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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 1-11202
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AUTHENTIC FITNESS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4268251
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

6040 BANDINI BOULEVARD
COMMERCE, CALIFORNIA 90040
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (323) 726-1262
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- --------------------------------------- -----------------------

Common Stock, par value $.001 per share New York Stock Exchange
Series A Junior Participating Preferred
Stock, par value $.01 per share New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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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 [ ]

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

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of September 27, 1999 was approximately $228,525,000

The number of shares of Common Stock outstanding as of September 27, 1999
was 20,071,061

Documents incorporated by reference: The definitive Proxy Statement of
Authentic Fitness Corporation, relating to the 1999 Annual Meeting of
Stockholders is incorporated by reference in Part III hereof.

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PART I

ITEM 1. BUSINESS.

Authentic Fitness Corporation (the 'Company'), a Delaware corporation, was
organized in 1990. The Company designs, manufactures and markets swimwear, swim
accessories and active fitness apparel under the Speedo'r', Speedo'r' Authentic
Fitness'r', Catalina'r', Anne Cole'r', Cole of California'r', Ralph Lauren'r',
Polo Sport Ralph Lauren'r', Polo Sport-RLX'r', Oscar de la Renta'r', Sunset
Beach'r', Sandcastle'r' and Sporting Life'r' brand names; and activewear and
swimwear under the White Stag'r' brand name. In addition, the Company operates
139 Speedo'r' Authentic Fitness'r' retail stores, which sell active fitness
apparel in major metropolitan areas of the United States and Canada, including
an E-commerce Internet website -- Speedo.com. The Speedo'r', Designer Swimwear
and Retail Divisions accounted for 55%, 30% and 15% of fiscal 1999 net revenues,
respectively.

The Company has leveraged the strength of its brand names and reputation
for quality to (i) continue to develop its core business, (ii) expand its
product offerings into new categories and (iii) enter new channels of
distribution. Due to the successful implementation of these strategies, the
Company's net revenues increased to $410.8 million in fiscal 1999 from $85.5
million in fiscal 1991, a compound annual growth rate of 21.7%.

SPEEDO'r' DIVISION

The Speedo'r' brand name is preeminent in the competition swimwear market
with over a 60% market share in fiscal 1999 and is widely recognized for product
innovation, quality and performance. The Speedo'r' Division's product line
consists of women's and men's competition swimwear and swim accessories, men's
swimwear and coordinating T-shirts, women's fitness swimwear, Speedo'r'
Authentic Fitness'r' activewear and children's swimwear, all of which are
marketed under the Speedo'r' brand name. The Company's license to use the
Speedo'r' trademark and such other related trademarks was granted in perpetuity
subject to certain conditions by Speedo International, Ltd., the licensor of the
Speedo'r' brand name and is exclusive in the United States, its territories and
possessions, Canada, Mexico and the Caribbean Islands.

The Company's strategy for the Speedo'r' Division is to attract new
customers to its core competition swimwear lines, and to expand its dominance in
competition swimwear to other markets for fitness apparel such as aerobics,
recreational water sports and volleyball; thereby targeting customers for whom
performance, quality and authenticity are important product attributes and to
open new channels of distribution, including its growing chain of Speedo'r'
Authentic Fitness'r' retail stores and on-line internet store -- Speedo.com.

Speedo'r' swimwear has been associated with swimming and diving champions
since the 1950's, when it was first worn by the Australian Olympic Swim Team. In
the 1996 Olympics in Atlanta, 24 out of 26 U.S. swimming medals were won by
athletes wearing Speedo'r' suits. Speedo'r' continued its dominance in
international swimming at the 1999 Pan Pacific Championships in Sydney,
Australia. At this meet, 12 world records were broken, all by swimmers wearing
Speedo'r' Aquablade'TM' swimsuits. Overall, swimmers wearing Speedo'r' won 24 of
the 26 gold medals. At the 1999 U.S. National Swimming Championships swimmers
wearing Speedo'r' won 25 of 28 gold medals. Overall, over 90% of the swimmers
competing at the U.S. Junior and Senior National Championships in 1999 were
wearing Speedo'r' swimwear.

The Company has long term promotional contracts with Olympic medalists and
world champion swimmers including Amy Van Dyken, Jenny Thompson, Lenny
Krayzelburg, Brooke Bennett, Bill Pilczuk, Josh Davis, Janet Evans and Summer
Sanders. Top U.S. Olympic hopeful in diving, Mark Ruiz, and diving legend Greg
Louganis are also under contract to Speedo'r' along with the top beach
volleyball players in the U.S., including multiple gold medalist Karch Kiraly,
and past Olympians Holly McPeak, Barbara Fontana, and Linda Hanley.

Since 1985, the Company has been an official sponsor of the U.S. National
Swim Federation, the U.S. Diving Federation and, since 1993, the U.S.A. Water
Polo Federation as well as the corresponding Canadian federations. Speedo'r'
also has become dominant in Triathlon with promotional agreements

with the top U.S. athletes, including the top ranked U.S. woman, Barb Lindquist.
Speedo'r' is the official apparel of USA Triathlon and Triathlon Canada and will
be outfitting all of the U.S. and Canadian competitors when triathlon makes its
debut as an Olympic sport in Sydney in 2000. These agreements extend through the
year 2000, ensuring Speedo'r' exposure at the 2000 Olympic Games in Sydney.
Management believes these athletes and federations provide exposure and
publicity prior to and during the Olympic Games and other national and
international swim meets that benefits not only the Company's competition
swimwear but also the Company's other Speedo'r' swimwear and accessories, as
well as the Speedo'r' Authentic Fitness'r' line of active fitness apparel.

The Company is the official swimwear and activewear sponsor of the 1999
Miss Teen USA and the 2000 Miss USA and Miss Universe pageants.

COMPETITION SWIMWEAR

The Speedo'r' brand first established its reputation for high performance
in competition swimwear and Speedo'r' continues to be the dominant brand in
competition swimwear with over 60% market share in the United States and Canada.
The Company believes that it has achieved such preeminence by focusing on
technological advances which provide superior performance. Although the
competition swimwear line includes a wide variety of styles and designs, the
majority of its sales represent repeat business in a relatively constant core
group of basic body styles.

The Company's competition swimsuits are manufactured to provide outstanding
fit, thus reducing water drag and enhancing comfort and freedom of movement. The
fabric used in these swimsuits also resists degradation from the sun, pool
chemicals and mildew enabling Speedo'r' competition swimsuits to last longer and
to maintain their fit better than suits made with other Lycra'r' types. The
Company consistently works to develop technologically advanced fabrics to
provide superior performance, including the following: the revolutionary
Speedo'r' Aquablade'TM' fabric which creates less water drag than exposed skin
and the Speedo'r' Aquablade'TM' Vortex Generator swimsuit designed to reduce
significant drag forces beneath the water. Speedo'r' Aquablade'TM' suits were
worn by winners of 24 of the 26 gold medals at the 1999 Pan Pacific
Championships. All twelve world records broken at the meet were set by swimmers
wearing Speedo'r' Aquablade'TM' suits, including U.S. swimmers Lenny Krayzelburg
and Jenny Thompson.

The competition swimwear line is sold primarily through sporting goods
stores and approximately 300 independent team dealers who interact with coaches
and managers of competitive and recreational swim programs.

The Company contracts domestically for the manufacture of substantially all
products in its competition swimwear line. Nylon and nylon Lycra'r', the
principal raw materials for the competition swimwear line, as well as the
fitness swimwear line and certain Speedo'r' Authentic Fitness'r' products, are
sourced from and printed by a variety of domestic and international mills and
converters. The Company considers its relationships with its present fabric
sources and manufacturers to be good.

Net revenues for the competition swimwear line increased to $47.5 million
in fiscal 1999 from $19.9 million in fiscal 1991, a compound annual growth rate
of 11.5%.

ACTIVE FITNESS

The active fitness line includes both fitness swimwear for women and the
Speedo'r' Authentic Fitness'r' line of active fitness apparel for men and women.
The Company believes that the Speedo'r' brand's reputation for performance,
quality and authenticity provides a natural base from which to build into the
fitness apparel market.

The fitness line of swimsuits is designed for the growing number of women
who participate in swimming or water aerobics as part of their regular exercise
program. The sale of fitness swimsuits is complemented by the Company's complete
line of accessories designed for aquatic exercise.

The Company launched its highly successful Speedo'r' Authentic Fitness'r'
line of active fitness apparel in the fall of 1991. Currently, the line consists
primarily of cotton Lycra'r' products for women, such as leotards, unitards and
tights all made with the same emphasis on styling and performance as the

Company's other Speedo'r' products. In addition, the Company sells coordinated
sportswear, including fleece and nylon warm-ups, jackets, shorts and pants for
men and women under the Speedo'r' Authentic Fitness'r' label. The Speedo'r'
Authentic Fitness'r' line is designed to be both functional for fitness work-
outs and fashionable enough for everyday wear. Styles are coordinated to mix and
match and are available in a variety of updated colors. Speedo'r' Authentic
Fitness'r' products function for a wide variety of fitness activities which
range from aerobics and running to volleyball and for a wide variety of fitness
participants from once-a-week health club members to triathletes.

The Company has benefited from increased awareness of the Speedo'r'
Authentic Fitness'r' line as a result of its increasing promotional presence in
Beach Volleyball, Triathlon, and Water-ski. The Company's promotional agreements
with Karch Kiraly, Holly McPeak, Barbara Fontana and Linda Hanley assures
Speedo'r' that the brand will be well represented at the Sydney Olympics and in
the events leading up to those games. All of the U.S. athletes competing at the
first Olympic Triathlon in Sydney will be wearing apparel from Speedo'r's
Triathlon line. Speedo'r's growing active swim line is also getting increased
exposure through sponsorship of the Women's pro water-ski tour, the outfitting
of all of the women on the U.S. pro tour, the Company's sponsorship of top women
water-skiers and wakeboarders and the sponsorship of the American Water-ski
Federation.

The increased awareness of the Speedo'r' and Speedo'r' Authentic Fitness'r'
brands has allowed the Company to further expand its product line. In fiscal
1993, the Company introduced a line of swimwear, T-shirts and sportswear for
children. The Speedo'r' kids line has been highly successful generating net
revenues of $31.3 million in fiscal 1999, an increase of more than 32% from
fiscal 1998. In September 1996, the Company's Speedo'r' kids line was the winner
of the prestigious Earnie Award presented by Earnshaw Publications for
'Excellence in Design -- Swimwear'. The Company expects that this business will
continue to grow significantly in future years.

The Company's fitness swimwear is sold primarily through department,
sporting goods and specialty stores. The Speedo'r' Authentic Fitness'r' line of
active fitness apparel is currently sold primarily through the Company's
Speedo'r' Authentic Fitness'r' retail stores.

The fitness swimwear and Speedo'r' Authentic Fitness'r' lines are currently
sourced from, printed and manufactured by substantially the same mills,
converters and sub-contractors as the competition swimwear line. Certain
Speedo'r' Authentic Fitness'r' styles are manufactured in Company owned
manufacturing facilities. The Company acquires the cotton, fleece and nylon used
in some of its Speedo'r' Authentic Fitness'r' products from a variety of
domestic and international sources and uses a variety of domestic and
international sewing sub-contractors to produce them. The Company considers its
relationship with these suppliers and sub-contractors to be good.

Net revenues for the active fitness swimwear and related lines increased to
$33.8 million in fiscal 1999 from $1.5 million in fiscal 1991, a compound annual
growth rate of 47.6%.

MEN'S SWIMWEAR

The Company's Speedo'r' brand watershorts were introduced in 1984 and are
one of the leading brands of men's and boy's branded swimwear in department and
specialty stores commanding a 15.1% market share for the 1999 selling season
according to The NPD Group, Inc. The Company's watershorts are designed for men
who participate in active sports and recreation in and out of the water. The
watershorts are made of cotton or nylon fabric and come in a wide variety of
color combinations, designs and lengths.

Since 1990, the Company has offered a collection of colorful Speedo'r'
T-shirts with bold graphics that coordinate with the color schemes and designs
used in Speedo'r' swimwear to provide an important complement to the swimwear
and Speedo'r' Authentic Fitness'r' lines. Stores which previously sold only
Speedo'r' swimwear may now display Speedo'r' T-shirts with such swimwear and
thus provide the consumer with the opportunity to purchase coordinated tops and
bottoms. The Company has also developed garments for use for a wide variety of
fitness activities, ranging from aerobics and running to triathlon and cycling.
These garments include shorts, pants and tops primarily made of cotton and nylon
knitted fabrics. The Company's successful extensions of the men's swimwear line
include the

introduction of the Speedo'r' Surf Runner'TM' nylon cross training watershorts,
which have become a key item in Speedo'r's activewear collection.

The Company's Speedo'r' brand watershorts and T-shirts are sold primarily
through department, sporting goods and specialty stores and catalogs. The
Company purchases T-shirt blanks and prints them domestically. The watershorts
are sourced principally from a variety of international sources. The buying
agent for products sourced from the Far East in fiscal 1999 was either ASCO
International Sourcing Limited or Soaring Force Limited (collectively, 'ASCO').
ASCO is an affiliate of Pentland Ventures Ltd ('Pentland'), one of the Company's
principal stockholders. The agreement with ASCO was terminated by the Company
effective June 1999 and the Company has established its own buying office for
sourcing in the Far East.

Net revenues for men's swimwear, primarily watershorts and T-shirts
increased to $46.8 million in fiscal 1999 from $15.7 million in fiscal 1991, a
compound annual growth rate of 14.6%.

ACCESSORIES

Speedo'r' accessories represent a major and growing product classification
for the Company complementing the competition swimwear, aquatic fitness and
recreational watersports lines. The Company's Speedo'r' accessories include a
diverse range of products including swim goggles, swimming caps, nose clips,
masks, snorkels, ear plugs, kickboards, flotation devices, and aquatic exercise
gear including the Speedo'r' Aquatic Cross-Training Mitt'TM' which provides a
more effective and efficient full body workout while swimming. Accessories which
can be used by fitness participants out of the pool include duffel bags,
athletic bags, sandals and Speedo'r' Surf Walker'r' and Beachers'r' footwear,
for use by the pool or at the beach.

The Company continues to develop innovative and functional accessories to
support the growing number of fitness swimmers participating in water aerobics
and lap swimming.

The mainstay of the Speedo'r' accessories line is swim goggles. Made from
polycarbonate plastic, the goggles come in varied shapes and tints and include
anti-fog, hypo-allergenic and prescription vision models. Management believes
that Speedo'r' is the number one brand of swim goggles sold in sporting goods
stores.

The swim goggle line is primarily manufactured by the Company to provide
more control over the manufacturing process and quick response to the needs of
the Company's customers. Latex and silicone swimming caps are sourced from the
Far East from manufacturers using specially-designed molds that the Company
either owns or has exclusive rights to use. Other products in the Speedo'r'
accessories line are sourced from a variety of domestic and international
sources. Swim goggles and other accessories are available in most department,
sporting goods and specialty stores which carry other Speedo'r' products.

Net revenues of the accessories line increased to $65.7 million in fiscal
1999 from $19.5 million in fiscal 1991, a compound annual growth rate of 16.4%.

DESIGNER SWIMWEAR DIVISION: CATALINA'r', ANNE COLE'r', COLE OF CALIFORNIA'r',
RALPH LAUREN'r', POLO SPORT RALPH LAUREN'r' AND POLO SPORT-RLX'r', OSCAR DE LA
RENTA'r', SANDCASTLE'r', SUNSET BEACH'r', SPORTING LIFE'r' AND WHITE STAG'r'

The Designer Swimwear Division's product line consists of women's swimwear
under the nationally recognized brand names: Catalina'r', Anne Cole'r', Cole of
California'r', Oscar de la Renta'r', Sandcastle'r', Sunset Beach'r', Sporting
Life'r' and White Stag'r'. Each of the brands targets a specific consumer and
price point. Anne Cole'r' and Oscar de la Renta'r' are designer brands, Cole of
California'r', Sandcastle'r' and Sporting Life'r' are missy brands and Sunset
Beach'r' is a junior brand, all of which target the department and specialty
store market. The Catalina'r' and White Stag'r' brands target the mass
merchandise market. These brands have allowed the Company to expand its
distribution in department and specialty stores and to add new channels of
distribution, including mass merchandisers. Prior to the acquisition of the
designer brands in 1993 ('Catalina/Cole Acquisition'), the Company estimates
that less than 10% of the Company's total women's Speedo'r' swimwear sales were
through department and specialty stores.

The Company seeks to grow its Designer Swimwear Division by expanding the number
of stores that carry its brands and increasing the presence of its brands within
each store location.

On February 1, 1998, the Company entered into an exclusive worldwide
license agreement with The Polo/Lauren Company, L.P. and PRL USA, Inc. and a
design services agreement with Polo/Ralph Lauren Corporation for Ralph
Lauren'r', Polo Sport Ralph Lauren'r' and Polo Sport-RLX'r' brand swimwear for
women and girls. Under the license, the Company produces and markets swimsuits,
bathing suits and coordinating cover-ups, tops and bottoms for women and girls.
First shipments under this license agreement occurred in January 1999 and the
Company exceeded its initial plan for fiscal 1999 by 30%, achieving
$11.5 million in net revenues.

For the 1999 selling season, two of the Company's designer brand names were
top ten best sellers at retail according to The NPD Group, Inc. Anne Cole'r' was
the third best selling missy swimwear brand and Cole of California'r' was the
seventh best selling missy swimwear brand.

During fiscal 1994, the Company capitalized on the high level of consumer
recognition and mass appeal of the Catalina'r' brand by repositioning it to a
line of swimwear and active apparel for the mass merchandise market. The Company
entered into a license agreement with Wal-Mart Stores, Inc. ('Wal-Mart')
pursuant to which Wal-Mart has the right, on a non-exclusive basis, to source,
distribute and sell activewear under the Catalina'r' brand name and to purchase
from the Company Catalina'r' swimwear for distribution and sale in Wal-Mart
stores. In fiscal 1999, net revenues from this agreement under the Catalina'r'
brand were $31.2 million, a 22.5% increase over the $25.5 million in fiscal
1998.

Also in fiscal 1994, the Company entered into an exclusive license
agreement for a period of ten years with an option to renew for successive
additional ten year terms with The Warnaco Group, Inc., a related party
('Warnaco'), pursuant to which Warnaco has the right to manufacture and
distribute men's and women's sportswear under the Catalina'r' brand name. The
Company recorded approximately $1.3 million of royalty income associated with
this agreement in fiscal 1999. See Note 13 of Notes to Consolidated Financial
Statements.

In October 1993, the Company entered into a worldwide license agreement
with Anne Cole and Anne Cole Design Studio Ltd. Under the worldwide license
agreement, the Company obtained the exclusive right in perpetuity to use the
Anne Cole'r' trademark for women's swimwear, activewear, beachwear and
children's swimwear. The Company also owns the Cole of California'r' and Hot
Coles'r' trademarks. In fiscal 1999, net revenues from these brands were
$43.9 million, an increase of 35.5% from $32.4 million in fiscal 1998. Also in
1993, the Company entered into a worldwide license agreement with Oscar de la
Renta Licensing Corporation for the design, manufacture and marketing of women's
and girl's swimwear and activewear under the Oscar de la Renta'r' brand name.

The White Stag'r' brand name, over 100 years old, is one of the most
recognized brand names in the United States. In 1992, the Company made a
strategic decision to capitalize on the awareness and potential mass appeal of
the White Stag'r' brand name by redirecting it to a line of activewear,
outerwear, swimwear and goggles for the mass merchandise market.

The Designer Swimwear Division's net revenues have increased 310% to $125.4
million since the Catalina/Cole Acquisition in October 1993. Net revenues for
the Designer Swimwear Division increased 18.2% to $125.4 million in fiscal 1999
from $106.1 million in fiscal 1998.

SPEEDO'r' AUTHENTIC FITNESS'r' RETAIL STORES DIVISION

Speedo'r' Authentic Fitness'r' retail stores are designed to appeal to
participants in water and land-based fitness activities, and to offer a complete
line of Speedo'r' and Speedo'r' Authentic Fitness'r' products that sell
throughout the year. The stores are a model for innovative retailing of the
Company's products and a proving ground for new products and marketing and
merchandising techniques. In November 1992, the Company opened its first
Speedo'r' Authentic Fitness'r' retail store in Los Angeles; since then the
Company has opened 138 additional stores in major metropolitan areas of the
United States and Canada to bring the total number of stores opened to 139 as of
July 3, 1999. During fiscal 1999, the Company opened six new stores while
closing six others. The Company expects to open ten additional stores in fiscal
2000. The stores average approximately 1,100 square feet in size. Capital
expenditures for each new store of average size are expected to be approximately
$200,000 and will require

approximately $50,000 of working capital. The Company believes that the success
of the retail stores to date evidences substantial consumer interest in new
innovative channelsd of distribution for fitness apparel.

In December 1998, the Company launched its own Internet website --
Speedo.com through which its products can be purchased. This on-line
E-commerce site presents Speedo'r' products in an easy-to-navigate, on-line
catalog which allows our customers to view and purchase Speedo'r' swimwear,
accessories, and active fitness apparel. The Company believes that this
additional retail distribution channel will build brand equity, expand market
penetration and improve customer service.

Net revenues of the Retail Division increased 6.2% to $60.3 million in
fiscal 1999 from $56.8 million in fiscal 1998 and comparable store sales
increased 6.3% in fiscal 1999.

INTERNATIONAL OPERATIONS

The Catalina/Cole Acquisition and the signing of the worldwide license
agreement for Ralph Lauren'r', Polo Sport Ralph Lauren'r' and Polo Sport-RLX'r'
are strategically intended to increase the Company's access to international
markets. Catalina'r', Cole of California'r' and Anne Cole'r' products are sold
directly to department and specialty stores and through various license
agreements throughout the world. Although historically a small portion of the
Company's business was international, the Company believes that the strength of
the Designer Swimwear brand names will create an opportunity to increase its
international presence over the next several years. The Company's licensing
agreements with Speedo International, Ltd. geographically restrict the Company's
international use of the Speedo'r' and other brand names to the United States,
its territories and possessions, Canada, Mexico and the Caribbean Islands.

The Company has a Canadian subsidiary which engages in manufacturing, sales
and marketing activities. Net revenues of such Canadian operations contributed
$15.3 million of the Company's net revenues for fiscal 1999. With the exception
of the fluctuation of local currencies against the U.S. dollar, the Company does
not believe that the Canadian operations are subject to risks which are
significantly different from domestic operations.

DISTRIBUTION

The Company has a distribution center located in Los Angeles, California
with approximately 250,000 square feet and a facility in Sparks, Nevada with
approximately 340,000 square feet. These facilities are used to ship to the
Company's wholesale customers, retail stores and E-commerce customers. These
facilities utilize bar code technology to provide inventory management and
carton controls.

MANAGEMENT INFORMATION SYSTEMS

The Company continues to invest in computer hardware, software systems and
networks in order to provide comprehensive order processing, production,
accounting and management information.

The Company uses an EDI system to receive on-line orders from most of its
major wholesale customers. The EDI technology enables the Company to facilitate
the processing of customer orders and to collect sales information for planning
and forecasting.

The Company has point-of-sale registers and other software programs in the
Speedo'r' Authentic Fitness'r' Retail Division that enable rapid stock
replenishment at the store level and aid in merchandise planning.

IMPORTS AND IMPORT RESTRICTIONS

Although the Company imported approximately 72.7% of its finished products
in fiscal 1999, substantially all of its competition swimwear is sourced
domestically or manufactured in facilities in the U.S. The Company's fashion
swimwear for women is manufactured in the Company's facilities or is sourced
from domestic and international contractors. A portion of the Company's
manufacturing is performed by a related party (See Note 13 of Notes to
Consolidated Financial Statements). Imports from certain countries are subject
to the constraints imposed by bilateral agreements between the

United States and substantially all of the countries from which the Company
imports goods. These agreements impose quotas that limit the quantity of certain
types of goods, including many of those imported by the Company, which can be
imported into the United States from those countries. Such agreements also allow
the United States to impose, under certain conditions, restraints on the
importation of categories of merchandise that, under the terms of the
agreements, are not subject to specified limits. The bilateral agreements
through which quotas are imposed have been negotiated under the framework
established by the Arrangement Regarding International Trade in Textiles, known
as the Multifiber Arrangement. Many quota and tariff restrictions negotiated
under the Multifiber Arrangement are being phased out over periods of up to ten
years under the World Trade Organization.

The Company's continued ability to source products that it imports may be
adversely affected by additional bilateral agreements, unilateral trade
restrictions, significant decreases in import quotas, the disruption of trade
from exporting countries as a result of political instability or the imposition
of additional duties, taxes and other charges on imports.

EMPLOYEES

The Company and its subsidiaries employed approximately 1,100 employees at
July 3, 1999, less than 1% of whom were represented by a labor union. The
Company considers its relationship with employees to be good and has not
experienced interruptions of operations due to labor disagreements.

CUSTOMERS

The Company has over 3,000 customers worldwide. In fiscal 1999, Wal-Mart
accounted for approximately 11% of the Company's net revenues.

COMPETITION

The apparel industry is highly competitive. The Company's competitors
include apparel manufacturers of all sizes, some of which have substantially
greater resources than the Company.

The Company believes that it has a significant competitive advantage
because of high consumer recognition and acceptance of its brand names and its
strong presence and strong share of the market in the major sporting goods,
department and specialty store chains.

TRADEMARKS AND LICENSING AGREEMENTS

The Company has license agreements in perpetuity with Speedo International,
Ltd. which permit the Company to design, manufacture and market certain men's,
women's and children's apparel including swimwear, sportswear and a wide variety
of other products using the Speedo'r' trademark and certain other trademarks
including Speedo'r' Surf Walker'r' and Speedo'r' Authentic Fitness'r'. The
Company's license to use the Speedo'r' trademark and such other trademarks was
granted in perpetuity subject to certain conditions and is exclusive in the
United States, its territories and possessions, Canada, Mexico and the Caribbean
Islands. Speedo International, Ltd. retains the right to use or license such
brand names in other jurisdictions and actively uses or licenses such brand
names throughout the world outside of the Company's licensed areas. The
agreements provide for minimum royalty payments to be credited against future
royalty payments based on a percentage of net sales. Speedo International, Ltd.
has the right to approve any designs bearing the licensed trademark as defined
in the license agreements. The license agreements may be terminated, with
respect to a particular territory only in the event the Company does not pay
royalties, or abandons, the trademark in such territory. Also, the license
agreements may be terminated in the event the Company manufactures or is
controlled by a company that manufactures racing/competitive swimwear, swimwear
caps or swimwear accessories, under a different trademark, as specifically
defined in the license agreements. Speedo International, Ltd. is an affiliate of
Pentland. In addition, the Company has certain rights to sublicense the
Speedo'r' trademark within the geographic regions covered by the licenses.

In 1992, the Company entered into an agreement with Speedo Holdings B.V.,
and its successor Speedo International, Ltd., granting certain irrevocable
rights to the Company relating to the use of the

Authentic Fitness'r' name and service mark, which rights are in addition to the
rights under the license agreements with Speedo International, Ltd.

In October 1993, the Company entered into a worldwide license agreement
with Anne Cole and Anne Cole Design Studio Ltd. Under the worldwide licensing
agreement, the Company obtained the exclusive right in perpetuity to use the
Anne Cole'r' trademark for women's swimwear, activewear, beachwear and
children's swimwear, subject to certain terms and conditions. Under the license,
the licensee is required to pay certain minimum guaranteed annual royalties, to
be credited against earned royalties, based on a percentage of net sales. The
licensor has the right to approve products bearing the licensed trademark as
defined in the agreement.

In 1993, the Company entered into a worldwide license agreement with Oscar
de la Renta Licensing Corporation for the design, manufacture and marketing of
women's and girls' swimwear and activewear under the Oscar de la Renta'r' brand
name. The agreement granting the exclusive right to use the Oscar de la Renta'r'
trademark is valid for a term up to and including March 31, 2000 and provides
for the payment of certain minimum royalty payments to be credited against
earned royalty payments for each agreement year.

The Company owns other trademarks, the most important of which are White
Stag'r', Catalina'r', Sunset Beach'r' and Cole of California'r'.

The Company licenses the White Stag'r' brand name to Warnaco in perpetuity
for women's and children's non-athletic sportswear pursuant to a license
agreement which is royalty free for so long as Warnaco is the licensee. In 1992,
the Company entered into a non-exclusive license agreement with Wal-Mart
pursuant to which Wal-Mart has the right to source, distribute and sell men's,
women's and children's activewear, skiwear and fashion swimwear under the White
Stag'r' brand name. The Company designs and develops products for Wal-Mart in
connection with this license agreement.

The Company licenses the Catalina'r', White Stag'r' and Cole of
California'r' brand names to several licensees for a variety of products. These
agreements generally require the licensee to pay royalties and fees to the
Company based on a percentage of the licensee's net sales. The Company monitors
product design, development, quality and merchandising of its licensees and
meets with individual licensees from time to time to assure compliance with the
Company's overall marketing, merchandising and design strategies. Royalties
derived from such licenses were approximately $0.5 million, $0.7 million and
$0.5 million in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. In
fiscal 1994, the Company entered into an exclusive license agreement with
Warnaco pursuant to which Warnaco has the right to manufacture and distribute
men's and women's sportswear under the Catalina'r' brand name. In fiscal 1995,
the Company entered into a sub-license agreement with Warnaco to manufacture and
market women's intimate apparel under the Speedo'r' name. The Company recognized
royalty income of approximately $1.3 million, $1.4 million and $0.8 million from
these agreements in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. See
Note 13 of Notes to Consolidated Financial Statements.

The Company believes that only the trademarks mentioned herein are material
to the business of the Company.

BACKLOG

Backlog represents booked orders which, although terminable without
penalty, are believed by the Company to be firm. Because of the seasonality of
the Company's business, the Company's backlog varies over the course of the
year. Backlog usually peaks in November for swimwear. At September 27, 1999, the
Company's backlog was $116.6 million, an increase of 4.2% compared to the prior
year. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Seasonality.'

ITEM 2. PROPERTIES.

The principal executive offices of the Company are located at 6040 Bandini
Blvd., Commerce, California 90040 and are occupied pursuant to a lease which
expires in 2000. The Company also maintains executive offices at 90 Park Ave.,
New York, New York 10016 and 11111 Santa Monica Blvd., Los Angeles, CA 90025.
The 90 Park Ave. and 11111 Santa Monica Blvd. properties are occupied on month
to month leases from Warnaco.

The Company has manufacturing, distribution and administrative facilities
located in Sparks, Nevada (distribution facility), Los Angeles, California, (one
warehouse, administrative and manufacturing facility and one other manufacturing
facility), Vancouver, British Columbia, Canada (manufacturing and distribution
facility) and Montreal, Quebec, Canada (distribution facility). Certain of the
Company's manufacturing and warehouse facilities are also used for
administrative functions. All of the Company's facilities are leased. Lease
terms expire from 2000 to 2003.

The Company leases 138 retail store locations in various cities in the
United States and Canada. The leases expire from 1999 to 2008.

All of the Company's production and warehouse facilities are located in
appropriately designed buildings which are kept in good repair. All such
facilities have well maintained equipment and sufficient capacity to handle
present volumes. No significant facility is materially under utilized.

ITEM 3. LEGAL PROCEEDINGS.

The Company is not a party to any litigation, other than routine litigation
incidental to the business of the Company, which is, individually or in the
aggregate, material to the business of the Company.

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

None.

EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company, their ages and their positions are
set forth below.

NAME AGE POSITION
---- --- --------

Linda J. Wachner...................... 53 Director, Chairman of the Board and
Chief Executive Officer
Christopher G. Staff.................. 57 President and Chief Operating Officer
Susan Guensch......................... 39 President Speedo'r' Division
Michael P. Mc Hugh.................... 60 Senior Vice President and Chief
Financial Officer

Mrs. Linda J. Wachner has been a Director, Chairman of the Board and Chief
Executive Officer of the Company since its inception in May 1990. Mrs. Wachner
concurrently serves as and has been a Director, President and Chief Executive
Officer of The Warnaco Group, Inc. ('Warnaco') since August 1987, and the
Chairman of the Board of Warnaco since August 1991. Mrs. Wachner was a Director
and President of Warnaco from March 1986 to August 1987. Mrs. Wachner held
various positions, including President and Chief Executive Officer, with Max
Factor and Company from December 1978 to October 1984. Mrs. Wachner also serves
as a Director of Applied Graphics Technologies, Inc., the New York Stock
Exchange, Inc. and Warnaco.

Mr. Christopher G. Staff has been President and Chief Operating Officer of
the Company since February 1997. Mr. Staff served as President of the Speedo'r'
and White Stag'r'/Skiwear Divisions and Chief Operating Officer of the Company
from April 1992 until September 1994 and as President of the Company from May
1990 until April 1992. Mr. Staff also served as a Director of the Company from
May 1990 until September 1994. Mr. Staff served as President and Chief Executive
Officer of Van's, Inc. from September 1994 until June 1995 and as a consultant
to the apparel and sportswear industry from June 1995 until November 1996. Mr.
Staff rejoined the Company in November 1996.

Ms. Susan Guensch has been President of the Speedo'r' Division since July
1996. Ms. Guensch joined the Company in June 1984 as Assistant Merchandiser for
the Speedo'r' Division and since that time has served in various positions of
increasing responsibility with the Company and its predecessor.

Mr. Michael P. Mc Hugh has been the Senior Vice President and Chief
Financial Officer of the Company since May 1998. Mr. Mc Hugh served as Corporate
Vice President and Chief Financial Officer of J. Crew Group, Inc. from September
1986 to April 1998. From 1983 to 1986, Mr. Mc Hugh was Vice President of Finance
and Chief Financial Officer of the Regina Company and from 1977 to 1983 was
Controller of Operations for Revlon, Inc. Mr. Mc Hugh served as U.S. Controller
of Canada Dry Corporation from 1975 to 1977 and from 1968 to 1975 was with
Borden, Inc. holding various divisional positions including Controller, Group
Controller and Vice President of Finance and Administration.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's Common Stock is listed on the New York Stock Exchange under
the symbol 'ASM'. The table below sets forth, for the periods indicated, the
high and low sales prices of the Company's Common Stock, as reported on the New
York Stock Exchange Composite Tape.

PERIOD HIGH LOW
------ ---- ---

Fiscal 1998:
First quarter.......................................... 15 3/4 11
Second quarter......................................... 19 9/16 14 15/16
Third quarter.......................................... 21 15 7/8
Fourth quarter......................................... 18 7/8 14 3/8
Fiscal 1999:
First quarter.......................................... 15 3/4 10 1/2
Second quarter......................................... 18 1/4 13 1/8
Third quarter.......................................... 18 15 5/16
Fourth quarter......................................... 18 1/4 15 15/16
Fiscal 2000:
First quarter through September 27, 1999............... 18 9/16 15 15/16

A recent last sales price for the shares of Common Stock as reported on the
New York Stock Exchange Composite Tape was 17 3/4 on September 27, 1999. On
September 27, 1999 there were 131 holders of Common Stock, based upon the number
of holders of record and the number of individual participants in certain
security position listings.

The Company paid its initial quarterly cash dividend of 1.25[c] per share
on October 2, 1995. Since that time the Company has declared sixteen successive
quarterly cash dividends of 1.25[c] per share.

ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth for the periods indicated selected
consolidated financial data for the Company. This information should be read in
conjunction with the consolidated financial statements included elsewhere herein
and 'Management's Discussion and Analysis of Financial Condition and Results of
Operations.' The selected consolidated balance sheet data for the Company as of
July 1, 1995, July 6, 1996 and July 5, 1997 and the selected consolidated
financial data for the fiscal years ended July 1, 1995 and July 6, 1996 are
derived from audited consolidated financial statements not included herein. The
selected consolidated financial data for the Company for the fiscal years ended
July 5, 1997, July 4, 1998 and July 3, 1999 and as of July 4, 1998 and July 3,
1999 are derived from audited consolidated financial statements included
elsewhere herein.

SELECTED FINANCIAL DATA

FISCAL YEAR ENDED
------------------------------------------------------------
JULY 1, JULY 6, JULY 5, JULY 4, JULY 3,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Net revenues.................... $266,133 $309,609 $323,088 $367,484 $410,817
Gross profit.................... 97,696 75,398 (a) 132,296 148,664 163,254
Selling, general and
administrative expenses....... 52,578 91,723 (a) 76,456 87,124 94,617
Non-recurring item.............. -- 13,642 (a) -- -- --
Facility consolidations and
other......................... -- -- 3,354(b) 1,408(c) 3,324(d)
Depreciation and amortization... 6,549 15,462 9,824 10,351 11,177
-------- -------- -------- -------- --------
Income (loss) before interest,
income taxes, extraordinary
items and cumulative effect of
change in accounting
principle..................... 38,569 (45,429) 42,662 49,781 54,136
Interest expense................ 6,977 11,547 13,554 14,253 14,060
-------- -------- -------- -------- --------
Income (loss) before income
taxes, extraordinary items and
cumulative effect of change in
accounting principle.......... 31,592 (56,976) 29,108 35,528 40,076
Income taxes (benefit).......... 12,118 (17,623) 10,073 12,759 15,629
-------- -------- -------- -------- --------
Income (loss) before
extraordinary items and
cumulative effect of change in
accounting principle.......... 19,474 (39,353) 19,035 22,769 24,447
Extraordinary items............. -- (1,497)(e) -- -- --
-------- -------- -------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle..................... 19,474 (40,850) 19,035 22,769 24,447
Cumulative effect of change in
accounting principle.......... -- -- -- -- 2,518(f)
-------- -------- -------- -------- --------
Net income (loss)............... $ 19,474 $(40,850) $ 19,035 $ 22,769 $ 21,929
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Dividends on common stock....... -- $ 964 $ 1,127 $ 1,149 $ 1,005
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
PER SHARE DATA:
Net income (loss):
Basic...................... $1.10 $(2.08) $0.85 $1.02 $1.08
Diluted.................... $0.90 $(2.08) $0.85 $1.01 $1.06
Weighted average number of
shares of common stock
outstanding(g):
Basic...................... 17,779 19,607 22,362 22,310 20,359
Diluted.................... 21,712 19,607 22,514 22,510 20,684
PRODUCT LINE SUMMARY:
Net revenues:
Speedo'r'.................. $143,991 $161,920 $171,856 $198,420 $225,167
Designer Swimwear.......... 79,005 94,480 94,024 106,103 125,383
Speedo'r' Authentic
Fitness'r' Retail........ 20,418 38,135 47,786 56,764 60,267
Skiwear and other.......... 22,719 15,074 9,422 6,197 --
-------- -------- -------- -------- --------
$266,133 $309,609 $323,088 $367,484 $410,817
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Percentage of net revenues:
Speedo'r'.................. 54.1% 52.3% 53.2% 54.0% 54.8%
Designer Swimwear.......... 29.7% 30.5% 29.1% 28.9% 30.5%
Speedo'r' Authentic
Fitness'r' Retail........ 7.7% 12.3% 14.8% 15.4% 14.7%
Skiwear and other.......... 8.5% 4.9% 2.9% 1.7% --
-------- -------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------

(table continued on following page)

(table continued from previous page)

JULY 1, JULY 6, JULY 5, JULY 4, JULY 3,
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------

BALANCE SHEET DATA:
Working capital................. $ 66,051 $ 50,373 $ 53,118 $ 69,097 $ 46,641
Total assets.................... 278,239 281,466 321,872 316,162 323,226
Long-term debt (excluding
current maturities)........... 32,446 49,432 42,682 33,178 22,476
Stockholders' equity............ 141,908 116,723 133,708 150,842 131,601

(a) The total non-recurring charges and other items recorded in fiscal 1996
were $43.0 million after-tax (or $2.19 per diluted share) which included
costs to exit an activity, inventory, accounts receivable and other
reserves, a special bad debt and terminated merger costs.

(b) Reflects excess distribution costs, not covered by insurance, of $2.2
million after-tax (or $0.10 per diluted share) as a result of the flood at
the Company's Sparks, Nevada facility in January 1997. See Note 12 of Notes
to Consolidated Financial Statements.

(c) Reflects costs incurred for plant consolidation and retail store closures
of $0.9 million after-tax (or $0.04 per diluted share). See Note 12 of
Notes to Consolidated Financial Statements.

(d) Reflects costs incurred for plant consolidations of $2.0 million after-tax
(or $0.10 per diluted share). See Note 12 of Notes to Consolidated
Financial Statements.

(e) Reflects the write-off of deferred financing costs related to certain
indebtedness and the refinancing of the Company's credit agreement in March
1996.

(f) Effective with the 1999 fiscal year, the Company early adopted the
provisions of SOP 98-5, 'Reporting on the Costs of Start-up Activities'
('SOP 98-5'), which requires, among other things, that certain
pre-operating costs which had previously been deferred and amortized be
expensed as incurred. The Company recorded the impact as the cumulative
effect of a change in accounting principle of $2.5 million, net of income
tax benefits, or $0.12 per diluted share.

(g) All share and per share amounts have been restated to reflect the
two-for-one stock split effective February 10, 1994 and the impact of
Statement of Financial Accounting Standards No. 128, 'Earnings Per Share',
adopted effective July 4, 1998.

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

The Company's strategy is to leverage its leading brand names by entering
new channels of distribution and expanding its product lines. Key elements of
this strategy include opening Company-owned Speedo'r' Authentic Fitness'r'
retail stores, launching its E-commerce site -- Speedo.com in December 1998, and
expanding its product offerings through mass merchandisers and entering
international markets. The Company's accomplishments include (i) the successful
transition of the Speedo'r' brand through line extensions from a highly focused
competitive swimwear brand to a complete active fitness brand, (ii) the
repositioning of White Stag'r' as an activewear, outerwear and swimwear brand
for the mass merchandise market, (iii) the opening of 141 Company-owned
Speedo'r' Authentic Fitness'r' retail stores through September 27, 1999, which
has resulted in a new channel of distribution for Speedo'r' and Speedo'r'
Authentic Fitness'r' products, including the successful December
1998 launch of the Company's E-commerce site -- Speedo.com, (iv) the acquisition
of the Catalina'r', Cole of California'r' and Anne Cole'r' swimwear brands, and
the signing of the worldwide license in perpetuity for the Anne Cole'r'
trademark and (v) the signing of an exclusive worldwide license agreement with
The Polo/Lauren Company, L.P. and PRL USA, Inc. to produce and market Ralph
Lauren'r', Polo Sport Ralph Lauren'r' and Polo Sport-RLX'r' brand swimsuits,
bathing suits and coordinating cover-ups, tops and bottoms for women and girls.

Due primarily to the successful implementation of its business strategies,
the Company increased net revenues to $410.8 million in fiscal 1999 from $85.5
million in fiscal 1991, a compound annual growth rate of 21.7%.

RESULTS OF OPERATIONS

The table below summarizes certain operating information for the Company
for each of the last three fiscal years. This supplemental information should be
read in conjunction with the consolidated financial statements and notes thereto
provided elsewhere herein.

STATEMENT OF INCOME
(SELECTED DATA)

FISCAL YEAR ENDED
------------------------------------------------------------
% OF % OF % OF
JULY 5, NET JULY 4, NET JULY 3, NET
1997 REVENUES 1998 REVENUES 1999 REVENUES
---- -------- ---- -------- ---- --------
(IN MILLIONS)

Net revenues.............................. $323.1 100.0% $367.5 100.0% $410.8 100.0%
Cost of goods sold........................ 190.8 59.1% 218.8 59.5% 247.6 60.3%
------ ----- ------ ----- ------ -----
Gross profit.............................. 132.3 40.9% 148.7 40.5% 163.2 39.7%
Selling, administrative and general
expenses................................ 76.4 23.7% 87.1 23.7% 94.6 23.0%
Facility consolidations and other......... 3.4 1.4 3.3
Depreciation and amortization............. 9.8 10.4 11.2
------ ------ ------
Income before interest, income taxes and
cumulative effect of change in
accounting principle.................... 42.7 13.2% 49.8 13.5% 54.1 13.2%
Interest expense.......................... 13.6 4.2% 14.3 3.9% 14.1 3.4%
------ ------ ------
Income before income taxes and cumulative
effect of change in accounting
principle............................... 29.1 9.0% 35.5 9.7% 40.0 9.8%
Income taxes.............................. 10.1 12.7 15.6
------ ------ ------
Income before cumulative effect of change
in accounting principle................. $ 19.0 5.9% $ 22.8 6.2% $ 24.4 6.0%
------ ------ ------
------ ------ ------

COMPARISON OF FISCAL 1999 TO FISCAL 1998

Net revenues increased $43.3 million or 11.8% to $410.8 million in fiscal
1999 compared with $367.5 million in fiscal 1998.

SPEEDO'r' DIVISION. Net revenues increased $26.7 million or 13.5% to $225.2
million in fiscal 1999 compared with $198.4 million in fiscal 1998. The
increase in Speedo'r' net revenues reflects increased volumes in children's
swimwear, men's swimwear, accessories and Authentic Fitness'r' wear.

DESIGNER SWIMWEAR DIVISION. Net revenues increased $19.3 million or 18.2% to
$125.4 million in fiscal 1999 compared with $106.1 million in fiscal 1998.
The increase in Designer Swimwear net revenues reflects the successful
launch of the Ralph Lauren'r', Polo Sport Ralph Lauren'r' and Polo
Sport-RLX'r' lines in January 1999, and increases in Anne Cole'r',
Catalina'r', Cole of California'r', Sunset Beach'r' and private label.

SPEEDO'r' AUTHENTIC FITNESS'r' RETAIL STORES DIVISION. Net revenues
increased $3.5 million or 6.2% to $60.3 million in fiscal 1999 compared with
$56.8 million in fiscal 1998. Comparable store sales increased by 6.3% in
fiscal 1999. The Company opened six new stores including the E-commerce
site -- Speedo.com, and closed six other stores.

Gross profit in fiscal 1999 increased to $163.3 million from $148.7 million
in fiscal 1998. Gross profit as a percentage of net revenues were 39.7% in
fiscal 1999 compared to 40.5% in fiscal 1998. Gross profit as a percentage of
net revenues for fiscal 1998 reflected $17.2 million of reimbursements from the
Company's insurance carrier related to the Los Angeles, California distribution
center fire. Adjusting for the insurance reimbursement, gross profit as a
percentage of net revenues would have been 37.5% for fiscal 1998.

SPEEDO'r' DIVISION. Gross profit increased $22.3 million or 31.0% to $94.2
million in fiscal 1999 compared with $71.9 million in fiscal 1998. Gross
margins as a percent of net revenues were 41.8%

in fiscal 1999 compared with 36.2% in fiscal 1998. The improvement in
margins resulted from increased production off-shore at lower costs,
purchasing savings, and an improved off-price margin.

DESIGNER SWIMWEAR DIVISION. Gross profit increased $11.5 million or 36.7% to
$42.9 million in fiscal 1999 compared with $31.4 million in fiscal 1998
after adjustment for the fire proceeds. Gross margins as a percent of net
revenues were 34.2% in fiscal 1999 compared with 33.0% in fiscal 1998 after
adjustments for the fire proceeds. The improvement in margins resulted from
increased production off-shore at lower costs and a significant increase in
off-price margin.

SPEEDO'r' AUTHENTIC FITNESS'r' RETAIL STORES DIVISION. The gross profit
increased $4.8 million or 14.4% to $38.1 million in fiscal 1999 compared
with $33.3 million in fiscal 1998. Gross margins as a percent of net
revenues were 63.3% in fiscal 1999 compared with 58.7% in fiscal 1998. The
improved gross margins in fiscal 1999 versus fiscal 1998 are the result of
reduced merchandise markdowns.

Selling, general and administrative expenses for fiscal 1999 increased to
$94.6 million from $87.1 million in fiscal 1998. Selling, general and
administrative expenses as a percentage of net revenues decreased by 0.7% in
fiscal 1999 compared to fiscal 1998. This favorable reduction resulted from
warehouse and shipping expenses decreasing by 0.5% as a percentage of net
revenues in fiscal 1999 and regional selling expenses in the Speedo'r' division
also decreasing as a percentage of net revenues in fiscal 1999 compared to
fiscal 1998.

Depreciation and amortization expenses increased to $11.2 million in fiscal
1999 from $10.4 million in fiscal 1998. The increase in depreciation and
amortization expenses is the result of the full year impact of fiscal 1998
computer equipment and software additions as well as fiscal 1999 additions. The
opening of six new Speedo'r' Authentic Fitness'r' retail stores in fiscal 1999
and the full year impact of the six retail stores opened in fiscal 1998 also
contributed to the increase in depreciation and amortization in fiscal 1999.

Interest expense decreased to $14.1 million in fiscal 1999 from $14.3
million in fiscal 1998. As a percentage of net revenues, interest expense in
fiscal 1999 decreased to 3.4% of net revenues compared to 3.9% of net revenues
in fiscal 1998. The decrease in interest expense in fiscal 1999 is the result of
a significant improvement in working capital partially offset by the Company's
stock repurchase program.

The Company's effective income tax rate for fiscal 1999 was 39.0% compared
to 35.9% in fiscal 1998. The difference between the Company's effective income
tax rate and the statutory income tax rate of 35% is primarily due to the impact
of state income taxes. The increase in the effective income tax rate in fiscal
1999 from fiscal 1998 is primarily due to foreign tax deductions provided for in
fiscal 1998.

COMPARISON OF FISCAL 1998 TO FISCAL 1997

Net revenues increased $44.4 million or 13.7% to $367.5 million in fiscal
1998 compared with $323.1 million in fiscal 1997.

SPEEDO'r' DIVISION. Net revenues increased $26.6 million or 15.5% to $198.4
million in fiscal 1998 compared with $171.9 million in fiscal 1997. The net
revenue increase in Speedo'r' Division was driven by increases in Fitness
swimwear, kids and goggles and accessories.

DESIGNER SWIMWEAR DIVISION. Net revenues increased $12.2 million or 13.0% to
$106.2 million in fiscal 1998 compared with $94.0 million in fiscal 1997.
The increase in Designer Division net revenues is due to increases in Cole
of California'r' and private label.

SPEEDO'r' AUTHENTIC FITNESS'r' RETAIL STORES DIVISION. Net revenues
increased $9.0 million or 18.8% to $56.8 million in 1998 compared with $47.8
million in fiscal 1997. Comparable store sales increased by 7.9%. The
Company opened six new stores and closed two stores in fiscal 1998.

On January 18, 1998, one of the Company's three distribution centers,
located in Los Angeles, California suffered a fire. The building was damaged and
certain inventory stored in the distribution center was damaged or destroyed.
The Company is fully insured for any inventory lost as well as profits lost due
to business interruption and other incurred expenses. The Company recorded a
$36.8 million receivable from the insurance company related to this claim.

Gross profit in fiscal 1998 increased to $148.7 million from $132.3 million
in fiscal 1997. Gross profit as a percentage of net revenues were 40.5% in
fiscal 1998 compared to 40.9% in fiscal 1997. Gross profit as a percentage of
net revenues for fiscal 1998 also reflects $17.2 million of reimbursements from
the Company's insurance carrier related to lost gross profit from the previously
mentioned distribution center fire. Adjusting for the insurance reimbursement,
gross profit as a percentage of net revenues would have been 37.5% for fiscal
1998. The decrease in gross profit as a percentage of net revenues is primarily
the result of markdowns relating to the Company's strategic decision to sell
certain slow moving inventory ahead of the market in the third quarter of fiscal
1998 and other promotional selling during the fourth quarter of fiscal 1998
which resulted in a lowering of year-end inventory of 26.1% versus fiscal 1997.
Partially offsetting the impact of markdowns in fiscal 1998 was the production
of approximately 6.6 million swimsuits off-shore at lower costs, an increase of
32% over the 5 million produced in fiscal 1997.

SPEEDO'r' DIVISION. Gross profit increased $9.4 million or 15.0% to $71.9
million in fiscal 1998 compared to $62.5 million in fiscal 1997 after
adjusting for insurance proceeds. Gross margins as a percent of net revenues
were 36.2% in fiscal 1998 compared to 38.3% in fiscal 1997, after adjusting
for insurance proceeds. The decrease in the gross margin as a percent of net
revenues is due to the lower margin on off-price sales.

DESIGNER SWIMWEAR DIVISION. Gross profit decreased $5.2 million or 14.4% to
$31.4 million in fiscal 1998, after adjusting for the above mentioned fire
proceeds, when compared to fiscal 1997. Gross margin as a percent of net
revenues were 33.0% in fiscal 1998 compared to 38.9% in fiscal 1997. The
decreased margins experienced in fiscal 1998 in a number of brands were a
result of delays and cancellations due to the previously mentioned
distribution center fire in fiscal 1998.

SPEEDO'r' AUTHENTIC FITNESS'r' RETAIL STORES DIVISION. The gross profit
increased $5.7 million or 20.7% to $33.3 million in fiscal 1998 compared
with $27.6 million in fiscal 1997. Gross margins as a percent of net
revenues were 58.7% in fiscal 1998 compared with 57.8% in fiscal 1997.

Selling, general and administrative expenses for fiscal 1998 increased to
$87.1 million from $76.5 million in fiscal 1997. Selling, general and
administrative expenses as a percentage of net revenues for both fiscal 1998 and
fiscal 1997 were at 23.7%. Marketing expenses as a percentage of net revenues
decreased 3.2% in fiscal 1998 as a result of the Olympic Games promotions in
fiscal 1997. The decrease as a percentage of net revenues was offset by the full
year impact of the fiscal 1997 opening of 52 new Speedo'r' Authentic Fitness'r'
retail stores impacting fiscal 1998 and the six new stores opened in fiscal
1998.

Depreciation and amortization expenses increased to $10.4 million in fiscal
1998 from $9.8 million in fiscal 1997. The increase in depreciation and
amortization expenses primarily reflects the amortization of leasehold
improvements related to the full year impact of the fiscal 1997 opening of 52
new Speedo'r' Authentic Fitness'r' retail stores impacting fiscal 1998 and the
six new stores opened in fiscal 1998.

Interest expense increased to $14.3 million in fiscal 1998 from $13.6
million in fiscal 1997. As a percentage of net revenues, interest expense in
fiscal 1998 decreased to 3.9% of net revenues compared to 4.2% of net revenues
in fiscal 1997. The increase in interest expense in fiscal 1998 primarily
reflects the borrowing to fund the expansion of the Company's Speedo'r'
Authentic Fitness'r' retail stores and the related increase in working capital.
The Company's borrowing rate for fiscal 1998 automatically decreased to LIBOR
plus 1% from LIBOR plus 1.5% at the end of fiscal 1997 pursuant to the terms of
the Company's credit agreement.

The Company's effective income tax rate for fiscal 1998 was 35.9% compared
to 34.6% in fiscal 1997. The difference between the Company's effective income
tax rate and the statutory income tax rate of 35% reflects the impact of state
income taxes offset by the benefit of reversing the valuation allowance recorded
by the Company in fiscal 1996 related to net operating loss carry forwards.

CAPITAL RESOURCES AND LIQUIDITY

On September 6, 1996, the Company entered into a $200 million Credit
Agreement with GE Capital, The Bank of Nova Scotia, Societe Generale and Union
Bank of California (the '$200 Million Credit Agreement'). The $200 Million
Credit Agreement is for a term of five years and provided for a term loan (the
'Term Loan') in the amount of $50 million and a revolving loan facility (the
'Revolving Loan') in the amount of $150 million. On March 18, 1998, after a
syndication of the Company's $200

million credit facility was oversubscribed, the Company and its banks agreed to
increase the amount of credit available under the Company's Revolving Loan to
$165 million while maintaining the Company's outstanding balance of $45 million
on its Term Loan. Borrowing under the $200 Million Credit Agreement accrued
interest at the lenders' base rate or at LIBOR plus 1.5-2.0% during fiscal 1997
but decreased to LIBOR plus 1.0% in the first quarter of fiscal 1998. The rate
of interest payable on outstanding borrowings will be automatically reduced, to
as low as LIBOR plus .75%, as the Company's EBITDA to debt ratio improves to 2.5
to 1.

The $200 Million Credit Agreement as amended, allows the Company to
purchase up to $50 million of its Common Stock. The Company's Board of Directors
has authorized a stock repurchase program which currently allows the Company to
buy up to $50 million of its outstanding Common Stock. As of July 3, 1999, the
Company had purchased 3,307,800 shares of the Company's Common Stock at an
aggregate cost of approximately $49.7 million.

On December 23, 1998, the Company entered into a $50 million credit
agreement ('Trade Credit Facility') with certain lenders under the Company's
Credit Agreement for the issuance of letters of credit and trade financing. The
trade financing portion of the Trade Credit Facility has a $40 million limit and
accrues interest at the lender's base rate plus 0.50% or at LIBOR plus 1.50% on
the unpaid principal. The Trade Credit Facility expires in December 1999. In
conjunction with entering into the Trade Credit Facility, the Company also
amended certain portions of its Credit Agreement to facilitate such Trade Credit
Facility.

On October 2, 1995, the Company paid its first quarterly cash dividend of
1 1/4[c] per share, equivalent to an annual rate of 5[c] per share. The Company
has declared sixteen successive quarterly cash dividends. The Company believes
that its stock repurchase program as well as the regular quarterly cash dividend
demonstrates the Company's ongoing commitment to increase stockholder value.

The Company plans to expand its channels of distribution and provide growth
in its operations by opening additional retail stores. The Company has 139
stores open, including the E-commerce site and expects to open ten additional
stores during fiscal 2000. The cost of leasehold improvements, fixtures and the
additional working capital associated with the opening of an average new store
is expected to be approximately $250,000.

The Company's liquidity requirements have historically arisen primarily
from its debt service requirements and the funding of the Company's working
capital needs, primarily inventory and accounts receivable. The Company's
borrowing requirements are seasonal, with peak working capital needs generally
arising at the end of the third quarter and the beginning of the fourth quarter
of the fiscal year. The Company typically generates nearly all of its operating
cash flow in the fourth quarter of the fiscal year reflecting third and fourth
quarter shipments and the sale of inventory built during the first half of the
fiscal year.

The Company meets its seasonal working capital needs by utilizing amounts
available under its revolving line of credit. The Company has amended and
increased its lines of credit primarily to support the growth of its swimwear
divisions and to fund the roll-out of the Company's Speedo'r' Authentic
Fitness'r' retail stores.

Cash provided by operating activities was $61.8 million, $33.4 million and
$17.8 million in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. The
increase in cash flow from operating activities in fiscal 1999 compared to
fiscal 1998 of $28.4 million is primarily the result of the increase in accounts
payable brought about by the refinancing of the ASCO trade credit and an
increase in late fourth quarter purchases in fiscal 1999. The increase in cash
flow from operating activities in fiscal 1998 compared to fiscal 1997 of $15.6
million primarily reflects a significant decrease in inventory in fiscal 1998
due to improved inventory controls, primarily in raw materials, partially offset
by lower accounts payable related to the reduced inventory.

Cash used in investing activities was $9.8 million, $7.5 million and $15.1
million for fiscal 1999, fiscal 1998 and fiscal 1997, respectively. Cash used in
investing activities in fiscal 1999 of $9.8 million primarily represents
expenditures for computer equipment and capital expenditures for the continued
retail store expansion. Cash used in investing activities for fiscal 1998
primarily reflects capital expenditures of $6.7 million related to computer
equipment and systems, the opening of six Speedo'r' Authentic Fitness'r' retail
stores and an increase in intangible assets. Cash used in investing activities
for fiscal 1997 primarily

reflects capital expenditures of $16.9 million, primarily related to leasehold
improvements and other costs associated with the opening of 52 Speedo'r'
Authentic Fitness'r' retail stores and an increase in intangible and other
assets partially offset by the proceeds from the sale of other assets of $8.5
million.

Cash used in financing activities was $51.4 million, $26.5 million and $3.0
million for fiscal 1999, fiscal 1998 and fiscal 1997, respectively. Cash flow
from financing activities for fiscal 1999 primarily reflects the $40.8 million
purchase of treasury stock and $10.1 million of debt repayment of which $8.8
million is repayment of the Term Loan. Cash flow from financing activities for
fiscal 1998 primarily reflects repayments under the revolving credit facility of
$13.8 million, repayment of the term loan of $6.9 million and purchase of
treasury stock of $7.0 million. Cash flow from financing activities for fiscal
1997 primarily reflects the proceeds from the Term Loan offset by repayments of
debt (including the pay down of the Revolving Loan), repurchase of the Series A
Warrant, dividend payments and the payment of deferred debt issue costs.

The Company's Revolving Loan and Term Loan balances were approximately
$65.4 million and $37.5 million as of September 27, 1999, respectively.

The Company believes that funds available under its current $200 Million
Credit Agreement, as noted above, combined with cash flow to be generated from
future operations will be sufficient for the operations of the Company,
including debt service, dividend payments and costs associated with the
expansion of its Speedo'r' Authentic Fitness'r' retail stores for at least the
next twelve months. Although the Company believes that its current credit
agreement and cash flow to be generated from future operations will also be
sufficient for its long-term operations (periods beyond the next twelve months),
circumstances may arise that would require the Company to seek additional
financing. In those circumstances the Company expects to evaluate potential
additional sources of funds, for example, sales of additional common stock and
expanded or additional bank credit facilities.

YEAR 2000 COMPLIANCE

The Company has assessed and modified its computer systems and business
processes to provide for their continued functionality with the arrival of the
Year 2000 and is also assessing the readiness of third parties with which it
interacts.

In the third quarter of fiscal 1999, the Company successfully completed all
of the required modifications and internal testing with regards to its Year 2000
readiness. The Company incurred approximately $6.0 million in capital
expenditures for enhanced hardware and software applications and to achieve Year
2000 compliance, of which $2.2 million was incurred during fiscal 1998. The
Company also incurred approximately $0.5 million of pre-tax costs associated
with the required modifications, which were expensed as incurred.

Attention continues to be focused on compliance attainment efforts of
vendors and other third parties, including key system interfaces with customers
and suppliers. The failure of key third parties who do business with the Company
or governmental agencies to timely remediate their Year 2000 issues could cause
system failures or errors and business interruptions. The Company has contacted
key suppliers and vendors in order to determine the status of such third party
Year 2000 remediation plans. The Company recognizes the need for Year 2000
contingency plans in the event that the remediation efforts of its vendors,
suppliers and governmental and regulatory agencies are not timely completed.
Evaluation of suppliers' and vendors' readiness is ongoing and includes
identification of alternate suppliers and vendors whose systems are Year 2000
compliant.

Management believes that the broad-base of manufacturing capacity and
capability available to the Company mitigates the possibility of significant
interruption in its operations.

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

This Report includes 'forward-looking statements' within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended which represent the Company's
expectations or beliefs concerning future events that involve risks and
uncertainties, including those associated with the effect of national and
regional economic conditions, the overall level of consumer spending, the
performance of the Company's products within the prevailing retail environment,
customer acceptance of both new designs and newly-introduced product lines, and
financial difficulties encountered by customers. All statements other than
statements of historical facts included in this Annual Report, including,
without limitation, the statements under

'Management's Discussion and Analysis of Financial Condition,' are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable; it can give no
assurance that such expectations will prove to have been correct.

SEASONALITY

The Company's operations are seasonal. In fiscal 1999, approximately 71% of
the Company's net revenues were generated in the second half of the fiscal year
and substantially all of the Company's cash flow from operating activities is
generated in the fourth quarter of the fiscal year.

The following table summarizes the net revenues of the Company for each of
the quarters in fiscal 1998 and fiscal 1999:

THREE MONTHS ENDED
-------------------------------------------------------------------------------
OCT 4, JAN 3, APRIL 4, JULY 4, OCT 3, JAN 2, APRIL 3, JULY 3,
1997 1997 1998 1998 1998 1999 1999 1999
---- ---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)

Net revenues........... $37.0 $72.7 $127.9 $129.9 $39.6 $78.0 $144.3 $148.9

The Speedo'r' Division produces a variety of products during the year and
is seasonal in nature with approximately 72% of net revenues realized in the
second half of fiscal 1999. The Designer Swimwear Division is seasonal in
nature, with most customer orders placed in the July through December period and
product is shipped to customers starting in November. In fiscal 1999,
approximately 81% of net revenues for the Designer Swimwear Division were
realized in the second half of the year.

INFLATION

The Company does not believe that the relatively moderate levels of
inflation which have been experienced in the United States and Canada have had a
significant effect on its net revenues or its profitability. In the past, the
Company has been able to offset such effects by increasing prices or by
instituting improvements in efficiency.

IMPACT OF NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, 'Accounting for
Derivative Instruments and Hedging Activities'. SFAS No. 133 was effective for
financial statements for fiscal years beginning after June 15, 1999. However, in
June 1999, the FASB issued SFAS 137 'Deferral of the effective date of FASB
Statement No. 133' delaying the effective date of SFAS 133 until fiscal years
beginning after June 15, 2000. The Company is evaluating the application of the
new statement and the impact on the Company's consolidated financial position,
liquidity, cash flows and results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates, and selectively uses financial instruments
to manage these risks. The Company does not enter into financial instruments for
speculation or trading purposes. The Company has entered into an interest rate
swap agreement to reduce the impact of interest rate fluctuations on cash flow
and interest expense. As of the end of fiscal 1999, approximately $75 million of
interest-rate sensitive obligations were swapped to achieve a fixed rate of
6.66%, limiting the Company's risk to any future shift in interest rates. As of
the end of fiscal 1999, the net fair value liability of all financial
instruments (primarily interest rate swap agreements) with exposure to interest
rate risk was approximately $1.4 million. The potential decrease in fair value
resulting from a hypothetical 10% shift in interest rates would be approximately
$1.6 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information required by Item 8 of Part II is incorporated herein by
reference to the Consolidated Financial Statements filed with this report. See
Item 14 of Part IV.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not Applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by Item 10 is incorporated by reference from page
9 of Item 4 of Part I included herein and the Proxy Statement of the Company to
be filed with the Securities and Exchange Commission within 120 days of the 1999
fiscal year end, relating to the 1999 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by Item 11 is hereby incorporated by reference
from the Proxy Statement of the Company to be filed with the Securities and
Exchange Commission within 120 days of the 1999 fiscal year end, relating to the
1999 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by Item 12 is hereby incorporated by reference
from the Proxy Statement of the Company to be filed with the Securities and
Exchange Commission within 120 days of the 1999 fiscal year end, relating to the
1999 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by Item 13 is hereby incorporated by reference
from the Proxy Statement of the Company to be filed with the Securities and
Exchange Commission within 120 days of the 1999 fiscal year end, relating to the
1999 Annual Meeting of Stockholders.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) 1. --Consolidated Financial Statements of Authentic Fitness Corporation:
Report of Independent Accountants, PricewaterhouseCoopers LLP.
Consolidated Balance Sheets as of July 4, 1998 and July 3, 1999.
Consolidated Statements of Income for the Years Ended July 5, 1997,
July 4, 1998 and July 3, 1999.
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended July 5, 1997, July 4, 1998 and July 3,
1999.
Consolidated Statements of Cash Flows for the Years Ended July 5,
1997, July 4, 1998 and July 3, 1999.
Notes to Consolidated Financial Statements.
2. -- Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
which are not included with this additional financial data have been
omitted because they are not applicable or the required information
is shown in the Consolidated Financial Statements or Notes thereto.
3. -- List of Exhibits:
3.1 -- Restated Certificate of Incorporation of the Registrant, as
amended. (Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended July 5, 1997).
3.2 -- Bylaws of the Registrant (Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended July
3, 1993).
4.1 -- Rights Agreement dated as of August 19, 1999 between the registrant
and The Bank of New York, as Rights Agent. (Incorporated herein by
reference to the Company's Current Report on Form 8-K dated
August 19, 1999).
4.2 -- Amendment No. 1 to the Rights Agreement dated as of August 19, 1999
between the registrant and The Bank of New York, as Rights Agent.

10.1 -- Management Stock Subscription Agreement dated May 11, 1990 among
the registrant and the Management Participants listed therein.
(Incorporated herein by reference to the Company's Registration
Statement on Form S-1, No. 33-47907).
10.2 -- Amendment to Management Stock Subscription Agreement dated as of
June 1, 1992 among the registrant and the Management Participants
listed therein. (Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended July 3, 1993).
10.3 -- Registration Rights Agreement dated as of May 14, 1990 among the
registrant and the Management Participants listed therein.
(Incorporated herein by reference to the Company's Registration
Statement on Form S-1, No. 33-47907).
10.4 -- Amendment to Registration Rights Agreement dated as of June 1, 1992
among the registrant, Warnaco Inc., Pentland Ventures Ltd. and the
Management Participants listed therein. (Incorporated herein by
reference to the Company's Annual Report on Form 10-K for the
fiscal year ended July 3, 1993).
10.5 -- Series A Warrant for 633,200 shares of Class A Common Stock of the
Registrant (3,618,358 shares of Class A Common Stock as adjusted for
subsequent stock splits) issued to General Electric Capital
Corporation (Incorporated herein by reference to the Company's
Registration Statement on Form S-1, No. 33-47907).
10.6 -- Amendment to Series A Warrant dated as of June 1, 1992 between the
registrant and General Electric Capital Corporation. (Incorporated
herein by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended July 3, 1993).
10.7* -- License Agreement dated May 10, 1990 among Speedo International
Limited, Speedo International B.V., Warnaco Inc. and Warnaco
International Inc. and related assignments to Authentic Fitness
Products, Inc. (formerly S Acquisition Corp.) (United States, its
territories and possessions, and Canada). (Incorporated herein by
reference to the Company's Registration Statement on Form S-1, No.
33-47907).
10.8* -- License Agreement dated May 10, 1990 among Speedo Knitting Mills
Pty. Limited, Warnaco Inc. and Warnaco International Inc. and
related assignments to Authentic Fitness Products, Inc. (formerly S
Acquisition Corp.) (Mexico and the Caribbean Islands). (Incorporated
herein by reference to the Company's Registration Statement on Form
S-1, No. 33-47907).
10.9 -- Buying Agency Agreement dated as of May 14, 1990 among Authentic
Fitness Products, Inc. (formerly S Acquisition Corp.), 171173 Canada
Inc., Asco International Sourcing Limited and Soaring Force Limited.
(Incorporated herein by reference to the Company's Registration
Statement on Form S-1, No. 33-47907).
10.10 -- Amendment to Buying Agency Agreement dated as of June 1, 1992 among
Authentic Fitness Products, Inc. (formerly S Acquisition Corp.),
171173 Canada Inc., Asco International Sourcing Limited and Soaring
Force Limited. (Incorporated herein by reference to the Company's
Registration Statement on Form S-1, No. 33-47907).
10.11 -- Employment Agreement ('Employment Agreement') dated as of July 2,
1992 between the registrant and Linda J. Wachner. (Incorporated
herein by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended July 3, 1993).
10.12 -- First Amendment to Employment Agreement. (Incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended July 2, 1994).
10.13 -- Incentive Compensation Plan. (Incorporated herein by reference to
the Company's Registration Statement on Form S-1, No. 33-47907).
10.14 -- 1990 Key Management Stock Option Plan. (Incorporated herein by
reference to the Company's Registration Statement on Form S-1, No.
33-47907).
10.15 -- 1992 Long Term Stock Incentive Plan. (Incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended July 1, 1995).
10.16 -- 1993 Stock Option Plan for Non-Employee Directors. (Incorporated
herein by reference to the Company's Registration Statement on Form
S-3, No. 33-71540).
10.17 -- 1998 Stock Option Plan. (Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended July
4, 1998).
10.18 -- 1998 Stock Option Plan for Non-Employee Directors.
10.19 -- Form of Indemnification Agreements between the Registrant and its
directors and executive officers. (Incorporated herein by reference
to the Company's Registration Statement on Form S-1, No. 33-47907).

10.20 -- $200,000,000 Credit Agreement Dated as of September 6, 1996 among
Authentic Fitness Products, Inc., as Borrower, and Authentic Fitness
Corporation and The Bank of Nova Scotia and General Electric Capital
Corporation as Agents, and The Bank of Nova Scotia, as Administrative
Agent, Swing Line Bank and Fronting Bank, and General Electric Capital
Corporation as Documentation Agent and Collateral Agent. (Incorporated
herein by reference to the Company's Annual Report on Form 10-K for the
fiscal year ended July 6, 1996).
10.21 -- Restated Credit Agreement, dated as of March 18, 1998, among
Authentic Fitness Products, Inc. as Borrower and Authentic Fitness
Corporation, The Financial Institutions named as Lenders and The
Bank of Nova Scotia and General Electric Capital Corporation as
Agents, and The Bank of Nova Scotia as Administrative Agent, Paying
Agent, Swing Line Bank and Fronting Bank, and General Electric
Capital Corporation as Documentation Agent and Collateral Agent and
Societe Generale, as Co-Agent. (Incorporated herein by reference to
the Company's Report on Form 10-Q for the quarterly period ended
April 4, 1998).
10.22 -- Amended and Restated Stockholders Agreement dated as of June 1,
1992 among the registrant, Pentland Ventures Ltd., General Electric
Capital Corporation, Warnaco Inc. and the Management Participants
listed therein. (Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended July 3, 1993).
21.1 -- Subsidiaries of the registrant.
23.1 -- Consent of PricewaterhouseCoopers LLP.
27.1 -- Financial Data Schedule.

- ------------

* Confidential treatment granted.

(b) Reports on Form 8-K.

No reports on Form 8-K were filed by the Registrant in the last quarter of
fiscal 1999.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 30th day of
September 1999.

AUTHENTIC FITNESS CORPORATION

By: /s/ LINDA J. WACHNER
...................................
LINDA J. WACHNER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ LINDA J. WACHNER Chairman of the Board of Directors; September 30, 1999
...................................... Chief Executive Officer (Principal
(LINDA J. WACHNER) Executive Officer)

/s/ MICHAEL P. MC HUGH Senior Vice President and Chief September 30, 1999
...................................... Financial Officer (Principal
(MICHAEL P. MC HUGH) Financial and Accounting Officer)

/s/ STANLEY S. ARKIN Director September 30, 1999
......................................
(STANLEY S. ARKIN)

/s/ STUART D. BUCHALTER Director September 30, 1999
......................................
(STUART D. BUCHALTER)

/s/ JOSEPH A. CALIFANO, JR. Director September 30, 1999
......................................
(JOSEPH A. CALIFANO, JR.)

/s/ WILLIAM S. FINKELSTEIN Director September 30, 1999
......................................
(WILLIAM S. FINKELSTEIN)

/s/ ROBERT D. WALTER Director September 30, 1999
......................................
(ROBERT D. WALTER)

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
AUTHENTIC FITNESS CORPORATION

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)1 on page 19 present fairly, in all material respects,
the financial position of Authentic Fitness Corporation and its subsidiaries at
July 3, 1999 and July 4, 1998, and the results of their operations and their
cash flows for each of the three years in the period ended July 3, 1999, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14(a)2 on page 19 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PRICEWATERHOUSECOOPERS LLP

Los Angeles, California
August 13, 1999

F-1

AUTHENTIC FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS

JULY 4, JULY 3,
1998 1999
---- ----
(IN THOUSANDS EXCEPT
FOR SHARE AMOUNTS)

ASSETS
Current assets:
Cash................................................... $ 638 $ 1,216
Accounts receivable -- net of allowances of
$4,864 -- 1998 and $7,067 -- 1999 (includes insurance
claim receivable of $12,276 -- 1998 and
$6,738 -- 1999)....................................... 114,710 123,850
Accounts receivable from affiliates.................... 7,250 5,189
Inventories............................................ 63,910 72,257
Other current assets................................... 8,080 7,056
-------- --------
Total current assets.............................. 194,588 209,568
Property, plant and equipment, net (Note 4)................. 50,417 50,265
Other assets, net (Note 5).................................. 71,157 63,393
-------- --------
$316,162 $323,226
-------- --------
-------- --------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilites:
Borrowing under revolving credit facility.............. $ 61,963 $ 63,019
Current maturities of long-term debt................... 9,324 11,826
Accounts payable....................................... 23,429 49,401
Payable to affiliates.................................. 16,604 22,299
Other accrued expenses................................. 6,636 7,603
Accrued income taxes................................... 4,386 6,454
Deferred income taxes.................................. 3,149 2,325
-------- --------
Total current liabilities......................... 125,491 162,927
Long-term debt.............................................. 33,178 22,476
Deferred income taxes....................................... 6,651 6,222
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred Stock, $.01 par value, 15,000,000 shares
authorized; none outstanding.......................... -- --
Common Stock, $.001 par value, shares authorized
60,000,000; issued 22,990,086 -- 1998 and
23,050,900 -- 1999.................................... 23 23
Additional paid-in capital............................. 163,164 163,770
Accumulated other comprehensive income (loss).......... (1,173) (1,105)
Retained earnings (accumulated deficit)................ (2,286) 18,638
Treasury stock, at cost (555,700 shares -- 1998 and
3,307,800 shares -- 1999)............................. (8,886) (49,725)
-------- --------
Total stockholders' equity........................ 150,842 131,601
-------- --------
$316,162 $323,226
-------- --------
-------- --------

The accompanying notes are an integral part of these consolidated financial
statements.

F-2

AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED
------------------------------------------
JULY 5, JULY 4, JULY 3,
1997 1998 1999
---- ---- ----
(IN THOUSANDS EXCEPT SHARE AND PER SHARE
INFORMATION)

Net revenues............................................... $323,088 $367,484 $410,817
Cost of goods sold......................................... 190,792 218,820 247,563
-------- -------- --------
Gross profit............................................... 132,296 148,664 163,254
Selling, general and administrative expenses............... 76,456 87,124 94,617
Facility consolidations and other.......................... 3,354 1,408 3,324
Depreciation and amortization.............................. 9,824 10,351 11,177
-------- -------- --------
Income before interest, income taxes and cumulative effect
of change in accounting principle........................ 42,662 49,781 54,136
Interest expense........................................... 13,554 14,253 14,060
-------- -------- --------
Income before income taxes and cumulative effect of change
in accounting principle.................................. 29,108 35,528 40,076
Provision for income taxes................................. 10,073 12,759 15,629
-------- -------- --------
Income before cumulative effect of change in accounting
principle................................................ 19,035 22,769 24,447
Cumulative effect of change in accounting principle........ -- -- 2,518
-------- -------- --------
Net income................................................. $ 19,035 $ 22,769 $ 21,929
-------- -------- --------
-------- -------- --------
Basic earnings per common share:
Income before cumulative effect of change in
accounting principle................................ $0.85 $1.02 $1.20

Cumulative effect of change in accounting principle... -- -- (0.12)
-------- -------- --------
Basic earnings per common share............................ $0.85 $1.02 $1.08
-------- -------- --------
-------- -------- --------
Diluted earnings per common share:
Income before cumulative effect of change in
accounting principle................................ $0.85 $1.01 $1.18
Cumulative effect of change in accounting principle... -- -- (0.12)
-------- -------- --------
Diluted earnings per common share.......................... $0.85 $1.01 $1.06
-------- -------- --------
-------- -------- --------
Weighted average number of shares of common stock
outstanding:
Basic................................................. 22,362,350 22,310,089 20,358,602
---------- ---------- ----------
---------- ---------- ----------
Diluted............................................... 22,513,513 22,509,736 20,683,596
---------- ---------- ----------
---------- ---------- ----------

The accompanying notes are an integral part of these consolidated financial
statements.

F-3

AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME

ACCUMULATED
SHARES OF OTHER RETAINED
COMMON ADDITIONAL COMPREHENSIVE EARNINGS/ TREASURY TOTAL
STOCK COMMON PAID-IN INCOME (ACCUMULATED STOCK, STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL (LOSS) DEFICIT) AT COST EQUITY
----------- ----- ------- ------ -------- ------- ------
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)

Balance at July 6, 1996..... 20,524,721 $21 $159,239 $ (723) $(41,814) $ -- $116,723
---------- --- -------- ------- -------- -------- --------
Net income.................. 19,035 19,035
Translation adjustments..... (18) (18)
--------
Comprehensive income.... 19,017
Exercise of options......... 86,000 -- 949 949
Dividends declared.......... (1,127) (1,127)
Exercise of Series A
Warrant................... 1,809,009 2 (2) --
Purchase of shares of
treasury stock............ (125,000) -- (1,854) (1,854)
---------- --- -------- ------- -------- -------- --------

Balance at July 5, 1997..... 22,294,730 23 160,186 (741) (23,906) (1,854) 133,708
---------- --- -------- ------- -------- -------- --------
Net income.................. 22,769 22,769
Translation adjustments..... (432) (432)
--------
Comprehensive income.... 22,337
Exercise of options......... 570,356 -- 2,978 2,978
Dividends declared.......... (1,149) (1,149)
Purchase of shares of
treasury stock............ (430,700) -- (7,032) (7,032)
---------- --- -------- ------- -------- -------- --------

Balance at July 4, 1998..... 22,434,386 23 163,164 (1,173) (2,286) (8,886) 150,842
---------- --- -------- ------- -------- -------- --------
Net income.................. 21,929 21,929
Translation adjustments..... 68 68
--------
Comprehensive income.... 21,997
Exercise of options......... 60,814 -- 606 606
Dividends declared.......... (1,005) (1,005)
Purchase of shares of
treasury stock............ (2,752,100) -- (40,839) (40,839)
---------- --- -------- ------- -------- -------- --------

Balance at July 3, 1999..... 19,743,100 $23 $163,770 $(1,105) $ 18,638 $(49,725) $131,601
---------- --- -------- ------- -------- -------- --------
---------- --- -------- ------- -------- -------- --------

The accompanying notes are an integral part of these consolidated financial
statements.

F-4

AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED
------------------------------
JULY 5, JULY 4, JULY 3,
1997 1998 1999
---- ---- ----
(IN THOUSANDS)

Cash flows from operating activities:
Net income................................................ $ 19,035 $ 22,769 $ 21,929
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for uncollectible accounts receivable........ 20,135 27,188 27,115
Depreciation and amortization.......................... 9,824 10,351 11,177
Amortization of deferred financing costs............... 1,208 1,454 1,772
Amortization of other assets........................... -- 2,607 1,215
Gain on disposal of other assets, net.................. (2,439) -- --
Income taxes........................................... 4,665 4,715 (1,253)
Facility consolidations and other...................... -- -- 3,074
Cumulative effect of change in accounting principle.... -- -- 4,128
Changes in assets and liabilities:
Accounts receivable.................................... (31,039) (46,690) (39,732)
Insurance claim receivable............................. (9,501) (2,775) 5,538
Inventories............................................ (21,690) 22,557 (9,044)
Other current assets................................... 4,035 (1,961) 1,024
Accrued income taxes................................... 11,352 2,619 2,067
Accounts payable....................................... 14,482 (10,131) 31,667
Other accrued expenses................................. (2,240) 725 1,157
-------- -------- --------
Net cash provided by operating activities................... 17,827 33,428 61,834
-------- -------- --------
Cash flows from investing activities:
Proceeds from the sale of other assets................. 8,500 -- --
Purchases of fixed assets.............................. (16,901) (6,716) (9,905)
Purchase of intangible assets and other assets......... (7,154) (2,012) (1,784)
Other, net............................................. 451 1,220 1,852
-------- -------- --------
Net cash used in investing activities....................... (15,104) (7,508) (9,837)
-------- -------- --------
Cash flows from financing activities:
Net borrowing (repayments) under revolving credit
facility............................................. (42,438) (13,813) 1,056
Net proceeds from the sale of Common Stock and exercise
of options........................................... 955 2,978 606
Issuances of long-term debt............................ 50,274 -- --
Payment of deferred financing fees..................... (5,669) (581) (1,127)
Repayments of debt..................................... (3,117) (6,931) (10,110)
Dividends.............................................. (1,127) (1,149) (1,005)
Purchase of treasury stock............................. (1,854) (7,032) (40,839)
-------- -------- --------
Net cash used in financing activities....................... (2,976) (26,528) (51,419)
-------- -------- --------
Net increase (decrease) in cash............................. (253) (608) 578
Cash -- beginning of year................................... 1,499 1,246 638
-------- -------- --------
Cash -- end of year......................................... $ 1,246 $ 638 $ 1,216
-------- -------- --------
-------- -------- --------

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation and presentation. The accompanying consolidated
financial statements include the accounts of the Company and all subsidiaries
for the fiscal years ended July 5, 1997, July 4, 1998 and July 3, 1999. All
significant intercompany accounts and transactions have been eliminated. Certain
amounts have been reclassified to conform to the current year presentation.

Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Comprehensive income and foreign currency translation. Comprehensive income
consists of net income and foreign currency translation adjustments. For
operations outside of the U.S. that prepare financial statements in currencies
other than the U.S. dollar, the Company translates income statement amounts at
average exchange rates for the year and translates assets and liabilities at
year-end exchange rates. The translation adjustments are applied directly to
stockholders' equity as a part of accumulated other comprehensive income.

Inventories. Inventories are stated at the lower of cost, determined on a
first-in first-out basis, or market.

Advertising expenses. Advertising costs, primarily print advertising, are
expensed when the advertisement is first shown. Advertising expense for the
years ended July 5, 1997, July 4, 1998 and July 3, 1999 were approximately
$20,432,000, $12,909,000, and $15,208,000, respectively.

Prepaid expenses. Design, sample and certain selling costs (primarily
product books) for the upcoming season are deferred and amortized using the
straight-line method over the season to which they pertain.

Pre-opening and start-up costs. Effective with the beginning of fiscal
1999, the Company early adopted the provisions of SOP 98-5 requiring that
start-up costs, as defined, be expensed as incurred. The Company recognized
$2,518,000, after taxes, as the cumulative effect of change in accounting
principle to write-off the balance of unamortized deferred start-up costs as of
the beginning of fiscal 1999.

Property, plant and equipment: Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are provided over the lesser of the estimated useful lives of the
assets or term of the capital lease, using the straight-line method, as
summarized below:

Buildings and improvements.................................. 20-40 years
Machinery and equipment..................................... 3-10 years
Furniture and fixtures...................................... 7-10 years

Assets under capital lease and related amortization of capitalized leases
are included in property, plant and equipment and accumulated depreciation and
the associated liability in debt.

Intangible assets. Amortization of licenses and trademarks is provided
using the straight-line method over the economic lives of the assets, which is
principally 20 years. Excess of cost over net assets acquired is amortized using
the straight-line method over 40 years. The Company periodically reviews the
carrying value of intangible assets for recoverability based on future
undiscounted cash flow.

Deferred financing costs. Deferred financing costs are amortized over the
life of the related debt using the interest method.

Income taxes. Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns.

F-6

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Revenue recognition. Revenue is recognized when goods are shipped to
customers. Returns and allowances are provided for at the time of sale.

Concentration of credit risk. The Company sells its products to department
stores, sporting goods stores, mass merchandisers and specialty outlets
primarily in the United States and Canada. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral. Credit losses have been within management's expectations.

Earnings Per Share. In February 1997, the Financial Accounting Standards
Board ('FASB') issued Statement of Financial Accounting Standards ('SFAS')
No. 128 'Earnings Per Share' ('SFAS No. 128'), which revised the methodology of
calculating earnings per share and requires the dual presentation of basic and
diluted earnings per share. Basic earnings per share is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding in each year. Diluted earnings per share is computed by
dividing income available to common stockholders plus income associated with
dilutive securities by the weighted average number of common shares outstanding
plus any potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock in each year.
The Company adopted SFAS No. 128 in the second quarter of fiscal 1998. All
earnings per share amounts for all periods presented have been restated to
conform to the SFAS No. 128 requirements.

Stock Based Compensation. Compensation cost attributable to stock option
and similar plans is recognized based on the difference, if any, between the
closing market price of the stock on the date of grant over the exercise price
of the option. The Company has not issued any stock options with an exercise
price less than the closing market price of the stock on the date of grant.

Accounting changes. In June 1998, the FASB issued SFAS No. 133, 'Accounting
for Derivative Instruments and Hedging Activities'. SFAS No. 133 was originally
effective for fiscal years beginning after June 15, 1999. However, in June 1999,
the FASB issued SFAS 137 'Deferral of the effective date of FASB Statement
No. 133' delaying the effective date of SFAS 133 until fiscal years beginning
after June 15, 2000. The Company is evaluating the application of the new
statement and the impact on the Company's consolidated financial position,
liquidity, cash flows and results of operations.

2 -- INVENTORIES

Inventories consist of the following (in thousands):

JULY 4, JULY 3,
1998 1999
---- ----

Raw materials and work in process......................... $17,754 $22,012
Finished goods............................................ 46,156 50,245
------- -------
$63,910 $72,257
------- -------
------- -------

3 -- OTHER CURRENT ASSETS

Prepaid design, sample and certain selling costs (primarily product books)
relating to the upcoming seasons which are included in other current assets
amounted to $4,097,000 and $3,529,000 at July 4, 1998 and July 3, 1999,
respectively.

F-7

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4 -- PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is recorded at cost and consist of the
following (in thousands):

JULY 4, JULY 3,
1998 1999
---- ----

Land.................................................... $ 238 $ 177
Buildings and improvements.............................. 1,038 --
Machinery and equipment................................. 20,912 24,744
Leasehold improvements.................................. 34,546 35,485
Furniture and fixtures.................................. 16,972 17,560
-------- --------
73,706 77,966
Accumulated depreciation................................ (23,289) (27,701)
-------- --------
$ 50,417 $ 50,265
-------- --------
-------- --------

Machinery and equipment under capital leases amounted to approximately
$1,599,000 (net of accumulated depreciation of $1,734,000) and $2,660,000 (net
of accumulated depreciation of $2,471,000) as of July 4, 1998 and July 3, 1999,
respectively.

Depreciation expense was $6,644,000, $7,190,000 and $8,056,000 for the
fiscal years ended July 5, 1997, July 4, 1998 and July 3, 1999, respectively.
During the fiscal years ended July 5, 1997, July 4, 1998 and July 3, 1999, the
Company capitalized approximately $177,000, $84,000 and $79,000 of interest
costs related to the construction of certain fixed assets.

5 -- OTHER ASSETS

As of July 3, 1999, other assets consists of deferred financing costs of
$3,937,000 (net of accumulated amortization of $4,482,000), licenses, trademarks
and other assets of $31,335,000 (net of accumulated amortization of $22,893,000)
and excess of cost over net assets acquired of $28,121,000 (net of accumulated
amortization of $12,160,000). As of July 4, 1998, other assets consists of
deferred financing costs of $4,582,000 (net of accumulated amortization of
$5,663,000), licenses, trademarks and other assets of $37,586,000 (net of
accumulated amortization of $22,542,000) and excess of cost over net assets
acquired of $28,989,000 (net of accumulated amortization of $11,293,000).

6 -- DEBT

On September 6, 1996, the Company entered into a $200 Million Credit
Agreement (the '$200 Million Credit Agreement') with GE Capital, The Bank of
Nova Scotia, Societe Generale and Union Bank of California. The $200 Million
Credit Agreement is for a term of five years expiring September 1, 2001.
Borrowing under the $200 Million Credit Agreement accrued interest at the
lenders base rate or at LIBOR plus 1.5-2.0%. In September 1997, the Company's
interest rate on outstanding borrowing under the $200 Million Credit Agreement
was automatically reduced to LIBOR plus 1.00% (approximately 6.36% at July 3,
1999). On December 12, 1997, the Company amended its $200 Million Credit
Agreement such that the Company's ability to purchase its own Common Stock was
increased to $20,000,000. On March 18, 1998, after a syndication of the
Company's $200 million credit facility was oversubscribed, the Company and its
banks agreed to increase the amount of credit available under the Company's
revolving loan (the 'Revolving Loan') from $150 million to $165 million
('Restated Credit Agreement') while maintaining the Company's outstanding
balance of $45 million on its term loan (the 'Term Loan'). In September 1998,
the Company amended the Restated Credit Agreement (the 'Credit Agreement') such
that the Company's ability to purchase its own Common Stock was increased to $50
million. See Note 7 of Notes to Consolidated Financial Statements. The terms of
the Company's Credit Agreement are the same as those of the $200 Million Credit
Agreement. The Company is also required to pay a commitment fee on the unused
portion of the Revolving Loan on the average daily unused

F-8

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

revolving loan commitment. Commitment fees are included in interest expense and
amounted to $283,000, $381,000 and $576,000 for the years ended July 5, 1997,
July 4, 1998 and July 3, 1999, respectively.

The rate of interest payable on outstanding borrowing under the Credit
Agreement will be automatically reduced as the Company's debt to EBITDA ratio
improves and can be reduced to as low as LIBOR plus .75% as the Company's EBITDA
to debt ratio improves to 2.5 to 1. The commitment fee payable on the unused
revolving loan commitment will also be automatically reduced as the Company's
EBITDA to debt ratio improves and can be reduced to as low as .25% per annum.

Borrowing under the Credit Agreement is secured by substantially all of the
assets of the Company. The collateral will be automatically released when the
Company achieves an investment grade implied senior debt rating, as determined
by certain credit rating agencies. In addition, the Credit Agreement contains
various restrictions and covenants and requires the Company to maintain certain
financial ratios relating to interest and lease coverage, minimum adjusted net
worth, maximum total debt to EBITDA, minimum EBITDA and limits the amount of
capital expenditures the Company may incur in any one fiscal year. The Company
was in compliance with all its covenants at July 3, 1999.

In June 1998, the Company entered into an interest rate swap agreement (the
'Swap Agreement') with a bank that is a lender in the Restated Credit Agreement.
The Swap Agreement allows the Company to convert variable rate borrowings with a
notional amount of $75,000,000 to a fixed rate interest rate. Borrowings under
the Swap Agreement are currently fixed at 6.66% until maturity in
September 2003. As of July 3, 1999, the variable rate under the Swap Agreement
of LIBOR is approximately 5.36%. Differences between the fixed interest rate and
the variable interest rate are settled quarterly and resulted in increased
interest expense of approximately $709,000 for the year ended July 3, 1999.

The weighted averaged interest rate on borrowings outstanding was 6.7% per
annum and 6.4% per annum at July 4, 1998 and July 3, 1999, respectively.

Long-term debt consists of amounts due under the Company's Term Loan and
obligations due under capital leases. The Term Loan is payable in nine
semi-annual installments commencing on June 30, 1997 with a final installment of
$7,500,000 due on September 1, 2001. Amounts due under capital leases as of
July 4, 1998 and July 3, 1999 were approximately $1,252,000 and $1,802,000,
respectively. Approximate maturities of long-term debt as of July 3, 1999 are as
follows (in thousands):

FISCAL YEAR AMOUNT
- ----------- ------

2000........................................................ $11,826
2001........................................................ 14,538
2002........................................................ 7,938

In April 1995, the Company entered into an agreement ('Collar Agreement')
with a bank. The terms of the Collar Agreement provided that the Company's
interest rate on $40,000,000 of debt would not fall below 6.25% or rise above
7.25% unless the prevailing LIBOR rate rose above 9% in which case the Company's
interest rate would have been LIBOR plus 1.50% as defined under the Credit
Agreement, as noted above. The cost to the Company of entering the Collar
Agreement was $116,000 and was amortized over the life of the Collar Agreement
using the straight-line method. The additional interest expense to the Company
for the year ended July 5, 1997 related to the Collar Agreement was

F-9

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately $46,000. The Collar Agreement matured on February 24, 1997.
Interest payments/receipts on the Collar Agreement were made quarterly.

Costs incurred to secure debt financing of the Company have been classified
as deferred financing costs. These costs are amortized over the life of the
related debt instrument using the interest method. Amortization of deferred
financing costs amounted to $1,208,000, $1,454,000 and $1,772,000 for the fiscal
years ended July 5, 1997, July 4, 1998 and July 3, 1999, respectively.

The Company's lender issues letters of credit guaranteeing the Company's
performance under certain trade purchase agreements. The letters of credit are
issued under the terms of the Company's credit facility. Total letters of credit
outstanding were $1,484,000 and $1,858,000 at July 4, 1998 and July 3, 1999,
respectively.

7 -- CAPITAL STOCK

On October 2, 1995 the Company paid its first quarterly dividend on its
Common Stock. Total dividends paid during the years ended July 5, 1997, July 4,
1998 and July 3, 1999 were $1,127,000, $1,149,000 and $1,005,000, respectively.

In connection with the purchase of the assets of the Activewear Division of
Warnaco and the initial capitalization of the Company, the Company granted to a
major stockholder the option to purchase Class A Common Stock of the Company
should the investor's ownership of issued and outstanding Common Stock fall
below 50%. The investor was entitled to purchase unissued Common Stock of the
Company (at fair value) sufficient to increase the investor's ownership of
Common Stock of the Company to more than 50% of all issued and outstanding
Common Stock. The Company and the major stockholder revised, upon the closing of
the Initial Public Offering of the Company's common stock ('IPO'), the option
agreement, which had allowed the major stockholder to purchase shares to
maintain its 50% interest at all times, to an option, for as long as the major
stockholder owns 20% or more of the outstanding Common Stock of the Company to
maintain its percentage interest in the outstanding Common Stock of the Company
in the event of certain issuance's of Common Stock by the Company. As of
July 3, 1999, the major stockholder held more than 20% of the Company's
outstanding Common Stock.

The Company's Board of Directors has authorized a stock repurchase program
which currently allows the Company to buy up to $50,000,000 of its outstanding
Common Stock. As of July 3, 1999 the Company had purchased 3,307,800 shares of
its Common Stock amounting to $49,725,000.

On August 19, 1999, the Company's Board of Directors authorized the
adoption of a stockholders' rights plan. Under the plan, rights to purchase
stock, at a rate of one right for each share of Common Stock held, were
distributed to holders of record on August 31, 1999 and automatically attach to
shares issued thereafter. Under the plan, the rights attach to the Common Stock
and are not represented by separate rights certificates, until, and generally
become exercisable only after, a person or group (i) acquires 15% or more of the
Company's outstanding Common Stock or (ii) commences a tender offer that would
result in such a person or group owning 15% or more of the Company's Common
Stock. When the rights first become exercisable, a holder will be entitled to
buy from the Company a unit consisting of one one-thousandth of a share of
Series A Junior Participating Preferred Stock of the Company at a purchase price
of $75. However, if any person acquires 15% or more of the Company's Common
Stock other than pursuant to a qualified offer or as provided for in the rights
plan, each right not owned by a 15% or more stockholder would become exercisable
for Common Stock of the Company (or in certain circumstances, other
consideration) having a market value equal to twice the exercise price of the
right. The rights expire on August 31, 2009, except as otherwise provided in the
plan.

F-10

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8 -- WARRANTS

At May 14, 1990, the Company issued a warrant for the purchase of 3,618,358
shares (Series A Warrant) of its Common Stock for a nominal exercise price per
share. On September 13, 1995, the Company purchased from GE Capital one-half of
the shares available for purchase under the Series A Warrant. During the first
quarter of fiscal 1997, GE Capital exercised the remaining portion of the
Series A Warrant and acquired 1,809,009 shares of the Company's Common Stock.

9 -- STOCK OPTIONS

The 1990 Key Management Stock Purchase Option Plan (the 'Option Plan')
provided for the granting of options to key employees to purchase the Company's
Common Stock at an exercise price of $.00875 per share. Options to purchase
286,668 shares of Common Stock were granted under the plan. At July 3, 1999, no
options were outstanding under the Option Plan.

The 1992 Long Term Incentive Plan (the 'Stock Plan') was adopted by the
Board of Directors on May 7, 1992. In November 1994, the stockholders approved
an amendment to the Stock Plan whereby the number of options available for grant
under the Stock Plan increases by an amount equal to 3% of the outstanding
shares of Common Stock of the Company on the first day of each fiscal year. As a
result, 840,312 options were available for grant under the Stock Plan as of
July 3, 1999.

In November 1993, the stockholders approved and the Company adopted the
1993 Stock Option Plan for Non-Employee Directors ('Directors Plan'). The
Directors Plan provided for awards of non-qualified stock options to Directors
of the Company who are not employees of the Company or its affiliates and who
have not, within one year, received any other award under any plan of the
Company or its affiliates. Options granted under the Directors Plan shall be
exercisable in whole or in part at all times during the period beginning on the
date of grant until the earlier of (i) ten years from the date of grant or
(ii) one year from the date on which an optionee ceases to be an eligible
Director. Options are granted at the fair market value of the Company's Common
Stock at the date of the grant. The Directors Plan provided for the automatic
grant of options to purchase (i) 15,000 shares of Common Stock upon a Director's
election to the Company's Board of Directors and (ii) 5,000 shares of Common
Stock immediately following each annual shareholders' meeting as of the date of
such meeting.

In May 1998, the Company's Board of Directors approved the adoption of The
Authentic Fitness Corporation 1998 Stock Option Plan ('the 1998 Plan'). The 1998
Plan provides for the issuance of stock options up to the number of shares of
the Company's Common Stock held in treasury. The 1998 Plan is administered by a
committee of the Board of Directors of the Company which determines the number
of stock options to be granted under the 1998 Plan, and the terms and conditions
of such grants. The 1998 Plan provides for the granting of non-qualified stock
options and restricted stock.

In November 1998, the Company's Board of Directors approved the adoption of
the 1998 Stock Option Plan for Non-Employee Directors ('the 1998 Directors
Plan') to replace the Directors Plan. The 1998 Directors Plan provides for
awards of non-qualified stock options to Directors of the Company who are not
employees of the Company or its affiliates. Options granted under the 1998
Directors Plan shall be exercisable in whole or in part at all times during the
period beginning on the date of grant until the earlier of (i) ten years from
the date of grant or (ii) one year from the date on which an optionee ceases to
be an eligible Director. Options are granted at the fair market value of the
Company's Common Stock at the date of the grant. The 1998 Directors Plan
provides for the automatic grant of options to purchase (i) 15,000 shares of
Common Stock upon a Director's election to the Company's Board of Directors and
(ii) 10,000 shares of Common Stock immediately following each annual
shareholders' meeting as of the date of such meeting.

F-11

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Options granted, exercised, cancelled and outstanding under the Stock Plan, the
Directors Plan, the 1998 Plan and the 1998 Directors Plan at July 3, 1999 are
summarized below:

WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------ --------------

Outstanding July 6, 1996................................. 2,648,019 16.49
Options granted.......................................... 970,000 13.13
Options exercised........................................ (66,000) 8.94
Options cancelled........................................ (489,667) 19.14
----------
Outstanding July 5, 1997................................. 3,062,352 15.16
Options granted.......................................... 2,161,900 18.53
Options exercised........................................ (570,356) 12.54
Options cancelled........................................ (1,403,568) 13.73
----------
Outstanding July 4, 1998................................. 3,250,328 18.47
Options granted.......................................... 1,573,250 13.19
Options exercised........................................ (44,664) 13.58
Options cancelled........................................ (147,069) 14.06
----------
Outstanding July 3, 1999................................. 4,631,845 16.87
----------
----------

Options are exercisable for a period of ten years from date of grant and
vest when granted, in the case of the Directors Plan and the 1998 Directors
Plan, and from the grant date to three years for the Option Plan, Stock Plan and
1998 Plan. Options expire from August 14, 2002 to June 28, 2009.

The Company has reserved 4,683,457 shares of Class A Common Stock for
issuance under the Option Plan, Stock Plan and Directors Plan as of July 3,
1999. In addition, there are 3,307,800 shares of Class A Common Stock in
treasury stock available for issuance under the 1998 Plan and 1998 Directors
Plan.

The following table summarizes information about stock options outstanding
and exercisable as July 3, 1999:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AT JULY 3, CONTRACTUAL EXERCISE AT JULY 3, EXERCISE
RANGE OF EXERCISE PRICES 1999 LIFE PRICE 1999 PRICE
- ------------------------ ---- ---- ----- ---- -----

$ 8.00 - $12.50......................... 1,406,168 8.6 $12.23 1,158,668 $12.17
13.00 - 15.25........................... 848,027 7.2 14.36 582,523 14.36
17.13 - 20.88........................... 2,377,650 7.9 20.50 2,140,150 20.77
--------- ---------
4,631,845 8.0 16.87 3,881,341 17.24
--------- ---------
--------- ---------

The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of the grant, no compensation expense has been
recognized.

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, 'Accounting for Stock Based Compensation' (SFAS
No. 123), which also requires that the pro forma information be determined as if
the Company had accounted for its employee stock options granted subsequent to
July 1, 1995 under the fair-value method of SFAS No. 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes
option-pricing model with the following assumptions:

F-12

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

JULY 5, JULY 4, JULY 3,
1997 1998 1999
---- ---- ----

Risk-free interest rate..................................... 6.04% 5.84% 5.38%
Dividend yield.............................................. 0.38% 0.28% 0.38%
Expected volatility of market price of Company's Common
Stock..................................................... 0.5313 0.4223 0.4288
Expected option life........................................ 4 years 4 years 4 years

The Company's pro forma information is as follows (in thousands):

FOR THE FISCAL YEARS ENDED
---------------------------
JULY 5, JULY 4, JULY 3,
1997 1998 1999
---- ---- ----

Pro forma net income........................................ $16,549 $11,995 $16,118
Pro forma basic income per share............................ $ 0.74 $ 0.54 $ 0.79
Pro forma diluted income per share.......................... $ 0.74 $ 0.53 $ 0.78

These pro forma effects may not be representative of the effects on future
years because of the prospective application required by SFAS No. 123, and the
fact that options vest over several years and new grants generally are made each
year. The weighted-average fair value of options granted during fiscal 1997,
fiscal 1998 and fiscal 1999 for which the exercise price equals the market price
on the grant date was $6.00, $7.36 and $5.20, respectively.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

10 -- EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):

FOR THE FISCAL YEARS ENDED
---------------------------
JULY 5, JULY 4, JULY 3,
1997 1998 1999
---- ---- ----

Numerator for basic and diluted earnings per share
Income before cumulative effect of change in accounting
principle............................................ $19,035 $22,769 $24,447
Cumulative effect of change in accounting principle.... -- -- 2,518
------- ------- -------
Net income.................................................. $19,035 $22,769 $21,929
------- ------- -------
------- ------- -------
Denominator for basic earnings per share --
Weighted average shares................................ 22,362 22,310 20,359
------- ------- -------
Effect of dilutive securities:
Employee stock options................................. 152 200 325
------- ------- -------
Denominator for diluted earnings per share --
Weighted average adjusted shares....................... 22,514 22,510 20,684
------- ------- -------
------- ------- -------
Basic earnings per share before cumulative effect of change
in accounting principle................................... $0.85 $1.02 $1.20
------- ------- -------
------- ------- -------
Diluted earnings per share before cumulative effect of
change in accounting principle............................ $0.85 $1.01 $1.18
------- ------- -------
------- ------- -------

Options to purchase 2,377,650 shares of common stock at prices ranging from
$16.25 to $20.88 per share were outstanding during fiscal 1999 but were not
included in the computation of diluted earnings

F-13

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

per share because the options' exercise price was greater than the average
market price of the common shares. The options, which expire from August 2005 to
June 2009 were still outstanding at the end of fiscal 1999.

11 -- COMMITMENTS AND CONTINGENCIES

The Company is not a party to any litigation or other claims or
uncertainty, other than routine litigation incidental to the business of the
Company, that individually or in the aggregate is material to the business of
the Company.

Rent expense, including rent paid to Warnaco (See Note 13 of Notes to
Consolidated Financial Statements) was $13,341,000, $15,438,000 and $16,194,000
for the years ended July 5, 1997, July 4, 1998 and July 3, 1999, respectively.

Future minimum lease payments, required under non-cancelable operating
leases with terms in excess of one year are as follows (in thousands):

FISCAL YEAR TOTAL
- ----------- -----

2000........................................................ $8,106
2001........................................................ 5,889
2002........................................................ 3,669
2003........................................................ 3,062
2004........................................................ 2,570
2005 and thereafter......................................... 2,325

12 -- FACILITY CONSOLIDATIONS AND OTHER

On October 2, 1998, the Company announced plans to discontinue sourcing
from KT West, Inc. from the Company's owned Checotah, Oklahoma facility and to
consolidate sourcing from the Company's leased Montebello, California facility
into the Company's Commerce, California facility. This decision was part of the
Company's continued strategy to secure the most efficient sourcing of its
products. The Company recorded a charge of $3,324,000 ($2,028,000 net of income
tax benefits) in the first quarter of fiscal 1999 primarily related to the
above, including pre-tax charges of $2.2 million in non-cash asset write-offs,
$0.6 million in connection with contractual obligations to KT West, Inc. and
$0.5 million in other costs.

During the first quarter of fiscal 1998 the Company closed its twenty
Speedo'r' Authentic Fitness'r' retail stores located in Bally's Fitness Centers
and consolidated its three California manufacturing facilities into two
facilities. The total costs associated with these actions was approximately
$1,408,000 ($859,000 net of income tax benefits).

On January 1, 1997, one of the Company's three distribution centers,
located in Sparks, Nevada, was flooded destroying certain inventory owned by the
Company. The Company is insured for such losses as well as for profits lost due
to business interruption. As of July 5, 1997, the Company had recorded a $25
million claim receivable from the insurance company related to this claim for
the cost of inventory damaged in the flood, lost profit on orders that were lost
due to the flood and other incurred expenses. As of July 5, 1997 the Company had
received $15.5 million from the insurance company against such claim receivable,
leaving an outstanding claim receivable of $9.5 million. In fiscal 1998, in
order to achieve an early resolution of the insurance claim, the Company
accepted a cash settlement offer on the outstanding claim receivable of
approximately $8.8 million and wrote-off the remaining receivable of $0.7
million. In the fourth quarter of fiscal 1997, the Company incurred certain
flood related distribution expenses in excess of amounts covered by insurance
amounting to $3,354,000 ($2,162,000 net of income tax benefits).

F-14

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13 -- RELATED PARTY TRANSACTIONS

In 1990, the Company purchased the Activewear Division of Warnaco. Certain
directors and officers of the Company are also directors and officers of
Warnaco. From time to time, the Company and Warnaco jointly negotiate contracts
and agreements with vendors and suppliers. The Company purchases certain
services from Warnaco including contract manufacturing, occupancy services
related to leased facilities, computer service, laboratory testing,
transportation and other services. Additionally, the Company sells certain
inventory to Warnaco and provides certain design services to Warnaco.

The Company has sales to subsidiaries of a major stockholder
('Subsidiaries'). The Company pays royalties to a subsidiary of a major
stockholder ('Subsidiary'). An affiliate of a major stockholder of the Company
('Affiliate') acted as buying agent for certain merchandise purchased by the
Company from international suppliers. This buying agreement was terminated in
June of 1999 as the Company opened its own buying office in the Far East.

In May 1996 the Company made a strategic decision to close its closeout
outlet stores. In July 1996, the Company closed several of its closeout outlet
stores, transferred the leases on the remaining stores to Warnaco and sold the
existing store inventory to Warnaco.

GE Capital is a shareholder of the Company and a party to the Company's
credit agreement. During fiscal 1997, fiscal 1998 and fiscal 1999, the Company
paid interest to GE Capital for amounts borrowed under the terms of its credit
facility.

During the second quarter of fiscal 1997, the Company realized a gain of
approximately $3 million from the sale of certain barter assets to the issuing
barter company. The barter assets had an original face value of $12.3 million of
which approximately $2.8 million had been utilized by the Company through
December 1996 and an adjusted net book value of approximately $5.5 million. The
Company received $8.5 million from the sale. The sale of the barter assets was
negotiated by certain officers and directors of the Company who also serve as
officers and directors of Warnaco.

The following summarizes related party transactions included in the
Consolidated Statements of Operations (in thousands):

JULY 5, JULY 4, JULY 3,
1997 1998 1999
---- ---- ----

Expenses for Warnaco services (excluding rent
expense)............................................. $ 7,110 $ 9,739 $22,659
Rent expense -- Warnaco................................ 726 612 575
Product sales and other income -- Warnaco.............. 28,726(a) 9,254 19,446
Product sales -- Subsidiaries.......................... 573 141 424
Interest expense relating to balance owed to
Affiliate............................................ 665 975 879
Gross purchases through Affiliate...................... 21,385 26,512 32,835
Royalty expenses -- Subsidiary......................... 5,705 6,959 6,894
Fees paid to Affiliate for buying agent services....... 1,419 1,759 2,003
Interest expense related to credit agreement........... 3,861 4,217 3,803

- ------------

(a) Includes revenues from the transfer of the Company's closeout outlet store
inventory of approximately $13 million.

F-15

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14 -- CASH FLOW INFORMATION

FOR THE YEARS ENDED
------------------------------------
JULY 5, JULY 4, JULY 3,
1997 1998 1999
---- ---- ----
(IN THOUSANDS)

Cash paid (received) during the year for:
Interest............................................... $12,239 $13,027 $12,012
Income taxes........................................... (6,163) 5,453 13,196
Supplemental Non-Cash Investing and Financing Activities:
Capital leases......................................... 274 -- 1,663

15 -- BENEFIT PLAN

The Company has a 401(k) defined contribution profit sharing plan ('Plan'),
which covers all eligible, non-union domestic employees of the Company. The
Company contributes amounts equal to 15% of employee contributions up to a
maximum of 6% of employee's eligible compensation. Company contributions to the
Plan were approximately $91,000, $67,000 and $65,000 for the years ended
July 5, 1997, July 4, 1998 and July 3, 1999, respectively.

16 -- INCOME TAXES

The components of deferred tax assets and liabilities as of July 4, 1998
and July 3, 1999 are as follows (in thousands):

JULY 4, JULY 3,
1998 1999
---- ----

Deferred tax assets:
Inventory and accounts receivable reserves............. $ 1,954 $ 2,862
Book amortization of trademarks, licenses and other
intangible assets.................................... 7,283 7,913
Tax credit carryforwards............................... 2,394 --
Net operating loss carryforward........................ 66 --
Other deferred tax assets.............................. 1,723 373
-------- --------
Deferred tax assets -- net........................ 13,420 11,148
Deferred tax liabilities:
Tax over book depreciation............................. (4,130) (4,544)
Acquisition related accruals........................... (2,391) (1,393)
Tax amortization of trademarks, licenses and other
intangible assets.................................... (7,908) (8,623)
Prepaids............................................... -- (1,318)
Pre-opening costs...................................... (587) --
Prepaid costs.......................................... (1,302) --
Software development costs............................. (1,048) --
Other deferred tax liabilities......................... (5,854) (3,817)
-------- --------
Deferred tax liabilities.......................... (23,220) (19,695)
-------- --------
Net deferred tax liability........................ $ (9,800) $ (8,547)
-------- --------
-------- --------

F-16

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The provision for income taxes included in the Consolidated Statements of
Operations amounts to (in thousands):

FOR THE YEARS ENDED
---------------------------
JULY 5, JULY 4, JULY 3,
1997 1998 1999
---- ---- ----

Current:
U.S. Federal........................................ $ 3,857 $ 5,988 $13,434
State............................................... 1,040 1,603 2,817
Foreign............................................. 511 453 631
------- ------- -------
5,408 8,044 16,882
------- ------- -------
Deferred:
U.S. Federal........................................ 4,541 3,752 (1,132)
State............................................... 100 943 (101)
Foreign............................................. 24 20 (20)
------- ------- -------
4,665 4,715 (1,253)
------- ------- -------
Total............................................... $10,073 $12,759 $15,629
------- ------- -------
------- ------- -------

The following represents the reconciliation of the tax provision rate to
the U.S. Federal income statutory tax rate:

FOR THE YEARS ENDED
---------------------------
JULY 5, JULY 4, JULY 3,
1997 1998 1999
---- ---- ----

Statutory rate.............................................. 35.0% 35.0% 35.0%
State rate.................................................. 7.0 4.7 3.8
Foreign tax rate in excess of U.S. statutory rate........... 0.8 0.1 --
Deduction for foreign taxes................................. -- (4.4) --
Intangible amortization..................................... 0.7 0.5 0.6
Other....................................................... 5.0 1.3 (0.4)
Valuation allowances........................................ (13.2) (1.3) --
Inventory contribution...................................... (0.7) -- --
----- ---- ----
Tax provision rate.......................................... 34.6% 35.9% 39.0%
----- ---- ----
----- ---- ----

17 -- BUSINESS SEGMENTS INFORMATION

BUSINESS SEGMENTS

In fiscal 1999, the Company adopted SFAS No. 131, 'Disclosures about
Segments of an Enterprise and Related Information.' SFAS 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and customers.

The Company designs, manufactures and markets apparel within the Speedo'r'
Division, Designer Swimwear Division and Speedo'r' Authentic Fitness'r' Retail
Stores Division.

The Speedo'r' Division designs, manufactures, imports and markets a product
line consisting of women's and men's competition swimwear and swim accessories,
men's swimwear and coordinating t-shirts, women's fitness swimwear, Speedo'r'
Authentic Fitness'r' activewear and children's swimwear, all of which are
marketed under the Speedo'r' brand name.

The Designer Swimwear Division designs, manufactures, imports and markets a
product line consisting of women's swimwear under nationally recognized brand
names: Ralph Lauren'r', Polo Sport

F-17

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Ralph Lauren'r', Polo Sport-RLX'r', Anne Cole'r', Catalina'r', Cole of
California'r', Oscar de la Renta'r', Sunset Beach'r', Sandcastle'r', Sporting
Life'r' and White Stag'r'.

Speedo'r' Authentic Fitness'r' retail stores sell the Company's Speedo'r'
and Speedo'r' Authentic Fitness'r' products to the general public through 139
retail stores, including its E-commerce website -- Speedo.com. The stores are
designed to appeal to participants in water and land based fitness activities
and to offer a complete line of Speedo'r' and Speedo'r' Authentic Fitness'r'
products that sell throughout the year. The Company designs, manufactures and
imports the product line.

The accounting policies of the segments are the same as those described in
the 'Summary of Significant Accounting Policies' in Note 1. The Company
evaluates the performance of its segments based on earnings before interest,
taxes, depreciation and amortization of intangibles and deferred financing costs
and restructuring, special charges and other non-recurring items, as well as the
effect of the early adoption of SOP 98-5 and other start-up related costs
('Adjusted EBITDA').

Information by business segment is set forth below (in thousands):

SPEEDO'r'
AUTHENTIC
FITNESS'r'
DESIGNER RETAIL
FISCAL YEAR SPEEDO'r' SWIMWEAR STORES OTHER* TOTAL
- ----------- ------- -------- ------ ------ -----

1997 --Net Revenues $171,856 $ 94,024 $47,786 $9,422 $323,088
Adjusted EBITDA 33,308 22,631 3,878 (520) 59,297

1998 --Net Revenues 198,420 106,103 56,764 6,197 367,484
Adjusted EBITDA 36,380 25,195 5,238 -- 66,813

1999 --Net Revenues 225,167 125,383 60,267 -- 410,817
Adjusted EBITDA 44,517 27,739 5,758 -- 78,014

- ------------

*Includes the former Skiwear division and insurance proceeds pertaining to the
distribution center fire. (See Note 12)

A reconciliation of total segment Adjusted EBITDA to total consolidated
income before income taxes and cumulative effect of change in accounting
principle for fiscal years 1997, 1998 and 1999 is as follows:

1997 1998 1999
---- ---- ----

Total Adjusted EBITDA for reportable segments............ $59,297 $66,813 $78,014
General corporate expenses not allocated................. 6,811 6,681 12,701
Depreciation and amortization............................ 9,824 10,351 11,177
Interest Expense......................................... 13,554 14,253 14,060
------- ------- -------
Income before income taxes and cumulative effect of
change in accounting principle......................... $29,108 $35,528 $40,076
------- ------- -------
------- ------- -------

F-18

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SPEEDO'r'
AUTHENTIC
FITNESS'r'
DESIGNER RETAIL RECONCILING
YEAR ENDED JULY 5, 1997 SPEEDO'r' SWIMWEAR STORES ITEMS* CONSOLIDATED
----------------------- ------- -------- ------ ------ ------------

Total assets............................ $160,699 $79,888 $59,365 $21,920 $321,872
Depreciation and amortization........... 2,166 1,792 3,676 2,190 9,824
Capital expenditures.................... 11,991 4,910 16,901

YEAR ENDED JULY 4, 1998
Total assets............................ 157,044 78,021 57,915 23,182 316,162
Depreciation and amortization........... 2,039 1,857 4,166 2,289 10,351
Capital expenditures.................... 1,480 5,236 6,716

YEAR ENDED JULY 3, 1999
Total assets............................ 176,967 75,986 48,384 21,889 323,226
Depreciation and amortization........... 2,159 1,539 4,530 2,949 11,177
Capital expenditures.................... 5,880 5,151 11,031

- ------------

*Includes Corporate items not allocated to business segments.

GEOGRAPHIC INFORMATION

Primarily all of the Company's net revenues are generated within the United
States and Canada. Net revenues from Canadian operations contributed
approximately $15,318,000 of the Company's net revenues for fiscal 1999.

INFORMATION ABOUT MAJOR CUSTOMERS

In fiscal 1999, the Company had one customer who accounted for
approximately $46,873,000 or 11.4% of net revenues. In fiscal 1998, the Company
had one customer who accounted for approximately $38,030,000 or 10.3% of net
revenues. In fiscal 1997, no customer accounted for 10% of the Company's net
revenues. Such revenues are included in the Speedo'r' Division and Designer
Swimwear Division.

18 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.

Revolving, term loan and other borrowings. The fair value of the Company's
outstanding balances under its Credit Agreement and other outstanding debt are
valued based on rates available to the Company for debt with similar terms and
maturities.

Interest rate swap agreement. The Company has entered into an interest rate
swap agreement which has the effect of converting a portion of the Company's
outstanding variable rate debt into fixed rate debt. The fair value of the
Company's agreement to fix the interest rate on $75,000,000 of its outstanding
debt is based upon quotes from brokers and represents the cash requirement if
the existing agreement had been settled at fiscal year end.

Letters of credit. Letters of credit collateralize the Company's
obligations to third parties and have terms ranging from thirty days to one
year. The face amount of the letters of credit are a reasonable estimate of the
fair value since the value for each is fixed over its relatively short maturity.

F-19

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The carrying amounts and fair value of the Company's financial instruments are
as follows (in thousands):

JULY 4, 1998 JULY 3, 1999
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----

Revolving Loan.................................. $61,963 $61,963 $63,019 $63,019
Term Loan....................................... 41,250 41,250 32,500 32,500
Other long term debt............................ 1,252 1,252 1,802 1,802
Interest rate swap.............................. -- 17 -- 1,439
Letters of credit............................... 1,484 1,484 1,858 1,858

19 -- QUARTERLY FINANCIAL DATA (UNAUDITED)

The following summarizes the unaudited quarterly financial results of the
Company for the fiscal years ended July 4, 1998 and July 3, 1999 (in thousands,
except share data):

YEAR ENDED JULY 4, 1998
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------

Net revenues......................................... $ 36,970 $72,652 $127,935 $129,927
Gross profit......................................... 13,070 32,441 53,648 49,505
Net income (loss).................................... (6,849) 3,660 13,954 12,004

Basic net income (loss) per common share............. $ (0.31) $ 0.17 $ 0.63 $ 0.53
-------- ------- -------- --------
-------- ------- -------- --------

Diluted net income (loss) per common share........... $ (0.31) $ 0.16 $ 0.62 $ 0.53
-------- ------- -------- --------
-------- ------- -------- --------

YEAR ENDED JULY 3, 1999
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------

Net revenues......................................... $ 39,619 $78,037 $144,293 $148,868
Gross profit......................................... 14,191 33,337 57,762 57,964
Income (loss) before cumulative effect of change in
accounting principle............................... $ (7,578) $ 4,097 $ 14,016 $ 13,912
Cumulative effect of change in accounting
principle.......................................... (2,518) -- -- --
-------- ------- -------- --------
Net income (loss).................................... $(10,096) $ 4,097 $ 14,016 $ 13,912
-------- ------- -------- --------
-------- ------- -------- --------
Basic net income (loss) per common share:
Income (loss) before cumulative effect of change
in accounting principle....................... $(0.34) $0.21 $0.71 $0.62

Cumulative effect of change in accounting
principle..................................... (0.12) -- -- --
------ ----- ------ -----

Net income (loss)............................... $(0.46) $0.21 $0.71 $0.62
------ ----- ----- -----
------ ----- ----- -----
Diluted net income (loss) per common share:
Income (loss) before cumulative effect of change
in accounting principle....................... $(0.34) $0.20 $0.69 $0.62

Cumulative effect of change in accounting
principle.......................................... (0.12) -- -- --
------ ----- ------ -----

Net income (loss).................................... $(0.46) $0.20 $0.69 $0.62
------ ----- ----- -----
------ ----- ----- -----

F-20

AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

20 -- SUBSEQUENT EVENT

On July 21, 1999, the Company entered into a Stock Purchase Agreement with
the owners of Ubertech Texas, Inc., a Texas corporation. Ubertech Texas, Inc.
specializes in the application of silicone-based graphics to apparel products.
The Stock Purchase Agreement calls for the Company to purchase 70% of the Common
Stock of Ubertech Texas, Inc., with an option to purchase the remaining 30% of
the Common Stock at a later date. The aggregate purchase price was $8.4 million,
of which $3.0 million was paid in cash on July 21, 1999, $5.1 million was
settled with the issuance of Authentic Fitness Corporation Common Stock from
treasury to the owners of Ubertech Texas, Inc. (62,223 shares at $15.94 on
August 12, 1999 and 234,073 shares at $17.69 on August 26, 1999) and the
remaining $0.3 million was settled by Authentic Fitness Corporation paying off a
revolving credit line balance owed by Ubertech Texas, Inc. The Company currently
estimates that the excess cost over net assets acquired as a result of this
transaction to be approximately $8,300,000.

F-21

SCHEDULE II

AUTHENTIC FITNESS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF YEAR EXPENSES(1) DEDUCTIONS(2) END OF YEAR
----------- ------- ----------- ------------- -----------
(IN THOUSANDS OF DOLLARS)

Accounts Receivable Allowances:
Year ended July 5, 1997....................... $9,361 $20,135 $(22,625) $6,871
------ ------- -------- ------
------ ------- -------- ------
Year ended July 4, 1998....................... $6,871 $27,188 $(29,195) $4,864
------ ------- -------- ------
------ ------- -------- ------
Year ended July 3, 1999....................... $4,864 $27,115 $(24,912) $7,067
------ ------- -------- ------
------ ------- -------- ------

- ------------

(1) Allowances are primarily charged to income as incurred. The allowance is
adjusted at the end of each period by a charge or credit to income for the
estimated discounts and allowances applicable to the accounts receivable
then outstanding.

(2) Uncollectible accounts written-off, net of recoveries and charges for
returns, allowances and cash discounts to the allowance account.

S-1

STATEMENT OF DIFFERENCES
------------------------

The trademark symbol shall be expressed as................................ 'TM'
The registered trademark symbol shall be expressed as..................... 'r'
The cent sign shall be expressed as....................................... [c]