**UNITEDSTATES SECURITIES AND 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  OCTOBER 4, 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 WILLIAM CARTER COMPANY**

(Exact name ofregistrant as specified in charter)

 

| **Massachusetts**                                                |                                                                            | **04-1156680**                        |
|------------------------------------------------------------------|---------------------------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of  Incorporation or Organization) |                                                                            | (I.R.S. 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 check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 ý      No o

 

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

 

Applicable only tocorporate issuers:

 

As of November 17,2003, there were 1,000 shares of Common Stock outstanding.

 

 

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**FORM 10-Q**

**THE WILLIAM CARTER COMPANY**

**(A WHOLLY-OWNED SUBSIDIARY OFCARTER’S, INC.)**

**INDEX**

 

 
| **Part I.**  |     | **Financial Information**                                                                                                                               |   |
|--------------|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|         |     |                                                                                                                                                    |   |
|         | Item 1.  | Financial Statements                                                                                                                                    |   |
|         |     |                                                                                                                                                    |   |
|         |     | Condensed  Consolidated Balance Sheets as of October 4, 2003 (unaudited) and  December 28, 2002                                               |   |
|         |     |                                                                                                                                                    |   |
|         |     | Unaudited  Condensed Consolidated Statements of Operations for the three and nine-month  periods ended October 4, 2003 and September 28, 2002 |   |
|         |     |                                                                                                                                                    |   |
|         |     | Unaudited  Condensed Consolidated Statements of Cash Flows for the nine-month periods  ended October 4, 2003 and September 28, 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 OFCARTER’S, INC.)**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(dollars inthousands, except per share data)

 

 
|                                                                                                                                                                |   | **October 4,  2003** |    | **December 28,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|---------|------------------------|--------|
|                                                                                                                                                                |   | **(unaudited)**      |    |                   |   |
| **ASSETS**                                                                                                                                                          |   |                 |    |                   |   |
| Current assets:                                                                                                                                                     |   |                 |    |                   |   |
|                                                                                                                                                                |   |                 |    |                   |   |
| Cash and cash  equivalents                                                                                                                                          |   | $                    | 7,055   |                   | $      | 35,562 |   |
| Accounts  receivable, net                                                                                                                                           |   | 70,893               |    | 53,600                 |   |
| Inventories, net                                                                                                                                                    |   | 118,080              |    | 105,700                |   |
| Prepaid expenses  and other current assets                                                                                                                          |   | 2,833                |    | 4,903                  |   |
| Deferred income  taxes                                                                                                                                              |   | 8,425                |    | 10,021                 |   |
|                                                                                                                                                                |   |                 |    |                   |   |
| Total current  assets                                                                                                                                               |   | 207,286              |    | 209,786                |   |
|                                                                                                                                                                |   |                 |    |                   |   |
| Property, plant,  and equipment, net                                                                                                                                |   | 47,679               |    | 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 $10,625 and $6,875                                                                                        |   | 4,375                |    | 8,125                  |   |
| Deferred debt  issuance costs, net                                                                                                                                  |   | 10,783               |    | 11,248                 |   |
| Other assets                                                                                                                                                        |   | 3,703                |    | 4,199                  |   |
|                                                                                                                                                                |   |                 |    |                   |   |
| Total assets                                                                                                                                                        |   | $                    | 633,341 |                   | $      | 643,349 |   |
|                                                                                                                                                                |   |                 |    |                   |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**                                                                                                                      |   |                 |    |                   |   |
| Current  liabilities:                                                                                                                                               |   |                 |    |                   |   |
|                                                                                                                                                                |   |                 |    |                   |   |
| Current  maturities of long-term debt                                                                                                                               |   | $                    | 1,180   |                   | $      | 6,346 |   |
| Accounts payable                                                                                                                                                    |   | 32,991               |    | 34,669                 |   |
| Other current  liabilities                                                                                                                                          |   | 36,723               |    | 38,309                 |   |
|                                                                                                                                                                |   |                 |    |                   |   |
| Total current  liabilities                                                                                                                                          |   | 70,894               |    | 79,324                 |   |
|                                                                                                                                                                |   |                 |    |                   |   |
| Long-term debt                                                                                                                                                      |   | 292,401              |    | 291,276                |   |
| Deferred income  taxes                                                                                                                                              |   | 83,717               |    | 83,873                 |   |
| Other long-term  liabilities                                                                                                                                        |   | 9,977                |    | 10,140                 |   |
|                                                                                                                                                                |   |                 |    |                   |   |
| Total  liabilities                                                                                                                                                  |   | 456,989              |    | 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 October 4, 2003 and December 28, 2002 |   | —               |    | —                 |   |
| Additional  paid-in capital                                                                                                                                         |   | 147,501              |    | 146,645                |   |
| Retained  earnings                                                                                                                                                  |   | 28,851               |    | 32,091                 |   |
|                                                                                                                                                                |   |                 |    |                   |   |
| Total common  stockholder’s equity                                                                                                                             |   | 176,352              |    | 178,736                |   |
|                                                                                                                                                                |   |                 |    |                   |   |
| Total  liabilities and stockholder’s equity                                                                                                                    |   | $                    | 633,341 |                   | $      | 643,349 |   |

 

See accompanying notes to the unaudited condensed consolidatedfinancial statements

 

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**THEWILLIAM CARTER COMPANY**

**(A WHOLLY-OWNED SUBSIDIARY OFCARTER’S, INC.)**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

(dollars inthousands)

(unaudited)

 
|                                           |   | **For the  three-month periods ended** |    | **For the  nine-month periods ended** |   |
|------------------------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                                           |   | **October 4, 2003**                    |    | **September 28, 2002**                |   | **October 4, 2003** |   | **September 28, 2002** |   |
|                                           |   |                                   |    |                                  |   |   |   |   |   |
| Net sales                                      |   | $                                      | 212,135 |                                  | $      | 165,779 |   | $ | 518,136 |   | $ | 409,469 |   |
| Cost of goods  sold                            |   | 136,451                                |    | 100,642                               |   | 331,993 |   | 250,711 |   |
|                                           |   |                                   |    |                                  |   |   |   |   |   |
| Gross profit                                   |   | 75,684                                 |    | 65,137                                |   | 186,143 |   | 158,758 |   |
| Selling,  general, and administrative expenses |   | 51,896                                 |    | 43,118                                |   | 138,660 |   | 122,031 |   |
| Plant closure  costs                           |   | 115                                    |    | —                                |   | 115 |   | — |   |
| Royalty income                                 |   | (3,692                                 | )       | (2,461                                | )      | (8,149 | ) | (6,236 | ) |
|                                           |   |                                   |    |                                  |   |   |   |   |   |
| Operating income                               |   | 27,365                                 |    | 24,480                                |   | 55,517 |   | 42,963 |   |
| Interest  expense, net                         |   | 6,788                                  |    | 7,268                                 |   | 20,309 |   | 21,238 |   |
|                                           |   |                                   |    |                                  |   |   |   |   |   |
| Income before  income taxes                    |   | 20,577                                 |    | 17,212                                |   | 35,208 |   | 21,725 |   |
| Provision for  income taxes                    |   | 7,922                                  |    | 6,634                                 |   | 13,555 |   | 8,372 |   |
|                                           |   |                                   |    |                                  |   |   |   |   |   |
| Net income                                     |   | $                                      | 12,655  |                                  | $      | 10,578 |   | $ | 21,653 |   | $ | 13,353 |   |

 

See accompanyingnotes to the unaudited condensed consolidated financial statements

 

4

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**THEWILLIAM CARTER COMPANY**

**(A WHOLLY-OWNED SUBSIDIARY OFCARTER’S, INC.)**

# **CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(dollars inthousands)

(unaudited)

 
|                                                                               |   | **For the  nine-month periods ended** |   |
|------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                               |   | **October 4,  2003**                  |   | **September  28, 2002** |   |
| Cash flows from  operating activities:                                             |   |                                  |   |   |   |
| Net income                                                                         |   | $                                     | 21,653 |   | $ | 13,353 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                                  |   |   |   |
| Depreciation and  amortization                                                     |   | 16,009                                |   | 13,202 |   |
| Amortization of  debt issuance costs                                               |   | 1,264                                 |   | 1,223 |   |
| Accretion of  debt discount                                                        |   | 99                                    |   | 98 |   |
| Non-cash  compensation expense                                                     |   | 256                                   |   | 762 |   |
| Plant closure  costs                                                               |   | 115                                   |   | — |   |
| Gain on sale of  property, plant, and equipment                                    |   | (21                                   | )      | (209 | ) |
| Deferred tax  provision (benefit)                                                  |   | 1,440                                 |   | (1,261 | ) |
| Effect of  changes in operating assets and liabilities:                            |   |                                  |   |   |   |
| (Increase) decrease  in assets:                                                    |   |                                  |   |   |   |
| Accounts  receivable                                                               |   | (17,293                               | )      | (12,794 | ) |
| Inventories                                                                        |   | (12,380                               | )      | (7,529 | ) |
| Prepaid expenses  and other assets                                                 |   | 1,515                                 |   | (822 | ) |
| (Decrease)  increase in liabilities:                                               |   |                                  |   |   |   |
| Accounts payable  and other liabilities                                            |   | (3,245                                | )      | 5,239 |   |
|                                                                               |   |                                  |   |   |   |
| Net cash  provided by operating activities                                         |   | 9,412                                 |   | 11,262 |   |
|                                                                               |   |                                  |   |   |   |
| Cash flows from  investing activities:                                             |   |                                  |   |   |   |
| Capital  expenditures                                                              |   | (9,367                                | )      | (8,989 | ) |
| Proceeds from  sale of property, plant, and equipment                              |   | 275                                   |   | 754 |   |
| Collections on  loan                                                               |   | 600                                   |   | — |   |
|                                                                               |   |                                  |   |   |   |
| Net cash used in  investing activities                                             |   | (8,492                                | )      | (8,235 | ) |
|                                                                               |   |                                  |   |   |   |
| Cash flows from  financing activities:                                             |   |                                  |   |   |   |
| Payments on term  loan                                                             |   | (6,040                                | )      | (937 | ) |
| Payments on  revolving loan facility                                               |   | (89,700                               | )      | — |   |
| Proceeds from  revolving loan facility                                             |   | 91,600                                |   | — |   |
| Payment of  dividend to Parent                                                     |   | (24,893                               | )      | — |   |
| Payments of debt  issuance costs                                                   |   | (799                                  | )      | — |   |
| Payments of  capital lease obligations                                             |   | (195                                  | )      | (567 | ) |
| Proceeds from  contributions from Parent                                           |   | 600                                   |   | 1,000 |   |
|                                                                               |   |                                  |   |   |   |
| Net cash used in  financing activities                                             |   | (29,427                               | )      | (504 | ) |
|                                                                               |   |                                  |   |   |   |
| Net (decrease)  increase in cash and cash equivalents                              |   | (28,507                               | )      | 2,523 |   |
| Cash and cash  equivalents, beginning of period                                    |   | 35,562                                |   | 24,692 |   |
|                                                                               |   |                                  |   |   |   |
| Cash and cash  equivalents, end of period                                          |   | $                                     | 7,055  |   | $ | 27,215 |   |

 

See accompanyingnotes to the unaudited condensed consolidated financial statements

 

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**THEWILLIAM CARTER COMPANY**

**(AWHOLLY-OWNED SUBSIDIARY OF CARTER’S, INC.)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(unaudited)

 

**NOTE 1 — BASIS OF PREPARATION:**

 

In our opinion, the accompanying unaudited condensedconsolidated financial statements of The William Carter Company (“TWCC “)contain all adjustments necessary to present fairly our financial position as ofOctober 4, 2003; the results of our operations for the three-month andnine-month periods ended October 4, 2003 and September 28, 2002; andour cash flows for the nine-month periods ended October 4, 2003 andSeptember 28, 2002.  Operatingresults for the three-month and nine-month periods ended October 4, 2003are not necessarily indicative of the results that may be expected for thefiscal year ending January 3, 2004. Our accompanying condensed consolidated balance sheet as ofDecember 28, 2002 is from our audited consolidated financial statementsincluded in our most recently filed annual report on Form 10-K.

 

Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles in the United Statesof America have been condensed or omitted pursuant to the rules and regulationsof the Securities and Exchange Commission and the instructions to Form10-Q.  The accounting policies wefollow, except as described in Note 7, are set forth in our most recently filedannual report on Form 10-K in the Notes to our Consolidated FinancialStatements for the fiscal year ended December 28, 2002.

 

Our fiscal year ends onthe Saturday, in December or January, nearest the last day of December.  Consistent with this policy, fiscal 2002ended 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 nine monthsof 2003.  Therefore, the accompanyingcondensed consolidated financial statements for the first nine months of 2003reflect our financial position as of October 4, 2003 and for the 40-weekperiod then ended.  The first ninemonths of 2002 ended on September 28, 2002 and included 39 weeks offinancial results.  The accompanyingcondensed consolidated financial statements for the three-month periods endedOctober 4, 2003 and September 28, 2002 each contain 13 weeks offinancial results.

 

Certain amounts fromprior periods have been reclassified to conform to the current period’spresentation.  These reclassificationshave no effect on net income as previously reported.

 

STOCK BASED 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 following tableillustrates the effect on net income if compensation expense for our optiongrants 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** |       | **For the  nine-month periods ended** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|
|                                                                                                                                                                     |   | **October 4,  2003**                   | ** ** | **September 28,  2002**               | ** ** | **October 4,  2003** | ** ** | **September 28,  2002** | ** ** |
|                                                                                                                                                                     |   |                                   |       |                                  |       |   |   |   |   |
| Net income, as reported                                                                                                                                                  |   | $                                      | 12,655     |                                  | $          | 10,578 |   | $ | 21,653 |   | $ | 13,353 |   |
| Add:                                                                                                                                                                     |   |                                   |       |                                  |       |   |   |   |   |
| Stock-based  employee compensation (under APB 25) included in reported net income, net of  related tax effects                                                           |   | 35                                     |       | 4                                     |       | 43 |   | 6 |   |
| 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 |   | (168                                   | )          | (130                                  | )          | (435 | ) | (375 | ) |
|                                                                                                                                                                     |   |                                   |       |                                  |       |   |   |   |   |
| Pro forma net  income                                                                                                                                                    |   | $                                      | 12,522     |                                  | $          | 10,452 |   | $ | 21,261 |   | $ | 12,984 |   |

 

For basic options, using a minimum value method, thefair value of each option as of the date of grant has been estimated to rangefrom $3.08 to $9.76 per share for options granted in 2003 and $2.44 to $3.95per share for options granted in 2002. For basic options, using a fair value method, the fair value of eachoption at the date of the grant has been estimated to range from $6.40 to$13.55 per share for options granted in 2003 and $6.31 per share for optionsgranted from August 23, 2002 to December 28, 2002.  These per share option values were calculatedat an assumed risk free interest rate from 3.8% to 4.2% for 2003 and 3.0% to4.4% for 2002, with an expected life of 10 years.  No dividends were assumed.

 

For performance options, using a minimum value method,the fair value of each option as of the date of grant has been estimated torange from $3.08 to $9.76 per share for options granted in 2003 and $2.44 to$3.95 per share for options granted in 2002. For performance options, using a fair value method, the fair value ofeach option at the date of grant has been estimated to range from $6.40 to$13.55 per share for options granted in 2003 and $6.31 per share for optionsgranted from August 23, 2002 to December 28, 2002.  These per share option values werecalculated at the same assumed risk free interest rates shown above with anexpected life of 10 years.  No dividendswere assumed.

* *

We have determined that the effect on pro forma netincome would be immaterial had compensation expense for our option grants beendetermined based on the fair value method as of the grant date using theBlack-Scholes model.

 

**NOTE 2 — THE COMPANY:**

 

TWCC is a wholly-ownedsubsidiary of Carter’s, Inc. (“Carter’s”). Carter’s has no significant assets or investments other than the sharesof TWCC’s common stock.

 

We design, source,manufacture, and market branded childrenswear under the *Carter’s, Carter’s Classics, Child ofMine,* and *Tykes* brand names.  Our products are sourced through productionat

 

7

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company-managed sewingfacilities located in Costa Rica and Mexico and through contractualarrangements with third-party manufacturers throughout the world (see Note 9regarding the closure of our Costa Rican sewing facilities).  Products are manufactured for wholesale distributionto major domestic retailers and for our 164 retail stores that market our brandname merchandise and certain products manufactured by other companies.  Our retail operations representedapproximately 37% of our consolidated net sales in the third quarter and firstnine months of 2003 and approximately 44% in the third quarter and first ninemonths of 2002.

 

**NOTE 3 — INVENTORIES:**

 

Inventories consisted ofthe following ($000):

 

|                        |   | **October 4,  2003** |    | **December  28,  2002** |   |
|-----------------------------|--------|----------------------|---------|-------------------------|--------|
| Finished  goods             |   | $                    | 114,904 |                    | $      | 99,609 |   |
| Work  in process            |   | 3,039                |    | 3,509                   |   |
| Raw  materials and supplies |   | 137                  |    | 2,582                   |   |
|                        |   |                 |    |                    |   |
| Total                       |   | $                    | 118,080 |                    | $      | 105,700 |   |

 

**NOTE 4 — PARENT COMPANY TRANSACTIONS:**

 

On July 31, 2003, wepaid a dividend of approximately $24.9 million to Carter’s.  Carter’s utilized the proceeds to pay adividend of $24.9 million on outstanding shares of its common stock to thestockholders of record as of July 30, 2003.  At the same time, we paid a special bonus of approximately $2.5million to Carter’s vested option holders. This special bonus was recorded as compensation expense during the thirdquarter of 2003.

 

During the nine-monthperiod ended October 4, 2003, Carter’s issued options to purchase itscommon stock to two directors and certain employees.  Additionally, during the first nine months of 2003, Carter’s soldshares of its common stock to two of our directors for cash proceeds of$600,000 (one during the second quarter and one during the third quarter).  In connection with these transactions, werecorded contributions from Carter’s to our additional paid-in capital in theamount of $600,000.  Additionally, werecorded approximately $256,000 in compensation expense during the thirdquarter related to certain of these stock sales and option grants.

 

During the nine-month period ended September 28,2002, Carter’s sold shares of its common stock to two of our directors (oneduring the second quarter and one during the third quarter) and issued sharesof its common stock to a consultant.  Inconnection with these transactions, as well as Carter’s stock option grants tocertain employees, we recorded compensation expense during the three andnine-month periods ended September 28, 2002 in the amounts ofapproximately $121,000 and $762,000. Additionally, we received cash proceeds of $1.0 million during thenine-month period ended September 28, 2002 and recorded contributions fromCarter’s to our additional paid-in capital in the amount of approximately $1.8million.

 

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

 

On August 15, 2001, we adopted the provisions ofSFAS No. 141, “Business Combinations” (“SFAS 141”) and applied the requiredprovisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS142”).  Accordingly, our tradename andgoodwill have been deemed to have indefinite lives and are no longer beingamortized.  Our licensing agreements arebeing amortized over the average three-year life of such agreements.  Amortization expense for the third quarterand first nine months of 2003 and 2002 was $1.3 million and $3.8 million,respectively, and is expected to be a total of $5.0 million for fiscal 2003 and$3.1 million for 2004.

 

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**NOTE 6 — SEGMENT INFORMATION:**

 

We report segmentinformation in accordance with the provisions of SFAS No. 131, “Disclosureabout Segments of an Enterprise and Related Information” (“SFAS 131”), whichrequires segment information to be disclosed based upon a “managementapproach.”  The management approachrefers to the internal reporting that is used by management for makingoperating decisions and assessing the performance of our reportablesegments.  During the third quarter offiscal 2003, we revised our methodology for evaluating and reportingprofitability.  Additionally, as a resultof the launch of our new *Child of Mine*brand with Wal-Mart, we have expanded our presence in the mass merchant channelthat has resulted in the establishment of a new segment of our business.

 

Under our previous methodof evaluating and reporting the profitability of our segments, each segment’sresults included costs directly related to the segment’s revenue and all othercosts were allocated based on the relationship to consolidated net sales orunits produced to support each segment’s revenue. Intersegment sales andtransfers were recorded at cost and treated as a transfer of inventory.  Under our new methodology, segment resultsinclude the direct costs of each segment (on the same basis as the previousmethodology) and all other costs are allocated based upon detailed estimatesand analysis of actual time and expenses incurred to support the operations ofeach segment or units produced or sourced to support each segment’srevenue.  Certain costs, including incentivecompensation for certain employees, the Berkshire Partners LLC management fee(see Note 10), and various other general corporate costs that are notspecifically allocable to our segments, are included in other reconciling itemsbelow.  Intersegment sales and transferscontinue to be recorded at cost and treated as a transfer of inventory. Priorperiod segment information has been reclassified to conform with the currentpresentation.  The accounting policiesof the segments are the same as those described in Note 2 – “Nature of Businessand Summary of Significant Accounting Policies” in our final Prospectus datedOctober 23, 2003 in the Notes to the Consolidated Financial Statements forthe fiscal year ended December 28, 2002.

 

Thetable below presents certain segment information for the periods indicated($000):

 
|                    |   | **For the  three-month periods ended** |    | **For the  nine-month periods ended** |   |
|-------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                    |   | **October 4,  2003**              |    | **% of  Total**                       |   | **September 28,  2002** |   | **% of  Total** |   | **October 4,  2003** |   | **% of  Total** |   | **September 28,  2002** |   | **% of  Total** |   |
|                    |   |                                   |    |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net sales:**          |   |                                   |    |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale               |   | $                                      | 103,341 |                                  | 49%    |   | $ | 86,580 |   | 52% |   | $ | 265,573 |   | 51% |   | $ | 211,866 |   | 52% |   |
| Retail                  |   | 77,471                                 |    | 37%                                   |   | 72,175 |   | 44% |   | 190,992 |   | 37% |   | 180,636 |   | 44% |   |
| Mass Merchant           |   | 31,323                                 |    | 15%                                   |   | 7,024 |   | 4% |   | 61,571 |   | 12% |   | 16,967 |   | 4% |   |
| Total net sales         |   | $                                      | 212,135 |                                  |   |   | $ | 165,779 |   |   |   | $ | 518,136 |   |   |   | $ | 409,469 |   |   |   |
|                    |   |                                   |    |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **EBITDA:**             |   |                                   |    |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale               |   | $                                      | 16,891  |                                  | 50%    |   | $ | 15,109 |   | 52% |   | $ | 42,716 |   | 60% |   | $ | 37,477 |   | 67% |   |
| Retail                  |   | 19,690                                 |    | 59%                                   |   | 19,611 |   | 67% |   | 42,115 |   | 59% |   | 40,275 |   | 71% |   |
| Mass Merchant           |   | 4,898                                  |    | 15%                                   |   | 1,101 |   | 4% |   | 6,602 |   | 9% |   | 1,099 |   | 2% |   |
| Other reconciling items |   | (8,096                                 | )       | (24%)                                 |   | (6,704 | ) | (23%) |   | (19,907 | ) | (28%) |   | (22,686 | ) | (40%) |   |
| Total EBITDA            |   | $                                      | 33,383  |                                  |   |   | $ | 29,117 |   |   |   | $ | 71,526 |   |   |   | $ | 56,165 |   |   |   |

 

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EBITDA shown above represents earnings beforeinterest, income tax expense, depreciation, and amortization.  EBITDA is presented because it is onemeasurement used by management in assessing financial performance, and webelieve it is helpful to investors, securities analysts, and other interestedparties in evaluating performance of companies in our industry.  EBITDA is also a measure used as a basis forcalculating our financial covenants under our senior credit facility.  Additionally, 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, an alternative to net income,or any other measures of performance derived in accordance with generallyaccepted accounting principles.  Ourdefinition and calculation of EBITDA may not be comparable to similarly titledmeasures used by other companies.

 

*Areconciliation of EBITDA to net income is presented below ($000):*

* *
|                                   |   | **For the  three-month periods ended** |   | **For the  nine-month periods ended** |   |
|----------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                   |   | **October 4,  2003**              |   | **September 28,  2002**          |   | **October 4,  2003** |   | **September 28,  2002** |   |
|                                   |   |                                   |   |                                  |   |   |   |   |   |
| EBITDA                                 |   | $                                      | 33,383 |                                  | $      | 29,117 |   | $ | 71,526 |   | $ | 56,165 |   |
| Depreciation and  amortization expense |   | (6,018                                 | )      | (4,637                                | )      | (16,009 | ) | (13,202 | ) |
| Interest expense, net                  |   | (6,788                                 | )      | (7,268                                | )      | (20,309 | ) | (21,238 | ) |
| Provision for income taxes             |   | (7,922                                 | )      | (6,634                                | )      | (13,555 | ) | (8,372 | ) |
|                                   |   |                                   |   |                                  |   |   |   |   |   |
| Net income                             |   | $                                      | 12,655 |                                  | $      | 10,578 |   | $ | 21,653 |   | $ | 13,353 |   |

 

**NOTE 7 — RECENT ACCOUNTING PRONOUNCEMENTS:**

 

In August 2001, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset RetirementObligations” (“SFAS 143”).  SFAS 143requires recording the fair market value of an asset retirement obligation as aliability in the period in which a legal obligation associated with theretirement of tangible long-lived assets is incurred (including certain leaseobligations).  SFAS 143 also requiresrecording an asset offsetting the initial obligation as an increase to thecarrying amount of the related long-lived asset and depreciation of that costover the life of the asset.  We adoptedthe provisions of SFAS 143 in the first quarter of 2003, and the impact of suchadoption was not material to our financial position or results of operationsfor the third quarter or first nine months of 2003.

 

In April 2002, the FASB issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections” (“SFAS 145”).  SFAS 145 rescinds FASB Statement No. 4, which required all gainsand losses from extinguishments of debt to be aggregated and, if material,classified as an extraordinary item, net of the related income tax effect.  As a result, the criteria in AccountingPrinciples Board Opinion 30 will now be used to classify those gains andlosses.  The provisions of SFAS 145, asrelated to the rescission of FASB Statement No. 4, are effective for fiscal2003.  In the first quarter of 2003, weadopted the provisions of SFAS 145 and the extraordinary item, of $7.6 million,recorded in our statement of operations for the predecessor period fromDecember 31, 2000 through August 14, 2001 will be reclassified in ourAnnual Report on Form 10-K as a component of income before income taxes of$12.5 million (pre-tax) with the tax benefit of $4.9 million reclassified as acomponent of income taxes for the year ended January 3, 2004.

 

In July 2002,the FASB 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 that must be met in order for costs associated withcontract terminations, facility consolidations, and 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

 

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prospectively toexit or disposal activities initiated by us after December 31, 2002.  See Note 9 to the unaudited condensed consolidatedfinancial statements regarding our decision to close two of our productionfacilities.

 

In November 2002,the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” (“FIN 45”).  FIN45 requires that a liability be recorded in the guarantor’s balance sheet uponissuance of a guarantee.  In addition,FIN 45 requires disclosures about the guarantees, including indemnifications,that an entity has issued and a rollforward of the entity’s product warrantyliabilities.  The disclosure provisionsof FIN 45 were effective for financial statements of interim periods or annualperiods ending after December 15, 2002. In addition, we adopted the recognition provisions of FIN 45 effectiveJanuary 1, 2003 for guarantees issued or modified after December 31,2002.  The adoption of FIN 45 did nothave a material impact on our financial position, results of operations, orcash flows.

 

In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation-Transition and Disclosure.”  SFAS 148 provides alternate methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. SFAS 148 also requires that disclosures of the pro forma effect of usingthe fair value method of accounting for stock-based employee compensation bedisplayed more prominently and in tabular format.  Additionally, SFAS 148 requires disclosure of the pro formaeffect of using the fair value method of accounting for stock-based employeecompensation in interim financial statements. The transition and annual disclosure requirements were effective for usas of December 28, 2002.  Theinterim disclosure requirements were effective for the first quarter of fiscal2003 and have been reflected in Note 1 to the unaudited condensed consolidatedfinancial statements.

 

In April 2003, theFASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies the accounting for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities under SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities.”  SFAS 149 isgenerally effective for contracts entered into or modified after June 30,2003 and for hedging relationships designated after June 30, 2003.  The adoption of SFAS 149 is not expected tohave a material effect on our financial position, results of operations, orcash flows.

 

In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity” (“SFAS 150”).  SFAS 150 requires that certain financialinstruments, which under previous guidance were accounted for as equity, mustnow be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock,certain financial instruments that require or may require the issuer to buyback some of its shares in exchange for cash or other assets and certainobligations that can be settled with shares of stock.  SFAS 150 is effective for all financial instruments entered intoor modified after May 31, 2003 and must be applied to our existingfinancial instruments effective July 6, 2003, the beginning of the firstfiscal period after June 15, 2003. The FASB recently decided to defer the provisions of paragraphs 9 and 10of this statement as they apply to mandatorily redeemable noncontrollinginterests.  We adopted SFAS 150 onJune 1, 2003.  The adoption of thisstatement did not have an effect on our financial position, results ofoperations, or cash flows.

 

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**NOTE 8 — LONG TERM DEBT: (See Notes 4and 10)**

 

Effective July 29,2003, our senior credit facility was amended to, among other things, increasethe amount of the commitments under the revolving portion of our senior creditfacility from $60.0 million to $75.0 million and allow for a maximum amount ofcommitments of up to $80.0 million (which has subsequently been committed to),provide for a 75 basis point reduction in the applicable interest margin byprepaying our existing Tranche B term loan and replacing it with a new TrancheC term loan, reduce the amount of our mandatory loan prepayment requirementfollowing the consummation of an initial public offering by us from aprepayment of 50% or 75% of excess cash flow to 25% or 50% of excess cash flow,depending on the applicable leverage ratio, and permit an aggregate dividendnot to exceed $27.5 million to our equity holders and vested optionholders.  Additionally, our seniorcredit facility was amended to provide that, upon the consummation of aninitial public offering by us, we are permitted to repurchase up to $61.3million of our senior subordinated notes (in addition to redemption premiums)with proceeds from an equity offering and terminate our obligations of up to$3.6 million under the management agreement with Berkshire Partners LLC.  These payments may be made from the proceedsof an equity offering prior to being required to use 50% of any of the netproceeds of such an equity offering to prepay borrowings under our seniorcredit facility.  Following the consummationof an initial public offering by us, we will also be permitted to repurchase upto $15.0 million of additional senior subordinated notes.

 

**NOTE 9 — PLANT CLOSINGS:**

 

InJuly of 2003, we decided to exit our sewing facilities located in CostaRica given our ability to obtain lower costs from third-party suppliers.  Such closures were announced onSeptember 16, 2003 and the facilities are being held and used forproduction through the end of November 2003. For the majority of theaffected employees, severance benefits were communicated at the end ofOctober 2003.  Total employees tobe terminated will be approximately 1,474. As a result of these closures, we have recorded approximately $900,000of accelerated depreciation (included in cost of goods sold), $65,000 of assetimpairment charges, and $50,000 of severance during the third quarter of 2003.

 

During the fourth quarterof 2003, we expect to incur additional accelerated depreciation and impairmentcharges of approximately $600,000.  Itis estimated that other closure costs of approximately $3.1 million will beincurred relating primarily to severance, lease termination costs, and incometaxes of which approximately $1.9 million will be incurred in the fourthquarter of 2003.

 

**NOTE 10 — SUBSEQUENT EVENTS:**

 

On October 29, 2003,Carter’s completed an initial public offering of its common stock including thesale of 5,390,625 shares by us and 1,796,875 shares by the sellingstockholders.  Net proceeds to us fromthe offering totaled $93.2 million and were contributed by Carter’s toTWCC.  On November 28, 2003, we will useapproximately $68.0 million of the proceeds to redeem approximately $61.3million in outstanding senior subordinated notes (and will pay a redemptionpremium of approximately $6.7 million). We have used approximately $2.6 million of the net proceeds to terminatethe Berkshire Partners LLC management agreement.  We have also used approximately 50% of the remaining proceeds ofapproximately $22.6 million to prepay $11.3 million of amounts outstandingunder the term loan.  The remainingproceeds of approximately $11.3 million will be utilized for working capitaland other general corporate purposes.

 

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| **ITEM 2.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:** |
|-------------|--------------------------------------------------------------------------------------------------|

 

The following is adiscussion of our results of operations and our current financialposition.  You should read thisdiscussion in conjunction with our unaudited condensed consolidated financialstatements and notes included elsewhere in this quarterly report.  Our discussion of our results of operationsand financial condition includes various forward-looking statements about ourmarkets, the demand for our products and services, and our future results.  We base these statements on assumptions thatwe consider reasonable.  Among thefactors that could cause actual results differ to materially include a decreasein sales to, or the loss of, one or more of our key customers, downwardpressure on our prices, disruptions in foreign supply sources, negativepublicity, the loss of one or more of our major suppliers for raw materials,increased competition in the baby and young children's apparel market, oursubstantial leverage which increases our exposure to interest rate risk andcould require us, in the event of default, to dedicate all or a portion of ourcash flow to repay principal, the impact of governmental regulations andenvironmental risks applicable to our business, and seasonal fluctuations in thechildren's apparel business.  Forfurther information about risks and exposures relating to our business and ourcompany, you should read Item 3 of this quarterly report entitled “Quantitativeand Qualitative Disclosures about Market Risks” and the section entitled“Risks Relating To Our Business” in our latest annual report on Form 10-K.  Actual results may differ materially fromthose suggested by our forward-looking statements for various reasons includingthose discussed in Item 3.  Except forany ongoing obligations to disclose material information as required by thefederal securities laws, we do not have any intention or obligation to updateforward-looking statements after we file this quarterly report.

 

The following table setsforth, for the periods indicated, (i) selected statement of operations dataexpressed as a percentage of net sales and (ii) the number of retail storesopen at the end of each such period:

 
|                                              |   | **As a  Percentage of Net Sales**       |   |
|---------------------------------------------------|--------|-----------------------------------------|--------|
|                                              |   | **For the  three-month  periods ended** |   | **For the  nine-month  periods ended** |   |
|                                              |   | **October 4,  2003**               |   | **September 28,  2002** | ** ** | **October 4,  2003** | ** ** | **September 28,  2002** | ** ** |
|                                              |   |                                    |   |   |   |   |   |   |   |
| Wholesale sales                                   |   | 48.7                                    | %      | 52.2 | % | 51.2 | % | 51.7 | % |
| Retail sales                                      |   | 36.5                                    |   | 43.5 |   | 36.9 |   | 44.1 |   |
| Mass merchant sales                               |   | 14.8                                    |   | 4.3 |   | 11.9 |   | 4.2 |   |
|                                              |   |                                    |   |   |   |   |   |   |   |
| Net sales                                         |   | 100.0                                   |   | 100.0 |   | 100.0 |   | 100.0 |   |
| Cost of goods sold                                |   | 64.3                                    |   | 60.7 |   | 64.1 |   | 61.2 |   |
|                                              |   |                                    |   |   |   |   |   |   |   |
| Gross profit                                      |   | 35.7                                    |   | 39.3 |   | 35.9 |   | 38.8 |   |
| Selling, general, and administrative expenses     |   | 24.5                                    |   | 26.0 |   | 26.8 |   | 29.8 |   |
| Royalty income                                    |   | (1.7                                    | )      | (1.5 | ) | (1.6 | ) | (1.5 | ) |
|                                              |   |                                    |   |   |   |   |   |   |   |
| Operating income                                  |   | 12.9                                    |   | 14.8 |   | 10.7 |   | 10.5 |   |
| Interest expense, net                             |   | 3.2                                     |   | 4.4 |   | 3.9 |   | 5.2 |   |
|                                              |   |                                    |   |   |   |   |   |   |   |
| Income before income taxes and extraordinary item |   | 9.7                                     |   | 10.4 |   | 6.8 |   | 5.3 |   |
| Provision for income taxes                        |   | 3.7                                     |   | 4.0 |   | 2.6 |   | 2.0 |   |
|                                              |   |                                    |   |   |   |   |   |   |   |
| Net income                                        |   | 6.0                                     | %      | 6.4 | % | 4.2 | % | 3.3 | % |
|                                              |   |                                    |   |   |   |   |   |   |   |
| Number of retail stores at end of period          |   | 164                                     |   | 156 |   | 164 |   | 156 |   |

 

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**Three and nine-month periods ended October 4, 2003compared to three and nine-month periods ended September 28, 2002**

 

*NETSALES.*   Thethree-month periods ended October 4, 2003 and September 28, 2002 eachcontained 13 weeks of financial results. The nine-month period ended October 4, 2003 contained 40 weeks ascompared to the nine-month period ended September 28, 2002, whichcontained 39 weeks.  In the thirdquarter of fiscal 2003, consolidated net sales increased $46.4 million, or28.0%, to $212.1 million from $165.8 million in the third quarter of fiscal2002. * *In the first nine months of 2003, consolidated netsales were $518.1 million, an increase of $108.7 million, or 26.5%, as comparedto $409.5 million for the first nine months of 2002.  This revenue growth has been driven by strong product performanceresulting from our focus on improving the value of our core products throughour global sourcing network, effective merchandising and pricing strategies,revenue recognized during the second and third quarters of 2003 from our new *Child of Mine* brand that is being sold insubstantially all Wal-Mart stores in the United States, and the additional weekof selling in the first nine months of 2003.

 

Total wholesale salesincreased $16.8 million, or 19.4%, to $103.3 million in the third quarter of2003 from $86.6 million in the third quarter of 2002.  In the first nine months of 2003, wholesale sales increased $53.7million, or 25.3%, to $265.6 million from $211.9 million in the first ninemonths of 2002.  Wholesale sales,excluding off-price sales, increased $13.5 million, or 16.2%, in the thirdquarter of 2003 to $96.4 million from $82.9 million in the third quarter of2002.  In the first nine months of 2003,wholesale sales, excluding off-price sales, increased $47.8 million, or 23.9%,to $248.3 million from $200.5 million in the first nine months of 2002.  These increases were driven primarily bygrowth in our baby and playclothes product lines, and to a lesser extent, oursleepwear product line.  This growth hasoccurred at the majority of our key wholesale accounts as a result of our focuson improving the value of our core products.

 

Our retail store saleswere $77.5 million for the third quarter of 2003, an increase of $5.3 million,or 7.3%, compared to the third quarter of 2002.  The drivers of the revenue increase were incrementalrevenue of $5.6 million generated from new stores opened subsequent toSeptember 28, 2002 and a comparable store sales increase of $1.7 million,or 2.5%, based on 147 locations, offset by the impact of stores closed of $2.0million.  Comparing the same 13 weeks of2003 to the same 13 weeks of 2002, comparable store sales increased 1.6% basedon 147 locations.  In the first ninemonths of 2003, retail store sales increased $10.4 million, or 5.7%, to $191.0million from $180.6 million in the first nine months of 2002.   The drivers of the revenue increase in the first ninemonths of 2003 were incremental revenue of $13.0 million from new storeopenings and the comparable store sales increase of $2.3 million, or 1.3%,based upon 147 locations, offset by the impact of stores closed in the lasttwelve months of $4.9 million.  Thecomparable store sales increase was driven by the additional week of salesincluded in the first nine months of 2003. Comparing the first 40 weeks of 2003 to the first 40 weeks of 2002,comparable store sales declined 1.6%, based on 147 locations.  This decline reflects the effect ofunfavorable weather conditions, particularly in February 2003.  We opened ten retail stores and closed twoduring the first nine months of 2003. There were a total of 164 stores as of October 4, 2003 compared to156 stores at September 28, 2002. We plan to open five stores during the balance of 2003.

 

Mass merchant store salesin the third quarter of 2003 increased $24.3 million to $31.3 million from $7.0million in the third quarter of 2002. In the first nine months of 2003, our mass merchant store salesincreased $44.6 million to $61.6 million from $17.0 million in the first ninemonths of 2002.  Revenue recognizedduring the second and third quarters of 2003 from our new *Child of Mine* brand contributed to thissignificant growth.  Also contributingto this growth for the third quarter and first nine months of 2003 is thestrong performance of our *Tykes*brand with Target.

 

*GROSSPROFIT.*    Our grossprofit increased $10.5 million, or 16.2%, to $75.7 million in the third quarterof 2003 from $65.1 million in the third quarter of 2002.  Gross profit as a percentage of net sales inthe third quarter of 2003 decreased to 35.7% from 39.3% in the third quarter of2002.  Gross profit increased $27.4million, or 17.2%, to $186.1 million in the first nine months of 2003 comparedto $158.8 million in the first nine months of 2002.  Gross profit, as a percentage of net sales, in the first ninemonths of 2003 decreased to 35.9% from 38.8% in similar periods in 2002.  Such decreases in gross profit, relative tosales, have resulted primarily from a higher mix of both wholesale sales andmass merchant store sales, both of which generally yield lower margins thansimilar products sold through our retail channel.  These decreases in gross profit margins also reflect the impactof our new pricing strategies with lower average

 

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prices on certain coreproducts which were partially offset by additional product cost reductionsachieved through the continued expansion and leverage of our global sourcingnetwork.  Additionally, during the thirdquarter of 2003, we recorded, in cost of goods sold, approximately $900,000 inaccelerated depreciation related to the closure of our sewing facilities inCosta Rica as further described in Note 9 to the condensed unauditedconsolidated financial statements.

 

*SELLING,GENERAL, AND ADMINISTRATIVE EXPENSES.*    Selling, general, and administrativeexpenses for the third quarter of 2003 increased $8.8 million, or 20.4%, to$51.9 million from $43.1 million in the third quarter of 2002.  These costs, as a percentage of net sales, decreasedto 24.5% in the third quarter of 2003 from 26.0% in the third quarter of2002.  In the first nine months of 2003,selling, general, and administrative expenses increased $16.6 million, or13.6%, to $138.7 million from $122.0 million in the first nine months of2002.  As a percentage of net sales,these expenses decreased to 26.8% in the first nine months of 2003 from 29.8%in the first nine months of 2002.  Suchdecreases for the third quarter and first nine months of 2003 were due to ourability to grow revenue at a faster rate than our selling, general, andadministrative expenses partially offset by higher distribution costs driven byunit volume growth and a special bonus to vested option holders of Carter’scommon stock as further described in Note 4 to the unaudited condensed consolidatedfinancial statements.

 

*ROYALTYINCOME.*    We licensethe use of the *Carter’s, Carter’s Classics,*and *Child of Mine*names**and**sublicensesthe*Tykes*name to certainlicensees.  Our royalty income in thethird quarter of 2003 was approximately $3.7 million, an increase of 50.0%,over the third quarter of 2002 driven by licensed sales of our new *Child of Mine* brand by many of ourlicensee partners who began shipping their products during the third quarter of2003.  During the first nine months of2003, royalty income was $8.1 million, an increase of $1.9 million, or 30.7%,over the first nine months of 2002. These increases resulted from licensed sales of our new *Child of Mine* brand and the expansion ofour licensed product placement with other key wholesale customers.

 

*OPERATINGINCOME.   *Operatingincome for the third quarter of 2003 increased $2.9 million to $27.4 millioncompared to $24.5 million in the third quarter of 2002.  Operating income for the first nine monthsof 2003 increased $12.6 million to $55.5 million from $43.0 million in thefirst nine months of 2002.  Theseincreases reflect the benefit from revenue growth, increased gross profit, andleveraging of operating expenses as described above.

 

*INTERESTEXPENSE*, *NET*.    Net interest expense for the third quarterof 2003 decreased $0.5 million to $6.8 million from $7.3 million in the thirdquarter of 2002.  In the first ninemonths of 2003, interest expense decreased $0.9 million to $20.3 million from$21.2 million in the first nine months of 2002.  These decreases were due to lower variable interest rates onreduced levels of term loan indebtedness partially offset by an additional weekof interest.  As a result of thecompletion of the initial public offering by Carter’s as described in Note 10to the unaudited condensed consolidated financial statements, and use ofproceeds to retire approximately $61.3 million in principal amount of oursenior subordinated notes and approximately $11.3 million in term loanborrowings, we will have reduced levels of interest expense in future periods.

 

*INCOMETAXES.   *We recordeda provision for income taxes of $7.9 million in the third quarter of 2003compared to $6.6 million in the third quarter of 2002.  In the first nine months of 2003, werecorded a provision for income taxes of $13.6 million compared to $8.4 millionin the first nine months of 2002.  Oureffective tax rate was approximately 38.5% during the third quarter and firstnine months of 2003 and 2002.

 

*NETINCOME.   *As a resultof the factors noted above, our third quarter 2003 net income was $12.7 millioncompared to $10.6 million in the third quarter of 2002.  Net income for the first nine months of 2003was $21.7 million compared to $13.4 million in the first nine months of 2002.

 

15

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**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 oursenior credit facility.  Our primarysource of liquidity will continue to be cash flow from operations andborrowings under our revolving loan facility, and we expect that these sourceswill 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.

 

Net accounts receivableat October 4, 2003 were $70.9 million compared to $48.4 million atSeptember 28, 2002 and $53.6 million at December 28, 2002.  The increase over September 28, 2002reflects sales of our new *Child of Mine*brand to Wal-Mart in 2003 and increased sales levels of wholesale shipments in thelatter part of the third quarter ended October 4, 2003.  Due to the seasonal nature of ouroperations, the net accounts receivable balance at October 4, 2003 is notcomparable to the net accounts receivable balance at December 28, 2002.

 

Net inventories atOctober 4, 2003 were $118.1 million compared to $96.6 million atSeptember 28, 2002 and $105.7 million at December 28, 2002.  This increase over September 28, 2002in inventory levels was planned to support fourth quarter 2003 shippingrequirements, including inventory required to support our new *Child of Mine* brand for Wal-Mart.  Average inventory levels in 2003 areexpected to be higher than average 2002 net inventory levels of $93.8 millionbased on increases in forecasted demand and our focus on shipping performanceto our customers.  Due to the seasonalnature of our operations, net inventories at October 4, 2003 are notcomparable to net inventories at December 28, 2002.

 

Net cash provided byoperating activities for the first nine months of 2003 was $9.4 millioncompared to $11.3 million for the first nine months of 2002.  The decrease in net cash flow from operatingactivities in the first nine months of 2003 compared to the first nine monthsof 2002 is primarily attributed to the increases in inventory and accountsreceivable, described above, and reductions in accounts payable and othercurrent liabilities, partially offset by increased net income.

 

We have invested $9.4million in capital expenditures during the first nine months of 2003 comparedto $9.0 million during the first nine months of 2002.  We plan to invest an additional $10 – $12 million in capitalexpenditures during the remainder of fiscal 2003.  Major investments include retail store openings and remodeling,fixturing programs for wholesale customers, and the expansion of ourdistribution centers.

 

AtOctober 4, 2003, we had approximately $293.6 million of debt outstanding,consisting of $174.0 million of senior subordinated notes, $117.7 million interm loan borrowings and $1.9 million in borrowings on our revolver, exclusiveof approximately $9.5 million of outstanding letters of credit.  At October 4, 2003, we hadapproximately $68.6 million of financing available under our revolver.  At December 28, 2002, we hadapproximately $297.6 million of debt outstanding, consisting of $173.9 millionof senior subordinated notes, $123.8 million in term loan borrowings and norevolver borrowings, exclusive of approximately $16.3 million of outstandingletters of credit.  The borrowings underthe revolver will be available to fund our working capital requirements,capital expenditures, and other general corporate purposes.

 

EffectiveJuly 29, 2003, our credit facility was amended to, among other things,increase the amount of the commitments under the revolver from $60.0 million to$75.0 million and allow for a maximum amount of commitments of up to $80.0million (which has subsequently been committed to), provide for a 75 basispoint reduction in the applicable interest margin by prepaying our existingTranche B term loan and replacing it with a new Tranche C term loan, reduce theamount of our mandatory loan prepayment requirement following the consummationof an initial public offering by us from a prepayment of 50% or 75% of excesscash flow to 25% or 50% of excess cash flow, depending on the applicableleverage ratio. Additionally, following the initial public offering by us, asdescribed below, we are also permitted to repurchase up to $15.0 million ofadditional senior subordinated notes.

 

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OnOctober 29, 2003, Carter’s completed an initial public offering of itscommon stock including the sale of 5,390,625 shares by us and 1,796,875 sharesby the selling stockholders.  Netproceeds to us from the offering totaled $93.2 million and were contributed byCarter’s to TWCC.  On November 28, 2003,we will use approximately $68.0 million of the proceeds to redeem approximately$61.3 million in outstanding senior subordinated notes (and will pay a redemptionpremium of approximately $6.7 million). We have used approximately $2.6 million of the net proceeds to terminatethe Berkshire Partners LLC management agreement.  We have also used approximately 50% of the remaining proceeds ofapproximately $22.6 million to prepay $11.3 million of amounts outstandingunder the term loan.  After givingeffect to this prepayment, we have $112.7 million of senior subordinatednotes and $106.4 million in term loan borrowings outstanding.  The remaining proceeds of approximately$11.3 million will be utilized for working capital and other general corporatepurposes.

 

After giving effect to the $11.3 million prepaymentdescribed above, principal borrowings under the term loan are due and payablein sixteen remaining quarterly installments of $266,614 from December 31,2003 through September 30, 2007 and four quarterly payments ofapproximately $25.5 million from December 31, 2007 throughSeptember 30, 2008.  Interest onthe term loan is usually payable at the end of interest rate reset periods,which vary in length but in no case exceed six months.  The outstanding balance under the revolveris payable in full on August 15, 2006. Interest is payable quarterly on base rate borrowings under the revolverand may be payable more frequently in the event we choose a Eurodollar rateoption available under the terms of our credit facility.  No principal payments are required on oursenior subordinated notes prior to their scheduled maturity inAugust 2011. Interest is payable semi-annually on our senior subordinatednotes in February and August of each year.  These payments commenced on February 15, 2002.  Prior to the redemption of $61.3 million insenior subordinated notes noted above, our semi-annual interest payments on oursenior subordinated notes were $9.5 million.  Subsequent to this redemption, our semi-annual interest paymentswill be $6.1 million.

 

The terms of the consolidated excess cash flowcondition, as required under our credit facility were effective for fiscal 2002,and, accordingly, we made a principal prepayment of approximately $4.8 millionon March 26, 2003.  This excesscash flow condition may result in future annual prepayments depending on theconsolidated excess cash flow generated in each year.  The lenders will apply such prepayments first to the term loanand, second, to reduce the revolver. Subject to certain conditions in our 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 LLC, we agreed, among otherthings, to pay Berkshire Partners an annual management fee of $1.65 million peryear for four years, commencing on the first anniversary of theAcquisition.  We paid this feequarterly, in advance.  As describedabove, upon completion of the initial public offering by Carter’s, this managementfee agreement was terminated.

 

On July 31, 2003, wepaid a cash dividend of approximately $24.9 million to Carter’s.  Carter’s utilized the proceeds to pay adividend of $24.9 million on the outstanding shares of common stock of Carter’sto the stockholders of record as of July 30, 2003.  Concurrently, we paid a special bonus ofapproximately $2.5 million to Carter’s vested option holders.  This payment was funded through our amendedcredit facility, as described above.

 

InJuly of 2003, we decided to exit our sewing facilities located in CostaRica given our ability to obtain lower costs from third-party suppliers.  Such closures were announced onSeptember 16, 2003 and the facilities are being held and used forproduction through the end of November 2003.  For the majority of the affected employees, severance benefitswere communicated at the end of October 2003.  As a result of these closures, we have recorded approximately$900,000 of accelerated depreciation (included in cost of goods sold), $65,000of asset impairment charges, and $50,000 of severance during the third quarterof 2003.  During the fourth quarter of2003, we expect to incur additional accelerated depreciation and impairmentcharges of approximately $600,000.  Itis estimated that other closure costs of approximately $3.1 million will beincurred relating primarily to severance, lease termination costs, and incometaxes of which approximately $1.9 million will be incurred in the fourthquarter of 2003.

 

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Based on our currentlevel of operations, anticipated cost savings, and other operatingimprovements, we believe that cash generated from operations and availablecash, together with amounts available under the revolver, 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.  If our debt is acceleratedfollowing an event of default, we may need to refinance all or a portion of theprincipal amount of our senior credit facility and our senior subordinatednotes prior to maturity.

 

Our creditfacility imposes certain covenants, requirements, and restrictions on ouractions and actions by our subsidiaries that, among other things, restrict thepayment of dividends beyond the dividend noted above.

 

**EFFECTS OF INFLATION AND DEFLATION**

 

We are affected byinflation and changing prices primarily through the purchase of raw materials,increased operating costs and expenses, and fluctuations in interestrates.  The effects of inflation on ournet sales and operations have not been material in recent years.  In recent years, there has been deflationarypressure on selling prices.  Due to thecompetitive nature of the children’s apparel industry, there is no assurancethat this trend will not continue. While we have been successful in offsetting deflationary pricingpressures through product improvements and lower costs with the expansion ofour global sourcing network, if deflationary price trends outpace our abilityto obtain further price reductions from our global suppliers, our profitabilitymay be affected.

 

### **SEASONALITY**

### ** **

Weexperience seasonal fluctuations in our sales and profitability, with generallylower sales 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 were generated in the secondhalf of our fiscal year.  Accordingly,our results of operations for the first and second quarters of any year are notindicative of the results we expect for the full year.

 

As a result of theeffects of seasonality, our inventory levels and other working capitalrequirements generally begin to increase during the second quarter and into thethird quarter of each year.  Duringthese peak periods we have historically borrowed under the revolver.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America.  The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues, expenses, and relateddisclosure of contingent assets and liabilities.  We base our estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, 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.

 

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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 require management’smost difficult and subjective judgments, often as a result of the need to makeestimates about the effect of matters that are inherently uncertain.

 

*Revenuerecognition: *Werecognize wholesale and mass merchant store revenue after shipment of productsto customers, when title passes and when all risks and rewards of ownershiphave transferred.  As discussed in Note2 to our consolidated financial statements contained in our most recently filedannual report on Form 10-K, in certain cases, this does not occur until thegoods have reached the specified customer. We consider revenue realized or realizable and earned when the producthas been shipped, the sales price is fixed or determinable and collectibility isreasonably assured.  In the normal courseof business, we grant certain accommodations and allowances to our wholesalecustomers.  Such amounts are reflectedas reductions of net sales.  Retailstore revenues are recognized at the point of sale.  We reduce revenue for customer returns and deductions.  We also maintain an allowance for doubtfulaccounts for estimated losses resulting from the inability of our customers tomake payments.  If the financialconditions of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, an additional allowance could be required.

 

*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 ofOctober 4, 2003, we have approximately $360 million in goodwill andtradename assets.  The fair value of the*Carter’s* tradename was estimatedat the Acquisition to be approximately $220 million using a discounted cashflow analysis, which examined the hypothetical cost savings that accrue as aresult of our ownership of the tradename. The cash flows, which incorporated both historical and projectedfinancial performance, 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 offeredproducts and 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.

 

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*Stock-based compensationarrangements: *We accountfor stock-based compensation on stock options under the intrinsic value method,whereby we record compensation expense equal to the difference between theexercise price of the stock option and the fair market value of the underlyingstock at the date of the option grant. For disclosure purposes only, we also estimate the impact on our netincome of applying the fair value method of measuring compensation cost onstock options with the fair value determined under the minimum value method asprovided by Statement of Financial Accounting Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation” as amended by SFAS No. 148,“Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS148”).  For stock issued or soldoutright to employees, directors, or third parties, we measure expense as thedifference between the price paid by the recipient and the fair market value ofthe stock on the date of issuance or sale. Prior to the third quarter of 2003, in the absence of a public marketfor Carter’s common stock, management and the Board of Directors estimated themarket value of Carter’s common stock for all option grant and stock issuancedates using an approach based upon a multiple of Adjusted EBITDA less net debt.  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-recurring charges-other.  Adjusted EBITDA is not a measurement undergenerally accepted accounting principles.

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

In August 2001, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset RetirementObligations” (“SFAS 143”).  SFAS 143requires recording the fair market value of an asset retirement obligation as aliability in the period in which a legal obligation associated with theretirement of tangible long-lived assets is incurred (including certain lease obligations).  The statement also requires recording anasset offsetting the initial obligation as an increase to the carrying amountof the related long-lived asset and depreciation of that cost over the life ofthe asset.  We adopted the provisions ofSFAS 143 in the first quarter of 2003, and the impact of such adoption was notmaterial to our financial position or results of operations for the thirdquarter or first nine months 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.  In thefirst quarter of 2003, we adopted the provisions of SFAS 145 and theextraordinary item, of $7.6 million, recorded in our statement of operationsfor the Predecessor period from December 31, 2000 through August 14,2001 will be reclassified in our Annual Report on Form 10-K as a component ofincome before income taxes of $12.5 million (pre-tax) with the tax benefit of$4.9 million reclassified as a component of income taxes for the year endedJanuary 3, 2004.

 

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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, and employee relocations andterminations to 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.  SeeNote 9 to the unaudited condensed consolidated financial statements regardingour decision to close two of our production facilities.

 

In November 2002,the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” (“FIN 45”).  FIN45 requires that a liability be recorded in the guarantor’s balance sheet uponissuance of a guarantee.  In addition,FIN 45 requires disclosures about the guarantees, including indemnifications,that an entity has issued and a rollforward of the entity’s product warrantyliabilities.  The disclosure provisions ofFIN 45 were effective for financial statements of interim periods or annualperiods ending after December 15, 2002. In addition, we adopted the recognition provisions of FIN 45 effectiveJanuary 1, 2003 for guarantees issued or modified after December 31,2002.  The adoption of FIN 45 did nothave a material impact on our financial position, results of operations, orcash flows.

 

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 requiresthat disclosures 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 disclosurerequirements were effective for the first quarter of fiscal 2003 and have beenreflected in Note 1 to the unaudited condensed consolidated financialstatements.

 

In April 2003, theFASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies the accounting for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities under SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities.”  SFAS 149 isgenerally effective for contracts entered into or modified after June 30,2003 and for hedging relationships designated after June 30, 2003.  The adoption of SFAS 149 is not expected tohave a material effect on our financial position, results of operations, orcash flows.

 

In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity” (“SFAS 150”).  SFAS 150 requires that certain financialinstruments, which under previous guidance were accounted for as equity, mustnow be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock,certain financial instruments that require or may require the issuer to buyback some of its shares in exchange for cash or other assets and certainobligations that can be settled with shares of stock.  SFAS 150 is effective for all financial instruments entered intoor modified after May 31, 2003 and must be applied to our existingfinancial instruments effective July 6, 2003, the beginning of the firstfiscal period after June 15, 2003. The FASB recently decided to defer the provisions of paragraphs 9 and 10of this statement as they apply to mandatorily redeemable noncontrollinginterests.  We adopted SFAS 150 onJune 1, 2003.  The adoption of thisstatement did not have an effect on our financial position, results ofoperations, or cash flows.

 

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### **ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISKS**

 

In the operation of ourbusiness, we have market risk exposures including those related to foreigncurrency risk and interest rate risk. These risks and our strategies to manage our exposure to them arediscussed below.

 

We contract for production with third partiesprimarily in the Far East and South and Central America.  While these contracts are stated in UnitedStates dollars, there can be no assurance that the cost for the futureproduction of our products will not be affected by exchange rate fluctuations betweenthe United States dollar and the local currencies of these contractors.  Due to the number of currencies involved, wecannot quantify the potential impact of future currency fluctuations on netincome in future years.  In order tomanage this risk, we source products from over 60 vendors worldwide, providingus with flexibility in our production should significant fluctuations occurbetween the United States and various local currencies.  To date, such exchange fluctuations have nothad a material impact on our financial condition or results of operations.  We do not hedge foreign currency exchangerate risk.

 

Our operating results aresubject to risk from interest rate fluctuations on debt, which carries variableinterest rates.  At October 4, 2003, outstanding debt aggregated $293.6 million, ofwhich $119.6 million bore interest at a variable rate.  An increase of 1% in the applicable ratewould increase our annual interest cost by $1,196,000 and could have an adverseeffect on our net income and cash flow. Pursuant to the provisions of our credit facility, we purchasedan interest rate cap as an economic hedge against approximately $31.3 millionof variable rate debt.  The cap rate is7.0% and the arrangement expires on December 7, 2004.

 

**OTHERRISKS**

 

We also have other risksin the operation of our business specifically related to raw material pricingand our global sourcing network.

 

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 couldtemporarily interrupt our supply, which could have an adverse effect on oursales and increase our costs.

 

We currently sourcesubstantially 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 new regulations relating to imports, duties,taxes, and other charges on imports, any significant decreases in the value ofthe dollar against foreign currencies, and restrictions on the transfer offunds.  These and other factors couldresult in the interruption of production in offshore facilities, delay receiptof the products into the United States or affect our operating income.  Our future performance may be subject tosuch factors, which are beyond our control, and there can be no assurance thatsuch factors would not have a material adverse effect on our financial conditionand results of operations.  We carefullyselect our sourcing agents, and in an effort to mitigate the possibledisruption in product flow, we place production in various countries we believeto be of lower risk.

 

We arecontinually evaluating opportunities to improve our products and reduce ourcosts.  Our remaining sewing facilitiescontinue to provide us with an advantageous cost base.  If we determine in the future that we areable to source those products at a significantly lower cost with superiorquality, we would incur substantial plant-closure, severance, and other chargesthat we cannot currently predict related to exiting those facilities.

 

Weenter into various 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, these cancellations and related termination chargeshave occurred infrequently and have not had a material impact on ourbusiness.  However, as we rely moreheavily on our full-package global sourcing network, we expect to incur more ofthese termination charges, which could increase our cost of goods sold.

 

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**ITEM 4.  DISCLOSURECONTROLS AND PROCEDURES:**

 

Our Chief ExecutiveOfficer and Chief Financial Officer have evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures (as definedunder Rules 13a-15(e) and 15d-15(e) promulgated under the Securities ExchangeAct of 1934, as amended) as of the end of the period covered by thisreport.  Based upon that evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures are adequate and effective.

 

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**PART II—OTHER INFORMATION:**

 

**ITEM 1. LEGAL PROCEEDINGS:**

 

From time to time, wehave 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, will have a material adverse effect onour financial condition, results of operations, or cash flows.

 

During 2002, a lawsuitwas 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:**

 

In August of 2003the shareholder of The William Carter Company acted by unanimous writtenconsent to elect Thomas Whiddon to fill an empty seat on the board of directorsof The William Carter Company.  Following that action, the board ofdirectors consisted of Frederick J. Rowan, II, Bradley M. Bloom, Ross M. Jones,David Pulver, Paul Fulton, John R. Welch, and Mr. Whiddon.

 

**ITEM 5. OTHER INFORMATION:**

 

None

 

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

 

(a) Exhibits:

 
| **Exhibit Number** |   | **Description  of Exhibits**           |
|--------------------|--------|----------------------------------------|
|               |   |                                   |
| 31.1               |   | Rule 13a-14(a)/15d-14(a) Certification |
|               |   |                                   |
| 31.2               |   | Rule 13a-14(a)/15d-14(a) Certification |
|               |   |                                   |
| 32                 |   | Section 1350 Certification        |

 

(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:  November 17, 2003 |   | /s/ FREDERICK J. ROWAN,  II |   |   |
|                               | Frederick J. Rowan, II |   |
|                               | *Chairman, President, and Chief Executive Officer* |
|                               |   |
|                               |   |
| Date:  November 17, 2003 | /s/ MICHAEL D. CASEY |   |
|                               | Michael D. Casey |   |
|                               | *Executive Vice President and Chief Financial Officer* |
|                                    |  |  |  |  |  |  |  |  |  |

#### * *

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