quantitative and  Qualitative Disclosures about Market Risks                                                                   |
|         |     |                                                                                                                           |
|         | Item 4.  | Disclosure Controls and Procedures                                                                                             |
|         |     |                                                                                                                           |
| **Part II.** |     | Other  Information                                                                                                             |
|              |          |                                                                                                                                |  |

 

2

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**THE WILLIAM CARTER COMPANY**

**(A WHOLLY-OWNED SUBSIDIARY OF CARTERHOLDINGS, INC.)**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(dollars inthousands, except per share data)

 
|                                                                                                                                                    |   | **April 5,  2003** |    | **December  28,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                                                                                                                                    |   | **(unaudited)**    |    |                    |   |
| **ASSETS**                                                                                                                                              |   |               |    |                    |   |
| Current  assets:                                                                                                                                        |   |               |    |                    |   |
| Cash  and cash equivalents                                                                                                                              |   | $                  | 39,502  |                    | $      | 35,562 |   |
| Accounts  receivable, net                                                                                                                               |   | 40,684             |    | 53,600                  |   |
| Inventories,  net                                                                                                                                       |   | 99,042             |    | 105,700                 |   |
| Prepaid  expenses and other current assets                                                                                                              |   | 5,248              |    | 4,203                   |   |
| Assets  held for sale                                                                                                                                   |   | 500                |    | 700                     |   |
| Deferred  income taxes                                                                                                                                  |   | 10,293             |    | 10,021                  |   |
|                                                                                                                                                    |   |               |    |                    |   |
| Total  current assets                                                                                                                                   |   | 195,269            |    | 209,786                 |   |
|                                                                                                                                                    |   |               |    |                    |   |
| Property,  plant, and equipment, net                                                                                                                    |   | 50,405             |    | 50,476                  |   |
| Tradename                                                                                                                                               |   | 220,233            |    | 220,233                 |   |
| Cost  in excess of fair value of net assets acquired                                                                                                    |   | 139,282            |    | 139,282                 |   |
| Licensing  agreements, net of accumulated amortization of $8,125 and $6,875                                                                             |   | 6,875              |    | 8,125                   |   |
| Deferred  debt issuance costs, net                                                                                                                      |   | 10,840             |    | 11,248                  |   |
| Other  assets                                                                                                                                           |   | 3,632              |    | 4,199                   |   |
|                                                                                                                                                    |   |               |    |                    |   |
| Total  assets                                                                                                                                           |   | $                  | 626,536 |                    | $      | 643,349 |   |
|                                                                                                                                                    |   |               |    |                    |   |
| **LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                                           |   |               |    |                    |   |
| Current  liabilities:                                                                                                                                   |   |               |    |                    |   |
| Current  maturities of long-term debt                                                                                                                   |   | $                  | 1,201   |                    | $      | 6,346 |   |
| Accounts  payable                                                                                                                                       |   | 22,090             |    | 34,669                  |   |
| Other  current liabilities                                                                                                                              |   | 33,158             |    | 38,309                  |   |
|                                                                                                                                                    |   |               |    |                    |   |
| Total  current liabilities                                                                                                                              |   | 56,449             |    | 79,324                  |   |
|                                                                                                                                                    |   |               |    |                    |   |
| Long-term  debt                                                                                                                                         |   | 291,009            |    | 291,276                 |   |
| Deferred  income taxes                                                                                                                                  |   | 83,361             |    | 83,873                  |   |
| Other  long-term liabilities                                                                                                                            |   | 10,071             |    | 10,140                  |   |
|                                                                                                                                                    |   |               |    |                    |   |
| Total  liabilities                                                                                                                                      |   | 440,890            |    | 464,613                 |   |
|                                                                                                                                                    |   |               |    |                    |   |
| Commitments  and contingencies                                                                                                                          |   |               |    |                    |   |
| Common  stockholder’s equity:                                                                                                                      |   |               |    |                    |   |
| Common  stock, voting; par value $.01 per share; 200,000 shares authorized, 1,000  shares issued and outstanding at April 5, 2003 and December 28, 2002 |   | —             |    | —                  |   |
| Additional  paid-in capital                                                                                                                             |   | 146,645            |    | 146,645                 |   |
| Retained  earnings                                                                                                                                      |   | 39,001             |    | 32,091                  |   |
|                                                                                                                                                    |   |               |    |                    |   |
| Total  common stockholder’s equity                                                                                                                 |   | 185,646            |    | 178,736                 |   |
|                                                                                                                                                    |   |               |    |                    |   |
| Total  liabilities and stockholder’s equity                                                                                                        |   | $                  | 626,536 |                    | $      | 643,349 |   |

 

See accompanyingnotes to the unaudited condensed consolidated financial statements

 

3

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**THE WILLIAM CARTER COMPANY**

**(A WHOLLY-OWNED SUBSIDIARY OF CARTERHOLDINGS, INC.)**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(dollars inthousands)

(unaudited)

 
|                                           |   | **For the  three-month periods ended** |    |
|------------------------------------------------|--------|----------------------------------------|---------|
|                                           |   | **April 5,  2003**                     |    | **March 30,  2002** |   |
|                                           |   |                                   |    |   |   |
| Net  sales                                     |   | $                                      | 165,993 |   | $ | 124,595 |   |
| Cost  of goods sold                            |   | 105,389                                |    | 76,706 |   |
|                                           |   |                                   |    |   |   |
| Gross  profit                                  |   | 60,604                                 |    | 47,889 |   |
| Selling,  general, and administrative expenses |   | 44,921                                 |    | 39,271 |   |
| Royalty  income                                |   | (2,554                                 | )       | (1,961 | ) |
|                                           |   |                                   |    |   |   |
| Operating  income                              |   | 18,237                                 |    | 10,579 |   |
| Interest  expense, net                         |   | 7,002                                  |    | 6,889 |   |
|                                           |   |                                   |    |   |   |
| Income  before income taxes                    |   | 11,235                                 |    | 3,690 |   |
| Provision  for income taxes                    |   | 4,325                                  |    | 1,421 |   |
|                                           |   |                                   |    |   |   |
| Net  income                                    |   | $                                      | 6,910   |   | $ | 2,269 |   |

 

See accompanyingnotes to the unaudited condensed consolidated financial statements

 

4

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**THE WILLIAM CARTER COMPANY**

**(A WHOLLY-OWNED SUBSIDIARY OF CARTERHOLDINGS, INC.)**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(dollars inthousands)

(unaudited)

 
|                                                                               |   | **For the  three-month periods ended** |   |
|------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                               |   | **April 5,  2003**                     |   | **March 30,  2002** |   |
| Cash  flows from operating activities:                                             |   |                                   |   |   |   |
| Net  income                                                                        |   | $                                      | 6,910  |   | $ | 2,269 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                                   |   |   |   |
| Depreciation  and amortization                                                     |   | 4,949                                  |   | 4,167 |   |
| Amortization  of debt issuance costs                                               |   | 408                                    |   | 408 |   |
| Accretion  of debt discount                                                        |   | 33                                     |   | 32 |   |
| Gain  on disposal of assets                                                        |   | —                                 |   | (112 | ) |
| Loss  on disposal of assets held for sale                                          |   | —                                 |   | 68 |   |
| Deferred  tax (benefit) provision                                                  |   | (784                                   | )      | 104 |   |
| Effect  of changes in operating assets and liabilities:                            |   |                                   |   |   |   |
| Decrease  (increase) in assets:                                                    |   |                                   |   |   |   |
| Accounts  receivable                                                               |   | 12,916                                 |   | (2,534 | ) |
| Inventories                                                                        |   | 6,658                                  |   | 3,425 |   |
| Prepaid  expenses and other assets                                                 |   | (1,078                                 | )      | 832 |   |
| Decrease  in liabilities:                                                          |   |                                   |   |   |   |
| Accounts  payable and other liabilities                                            |   | (17,675                                | )      | (2,203 | ) |
|                                                                               |   |                                   |   |   |   |
| Net  cash provided by operating activities                                         |   | 12,337                                 |   | 6,456 |   |
|                                                                               |   |                                   |   |   |   |
| Cash  flows from investing activities:                                             |   |                                   |   |   |   |
| Capital  expenditures                                                              |   | (3,471                                 | )      | (1,727 | ) |
| Proceeds  from sale of property, plant, and equipment                              |   | 4                                      |   | 142 |   |
| Proceeds  from assets held for sale                                                |   | —                                 |   | 227 |   |
| Collections  on loan                                                               |   | 600                                    |   | — |   |
|                                                                               |   |                                   |   |   |   |
| Net  cash used in investing activities                                             |   | (2,867                                 | )      | (1,358 | ) |
|                                                                               |   |                                   |   |   |   |
| Cash  flows from financing activities:                                             |   |                                   |   |   |   |
| Payments  of term loan                                                             |   | (5,445                                 | )      | (625 | ) |
| Payments  of capital lease obligations                                             |   | (85                                    | )      | (333 | ) |
|                                                                               |   |                                   |   |   |   |
| Net  cash used in financing activities                                             |   | (5,530                                 | )      | (958 | ) |
|                                                                               |   |                                   |   |   |   |
| Net  increase in cash and cash equivalents                                         |   | 3,940                                  |   | 4,140 |   |
| Cash  and cash equivalents, beginning of period                                    |   | 35,562                                 |   | 24,692 |   |
|                                                                               |   |                                   |   |   |   |
| Cash  and cash equivalents, end of period                                          |   | $                                      | 39,502 |   | $ | 28,832 |   |

 

See accompanyingnotes to the unaudited condensed consolidated financial statements

 

5

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**THEWILLIAM CARTER COMPANY**

**(A WHOLLY-OWNED SUBSIDIARY OF CARTERHOLDINGS, INC.)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(unaudited)

 

**NOTE 1 — BASIS OF PREPARATION:**

 

In our opinion,the accompanying unaudited condensed consolidated financial statements of TheWilliam Carter Company (“Carter’s,” “we,” “us,” and “our”) contain alladjustments necessary to present fairly our financial position as of April 5,2003 and the results of our operations and cash flows for the three-monthperiods ended April 5, 2003 and March 30, 2002.  Operating results for the three-month period ended April 5, 2003are not necessarily indicative of the results that may be expected for thefiscal year ending January 3, 2004.  Ouraccompanying condensed consolidated balance sheet as of December 28, 2002 isfrom our audited consolidated financial statements included in our mostrecently filed annual report on Form 10-K.

 

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles in theUnited States of America have been condensed or omitted pursuant to the rulesand regulations of the Securities and Exchange Commission and the instructionsto Form 10-Q.  The accounting policieswe follow, except as described in Note 7, are set forth in our most recentlyfiled annual report on Form 10-K in the Notes to our Consolidated FinancialStatements for the fiscal year ended December 28, 2002.

 

Our fiscal yearends on the Saturday in December or January nearest the last day ofDecember.  Consistent with this policy,fiscal 2002 ended on December 28, 2002, and fiscal 2003 will end on January 3,2004.  As a result, fiscal 2003 willcontain 53 weeks of financial results. The additional week in fiscal 2003 was included in the first quarter of2003.  Therefore, the accompanying consolidatedfinancial statements for the first quarter of 2003 reflect our financialposition as of April 5, 2003 and for the 14-week period then ended.  The first quarter of 2002 ended on March 30,2002 and included 13 weeks of financial results.

 

STOCKBASED COMPENSATION:

 

We account forstock-based compensation on stock options under the intrinsic value methodconsistent with Accounting Principles Board Opinion No. 25 (“APB 25”).  Under this method, we record compensationexpense equal to the difference between the exercise price of the stock optionand the fair market value of the underlying stock as of the date of the optiongrant.  For disclosure purposes only, wealso estimate the impact on our net income of applying the fair value method ofmeasuring compensation cost on stock options with the fair value determinedunder the minimum value method as provided by Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS123”) as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure” (“SFAS 148”).

 

6

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The followingtable illustrates the effect on net income if compensation expense for ouroption grants had been determined based on the fair value as of the grant datesconsistent with the methodology of SFAS 123 and SFAS 148 ($000):

 
|                                                                                                                                                                    |   | **For the****three-month periods ended** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                                                                                                                    |   | **April 5,****2003**                     |   | **March 30,****2002** |   |
| Net  income, as reported                                                                                                                                                |   | $                                        | 6,910  |   | $ | 2,269 |   |
|                                                                                                                                                                    |   |                                     |   |   |   |
| Add:                                                                                                                                                                    |   |                                     |   |   |   |
| Stock-based employee  compensation (under APB 25) included in reported net income, net of related  tax effects                                                          |   | 4                                        |   | — |   |
| Deduct:                                                                                                                                                                 |   |                                     |   |   |   |
| Total stock-based  employee compensation expense determined under the fair value based method  (under SFAS 123 and SFAS 148) for all awards, net of related tax effects |   | (133                                     | )      | (122 | ) |
|                                                                                                                                                                    |   |                                     |   |   |   |
| Pro forma net income                                                                                                                                                    |   | $                                        | 6,781  |   | $ | 2,147 |   |

 

For basic options,using a minimum value method, the fair value of each option as of the date ofgrant has been estimated to be approximately $10 per share for options grantedin 2001, $10 to $17 per share for options granted in 2002, and $10 per sharefor options granted in 2003.  These pershare option values were calculated at an assumed risk free interest rate of2.9% for 2003, 4.4% to 3.0% for 2002, and 5.5% for 2001, with an expected lifeof 10 years.  No dividends were assumed.

 

For performanceoptions, using a minimum value method, the fair value of each option as of thedate of grant has been estimated to be approximately $9 per share for optionsgranted in 2001, $10 to $17 per share for options granted in 2002, and $10 pershare for options granted in 2003. These per share option values were calculated at the same assumed riskfree interest rates shown above with an expected life of 10 years.  No dividends were assumed.

 

**NOTE 2 — THE COMPANY:**

 

Carter’s is awholly-owned subsidiary of Carter Holdings, Inc. (“Holdings”).  Holdings has no significant assets orinvestments other than the shares of Carter’s common stock.

 

We design, source,manufacture, and market premier branded childrenswear under the *Carter’s,**Carter’sClassics,*and *Tykes* brand names.  Our products are sourced through productionat company-based sewing facilities located in Costa Rica and Mexico and throughcontractual arrangements with third-party manufacturers throughout theworld.  Products are manufactured forwholesale distribution to major domestic retailers and for our 158 retailstores that market our brand name merchandise and certain products manufacturedby other companies.  Our retailoperations represented approximately 34% and 43% of our consolidated net salesin the first quarters of 2003 and 2002.

 

7

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**NOTE 3 — INVENTORIES:**

 

Inventoriesconsisted of the following ($000):

 
|                        |   | **April 5,  2003** |   | **December  28,  2002** |   |
|-----------------------------|--------|--------------------|--------|-------------------------|--------|
| Finished goods              |   | $                  | 89,522 |                    | $      | 99,609 |   |
| Work  in process            |   | 6,527              |   | 3,509                   |   |
| Raw  materials and supplies |   | 2,993              |   | 2,582                   |   |
|                        |   |               |   |                    |   |
| Total                       |   | $                  | 99,042 |                    | $      | 105,700 |   |

 

**NOTE 4 — PARENT COMPANY TRANSACTIONS:**

 

During the firstquarter of 2003, Holdings issued options to purchase its common stock to one ofour directors.  Additionally, Holdingsissued options to purchase its common stock to certain employees.  No compensation expense was recorded onthese option grants, as the fair market value of the options issued as of thedate of grant was deemed to equal the exercise price of the options.

 

**NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS:**

 

In connection withthe acquisition of Holdings by Berkshire Partners LLC and affiliates (the“Acquisition”), as more fully described in Note 1 to our consolidated financialstatements in our most recently filed annual report on Form 10-K, we adoptedprovisions of SFAS No. 141, “Business Combinations” (“SFAS 141”) and appliedthe required provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”(“SFAS 142”).  Accordingly, ourtradename and goodwill have now been deemed to have indefinite lives and are nolonger being amortized.  Our licensingagreements are being amortized over the average three-year life of suchagreements.  Amortization expense forthe first quarter of 2003 and 2002 was $1.3 million and is expected to be $5.0million for fiscal 2003 and $3.1 million for 2004.

 

**NOTE 6 — SEGMENT INFORMATION:**

 

Our two businesssegments are “Wholesale” and “Retail.” We generally sell the same products in each business segment.  Wholesale products are offered through ourWholesale distribution channel while the Retail segment reflects the operationsof our retail stores.  Each segment’s resultsinclude the costs directly related to the segment’s revenue and all other costsare allocated based on the relationship of such costs to consolidated net salesor units produced to support each segment’s revenue.

 

The table below presents certain segment information for the periodsindicated ($000):

 
|             |   | **For the****three-month periods ended** |    |
|------------------|--------|------------------------------------------|---------|
|             |   | **April 5,****2003**                     |    | **March 30,****2002** |   |
|             |   |                                     |    |   |   |
| **Net sales:**   |   |                                     |    |   |   |
| Wholesale        |   | $                                        | 109,051 |   | $ | 71,059 |   |
| Retail           |   | 56,942                                   |    | 53,546 |   |
| Total  net sales |   | $                                        | 165,993 |   | $ | 124,595 |   |
|             |   |                                     |    |   |   |
| **EBITDA:**      |   |                                     |    |   |   |
| Wholesale        |   | $                                        | 14,620  |   | $ | 8,565 |   |
| Retail           |   | 8,566                                    |    | 6,181 |   |
| Total  EBITDA    |   | $                                        | 23,186  |   | $ | 14,746 |   |

 

8

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EBITDA, in theabove table, represents earnings before interest, income tax expense,depreciation, and amortization.  It ispresented because it is a basis used by management in assessing financialperformance, and we believe it is helpful to investors, securities analysts,and other interested parties, in evaluating performance of companies in ourindustry.  We believe EBITDA is anaccepted indicator of our ability to incur and service debt obligations andmake capital expenditures.  EBITDA isnot a measurement of financial performance under generally accepted accountingprinciples in the United States of America. It should not be considered as an alternative to cash flow fromoperating activities, as a measure of liquidity, or an alternative to netincome indicating our operating performance or any other measures ofperformance derived in accordance with generally accepted accountingprinciples.  Our definition andcalculation of EBITDA may not be comparable to similarly titled measures usedby other companies.

 

A reconciliation of total EBITDA for reportable segments toconsolidated income before income taxes is presented below ($000):

* *
|                                    |   | **For the  three-month periods ended** |   |
|-----------------------------------------|--------|----------------------------------------|--------|
|                                    |   | **April 5,  2003**                     |   | **March 30,  2002** |   |
|                                    |   |                                   |   |   |   |
| Total EBITDA for reportable segments    |   | $                                      | 23,186 |   | $ | 14,746 |   |
| Depreciation and amortization expense   |   | (4,949                                 | )      | (4,167 | ) |
| Interest expense, net                   |   | (7,002                                 | )      | (6,889 | ) |
| Consolidated income before income taxes |   | $                                      | 11,235 |   | $ | 3,690 |   |

 

**NOTE 7 — RECENT ACCOUNTINGPRONOUNCEMENTS:**

 

In August 2001,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143,“Accounting for Asset Retirement Obligations” (“SFAS 143”).  SFAS 143 requires recording the fair marketvalue of an asset retirement obligation as a liability in the period in which alegal obligation associated with the retirement of tangible long-lived assetsis incurred (including certain lease obligations).  SFAS 143 also requires recording an asset offsetting the initialobligation as an increase to the carrying amount of the related long-livedasset and depreciation of that cost over the life of the asset.  We adopted the provisions of SFAS 143 in thefirst quarter of 2003, and the impact of such adoption was not material to ourfinancial position or results of operations for the first quarter of 2003.

 

In April 2002, theFASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS145”).  SFAS 145 rescinds FASB StatementNo. 4, which required all gains and losses from extinguishments of debt to beaggregated and, if material, classified as an extraordinary item, net of therelated income tax effect.  As a result,the criteria in Accounting Principles Board Opinion 30 will now be used toclassify those gains and losses.  Theprovisions of SFAS 145, as related to the rescission of FASB Statement No. 4,are effective for fiscal 2003.  Weadopted the provisions of SFAS 145 in the first quarter of 2003.

 

9

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In July 2002, theFASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities” (“SFAS 146”).  SFAS 146 setsforth various modifications to existing accounting guidance, which prescribesthe conditions that must be met in order for costs associated with contractterminations, facility consolidations, employee relocations, and terminationsto be accrued and recorded as liabilities in financial statements.  Accordingly, SFAS 146 may affect the timingof recognizing any of our future restructuring costs as well as the amountrecognized.  SFAS 146 also establishesthat the liability should initially be measured and recorded at fairvalue.  The provisions of SFAS 146 arerequired to be applied prospectively to exit or disposal activities initiatedby us after December 31, 2002.

 

In December 2002,the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure.” SFAS 148 provides alternate methods of transition for a voluntary changeto the fair value based method of accounting for stock-based employeecompensation.  SFAS 148 also requires thatdisclosures of the pro forma effect of using the fair value method ofaccounting for stock-based employee compensation be displayed more prominentlyand in tabular format.  Additionally,SFAS 148 requires disclosure of the pro forma effect of using the fair valuemethod of accounting for stock-based employee compensation in interim financialstatements.  The transition and annualdisclosure requirements were effective for us as of December 28, 2002.  The interim disclosure requirements areeffective for the first quarter of fiscal 2003 and have been reflected in Note1 to the unaudited condensed consolidated financial statements.

 

10

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**ITEM 2.****                 MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION****AND RESULTS OF OPERATIONS:**

 

The following is adiscussion of the risks relating to our business, our results of operations,and our current financial position.  Youshould read this discussion in conjunction with our unaudited condensed consolidatedfinancial statements and notes included elsewhere in this quarterlyreport.  Our discussion of our resultsof operations and financial condition includes various forward-lookingstatements about our markets, the demand for our products and services, and ourfuture results.  We base thesestatements on certain assumptions that we consider reasonable.  For further information about risks andexposures relating to our business and our company, you should read Item 3 ofthis quarterly report entitled “Quantitative and Qualitative Disclosures aboutMarket Risks” and the section entitled “Risks Relating To Our Business” in ourlatest annual report on Form 10-K. Actual results may differ materially from those suggested by ourforward-looking statements for various reasons including those discussed inItem 3.  Except for any ongoingobligations to disclose material information as required by the federalsecurities laws, we have no intention or obligation to update forward-lookingstatements after we file this quarterly report.

 

**RESULTS OF OPERATIONS**

 

The followingtable sets forth, for the periods indicated, (i) selected statement ofoperations data expressed as a percentage of net sales and (ii) the number ofretail stores open at the end of each such period:

 
|                                          |   | **As a percentage of net sales for  the three-month periods ended** |   |
|-----------------------------------------------|--------|---------------------------------------------------------------------|--------|
|                                          |   | **April 5,  2003**                                                  |   | **March 30,  2002** |   |
|                                          |   |                                                                |   |   |   |
| Wholesale sales                               |   | 65.7                                                                | %      | 57.0 | % |
| Retail sales                                  |   | 34.3                                                                |   | 43.0 |   |
|                                          |   |                                                                |   |   |   |
| Net sales                                     |   | 100.0                                                               |   | 100.0 |   |
| Cost of goods sold                            |   | 63.5                                                                |   | 61.6 |   |
|                                          |   |                                                                |   |   |   |
| Gross profit                                  |   | 36.5                                                                |   | 38.4 |   |
| Selling, general, and administrative expenses |   | 27.1                                                                |   | 31.5 |   |
| Royalty income                                |   | (1.5                                                                | )      | (1.6 | ) |
|                                          |   |                                                                |   |   |   |
| Operating income                              |   | 11.0                                                                |   | 8.5 |   |
| Interest expense, net                         |   | 4.2                                                                 |   | 5.5 |   |
|                                          |   |                                                                |   |   |   |
| Income before income taxes                    |   | 6.8                                                                 |   | 3.0 |   |
| Provision for income taxes                    |   | 2.6                                                                 |   | 1.2 |   |
|                                          |   |                                                                |   |   |   |
| Net income                                    |   | 4.2                                                                 | %      | 1.8 | % |
|                                          |   |                                                                |   |   |   |
| Number of retail stores at end of period      |   | 158                                                                 |   | 152 |   |

 

**Three-month period ended April 5,2003 compared to three-month period ended March 30, 2002**

 

*NETSALES.*    Thethree-month period ended April 5, 2003 contained 14 weeks as compared to thethree-month period ended March 30, 2002, which contained 13 weeks.  In the first quarter of fiscal 2003,consolidated net sales increased $41.4 million, or 33.2%, to $166.0 millionfrom $124.6 million in the first quarter of fiscal 2002.  This first quarter increase in revenue overthe prior year is due to continued strong product performance, the timing ofnew product launches, our focus on improving the value of our core productsthrough our global sourcing capabilities, effective merchandising and pricingstrategies, and the additional week of selling in the first quarter of 2003.

 

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Total wholesalesales increased $38.0 million, or 53.5%, to $109.1 million in the first quarterof 2003 from $71.1 million in the first quarter of 2002.  Wholesale sales, excluding discount storechannel and off-price sales, increased $30.0 million, or 47.3%, to $93.4million from $63.4 million in the first quarter of 2002.  This increase in wholesale sales reflectssignificant growth in our baby and playclothes lines driven by strong productperformance within the majority of our key wholesale accounts and new pricingstrategies offset by lower demand for our sleepwear product line.

 

Discount storechannel sales, which increased $8.0 million to $12.5 million from $4.4 millionin the first quarter of 2002 contributed to the increase in total wholesalesales for the first quarter of 2003. This growth reflects strong performance across all product lines thatare sold within this channel.

 

Our retail storesales were $56.9 million for the first quarter of 2003, an increase of $3.4million, or 6.4%, compared to the first quarter of 2002.  The primary driver of this increase is theadditional week of sales in the first quarter of 2003.  Also contributing to the increase wasincremental revenue generated from new stores opened subsequent to March 30,2002.  Comparable store sales for thefirst quarter of 2003, on a 14-week versus 13-week basis increased 2.5%, basedon 144 locations.  Comparing the first14 weeks of 2003 to the first 14 weeks of 2002, comparable store salesdecreased (5.7%).  This decreasereflects inclement weather, the shift of the Easter holiday into the secondquarter of 2003, and continued weakness in the economy.  During the first quarter of 2003, we openedthree retail stores and closed one. There were a total of 158 stores as of April 5, 2003.  We plan to open eleven stores and close fourstores during the balance of 2003.

 

*GROSSPROFIT.*    Our grossprofit increased $12.7 million, or 26.6%, to $60.6 million in the first quarterof 2003 from $47.9 million in the first quarter of 2002.  Gross profit as a percentage of net sales inthe first quarter of 2003 decreased to 36.5% from 38.4% in the first quarter of2002.  This decrease in gross profit,relative to sales, has resulted primarily from a higher mix of wholesalerevenues that generally yield lower margins than similar products sold throughour retail channel.  Total wholesalesales, including discount store and off-price sales, were 66% of total sales inthe first quarter of 2003 as compared to 57% in the first quarter of 2002.  Gross margin also reflects the impact oflower average prices on certain core products. These declines in gross margin were partially offset by additionalproduct cost reductions achieved through the continued expansion of our globalsourcing strategy.

 

*SELLING,GENERAL, AND ADMINISTRATIVE EXPENSES.*    Selling, general, and administrativeexpenses for the first quarter of 2003 increased $5.7 million, or 14.4%, to$44.9 million from $39.3 million in the first quarter of 2002.  Selling, general, and administrativeexpenses as a percentage of net sales decreased to 27.1% in the first quarterof 2003 from 31.5% in the first quarter of 2002 due to the benefit ofleveraging operating expenses on higher levels of revenue partially offset byhigher distribution costs driven by unit volume growth.

 

*ROYALTYINCOME.*    We licensethe use of the *Carter’s, Carter’s Classics,*and*Tykes*names to certain licensees.  Our royalty income in the first quarter of2003 increased $0.6 million, or 30.2%, to $2.6 million compared to $2.0 millionin the first quarter of 2002.  Thisincrease resulted from the continued extension of our brand through ourlicensing arrangements.

 

*OPERATINGINCOME.   *Operatingincome for the first quarter of 2003 increased $7.7 million, or 72.4%, to $18.2million compared to $10.6 million in the first quarter of 2002.  Operating income as a percentage of netsales increased to 11.0% in the first quarter of 2003 compared to 8.5% in thefirst quarter of 2002.  This increaseprimarily results from the impact of higher levels of revenue and operatingexpense leverage described above.

 

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*INTERESTEXPENSE*, *NET*.    Interest expense in the first quarter of2003 increased $0.1 million to $7.0 million as compared to $6.9 million in thefirst quarter of 2002.  Interest expensefor the first quarter of 2003 includes an additional week of interest offset bylower variable interest rates payable on term loan indebtedness.

 

*INCOMETAXES.   *We recordeda provision for income taxes of $4.3 million in the first quarter of 2003compared to $1.4 million in the first quarter of 2002.  Our effective tax rate was approximately38.5% during the first quarters of 2003 and 2002.

 

*NETINCOME.   *As a resultof the factors noted above, our first quarter 2003 net income was approximately$6.9 million, as compared to approximately $2.3 million in the first quarter of2002.

 

**FINANCIAL CONDITION, CAPITAL RESOURCES, AND LIQUIDITY**

 

Our primary cashneeds are working capital, capital expenditures, and debt service.  Historically, we have financed these needsprimarily through internally generated cash flow and funds borrowed under asenior credit facility.  Our primarysource of liquidity will continue to be cash flow from operations andborrowings available under our credit facilities, and we expect that thesesources will fund our ongoing requirements for debt service and capitalexpenditures.  These sources ofliquidity may be impacted by continued demand for our products and our abilityto meet debt covenants under our credit facility.

 

On August 23,2002, Holdings filed a registration statement with the Securities and ExchangeCommission to register an initial public offering of up to $100.0 million ofits common stock.  That registrationstatement has not yet become effective. If the initial public offering is completed, Holdings intends tocontribute to us a portion of its proceeds from the offering.  In the fourth quarter of 2002, we decided topostpone the initial public offering process given the deterioration in equitymarket conditions.

 

Net accountsreceivable at April 5, 2003 were $40.7 million compared to $38.0 million atMarch 30, 2002 and $53.6 million at December 28, 2002.  The first quarter increase over thecomparable quarter in 2002 reflects a higher level of wholesale shipments inthe latter part of the first quarter ended April 5, 2003.  Due to the seasonal nature of ouroperations, the net accounts receivable balance at April 5, 2003 is notcomparable to the net accounts receivable balance at December 28, 2002.

 

Net inventories atApril 5, 2003 were $99.0 million compared to $85.6 million at March 30, 2002and $105.7 million at December 28, 2002. The first quarter increase in net inventory levels as compared to March30, 2002 is to support second quarter 2003 shipping requirements.  We expect inventories to be higher duringthe balance of the year to support increased levels of demand including thelaunch of our new brand *Child of Mine*that begins shipping to substantially all U.S.-based Wal-Mart stores in June2003.  Due to the seasonal nature of ouroperations, net inventories at April 5, 2003 are not comparable to netinventories at December 28, 2002.

 

Net cash providedby operating activities for the first quarter of 2003 was $12.3 millioncompared to $6.5 million in the first quarter of 2002.  The change in net cash provided by operatingactivities in the first quarter of 2003 compared to the first quarter of 2002is primarily attributable to the increase in net income and reductions inaccounts receivable and inventory, partially offset by reductions in currentliabilities.

 

Our current levelsof cash and borrowing capacity available under the senior credit facility areexpected to fund the additional working capital required to support forecastedincreases in demand.

 

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We have invested$3.5 million in capital expenditures during the first quarter of 2003 ascompared to $1.7 million during the first quarter of 2002.  We plan to invest an additional $17.0million in capital expenditures during the remainder of fiscal 2003.  Major investments include retail storeopenings and remodeling, fixturing programs for wholesale customers, andexpansion of distribution capabilities.

 

At April 5, 2003, we had approximately $292.2 million of debtoutstanding, consisting of $173.9 million of senior subordinated notes(the “Notes”), $118.3 million in term loan borrowings, and no revolverborrowings under the senior credit facility, exclusive of approximately$9.5 million of outstanding letters of credit.  At April 5, 2003, we had approximately $50.5 million of financingavailable under our revolving loan facility. At December 28, 2002, we had approximately $297.6 million ofdebt outstanding, consisting of $173.9 million of Notes,$123.8 million in term loan borrowings and no revolver borrowings underthe senior credit facility, exclusive of approximately $16.3 million ofoutstanding letters of credit.  Theborrowings under the revolving credit facility will be available to fund our workingcapital requirements, capital expenditures, and other general corporatepurposes.

 

Principalborrowings under the term loan are due and payable in eighteen quarterlyinstallments of $300,267 from June 30, 2003 through September 30, 2007 and fourquarterly payments of approximately $28.2 million from December 31, 2007through September 30, 2008.  Interest onthe term loan is payable at the end of interest rate reset periods, which varyin length but in no case exceed six months. The outstanding balance of the revolving credit facility is payable infull on August 15, 2006, and interest is payable quarterly, or more frequentlyin the event we have chosen a Eurodollar rate option available under the termsof the senior credit facility.  Noprincipal payments are required on the Notes prior to their scheduled maturityin August 2011.  Interest is payablesemi-annually on the Notes in February and August of each year, in the amountof $9.5 million for each payment.  Thesepayments commenced on February 15, 2002.

 

The senior credit facility sets forth mandatory and optional prepaymentconditions that may result in our use of cash to reduce our debt obligations,including payments of: (i) 50% of the net cash proceeds from an equity issuanceby Holdings, excluding, among other things, any issuance of equity inconnection with employee or director stock plans or a permitted acquisition and(ii) 50% or 75% of consolidated excess cash flow, depending on the applicableleverage ratio, as both terms are defined in the senior credit facility.  The terms of the consolidated excess cashflow condition were effective for fiscal 2002 and, accordingly, we made aprincipal prepayment of approximately $4.8 million on March 26, 2003.  This excess cash flow condition may resultin the future annual prepayments depending on the consolidated excess cash flowgenerated in each year.  The lenderswill apply such prepayments first to the term loan and, second, to permanentlyreduce the revolving credit commitments. Subject to certain conditions in the senior credit facility, we may makeoptional prepayments of our debt obligations without premium or penalty.  The lenders will apply such optionalprepayments according to our instruction.

 

As provided by amanagement agreement with Berkshire Partners, we agreed, among other things, topay Berkshire Partners an annual management fee of $1.65 million per year forfour years, commencing on the first anniversary of the Acquisition.  We pay this fee quarterly in advance.  We have agreed to pay Berkshire Partners anacquisition fee of 1% of any future financing or 1% of the value of anyacquisition for their advice in connection with any future financing oracquisition.

 

Based on our current level of operations and anticipated cost savingsand operating improvements, we believe that cash generated fromoperations and available cash, together with amounts available under therevolving credit portion of our new senior credit facility, will be adequate tomeet our debt service requirements, capital expenditures, and working capitalneeds for the foreseeable future, although no assurance can be given in thisregard.  We may, however, need to refinance all or a portion of the principalamount of the Notes on or prior to maturity.

 

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The senior creditfacility imposes certain covenants, requirements, and restrictions on actionsby us and our subsidiaries that, among other things, restrict the payment ofdividends.

 

**EFFECTS OF INFLATION**

 

We are affected byinflation and changing prices primarily through the purchase of raw materials,increased operating costs and expenses, and higher interest rates.  The effects of inflation in changing priceson our net sales, revenues, and operations have not been material in recentyears.  In recent years, there has beendeflationary pressure on selling prices. Due to the competitive nature of the children’s apparel industry, thereis no assurance that this trend will not continue.  While we have been successful in offsetting such deflationarypressures through expansion of our global sourcing capabilities, if the trendin selling prices outpaces our ability to obtain further price reductions fromour global suppliers, our profitability may be affected.

 

**SEASONALITY**

 

We experienceseasonal fluctuations in our sales and profitability, with generally lowersales and gross profit in the first and second quarters of our fiscalyear.  Over the past five fiscal years,approximately 58% of our consolidated net sales was generated in the secondhalf of our fiscal year.  We believe,generally, that the seasonality of sales and profitability is a factor thataffects the baby and young children’s apparel industry and is primarily due toretailers’ emphasis on price reductions in the first quarter, promotionalretailers’ and manufacturers’ emphasis on closeouts of the prior year’s productlines, and “back-to-school” and holiday shopping patterns.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Our discussion and analysis of our financial condition and results ofoperations are based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America.  Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues,expenses, and related disclosure of contingent assets and liabilities.  We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.

 

Our significantaccounting policies are described in Note 2 to our consolidated financialstatements contained in our most recently filed annual report on Form10-K.  The following discussionaddresses our critical accounting policies, which are those that requiremanagement’s most difficult and subjective judgments, often as a result of theneed to make estimates about the effect of matters that are inherentlyuncertain.

 

*Revenuerecognition:*  Werecognize wholesale revenue after shipment of products to customers, when titlepasses and when all risks and rewards of ownership have transferred.  As discussed in Note 2 to our consolidatedfinancial statements contained in our most recently filed annual report on Form10-K, in certain cases, this does not occur until the goods have reached thespecified customer.  We consider revenuerealized or realizable and earned when the product has been shipped, the salesprice is fixed or determinable and collectibility is reasonably assured.  In the normal course of business, we grantcertain accommodations and allowances to our wholesale customers.  Such amounts are reflected as reductions ofnet sales.  Retail store revenues arerecognized at the point of sale.  Wereduce revenue for customer returns and deductions.  We also maintain an allowance for doubtful accounts for estimatedlosses resulting from the inability of our customers to make payments.  If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, an additional allowance could be required.

 

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*Inventory: *We write down ourinventory for estimated excess and obsolescence equal to the difference betweenthe cost of inventory and the estimated market value based upon assumptionsabout future demand and market conditions. If actual market conditions are less favorable than those we project,additional write-downs may be required.

 

*Goodwilland tradename:*  As ofApril 5, 2003, we have approximately $360 million in goodwill and tradenameassets.  The fair value of the *Carter’s* tradename was estimated at theAcquisition to be approximately $220 million using a discounted cash flowanalysis, which examined the hypothetical cost savings that accrue as a resultof our ownership of the tradename.  Thecash flows, which incorporated both historical and projected financialperformance, were discounted using a discount rate of 11%.  The tradename was determined to have anindefinite life.  The carrying value ofthese assets is subject to annual impairment reviews as of the last day of eachfiscal year.  Factors affecting suchimpairment reviews include the continued market acceptance of our offered productsand the development of new products. Impairment reviews may also be triggered by any significant events orchanges in circumstances.  Ourimpairment review of goodwill is based on the estimated fair values of theunderlying businesses.  These estimatedfair values are based on estimates of the future cash flows of the businesses.

 

*Accruedexpenses: *Accruedexpenses for health insurance, workers compensation, incentive compensation,professional fees, and other outstanding obligations are assessed based onactual commitments, statistical trends, and estimates based on projections andcurrent expectations, and these estimates are updated periodically asadditional information becomes available.

 

*Accountingfor income taxes:*  Aspart of the process of preparing our consolidated financial statements, we arerequired to estimate our actual current tax exposure (state, federal, andforeign), together with assessing permanent and temporary differences resultingfrom differing bases and treatment of items for tax and accounting purposes,such as the carrying value of intangibles, deductibility of expenses,depreciation of property and equipment, and valuation of inventories.  Temporary differences result in deferred taxassets and liabilities, which are included within our consolidated balancesheets.  We must then assess thelikelihood that our deferred tax assets will be recovered from future taxableincome.  Actual results could differfrom this assessment if sufficient taxable income is not generated in futureperiods.  To the extent we determine theneed to establish a valuation allowance or increase such allowance in a period,we must include an expense within the tax provision in the accompanyingunaudited condensed consolidated statement of operations.

 

*Stock-based compensationarrangements:  *We account for stock-basedcompensation on stock options under the intrinsic value method, whereby werecord compensation expense equal to the difference between the exercise priceof the stock option and the fair market value of the underlying stock at the dateof the option grant.  For disclosurepurposes only, we also estimate the impact on our net income of applying thefair value method of measuring compensation cost on stock options with the fairvalue determined under the minimum value method as provided by Statement ofFinancial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation” as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure” (“SFAS 148”).  For stock issued or sold outright to employees, directors, orthird parties, we measure expense as the difference between the price paid bythe recipient and the fair market value of the stock on the date of issuance orsale.  In the absence of a public marketfor Holdings common stock, management and the Board of Directors estimate themarket value of Holdings common stock for all option grant and stock issuancedates using an approach based upon a multiple of Adjusted EBITDA.  Adjusted EBITDA represents earnings beforeinterest, income tax expense, depreciation and amortization, and also excludesAcquisition-related non-recurring charges, write-downs of long-lived assets,non-recurring charges-plant closure costs, and non-recurringcharges-other.  Adjusted EBITDA is not ameasurement under generally accepted accounting principles.

 

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*Accountingfor contingencies: *From time to time, we are named as adefendant in legal actions arising from normal operations.  We account for such contingencies inaccordance with SFAS No. 5, “Accounting for Contingencies”, which requires usto record an estimated loss liability when information available prior toissuance of our financial statements indicates that it is probable that anasset has been impaired or a liability has been incurred at the date of thefinancial statements and the amount of the loss can be reasonablyestimated.  Accounting for contingenciesarising from contractual or legal proceedings requires company management touse its best judgment when estimating an accrual related to suchcontingencies.  As additionalinformation becomes known, such estimates are revised and updated as necessaryand may fluctuate from period to period.

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

In August 2001,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143,“Accounting for Asset Retirement Obligations” (“SFAS 143”).  SFAS 143 requires recording the fair marketvalue of an asset retirement obligation as a liability in the period in which alegal obligation associated with the retirement of tangible long-lived assetsis incurred (including certain lease obligations).  The statement also requires recording an asset offsetting theinitial obligation as an increase to the carrying amount of the related long-livedasset and depreciation of that cost over the life of the asset.  We adopted the provisions of SFAS 143 in thefirst quarter of 2003 and the impact of such adoption was not material to ourfinancial position or results of operations for the first quarter of 2003.

 

In April 2002, theFASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS145”).  SFAS 145 rescinds FASB StatementNo. 4, which required all gains and losses from extinguishments of debt to beaggregated and, if material, classified as an extraordinary item, net of therelated income tax effect.  As a result,the criteria in Accounting Principles Board Opinion 30 will now be used toclassify those gains and losses.  Theprovisions of SFAS 145, as related to the rescission of FASB Statement No. 4,are effective for fiscal 2003.  Weadopted the provisions of SFAS 145 in the first quarter of 2003.

 

In July 2002, theFASB issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities” (“SFAS 146”).  SFAS146 sets forth various modifications to existing accounting guidance, whichprescribes the conditions which must be met in order for costs associated withcontract terminations, facility consolidations, employee relocations, andterminations to be accrued and recorded as liabilities in financialstatements.  Accordingly, SFAS 146 mayaffect the timing of recognizing any of our future restructuring costs as wellas the amount recognized.  SFAS 146 alsoestablishes that the liability should initially be measured and recorded atfair value.  The provisions of SFAS 146are required to be applied prospectively to exit or disposal activitiesinitiated by us after December 31, 2002.

 

In December 2002,the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure.” SFAS 148 provides alternate methods of transition for a voluntary changeto the fair value based method of accounting for stock-based employee compensation.  SFAS 148 also requires that disclosures ofthe pro forma effect of using the fair value method of accounting forstock-based employee compensation be displayed more prominently and in tabularformat.  Additionally, SFAS 148 requiresdisclosure of the pro forma effect of using the fair value method of accountingfor stock-based employee compensation in interim financial statements.  The transition and annual disclosurerequirements were effective for us as of December 28, 2002.  The interim disclosure requirements areeffective for the first quarter of fiscal 2003 and have been reflected in Note1 to the unaudited condensed consolidated financial statements.

 

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**ITEM 3.****                        QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISKS**

 

In the operationof our business, we have market risk exposures to global sourcing, raw materialprices, and interest rates.  Each ofthese risks and our strategies to manage our exposure to them is discussedbelow.

 

We currentlysource substantially all of our production from our offshore operations andthird-party manufacturers located in foreign countries.  As a result, we may be adversely affected bypolitical instability resulting in the disruption of trade from foreigncountries, the imposition of additional regulations relating to imports,duties, taxes, and other charges on imports, any significant decreases in thevalue of the dollar against foreign currencies, and restrictions on thetransfer of funds.  These and otherfactors could result in the interruption of production in offshore facilities,delay receipt of the products in the United States or affect our operatingincome.  Our future performance may besubject to such factors, which are beyond our control, and there can be noassurance that such factors would not have a material adverse effect on ourfinancial condition and results of operations. We carefully select our sourcing agents, and in an effort to mitigatethe possible disruption in product flow, we place production in variouscountries we believe to be of lower risk. We are unable to predict whether the emerging Severe Acute RespiratorySyndrome, or SARS, epidemic will have a negative effect on our procurement ofproducts from China, Taiwan, or other parts of Asia.  If the spread of this epidemic impacts our ability to obtainproducts on a timely basis, there could be disruption in our operations.

 

We enter intovarious purchase order commitments with full package suppliers.  We can cancel these arrangements, althoughin some instances, we may be subject to a termination charge reflecting apercentage of work performed prior to cancellation.  Historically, such cancellations and related termination chargeshave not had a material impact on our business.

 

The principal rawmaterials we use are finished fabrics and trim materials.  Prices for these materials are affected bychanges in market demand and there can be no assurance that prices for theseand other raw materials will not increase in the near future.  These materials are available from more thanone supplier, which enables us to negotiate pricing.  However, the loss of one or more of these suppliers couldinterrupt our supply, which could have an adverse effect on our sales andincrease our costs.

 

We contract forproduction with third parties primarily in the Far East and South and CentralAmerica.  While these contracts arestated in United States dollars, there can be no assurance that the cost forthe future production of our products will not be affected by exchange ratefluctuations between the United States dollar and the local currencies of thesecontractors.  Due to the number ofcurrencies involved, we cannot quantify the potential impact of future currencyfluctuations on net income in future years. To date, such exchange fluctuations have not had a material impact onour financial condition or results of operations.

 

Our operatingresults are subject to risk from interest rate fluctuations on debt, whichcarries variable interest rates.  At April 5, 2003, outstanding debt aggregated$292.2 million, of which $118.3 million bore interest at a variable rate, sothat an increase of 1% in the applicable rate would increase our annualinterest cost by $1.2 million and could have an adverse effect on our netincome and cash flow.  Pursuantto the provisions of the senior credit facility, we purchased an interest ratecap as an economic hedge against approximately $31.3 million of variable ratedebt.  The cap rate is 7.0% and thearrangement expires on December 7, 2004.

 

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**ITEM 4.****                        DISCLOSURE CONTROLS AND PROCEDURES**

 

Based on anevaluation of our disclosure controls and procedures as of a date within 90days of the filing date of this quarterly report, our Chief Executive Officerand Chief Financial Officer have concluded that our disclosure controls andprocedures are effective in connection with our filing of this quarterly reporton Form 10-Q for the period ended April 5, 2003.

 

There were no significantchanges in our internal controls or in any other factors, which couldsignificantly affect those controls, subsequent to the date of our most recentevaluation of our internal controls, including any corrective actions withregard to any significant deficiencies or material weaknesses.

 

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**PARTII—OTHER INFORMATION:**

 

**ITEM 1. LEGAL PROCEEDINGS:**

 

From time to time,we have been involved in various legal proceedings.  We believe that all such litigation is routine in nature andincidental to the conduct of our business, and we believe that no suchlitigation, if resolved adversely to us, would have a material adverse effecton our financial condition or results of operations or cash flows.

 

During 2002, alawsuit was filed against us in which the plaintiff is claiming damages ofapproximately $830,000 related to an alleged oral guarantee of money owed to itby a third-party vendor.  We have notprovided for this exposure, as we believe that this claim is without merit andwe intend to vigorously defend this matter.

 

**ITEM 2. CHANGES IN SECURITIES:**

 

None

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES:**

 

None

 

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

 

On February 20,2003, the holder of all of our 1,000 shares of common stock, voted by unanimouswritten consent in lieu of a special meeting to elect Paul Fulton and John R.Welch as directors of The William Carter Company.  Also on February 20, 2003, David A. Brown and Joseph Pacificoresigned as directors.  After February20, 2003, the directors of The William Carter Company were as follows:Frederick J. Rowan, II, Bradley M. Bloom, Ross M. Jones, David Pulver, PaulFulton, and John R. Welch.

 

**ITEM 5. OTHER INFORMATION:**

 

None

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:**

 

(a) Exhibits:  None

 

(b) Reports onForm 8-K:  None

 

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## **SIGNATURES**

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   | THE WILLIAM  CARTER COMPANY     |                        |
|--------|---------------------------------|-----------------------------|
|   |                            |                        |
|   |                            |                        |
|   | Date:  May 16, 2003        | /s/ FREDERICK J.  ROWAN, II |   |
|   |                            |                        |
|   | Frederick J.  Rowan, II         |                        |
|   | *Chairman, President, and*      |                        |
|   | *Chief  Executive Officer*      |                        |
|   |                            |                        |
|   | Date:  May 16, 2003        | /s/ MICHAEL D.  CASEY       |   |
|   |                            |                        |
|   | Michael D. Casey                |                        |
|   | *Executive Vice  President and* |                        |
|   | *Chief Financial Officer*       |                        |

 

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**CERTIFICATION**

 

I, Frederick J. Rowan,II, certify that:

 

1. I have reviewed thisquarterly report on Form 10-Q of The William Carter Company;

 

2. Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:  May 16, 2003 |                        |   |
|--------------------------|-----------------------------|--------|
|                     |                        |   |
|                     |                        |   |
|                     | /s/ FREDERICK J.  ROWAN, II |   |
|                     |                        |   |
|                     | Frederick J.  Rowan, II     |   |
|                     | *Chief Executive Officer*   |   |

 

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**CERTIFICATION**

 

I, Michael D. Casey,certify that:

 

1. I have reviewed thisquarterly report on Form 10-Q of The William Carter Company;

 

2. Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:  May 16, 2003 |                      |   |
|--------------------------|---------------------------|--------|
|                     |                      |   |
|                     |                      |   |
|                     | /s/ MICHAEL D.  CASEY     |   |
|                     |                      |   |
|                     | Michael D. Casey          |   |
|                     | *Chief Financial Officer* |   |

 

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