UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission file number:

001-31829

CARTER’S, INC.

(Exact name of Registrant as specified in its charter)

The Proscenium
1170 Peachtree Street NE, Suite 900
Atlanta, Georgia 30309

(Address of principal executive offices, including zip code)

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

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 if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x   No o

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o   No x

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer x      Accelerated Filer o      Non-Accelerated Filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

The approximate aggregate market value of the voting stock held by non-affiliates of the Registrant as of July 2, 2005 (the last business day of our most recently completed second quarter) was $1,180,667,617.

There were 28,950,929 shares of Carter’s, Inc.’s common stock with a par value of $0.01 per share outstanding as of the close of business on March 15, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the Annual Meeting of Stockholders of Carter’s, Inc., to be held on May 11, 2006, will be incorporated by reference in Part III of this Form 10-K. Carter’s, Inc. intends to file such proxy statement with the SEC not later than 120 days after its fiscal year ended December 31, 2005.

CARTER’S, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

PART I

Our market share data is based on information provided by the NPD Group, Inc. Unless otherwise indicated, references to market share in this annual report mean our share expressed as a percentage of total retail revenues of a market. The baby and young children’s market includes apparel products from sizes newborn to seven.

ITEM 1.                BUSINESS

On September 30, 2003, Carter Holdings, Inc., a Massachusetts corporation, re-incorporated in Delaware and changed its name by forming and subsequently merging with and into its new wholly-owned Delaware subsidiary. The surviving company is named Carter’s, Inc. Unless the context indicates otherwise, in this filing on Form 10-K, “Carter’s,” the “Company,” “we,” “us,” “its,” and “our” refers to Carter’s, Inc. and its wholly-owned subsidiaries.

On July 14, 2005, through our wholly-owned subsidiary The William Carter Company (“TWCC”), we acquired OshKosh B’Gosh, Inc. (“OshKosh”) for a purchase price of $312.1 million, (the “Acquisition”). Established in 1895, OshKosh is recognized and trusted by consumers for its line of high-quality apparel for children sizes newborn to 16.

We are the largest branded marketer of apparel exclusively for babies and young children in the United States. As a result of the Acquisition, we own two of the most highly recognized and most trusted brand names in the children’s apparel industry, Carter’s and OshKosh. We have extensive experience in the young children’s apparel market and focus on delivering products that satisfy our consumers’ needs. We market high-quality, essential core products at prices that deliver an attractive value proposition for consumers.

We have developed a business model that we believe has multiple platforms for growth and is focused on high volume and productivity. We believe each of our brands has its own unique positioning in the marketplace and strong growth potential. Our brands compete in the $17.8 billion children’s apparel market, for children sizes newborn to seven, with our Carter’s brand achieving the #1 branded position with a 7.0% market share. Our OshKosh brand also has a strong position with a 3.0% market share. We offer multiple product categories, including baby, sleepwear, playclothes, and other accessories. Our distribution strategy enables us to reach a broad range of consumers through channel, price point, and region. We sell our products to national department stores, chain and specialty stores, discount retailers, and through 193 Carter’s and 142 OshKosh brand outlet and strip center retail stores.

Since 1992, when the current executive management team joined Carter’s, we have increased net sales from $227 million to $1.1 billion in fiscal 2005. Over the past five fiscal years, we have increased net sales at a compounded annual growth rate of 19.3%, and we have increased operating income from $40.5 million in fiscal 2000 to $121.2 million in fiscal 2005, yielding a compounded annual growth rate of 24.5%. During this five-year period, our pre-tax results were decreased in 2001 by acquisition-related charges of $11.3 million, debt extinguishment charges of $12.5 million, and closure costs of $4.0 million. In fiscal 2003, our pre-tax results were decreased by debt extinguishment charges of $9.5 million, a management fee termination charge of $2.6 million, and closure costs of $1.0 million. In fiscal 2005, our pre-tax results were decreased by debt extinguishment charges of $20.1 million, closure costs of $8.4 million, and $13.9 million in charges related to a fair value step-up of inventory acquired from OshKosh.

The Company’s principal executive offices are located at The Proscenium, 1170 Peachtree Street NE, Suite 900, Atlanta, Georgia 30309, and our telephone number is (404) 745-2700.

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OUR BRANDS, PRODUCTS, AND DISTRIBUTION CHANNELS

CARTER’S BRANDS

Under our Carter’s brand, we design, source, and market a broad array of products, primarily for sizes newborn to seven. Our Carter’s brand is sold in department stores, national chains, specialty stores, off-price sales channels, and through our Carter’s brand retail stores. Additionally, we sell our Just One Year and Child of Mine brands through the mass channel at Target and Wal-Mart, respectively. In fiscal 2005, we sold over 215 million units of Carter’s, Just One Year, and Child of Mine products to our wholesale customers, mass channel customers, and through our retail stores, an increase of approximately 15% from fiscal 2004. Under our Carter’s, Just One Year, and Child of Mine brands, revenue growth has been driven by our focus on essential, high-volume, core apparel products for babies and young children. Such products include bodysuits, pajamas, blanket sleepers, gowns, bibs, towels, washcloths, and receiving blankets. Our top ten baby and sleepwear core products accounted for 80% of our baby and sleepwear net sales in fiscal 2005, including the mass channel. We believe these core products are consumer staples and are insulated from changes in fashion trends. Whether they are shopping for their own children or purchasing gifts, consumers provide consistent demand for our products as they purchase the first garments and related accessories for the more than four million babies born each year and replace clothing their children outgrow.

We have four cross-functional product teams focused on baby, sleepwear, playclothes, and the mass channel. These teams are skilled in identifying and developing high-volume, core products. Each team includes members from merchandising, design, sourcing, product development, forecasting, and supply chain logistics. These teams follow a disciplined approach to fabric usage, color rationalization, and productivity and are supported by a dedicated art department and state-of-the-art design systems. We also license our brand names to other companies to create a complete collection of lifestyle products, including bedding, hosiery, underwear, shoes, room décor, and toys. The licensing team directs the use of our designs, art, and selling strategies to all licensees.

We believe this disciplined approach to product design reduces fashion risk and large seasonal fluctuations and supports efficient operations. We conduct product testing in our own stores, and we analyze quantitative measurements such as pre-season bookings, weekly over-the-counter selling results, and daily re-order rates in order to assess productivity.

CARTER’S PRODUCTS

Baby

Carter’s brand baby products include bodysuits, undershirts, towels, washcloths, receiving blankets, layette gowns, bibs, caps, and booties. In fiscal 2005, we generated $260.1 million in net sales of these products, excluding the mass channel, representing 23.2% of our consolidated net sales.

Our Carter’s brand is the leading brand in the baby category. In fiscal 2005, in the department store, national chain, outlet, specialty store, and off-price sales channels, our aggregate market share under the Carter’s brand was approximately 28% for baby, which represents greater than four times the market share of the next largest brand. We sell a complete range of baby products for newborns, primarily made of cotton. We attribute our leading market position to our brand strength, distinctive print designs, artistic applications, reputation for quality, and ability to manage our dedicated floor space for our retail customers. We tier our products through marketing programs targeted toward gift-givers, experienced mothers, and first-time mothers. Our Carter’s Classics product line consists of coordinated baby programs designed for first-time mothers and gift-givers. Our Carter’s Starters product line, the largest component of our baby business, provides mothers with essential, core products and accessories, including value-focused multi-packs.

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Sleepwear

Carter’s brand sleepwear products include pajamas, cotton long underwear, and blanket sleepers in sizes 12 months to size seven. In fiscal 2005, we generated $151.7 million in net sales of these products, excluding the mass channel, or 13.5% of our consolidated net sales.

Our Carter’s brand is the leading brand of sleepwear for babies and young children within the department store, national chain, outlet, specialty store, and off-price sales channels in the United States. In fiscal 2005, in these channels, our Carter’s brand market share was approximately 29%, which represented two times the market share of the next largest competitor. As in baby, we differentiate our sleepwear products by offering high-volume, core products with creative artwork and soft fabrications.

Playclothes

Carter’s brand playclothes products include knit and woven cotton apparel for everyday use in sizes three months to size seven. In fiscal 2005, we generated $275.8 million in net sales of these products, excluding the mass channel, or 24.6% of our consolidated net sales.

We have focused on building our Carter’s brand in the playclothes market by developing a base of essential, high-volume, core products that utilize original print designs and innovative artistic applications. We believe this product focus, in combination with our brand strength, strong customer relationships, and expanded global sourcing network, is increasing our playclothes sales. Our 2005 Carter’s brand playclothes market share was 6% in the $8 billion department store, national chain, outlet, specialty store, and off-price sales channels.

Mass Channel Products

Our mass channel product team focuses on baby, sleepwear, and playclothes products marketed in the $6 billion mass channel children’s apparel market. Our mass channel team develops differentiated products specifically for the mass channel, including different fabrications, artwork, and packaging. During the second quarter of fiscal 2003, we launched our Child of Mine brand in substantially all Wal-Mart stores nationwide. The Child of Mine product line includes layette, sleepwear, and playclothes along with a range of licensed products, such as hosiery, bedding, toys, and gifts. During 2005, we successfully expanded our product offering in the mass channel under our Child of Mine brand to include playclothes products. We also sell our Just One Year brand to Target, which includes baby, sleepwear, and baby playclothes along with a range of licensed products, such as hosiery, bedding, toys, and gifts. In fiscal 2005, we generated $178.0 million in net sales of our Child of Mine and Just One Year products, or 15.9%, of our consolidated net sales.

Other Products

Our other product offerings include bedding, outerwear, shoes, socks, diaper bags, gift sets, toys, room décor, and hair accessories. In fiscal 2005, we generated $55.9 million in sales of these other products in our Carter’s brand retail stores.

Licensed Products

We currently extend our Carter’s, Child of Mine, and Just One Year product offerings by licensing our brands to 16 domestic marketers of related products in the United States. These licensing partners develop and sell products through our multiple sales channels while leveraging our brand strength, customer relationships, and artwork. Our license agreements require strict adherence to our quality and compliance standards and to a multi-step product approval process. We work in conjunction with our licensing partners in the development of their products and ensure that they fit within our vision of high-quality, core products at attractive values to the consumer. In addition, we work closely with our wholesale and

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mass channel customers and our licensees to gain dedicated real estate for licensed product categories. Our licensed products provide our customers and consumers with a range of Carter’s, Child of Mine, and Just One Year products that complement and expand upon our core baby and young children’s apparel offerings. In fiscal 2005, our Carter’s brand and mass channel licensees generated wholesale and mass channel net sales of $159.3 million on which we earned $13.8 million in royalty income.

CARTER’S DISTRIBUTION CHANNELS

As described above, we sell our Carter’s brand products to leading retailers throughout the United States in the wholesale and mass channels and through our own Carter’s brand retail outlet and strip center stores. In fiscal 2005, sales of our Carter’s brand products through the wholesale channel accounted for 38.1% of our consolidated net sales, sales through our retail stores accounted for 28.2% of our consolidated net sales, and sales through the mass channel accounted for 15.9% of our consolidated net sales.

Business segment financial information for our Carter’s brand wholesale, Carter’s brand retail, and Carter’s brand mass channel segments is contained in ITEM 8 “Financial Statements and Supplementary Data,” Note 14—“Segment Information” to the accompanying consolidated financial statements.

Our Carter’s brand wholesale customers include top retailers, such as Kohl’s, Babies “R” Us, JCPenney, Costco, Sears, and Federated. Our mass channel customers are Wal-Mart and Target. Our sales professionals work with their department or specialty store accounts to establish annual plans for our baby products, which we refer to as core basics. Once we establish an annual plan with an account, we place the majority of our accounts on our automatic reorder plan for core basics. This allows us to plan our sourcing requirements and benefits both us and our wholesale and mass channel customers by maximizing our customers’ in-stock positions, thereby improving sales and profitability. We intend to drive continued growth with our wholesale and mass channel customers through our focus on managing our key accounts’ business through product mix, fixturing, brand presentation, and advertising. We believe that we maintain strong account relationships and drive brand growth through frequent meetings with the senior management of our key wholesale and mass channel customers.

We currently operate 193 Carter’s brand retail stores, of which 152 are in outlet centers and 41 are in strip center locations. These stores carry a complete assortment of first-quality baby and young children’s apparel, accessories, and gift items. Our stores average approximately 4,800 square feet per location and are distinguished by an easy, consumer-friendly shopping environment. We believe our consistent, well-defined pricing strategy, coupled with our brand strength and our assortment of core products, has made our stores a destination location within many outlet and strip centers.

We have established a disciplined real estate selection process whereby we fully assess all new locations based on demographic factors, retail adjacencies, and population density. We believe that we are located in many of the premier outlet centers in the United States and that we are successfully adding high-volume strip center locations to our real estate portfolio.

CARTER’S BRAND POSITIONING

Our strategy has been to drive our brand image as the leader in baby and young children’s apparel and to consistently provide quality products at a great value to consumers. We employ a disciplined marketing strategy, which identifies and focuses on core products. We believe that we have strengthened our brand image with the consumer by differentiating our core products through fabric improvements, new artistic applications, and new packaging and presentation strategies. We also attempt to differentiate our products through store-in-store shops and advertising with wholesale and mass channel customers. We will continue to invest in display units for our major wholesale customers that clearly present our core products on their floors to enhance brand and product presentation. We also strive to provide our wholesale and mass

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channel customers with consistent, premium service, including delivering and replenishing products on time to fulfill customer and consumer needs.

OSHKOSH BRANDS

Under our OshKosh brand, we design, source, manufacture, and market a broad array of young children’s apparel, primarily for children in sizes newborn to 16. Our OshKosh brand is currently sold in our OshKosh brand retail stores, department stores, national chains, specialty stores, and through off-price sales channels. We also have a licensing agreement with Target through which products are sold at Target under our Genuine Kids from OshKosh brand. In the few years prior to acquiring OshKosh in July 2005, our OshKosh brand experienced a significant decline in sales, most notably in the wholesale channel. However, given its long history of durability, quality, and style, we believe our OshKosh brand continues to be a market leader in the children’s branded apparel industry and represents a significant long-term growth opportunity for us, especially in the $13 billion young children’s playclothes market. Our plans to integrate and grow the OshKosh business focus on implementing our core product marketing disciplines, leveraging our relationships with key wholesale accounts, leveraging our infrastructure and supply chain, closing unprofitable retail stores, and improving the productivity of our OshKosh brand retail stores.

OSHKOSH PRODUCTS

Playclothes

Our OshKosh brand is best known for its playclothes products. During the period from July 14, 2005 through December 31, 2005, we generated $145.9 million in net sales of OshKosh brand playclothes products, which accounted for approximately 13.0% of our consolidated net sales. We plan to expand and grow this business by reducing product complexity and leveraging our strong customer relationships and global supply chain expertise.

We believe our OshKosh brand represents a significant opportunity for us to increase our share in the $13 billion young children’s playclothes market, which includes the mass channel. The market for baby and young children’s playclothes in fiscal 2005 was more than six times the size of the baby and sleepwear markets combined. The playclothes market for babies and young children is highly fragmented, with no single branded competitor having more than a 7% share of the entire market in 2005. Our OshKosh brand’s playclothes market share in the department store, national chain, outlet, specialty store, and off-price sales channels in 2005 was approximately 5.2% in the $8 billion market in these channels. We intend to establish a base of essential, high-volume, core playclothes products for our OshKosh brand.

OshKosh brand playclothes products include denim apparel products with multiple wash treatments and coordinating garments, overalls, woven tops and bottoms, and apparel products for everyday use in sizes newborn to 16.

Baby

During the period from July 14, 2005 through December 31, 2005, we generated approximately $29.1 million in OshKosh brand baby products in our OshKosh brand stores, which accounted for approximately 2.6% of our consolidated net sales.

Other Products

The remainder of our OshKosh brand product offering includes bedding, outerwear, shoes, sleepwear, and accessories. In fiscal 2005, we generated $24.8 million in sales of these other products in our OshKosh brand retail stores, which accounted for 2.2% of our consolidated net sales.

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Licensed Products

We partner with a number of domestic and international licensees to extend the reach of our OshKosh brand. We currently have 8 domestic licensees, as well as 24 international licensees selling product in over 40 countries. Our largest licensing agreement involves the Genuine Kids from OshKosh line sold at Target. All Genuine Kids from OshKosh products sold at Target are sold pursuant to the license agreement. In addition to Genuine Kids from OshKosh products, our licensed products provide our customers and consumers with a range of OshKosh and OshKosh B’Gosh products including outerwear, shoes, bedding, and accessories. During the period from July 14, 2005 through December 31, 2005, our licensees generated wholesale and mass channel net sales of $159.8 million on which we earned approximately $6.6 million in royalty income.

OSHKOSH DISTRIBUTION CHANNELS

In fiscal 2005, sales through our OshKosh brand retail stores accounted for 12.5% of our consolidated net sales and sales through the wholesale channel accounted for 5.3% of our consolidated net sales.

We currently operate 142 OshKosh brand retail stores as of the end of fiscal 2005. These stores carry a wide assortment of young children’s apparel, accessories, and gift items and average approximately 4,900 square feet per location.

Our OshKosh brand wholesale customers include top retailers, such as Kohl’s, Federated, JCPenney, Costco, and Babies “R” Us. We are currently working with our department and specialty store accounts to establish seasonal plans for playclothes products. The majority of our OshKosh brand playclothes products will be planned and ordered seasonally as we introduce new products.

OSHKOSH BRAND POSITIONING

We believe our OshKosh brand stands for high-quality, authentic, active products for children sizes newborn to 16. Core OshKosh brand products include denim, overalls, woven tops and bottoms, and other playclothes for children. Our OshKosh brand is positioned differently from our Carter’s brand. Our OshKosh brand is generally positioned towards an older age range (ages 2-7) and at higher average prices than our Carter’s brand. We believe our OshKosh brand has significant brand name recognition, which consumers associate with rugged, durable, and active playclothes for young children.

GLOBAL SOURCING NETWORK

Revenue and earnings growth in recent years have been driven by strong product performance made possible through our global sourcing network. We have significant experience in sourcing products from the Far East, with expertise that includes the ability to evaluate vendors, familiarity with foreign supply sources, and experience in sourcing logistics particular to the Far East. We have recruited people with these skills from Disney, Mast Industries, The Limited, The Gap, Nike, and other major apparel companies. We also have established relationships with both leading and certain specialized sourcing agents in the Far East. In connection with our global sourcing initiatives, we have closed our domestic manufacturing operations, including textile, printing, cutting, embroidery, and sewing facilities. We also closed all five of our Carter’s brand offshore sewing facilities. Since acquiring OshKosh on July 14, 2005, we have closed one OshKosh brand sewing facility located in Choloma, Honduras and have recently announced our plans to close the remaining OshKosh brand sewing facility located in Uman, Mexico by April 2006.

Since launching our global sourcing initiative, we have experienced significant increases in product quality, lower product costs, and improvement in product margins, which has enabled us to price our products more competitively, accelerate revenue growth, and successfully enter the mass channel. We expect to realize further benefits as we expand and leverage our global sourcing network, continue our focus on core product offerings, and integrate our OshKosh brand.

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Our sourcing network consists of approximately 100 vendors located in approximately 15 countries. We believe that our sourcing arrangements are sufficient to meet our current operating requirements and provide capacity for growth.

DEMOGRAPHIC TRENDS

In the United States, there were approximately four million births reported in 2004, and demographers project an increase in births over the next 20 years. Favorable demographic trends support continued strength in the market for baby and young children’s products. Highlights of these trends include:

·        parents are having children later in life and are earning higher incomes when their children are born;

·        40% of all births are first children, which we believe leads to higher initial spending; and

·        grandparents are a large and growing market and are spending more money on their grandchildren than previous generations spent.

COMPETITION

The baby and young children’s apparel market is highly competitive. Competition is generally based upon product quality, brand name recognition, price, selection, service, and convenience. Both branded and private label manufacturers compete in the baby and young children’s apparel market. Our primary competitors in the wholesale and mass channels include Disney, Gerber, and private label product offerings. Our primary competitors in the retail store channel include Old Navy, The Gap, The Children’s Place, Gymboree, and Disney. Most retailers, including our customers, have significant private label product offerings that compete with us. Because of the highly-fragmented nature of the industry, we also compete with many small manufacturers and retailers. We believe that the strength of our Carter’s and OshKosh brand names combined with our breadth of product offerings and operational expertise position us well against these competitors.

ENVIRONMENTAL MATTERS

We are subject to various federal, state, and local laws that govern activities or operations that may have adverse environmental effects. Noncompliance with these laws and regulations can result in significant liabilities, penalties, and costs. Generally, compliance with environmental laws has not had a material impact on our operations, but there can be no assurance that future compliance with such laws will not have a material adverse effect on our operations.

TRADEMARKS, COPYRIGHTS, AND LICENSES

We own many trademarks and tradenames, including Carter’s®, Carter’s® Classics, Celebrating Childhood™, Celebrating Imagination®, Child of Mine®, Just One Year®, OshKosh B’Gosh®, OshKosh Est. 1895®, and Genuine Kids from OshKosh®, as well as copyrights, many of which are registered in the United States and in more than 110 foreign countries.

We license various Company trademarks, including Carter’s, Carter’s Classics, Just One Year, Child of Mine, OshKosh B’Gosh, OshKosh Est. 1895, and Genuine Kids from OshKosh to third-parties to produce and distribute children’s apparel and related products such as diaper bags, room décor, hosiery, outerwear, underwear, bedding, plush toys, and shoes.

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AVAILABLE INFORMATION

Our Internet address is www.carters.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. There we make available, free of charge, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, proxy statements, director and officer reports on Forms 3, 4, and 5, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Our SEC reports can be accessed through the investor relations section of our website. The information found on our website is not part of this or any other report we file with or furnish to the SEC. We also make available on our website, the Carter’s Code of Business Ethics and Professional Conduct, our Corporate Governance Principles, and the charters for the Compensation, Audit, and Nominating and Corporate Governance Committees of the Board of Directors.

EMPLOYEES

As of December 31, 2005, we had 7,795 employees, 2,981 of whom were employed on a full-time basis in our domestic operations, 3,712 of whom were employed on a part-time basis in our domestic operations, and 1,102 of whom were employed on a full-time basis in our offshore operations. We have had no labor-related work stoppages and believe that our labor relations are good. Production employees in our White House, Tennessee distribution center are unionized. None of our other employees is unionized.

ITEM 1A.        RISK FACTORS

You should carefully consider each of the following risk factors as well as the other information contained in this Annual Report and other filings with the Securities and Exchange Commission in evaluating our business. The risks and uncertainties described below are not the only we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our operating results may be affected in future periods.

Risks Relating to Our Business

The loss of one or more of our key customers could result in a material loss of revenues.

In fiscal 2005, we derived approximately 43.0% of our consolidated net sales from our top eight customers, including mass channel customers. Kohl’s and Wal-Mart each accounted for approximately 10% of our consolidated net sales. We expect that these customers will continue to represent a significant portion of our sales in the future. However, we do not enter into long-term sales contracts with our key customers, relying instead on long-standing relationships with these customers and on our position in the marketplace. As a result, we face the risk that one or more of our key customers may significantly decrease its or their business with us or terminate its or their relationships with us. Any such decrease or termination or a decrease in our key customers’ business could result in a material decrease in our revenue and operating income.

The acceptance of our product in the marketplace is affected by consumers’ tastes and preferences, along with fashion trends.

We believe that continued success depends on our ability to provide a unique and compelling value proposition for our consumers in the Company’s distribution channels. There can be no assurance that the demand for our products will not decline, or that we will be able to successfully evaluate and adapt our product to be aware of consumers’ tastes and preferences and fashion trends. If consumers’ tastes and preferences are not aligned with our product offerings, promotional pricing may be required to move

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seasonal merchandise. Increased use of promotional pricing would have a material adverse affect on our sales, gross margin, and results of operations.

The value of our brand, and our sales, could be diminished if we are associated with negative publicity.

While our employees, agents, and third-party compliance auditors periodically visit and monitor the operations of our vendors, independent manufacturers, and licensees, we do not control these vendors, independent manufacturers, licensees, or their labor practices. A violation of our vendor policies, licensee agreements, labor laws, or other laws by these vendors, independent manufacturers, or licensees could interrupt or otherwise disrupt our sourcing or damage our brand image. As a result, negative publicity regarding our company, brands, or products, including licensed products, could adversely affect our reputation and sales.

The Company’s royalty income is greatly impacted by the Company’s brand reputation.

The Company’s brand image as a consumer product with outstanding quality and name recognition makes it valuable as a royalty source. The Company is able to license complementary products and obtain royalty income from use of its Carter’s, Child of Mine, Just One Year, OshKosh, OshKosh B’Gosh, Genuine Kids from OshKosh, and related trademarks. The Company is able to obtain substantial amounts of foreign royalty income as our OshKosh B’Gosh label carries an international reputation for quality and American style. While the Company takes significant steps to ensure the reputation of its brand is maintained through its license agreements, there can be no guarantee the Company’s brand image will not be negatively impacted through its association with products outside of the Company’s core apparel products.

There are deflationary pressures on the selling price of apparel products.

In part due to the actions of discount retailers, and in part due to the worldwide supply of low cost garment sourcing, the average selling price of children’s apparel continues to decrease. To the extent these deflationary pressures are offset by reductions in manufacturing costs, there is a modest affect on the gross margin percentage. However, the inability to leverage certain fixed costs of the Company’s design, sourcing, distribution, and support costs over its gross sales base could have an adverse impact on the Company’s operating income.

Our business is sensitive to overall levels of consumer spending, particularly in the apparel segment.

The Company believes that spending on children’s apparel is somewhat discretionary. While certain apparel purchases are less discretionary due to size changes as children grow, the amount of clothing consumers desire to purchase, specifically name brand apparel products, is impacted by the overall level of consumer spending. Overall economic conditions that affect discretionary consumer spending include employment levels, business conditions, tax rates, interest rates, and overall levels of consumer indebtedness. Reductions in the level of discretionary spending or shifts in consumer spending to other products may have a material adverse affect on the Company’s sales and results of operations.

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We source substantially all of our products through foreign production arrangements. Our dependence on foreign supply sources could result in disruptions to our operations in the event of political instability, international events, or new foreign regulations and such disruptions may increase our cost of goods sold and decrease gross profit.

We source substantially all of our products through a network of various vendors in the Far East, coordinated by our Far East agents. The following could disrupt our foreign supply chain, increase our cost of goods sold, decrease our gross profit, or impact our ability to get products to our customers:

·       political instability or other international events resulting in the disruption of trade in foreign countries from which we source our products;

·       the imposition of new regulations relating to imports, duties, taxes, and other charges on imports;

·       the occurrence of an epidemic, the spread of which may impact our ability to obtain products on a timely basis;

·       changes in U.S. Customs procedures concerning the importation of apparel products;

·       unforeseen delays in customs clearance of any goods;

·       disruption in the global transportation network such as a port strike, world trade restrictions or war.

These and other events beyond our control could interrupt our supply chain and delay receipt of our products into the United States.

We operate in a highly-competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can, resulting in a loss of market share and, as a result, a decrease in revenues and gross profit.

The baby and young children’s apparel market is highly competitive. Both branded and private label manufacturers compete in the baby and young children’s apparel market. Our primary competitors in our wholesale and mass channel businesses include Disney, Gerber, and private label product offerings. Our primary competitors in the retail store channel include Old Navy, The Gap, The Children’s Place, Gymboree, and Disney. Because of the fragmented nature of the industry, we also compete with many other manufacturers and retailers. Some of our competitors have greater financial resources and larger customer bases than we have and are less financially leveraged than we are. As a result, these competitors may be able to:

·       adapt to changes in customer requirements more quickly;

·       take advantage of acquisition and other opportunities more readily;

·       devote greater resources to the marketing and sale of their products; and

·       adopt more aggressive pricing policies than we can.

The Company’s retail success and future growth is dependent upon identifying locations and negotiating appropriate lease terms for retail stores.

The Company’s retail stores are located in leased retail locations across the country. Successful operation of a retail store depends, in part, on the overall ability of the retail location to attract a consumer base sufficient to make store sales volume profitable. If the Company is unable to identify new retail locations with anticipated consumer traffic sufficient to support a profitable sales level, retail growth may consequently be limited. Further, if existing outlet centers do not maintain a sufficient customer base that provides a reasonable sales volume, there could be a material adverse impact on the Company’s sales, gross margin, and results of operations.

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Our substantial leverage could adversely affect our financial condition.

On December 31, 2005, we had total debt of approximately $430.0 million.

Our substantial indebtedness could have negative consequences. For example, it could:

·       increase our vulnerability to interest rate risk;

·       limit our ability to obtain additional financing to fund future working capital, capital expenditures, and other general corporate requirements, or to carry out other aspects of our business plan;

·       require us to dedicate a substantial portion of our cash flow from operations to pay principal of, and interest on, our indebtedness, thereby reducing the availability of that cash flow to fund working capital, capital expenditures, or other general corporate purposes, or to carry out other aspects of our business plan;

·       limit our flexibility in planning for, or reacting to, changes in our business and the industry; and

·       place us at a competitive disadvantage compared to our competitors that have less debt.

In addition, our senior credit facility contains financial and other restrictive covenants that may limit our ability to engage in activities that may be in our long-term best interests such as selling assets, strategic acquisitions, paying dividends, and borrowing additional funds. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt which could leave us unable to meet some or all of our obligations.

We may fail to realize the cost savings and other benefits that we expect from synergies and other cost reduction initiatives.

Since the due diligence phase of the Acquisition we have been developing specific plans and timelines for integrating the OshKosh business. We may encounter difficulties during the integration process. If we do not achieve our integration plans and the benefits and synergies we had anticipated, this could have an adverse effect on our operating results.

The Company’s success is dependent upon retaining key individuals within the organization to execute the Company’s strategic plan.

The Company’s ability to attract and retain qualified executive management, marketing, merchandising, design, sourcing, operations, and support function staffing is key to the Company’s success. If the Company were unable to attract and retain qualified individuals in these areas, an adverse impact on the Company’s growth and results of operations may result.

ITEM 1B.       UNRESOLVED STAFF COMMENTS

None

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ITEM 2.                PROPERTIES

All properties are owned by the Company with the exception of:

(1) lease expiration—April 2010 (13-year renewal option); (2) lease expiration—December 2006; (3) lease expiration—June 2015 (5-year renewal option); (4) lease expiration—December 2006 (5-year renewal option); (5) lease expiration—March 2006, (6) lease terminated January 2006; (7) lease expiration—July 2007; (8) lease expiration—January 2006 (to be renewed month to month until closure); (9) lease expiration—January 2015; (10) lease expiration—April 2007; (11) lease expiration—August 2008.

We currently operate 335 leased retail stores located primarily in outlet and strip centers across the United States, having an average size of approximately 4,800 square feet. Generally, leases have an average term of approximately five years with additional five-year renewal options.

Aggregate lease commitments as of December 31, 2005 for the above leased properties are as follows:  fiscal 2006—$35.9 million; fiscal 2007—$29.3 million; fiscal 2008—$24.3 million; fiscal 2009—$19.5 million; fiscal 2010—$14.8 million, and $40.7 million for the balance of these commitments beyond fiscal 2010.

ITEM 3.                LEGAL PROCEEDINGS

Not applicable

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

Not applicable

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ITEM 4A.        EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers and their ages as of December 31, 2005 are as follows:

Frederick J. Rowan, II joined us in 1992 as President and Chief Executive Officer and became Chairman of our Board of Directors in October 1996. Prior to joining us, Mr. Rowan was Group Vice President of VF Corporation, a multi-division apparel company and, among other positions, served as President and Chief Executive Officer of both The HD Lee Company, Inc. and Bassett-Walker, Inc., divisions of VF Corporation. Mr. Rowan, who has been involved in the textile and apparel industries for over 40 years, has been in senior executive positions for nearly 29 of those years. Mr. Rowan began his career at the DuPont Corporation and later joined Aileen, Inc., a manufacturer of women’s apparel, where he subsequently became President and Chief Operating Officer. On June 1, 2004, the Company named Joseph Pacifico, formerly Carter’s President of Marketing, as President of Carter’s, Inc. Mr. Rowan continues to serve as our Chairman of the Board of Directors and Chief Executive Officer.

Joseph Pacifico joined us in 1992 as Executive Vice President—Sales and Marketing and was named President—Marketing in 1997. Mr. Pacifico began his career with VF Corporation in 1981 as a sales representative for The HD Lee Company, Inc. and was promoted to the position of Vice President of Marketing in 1989, a position he held until 1992. On June 1, 2004, Mr. Pacifico was named President of Carter’s, Inc.

Charles E. Whetzel, Jr. joined us in 1992 as Executive Vice President—Operations and was named Executive Vice President—Manufacturing in 1997. In 2000, Mr. Whetzel’s title became Executive Vice President—Global Sourcing and in 2005 he was named Executive Vice President and Chief Sourcing Officer, consistent with our focus on our global sourcing capabilities. Mr. Whetzel began his career at Aileen, Inc. in 1971 in the quality function and was later promoted to Vice President of Apparel. Following Aileen, Inc., Mr. Whetzel held positions of increased responsibility with Health-Tex, Inc., Mast Industries, Inc., and Wellmade Industries, Inc. In 1988, Mr. Whetzel joined Bassett-Walker, Inc. and was later promoted to Vice President of Manufacturing for The HD Lee Company, Inc.

David A. Brown joined us in 1992 as Senior Vice President—Business Planning and Administration. In 1997, Mr. Brown was named Executive Vice President—Operations and in 2005 was named Executive Vice President and Chief Operations Officer. Prior to 1992, Mr. Brown held various positions at VF Corporation including Vice President—Human Resources for both The HD Lee Company, Inc. and Bassett-Walker, Inc. Mr. Brown also held personnel related positions with Blue Bell, Inc. and Milliken & Company earlier in his career.

Michael D. Casey joined us in 1993 as Vice President—Finance and was named Senior Vice President—Finance in 1997. In 1998, Mr. Casey was named Senior Vice President and Chief Financial Officer. In March 2003, Mr. Casey was named Executive Vice President and Chief Financial Officer. Prior to joining us, Mr. Casey was a Senior Manager with Price Waterhouse LLP, predecessor to PricewaterhouseCoopers LLP.

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PART II

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

Carter’s, Inc.’s common stock trades on the New York Stock Exchange under the symbol CRI. The last reported sale price per share of Carter’s, Inc.’s common stock on March 8, 2006 was $65.55. On that date there were approximately 7,090 holders of record of Carter’s, Inc.’s common stock.

The following table sets forth for the period indicated the high and low sales prices per share of common stock as reported by the New York Stock Exchange:

No purchases of Carter’s, Inc.’s common stock were made by or on behalf of the Company or any affiliated purchaser during the fourth quarter of fiscal 2005.

DIVIDENDS

Provisions in our Senior Credit Facility currently restrict the ability of our operating subsidiary, TWCC, from paying cash dividends to our parent company, Carter’s, Inc., in excess of $15.0 million, which thereby materially restricts Carter’s, Inc. from paying cash dividends on our Carter’s, Inc. common stock. We do not anticipate paying cash dividends on Carter’s, Inc.’s common stock in the foreseeable future but intend to retain future earnings, if any, for reinvestment in the future operation and expansion of our business and related development activities. Any future decision to pay cash dividends will be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, terms of financing arrangements, capital requirements, and such other factors as our Board of Directors deems relevant.

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EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about our equity compensation plan as of our last fiscal year:

(1)          Represents stock options that are outstanding or that are available for future issuance pursuant to the Carter’s, Inc.’s Amended and Restated 2003 Equity Incentive Plan.

RECENT SALES OF UNREGISTERED SECURITIES

Not applicable.

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ITEM 6.                SELECTED FINANCIAL DATA

The following table sets forth selected financial and other data as of and for the five fiscal years ended December 31, 2005 (fiscal 2005). On August 15, 2001, investment funds affiliated with Berkshire Partners LLC purchased control of Carter’s, Inc. from Investcorp S.A. (the “2001 Acquisition”), which had been our controlling stockholder since acquiring us in 1996. Financing for the 2001 Acquisition and related transactions totaled $468.2 million and was provided by: the Company’s senior credit facility (“former senior credit facility”) including $24.0 million in revolving loan facility borrowings and $125.0 million in term loan borrowings; $173.7 million from the sale by TWCC of 10.875% Senior Subordinated Notes; and $145.5 million of capital invested by investment funds affiliated with Berkshire Partners LLC and other investors, which included rollover equity by our management of $18.3 million.

The proceeds from the 2001 Acquisition and refinancing were used to purchase our existing equity ($252.5 million), pay for selling stockholders’ transactions expenses ($19.1 million), pay for buyers’ transaction expenses ($4.0 million), pay debt issuance costs ($13.4 million), and to retire all outstanding balances on previously outstanding long-term debt, including accrued interest thereon ($174.8 million). In addition, $4.4 million of proceeds were held as cash for temporary working capital purposes.

As a result of certain adjustments made in connection with the 2001 Acquisition, the results of operations for fiscal 2005, 2004, 2003, and 2002 and the period from August 15, 2001 through December 29, 2001 (the “Successor” periods) are not comparable to prior periods (the “Predecessor” periods).

As a result of the 2001 Acquisition, our assets and liabilities were adjusted to their estimated fair values as of August 15, 2001. The seven and one-half month period prior to the 2001 Acquisition includes certain acquisition-related charges, principally sellers’ expenses, such as management bonuses and professional fees, debt extinguishment charges for debt redemption premiums, and the write-off of deferred debt issuance costs on debt retired as a result of the 2001 Acquisition and refinancing. The Predecessor periods include amortization expense on our tradename and goodwill. The Successor periods reflect increased interest expense, the amortization of licensing agreements, and cessation of amortization on our tradename and goodwill due to the adoption of Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”) and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Accordingly, the results of operations for the Predecessor and Successor periods are not comparable.

On October 29, 2003, we completed an initial public offering of Carter’s, Inc.’s common stock including the sale of 5,390,625 shares by us and 1,796,875 shares by the selling stockholders, primarily Berkshire Partners LLC and its affiliates. Net proceeds to us from the offering totaled $93.9 million. On November 28, 2003, we used approximately $68.7 million of the proceeds to redeem approximately $61.3 million in outstanding 10.875% Senior Subordinated Notes and pay a redemption premium of approximately $6.7 million and related accrued interest charges of $0.7 million. We used approximately $2.6 million of the net proceeds to terminate the Berkshire Partners LLC management agreement and used approximately $11.3 million to prepay amounts outstanding under the term loan as required by the senior credit facility. The remaining proceeds were used for working capital and other general corporate purposes.

On July 14, 2005, Carter’s, Inc., through TWCC, acquired all of the outstanding common stock of OshKosh for a purchase price of $312.1 million, which includes payment for vested stock options (the “Acquisition”). As part of financing the Acquisition, the Company refinanced its existing debt (the “Refinancing”), including its former senior credit facility and its $113.8 million 10.875% Senior Subordinated Notes due 2011 (together with the Acquisition, the “Transaction”).

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Financing for the Transaction was provided by a new $500 million Term Loan B and a $125 million revolving credit facility (including a sub-limit for letters of credit of $80 million, the “Revolver”) entered into by TWCC with Bank of America, N.A., as administrative agent, Credit Suisse, and certain other financial institutions (the “Senior Credit Facility”).

The proceeds of the financing were used to purchase the outstanding common stock and vested stock options of OshKosh ($312.1 million), pay transaction expenses ($6.2 million), refinance the Company’s former senior credit facility ($36.2 million), repurchase the Company’s 10.875% Senior Subordinated Notes ($113.8 million), pay a redemption premium on the Company’s 10.875% Senior Subordinated Notes ($14.0 million), along with accrued and unpaid interest ($5.1 million), and pay debt issuance costs ($10.6 million). Other Transaction expenses paid prior and subsequent to the closing of the Transaction totaled $1.4 million, including $0.2 million in debt issuance costs.

As a result of the Refinancing, we wrote off $4.5 million in unamortized debt issuance costs related to the former senior credit facility and 10.875% Senior Subordinated Notes and expensed $0.5 million related to the debt discount on the 10.875% Senior Subordinated Notes. Additionally, we expensed approximately $1.1 million of debt issuance costs associated with the Senior Credit Facility in accordance with Emerging Issues Task Force (“EITF”) No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.”

On March 1, 2006, we announced our intention to split the Company’s common stock on a two-for-one basis through a stock dividend entitling each stockholder of record to receive one additional share of common stock for every one share owned. To accomplish the stock split, the Board of Directors has recommended that the Company’s stockholders approve an amendment to the Company’s certificate of incorporation increasing the number of authorized shares of the Company’s common stock from 40,000,000 to 150,000,000 at the company’s May 11, 2006 annual stockholders meeting. Following stockholder approval and subject to then-current market conditions, the Company intends to announce the specific timing of the stock split and declare the stock dividend. The Board of Directors, however, may determine not to declare the stock dividend.

The selected financial data for the five fiscal years ended December 31, 2005 were derived from our Audited Consolidated Financial Statements. Our fiscal year ends on the Saturday in December or January nearest to the last day of December. Consistent with this policy, fiscal 2005 ended on December 31, 2005 and fiscal 2004 ended on January 1, 2005. Fiscal 2005 and fiscal 2004 each contained 52 weeks of financial results.

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The following table should be read in conjunction with ITEM 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and ITEM 8 “Financial Statements and Supplementary Data.”

See Notes to Selected Financial Data.

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NOTES TO SELECTED FINANCIAL DATA

(a) As a result of the 2001 Acquisition, we adjusted our assets and liabilities to their estimated fair values as of August 15, 2001. In addition, we entered into new financing arrangements and changed our capital structure in connection with the 2001 Acquisition. At the time of the 2001 Acquisition, we adopted the provisions of SFAS 141 and SFAS 142, which affect the amortization of goodwill and other intangibles. Accordingly, the results as of the end of and for the Successor period from August 15, 2001 through December 29, 2001 and the Successor fiscal years 2002, 2003, 2004, and 2005 are not comparable to prior periods.

(b) On a pro forma basis, assuming SFAS 142 was in effect for all periods presented, pro forma loss before income taxes would have been $(21.8) million for the Predecessor period from December 31, 2000 through August 14, 2001. Pro forma net loss would have been $(15.5) million for the Predecessor period from December 31, 2000 through August 14, 2001.

(c) In the first quarter of fiscal 2003, we adopted the provisions of SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds Financial Accounting Standards Board (“FASB”) Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in Accounting Principles Board Opinion 30 will now be used to classify those gains and losses. Accordingly, charges related to the extinguishment of debt during the Predecessor period from December 31, 2000 through August 14, 2001, as more fully described in note (h) below, have been reclassified to conform to the provisions of SFAS 145.

(d) The Acquisition-related charges for the Predecessor period from December 31, 2000 through August 14, 2001 include $4.5 million in management bonuses and $6.8 million in other seller expenses.

(e) The $4.3 million in closure costs for the Predecessor period from December 31, 2000 through August 14, 2001 relate to closure costs associated with two domestic manufacturing facilities, including a $3.2 million write-down of long-lived assets. The $1.0 million in closure costs for the Successor 2003 fiscal year relate to the closure of our two sewing facilities located in Costa Rica. The $0.6 million in closure costs for fiscal 2004 relate to closure costs associated with the closure of our Costa Rican facilities and our distribution facility in Leola, Pennsylvania. The $6.8 million in closure costs for fiscal 2005 relate to the closure of our Mexican sewing facilities.

(f) The deferred charge write-off in the Successor fiscal year 2002 reflects the write-off of $0.9 million of previously deferred costs associated with the filing of a registration statement on Form S-1 in August 2002, to register an initial public offering of Carter’s, Inc.’s common stock.

(g) The $2.6 million reflects the payment to terminate the Berkshire Partners LLC management agreement upon completion of our initial public offering of Carter’s, Inc.’s common stock on October 29, 2003.

(h) Debt extinguishment charges for the Predecessor period December 31, 2000 through August 14, 2001 reflect the write-off of debt issuance costs of approximately $4.7 million and a debt redemption premium of approximately $7.8 million. Debt extinguishment charges for the Successor 2003 fiscal year reflect the write-off of $2.4 million of debt issuance costs resulting from the redemption of $61.3 million of our 10.875% Senior Subordinated Notes and the prepayment of $11.3 million in term loan indebtedness, a debt redemption premium of approximately $6.7 million, and a $0.4 million write-off of the related note discount. Debt extinguishment charges for the Successor 2005 fiscal year reflect the payment of a $14.0 million redemption premium on the 10.875% Senior Subordinated Notes, the write-off of $4.5 million in unamortized debt issuance costs related to the former senior credit facility and 10.875% Senior Subordinated Notes, and $0.5 million related to the debt discount on the 10.875% Senior

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Subordinated Notes. Additionally, we expensed approximately $1.1 million of debt issuance costs associated with our new Senior Credit Facility in accordance with Emerging Issuance Task Force (“EITF”) No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.”

(i) As a result of the 2001 Acquisition, our capital structure and the number of outstanding shares were changed. Accordingly, earnings per share in Predecessor periods are not comparable to earnings per share in Successor periods.

(j) Represents total current assets less total current liabilities.

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

The following is a discussion of our results of operations and current financial condition. You should read this discussion in conjunction with our consolidated historical financial statements and notes included elsewhere in this annual report. Our discussion of our results of operations and financial condition includes various forward-looking statements about our markets, the demand for our products and services, and our future results. We based these statements on assumptions that we consider reasonable. Actual results may differ materially from those suggested by our forward-looking statements for various reasons including those discussed in the “Risk Factors” section. Those risk factors expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. Except for any ongoing obligations to disclose material information as required by the federal securities laws, we do not have any intention or obligation to update forward-looking statements after we file this annual report.

OVERVIEW

Over the past 141 years, Carter’s has become one of the most highly-recognized and most trusted brand names in the children’s apparel industry. On July 14, 2005, we acquired OshKosh for a purchase price of $312.1 million, which included payment for vested stock options (the “Acquisition”). Established in 1895, our OshKosh brand is also highly-recognized and well known for its high-quality apparel for children sizes newborn to 16. The Acquisition has increased our market share in the wholesale and retail channels of distribution.

We sell our products under various Carter’s and OshKosh brands in the wholesale channel, which includes approximately 330 department store, national chain, and specialty store accounts. Additionally, we currently operate 193 Carter’s and 142 OshKosh brand retail stores located primarily in outlet and strip centers throughout the United States and sell our products in the mass channel under our Just One Year brand to approximately 1,400 Target stores and under our Child of Mine brand to approximately 3,200 Wal-Mart stores nationwide. We also extend our brand reach by licensing our Carter’s, Child of Mine, Just One Year, and OshKosh B’Gosh and related brand names through domestic licensing arrangements, including licensing of our Genuine Kids from OshKosh brand to Target stores nationwide. Our OshKosh B’Gosh brand name is also licensed through international licensing arrangements. During fiscal 2005, we earned approximately $20.4 million in licensing income, including $6.6 million from our OshKosh B’Gosh and Genuine Kids from OshKosh brands for the period from July 14, 2005 through December 31, 2005.

We are currently in the process of integrating the OshKosh business. Our plans are to integrate and grow our OshKosh brand by implementing our core product development and marketing disciplines, leveraging Carter’s relationships with key wholesale accounts, closing unprofitable stores, leveraging Carter’s infrastructure and supply chain, and improving the productivity of our OshKosh brand retail stores.

We have reduced the number of OshKosh sub-brands and are in the process of simplifying the number of product offerings under our OshKosh brand. This should allow us to reduce product complexity, focus our efforts on essential, core products, and streamline operations. Since the Acquisition, we have closed 15 unprofitable OshKosh lifestyle stores, 14 OshKosh brand retail stores, and plan to close an additional three OshKosh brand retail stores in fiscal 2006. We plan to implement various retail store productivity improvements that have been successful in our Carter’s brand retail stores. Such improvements include more impactful window displays and better product placement and in-store marketing programs.

We are also leveraging our existing infrastructure and supply chain expertise to reduce costs. In December 2005, we closed the OshKosh Choloma, Honduras sewing facility and recently announced our plans to close the OshKosh Uman, Mexico sewing facility during the first half of fiscal 2006. We intend to

21

place such production primarily with our vendors in the Far East. We are also in the process of integrating retail store operations and various other support functions throughout the Company.

As part of financing the Acquisition, we refinanced our existing debt (the “Refinancing”), including our former senior credit facility and our outstanding 10.875% Senior Subordinated Notes due 2011 (together with the Acquisition, the “Transaction”). In connection with the Refinancing, we paid a $14.0 million redemption premium on the Company’s 10.875% Senior Subordinated Notes, we wrote off $4.5 million in unamortized debt issuance costs related to the former senior credit facility and repayment of the 10.875% Senior Subordinated Notes, and expensed $0.5 million related to the debt discount on the 10.875% Senior Subordinated Notes. Additionally, we expensed approximately $1.1 million of debt issuance costs associated with our new Senior Credit Facility in accordance with Emerging Issues Task Force (“EITF”) No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.”

As a result of the Transaction, we have had a significant increase in interest costs with average borrowings of $169.1 million at an effective interest rate of 9.9% for the period from January 2, 2005 through July 14, 2005 and average borrowings of $472.7 million at an effective interest rate of 5.9% subsequent to the Transaction. Additionally, we have acquired certain indefinite-lived intangible assets in connection with the Acquisition of OshKosh including licensing agreements and leasehold interests which will result in annual amortization expense of $4.7 million in fiscal 2006, $4.5 million in fiscal 2007, $4.1 million in fiscal 2008, $3.7 million in fiscal 2009, and $1.8 million in fiscal 2010.

Effective January 1, 2006, we will adopt the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which is estimated to result in a reduction in fiscal 2006 net income of approximately $3.0 million, or approximately $0.10 per diluted share. The impact of adopting SFAS 123R is discussed further under “Recent Accounting Pronouncements.”

Our fiscal year ends on the Saturday, in December or January, nearest the last day of December. Consistent with this policy, fiscal 2005 ended on December 31, 2005 and as a result, contained 52 weeks of financial results. Fiscal 2004 ended on January 1, 2005 and also contained 52 weeks of financial results. Fiscal 2003 ended on January 3, 2004 and contained 53 weeks of financial results.

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RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, (i) selected statement of operations data expressed as a percentage of net sales and (ii) the number of retail stores open at the end of each period:

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FISCAL YEAR ENDED DECEMBER 31, 2005 COMPARED WITH FISCAL YEAR ENDED JANUARY 1, 2005

CONSOLIDATED NET SALES

Consolidated net sales for fiscal 2005 were $1.1 billion, an increase of $298.2 million, or 36.2% compared to $823.1 million in fiscal 2004. This increase reflects growth in all channels of distribution and includes $199.8 million in net sales from OshKosh during the period from July 14, 2005 through December 31, 2005.

CARTER’S WHOLESALE SALES

Carter’s brand wholesale sales increased $41.2 million in fiscal 2005, or 10.7%, to $427.0 million. Excluding off-price sales, Carter’s brand wholesale sales increased $28.7 million in fiscal 2005, or 7.8%, to $394.5 million. The increase in Carter’s brand wholesale sales, excluding off-price sales, was driven by a 3% increase in units shipped and a 5% increase in average revenue per unit as compared to fiscal 2004.

Growth in units shipped was driven primarily by our playclothes product category, which accounted for approximately 30% of total Carter’s brand wholesale units shipped in fiscal 2005. We continue to focus on strengthening our playclothes products by developing high-volume, essential core products in addition to leveraging the brand strength of our baby and sleepwear products.

The increase in average revenue per unit as compared to fiscal 2004 was driven primarily by growth in our playclothes product category. In addition, favorable product mix in our sleepwear category, which accounted for 20% of our Carter’s brand wholesale units shipped in fiscal 2005, also contributed to the increase in average revenue per unit. Our playclothes and sleepwear product categories both carry higher average prices per unit than our baby product category.

Off-price sales increased $12.6 million in fiscal 2005, or 63.0%, to $32.5 million. Off-price units shipped were up 93% as compared to fiscal 2004 and average revenue per unit was down 16%. The increase in off-price units shipped reflects the disposal of a larger percentage of our excess inventory through the off-price channel rather than selling such excess in our retail stores. This strategy has enabled us to maintain a cleaner mix of higher-margin inventory in our Carter’s brand retail outlet stores.

OSHKOSH WHOLESALE SALES

OshKosh brand wholesale sales were $59.7 million for the period from July 14, 2005 through December 31, 2005, including $10.2 million in off-price sales. As the Acquisition was completed on July 14, 2005, all sales from OshKosh brand products are incremental to our results. Since the Acquisition, we have reduced the number of OshKosh wholesale brands from three brands to one brand (OskKosh B’Gosh), significantly reduced the number of styles in order to improve productivity, exited unprofitable and marginally-profitable customer relationships, and have begun leveraging our relationships with our key customers to build plans for growth.

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MASS CHANNEL SALES

Mass channel sales increased $32.1 million in fiscal 2005, or 22.0%, to $178.0 million. The increase was driven by increased sales of $23.4 million, or 26.6%, of our Child of Mine brand to Wal-Mart and increased sales of $8.6 million, or 14.9%, of our Just One Year brand to Target. The increase in sales resulted primarily from selling products at more Wal-Mart and Target stores, additional floor space at both Wal-Mart and Target, and $8.5 million from new product introductions.

CARTER’S BRAND RETAIL STORES

Carter’s brand retail store sales increased $25.1 million in fiscal 2005, or 8.6%, to $316.5 million. Such growth was driven by incremental sales of $12.2 million generated by new store openings and a comparable store sales increase of $13.8 million, or 4.8%, based on 174 locations. This growth was partially offset by the impact of four store closures of $0.9 million.

The Company’s comparable store sales calculations include sales for all stores that were open during the comparable fiscal period, including remodeled stores and certain relocated stores. If a store relocates within the same center with no business interruption or material change in square footage, the sales for such store will continue to be included in the comparable store calculation. If a store relocates to another center or there is a material change in square footage, such store is treated as a new store. Stores, which are closed, are included in the comparable store sales calculation up to the date of closing.

The increase in comparable store sales was led by a comparable store sales increase of 10.7% in our “brand” stores. Our “brand” stores are generally located in high-traffic strip centers located in or near major cities. As of December 31, 2005, we had 41 “brand” stores as compared to 27 stores as of January 1, 2005. Our “drive to” outlet stores, of which there were 71 as of December 31, 2005, had a comparable store sales increase of 2.8% and were impacted by rising fuel prices as these locations are generally located within 20 to 30 minutes outside of densely populated areas. Across the chain, comparable store sales have been driven by converting all stores to our new format beginning May of 2004, including moving baby products to the front of the store, more impactful window displays, and more effective in-store merchandising and marketing. All stores were converted to the new store format as of April 2005.

There were a total of 193 Carter’s brand retail stores as of December 31, 2005. During fiscal 2005, we opened 17 stores and closed 4 stores. We plan to open 31 and close 10 stores during fiscal 2006.

OSHKOSH BRAND RETAIL STORES

OshKosh brand retail stores contributed $140.1 million in net sales from the period from July 14, 2005 through December 31, 2005. During the period from July 14, 2005 through December 31, 2005, we closed 29 OshKosh brand retail stores, including 15 OshKosh brand lifestyle stores. Liabilities for these store closures have been provided for in purchase accounting as described in Note 15 to the accompanying consolidated financial statements.

There were a total of 142 OshKosh brand retail stores as of December 31, 2005. We plan to open 14 and close 3 OshKosh brand retail stores during fiscal 2006.

GROSS PROFIT

Our gross profit increased $98.2 million, or 33.0%, to $396.3 million in fiscal 2005. Gross profit as a percentage of net sales was 35.3% in fiscal 2005 as compared to 36.2% in fiscal 2004.

The decrease in gross margin as a percentage of net sales reflects:

(i)             an amortization charge of $13.9 million related to a fair value step-up of inventory acquired from OshKosh and sold during the period;

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(ii)         growth in our lower margin mass channel business;

(iii)     the impact of lower margin OshKosh brand wholesale sales relative to Carter’s brand wholesale sales; and

(iv)       $1.6 million of accelerated depreciation recorded in connection with our decision to close two sewing facilities in Mexico.

Partially offsetting these decreases were:

(i)             a reduction in product costs resulting from leveraging our full package sourcing network and completing the transition of Carter’s brand products to full package sourcing;

(ii)         significant growth in our higher margin retail business, resulting from the Acquisition of the OshKosh brand retail stores (consolidated retail sales increased from 35% of total sales to 41% of total sales); and

(iii)     a decrease of $2.5 million in charges related to excess inventory.

The Company includes distribution costs in its selling, general, and administrative expenses. Accordingly, the Company’s gross margin may not be comparable to other companies that include such distribution costs in their cost of goods sold.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Selling, general, and administrative expenses in fiscal 2005 increased $79.9 million, or 38.3%, to $288.6 million. As a percentage of net sales, selling, general, and administrative expenses in fiscal 2005 increased to 25.7% as compared to 25.3% in fiscal 2004.

The increase in selling, general, and administrative expenses as a percentage of net sales was led primarily by:

(i)             the impact of a higher retail store cost structure at OshKosh as retail store selling, general, and administrative expenses, which comprise approximately 39% of consolidated selling, general, and administrative expenses, grew from 23.6% of retail sales in fiscal 2004 to 24.8% of retail sales in fiscal 2005; and

(ii)         amortization of OshKosh intangible assets including a charge of $2.2 million related to the OshKosh licensing agreements and leasehold interests capitalized in connection with the Acquisition.

Partially offsetting these increases were:

(i)             a decline in distribution costs as a percentage of sales from 4.9% in fiscal 2004 to 4.2% in fiscal 2005, driven primarily by efficiencies gained with our distribution center in Stockbridge, Georgia;

(ii)         effectively managing growth in spending to a rate lower than the growth in net sales, most notably in the mass channel; and

(iii)     cessation of amortization of our Carter’s licensing agreements, which were fully amortized on August 15, 2004. Amortization expense in fiscal 2004 related to these agreements was approximately $3.1 million.

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CLOSURE COSTS

In May 2005, we decided to exit two Carter’s brand sewing facilities in Mexico. We have developed alternative capabilities to source comparable products in the Far East at lower costs. As a result of these closures, we have recorded total costs of $8.4 million, including $4.6 million of severance charges, $1.3 million of lease termination costs, $1.6 million of accelerated depreciation (included in cost of goods sold), $0.1 million of asset impairment charges, and $0.8 million of other exit costs during fiscal 2005.

We anticipate additional charges to be incurred during the first half of fiscal 2006 to include severance charges and other exit costs of approximately $0.5 million.

ROYALTY INCOME

Our royalty income increased $8.1 million, or 65.2%, to $20.4 million in fiscal 2005.

We license the use of our Carter’s, Carter’s Classics, Just One Year, and Child of Mine names. Royalty income from these brands was approximately $13.8 million in fiscal 2005, an increase of 11.8% or $1.5 million as compared to fiscal 2004. This increase was driven primarily by increased sales of our Carter’s and Just One Year brand licensees.

As a result of the Acquisition, as discussed in Note 1 to the accompanying consolidated financial statements, we license the use of our OshKosh B’Gosh, OshKosh Est. 1895, and Genuine Kids from OshKosh brand names. Royalty income from these brands was approximately $6.6 million for the period from July 14, 2005 through December 31, 2005, including $2.6 million in international royalty income.

OPERATING INCOME

Operating income increased $20.2 million, or 20.0% to $121.2 million in fiscal 2005. The increase in operating income was due to the factors described above.

LOSS ON EXTINGUISHMENT OF DEBT

As described in Note 1 to the accompanying consolidated financial statements, as a result of the Refinancing, we incurred a $14.0 million redemption premium in connection with the repurchase of our 10.875% Senior Subordinated Notes, wrote off $4.5 million in debt issuance costs associated with our former senior credit facility and 10.875% Senior Subordinated Notes, expensed $0.5 million related to the debt discount on the 10.875% Senior Subordinated Notes, and wrote off $1.1 million in new debt issuance costs associated with our new Senior Credit Facility in accordance with Emerging Issues Task Force No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.”

INTEREST EXPENSE, NET

Interest expense in fiscal 2005 increased $4.7 million, or 25.5%, to $23.2 million. This increase is attributable to the impact of additional borrowings associated with the Transaction as described in Note 1 to the accompanying consolidated financial statements. Weighted-average borrowings in fiscal 2005 prior to the Transaction were $169.1 million at an effective interest rate of 9.9%. Subsequent to the Transaction, weighted-average borrowings were $472.7 million at an effective interest rate of 5.9%. In fiscal 2004, weighted-average borrowings were $204.6 million at an effective interest rate of 8.6%.

INCOME TAXES

Our effective tax rate was 39.4% for fiscal 2005 and 39.8% for fiscal 2004. Our effective tax rate was slightly higher in 2004 due primarily to the impact of certain non-deductible costs. See Note 8 to the

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accompanying consolidated financial statements for the reconciliation of the statutory rate to our effective tax rate.

NET INCOME

Our fiscal 2005 net income decreased $2.5 million to $47.2 million as compared to $49.7 million in fiscal 2004 as a result of the factors described above.

FISCAL YEAR ENDED JANUARY 1, 2005 COMPARED WITH FISCAL YEAR ENDED JANUARY 3, 2004

NET SALES

Consolidated net sales for fiscal 2004 were $823.1 million, an increase of $119.3 million, or 16.9%, compared to $703.8 million in fiscal 2003. Revenue growth in all channels has been driven by the success of our focus on high-quality essential core products. Revenue growth has also been driven by retail store growth, productivity improvements in our retail stores, and a full year of revenue from our Child of Mine brand which launched in June of 2003.

Total wholesale sales increased $28.9 million, or 8.1%, to $385.8 million in fiscal 2004 from $356.9 million in fiscal 2003. In fiscal 2004, wholesale sales, excluding off-price sales, increased $30.7 million, or 9.2%, to $365.9 million from $335.2 million in fiscal 2003. The increase in wholesale sales, excluding off-price sales, was driven by a 17% increase in units shipped offset by a 6% decrease in revenue per dozen as compared to fiscal 2003. Growth in units shipped was driven by increased sales in all product categories driven by our focus on consistently improving the value of our baby, playclothes, and sleepwear products and our focus on improving customer service levels. The decrease in revenue per dozen was driven by product mix in all product categories.

Mass channel sales increased $62.2 million in fiscal 2004, or 74.3%, to $145.9 million. This increase was driven by increased sales of $50.7 million of our Child of Mine brand to Wal-Mart and increased sales of $11.6 million, or 25%, of our Just One Year brand to Target. The growth in Child of Mine sales of $50.7 million to $88.0 million in fiscal 2004 from $37.4 million in fiscal 2003 reflects a full year of sales as we began shipping our Child of Mine brand to Wal-Mart in June of 2003. Also contributing to growth in the mass channel was new door growth and additional floor space at both Wal-Mart and Target stores.

Retail store sales increased $28.2 million, or 10.7%, to $291.4 million in fiscal 2004 from $263.2 million in fiscal 2003. The driver of the revenue increase in fiscal 2004 was incremental revenue of $16.2 million generated from new store openings offset by the impact of store closures of $0.8 million and a comparable store sales increase of $15.9 million, or 6.2%, based on 166 locations. The increase in comparable store sales was driven by our focus on improving the productivity of the stores. Such improvement was driven by converting approximately 100 stores to a new format, including moving baby products to the front of the store, more impactful window displays, and more effective in-store merchandising and marketing.

GROSS PROFIT

In fiscal 2004, gross profit increased $42.8 million, or 16.7%, to $298.0 million compared to $255.3 million in fiscal 2003. Gross profit as a percentage of net sales was 36.2% in fiscal 2004 and 36.3% in fiscal 2003. The impact on gross margin from a higher mix of mass channel sales was largely offset by product cost reduction. Results for fiscal 2003 also included approximately $1.3 million in accelerated depreciation related to the closure of our Costa Rican sewing facilities.

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SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

In fiscal 2004, selling, general, and administrative expenses increased $20.7 million, or 11.0%, to $208.8 million from $188.0 million in fiscal 2003. As a percentage of net sales, these expenses decreased to 25.3% in fiscal 2004 from 26.7% in fiscal 2003. The decrease, relative to sales, reflects the benefit of leveraging operating expenses, most notably in the mass channel, against higher levels of revenue. The decrease, relative to sales, also reflects the cessation of the amortization of our licensing agreements as of August 15, 2004. During fiscal 2004, we recorded approximately $3.1 million in amortization related to these agreements as compared to $5.0 million in fiscal 2003. Results for fiscal 2003 included the payment of a $2.5 million special bonus to vested option holders in July 2003.

CLOSURE COSTS

In June of 2004, we exited our distribution facility in Leola, Pennsylvania in order to consolidate our distribution operations and reduce costs. We recorded approximately $175,000 of severance and other exit costs related to this closure during fiscal 2004.

In July of 2003, we decided to exit our Costa Rican sewing facilities, given our ability to obtain lower costs from third-party suppliers. During fiscal 2003, we recorded approximately $1,041,000 in severance and other exit costs related to these closures. During fiscal 2004, we recorded approximately $74,000 and $371,000 in severance and other exit costs related to these closures.

MANAGEMENT FEE TERMINATION

In the fourth quarter of 2003, upon completion of our initial public offering on October 29, 2003, we paid $2.6 million to terminate the Berkshire Partners LLC management agreement. Under the agreement, which was scheduled to expire in fiscal 2005, we paid an annual fee of $1.65 million.

ROYALTY INCOME

We license the use of the Carter’s, Carter’s Classics, Just One Year, and Child of Mine names and sublicensed the Tykes name to certain licensees. In fiscal 2004, royalty income increased 12.1% to $12.4 million compared to $11.0 million in fiscal 2003. This increase primarily reflects increased licensed sales of our Child of Mine brand by our licensee partners who began shipping their products during the third quarter of fiscal 2003.

OPERATING INCOME

Operating income for fiscal 2004 increased $26.4 million, or 35.3%, to $101.0 million compared to $74.6 million in fiscal 2003. Operating income, as a percentage of net sales, was 12.3% in fiscal 2004 as compared to 10.6% in fiscal 2003 as a result of the factors described above.

INTEREST EXPENSE, NET

Interest expense in fiscal 2004 decreased $7.7 million, or 29.5%, to $18.5 million from $26.3 million in fiscal 2003. This decrease is attributable to the redemption of approximately $61.3 million of our 10.875% Senior Subordinated Notes on November 28, 2003, reduced levels of term loan indebtedness, and the additional week of interest expense in fiscal 2003.

LOSS ON EXTINGUISHMENT OF DEBT

On November 28, 2003, we used the proceeds of the initial public offering to redeem $61.3 million of our 10.875% Senior Subordinated Notes. In connection with this redemption, we incurred redemption premiums of approximately $6.7 million, wrote off $2.2 million of deferred debt issuance costs, and

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expensed $0.4 million related to the note discount. We also prepaid $11.3 million in term loan indebtedness and subsequently wrote off $0.2 million of deferred debt issuance costs.

INCOME TAXES

Our effective tax rate was 39.8% for fiscal 2004 and 40.2% for fiscal 2003. Our effective tax rates in fiscal 2004 and 2003 were higher than the statutory rates due primarily to the impact of certain non-deductible costs. See Note 8 to the accompanying consolidated financial statements for the reconciliation of the statutory tax rate to our effective tax rate.

NET INCOME

Our fiscal 2004 net income increased to $49.7 million as compared to $23.3 million in fiscal 2003 as a result of the factors described above.

LIQUIDITY AND CAPITAL RESOURCES

Our primary cash needs are working capital, capital expenditures, and debt service. Historically, we have financed these needs through operating cash flow and funds borrowed under our former senior credit facility. Our primary source of liquidity will be cash flow from operations and borrowings under our new Revolver, and we expect that these sources will fund our ongoing requirements for debt service and capital expenditures. These sources of liquidity may be impacted by continued demand for our products and our ability to meet debt covenants under our new Senior Credit Facility, described below.

Net accounts receivable at December 31, 2005 were $96.1 million compared to $80.4 million at January 1, 2005. This increase primarily reflects $13.3 million of OshKosh receivables and higher levels of wholesale and mass channel revenue in the latter part of fiscal 2005 as compared to the latter part of fiscal 2004.

Inventory levels at December 31, 2005 were $188.5 million compared to $120.8 million at January 1, 2005. Increased inventory levels as of December 31, 2005 include $57.6 million of OshKosh brand inventory and an increase in Carter’s brand inventory of $10.1 million due primarily to increases in forecasted demand. Excluding OshKosh, average inventory levels increased 3.7% to $133.9 million in fiscal 2005 compared to $129.1 million in fiscal 2004. Average inventory levels are expected to be higher in fiscal 2006 due to the Acquisition of OshKosh and increases in forecasted demand.

Net cash provided by operating activities during fiscal 2005 and fiscal 2004 was $137.3 million and $42.7 million. This increase in net cash flow provided by operating activities in fiscal 2005 as compared to fiscal 2004 was driven by the growth in earnings, adjusted for non-cash charges related to the Transaction, increases in accounts payable and other current liabilities, and reductions in OshKosh brand inventory since the date of Acquisition. Net cash provided by our operating activities in fiscal 2003 was approximately $40.5 million. The increase in net cash flow provided by operating activities in fiscal 2004 as compared to fiscal 2003 was driven by the growth in earnings and reductions in prepaid expenses, partially offset by increased levels of inventory to support demand and increased levels of accounts receivable resulting from growth in revenue and the timing of shipments.

As a result of the decision to close our sewing facilities in Mexico, we have recorded total charges of $8.4 million including approximately $4.6 million of severance charges, $1.3 million in lease termination charges, $1.6 million of accelerated depreciation (included in cost of goods sold), $0.1 million of asset impairment charges, and $0.8 million of other exit costs during fiscal 2005. Additional charges expected to be incurred during the first half of fiscal 2006 primarily include severance charges and other exit costs of approximately $0.5 million.

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In connection with the Acquisition of OshKosh, we have developed an integration plan that includes severance and relocation costs, certain facility and store closings, and contract termination costs. The following liabilities, included in our other current liabilities in the accompanying consolidated financial statements, were established at Acquisition and will be funded by cash flows from operations and borrowings under our new Revolver:

Also in connection with the Acquisition, we refinanced our former senior credit facility, which consisted of a $36.2 million Term Loan C and an available $80.0 million revolving loan facility under which no borrowings were outstanding, exclusive of outstanding letters of credit, and we repurchased our 10.875% Senior Subordinated Notes at a price that included a redemption premium of $14.0 million in addition to the principal amount of $113.8 million. As a result of the Refinancing, we wrote off $4.5 million in debt issuance costs related to the former senior credit facility and the 10.875% Senior Subordinated Notes and expensed $0.5 million related to the discount on the 10.875% Senior Subordinated Notes.

Financing for the Transaction was provided by a new $500 million Term Loan B and a $125 million revolving credit facility (including a sub-limit for letters of credit of $80 million) (the “Revolver”) entered into by TWCC with Bank of America, N.A., as administrative agent, Credit Suisse, and certain other financial institutions (the “Senior Credit Facility”). The proceeds from the Senior Credit Facility were used to purchase the outstanding common stock and vested stock options of OshKosh ($312.1 million), pay transaction expenses ($6.2 million), refinance our former senior credit facility ($36.2 million), repurchase our 10.875% Senior Subordinated Notes ($113.8 million), pay a redemption premium on our 10.875% Senior Subordinated Notes ($14.0 million), along with accrued and unpaid interest ($5.1 million), and pay debt issuance costs ($10.6 million). Approximately $1.1 million of the debt issuance costs were expensed in accordance with Emerging Issues Task Force No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.”  Other costs paid prior and subsequent to the closing of the transaction totaled $1.4 million, including $0.2 million in debt issuance costs.

The term of the Revolver expires July 14, 2011 and the term of the Term Loan B expires July 14, 2012. Amounts outstanding under the Revolver initially accrue interest at a prime rate plus 0.75% or, at our option, a LIBOR rate plus 1.75% and may be reduced based upon the achievement of certain leverage ratios. Amounts outstanding under the Term Loan B accrue interest at a prime rate plus 0.75% or, at our option, a LIBOR rate plus 1.75% and may be reduced based upon the achievement of certain leverage ratios and credit ratings. Interest is payable at the end of interest rate reset periods, which vary in length but in no case exceed 12 months for LIBOR rate loans and quarterly for prime rate loans. The effective interest rate on variable rate Term Loan B borrowings as of December 31, 2005 was 5.7%. The Senior Credit Facility contains financial covenants, including a minimum interest coverage ratio, maximum leverage ratio, and fixed charge coverage ratio. The Senior Credit Facility also sets forth mandatory and optional prepayment conditions, including an annual excess cash flow requirement, as defined, that may result in our use of cash to reduce our debt obligations. There is no excess cash flow payment required in fiscal 2006. Our obligations under the Senior Credit Facility are collateralized by a first priority lien on substantially all of our assets, including the assets of our domestic subsidiaries.

The Senior Credit Facility requires us to hedge at least 25% of our variable rate debt under the term loan. On September 22, 2005, we entered into a swap agreement to receive floating rate interest and pay

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fixed interest. This swap agreement is designated as a cash flow hedge of the variable interest payments on a portion of our variable rate Term Loan B debt. The swap agreement matures July 30, 2010.

Principal borrowings under the Term Loan B are due and payable in quarterly installments of $1.1 million from March 31, 2006 through June 30, 2012 with the remaining balance of $401.9 million due on July 14, 2012.

In addition to scheduled amortization payments made during the third and fourth quarters of fiscal 2005, we prepaid an additional $67.6 million of Term Loan B indebtedness.

Our former senior credit facility, as amended, set forth mandatory and optional prepayment conditions that resulted in our use of cash to reduce our debt obligations. Accordingly, we made an excess cash flow principal prepayment of approximately $2.4 million on March 22, 2004. No such prepayment was required in fiscal 2005.

On June 2005, March 2005, December 2004, and March 2004, we prepaid an additional $15.0 million, $20.0 million, $20.0 million, and $5.0 million, respectively, of term loan indebtedness under our former senior credit facility.

At December 31, 2005, we had approximately $430.0 million in term loan borrowings and no borrowings under our Revolver, exclusive of approximately $20.2 million of outstanding letters of credit. At January 1, 2005, under our former senior credit facility, we had approximately $184.5 million of debt outstanding, consisting of $113.2 million of 10.875% Senior Subordinated Notes, $71.3 million in term loan borrowings under our former senior credit facility and no revolving loan facility borrowings, exclusive of approximately $6.8 million of outstanding letters of credit.

The following table summarizes as of December 31, 2005, the maturity or expiration dates of mandatory contractual obligations and commitments for the following fiscal years: