UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended JANUARY 3, 2004

For the transition period from ___________ to ___________

Commission file number 0-1790

RUSSELL CORPORATION

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None

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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No [  ]

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X]  No [  ]

The aggregate market value of Common Stock, par value $.01, held by non-affiliates of the registrant, as of July 3, 2003, was approximately $628,718,517.

As of March 5, 2004, there were 32,553,384 shares of Common Stock, $.01 par value outstanding (excluding treasury shares).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on April 21, 2004 (the “Proxy Statement”) are incorporated by reference into Part III.

Table of Contents

PART I

ITEM 1. BUSINESS

General

Russell Corporation (“Russell,” “we,” “our” or the “Company”) is a leading branded athletic, activewear and outdoor company marketing athletic uniforms, apparel, sporting goods, athletic equipment, and accessories for a wide variety of sports, outdoor and fitness activities under widely-recognized brand names including Russell Athletic^®, Jerzees^®, Mossy Oak^®, Cross Creek^®, Moving Comfort^®, Discus^®, Bike^®, Spalding^®, Dudley^®, and Sherrin^®. Russell was incorporated in 1902 and has its headquarters in Atlanta, Georgia. The Russell name has been associated with high quality apparel since 1902 and with team uniforms since 1932.

We design, market and manufacture or source a variety of apparel products including fleece, t-shirts, casual shirts, jackets, athletic shorts, socks and camouflage attire for men, women, boys, and girls. We are a leading supplier of team uniforms and related apparel to college, high school and other organized sports teams. In addition, we completed two acquisitions in 2003 that launched our participation in the sporting goods and athletic equipment markets. In February 2003, we acquired the brand and related assets of Bike Athletic Company, which introduced athletic supporters, knee and elbow pads, braces, and protective equipment into our product offering. Then, with the May 2003 acquisition of the brands, contracts and related assets of the sporting goods business of Spalding Sports Worldwide, Inc., we became a leading marketer of basketballs, footballs, soccer balls, and volleyballs. Spalding is the official basketball supplier for the National Basketball Association (“NBA”) and the Women’s National Basketball Association; the official football for the Arena Football League; the official soccer ball of the Major Indoor Soccer League; and the official volleyball for the National Collegiate Athletic Association and American Volleyball Association.

We offer a diversified portfolio of brands across multiple distribution channels and market our products in the United States and Canada and approximately 70 other countries. We market and distribute our products through mass merchandisers, sporting goods dealers, department and sports specialty stores, college stores, on-line retailers, mail order houses, artwear distributors, screenprinters, and embroiderers. We sell our products primarily through a combination of salaried, Company-employed sales persons and commission agents. We operate in two segments: Domestic, which includes the United States, and International. Domestic segment sales represented approximately 92% of our total 2003 net sales. The Domestic segment is further aligned by distribution channel: Athletic, Mass Retail and Artwear/Careerwear. For fiscal 2003, these channels represented approximately 32%, 29% and 31%, respectively of our total net sales. International segment sales represented approximately 8% of our total 2003 net sales.

We produce finished apparel and fabrics utilizing owned facilities, as well as contractors and other suppliers for knitting and weaving, dyeing and finishing, and cutting and sewing operations. The products offered by the Spalding and Bike businesses are primarily sourced from third-party contractors. We outsource our yarn requirements, purchasing the majority from the yarn spinning joint venture we entered into in 2001 pursuant to a long-term supply agreement, and the remainder from other manufacturers. For further discussion of our yarn joint venture, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and Notes 8 and 9 of “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Report on Form 10-K.

Knitting, weaving, dyeing, finishing, and cutting processes are primarily performed in Company-owned facilities in the United States. Approximately 99% of our apparel sewing and assembly operations are conducted offshore for products sold by the Domestic segment (excluding socks). Our dependence on third parties for manufacturing and raw materials production could subject us to difficulties in obtaining timely delivery of products that meet our quality standards. Although we monitor the performance of our contractors, we cannot assure that they will deliver our products in a timely manner or that they will meet our quality standards. In this event, failure to satisfy our customers’ requirements could result in our customers canceling orders, demanding reduced prices, refusing to accept orders, or reducing future orders, any of which could have a material adverse effect on our business, results of operations and financial condition.

In 1998, we initiated a Multi-Year Restructuring and Reorganization Program with the objectives of: (i) transitioning the Company from a manufacturing-driven business to a consumer-focused organization that markets branded apparel products; and (ii) creating an efficient, low-cost operating structure with the flexibility to take advantage of future opportunities to further reduce costs, such as strategic outsourcing arrangements, transferring our sewing and assembly operations to offshore facilities, and utilizing increasingly efficient domestic facilities. We substantially completed our restructuring and reorganization program in 2001. In October 2003, we announced an Operational Improvement Program (“OIP”) targeting $50 million in cost reductions to offset anticipated selling price decreases, higher fiber costs and other cost increases anticipated in fiscal 2004. The OIP includes improving our operating efficiencies and asset utilization, while streamlining processes in both our manufacturing and administrative areas such as: (1) expanded production with lower cost contractors; (2) lower sourcing costs; (3) increased efficiencies in domestic textile operations;

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and (4) improved distribution costs. As part of the OIP, we eliminated approximately 100 positions, primarily salaried and administrative office staff, and incurred asset impairment charges associated with the planned closings of two international sales offices and the abandonment of a previously idled domestic finished goods warehouse. For further discussion of activities under the restructuring and reorganization program and the OIP, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and Note 9 of “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Report on Form 10-K.

We do not have long-term supply contracts for any of our raw materials other than yarn, but we believe there are readily available alternative sources of supply. However, if we are unable to secure or maintain our relationships with suppliers, or experience delays in obtaining alternative sources of supply, we may not be able to fulfill our customers’ requirements, which could have a material adverse effect on our business, results of operations and financial condition. The raw materials used to manufacture our products are subject to price volatility caused by weather, supply conditions, government regulations, economic climate, and other unpredictable factors. To reduce the risk caused by market fluctuations, we have in the past entered into futures contracts to hedge commodity prices, principally cotton, on portions of anticipated purchases. However, due to the sale of our yarn spinning assets to our yarn joint venture, we no longer directly hold any significant hedging positions and have no present intention to engage in further commodity hedging. The yarn supply agreement provides for pricing to be calculated on a conversion cost basis plus the actual cost of raw materials. We direct the timing and pricing of cotton purchases by the joint venture.

Our results of operations are affected by numerous factors, including seasonal variations. Typically, demand for our apparel products is higher during the third and fourth quarters of each fiscal year. Weather conditions also affect the demand for our apparel products, particularly for our fleece products. Generally, we produce and store finished goods inventory, particularly fleece, to meet the expected demand for delivery in the upcoming season. If, after producing and storing inventory in anticipation of seasonal deliveries, demand is significantly less than expected, we may hold inventory for extended periods of time or sell excess inventory at reduced prices. Either scenario could adversely affect our results of operations. Reduced demand could also result in slower production, lower plant and equipment utilization and lower fixed operating cost absorption, all of which would have a negative impact on our business. In addition, due to the time that may lapse between production and shipment of goods, prices may or may not immediately reflect changes in our cost of raw materials and other costs.

Some of our customers are material to our business and results of operations. For fiscal 2003, 2002 and 2001 respectively, Wal-Mart and its subsidiaries, our largest customer, represented approximately 21.2%, 19.6% and 17.8% of our consolidated gross sales. Our percentage of gross sales to Wal-Mart and its subsidiaries may increase as we pursue opportunities for new business with Wal-Mart. Our top ten customers accounted for approximately 46% of our 2003 gross sales. We believe that consolidation in the retail industry and the strength of our customers have given certain customers the ability to make greater demands and we expect this trend to continue. However, we also believe that this consolidation may afford us greater cost savings potential as a result of more advantageous economies of scale. If consolidation continues, our sales and results of operations may be increasingly sensitive to a deterioration in the financial condition of, or other adverse developments with, one or more of our customers. Although we believe that our relationships with our major customers are good, we generally do not have long-term contracts with any of them, which is typical of our industry. As a result, although our customers provide indications of their product needs and purchases on a season by season basis, they generally purchase our products on an order-by-order basis and the relationship, as well as particular orders, can be terminated at any time. The loss of, or significant decrease in, business from any of our major customers could have a material adverse effect on our business, results of operations and financial condition.

Financial Information About Segments

Russell has two reportable segments: Domestic and International. The Domestic segment is further aligned by distribution channel: Athletic, Mass Retail and Artwear/Careerwear. Athletic, Mass Retail and Artwear/Careerwear have been aggregated into the Domestic reportable segment because these business lines are similar in economic characteristics, products, production processes, type of customer, distribution method and regulatory environment. The International segment distributes most of our athletic, outdoor and activewear products. For further discussion of the financial information on our segments, see Note 10 of “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Report on Form 10-K.

Domestic. Our Domestic segment is organized into three distribution channels: (1) Athletic, (2) Mass Retail and (3) Artwear/Careerwear. The Athletic channel is comprised of Russell Athletic^®, Bike^®, Moving Comfort^®, Spalding^®, Dudley^®, and Discus^® products. The Mass Retail channel is made up primarily of Jerzees^® and Jerzees Outdoors^® products and Mossy Oak^® camouflage products. The Artwear/Careerwear channel consists primarily of Jerzees^®, Cross Creek^®, and Three Rivers^® unprinted or “blank” products that are sold to artwear distributors, wholesalers and embellishers who then decorate the products or sell them to a

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third party, such as a screen printer. This channel also includes fabrics that we sell to other apparel manufacturers, primarily for the manufacture of school and industrial uniforms.

International. The International segment is made up primarily of sales of our core Russell Athletic^® and Jerzees^® apparel products outside the United States. For fiscal 2003, this segment represented approximately 8%, or $101.4 million, of total net sales. The majority of our International segment business is sales of Jerzees^® products to the artwear channel in Europe. In Europe, we also market Russell Athletic^® products primarily through nine licensing arrangements. Russell Athletic^® products are also sold in Japan, where Discus^® products are sold as well. Our International sales force and the independent agents dedicated to the international business are primarily based in the United Kingdom, continental Europe, Mexico, Japan, and Australia and are generally assigned by business line and by geographic territory.

Financial Information About Geographic Areas

See “Enterprise-wide Disclosures” from Note 10 of “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Report on Form 10-K.

Our foreign operations subject us to risks customarily associated with foreign operations. Our products are sold in more than 70 countries and we have facilities in numerous foreign countries, including Australia, Honduras, Mexico, and the United Kingdom, with the majority of our foreign sales being in Europe, Australia and Mexico. Net sales are collected in the local currency, exposing the Company to risks of change in social, political and economic conditions inherent in operating in foreign countries, including, but not limited to, the following: (i) currency fluctuations; (ii) import and export license requirements; (iii) trade restrictions; (iv) changes in tariffs and taxes; (v) restrictions on repatriating foreign profits back to the United States; (vi) foreign laws and regulations; (vii) difficulties in staffing and managing international operations; (viii) political unrest; and (ix) disruptions or delays in shipments.

We have foreign currency exposures relating to buying, selling and financing in currencies other than our functional currencies. We also have foreign currency exposure related to foreign denominated revenues and costs translated into U.S. dollars. These exposures are primarily concentrated in the euro, British pound sterling and Mexican peso. Fluctuations in foreign currency exchange rates may affect the results of our operations and the value of our foreign assets, which in turn may adversely affect reported earnings and the comparability of period-to-period results of operations. Fluctuations in currency exchange rates may also affect the relative prices at which we and our foreign competitors sell products in the same markets. In addition, changes in the value of the relevant currencies may affect the cost of certain items required in our operations. Fluctuations in foreign currency exchange rates could have a material adverse effect on our business, results of operations and financial condition. For further discussion of foreign currency exposures, see “Quantitative and Qualitative Disclosures About Market Risks” in Part II, Item 7A of this Report on Form 10-K.

Intellectual Property

We market our products under a number of trademarks and tradenames. We have registered trademarks in the United States for Russell Athletic^®, Jerzees^®, Bike^®, Cross Creek^®, Moving Comfort^®, Spalding^®, Infusion^®, Dudley^®, and Discus^® and variations of these brands as well as other trademarks. We have similar trademark registrations internationally. We also have a worldwide license to use certain registered Mossy Oak^® trademarks. The protection of our trademarks is important to our business. We believe that our registered and common law trademarks have significant value and these trademarks are instrumental to our ability to create and sustain demand for our products.

We hold licenses to manufacture and sell Major League Baseball apparel products, NBA basketballs, college apparel and Mossy Oak^® branded camouflage apparel. Our licenses with Major League Baseball expire on December 31, 2004, and will not be renewed. Our licenses with the NBA allow us to manufacture, market and sell NBA and team-identified basketballs (including the official game ball of the NBA) and certain other NBA and team-identified products worldwide through September 30, 2005. These licenses require us to pay licensing fees, including fixed minimum fees plus a percentage of net sales on those products, and require us to provide a specified amount of product to the NBA and NBA teams free of charge. We intend to negotiate the renewal of the NBA licenses on commercially reasonable terms; however, we cannot guarantee that we will be able to renew our licenses with the NBA or that the NBA will not grant additional licenses to other parties.

Our Mossy Oak^® license from Haas Outdoors is perpetual and permits us to use certain of the licensor’s trademarks, service marks, trade names, logos, and copyrights on apparel and accessories. This license is non-exclusive for certain products including accessories, gloves, headwear, footwear, bags, and products incorporating performance features such as special fabrics. The Mossy Oak^® license also requires that we pay a licensing fee calculated as a percentage of net sales from our Mossy Oak^® products, with certain minimum

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annual royalty payments through 2005. If we fail to comply with the terms of the Mossy Oak® license, including the obligation to make royalty payments, Haas Outdoors may terminate the license.

We have two non-exclusive licenses with licensing agents that cover approximately 180 colleges and universities. One of these licenses expires on March 31, 2004, and we expect to renew that license. The other license automatically renews for rolling one-year terms, but is subject to termination without cause at any time on 90 days notice. We also have approximately 60 licenses directly with colleges and universities that are generally for one to two year terms and require us to pay a licensing fee of a percentage of net sales.

Product innovation is a highly important factor in our sporting goods and athletic equipment businesses and many of the innovations in the products marketed by those businesses have been patented. The loss of any of our patents could result in increased competition and reduced sales and margins of these products. However, we do not believe that the loss of any one patent would have a material effect on our business, results of operations and financial condition.

Competition

The apparel and sporting goods industries are extremely competitive. While no single competitor dominates any channel in which we operate, some of our competitors are larger, more diversified and have greater financial and other resources than we do. We, and others in our industry, face competition on many fronts, including, without limitation: (i) quality of product; (ii) brand recognition; (iii) price; (iv) product differentiation; (v) advertising; and (vi) customer service. We also compete with companies outside the United States, many of which may have lower costs. Our ability to remain competitive in the areas of quality, price, marketing, product development, manufacturing, distribution, and order processing will, in large part, determine our future success.

Employees

As of January 3, 2004, we employed 13,644 persons. We have never had a strike or work stoppage and consider our relationship with our employees to be good.

Regulation

We are subject to federal, state and local laws and regulations affecting our business, including, but not limited to, those promulgated under the Occupational Safety and Health Act, the Consumer Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Product Identification Act, and the rules and regulations of the Consumer Products Safety Commission and various environmental laws and regulations. We believe that we are in compliance with all applicable governmental regulations under these statutes. We also believe that we are in compliance with all current environmental requirements and we expect no material environmental expenditures in the foreseeable future.

Available Information

Our Internet address is www.russellcorp.com and our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available, free of charge, through the Investor Relations section of our website as soon as reasonably practicable after filing with the Securities and Exchange Commission.

FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains certain statements that describe our beliefs concerning future business conditions, prospects, growth opportunities, new product lines and the outlook for the Company based upon currently available information. Wherever possible, we have identified these “forward-looking” statements (as defined in Section 21E of the Securities Exchange Act of 1934) by words such as “anticipates”, “believes”, “could”, “may”, “intends”, “estimates”, “expects”, “projects”, and similar phrases. These forward-looking statements are based upon assumptions we believe are reasonable.

Such forward-looking statements are subject to risks and uncertainties that could cause our actual results, performance and achievements to differ materially from those expressed in, or implied by, these statements, including, but not limited to: (a) economic conditions; (b) changes in weather and the seasonal nature of our business; (c) significant competitive activity, including, but not limited to, promotional and price competition; (d) changes in customer demand for our products; (e) inherent risks in the marketplace associated with new products and new product lines; (f) the ability to implement and achieve the goals of our Operational Improvement Program and other cost savings initiatives; (g) the collectibility of receivables from our customers; (h) our debt structure,

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cash management and cash requirements; (i) risks relating to fluctuations in interest rates, currency exchange rates and commodity prices; (j) estimates and assumptions utilized in our accounting practices; (k) plant utilization; (l) our Multi-Year Restructuring and Reorganization Program; (m) implementation of new systems; (n) effects of lawsuits and government regulations; (o) dependence on licenses from third parties; (p) price volatility of raw materials and the availability of alternative sources of supply; (q) reliance on a few customers for a portion of our sales; (r) dependence on third parties for the production of yarn and the manufacture of certain of our products; (s) our international operations; (t) protection of our intellectual property; (u) risks related to our acquisition strategy; and (v) other risk factors listed from time to time in our SEC filings. The risks listed above are not exhaustive and other sections of this annual report may include additional factors that could adversely affect our business and financial performance. We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 2. PROPERTIES

Russell’s principal executive office is located in Atlanta, Georgia, with other executive offices located in Alexander City, Alabama, Ft. Payne, Alabama, and Springfield, Massachusetts. We own manufacturing plants and distribution facilities for the Domestic segment in Alabama, Georgia, North Carolina, Mexico, and Honduras. We have secured most of our outstanding debt by a pledge of substantially all of our domestic assets, which included first mortgages on our real property in the United States, other than property held for sale, and encumbrances on manufacturing machinery held in the United States. We have no other material encumbrances on real property or manufacturing machinery.

We believe that all of our properties are well maintained and suitable for operation and are currently fully utilized for such purposes, excluding plants and equipment that are held for sale as a result of our OIP and our restructuring and reorganization program (See Note 9 of “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Report on Form 10-K).

We utilize an aggregate of approximately 8,256,000 square feet of manufacturing, warehousing and office facilities, and have approximately 1,398,000 square feet that is either idle or held for sale. The following table summarizes the approximate areas of such facilities:

All presently utilized facilities in the U.S. are owned, except certain regional sales offices, certain warehousing and shipping facilities and the Company’s executive offices in Atlanta, Georgia and Springfield, Massachusetts (see Note 8 of “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Report on Form 10-K).

ITEM 3. LEGAL PROCEEDINGS

We are a co-defendant in Locke, et al. v. Russell Corporation, et al., in Jefferson County, Alabama. Fifteen families who own property on Lake Martin in the Raintree Subdivision in Alexander City, Alabama, were the original plaintiffs in the case, which sought unspecified money damages for trespass and nuisance. However, ten families dropped out of the case and there are five remaining plaintiff families. In May 2002, the trial court entered summary judgment in our favor on all but one of the plaintiffs’ claims. The remaining claim, which involves a private right of action for public nuisance, was scheduled for trial in October 2003; however, the trial court has continued the case until 2004 and allowed us to move for summary judgment on the remaining claim. We filed our summary judgment motion on October 31, 2003, which is pending before the court.

A substantially identical lawsuit to the Locke case was filed on November 20, 2001, in the Circuit Court of Jefferson County, Alabama, by two residents of the Raintree Subdivision (Gould v. Russell Corporation, et al.). On May 22, 2002, the trial court entered summary judgment in our favor on all claims, and, on June 17, 2002, the plaintiffs filed a motion to alter that determination, which is pending. The allegations in the Locke and Gould cases are similar to those contained in a case styled Sullivan, et al. v. Russell Corporation, et al., which was resolved in our favor by a ruling by the Alabama Supreme Court in 2001. We plan to vigorously defend the Locke and Gould suits.

We are a party to various other lawsuits arising out of the normal conduct of our business. We do not believe that any of these matters, if adversely determined, would have a material adverse effect upon us.

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

None.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Russell’s securities are traded on the New York Stock Exchange and various other regional exchanges under the ticker symbol RML. As of March 9, 2004 we had approximately 9,000 holders of record of our common stock. The range of high and low prices of our common stock, year-end closing prices and the dividends per share declared during each calendar quarter of the last two years are presented below:

We are subject to certain restrictions on our ability to pay dividends under the terms of our $325 million Senior Secured Credit Facilities and our $250 million aggregate principal amount of 9.25% Senior Unsecured Notes due 2010. For a description of such restrictions, see Note 2 of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Report on Form 10-K.

Securities Authorized for Issuance Under Equity Compensation Plans

(1)

Of this number of shares, 543,050, 2,342,738 and 323,194 are reserved for issuance under the 2000 Employee Stock Purchase Plan, Executive Incentive Plan and the 2000 Non-Employee Directors’ Compensation Plan, respectively. Both the Executive Incentive Plan and the 2000 Non-Employee Directors’ Compensation Plan permit grants of several forms of equity securities in addition to options, warrants or rights. See Note 7 of “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Report on Form 10-K.

(2)

These shares are reserved for issuance under the Russell Corporation 2000 Stock Option Plan (the “2000 Option Plan”). The 2000 Option Plan was adopted by the Board of Directors as an incentive compensation plan that gives us broad discretion to grant awards, and develop the terms of such awards, to any employee or consultant of the Company. Approval of the 2000 Option Plan by security holders was not required under applicable regulations. The 2000 Option Plan permits the issuance of awards in a variety of forms, including: (a) incentive stock options; (b) non-qualified stock options; (c) reload stock options; (d) restricted shares; (e) bonus shares; (f) deferred shares; (g) freestanding stock appreciation rights; (h) tandem stock appreciation rights; (i) performance units; and (j) performance shares.

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ITEM 6. SELECTED FINANCIAL DATA

Ten-Year Selected Financial Highlights

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(a)		Fiscal 1999, 2000, 2001, 2002, and 2003 include costs associated with outbound freight as cost of goods sold in accordance with EITF 00-10, as described in Note 1 to the consolidated financial statements. These freight costs for fiscal 1999, 2000, 2001, 2002, and 2003 were $6,630,000, $8,750,000, $9,622,000, $9,451,000, and $10,123,000, respectively. Fiscal 1994 through 1998 include such costs as a reduction of net sales.
(b)		On February 6, 2003, we acquired the majority of the assets of Bike Athletic Company. On May 16, 2003, we completed the acquisition of the brands, contracts and related net assets of Spalding Sports Worldwide, Inc. The results of operations for Bike and Spalding have been included in our consolidated financial statements since their respective acquisition dates. See note 14 to the consolidated financial statements for more information on these acquisitions.
(c)		Fiscal 1998, 1999, 2000, 2001, and 2003 include special charges of $83,007,000, $70,721,000, $65,011,000, $144,092,000, and $7,303,000 respectively, as discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations. The after-tax impact of these charges on 1998, 1999, 2000, 2001, and 2003 earnings was ($1.46), ($1.38), ($1.46), ($2.88), and ($0.15) respectively, per diluted share. There were no special charges incurred in fiscal 2002.
(d)		Fiscal 2002 includes a charge of $20,097,000 ($12,621,000, net of tax) associated with the early retirement of long-term indebtedness as described in Note 2 to the consolidated financial statements. The after-tax impact of this charge on 2002 earnings was ($0.39) per diluted share.
(e)		Fiscal 2003 includes non-recurring favorable tax effects of $2,635,000 ($0.08 per diluted share) as described in Note 6 to the consolidated financial statements.
(f)		Average of amounts at beginning and end of each fiscal year.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

We are a leading branded athletic, outdoor and activewear company with over a century of success in marketing athletic uniforms, apparel and accessories for a wide variety of sports, outdoor and fitness activities. Our brands include: Russell Athletic^®, JERZEES^®, Mossy Oak^®, Cross Creek^®, Discus^®, and Moving Comfort^® along with Bike^®, Spalding^®, Dudley^®, and Sherrin^® which we acquired in 2003.

We design, market and manufacture or source a variety of apparel products including fleece, t-shirts, casual shirts, jackets, athletic shorts, socks and camouflage attire for men, women, boys, and girls. We are a leading supplier of team uniforms and related apparel to college, high school and organized sports teams. We are, and will be through 2004, the official uniform supplier of 15 Major League Baseball teams, including the Atlanta Braves, New York Yankees, San Francisco Giants, and Seattle Mariners. In addition, we are the official uniform supplier to the U. S. Olympic baseball team and Little League Baseball and an official uniform supplier to Minor League Baseball. The Russell name has been associated with high quality apparel for over 100 years and with team uniforms since 1932.

With our recent acquisition of the brand and related assets of Bike Athletic Company, we now also market and source athletic supporters, knee and elbow pads, braces, and protective equipment. Furthermore, with the acquisition of the brands, contracts and related assets of the sporting goods business of Spalding Sports Worldwide, Inc., we are now a leading marketer of basketballs, footballs, soccer balls, and volleyballs. Spalding is the official basketball supplier for the National Basketball Association (“NBA”) and the Women’s National Basketball Association (“WNBA”); the official football for the Arena Football League; the official soccer ball of the Major Indoor Soccer League; and the official volleyball for the National Collegiate Athletic Association (“NCAA”) and American Volleyball Association.

We operate our business in two segments: Domestic and International. The Domestic segment is further aligned by distribution channel: Athletic, Mass Retail and Artwear/Careerwear. The International segment distributes most of our athletic, outdoor and activewear products.

Critical Accounting Policies

The following discussion and analysis of our financial condition, results of operations, liquidity, and capital resources are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Generally accepted accounting principles require that we 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 customer programs and incentives, product returns, bad debts, inventories, investments, intangible assets, long-lived assets, deferred income taxes, restructuring reserves, pensions and other post-retirement benefits, contingencies, and litigation. We base our estimates on historical experience and on various other assumptions that we believe are 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.

We believe that some of our significant accounting policies involve a higher degree of judgment or complexity than our other accounting policies. We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and associated risks related to these policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 to the consolidated financial statements.

Revenue recognition. We recognize revenues, net of estimated sales returns, discounts and allowances, when goods are shipped, title has passed, the sales price is fixed, and collectibility is reasonably assured. Substantially all of our sales reflect FOB (“free-on-board”) shipping point terms.

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We record provisions for estimated sales returns and allowances on sales in the same period as the related sales are recorded. These estimates are based on historical sales returns, analyses of credit memo data and other known factors. If the historical data we use to calculate these estimates do not properly reflect future returns, net sales could either be understated or overstated.

Trade accounts receivable. Trade accounts receivable consist of amounts due from our normal business activities. We maintain an allowance for doubtful accounts to reflect expected credit losses. We provide for bad debts based on collection history and specific risks identified on a customer-by-customer basis. A considerable amount of judgment is required to assess the ultimate realization of accounts receivable and the creditworthiness of each customer. Furthermore, these judgments must be continually evaluated and updated. If the financial condition of our customers were to deteriorate causing an impairment of their ability to make payments, additional provisions for bad debts may be required in future periods. On the other hand, if our ultimate recovery on the accounts we have reserved or written off exceeds our estimates, we may need to decrease our reserves in the future. For example, we increased our reserve in the third quarter of fiscal 2002 to reflect estimated losses related to Kmart Corporation (“Kmart”), which filed for protection under federal bankruptcy laws in January 2002. In 2003, we sold our Kmart pre-petition receivables, and thus, we are no longer exposed to further credit losses on Kmart pre-petition receivables.

Inventories. Inventories are carried at the lower of cost or market, with cost for a substantial portion of inventories determined under the Last-In, First-Out (LIFO) method. We write down obsolete and unmarketable inventories to their estimated net realizable value based upon, among other things, assumptions about future demand and market conditions. We apply the lower of cost or market principle to LIFO inventories in the aggregate, rather than to individual stock keeping units (SKU’s), because it is not practical to establish the LIFO cost of an individual SKU. If actual market conditions are less favorable than we project, additional inventory write-downs may be required.

In 2003, our pre-tax income was favorably impacted by $2.5 million from the liquidation in one of our LIFO pools that had inventory quantities carried at lower costs prevailing in prior years as compared with current costs. In 2002, we recorded a LIFO charge of $10.3 million due to lower inventory levels, of which $6.0 million related to the liquidation of LIFO inventory quantities carried at higher costs prevailing in prior years as compared with our current manufacturing costs.

Deferred Tax Assets. We record a valuation allowance to reduce deferred tax assets to the amount we believe is likely to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, if we determine that we will not be able to realize all or part of our net deferred tax assets in the future, we would make an adjustment to increase our valuation allowance for deferred tax assets and that adjustment would be charged to income in the period that we make the determination. Likewise, if we determine that we will be able to realize more of our deferred tax assets than we currently expect, we would adjust our deferred tax assets, which would have the effect of increasing income in the period that we make the determination. We recorded $5.9 million, $2.6 million and $2.8 million of valuation allowances related to net deferred tax assets (primarily foreign and state net operating loss carryforwards) in fiscal 2003, 2002 and 2001, respectively. At the end of fiscal 2003, our total valuation allowances amounted to $19.5 million.

Impairment and Depreciation of Property, Plant and Equipment. Property, plant and equipment are stated at historical cost and depreciation is computed using the straight-line method over the lives of the assets. We estimate the depreciable lives of property, plant and equipment based on the period over which the assets will be of economic benefit to us. In 2003, we completed the implementation of our new fixed asset system, which resulted in the retirement of approximately $174.8 million of assets (primarily machinery and equipment) that were primarily fully depreciated and no longer in use.

We review property, plant and equipment for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Most of our property, plant and equipment are employed in integrated manufacturing and distribution processes. Accordingly, we ordinarily cannot assess impairment of assets held for use at the individual asset level, but rather we aggregate them into logical groups for purposes of testing whether they are impaired. When we identify assets that will be taken out of service through the ordinary course of replacement and modernization or through restructuring activities, we shorten the remaining useful lives and adjust the salvage values, as appropriate, to recognize depreciation over the shortened remaining estimated useful lives. Otherwise, we classify assets as held for sale, write down the carrying value to fair value (less cost to sell) and suspend depreciation on the assets when we formulate a plan of disposal and there is no operational requirement to continue their use. We determine fair value, in most cases, by reference to third-party appraisals, and, in other cases, we perform internal analyses based upon recent sales prices of comparable assets (when available). We periodically evaluate the carrying values of assets held for sale to determine whether revisions are needed to reflect changed circumstances, including market conditions.

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In 2003, we recorded $2.0 million, net of $1.1 million of realized gains on the disposal of five properties, of asset impairment charges on assets previously held for sale and an asset that we abandoned. At January 3, 2004, we had six idled properties remaining to be sold, which are reflected in our consolidated balance sheet at approximately $5.6 million, representing our best estimates of ultimate selling prices less disposal costs. Although we do not anticipate further significant charges, the actual proceeds from the sales of these facilities and the actual costs to dispose of these assets may differ from our current estimates, which would require us to recognize a non-operating charge or credit to future earnings.

Impairment and Amortization of Intangible Assets. Under FASB Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, amortization of goodwill is eliminated; however, an annual two-step impairment test is required. The first step determines if goodwill is impaired by comparing the fair value of the reporting unit as a whole to the book value. If a deficiency exists, the second step measures the amount of the impairment loss as the difference between the implied fair value of goodwill and its carrying value. In performing these annual impairment tests, we make assumptions regarding estimated future cash flows and other factors to determine whether the carrying values are impaired, and then, if impaired, to determine the amount of any impairment loss required to reduce the carrying value to fair value. If these estimates or assumptions change, we may be required to record impairment charges for these assets.

Purchased intangibles with indefinite economic lives are tested for impairment annually using a lower of cost or fair value approach. In determining whether an intangible has an indefinite life, we consider the expected use of the asset; the expected useful lives of other assets to which the asset may relate; any legal, regulatory or contractual provisions; the level of maintenance expenditures required to obtain the expected future cash flows from the asset; and the effects of obsolescence, demand and other economic factors. In performing these annual impairment tests, we make assumptions regarding estimated future cash flows and other factors to determine whether the carrying values are impaired, and then, if impaired, to determine the amount of any impairment loss required to reduce the carrying value to fair value. If these estimates or assumptions change, we may be required to record impairment charges for these assets.

Other intangibles continue to be amortized over their estimated useful lives, ranging from 2.4 to 40 years, and reviewed for impairment using a process similar to that used to evaluate property, plant and equipment.

Pension Benefits. We account for defined benefit pension plans in accordance with SFAS No. 87, Employers’ Accounting for Pensions, which requires us to recognize pension costs and liabilities based on actuarial evaluations. Inherent in these valuations are key assumptions including the discount rate at which the pension obligations could be effectively settled, the anticipated rate of future salary increases, and the assumed long-term rate of return on plan assets. In determining the discount rate, we consider current yields on high-quality fixed-income investments. The salary increase assumption is based upon historical experience and anticipated future management actions. The assumed long-term rate of return on plan assets is based upon the historical rate of return on the invested funds of the pension plan after adjusting for current market trends. Periodic changes in these key assumptions could have a significant impact on the amount of recorded pension liabilities and on future pension benefit costs, although SFAS No. 87 permits the effects of the performance of the pension plan’s assets and changes in pension assumptions on our computation of pension expense to be amortized over future periods. For instance, given the continued decrease in interest rates, we plan to reduce the discount rate from 6.75% in 2003 to 6.25% in 2004. In addition, we plan to change the salary increase assumption from 3.5% in 2003 to 3.0% in 2004. These assumption changes along with changes in the plan participants’ demographics and other factors are expected to increase pension expense by $2.3 million from fiscal 2003 to fiscal 2004.

Although our actual return on pension plan assets improved in 2003, an after-tax minimum pension liability of approximately $18.6 million remained in stockholders’ equity at January 3, 2004.

Restructuring and Other Unusual Charges. With respect to our Operational Improvement Program announced in October 2003 and our Multi-Year Restructuring and Reorganization Program announced in July 1998 (discussed in more detail below), our consolidated balance sheets reflect our best estimate of the ultimate settlement of severance, exit cost and other accruals. In 2003, we recorded approximately $5.3 million in severance and other costs. In addition, we settled some of our estimated liabilities for more or less than the amounts accrued in prior periods. At the end of fiscal 2003, we have approximately $3.6 million in remaining severance, exit cost and other liabilities. Our estimates for these costs could change if the actual costs of termination benefits or other costs are different from our expectations.

Stock Compensation. Awards under our incentive compensation plans (as more fully described in Note 7 to the consolidated financial statements) may include incentive stock awards, nonqualified stock options, reload stock options and restricted shares. On January 5, 2003, we adopted the prospective transition provisions of SFAS No. 123, Accounting and Disclosure of Stock-Based Compensation,

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as amended by SFAS No. 148. SFAS No. 148 uses a fair value based method of accounting for employee stock awards using assumptions such as a risk-free interest rate, expected dividend yield, expected life of the stock award and the expected volatility of our stock price. By electing the prospective transition method of SFAS No. 148, our results of operations and our financial position were not affected by stock compensation awards granted prior to January 5, 2003. We recognized approximately $0.6 million ($0.4 million after-tax) in stock compensation in 2003. For stock compensation awards granted prior to January 5, 2003, we used the intrinsic value approach under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. See Note 7 to the consolidated financial statements for a comparison of reported results versus proforma results that assumes the fair value based method of SFAS No. 148 had been applied to all stock compensation awards granted.

Operational Improvement Program

In October 2003, we announced an Operational Improvement Program targeting $50 million in cost reductions to offset anticipated selling price decreases, higher fiber costs and other cost increases for fiscal 2004. The Operational Improvement Program includes improving operating efficiencies and asset utilization, while streamlining processes in both our manufacturing and administrative areas such as: (1) expanded production with lower cost contractors in Central America; (2) lower sourcing costs; (3) increased efficiencies in domestic textile operations; and (4) improved distribution costs. As part of the Operational Improvement Program, we eliminated approximately 100 positions in 2003, primarily salaried and administrative office staff, and incurred asset impairment charges associated with the planned closings of two International sales offices and the abandonment of a previously idled domestic finished goods warehouse. See Note 9 to the consolidated financial statements for details of the charges associated with the Operational Improvement Program. At the end of fiscal 2003, we had $3.3 million in remaining liabilities, which we expect will be substantially paid in fiscal 2004.

In addition, we have started construction on a new textile plant in Honduras for both t-shirt and fleece production. Once fully operational in 2006, the annual savings from Phase I of the Merendon Plant are expected to be approximately $15 million to $20 million.

Multi-Year Restructuring and Reorganization Program

In July 1998, we adopted a restructuring and reorganization program with the objective of (1) transitioning our company from a manufacturing-driven business to a consumer-focused organization that markets branded apparel products; and (2) creating an efficient, low-cost operating structure with the flexibility to take advantage of future opportunities to reduce our costs. The plan originally called for closing a number of our worldwide facilities (which included selected manufacturing plants, distribution centers and offices); expanding production outside the United States; consolidating and downsizing the licensed products businesses; disposing of owned shopping-center real estate; reorganizing the corporate structure; and other cost savings initiatives. In addition, we established a dual headquarters in Atlanta, Georgia. In July 2001, we announced an extension of this program to align the organization by distribution channel to provide stronger customer service, supply chain management, and more cost-effective operations.

As a result of our restructuring and reorganization program: (1) 100% of our yarn requirements are now purchased, rather than manufactured internally, from Frontier Yarns, LLC (“Frontier Yarns”), our 45.3% owned yarn joint venture, Frontier Spinning Mills, Inc. (“Frontier Spinning”), our joint venture partner, and other third-party suppliers; (2) we reduced our U.S. employee base by approximately 66% from 16,200 in 1998 to 5,502 at the end of 2003; (3) we have outsourced production of approximately 20% of our finished fabrics for our Domestic business; and (4) over 99% of our apparel products (excluding socks) sold are now sewn and assembled offshore, compared to approximately 8.0% in 1997. We also closed 35 facilities and exited unprofitable businesses and product lines representing approximately $150 million of sales as measured by the last full year of operations for each business. The cost savings associated with these initiatives were the primary drivers in maintaining gross margin levels in fiscal years 2001 through 2003 despite pricing pressures in certain of our channels (primarily Artwear/Careerwear) and other factors discussed in the Results of Operations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

See Note 9 to the consolidated financial statements for details of the 2001 restructuring, reorganization and other unusual charges associated with the Multi-Year Restructuring and Reorganization Program. See Note 10 to the consolidated financial statements in our 2002 Annual Report for details of the 2000, 1999 and 1998 charges associated with the Multi-Year Restructuring and Reorganization Program. At the end of fiscal 2003, we had $0.3 million in remaining restructuring liabilities under this program, which we expect will be substantially paid in fiscal 2004.

Although the majority of the facilities idled by our restructuring initiatives have been sold, we have six idle properties remaining to sell, which are reflected in our balance sheet at $5.6 million. This value represents our best estimate of future selling prices less disposal costs. We expect most, if not all, of these properties will be sold in 2004; however, given current market conditions, it may

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take longer to liquidate some of these properties. In 2003, we decreased the carrying value of some of these properties by $2.6 million to reflect difficult market conditions for industrial and warehouse properties in the geographic areas where these properties are located. However, these write downs were partially offset by $1.1 million of gains realized on sales of properties and equipment that we had written down in prior years. We do not anticipate incurring any further charges related to our Multi-Year Restructuring and Reorganization Program, other than to the extent our estimated restructuring liabilities and the carrying value of idled assets differ from the amounts ultimately realized upon settlement of the liabilities or sale of the assets.

Results of Operations

Our results of operations are affected by numerous factors, including competition, general economic conditions, seasonal variation, raw material costs, mix of products sold, and plant utilization. In addition, our results can be affected by the usual risks of doing business abroad, such as possible revaluation of currencies, export duties, quotas, restrictions on the transfer of funds and, in certain parts of the world, political instability. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such developments occurring.

Typically, demand for our products is higher during the third and fourth quarters of each fiscal year. Weather conditions also affect the demand for our products, particularly for our fleece products. In addition, athletic and activewear products are generally available from multiple sources and our customers often purchase products from more than one source. To remain competitive, we review and adjust our pricing structure from time to time.

Our product mix affects our overall gross profit margin. Additionally, plant utilization levels are important to our profitability because a substantial portion of our total production cost is fixed. The cost of yarn is a significant component of our cost of goods sold. As a result of our restructuring and reorganization program, in 2002, we discontinued internal production of yarn and began purchasing all of our yarn from Frontier Yarns, Frontier Spinning and other third party suppliers. Yarn prices typically fluctuate principally as a result of supply and demand in the raw cotton and synthetic fibers markets. While cotton prices are primarily affected by agricultural factors and commodity exchange behavior, fluctuations in petroleum prices can influence the prices of chemicals, dyestuffs and polyester yarn. Accordingly, we adjust the timing and size of our raw material purchases when necessary to minimize the impact of these market forces and pricing fluctuations.

The following information is derived from our audited consolidated statements of operations for our fiscal years ended January 3, 2004 (fiscal 2003 – a 52-week period), January 4, 2003 (fiscal 2002 – a 53-week period), and December 29, 2001 (fiscal 2001 – a 52-week period).

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Special Charges. The following represents special charges associated with both the Operational Improvement Program and our Multi-Year Restructuring and Reorganization Program. See Note 9 to the consolidated financial statements for further details and discussion related to these charges and adjustments.

2003 vs. 2002

Net Sales. In fiscal 2003 (a 52-week period), our net sales increased $21.9 million, or 1.9%, to $1.186 billion versus $1.164 billion in fiscal 2002 (a 53-week period).

The following table is a breakdown of net sales (in thousands).

Net sales from our acquisitions of Spalding, Bike and Moving Comfort in fiscal 2003 were $76.7 million. In fiscal 2002, net sales from businesses that were acquired or discontinued were $6.5 million. After excluding sales from businesses that were acquired or discontinued during both fiscal years, 2003 net sales on an ongoing basis decreased 4.2% from ongoing net sales in fiscal 2002. On a comparable (proforma) 52-week basis, 2003 net sales on an ongoing basis decreased 3.2%, after excluding sales of $11.6 million from the fifty-third week in fiscal 2002.

For the 2003 fiscal year, net sales in our Domestic segment totaled $1.085 billion, an increase of $8.5 million, or 0.8%, from net sales of $1.076 billion in fiscal 2002. After excluding sales from businesses that were acquired or discontinued during both fiscal years, 2003 net sales on an ongoing basis in our Domestic segment decreased 5.8% over ongoing net sales in our Domestic segment for fiscal 2002.

For the 2003 fiscal year in our Domestic segment:

•

Net sales in our Athletic channel increased $73.1 million, or 24.1%, to $375.8 million. The increase in net sales was primarily driven by our acquisitions of Spalding, Bike and Moving Comfort. We also had a 3.1% increase in sales of our Russell Athletic® branded products to college bookstores and to retailers. The increase in sales of Russell Athletic® branded products in college bookstores and to retailers was offset by a 6% decrease in our Russell Athletic® team sports business. Without acquisitions, sales in our base Athletic business were down $1.7 million, or 0.6%, in fiscal 2003 versus the prior year, while dozens shipped were up 3.0% versus fiscal 2002.

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•		Net sales from our acquisitions include athletic equipment, team uniforms and apparel products. Our 2003 operating results reflect the operations of our Spalding business from May 16, 2003, the date we acquired the Spalding® brand and related net assets. Spalding is a leading producer and marketer of basketballs, footballs, soccer balls, and volleyballs under the Spalding® brand name and softballs under the Dudley® brand name. We acquired certain assets of Bike in the first quarter of fiscal 2003. The Bike acquisition added athletic supporters, knee and elbow pads, braces, protective equipment, team uniforms, and performance apparel to our product offering. We purchased Moving Comfort in the third quarter of fiscal 2002, which expanded our women’s product offering to include performance sports underwear, shorts, pants, tops, and outerwear.
•		Net sales in our Mass Retail channel were $344.5 million, a decrease of $5.7 million, or 1.6%, from fiscal 2002. The decrease was principally driven by lower sales of our Jerzees® activewear and Mossy Oak® products to Kmart. Our 2003 sales to Kmart were $4.0 million, a decrease of $26.1 million from the $30.1 million in fiscal 2002. Despite this reduction, sales of our Jerzees® activewear products in this channel increased 4.9%. This increase was partially offset by lower sock sales in the channel. For fiscal 2003, dozens shipped in our mass retail channel decreased 3.8%, reflecting an overall reduction of sock inventories at retail. Excluding socks, overall dozens shipped in our Mass Retail channel were up 6.3% from fiscal 2002.
•		Net sales in our Artwear/Careerwear channel were $364.5 million, a decrease of $58.9 million, or 13.9%, from fiscal 2002. The decrease in sales reflects industry-wide lower prices coupled with a shift in sales mix toward lower-priced promotional products. Overall dozens shipped in this channel decreased 7.3%; however, excluding dozens sold in our private label and careerwear businesses, dozens shipped in the Artwear market decreased 4.4% from the prior year.

In fiscal 2003, we continued to be a leading supplier in the distributor channel of the Artwear market. Our Jerzees® brand remained the number-one fleece product in that channel with a share of 42.3% in fiscal 2003. Furthermore, in the blended fleece category, the largest segment of the fleece market, our Jerzees® brand finished 2003 with a share of 52.3%. In the overall t-shirt category, our market share was unchanged at 12.6% for the year. However, our Jerzees® brand became number one in the blended t-shirt category in 2003 with a 33.1% share, an increase of 2.2 share points from the prior year. Jerzees® also became the number-one brand in the knit (sportshirt) category with a share of 21.0% in 2003, versus 20.4% share in 2002.

All U.S. market and market share data for the Artwear channel is based on a static sample from the S.T.A.R.S. Report produced by ACNielsen Market Decisions for the full 2003 calendar year.

In fiscal 2003, net sales for our International segment were $101.4 million, an increase of 15.2%, or $13.4 million, and total dozens shipped increased 1.8% over fiscal 2002. The increase in net sales and dozens shipped for the segment primarily reflects the favorable changes in foreign currency exchange rates and sales growth in markets such as Europe and Canada.

Gross Profit and Gross Margin. Our gross profit was $344.1 million, or a 29.0% gross margin, for fiscal 2003 versus a gross profit of $338.5 million, or a 29.1% gross margin, in the prior year. During fiscal 2003, our gross profit was positively impacted by: (1) the acquisitions of Spalding, Bike and Moving Comfort; (2) our ongoing cost savings initiatives; (3) lower 2003 inventory reserves for our Russell Athletic distribution center; and (4) favorable LIFO adjustments related to the liquidation of LIFO inventory quantities.

The benefits we realized in 2003 from the factors above were offset by: (1) pricing pressures and lower volumes, primarily in the distributor market of the Artwear channel; (2) additional costs for new product features; (3) higher pension and medical insurance costs; and (4) higher raw material costs for cotton and polyester.

Selling, General and Administrative (“SG&A”). For fiscal 2003, our SG&A expenses were $246.5 million, or 20.8% of net sales, versus $235.8 million, or 20.3% of net sales, in the prior year. During fiscal 2003, we incurred $4.6 million of special charges primarily related to the reduction in our salaried and administrative office staff as part of our Operational Improvement Program. Excluding these charges, our SG&A expenses for fiscal 2003 would have been $241.9 million, or 20.4% of net sales. On a comparative basis, excluding the charge of $5.0 million related to our pre-petition receivables from Kmart, our SG&A expenses for fiscal 2002 would have been $230.8 million, or 19.8% of net sales.

Excluding the charges in both years, the increase in SG&A expenses in fiscal 2003 compared to fiscal 2002 was mainly as a result of the incremental expenses from our acquisitions (Spalding, Bike and Moving Comfort) and higher marketing expenses of $15.4 million. In addition, we incurred approximately $0.6 million in stock compensation expense related to our adoption of SFAS No. 123 during fiscal 2003. These increases were partially offset by lower general and administrative costs mainly in our Artwear/Careerwear business.

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Other-Net. Other-net was expense of $4.0 million in fiscal 2003 versus income of $2.2 million in fiscal 2002. Excluding the $2.7 million impact of the 2003 special charges, other-net was an expense of $1.3 million in fiscal 2003. Other income during fiscal 2002 was primarily attributable to gains of $2.5 million on the sale of non-core assets.

Operating Income. Our consolidated operating income for fiscal 2003 was $93.6 million, or 7.9% of net sales, versus $104.9 million, or 9.0% of net sales, in fiscal 2002. Excluding $7.3 million of special charges in the 2003-third and fourth quarters, our operating income for fiscal 2003 would have been $100.9 million, or 8.5% of net sales. On a comparative basis, excluding the charge of $5.0 million in the 2002-third quarter related to our pre-petition receivables from Kmart and the $2.5 million gain associated with the sale of non-core assets, our operating income would have been $107.4 million, or 9.2% of net sales, in fiscal 2002. This year-over-year decrease in operating income was primarily attributable to lower sales and volumes in the Artwear/Careerwear channel, higher raw material costs for cotton and polyester, and the other factors described above in both the Gross Profit and the SG&A sections of this report.

In fiscal 2003, our Domestic segment operating income was $112.8 million, or 10.4% of the segment’s net sales, versus $124.0 million, or 11.5% of the segment’s net sales, in fiscal 2002. Excluding the $5.0 million charge related to our pre-petition receivables from Kmart and the $2.5 million gain associated with the sale of non-core assets, the Domestic segment operating income for 2002 would have been $126.5 million, or 11.8% of the segment’s net sales. The decrease of $13.7 million in operating income for the segment was primarily attributable to lower sales in our Artwear/Careerwear channel, higher raw material costs for cotton and polyester, and the other factors described above in the Gross Profit and SG&A sections of this report.

In fiscal 2003, our International segment operating income was a profit of $0.5 million versus a loss of $0.8 million in fiscal 2002. The increase of $1.3 million in operating income for the segment primarily reflects favorable changes in foreign currency exchange rates and sales growth in markets such as Europe and Canada.

Income Taxes. Our effective tax rate for 2003 of 32.7% decreased 4.5 percentage points from 37.2% in fiscal 2002. This decrease was primarily due to $2.6 million of non-recurring tax benefits and other deferred tax adjustments realized in 2003. For information concerning income tax provisions, as well as information regarding other differences between our effective tax rates and applicable statutory tax rates, see Note 6 to the consolidated financial statements.

2002 vs. 2001

Net Sales. In fiscal 2002 (a 53-week period), our net sales increased $3.4 million, or 0.3%, to $1.164 billion versus $1.161 billion in fiscal 2001 (a 52-week period).

The following table is a breakdown of net sales (in thousands).

However, after excluding $19.4 million in sales from businesses that were acquired or discontinued, 2002 net sales on an ongoing basis increased 2.0% over ongoing net sales for fiscal 2001. This increase in sales from ongoing businesses was driven by new and expanded programs in both our Domestic and International segments. The businesses that were discontinued principally consisted of the direct marketing of our Cross Creek® brand to golf pro shops and department stores and yarn sales in our Domestic segment.

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For the 2002 fiscal year, net sales in our Domestic segment totaled $1.076 billion, a decline of $4.0 million, or 0.4%, from net sales of $1.080 billion in fiscal 2001. However, after excluding $19.4 million in sales from businesses that were acquired or discontinued, 2002 net sales on an ongoing basis in our Domestic segment increased 1.5% over ongoing net sales for fiscal 2001. Overall dozens shipped within the Domestic segment during fiscal 2002 were up 5.0% from the prior year. The increases in sales and dozens shipped were primarily driven by new and expanded fall programs, such as a national expansion of men’s and boys’ fleece at JCPenney and a national men’s fleece program at Sam’s Club. Other new and expanded programs which increased net sales include Vintage Varsity™ by Russell Athletic®, the rollout of no-show socks, a broadened product offering for Mossy Oak® and the introduction of Discus® branded products at Sears. The increases in sales and dozens shipped were offset by price reductions on some of our products, primarily in the Artwear/Careerwear and Mass Retail distribution channels.

For the 2002 fiscal year in our Domestic segment:

•		Net sales in our Athletic channel increased $22.4 million, or 8.0%, to $302.7 million, while dozens shipped were up 10.6% from fiscal 2001. The increase in sales and dozens shipped were primarily driven by new and expanded fall programs such as a national expansion of men’s and boys’ fleece at JCPenney and the introduction of our Discus® brand at Sears. To a lesser extent, sales and dozens shipped were also positively impacted by new and expanded programs in our college bookstore business. These increases were partially offset by lower sales in our team sports business during the first half of fiscal 2002, primarily due to order processing and shipping delays we experienced during the reconfiguration of our Alexander City, Alabama distribution center and during the implementation phase of our new order processing and fulfillment system. These systems have been fully operational since June 2002.
•		Net sales in our Mass Retail channel increased $13.6 million, or 4.0%, to $350.2 million, while overall dozens shipped were up 5.0% from fiscal 2001. The increases in sales and dozens shipped were due to increased sales of our Mossy Oak® and Jerzees® brands as well as increased sock sales. The increases in sales and dozens shipped were somewhat offset by lower pricing. To a lesser extent, the increases in sales and dozens shipped were partially offset by lower sales to Kmart. Our 2002 sales to Kmart were $30.1 million, a decrease of $6.6 million from the $36.7 million in fiscal 2001.
•		Net sales in our Artwear/Careerwear channel decreased $39.9 million, or 8.6%, to $423.4 million, while overall dozens shipped were down 1.4% from fiscal 2001. However, after excluding sales from our private label and discontinued businesses, our 2002 ongoing net sales to the distributor market were $399.2 million, a decrease of $20.3 million, or 4.8% from fiscal 2001. These decreases reflect industry-wide lower prices, primarily in the promotional t-shirt market, and reduced corporate purchasing of our higher priced products, such as sports shirts, denims and wovens.

International segment net sales for fiscal 2002 were $88.0 million, an increase of 9.1%, or $7.4 million, reflecting an increase of 19.3% in dozens shipped over fiscal 2001. New product introductions in Europe mainly drove the increase in sales and dozens shipped. Net sales were also positively impacted by the strengthening of the euro and British pound against the U.S. dollar. These increases were partially offset by a change in the mix of products sold and lower pricing in Europe.

Gross Profit and Gross Margin. Our gross profit was $338.5 million, or a 29.1% gross margin, for fiscal 2002 versus a gross profit of $266.9 million, or a 23.0% gross margin, in the comparable prior year period. Excluding the $43.8 million impact of special charges, gross profit in fiscal 2001 was $310.7 million, or a 26.8% gross margin.

During fiscal 2002, our gross profit was positively impacted by: (1) lower fiber costs and conversion cost savings from our yarn joint venture; (2) improved plant utilization; (3) a better mix of products sold and higher sales volumes; (4) the completion of our Multi-Year Restructuring and Reorganization Program; and (5) other ongoing efforts to improve and streamline our manufacturing processes as well as our continued focus on reducing expenses.

The benefits we realized from the factors above were partially offset by: (1) pricing pressures primarily in the Artwear/Careerwear and Mass Retail channels; (2) LIFO charges reflecting our lower inventory levels and a lower per unit manufacturing cost on our products resulting from the success of our restructuring and reorganization program; and (3) an inventory charge associated with the reconfiguration of our Russell Athletic distribution center in Alexander City, Alabama.

Selling, General and Administrative (“SG&A”). For fiscal 2002, our SG&A expenses were $235.8 million, or 20.3% of net sales, versus $226.5 million, or 19.5% of net sales, in the comparable prior year period. Excluding special charges of $1.6 million, SG&A expenses were $224.9 million, or 19.4% of net sales, during fiscal 2001.

During the 2002 third quarter, we increased our bad debt reserve by $5.0 million to provide for potential additional losses on our pre-petition receivables from Kmart, which brought our reserve level to 90% of the $12.4 million pre-petition accounts receivable balance due from Kmart. Excluding this charge, our SG&A expenses for fiscal 2002 would have been $230.8 million, or 19.8% of net sales.

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On a comparable basis, excluding special charges and the charge of $6.2 million in the 2001-fourth quarter related to establishing a bad debt reserve for Kmart, our SG&A expenses would have been $218.7 million, or 18.8% of net sales.

During fiscal 2002, we benefited from lower selling expenses associated with the reorganization of our Cross Creek® apparel business and lower marketing expenses. Other general and administrative costs across our operations (primarily higher bonuses, insurance and commission costs) and increased costs in connection with the reconfiguration of our Alexander City, Alabama distribution center more than offset the benefits from these lower expenses during the 2002 fiscal year.

Other-Net. Other-net was income of $2.2 million in fiscal 2002 versus expense of $94.7 million in fiscal 2001. Excluding the $98.7 million impact of the 2001 special charges, other-net was income of $4.0 million in fiscal 2001. The decrease of $1.8 million in other-net was primarily due to fewer gains on the sales of non-operating assets and fewer gains on foreign currency forwards during fiscal 2002.

Operating Income. Our consolidated operating income in fiscal 2002 was $104.9 million, or 9.0% of net sales, versus a loss of $54.3 million in the comparable prior year period. Excluding the impact of the 2001 special charges of $144.1 million, consolidated operating income in fiscal 2001 was $89.8 million, or 7.7% of net sales. Exclusive of the charge in the 2002-third quarter related to our bad debt reserve for Kmart, our operating income would have been $109.9 million, or 9.4% of net sales, which included a $2.5 million gain on the sale of non-core assets. On a comparable basis, excluding special charges and the $6.2 million charge related to Kmart, our 2001 operating income would have been $96.0 million, or 8.3% of net sales.

In fiscal 2002, our Domestic segment operating income was $124.0 million, or 11.5% of the segment’s net sales, versus a loss of $40.1 million in fiscal 2001. Exclusive of special charges of $144.0 million, our fiscal 2001 Domestic segment operating income was $103.9 million, or 9.6% of the segment’s net sales. The increase in our Domestic segment operating income for fiscal 2002 was primarily attributable to the benefits from the factors described above in the Gross Profit and the SG&A sections of this year-over-year comparison.

In fiscal 2002, our International segment operating income was a loss of $0.8 million versus income of $2.3 million in fiscal 2001. Exclusive of special charges of $0.1 million, our fiscal 2001 International segment operating income was $2.4 million, or 3.0% of the segment’s net sales. The decrease in our International segment operating income for fiscal 2002 was primarily attributable to: (1) higher costs associated with product features and SG&A increases in Mexico; (2) fewer gains on foreign currency forwards and SG&A increases in Europe; and (3) lower sales and increased marketing expenses in Japan.

Income Taxes. For information concerning our income tax provisions, as well as information regarding differences between our effective tax rates and applicable statutory tax rates, see Note 6 to the consolidated financial statements.

Liquidity and Capital Resources

Our total debt to capitalization ratio improved 190 basis points, or 1.9 percentage points, declining to 35.3% at the end of fiscal 2003, versus 37.2% at the end of fiscal 2002. Our total debt less cash at the end of fiscal 2003 was $261.3 million which is $52.7 million higher than total debt less cash at the end of fiscal 2002, despite acquisitions of $86.7 million in 2003.

Cash From Operating Activities. Our operations provided $58.0 million of cash during fiscal 2003, versus providing $203.4 million of our cash requirements during fiscal 2002. Inventory increased during fiscal 2003 partly as a result of acquisitions; however, inventory decreased from December 29, 2001 to January 4, 2003 as a result of higher than normal inventory levels in December 2001. Excluding inventories from acquisitions, during fiscal 2003, inventories increased 6.0%, or $18.4 million, to $325.1 million at the end of fiscal 2003 versus an inventory level of $306.7 million at the end of fiscal 2002. This increase was primarily driven by softer sales in the 2003-fourth quarter than anticipated, principally as a result of key customers continuing to reduce their inventories and poor weather conditions impacting fleece sales.

Accounts receivable in fiscal 2003 increased versus a decrease in fiscal 2002, as a result of incremental sales from our acquisitions and our higher accounts receivable levels in December 2001. Excluding accounts receivable from acquisitions during fiscal 2003, accounts receivable increased by 2.6%, or $3.8 million, to $152.7 million at the end of fiscal 2003 versus accounts receivable of $148.9 million at the end of fiscal 2002.

The increase in accounts payable and accrued expenses was less in fiscal 2003 than fiscal 2002 primarily as a result of year-end employee performance bonus, customer incentive and advertising accruals that were substantially higher at the end of fiscal 2002 versus fiscal 2001.

Our business is seasonal and our cash flows from operations are ordinarily higher in the second half of the year.

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Cash From Investing Activities. Net cash used in investing activities was $109.9 million in fiscal 2003 versus $22.8 million in fiscal 2002. Our investing activities in fiscal 2003 consisted primarily of capital expenditures of $38.6 million and the acquisitions of Spalding and Bike for $86.7 million, less $14.8 million of proceeds from the sale of non-core assets. In fiscal 2002, our investing activities primarily consisted of capital expenditures of $28.3 million and acquisitions of $4.7 million, less $9.5 million of proceeds from the sale of non-core assets.

For fiscal 2004, we are forecasting capital expenditures to be in the range of $45 million to $50 million. The majority of planned fiscal 2004 capital expenditures are to further enhance our manufacturing and distribution capabilities, including construction of a new textile facility in Honduras, and to improve our information systems capabilities to support our business initiatives.

Cash From Financing Activities. We paid $5.2 and $5.1 million in dividends ($0.16 per share) during fiscal 2003 and fiscal 2002, respectively. In 2001, we paid $14.7 million in dividends ($0.46 per share).

On April 18, 2002, we completed a refinancing of our debt structure. Refer to Note 2 of the consolidated financial statements for more information.

On January 3, 2004, our debt facilities and outstanding debt obligations included:

•

$315 million in Senior Secured Credit Facilities (the “Facilities”). The Facilities include a $300 million Senior Secured Revolving Credit Facility (the “Revolver”) due April 2007, of which $12.4 million was outstanding, and $15 million outstanding under our Senior Secured Term Loan (the “Term Loan”), due ratably through April 2007; and

•

$250 million in 9.25% Senior Unsecured Notes (the “Senior Notes”) due 2010.

We used the net proceeds of the Senior Notes offering (together with $132.4 million of initial borrowings under the Facilities) to repay the outstanding balances, accrued interest, prepayment penalties and expenses under our previous revolving credit facility and long-term notes, and to pay issuance costs. During the second quarter 2002, we incurred a $20.1 million ($12.6 million after-tax) charge associated with the early retirement of debt. The charge consisted of $15.0 million related to prepayment penalties, fees and expenses associated with the early termination of our previous notes payable and the write-off of $5.1 million of unamortized loan costs associated with the extinguished debt.

Borrowings under our Facilities are subject to mandatory prepayment equal to: (1) 100% of the net proceeds received by us from the issuance of any new or replacement debt securities (excluding the issuance of the Senior Notes); and (2) 50% of the net proceeds received from the sale of certain of our assets.

The Facilities and the Senior Notes impose certain restrictions on us, including restrictions on our ability to: incur debt; grant liens; provide guarantees in respect of obligations of any other person; pay dividends; make loans and investments; sell our assets; issue redeemable preferred stock and non-guarantor subsidiary preferred stock; make redemptions and repurchases of capital stock; make capital expenditures; prepay, redeem or repurchase debt; engage in mergers or consolidation; engage in sale/leaseback transactions and affiliate transactions; change our business; amend certain debt and other material agreements, including the indenture governing the Senior Notes and other documents governing any subordinated debt that we may issue in the future; issue and sell capital stock of subsidiaries; and restrict distributions from subsidiaries. The Facilities require us to achieve a fixed charge coverage ratio of: 1.15 to 1.0 through the next to last day of fiscal year 2003; 1.2 to 1.0 through the next to last day of fiscal year 2004; and 1.25 to 1.0 thereafter. We also must maintain a maximum leverage ratio of: 4.0 to 1.0 through the next to last day of fiscal year 2002; 3.75 to 1.0 through the next to last day of fiscal year 2003; and 3.5 to 1.0 thereafter. We were in compliance with these covenants at the end of fiscal year 2003, and we expect to remain in compliance with them in the foreseeable future.

Under the Facilities, pricing is adjusted quarterly based on our consolidated fixed charge coverage ratio. For the majority of fiscal 2003, variable interest on the Revolver was either LIBOR plus 1.75% (2.8425% at January 3, 2004), or Base Rate plus 0.25% (4.25% at January 3, 2004), and on the Term Loan was either LIBOR plus 2.25% (3.3425% at January 3, 2004), or Base Rate plus 0.75% (4.75% at January 3, 2004), with an annual commitment fee on the unused portion of the Facilities of 0.375%. These terms will continue to be in effect through the first quarter of 2004; however, our rate on the Revolver will change to LIBOR plus 2.00%, or Base Rate plus 0.50%, and on the Term Loan to LIBOR plus 2.50% or Base Rate plus 1.00%, beginning in the second quarter of 2004.

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If we violate these covenants and are unable to obtain waivers from our lenders, our debt under these agreements would be in default and could be accelerated by our lenders. If our indebtedness is accelerated, we may not be able to repay or refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to us. Cross default provisions exist in the indenture governing our Senior Notes whereby a default on our Senior Notes would occur if we default on any covenant of any other debt agreement (which has an outstanding balance in excess of $25 million) and such default causes an acceleration of the maturity date of the other indebtedness. Also, under cross default provisions in our Facilities, a default would occur if we default on any covenant of any other debt agreement (which has an outstanding balance in excess of $5 million) and such default causes an acceleration of the maturity date of the other indebtedness.

On March 11, 2003, we amended the Facilities to, among other things: (1) lessen some of the restrictions on our ability to make acquisitions, (2) permit us to make additional investments and guarantees, and (3) allow us to repurchase a portion of our Senior Notes and capital stock, subject to annual limitations.

Pension Funding Considerations. Our actual return on plan assets significantly improved from a 7.1% loss in 2002 to a positive return of 21.0% in 2003; however, we still have an after-tax minimum pension liability of approximately $18.6 million at January 3, 2004. Currently, there is no funding requirement to comply with our principal debt agreement; however, it is possible that we could be required to make a contribution as much as $1.6 million to the qualified plan in fiscal 2004.

Adequacy of Borrowing Capacity. Availability under our Revolver is subject to a borrowing base limitation that is determined based on eligible accounts receivable and inventory. As of January 3, 2004, we had $12.4 million in outstanding borrowings under the Revolver and approximately $206.6 million of availability remaining. We also had $20.1 million in cash available to fund ongoing operations. Although there can be no assurances, we believe that cash flow available from operations along with the availability under our Revolver and cash on hand will be sufficient to operate our business; satisfy our working capital, capital expenditure requirements (including the new Honduras textile facility), and needs under our Operational Improvement Program; and meet our foreseeable liquidity requirements, including debt service on our Senior Notes and the Facilities, until the maturity of our Facilities in 2007.

Contingencies. For information concerning our ongoing litigation, see Note 8 to the consolidated financial statements.

Commitments. The following table summarizes information about our contractual cash obligations as of January 3, 2004 (in millions):

(1)

Includes guaranteed minimums for utilities and for royalties associated with various sports and league licenses. Obligations under advertising contractual arrangements are also included. Our yarn purchase commitment to Frontier Yarns is excluded but described below.

We are required to purchase certain minimum quantities of yarn on an annual basis from Frontier Yarns pursuant to a supply agreement. The agreement also provides for pricing to be calculated on a conversion cost basis plus actual cost of raw materials. We estimate our total purchases will be in the range of $105 million to $135 million per year. We can terminate the agreement under certain circumstances related to a fundamental decrease in our demand for yarn or the cost of yarn becoming uncompetitive. In addition, beginning in 2006, the agreement may be terminated for any reason upon two years’ notice, but not prior to 2008. Other than our purchase requirements under the supply agreement, we have no other required purchases or financial commitments to Frontier Yarns. Frontier Yarns now supplies most of our yarn needs.

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The following table summarizes information about other commercial commitments as of January 3, 2004.

We had $14.2 million outstanding under letters of credit for the purchase of inventories at January 3, 2004. We had $4.5 million outstanding under letters of credit at January 3, 2004 for the guarantee of debt of a non-affiliated foreign contractor that expires ratably over the period of 2004 – 2005. In addition, we had $3.7 million outstanding under letters of credit at January 3, 2004 related to self-insurance of workers’ compensation programs.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks relating to fluctuations in interest rates, currency exchange rates and commodity prices. Our financial risk management objectives are to minimize the potential impact of interest rate, foreign exchange rate and commodity price fluctuations on our earnings, cash flows and equity. To manage these risks, we may use various financial instruments, including interest rate swap agreements, commodity futures contracts and forward currency exchange contracts. We only use traded instruments with major financial institutions as the counterparties to minimize the risk of credit loss. Refer to Notes 1 and 4 of the consolidated financial statements for a more complete description of our accounting policies and the extent of our use of such instruments.

The following analyses present the sensitivity of the market value, earnings and cash flows of our significant financial instruments to hypothetical changes in interest rates, exchange rates and commodity prices as if these changes had occurred at January 3, 2004. The range of changes chosen for these analyses reflects our view of changes that are reasonably possible over a one-year period. Market values are the present values of projected future cash flows based on the interest rate assumptions or quoted market prices where available. These forward-looking disclosures are selective in nature and only address the potential impacts from financial instruments. They do not include other potential effects which could impact our business as a result of changes in interest rates, exchange rates or commodity prices.

Interest Rate and Debt Sensitivity Analysis. At January 3, 2004, our outstanding debt totaled $281.4 million, which consisted of fixed-rate debt of $250.0 million and variable-rate debt of $31.4 million. Based on our 2003 average outstanding borrowings under our variable-rate debt, a one-percentage point increase in interest rates would negatively impact our annual pre-tax earnings and cash flows by approximately $0.9 million. A one-percentage point increase in market interest rates would decrease the fair market value of our fixed-rate debt at January 3, 2004, by approximately $5.4 million. Changes in the fair value of our fixed rate debt will not have any impact on us unless we repurchase the debt in the open market.

Currency Exchange Rate Sensitivity. We have foreign currency exposures related to buying, selling and financing in currencies other than our functional currencies. We also have foreign currency exposure related to foreign denominated revenues and costs translated into U.S. dollars. These exposures are primarily concentrated in the euro, British pound sterling and Mexican peso. We enter into foreign currency forward contracts to manage the risk associated with doing business in foreign currencies. Our policy is to hedge currency exposures of firm commitments and anticipated transactions denominated in non-functional currencies to protect against the possibility of diminished cash flow and adverse impacts on earnings. A ten-percentage point adverse change in the foreign currency spot rates would decrease the fair market value of our foreign currency forward contracts held at January 3, 2004, by $6.2 million. Changes in the fair value of our foreign currency forward contracts will not have any impact on our results of operations unless these contracts are deemed to be ineffective at hedging currency exposures of anticipated transactions. We generally view our net investments in foreign subsidiaries that have a functional currency other than the U.S. dollar as long-term. As a result, we generally do not hedge these net investments.

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Commodity Price Sensitivity. The availability and price of cotton is subject to wide fluctuations due to unpredictable factors such as weather conditions, governmental regulations, economic climate or other unforeseen circumstances. We are purchasing yarn primarily from Frontier Yarns, Frontier Spinning and other third parties, and our yarn pricing will continue to be directly impacted by the price of cotton. We did not have any outstanding cotton futures contracts at January 3, 2004.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets
January 3, 2004 and January 4, 2003
(In thousands, except share data)

See notes to consolidated financial statements.

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Consolidated Statements of Operations
Years ended January 3, 2004, January 4, 2003 and December 29, 2001
(In thousands, except share and per share data)

See notes to consolidated financial statements.

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Consolidated Statements of Cash Flows
Years ended January 3, 2004, January 4, 2003 and December 29, 2001
(In thousands)

See notes to consolidated financial statements.

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Consolidated Statements of Stockholders’ Equity
Years ended January 3, 2004, January 4, 2003 and December 29, 2001
(In thousands, except share data)