CARTER WILLIAM CO /GA/ - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 29, 2002 OR

[ ] 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 of registrant as specified in charter)

MASSACHUSETTS 04-1156680
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

THE PROSCENIUM
1170 PEACHTREE STREET NE, SUITE 900
ATLANTA, GEORGIA 30309
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(Address of principal executive offices, including zip code)

(404) 745-2700
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(Registrant's telephone number, including area code)

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

Applicable only to corporate issuers:

As of August 13, 2002, there were 1,000 shares of Common Stock outstanding.

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FORM 10-Q

THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
INDEX

2

THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)

See accompanying notes to the condensed consolidated financial statements

3

THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)

See accompanying notes to the condensed consolidated financial statements

4

THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)

See accompanying notes to the condensed consolidated financial statements

5

THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

See accompanying notes to the condensed consolidated financial statements

6

THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 -- CHANGE IN OWNERSHIP:

The William Carter Company ("Carter's," "we," "us" and "our") is a
wholly-owned subsidiary of Carter Holdings, Inc. ("Holdings"). Holdings has no
significant assets or investments other than the shares of stock of The William
Carter Company. On July 12, 2001, a special-purpose entity formed by Berkshire
Partners LLC and affiliates ("Berkshire") entered into a stock purchase
agreement with Holdings and all of Holdings' stockholders to acquire
substantially all of the stock of Holdings except for some equity interests held
by our management (the "Acquisition"). The Acquisition was consummated on August
15, 2001. Financing for the Acquisition and related transactions totaled $468.2
million and was provided by: $24.0 million in new revolving credit facility
borrowings; $125.0 million in new term loan borrowings (both the revolver and
term loan are part of a $185.0 million new senior credit facility entered into
by us); $173.7 million of borrowings under a new senior subordinated loan
facility (issued by us in connection with an August 15, 2001 private placement);
and $145.5 million of capital invested by affiliates of Berkshire and other
investors, which includes rollover equity by our management of $18.3 million.

The proceeds of the Acquisition and financing were used to purchase
existing equity of Holdings ($252.5 million), pay for selling stockholders
transaction expenses ($19.1 million, including $0.8 million in debt prepayment
penalties recorded on Holdings), pay for buyers' transaction expenses ($4.0
million), pay debt issuance costs ($13.4 million) and to retire all outstanding
balances on our and Holdings' previously outstanding long-term debt including
accrued interest thereon ($174.8 million). In addition, $4.4 million of proceeds
were held as cash for temporary working capital purposes. Portions of these
payments were accomplished by an intercompany dividend of $128.6 million from us
to Holdings. Also in connection with the Acquisition, our redeemable preferred
stock held by Holdings was cancelled.

For purposes of identification and description, we are referred to as
the "Predecessor" for the period prior to the Acquisition and the "Successor"
for the period subsequent to the Acquisition.

The Acquisition was accounted for as a purchase and has been reflected
in our financial statements using pushdown accounting. Accordingly, the purchase
price for the Acquisition, including related fees and expenses, has been
allocated to our tangible and identifiable intangible assets and liabilities
based upon their estimated fair values with the remainder allocated to goodwill.

7

THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

NOTE 1 -- CHANGE IN OWNERSHIP: (CONTINUED)

A summary of the total purchase price is as follows ($000):

Total purchase price ............................................ $ 468,193
Less-amounts retained at Holdings ............................ (623)
---------
$ 467,570
=========
Allocated to:
Cash and cash equivalents .................................... $ 7,333
Accounts receivable, net ..................................... 39,570
Inventories, net ............................................. 110,219
Prepaid expenses and other current assets .................... 3,525
Property, plant and equipment ................................ 42,569
Assets held for sale ......................................... 884
Licensing agreements ......................................... 15,000
Tradename .................................................... 220,233
Cost in excess of fair value of net assets acquired .......... 139,349
Deferred debt issuance costs ................................. 13,427
Other assets ................................................. 5,432
Accounts payable ............................................. (18,340)
Other current liabilities .................................... (25,936)
Closure and exit liabilities ................................. (2,680)
Other long-term liabilities .................................. (10,850)
Net deferred tax liabilities ................................. (72,165)
---------

$ 467,570
=========

As a result of the above, our initial capitalization as of the Acquisition
date consisted of ($000):

Borrowings on new revolving credit facility..................... $ 24,000
Borrowings on new term loan..................................... 125,000
Borrowings under new senior subordinated note................... 173,693
Additional paid-in capital...................................... 144,877
--------
Total capitalization......................................... $467,570
========

Subsequent to the Acquisition, our results of operations will be
significantly impacted by changes in interest expense and amortization of
intangibles.

The following unaudited pro forma operating data presents the results of
operations for the three-month and six-month periods ended June 30, 2001 as if
the Acquisition had occurred on December 31, 2000, with financing obtained as
described above and assumes that there were no other changes in our operations.
The pro forma results are not necessarily indicative of the financial results
that might have occurred had the transaction actually taken place on December
31, 2000 or of future results of operations ($000):

8

THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

NOTE 2 -- BASIS OF PREPARATION:

In our opinion, our accompanying unaudited condensed consolidated financial
statements contain all adjustments necessary to present fairly our financial
position as of June 29, 2002 (Successor), the results of our operations for the
three-month and six-month periods ended June 29, 2002 (Successor) and June 30,
2001 (Predecessor) and cash flows for the six-month periods ended June 29, 2002
(Successor) and June 30, 2001 (Predecessor). Operating results for the
three-month and six-month periods ended June 29, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 28, 2002 (Successor). Our accompanying condensed consolidated balance
sheet as of December 29, 2001 (Successor) is from our audited consolidated
financial statements included in our most recently filed annual report on Form
10-K.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission and the instructions to Form 10-Q. The
accounting policies we follow, except as described in Note 9, are set forth in
our most recently filed annual report on Form 10-K in the Notes to our
Consolidated Financial Statements for the fiscal year ended December 29, 2001.

Certain amounts from prior periods have been reclassified to conform to the
current period's presentation. These reclassifications had no effect on net
income as previously reported.

NOTE 3 -- THE COMPANY:

We design, manufacture, source and market premier branded childrenswear
under the CARTER'S and TYKES labels. Our products are sourced internationally
through internally managed production at plants located in Costa Rica and Mexico
and through contractual arrangements with several manufacturers throughout the
world. Our products are sourced for wholesale distribution to major U.S.-based
retailers and for our 155 retail stores that market our brand name merchandise
and certain products manufactured by other companies. Our retail operations
represented approximately 46% and 48% of our consolidated net sales in the
second quarter of 2002 and 2001, and approximately 45% in the first half of 2002
and 2001.

NOTE 4 -- INVENTORIES:

Inventories consisted of the following ($000):

NOTE 5 -- PARENT COMPANY TRANSACTIONS:

During the second quarter ended June 29, 2002, Holdings sold shares of
its common stock to one of our directors for cash proceeds of $500,000 and
issued shares of its common stock to an outside consultant. In connection
with these transactions, as well as Holdings' stock option grants to certain
employees, we recorded compensation expense during the second quarter ended
June 29, 2002 in the amount of approximately $641,000, received cash of
$500,000 and recorded contributions from Holdings to our additional paid-in
capital in the amount of approximately $1.1 million.

9

THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

NOTE 5 -- PARENT COMPANY TRANSACTIONS: (CONTINUED)

During the six-month period ended June 30, 2001, we paid a dividend on our
common stock held by Holdings in the amount of approximately $60,000, the
proceeds of which were used by Holdings to repurchase shares of Holdings' stock
owned by a former employee of Carter's. In addition, during the six-month period
ended June 30, 2001, Holdings made a $60,000 capital contribution to us in
connection with the issuance of shares of Holdings' stock to an employee of
Carter's. This transaction involved no cash proceeds and we recognized $60,000
as compensation expense.

During the second quarter of 2001, we paid a semi-annual dividend of
approximately $1.2 million on $20.0 million of redeemable preferred stock, which
accrued annually at 12%. All of our redeemable preferred stock held by
Holdings was cancelled in connection with the Acquisition.

NOTE 6 -- SEGMENT INFORMATION:

Our two business segments are "Wholesale" and "Retail." We generally sell
the same products in each business segment. Wholesale products are offered
through our Wholesale distribution channel while the Retail segment reflects the
operations of our retail stores. Each segment's results include the costs
directly related to the segment's revenue and all other costs are allocated
based on the relationship to consolidated net sales or units sourced to support
each segment's revenue.

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

10

THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

NOTE 6 -- SEGMENT INFORMATION: (CONTINUED)

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

NOTE 7 -- CLOSURE OF MANUFACTURING FACILITIES:

In the first quarter of fiscal 2001, we announced our plans to close our
sewing facility located in Harlingen, Texas, which subsequently closed and
ceased operations on May 11, 2001. In the first quarter of 2001, we recorded a
non-recurring charge of approximately $582,000 for closure costs and involuntary
termination benefits and a non-cash charge of approximately $742,000 related to
the writedown of the asset value of our Harlingen, Texas facility to its
estimated net realizable value. As of March 30, 2002, all of the costs provided
for in the first quarter of 2001 for severance and other termination benefits
were paid.

In the second quarter of fiscal 2001, we announced our plans to close our
fabric printing operations located in Barnesville, Georgia, which subsequently
closed and ceased operations on June 29, 2001. In the second quarter of 2001, we
recorded a non-recurring charge of approximately $534,000 for closure costs and
involuntary termination benefits and a non-cash charge of approximately $2.4
million related to the writedown of the asset value of our fabric printing
operations in Barnesville, Georgia to its estimated net realizable value. As of
June 29, 2002, all of the costs provided for in the second quarter of 2001 for
severance and other termination benefits have been paid.

In connection with the Acquisition, we evaluated the requirements for
certain manufacturing operations, which we had previously planned to maintain to
support our long-term revenue growth plans. After a thorough assessment of
alternative sourcing opportunities, we decided to exit certain manufacturing
operations. We made this decision in connection with our new ownership in
advance of the Acquisition. Accordingly, on October 23, 2001, we announced our
plans to close our cutting and fabric warehouse operations located in Griffin,
Georgia, our embroidery operation located in Milner, Georgia, our bed and bath
sewing and finishing operation located in Barnesville, Georgia and our sewing
facility located in San Pedro, Dominican Republic, all of which subsequently
closed and ceased operations before the end of fiscal 2001. At the time of the
Acquisition, we established a liability for these plant closures. As of June 29,
2002, all of the severance and other termination costs associated with these
plant closures have been paid.

The assets held for sale related to the embroidery operations at Milner,
Georgia were sold during the first quarter of 2002. The assets from the
printing, bed and bath sewing and finishing facility located in Barnesville,
Georgia and land associated with the Harlingen, Texas facility are included in
assets held for sale on the accompanying balance sheets.

11

THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

NOTE 8 -- OTHER EXIT COSTS:

In connection with the Acquisition and our new ownership, we announced our
decision to terminate an initiative to open full-price retail stores. At
Acquisition, we established a liability related to terminating three employees,
exiting a full-price retail consulting contract and providing for related lease
obligations. As of June 29, 2002, all of the costs associated with exiting the
full-price retail initiative have been paid.

NOTE 9 -- RECENT ACCOUNTING PRONOUNCEMENTS:

In connection with the Acquisition, we adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations"
("SFAS 141") and applied the required provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). Accordingly, our tradename and goodwill
have now been deemed to have indefinite lives and are no longer being amortized
in the Successor period. Our licensing agreements are being amortized over the
average three-year life of such agreements, as it has been determined that these
agreements have finite lives. Amortization expense for the first half of 2002
was $2.5 million and is expected to be $5.0 million for fiscal 2002, $5.0
million for fiscal 2003 and $3.1 million for 2004.

We adopted the remaining provisions of SFAS 142 as of the beginning of
fiscal 2002. In accordance with SFAS 142, we have identified our reporting
units, completed an initial assessment for impairment of goodwill (by comparing
the fair values of our reporting units to their respective carrying values,
including allocated goodwill) and our tradename and found that there was no
impairment of either asset. The calculation of reported net income (loss)
adjusted for goodwill and tradename amortization expense, net of taxes is shown
below ($000):

In accordance with SFAS 142, we are required to measure our goodwill and
tradename for impairment on at least an annual basis. They must also be tested
for impairment if events or changes in circumstances so dictate.

In October 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets"
("SFAS 144") which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. We adopted SFAS 144 as of the
beginning of fiscal 2002 and it did not have a material impact on our financial
position or results of operations for the second quarter or the first half of
2002.

In November 2001, the Financial Accounting Standards Board's Emerging
Issues Task Force ("EITF") issued EITF Issue No. 01-09, "Accounting for
Consideration Given by a Vendor to a Customer/Reseller" ("EITF 01-09"). EITF
01-09 outlines the presumption that consideration given by a vendor to a
customer is to be treated as a reduction of revenue, unless certain conditions
are met. Historically, we have accounted for accommodations and cooperative
advertising allowances made to wholesale customers as selling expenses at

12

THE WILLIAM CARTER COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF CARTER HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

NOTE 9 -- RECENT ACCOUNTING PRONOUNCEMENTS: (CONTINUED)

the point at which we enter into such commitments. We adopted EITF 01-09 as of
the beginning of fiscal 2002 and classified these expenses as a reduction of
revenue rather than as selling, general and administrative expenses.
Accommodations and cooperative advertising allowances of $2.2 million for the
second quarter of 2001 and $3.8 million for the first half of 2001 have been
reclassified to conform with the current period's presentation. These
reclassifications did not impact net income (loss).

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). SFAS 145 rescinds FASB Statement No. 4, which required all gains
and 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 Accounting Principles Board Opinion 30 will now be used
to classify those gains and losses. The provisions of SFAS 145, as related to
the rescission of FASB Statement No. 4, will be effective for fiscal 2003. We
are currently evaluating the impact of this statement to determine the effect,
if any, that it may have on our consolidated results of operations and financial
condition.

13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:

The following is a discussion of our results of operations and current
financial position. You should read this discussion in conjunction with our
condensed consolidated historical financial statements and notes included
elsewhere in this quarterly report. Our discussion of our results of operations
and financial condition includes various forward-looking statements about our
markets, the demand for our products and services and our future results. We
base these statements on certain assumptions that we consider reasonable. For
information about risks and exposures relating to our business and our company,
you should read Item 3 of this quarterly report entitled "Quantitative and
Qualitative Disclosures about Market Risk" and the section entitled "Risks
Relating to Our Business" in our most recently filed annual report on Form 10-K.
Actual results may differ materially from those suggested by our forward-looking
statements for various reasons including those discussed in Item 3. Those risk
factors expressly qualify all subsequent oral and written forward-looking
statements attributable to us or persons acting on our behalf. Except for any
ongoing obligations to disclose material information as required by the federal
securities laws, we have no intention or obligation to update forward-looking
statements after we file this quarterly report.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, (i) selected
statement of operations data expressed as a percentage of net sales, (ii) the
percentage change from the same period of the prior year in such selected
statement of operations data and (iii) the number of retail stores open
at the end of each such period.

14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS: (CONTINUED)

THREE AND SIX-MONTH PERIODS ENDED JUNE 29, 2002 COMPARED TO THREE AND SIX-MONTH
PERIODS ENDED JUNE 30, 2001

As a result of the Acquisition, our assets and liabilities were
adjusted to their estimated fair values as of August 15, 2001. In addition, we
entered into new financing arrangements and had a change in our capital
structure. All periods prior to the Acquisition (the "Predecessor" periods)
presented include amortization expense on our tradename and goodwill. The
periods subsequent to the Acquisition (the "Successor" periods) reflect
increased interest expense, amortization of licensing agreements and cessation
of amortization on our tradename and goodwill due to the adoption of Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations"
("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). Accordingly, the results of operations for the Predecessor and Successor
periods are not comparable.

NET SALES. In the second quarter of fiscal 2002, consolidated net sales
increased $11.9 million, or 11.1%, to $119.1 million from $107.2 million in the
second quarter of fiscal 2001. Consolidated net sales for the first half of 2002
were $243.7 million, an increase of $26.5 million, or 12.2%, as compared with
$217.2 million for the first half of 2001. Improvements in the quality of
fabrics, garment construction, embroideries and prints made possible through our
global sourcing capabilities contributed to our strong product performance and
growth in each of our channels of distribution for both the second quarter and
first half of 2002 over 2001.

Total wholesale sales, excluding discount store channel and off-price sales,
increased $6.1 million, or 12.8%, in the second quarter of 2002 to $54.1 million
from $48.0 million in the second quarter of 2001. These sales also increased in
the first half of 2002 by $13.7 million, or 13.2%, to $117.6 million from $103.8
million in the same period in 2001. This revenue growth was driven by our baby
and playclothes product lines.

Discount store channel sales increased 16.1% and 6.0% for the second quarter
and first half of 2002 from similar periods in 2001. We attribute these
increases to strong product performance as well as floor space gained through
the opening of additional Target stores.

Our retail store sales were $54.9 million for the second quarter of 2002,
which represented an increase of $4.0 million, or 7.8%, compared to the second
quarter of 2001. Sales from this channel also increased $11.1 million, or 11.4%,
in the first half of 2002 to $108.5 million from $97.4 million in the first half
of 2001. These increases are attributed to growth of all of our product lines
for both periods. Strong product performance drove our comparable store sales
growth of 5.0% and 8.3% in the second quarter and the first half of 2002. During
the first half of 2002, we have added four new stores for a total of 155
operating as of June 29, 2002. We plan to open eight and close four stores
during the remainder of 2002.

GROSS PROFIT. Our gross profit increased $8.1 million, or 21.4%, to $45.7
million in the second quarter of 2002 from $37.7 million in the second quarter
of 2001. Gross profit increased $17.4 million, or 22.8%, to $93.6 million in the
first half of 2002 compared to $76.2 million in the first half of 2001. Gross
profit, as a percentage of net sales, in the second quarter and first half of
2002 increased to 38.4% from 35.1% compared to 2001. We attribute the 330 basis
points increase to the expansion of our global sourcing capabilities, which has
enabled us to source better products at lower costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the second quarter of 2002 increased $5.0 million,
or 14.3%, to $39.6 million from $34.7 million in the second quarter of 2001.
These costs, as a percentage of net sales, increased to 33.3% in the second
quarter of 2002 from 32.4% in the second quarter of 2001. In the first half of
2002, selling, general and administrative expenses increased $10.4 million, or
15.2%, to $78.9 million from $68.5 million in the first half of 2001. As a
percentage of net sales, these expenses increased to 32.4% in the first half of
2002 from 31.5% in the first half of 2001. Such increases for the second quarter
and first half of 2002

15

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS: (CONTINUED)

are due to the net effect of fees related to strategic consulting arrangements
and personnel costs offset by continued increases in comparable retail store
sales growth.

NON-RECURRING CHARGES / WRITEDOWN OF LONG-LIVED ASSETS. In the first
quarter of 2001, we recognized a non-recurring charge of approximately $582,000
for certain closure costs and involuntary termination benefits related to our
sewing facility in Harlingen, Texas. Additionally, we recorded a non-cash charge
of approximately $742,000 for the writedown of the asset value to its estimated
net realizable value. In the second quarter of fiscal 2001, we closed our fabric
printing operations located in Barnesville, Georgia and recognized a
non-recurring charge of approximately $534,000 related to certain closure costs
and involuntary termination benefits. Additionally, we recorded a non-cash
charge of approximately $2.4 million for the writedown of the related asset
value to its estimated net realizable value.

ROYALTY INCOME. We license the use of the CARTER'S and TYKES names to
certain licensees. Our royalty income in the second quarter of 2002 was
approximately $1.8 million compared to approximately $1.5 million in the
second quarter of 2001. During the first half of 2002, royalty income was
approximately $3.8 million compared to approximately $3.5 million during the
first half of 2001. We attribute our royalty earnings to our strong brand
image and consumer awareness.

OPERATING INCOME. Operating income for the second quarter of 2002 increased
$6.4 million to $7.9 million compared to $1.5 million in the second quarter of
2001. Operating income for the first half of 2002 increased $11.6 million to
$18.5 million from $6.9 million in the first half of 2001. As a percentage of
net sales, operating income more than doubled over the second quarter and first
half of 2001. The increase reflects the effect of higher levels of revenue and
gross profit, in addition to the unfavorable impact of the non-recurring charges
in 2001. Excluding the non-recurring charges in 2001, operating income in the
first half of 2002 would have increased $7.3 million, or 65.0%, over the first
half of 2001.

INTEREST EXPENSE, NET. Net interest expense for the second quarter of 2002
increased $3.2 million to $7.1 million from $3.9 million in the second quarter
of 2001. In the first half of 2002, interest expense increased $6.1 million to
$14.0 million from $7.8 million in the first half of 2001. This increase is a
result of the additional borrowings from the Acquisition and refinancing. At
June 29, 2002, outstanding debt aggregated $297.9 million compared to $156.7
million at June 30, 2001. We had outstanding letters of credit totaling
approximately $10.4 million as of June 29, 2002 compared to approximately
$4.3 million as of June 30, 2001.

INCOME TAXES. We recorded a provision for income taxes of $317,000 in the
second quarter of 2002 compared to a benefit of $934,000 in the second quarter
of 2001. In the first half of 2002, we recorded a provision for income taxes of
$1.7 million compared to a benefit of $364,000 in the first half of 2001. Our
effective tax rate was approximately 38.5% during the first half of 2002 and
approximately 40.0% during the first half of 2001.

NET INCOME (LOSS). As a result of the factors noted above, our second
quarter 2002 net income was $506,000 compared to a net loss of approximately
$1.4 million in the second quarter of 2001. Net income for the first half of
2002 was approximately $2.8 million compared to a net loss of $545,000 in the
first half of 2001.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Our primary cash needs are working capital, capital expenditures and debt
service. Historically, we have financed these needs primarily through internally
generated cash flow and funds borrowed under senior credit facilities. Our
primary source of liquidity will continue to be cash flow from operations and
borrowings under our credit facilities, and we expect that these sources will
fund our ongoing requirements for debt service and capital expenditures. These
sources of liquidity may be impacted by continued demand for our products and
our ability to meet debt covenants under our credit facility.

16

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS: (CONTINUED)

Net accounts receivable at June 29, 2002 were $40.1 million compared to
$36.6 million at June 30, 2001 and $35.4 million at December 29, 2001. The
increase over June 30, 2001 is attributed to the growth in net sales. Due to the
seasonal nature of our operations, the net accounts receivable balance at June
29, 2002 is not comparable to the net accounts receivable balance at December
29, 2001.

Net cash used in operating activities for the first half of 2002 was
$632,000 compared to $13.6 million for the first half of 2001. This decrease is
primarily attributable to managing the growth and quality of inventories and the
increase in net income.

Net inventories at June 29, 2002 were $98.1 million compared to $110.7
million at June 30, 2001 and $89.1 million at December 29, 2001. This reduction
over June 30, 2001 reflects the favorable impact of our forecasting and
sourcing strategies. Due to the seasonal nature of our operations, net
inventories at June 29, 2002 are not comparable to net inventories at
December 29, 2001.

We have invested $5.6 million in capital expenditures during the first half
of 2002 compared to $6.1 million during the first half of 2001. We plan to
invest approximately $20.0 million in capital expenditures in 2002. Major
investments include retail store openings and remodeling, fixturing programs for
wholesale customers and the expansion of our distribution centers.

At June 29, 2002, we had approximately $297.9 million of debt outstanding,
consisting of $173.8 million of senior subordinated notes (the "Notes"), $124.1
million in term loan borrowings and no revolver borrowings under the senior
credit facility, exclusive of approximately $10.4 million of outstanding letters
of credit. At June 29, 2002, we invested our available cash of $21.0 million in
money market mutual funds at a tax-exempt interest rate of 1.12%, compared to a
borrowing amount of $18.0 million under the revolving portion of our previous
senior credit facility at June 30, 2001. At June 29, 2002, we had approximately
$49.6 million of financing available under our revolving loan facility. At
December 29, 2001, we had approximately $298.7 million of debt outstanding,
consisting of $173.7 million of Notes, $125.0 million in term loan borrowings
and no revolver borrowings under the senior credit facility, exclusive of
approximately $6.5 million of outstanding letters of credit. The borrowings
under the revolving credit facility will be available to fund our working
capital requirements, capital expenditures and other general corporate purposes.

Principal borrowings under the term loan are due and payable in twenty-four
quarterly installments of $312,500 beginning December 31, 2001 through
September 30, 2007 and four quarterly payments of approximately $29.4 million
from December 31, 2007 through September 30, 2008. Interest on the term loan
is payable at the end of interest rate reset periods, which vary in length
but in no case exceed six months. The outstanding balance of the revolving
credit facility is payable in full on August 15, 2006, and interest is
payable quarterly. No principal payments are required on the Notes prior to
their scheduled maturity. Interest is payable semi-annually on the Notes in
February and August of each year, commencing February 15, 2002, in the amount
of approximately $9.5 million for each payment.

Based on our current level of operations and anticipated cost savings and
operating improvements, we believe that cash generated from operations and
available cash, together with amounts available under the revolving credit
portion of our new senior credit facility, will be adequate to meet our debt
service requirements, capital expenditures and working capital needs for the
foreseeable future, although no assurance can be given in this regard. We may,
however, need to refinance all or a portion of the principal amount of the Notes
on or prior to maturity.

The senior credit facility imposes certain covenants, requirements and
restrictions on our actions and our subsidiaries that, among other things,
restrict the payment of dividends.

17

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS: (CONTINUED)

EFFECTS OF INFLATION

We are affected by inflation and changing prices primarily through the
purchase of raw materials, increased operating costs and higher interest rates.
The effects of inflation in changing prices on our net sales, revenues and
operations have not been material in recent years.

SEASONALITY

We experience seasonal fluctuations in our sales and profitability, with
generally lower sales and gross profit in the first and second quarters of our
fiscal year. Approximately 58% of our consolidated net sales is generated in the
second half of our fiscal year. We believe that the seasonality of sales and
profitability is a factor that affects the baby and young children's apparel
industry generally and is primarily due to retailers' emphasis on price
reductions in the first quarter, promotional retailers' and manufacturers'
emphasis on closeouts of the prior year's product lines and "back-to-school" and
holiday shopping patterns. Accordingly, the results of operations for the three
and six-month periods ended June 29, 2002 are not indicative of the results we
expect for the full year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to bad debts, inventories, intangible assets, income taxes,
restructuring, pensions and other post-retirement benefits and contingencies and
litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.

A summary of the significant accounting policies and methods used in the
preparation of our consolidated financial statements is included in Note 2 to
the Consolidated Financial Statements, included in our most recently filed
annual report on Form 10-K. The following is a brief discussion of the more
significant accounting policies and methods we use.

REVENUE RECOGNITION: We recognize wholesale revenue after shipment of
products to customers, when title passes and when all risks and rewards of
ownership have transferred. In certain cases, this does not occur until
the goods reach the specified customer. We consider revenue realized or
realizable and earned when the product has been shipped, the sales price
is fixed or determinable and collectibility is reasonably assured.

In the normal course of business, we grant certain accommodations and
allowances to our wholesale customers. As a result of our recent adoption
of the Financial Accounting Standards Board's Emerging Issues Task Force
("EITF") Issue No. 01-09, "Accounting for Consideration Given by a Vendor
to a Customer/Reseller," ("EITF 01-09") these amounts are classified as a
reduction of revenue. We also reduce revenue for customer returns and
deductions and maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make payments. If
the financial condition of our customers were to deteriorate, resulting in
an impairment of their ability to make payments, an additional allowance
could be required. Retail store revenues are recognized at the point of
sale.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS: (CONTINUED)

INVENTORY: We write down our inventory for estimated excess and
obsolescence equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than
those projected by us, additional write-downs may be required.

GOODWILL AND TRADENAME: As of June 29, 2002, we have approximately $360
million in goodwill and tradename assets on our balance sheet. At
Acquisition, we estimated the fair value of the CARTER'S tradename to be
approximately $220 million using a discounted cash flow analysis which
examined the hypothetical cost savings that accrue as a result of our
ownership of the tradename. The cash flows, which incorporated both
historical and projected financial performance, were discounted using a
discount rate of ten percent. We determined that the tradename has an
indefinite life. The carrying value of these assets will be subject to
annual impairment reviews based on the estimated fair values of the
underlying businesses. These estimated fair values are based on estimates
of the future cash flows of the businesses. Factors affecting these future
cash flows include the continued market acceptance of our offered products
and our development of new products. Impairment reviews may also be
triggered by any significant events or changes in circumstances.

RECENT ACCOUNTING PRONOUNCEMENTS

In connection with the Acquisition, we adopted the provisions of SFAS 141,
"Business Combinations" and applied the required provisions of SFAS 142,
"Goodwill and Other Intangible Assets." Accordingly, our tradename and goodwill
have now been deemed to have indefinite lives and are no longer being amortized
in the Successor period. Our licensing agreements are being amortized over the
average three-year life of such agreements, as it has been determined that these
agreements have finite lives. Amortization expense for the first half of 2002
was $2.5 million and is expected to be $5.0 million for fiscal 2002, $5.0
million for fiscal 2003 and $3.1 million for 2004.

We adopted the remaining provisions of SFAS 142 as of the beginning of
fiscal 2002. In accordance with SFAS 142, we have identified our reporting
units, completed an initial assessment for impairment of goodwill (by comparing
the fair values of our reporting units to their respective carrying values,
including allocated goodwill) and our tradename and found that there was no
impairment of either asset. The calculation of reported net income (loss)
adjusted for goodwill and tradename amortization expense, net of taxes is shown
below ($000):

In accordance with SFAS 142, we are required to measure our goodwill and
tradename for impairment on at least an annual basis. They must also be tested
for impairment if events or changes in circumstances so dictate.

19

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS: (CONTINUED)

In October 2001, the Financial Accounting Standards Board issued ("FASB")
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets"
("SFAS 144") which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. We adopted SFAS 144 as of the
beginning of fiscal 2002 and it did not have a material impact on our financial
position or results of operations for the second quarter or the first half of
2002.

In November 2001, the EITF issued EITF 01-09, which outlines the
presumption that consideration given by a vendor to a customer is to be treated
as a reduction of revenue, unless certain conditions are met. Historically, we
have accounted for accommodations and cooperative advertising allowances made to
wholesale customers as selling expenses at the point at which we enter into such
commitments. We adopted EITF 01-09 as of the beginning of fiscal 2002 and
classified these expenses as a reduction of revenue rather than as selling,
general and administrative expenses. Accommodations and cooperative advertising
allowances of $2.2 million for the second quarter of 2001 and $3.8 million for
the first half of 2001 have been reclassified to conform with the current
period's presentation. These reclassifications did not impact net income (loss).

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). SFAS 145 rescinds FASB Statement No. 4, which required all gains
and 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 Accounting Principles Board Opinion 30 will now be used
to classify those gains and losses. The provisions of SFAS 145, as related to
the rescission of FASB Statement No. 4, will be effective for fiscal 2003. We
are currently evaluating the impact of this statement to determine the effect,
if any, that it may have on our consolidated results of operations and financial
condition.

20

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

In the operation of our business, we have market risk exposures to global
sourcing, raw material prices and interest rates. Each of these risks and our
strategies to manage the exposure are discussed below.

We currently source substantially all of our production from our offshore
operations and third-party manufacturers located in foreign countries. As a
result, we may be adversely affected by political instability resulting in the
disruption of trade from foreign countries, the imposition of new regulations
relating to imports, duties, taxes and other charges on imports and any
significant decreases in the value of the dollar against foreign currencies and
restrictions on the transfer of funds. Some of these and other factors could
interrupt production in offshore facilities, delay receipt of the products into
the United States or affect our operating income. Our future performance may be
subject to such factors, which are beyond our control, and there can be no
assurance that such factors would not have a material adverse effect on our
financial condition and results of operations. We carefully select our sourcing
agents, and in an effort to mitigate the possible disruption in product flow, we
place production in various countries we believe to be of lower risk.

Additionally, we enter into various purchase order commitments with full
package suppliers. We can cancel these arrangements, although in some instances,
we may be subject to a termination charge reflecting a percentage of work
performed prior to cancellation. Historically, such cancellations and related
termination charges have not had a material impact on our business.

The principal raw materials we use are finished fabrics and trim materials.
Prices for these materials are affected by changes in market demand and there
can be no assurance that prices for these and other raw materials will not
increase in the near future. Most of these materials are available from more
than one supplier, which enables us to negotiate pricing.

Our operating results are subject to risk from interest rate fluctuations
on debt, which carries variable interest rates. At June 29, 2002, outstanding
debt aggregated $297.9 million, of which $124.1 million bore interest at a
variable rate. An increase of 1% in the applicable rate would increase our
annual interest cost by $1,241,000 and could have an adverse effect on our net
income and cash flow. Pursuant to the provisions of our senior credit facility,
we purchased an interest rate cap as an economic hedge against approximately
$31.3 million of variable rate debt. The cap rate is 7.0% and the arrangement
expires on December 7, 2004.

21

PART II--OTHER INFORMATION:

ITEM 1. LEGAL PROCEEDINGS:

From time to time, we have been involved in various legal proceedings. We
believe that all such litigation is routine in nature and incidental to the
conduct of our business, and we believe that no such litigation will have a
material adverse effect on our financial condition or results of operations.

ITEM 2. CHANGES IN SECURITIES:

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES:

None

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

On May 16, 2002, the holder of all of our 1,000 shares of common stock
voted by unanimous written consent in lieu of a special meeting to elect Paul
Fulton as a director of The William Carter Company. After May 16, 2002, the
directors of The William Carter Company were as follows: Frederick J. Rowan, II,
Joseph Pacifico, David A. Brown, Bradley M. Bloom, Ross M. Jones, David Pulver
and Paul Fulton.

ITEM 5. OTHER INFORMATION:

None

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

(a) Exhibits: None

(b) Reports on Form 8-K

No report was filed by the Registrant during the quarter ended June 29,
2002.

22

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

THE WILLIAM CARTER COMPANY

Date: August 13, 2002 /s/ FREDERICK J. ROWAN, II
---------------------------
Frederick J. Rowan, II
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER

Date: August 13, 2002 /s/ MICHAEL D. CASEY
---------------------------
Michael D. Casey
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER

23

CERTIFICATION

Each of the undersigned in the capacity indicated hereby certifies that, to
his knowledge, this Report on Form 10-Q for the quarter ended June 29, 2002
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and the information contained in this Report fairly
presents, in all material respects, the financial condition and results of
operations of The William Carter Company.

Date: August 13, 2002 /s/ FREDERICK J. ROWAN, II
---------------------------
Frederick J. Rowan, II
CHIEF EXECUTIVE OFFICER

Date: August 13, 2002 /s/ MICHAEL D. CASEY
---------------------------
Michael D. Casey
CHIEF FINANCIAL OFFICER

24