UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 1998
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission file number: 1-5256

GERBER CHILDRENSWEAR, INC.
(Exact name of registrant as specified in its charter)

Delaware 62-1624764
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)

7005 Pelham Road
Suite D
Greenville, SC 29615
(Address of principal executive offices)

(864) 987-5200
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Name of each
Title of each class exchange on which registered
----------------------------- ----------------------------
Common Stock, $0.01 par value New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or 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 amendment to this Form 10-K. [ ]

As of March 16, 1999, there were outstanding 8,352,949 shares of
Common Stock and 8,692,315 shares of Class B Common Stock. As of that date, the
aggregate market value of the shares of Common Stock held by nonaffiliates of
the registrant (based on the closing price for the Common Stock on the New York
Stock Exchange on March 16, 1999) was approximately $30,655,000.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held May 18, 1999, which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1998.

TABLE OF CONTENTS

PART I
Page
----

Item 1. Business........................................................................................4
Item 2. Properties......................................................................................9
Item 3. Legal Proceedings...............................................................................9
Item 4. Submission of Matters to a Vote of Security Holders............................................10

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................10
Item 6. Selected Financial Data........................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................19
Item 8. Financial Statements and Supplementary Data....................................................20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........20

PART III

Item 10. Directors and Executive Officers of the Registrant.............................................20
Item 11. Executive Compensation.........................................................................20
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................20
Item 13. Certain Relationships and Related Transactions.................................................20

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................21

2
3

SAFE-HARBOR STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

This report includes "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which
represent the Company's expectations or beliefs concerning future events that
involve known and unknown risks and uncertainties, including, without
limitation, 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, competition 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 and Results of Operations, are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statement are reasonable, it can give no assurance that such
expectations will prove to have been correct and actual results, performance or
events could differ materially from those expressed in such statements.

References in this annual report on Form 10-K (the "Report") to the "Company"
shall, as the context requires, refer to Gerber Childrenswear Inc. (and its
predecessor), together with its wholly-owned direct and indirect subsidiaries.
References in this Report to "Gerber" shall, as the context requires,
collectively refer to Gerber Childrenswear, Inc., Costura Dominicana Inc.,
Gerber Childrenswear Canada, Inc. (a Delaware corporation formed in 1998), GCI
IP Sub, Inc., Costura Matamoros S.A. de C.V. (a Mexican corporation formed in
1998) and GCW Mexico S.A. de C.V. (a Mexician Corporation formed in 1998).
References in this Report to "Auburn" shall, as the context requires,
collectively refer to Auburn Hosiery Mills, Inc., GCI Spainco, S.L. (a Spanish
corporation formed in 1998), Sport Socks Co. (UK) Limited and Sport Socks Co.
(Ireland) Limited, each a wholly-owned direct or indirect subsidiary of Gerber
Childrenswear, Inc.

3
4

PART I

ITEM 1. BUSINESS.

HISTORY

Gerber Childrenswear, Inc. was formed and became a single
corporate entity through the merger in April 1989 of four separate companies
acquired by Gerber Products Company ("GPC"). In January 1996, Gerber
Childrenswear, Inc. was acquired by GCIH, Inc. ("GCIH") from GPC for
approximately $61.5 million in cash (subject to purchase price adjustments) and
a $12.5 million promissory note (the "Original Acquisition"). Since the Original
Acquisition, GPC has not owned any capital stock of the Company, nor have GPC
and the Company shared common directors, officers or employees. In connection
with such acquisition and related financing, Citicorp Venture Capital, Ltd.
("CVC"), management, directors and others purchased the equity of GCIH. Gerber
conducts the apparel segment of the Company's business which consists of the
production and sale of infant and toddler sleepwear, playwear, underwear,
bedding, bath, cloth diapers and other products under the Gerber, Baby Looney
Tunes and Curity brand names, Onesies trademark and private labels.

The Company acquired all of the capital stock of Auburn in
December 1997 for approximately $40.0 million in cash (the "Recent
Acquisition"). Auburn conducts the hosiery segment of the Company's business
which consists of the production and sale of sport socks under the Wilson, Coca
Cola, Converse and Dunlop names to major retailers in the United States and
Europe.

In connection with the consummation of the Company's Initial
Public Offering ("Offering") in June 1998, GCIH and Gerber consummated a series
of transactions pursuant to which GCIH was recapitalized and reorganized and
Gerber was merged into GCIH (the "Reorganization"). The principal transactions
that comprised the Reorganization which occurred in connection with the
consummation of the Offering were: (i) the conversion of all of the outstanding
shares of preferred stock of GCIH into either common stock of GCIH or the right
to receive cash, (ii) the merger of Gerber into and with GCIH, with GCIH being
the surviving entity of such merger, and (iii) the amendment of the certificate
of incorporation of GCIH to provide for (a) the reclassification and exchange of
all of the outstanding shares of all classes of common stock and warrants to
purchase common stock of GCIH for shares of Common Stock, Class B Common Stock
or warrants to purchase Class B Common Stock of GCIH and (b) a change of the
corporate name of GCIH, from GCIH to "Gerber Childrenswear, Inc".

The Company is a Delaware corporation. The Company's principal
offices are located at 7005 Pelham Road, Suite D, Greenville, SC 29615, and its
telephone number is (864) 987-5200.

4
5

BUSINESS SEGMENTS

APPAREL SEGMENT

The apparel segment consists of the production and sale of infant
and toddler sleepwear, playwear, underwear, bedding, bath, cloth diapers and
other products under the Gerber, Baby Looney Tunes, Curity and Onesies
trademarks and private labels. Gerber Childrenswear, Inc. is a leading marketer
of infant and toddler apparel and related products, offering products under its
flagship brand, Gerber, as well as the Baby Looney Tunes and Curity brand names
and the Onesies trademark. The Gerber name and baby head logo are among the best
recognized in the infant and toddler industry. The Company believes that Gerber
is the leading provider of infant and toddler apparel and related products,
based on dollar volume and breadth of product offering, to volume retailers,
which constitute the fastest growing segment of the retail industry. The Company
also distributes products to mid-tier department stores and specialty retailers.
Gerber holds a leading market share, based on dollar volume, in its distribution
channels in the underwear, blanket sleeper and cloth diaper categories. The
Company believes that these leading positions, in addition to strong consumer
recognition of its brands, provide opportunities for Gerber to leverage its
brands into other product categories including sleep 'n play, bed & bath,
playwear, bibs, hosiery and gift sets where Gerber has a growing presence.

The Company believes the market offers continued growth prospects
due to demographic factors including (i) more women having children at an older
age and returning to work thereafter, resulting in greater disposable income for
expenditures on children; and (ii) an increasing number of grandparents, who
represent a key consumer segment for infant and toddler products. Within the
infant and toddler industry, greater emphasis on value has shifted consumer
purchases away from traditional department stores and toward more
value-conscious retail channels, including volume retailers and mid-tier
department stores. Additionally, the industry is highly fragmented and services
volume retailers who are interested in limiting their purchases to a smaller
number of well-capitalized vendors with a broad base of branded products. The
Company believes that its strong brand names, leading market positions, broad
product offerings and strong customer relationships with volume retailers and
mid-tier department stores position it to benefit from industry trends.

HOSIERY SEGMENT

The hosiery segment which was acquired on December 17, 1997
consists of the production and sale of sport and casual socks under the Wilson,
Coca Cola, Converse and Dunlop names to major retailers in the United States
and/or Europe. The hosiery segment conducted by Auburn manufactures, markets and
sells branded sport socks for men, women and children under established brand
names such as Wilson, Coca-Cola and Converse in the U.S. and Europe and under
the Dunlop brand name in Europe. Auburn has operations in the United States and
Ireland. Auburn markets to a diversified customer base in the U.S. and Europe,
including volume retailers, department stores, wholesale clubs and major
sporting good chains. These strong brand names and Auburn's long-term reputation
for quality facilitate a multi-channel distribution strategy. Auburn competes
effectively in these distribution channels by offering its branded products at
competitive prices, operating as a low-cost producer, servicing customers with
quick turnaround, and maintaining strong customer relations.

BUSINESS SEGMENT DATA

For information regarding net sales, income (loss) before
interest and income taxes and assets by industry segment, reference is made to
the information presented in Note 18 "Business Segments and Geographic Areas" to
the consolidated financial statements.

GENERAL

MANUFACTURING AND SOURCING

Through its own and third party manufacturing operations, Gerber
is able to control the knitting, cutting, sewing, embroidering and packaging of
its products. Over the last several years, Gerber has focused its operations on
its manufacturing strengths such as knitting, cutting and sewing, and has
discontinued its inefficient manufacturing operations such as spinning yarn and
dyeing fabric. The Company believes that the combination of

5
6

domestic and foreign production helps Gerber maintain competitive pricing by
keeping costs low while fulfilling customer demand for fast turnaround on
orders.

Gerber has eight manufacturing operations, including one in each
of South Carolina and Texas, two locations in North Carolina and three "9802"
facilities in the Dominican Republic and one location in Mexico. The new
facility in Mexico began operations in the fourth quarter of 1998. The lower
labor costs in Mexico and proximity to new and existing markets ensures the
Company's cost competitiveness and "just in time" deliveries. In addition, the
facility can service the Canadian market under the NAFTA agreement, as well as
South America without incurring duties. In "9802" facilities, U.S. components
are shipped abroad, assembled, packaged and re-imported with duty charges
assessed only on the value added abroad.

In addition, the Company utilizes third party manufacturers (both
domestically and offshore), and has entered into exclusive production agreements
with certain contractors in the United States, Estonia, Guatemala and Mexico.
These agreements are generally for terms of one year, payment is due within 30
days, the contractors must provide labor and conduct hiring practices consistent
with local laws and the Company's condition of employment standards, and pricing
terms are negotiated on an item by item basis.

Hosiery segment manufacturing requires a capital intensive
process through which the sock is knit in the greige, the toe is closed, the
sock is bleached or dyed and then packaged for distribution. In the U.S., Auburn
conducts knitting and toe closing operations at its manufacturing facility in
Adairville, Kentucky. From time to time, Auburn also employs outside contractors
to knit socks on a purchase order basis. The amount of socks knitted by such
outside contractors is not material. The Adairville facility houses
technologically advanced knitting and sewing equipment with no significant
equipment older than five years. Auburn has implemented a computerized
monitoring system of this machinery which increases efficiency, usage rates and
productivity. Auburn's bleaching, dyeing, packaging and shipping operations are
conducted at its facility in Auburn, Kentucky. Technological advances and other
control mechanisms at both the Adairville and Auburn facilities allow Auburn to
maximize productivity. The Company intends to invest in further technological
advances as they become available.

Outside the U.S., Auburn operates a facility in Cahirciveen,
County Kerry, Ireland which conducts knitting, sewing, bleaching, packaging and
shipping functions using machinery, processes and technology virtually identical
to those of the U.S. facilities. The Ireland facility primarily supplies the
European market (including Western Europe and Eastern Europe west of Russia)
with the same branded American-style sports socks. In addition, the Company
recently installed in the Ireland facility a computerized monitoring system
similar to that which Auburn is currently implementing in its Adairville
facility. Now fully operational in Ireland, the system has significantly
increased efficiency and productivity at that facility. The Company believes
that Auburn's ability to offer high quality, branded socks at competitive prices
has been recognized by value-conscious Europeans, and that the low levels of
similar product offerings at this time offer an opportunity to develop brand
recognition in these markets.

CUSTOMERS

Certain of the Company's volume retailer and mid-tier department
store customers account for significant portions of the Company's net sales. The
Apparel segment directly services approximately 1,100 retail accounts, with its
top 10 customers representing approximately 83% and 82% of total 1998 and 1997
sales, respectively. The Apparel segment had sales to Wal-Mart and two other
customers that accounted for 40%, 11% and 10% of total Apparel sales in 1998,
respectively; 43%, 10%, and 11% of total Apparel sales in 1997, respectively;
44%, 6%, and 10% of total Apparel sales in 1996, respectively. The Hosiery
segment had sales to Wal-Mart that accounted for 45% of 1998 sales and 49% of
its 1997 sales on a pro forma basis.

The Company generally does not enter into long-term or other
purchase agreements with its customers. Customer orders are received by the
Company through one of two methods. With the exception of fashion-oriented and
seasonal products, most customer orders are tied to a planogram, which is
established by customers for setting up displays within their stores. Generally
planograms are revised annually in these merchandise categories. The Company's
customers, based on sales data captured at cash registers, generate orders for
replenishment goods which are transmitted to the Company through its electronic
data interchange ("EDI") systems. Replenishment orders for planogram merchandise
are generally filled within three days. Under the second program, customer
orders for fashion-oriented and seasonal products (e.g., blanket sleepers) are
received on a purchase order basis and

6
7

such orders are filled without an in-season reorder expectation.

COMPETITION

The infant and toddler apparel market is highly competitive. Both
branded and private label manufacturers compete in the infant and toddler
apparel markets. Competition generally is based upon product quality, brand name
recognition, price, selection, service and convenience. Gerber's primary
competitors include Fruit of the Loom, Inc. ("Fruit of the Loom"), the Hanes
subsidiary of the Sara Lee Corporation ("Hanes"), The William Carter Company
("Carter's"), licensed products and firms using character licenses from Walt
Disney Company, Inc. ("Disney") and others. Gerber also competes with certain
retailers, including several which are customers of the Company, which have
significant private label product offerings. Gerber's ability to compete
depends, in substantial part, on the continued high regard for the Gerber brand
name and the ability of Gerber to continue to offer high-quality products at
competitive prices.

The hosiery industry is highly fragmented and has significant
branded and private label components. Competition is generally in terms of
price, quality, service, brand recognition and style. Auburn's primary
competitors include Hanes, which has the largest share of the market, Renfro
Corporation ("Renfro"), Neuville Industries, Inc. ("Neuville") and the Russell
Corporation ("Russell"). Auburn also competes with certain retailers, including
several which are customers of the Company, which have significant private label
product offerings. In addition, Auburn competes with private label
manufacturers, including small, local manufacturers and large, public companies.

PATENTS, LICENSES AND TRADEMARKS

The Company is largely dependent on the use of the Gerber name.
The Gerber name and trademark are exclusively licensed to the Company from GPC
for use on certain clothing and textile products in the infant and toddler
apparel market sold in the United States, Canada and the Caribbean. The product
categories covered by the Gerber license include infant and toddler shoes,
underwear, sleepwear (including blanket sleepers, pajamas and sleep 'n play),
playwear, bed and bath products, reusable cloth diapers and diaper liners, bibs,
hosiery, swimwear and gift sets and layette incorporating the above articles, in
each case targeted to infants and toddlers. The terms and conditions for use of
the Gerber name for other product categories and geographic areas must be
negotiated by the Company on an individual basis. The Gerber license extends
through 2006, after which there are two five-year renewal periods. GPC retains
the rights under the license to produce, distribute, advertise and sell, and to
authorize others to produce, distribute, advertise and sell, products under the
Gerber name other than clothing and textile products. The Company is not
required to pay royalty fees to GPC until 2002, although the Company is
recording royalty expense to reflect such fees over the initial license period.

The Company also licenses the Baby Looney Tunes brand name from
the Warner Brothers division of Time-Warner, Inc. ("Warner Brothers") and the
Curity brand name from The Kendall Company. The Company is licensed to use the
Baby Looney Tunes brand name in the U.S. and Canada and the Curity brand name in
the U.S. and internationally. The Baby Looney Tunes and Curity licenses are
limited to certain product categories, including, in the case of Baby Looney
Tunes, bath products, bedding, sleepwear, underwear, footwear, socks, layettes
and infant and toddler playwear, and in the case of Curity, cloth diapers and
diaper liners, underwear, hosiery, sleepwear (including blanket sleepers and
sleep `n play) and certain other products, in each case for infants and
toddlers. The Curity license automatically renews for periods of ten years. The
Baby Looney Tunes license has recently been renewed and extends through December
31, 2000. The Company owns the Onesies trademark.

Auburn also licenses properties from different companies for its
products. The license from Wilson Sporting Goods Co. ("Wilson") expires in 2002
with a five year renewal period if certain sales targets are exceeded. Auburn
has held this license since 1982. The license from Wilson can be terminated by
Wilson if the employment of either Kevin K. Angliss or Donald J. Murphy with
Auburn terminates. The license from Converse Inc. ("Converse") expires on
December 31, 2001 with an obligation to enter into good faith discussions in
2001 with respect to a new three year contract. This license can be terminated
by Converse if Kevin K. Angliss and Timothy Graham are no longer the principal
managers of Auburn's Converse-brand product line. Messrs. Angliss, Murphy and
Graham have not entered into employment agreements with Auburn. The Coca-Cola
Company ("Coca-Cola") license was recently renewed through December 31, 1999
(with a one year renewal option for the

7
8

year 2000). The license from Dunlop Slazenger International Ltd. ("Dunlop")
expires in 2001 (with a five year renewal period if certain sales targets are
exceeded). All of these licenses have particular geographic and other
limitations, and the Company negotiates the terms and conditions for the use of
such trademarks outside such limitations on an individual basis. The products
covered by the licenses include (i) sport socks in the case of Wilson, (ii)
men's, women's and youth's hosiery in all color combinations and styles in the
case of Converse, (iii) athletic and casual socks in the case of Coca-Cola, and
(iv) sport and casual socks in the case of Dunlop.

The Company has not experienced any proprietary license
infringements or legal actions that have had a material impact on its financial
condition or results of operations.

RAW MATERIALS

The Company depends on certain raw materials such as yarn for the
manufacturing of its products. In order to hedge against price increases of
yarn, the Company actively manages its cost through contracts with its yarn
suppliers with terms of up to one year. With the exception of suppliers located
in Ireland, the United Kingdom, Spain, Italy and Germany which provide yarn to
the Company's Irish subsidiary, all of the Company's yarn suppliers are located
in the U.S. None of the foreign suppliers, either individually or in the
aggregate, provide material quantities of yarn to the Company. Management
believes, however, that none of these suppliers are material and that there are
many alternate sources from which yarn may be readily obtained.

COST OF ENVIRONMENTAL COMPLIANCE

The Company's manufacturing facilities and operations are subject
to certain federal, state, local and foreign laws and regulations relating to
environmental protection and occupational health and safety, including those
governing wastewater discharges, air emissions, the management and disposal of
solid and hazardous wastes, and the remediation of contamination associated with
the release of hazardous substances. Prior to the Recent Acquisition, Auburn was
cited for discharging contaminants into the sewer system from its facility in
Auburn, Kentucky in excess of the amounts allowed under its permits. The
condition underlying such violations were either fully remediated at an
immaterial cost or are being remediated at an immaterial cost. Gerber and, other
than the above, Auburn have never been cited, fined or otherwise held liable for
violations of environmental statutes or regulations. In addition, the Company is
not aware of any noncompliance with such laws and regulations. The Company has
incurred, and will continue to incur, capital expenditures and operating
expenses to comply with such requirements. However, the Company does not
currently anticipate any material capital expenditures for environmental control
facilities for the current or succeeding fiscal year. Nonetheless, there can be
no assurance that such laws will not become more stringent or be interpreted and
applied more stringently. Such future changes or interpretations or the
identification of adverse environmental conditions previously unknown to the
Company could result in additional compliance costs or in remediation costs to
the Company.

The Company's older facilities contain asbestos materials and
lead-based paint in inactive areas utilized for the storage of records, machine
parts and obsolete supplies, where the potential for worker exposure to such
materials is minimal. If the Company were to elect to utilize such areas as
active manufacturing or distribution facilities such that the potential for
worker exposure would be increased, as a matter of policy the Company would
undertake to remediate or encapsulate such materials. The cost of removing or
encapsulating such materials from the Company's Pelzer, South Carolina
facilities would be a material expenditure.

BACKLOG OF ORDERS

The Company delivers products throughout the year and generally
experiences buy cycles during the first and third quarters. The EDI system and
Vendor Managed Inventory ("VMI") programs have significantly reduced the average
order period, which effectively reduces backlog. At December 31, 1998, the
Company's backlog of orders for its products, all of which were expected to be
shipped during fiscal 1999, was approximately $21.9 million as compared to
approximately $20.2 million at December 31, 1997. Backlog as of any given date
may not be indicative of backlog at a subsequent date. Therefore, a comparison
of backlog from period to period is not necessarily an accurate indicator of
eventual shipments.

8
9

EMPLOYEES

As of December 31, 1998, the Company had approximately 3,250
employees including approximately 2,000 in the United States and approximately
1,250 in foreign countries. None of the Company's employees are members of
unions or are otherwise party to a collective bargaining agreement. Certain of
the Company's employees in Ireland are subject to the national wage agreement in
Ireland. The Company considers its relations with its employees to be good.

ITEM 2. PROPERTIES.

The following table sets forth the principal real property owned
or leased by the Company and used as production, distribution, warehouse,
manufacturing or other facilities as of December 31, 1998:

Owned Approximate
Location Use or Leased Floor Space (Sq. Ft.)
- --------------------------------- -------------------------------- --------- ----------------------

APPAREL SEGMENT:
Ballinger, TX Manufacturing Owned 85,000
Ballinger, TX Warehouse, Distribution Leased 70,000
Evergreen, AL Warehouse, Distribution Leased 255,000
Dominican Republic
(Three Facilities) Manufacturing Leased 90,000
Lumberton, NC
(Two Facilities) Manufacturing Owned 183,000
Pelzer, SC (Two Facilities) Manufacturing, Distribution Owned 804,000
Matamoros, Mexico Manufacturing Leased 74,000

HOSIERY SEGMENT:
Adairville, KY Manufacturing Owned 72,000
Auburn, KY Manufacturing, Distribution and
Administration Owned 160,000
Cahirciveen, Ireland Manufacturing, Distribution and
(Two Facilities) Administration Leased 62,000

In addition to the facilities described above, the Company leases
48,000 square feet for its headquarters in Greenville, South Carolina and
approximately 16,000 square feet for its executive offices and showroom in New
York, New York. From time to time, the Company also uses storage space in
warehouses in Franklin, Kentucky and Monroeville, Alabama. The Company holds a
purchase option for the Evergreen, Alabama warehouse which is exercisable at any
time during the 15 year lease term at a price of two dollars. The Company also
holds a purchase option on the Matamoros, Mexico lease which is exercisable
during the life of the lease for a price of approximately $2.6 million.

ENVIRONMENTAL AND OTHER REGULATORY MATTERS

For a discussion of environmental and other regulatory matters
see "Item 1. Business - General - Cost of Environmental Compliance."

ITEM 3. LEGAL PROCEEDINGS.

The Company is involved from time to time in various routine
legal and administrative proceedings and threatened legal and administrative
proceedings incidental to the ordinary course of its business. The Company has
been active in pursuing actions against counterfeiters and diverters of its
products. In the opinion of the Company's management, the resolution of such
matters will not have a material adverse effect on the Company's business,
financial condition or results of operations.

9
10

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

None.

PART II

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

MARKET INFORMATION FOR COMMON STOCK

Gerber Childrenswear, Inc.'s common stock is traded on the New
York Stock Exchange. The following table reflects the range of high and low
selling prices of Gerber Childrenswear, Inc.'s Common Stock by quarter from the
time of the Company's initial public offering in June 1998.

1998
------------------------
HIGH LOW
------- -------

First Quarter................................... N/A N/A
Second Quarter (beginning June 11, 1998)........ 16 1/16 14 7/16
Third Quarter................................... 16 5/8 7 3/8
Fourth Quarter.................................. 10 3/8 5 1/4

HOLDERS

At March 16, 1999, there were approximately 89 holders of record
of Common Stock and two holders of record of Class B Common Stock.

DIVIDENDS

The Company has not paid any dividends with respect to the Common
Stock. The Company presently intends to retain future earnings to finance its
growth and development and therefore does not expect to pay any cash dividends
in the foreseeable future. In addition, the Company's Credit Agreement restricts
the payment of cash dividends by the Company (subject to certain limited
exceptions), and the Company may in the future enter into loan or other
agreements or issue debt securities or preferred stock that restrict the payment
of dividends. The declaration and payment of dividends by the Company are
subject to the discretion of the Board of Directors of the Company (the
"Board"). Any future determination to pay dividends will depend on the Company's
results of operations, financial condition, capital requirements, contractual
restrictions and other factors deemed appropriate by the Board.

10
11

ITEM 6. SELECTED FINANCIAL DATA.

ANNUAL FINANCIAL DATA

The following table presents (i) selected historical consolidated
financial data of the Predecessor Company as of and for the nine months ended
December 31, 1994 and as of and for the year ended December 31, 1995 and (ii)
selected historical consolidated financial information of the Company at
December 31, 1996 and for the period from January 22, 1996 to December 31, 1996
and as of and for the years ended December 31, 1997 and 1998. The selected
consolidated financial data of the Predecessor has been derived from the
financial statements of the Predecessor for the year ended December 31, 1995,
the selected financial data of the Company for the period from January 22, 1996
to December 31, 1996, as well as the year ended December 31, 1997 and 1998 has
been derived from the financial statements of the Company. The selected
financial data should be read in conjunction with the Consolidated Financial
Statements and the related notes as indexed on page F-1 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7.

Predecessor
Company Company
-------------------------------------- --------------------
Period from Nine
Year Year January 22, Year Months
Ended Ended 1996 to Ended Ended
December 31,
--------------------------------------------------------------
Statements of Income Data: 1998 1997 (a) 1996 (b) 1995 (c) 1994
--------- --------- --------- -------- --------
(In millions, except per share data)

Net sales .............................................. $ 278.5 $ 202.0 $ 185.2 $ 197.4 $ 144.1
Cost of sales .......................................... 209.5 146.3 138.6 156.4 113.1
--------- --------- --------- -------- --------
Gross margin ........................................... 69.0 55.7 46.6 41.0 31.0
Selling, general and administrative expenses ........... 38.5 27.7 23.9 24.6 19.1
Stock compensation (d) ................................. -- 9.5 -- -- --
Other .................................................. -- .2 .7 -- .5
--------- --------- --------- -------- --------
Total operating expenses ............................... 38.5 37.4 24.6 24.6 19.6
--------- --------- --------- -------- --------
Income before interest and income taxes ................ 30.5 18.3 22.0 16.4 11.4
Interest expense, net .................................. 5.8 5.8 6.3 -- .7
--------- --------- --------- -------- --------
Income before income taxes and extraordinary item, net . 24.7 12.5 15.7 16.4 10.7
Provision for income taxes ............................. 8.7 4.8 6.2 6.3 4.2
--------- --------- --------- -------- --------
Income before extraordinary item, net .................. 16.0 7.7 9.5 10.1 6.5
Extraordinary item, net (e) ............................ (.2) (.7) -- -- --
--------- --------- --------- -------- --------
Net income ............................................. 15.8 7.0 9.5 10.1 6.5
Less preferred stock dividends ......................... (.8) (1.6) (1.3) -- --
--------- --------- --------- -------- --------
Net income available to common shareholders ............ $ 15.0 $ 5.4 $ 8.2 $ 10.1 $ 6.5
========= ========= ========= ======== ========

Earnings per common share .............................. $ 1.06 $ .48 $ .72
Earnings per common share - assuming dilution .......... $ .85 $ .37 $ .53

Predecessor
Company Company
--------------------------------- --------------------
December 31,
--------------------------------------------------------
Balance Sheet Data: 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------

Working capital ........................... $ 82.7 $ 65.9 $ 56.2 $ 69.6 $ 63.3
Total assets .............................. 185.7 163.9 106.1 103.2 110.3
Total debt ................................ 39.7 77.0 43.4 -- --
Preferred stock including accrued dividends -- 14.6 13.1 -- --
Investment by GPC ......................... -- -- -- 79.1 81.6
Shareholders' equity ...................... $ 98.9 $ 19.4 $ 9.1 -- --

See following page for notes to the selected financial data.

11
12

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

(a) Includes the following operating results for Auburn and Sport Socks
Ireland for the period December 17, 1997 through December 31, 1997 (in
millions).

Net Sales ........................... $ 1.5
Gross Margin ........................ .2
SG&A Expenses ....................... .2
Loss before interest and income taxes *
Net loss ............................ *

* Less than $50,000.

(b) Excludes the Predecessor Company's unaudited operations for the period
January 1, 1996 through January 21, 1996 (in millions).

Net Sales ........................... $ 6.7
Gross Margin ........................ 1.1
SG&A Expenses ....................... 1.4
Loss before interest and income taxes (.3)
Net loss ............................ (.2)

(c) The Predecessor Company operated as a wholly-owned subsidiary of GPC
until being divested by GPC on January 22, 1996. The financial data for
the Predecessor Company is not entirely comparable to that of the Company
due to certain factors including the following:

(i) The Predecessor Company did not incur any royalty expense for the
use of the Gerber name and baby head logo. During the period from
January 22, 1996 to December 31, 1996, and for the years ended
December 31, 1997 and 1998, the royalty expense to GPC was
approximately $1.9 million, $3.5 million and $2.8 million,
respectively.

(ii) The Predecessor Company's net sales in 1995 included approximately
$8.3 million of net sales at cost to GPC that generated no gross
margin. Net sales to GPC in 1996, 1997 and 1998 of approximately
$6.2 million, $4.3 million and $1.1 million, respectively,
generated gross margins in 1996, 1997 and 1998 of approximately
$950, $598 and $205, respectively.

(iii) The Predecessor Company was included in various self-insurance
programs provided by GPC, including medical, dental, workers'
compensation, comprehensive general and excess liability and
property damage and business interruption. GPC also provided
management information services to the Predecessor Company and
allocated a portion of the expenses incurred to the Predecessor
Company. In addition, the Predecessor Company was allocated a
portion of legal and professional costs for services directly
attributable to the Predecessor Company. Certain services were
provided by GPC's corporate staff, for which no charge was made to
the Predecessor Company. Management believes the aggregate cost of
these unallocated services was insignificant. The Predecessor
Company was charged for all outside legal and professional
expenses directly attributable to it.

(iv) In 1995, the Predecessor Company had no long term debt and was not
charged any interest expense as a subsidiary of GPC.

(v) The provision for income taxes of the Predecessor Company results
from applying the Federal and state statutory rates to the
operations of a stand-alone company.

(d) Represents expense related to stock compensation incurred in connection
with the sale of capital stock below fair market value to executives and
management of the Company.

(e) In June 1998, the Company repaid senior and junior subordinated notes in
the principal amount of $22.5 million and $11.0 million, respectively.
The write-off of unamortized discount and loan costs totaled $.3

12
13

million (net of an income tax benefit of $.2 million). In 1997, the
Company expensed unamortized loan costs and a prepayment penalty of $.7
million (net of an income tax benefit of $.5 million) in connection with
the replacement of the Company's then existing credit facility with the
current Credit Agreement.

QUARTERLY FINANCIAL DATA

For information regarding quarterly financial data, reference is
made to Note 19 "Selected Quarterly Financial Data - (Unaudited)" to the
consolidated financial statements.

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

INITIAL PUBLIC OFFERING

During June 1998, the Company consummated its Offering with
4,140,000 shares (including the exercise of the underwriters' over-allotment
option) of its Common Stock being sold at a price of $13.00 per share. The net
proceeds from the Offering were $48.7 million and were used to: (a) repay a
senior subordinated note in the aggregate principal amount of $22.5 million; (b)
repay a junior subordinated note in the aggregate principal amount of $11.0
million; (c) repay certain other indebtedness of the Company in the aggregate
principal amount of $14.8 million; and (d) redeem 2,828.4 shares of the
Company's redeemable preferred stock in the aggregate amount of approximately
$0.4 million held by certain of its officers.

MEXICAN FACILITY

In order to provide low cost production on a timely basis and to
diversify the Company's manufacturing base, the Company leased a 74,000 square
foot manufacturing facility in Matamoros, Mexico in October 1998. The Company
will be leasing the facility for approximately $22,000 per month for an initial
term of 10 years with the option to extend the lease for two consecutive five
year periods. The Company maintains a purchase option during the lease term for
approximately $2.6 million. The lower labor costs and proximity to new and
existing markets insures the Company's cost competitiveness and "just in time"
deliveries. In addition, the facility can service the Canadian market under the
NAFTA agreement, as well as South America, without incurring duties.

YEAR 2000 COMPLIANCE

The Year 2000 ("Y2K") problem is a result of computer programs
having been written using two rather than four digits to identify an applicable
year. Any equipment that has time sensitive embedded chips may recognize a date
using "00" as the year 1900 rather than the year 2000. If not corrected, many
computer programs/embedded chips could cause systems to fail or other errors,
leading to possible disruptions in operations or creation of erroneous results.
The Company, in an enterprise-wide effort, is taking steps to ensure that its
internal systems are secure from such failure and that its current products will
perform. The Company created a Y2K Compliance Project that focused on three
primary areas of concern: the Company's Information Technology ("IT plan"),
other Non-IT equipment ("Non-IT plan") and third party suppliers and customers
("TP plan").

The IT plan was begun in 1997 and consisted of three phases: 1)
investigation of the Company's affected systems; 2) assessment and design of a
remediation plan; and 3) remediation and testing. As of December 31, 1998, the
Company had completed the first and second phase and was 75% complete on the
third phase of the IT plan. The remaining 25% of the third phase consists of
system wide testing. Each IT system has been tested individually but not in
conjunction with the overall MIS environment. The Company established a testing
date in the first quarter of 1999, whereby all systems were rolled to year 2000,
to determine if there were any remaining deficiencies. Based on this system wide
testing, only minor problems were noted. The Company is currently addressing all
deficiencies noted and anticipates completion of this third phase by the end of
the first quarter of 1999. The Company believes that all internal IT systems
necessary to manage the business effectively have been replaced, modified or
upgraded.

13
14

The Non-IT plan was begun in 1998 and consists of two phases: 1)
identification and assessment of the Company's Non-IT equipment; and 2)
remediation and/or development of contingency plans. The Company's Non-IT
equipment used to conduct business at its business locations consist primarily
of production equipment, fire prevention equipment, security system equipment,
office equipment (besides computers), and communications equipment. The Company
is presently investigating whether time sensitive embedded chips are used in its
Non-IT equipment and if significant, are contacting the equipment vendors (via
Y2K questionnaires) to determine the status of their Y2K readiness. Based on the
results (as received) from the Y2K questionnaire, the Company is currently in
the process of developing contingency plans to minimize identified exposures.
Contingency plans include, but are not limited to, using alternate vendors,
using manual interfaces, and hard copies. The Company does not currently believe
that it faces material adverse issues related to its Non-IT equipment, although
there can be no assurance that this will be the case.

Like every other business, the Company is at risk from potential
Y2K failures on the part of its major business partners, including, but not
limited to, suppliers, vendors, financial institutions, benefit providers,
payroll services, and clients, as well as potential failures in public and
private infrastructure services, including electricity, water, transportation,
and communications. The Company in 1998 began its TP plan by initiating
communications (with Y2K questionnaires) with significant third party
businesses. The Company is reviewing the responses as received and is assessing
the third parties' efforts in addressing Y2K issues and is in the process of
determining the Company's vulnerability if these third parties fail to remediate
their Y2K problems. Contingency plans are being developed and include, but are
not limited to, using alternate vendors, using manual interfaces, and hard
copies. There can be no guarantee that the systems of third parties will be
remediated on a timely basis, or that such parties' failure to remediate Y2K
issues would not have a material adverse effect on the Company.

The total cost of adapting the Company's systems to the Y2K
problem is now estimated at approximately $350,000. Expenses incurred up to and
including 1998 totaled $300,000. The remaining provisions established by the
Company are expected to be adequate to cover costs still to be incurred.
Provisions have not been made for expenses that may arise from problems
occurring from third party non-compliance.

The goal is to have all significant Non-IT systems Y2K compliant
during the first half of 1999. This should allow time before December 31, 1999,
to verify or complete contingency plans for customers, suppliers and other third
parties who may not be Y2K compliant. Major business risks associated with the
Y2K problem include, but are not limited to, infrastructure failures,
disruptions to the economy in general, excessive cash withdrawal activity,
closure of government offices, foreign banks, and clearing houses, and a general
slow down in the economy. These risks, along with the risk of the Company
failing to adequately complete the remaining parts of its Y2K Compliance Project
and the resulting possible inability to properly process core business
transactions and meet contractual servicing agreements, could expose the Company
to loss of revenues, litigation and fluctuations in the price of the Company's
common stock. The Y2K problem is unique in that it has never previously
occurred; thus, it is not possible to completely foresee or quantify the overall
or any specific financial or operational impacts to the Company or to third
parties which provide significant services to the Company. The foregoing
constitutes a "forward-looking statement" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. It is based on management's current expectations, estimates and
projections, which could ultimately prove to be inaccurate. Factors which could
affect the Company's ability to be Y2K compliant by the end of 1999 include the
failure of customers, suppliers, governmental entities and others to achieve
compliance and the inaccuracy of certifications received from them.

CASUALTY EVENT - HURRICANE GEORGES

In late September 1998, the Company's three plants in the
Dominican Republic sustained property damage and began to experience business
interruption losses associated with Hurricane Georges. The Company has
maintained property damage insurance and is currently working with its insurance
providers in determining the estimated proceeds for the loss.

The Company had fully recovered the production levels of its Dominican Republic
plants by the end of the first quarter of 1999. The Company has maintained
business interruption insurance and is currently working with its insurance
providers in determining the estimated loss value of production/sales. The final
outcome/settlement of this claim can not be presently determined and thus no
amounts have been recorded in the statement of income for the year ended
December 31, 1998. The final outcome may or may not have a material

14
15

impact on the statement of income in the year in which an outcome/settlement is
made; however, the Company does not believe that the final outcome/settlement
will have a material impact on the Company's financial position, although there
can be no assurance that this will be the case.

SEASONALITY

In the Apparel segment, sales are typically higher in the third
and fourth quarters. The Company believes that there are three main reasons for
this trend in the third quarter: (i) sales of blanket sleepwear occur mostly
during this period; (ii) a portion of the Company's underwear business is
seasonal in that a product line for the fall season incorporates seasonal
designs, prints, colors and fabric weight; and (iii) sales in general rise as
retailers prepare for events such as back-to-school season (as consumers visit
stores to buy clothing for older children) and retailer initiated promotions of
baby apparel. In the fourth quarter, such trend is primarily due to greater
sales of blanket sleepers in the early fourth quarter and increased sales of
playwear in the late fourth quarter.

In the Hosiery segment, sales are generally non-seasonal, but
Auburn does experience somewhat higher sales in the second and third quarters as
a result of the seasonal use of the product and back to school sales. Auburn's
business is also influenced by promotions instituted by its customers.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, income
statement data expressed as a percentage of revenue. Any trends reflected by the
following table may not be indicative of future results.

Percent of Net Sales
------------------------------------------
Period from
January 22,
Year Ended Year Ended 1996 to
December 31, December 31, December 31,
1998 1997 1996
-----------------------------------------

Net sales ............................................ 100.0% 100.0% 100.0%
Cost of sales ........................................ 75.2 72.4 74.8
----- ----- -----
Gross margin ......................................... 24.8 27.6 25.2
Selling, general & administrative expenses ........... 13.8 13.7 12.9
Stock compensation ................................... 0.0 4.7 0.0
Other ................................................ 0.0 0.1 0.4
----- ----- -----
Income before interest and income taxes .............. 11.0 9.1 11.9
Interest expense, net ................................ 2.1 2.9 3.4
----- ----- -----
Income before income taxes and extraordinary item, net 8.9 6.2 8.5
Provision for income taxes ........................... 3.1 2.4 3.4
----- ----- -----
Income before extraordinary item, net ................ 5.8 3.8 5.1
Extraordinary item, net .............................. (0.1) (0.3) 0.0
----- ----- -----
Net income ........................................... 5.7% 3.5% 5.1%
===== ===== =====

BUSINESS SEGMENT DATA

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Net sales. Apparel net sales were $212.4 million for 1998, an
increase of $11.9 million or 5.9% over net sales of $200.5 million for 1997 due
to increased unit volume sales. Hosiery net sales were $66.1 million in 1998
compared to $1.5 million and $69.6 million for the two week period ended
December 31, 1997 and pro forma net sales for 1997, respectively.

15
16

Gross margin. Gross margin as a percentage of net sales declined
from 27.6% in 1997 to 24.8% in 1998. The decrease in gross margin was due in
part to Hosiery sales, which typically have lower gross margins than Apparel
sales, and in part to underabsorbed overhead, sales allowances and inventory
markdowns for Apparel due to lost production associated with Hurricane Georges
and inventory reduction efforts in late 1998.

Selling general & administrative expenses, excluding stock
compensation. Selling, general and administrative expenses (excluding stock
compensation) as a percentage of net sales increased to 13.8% in 1998, from
13.7% in 1997. The increase is primarily due to higher than expected
distribution costs at the Apparel segment.

Stock Compensation. In 1997, stock compensation of $9.5 million
was incurred in connection with the sale of stock below its fair market value to
certain executives and managers of the Company.

Income before interest and income taxes. Apparel income before
interest and income taxes as a percentage of Apparel sales was 12.0% in 1998
compared to 9.1% in 1997. Excluding stock compensation, Apparel income before
interest and income taxes as a percentage of Apparel sales was 13.9% in 1997 due
to higher gross margins. The Hosiery segment income before interest and taxes
was 7.7% of Hosiery sales in 1998 compared to 3.7% for pro forma 1997. The
improvement resulted from reduced SG&A expenses in 1998, including a $1.8
million year over year reduction in expense from forward foreign currency
exchange contracts.

Interest expense, net. Interest expense was approximately $5.8
million in both 1998 and 1997. Interest expense reflects the higher debt levels
maintained most of the year associated with the acquisition of the Hosiery
operations and higher Apparel inventories, offset by the Offering proceeds used
to repay debt in June 1998.

Provision for income taxes. Provision for income taxes was $8.6
million in 1998, compared to $4.8 million in 1997. The effective tax rate was
35.0% for 1998 compared to 38.2% for 1997. The Company's effective income tax
rate differed from the prior period effective rate due to the impact of foreign
earnings, certain of which are taxed at lower rates than in the United States,
partially offset by goodwill amortization, most of which is not deductible for
federal and state income tax purposes.

Extraordinary item, net. The Company repaid senior and junior
subordinated notes in June 1998 with the proceeds from the Offering, resulting
in the write-off of unamortized discount and loan costs of approximately $.3
million (net of an income tax benefit of $.2 million). In 1997, unamortized loan
costs and a prepayment penalty of $.7 million (net of an income tax benefit of
$.5 million) were expensed in connection with the replacement of the Company's
then existing credit facility with its current Credit Agreement.

Net income. As a result of the above, net income was $15.8
million for 1998, a 124.8% increase over the $7.0 million in 1997.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO PERIOD FROM JANUARY 22, 1996 TO
DECEMBER 31, 1996

Net sales. Net sales were $202.0 million in 1997, an increase of
$16.8 million, or 9.1%, from net sales of $185.2 million for the period January
22, 1996 to December 31, 1996. The revenue in 1997 included three weeks of
additional results compared to 1996 and also included $1.5 million relating to
Hosiery sales following the acquisition of the Hosiery segment on December 17,
1997. Excluding Hosiery results in 1997 and including the Predecessor Company's
results for the period January 1, 1996 through January 21, 1996, the increase in
net sales was $9.0 million, primarily resulting from increases in unit sales to
existing customers in core categories. The growth in unit sales was primarily
due to a greater emphasis on developing new product categories and the
introduction of new displays offering promotional buying advantages for the
consumer.

Gross margin. Gross margin as a percentage of net sales increased
to 27.6% in 1997 from 25.2% in 1996. Gross margin is determined after accruing
royalty expense under the Gerber license agreement of $3.5 million in 1997
versus $1.9 million in 1996. The principal reasons for the improved gross margin
as a percentage of net sales were lower manufacturing costs resulting from
improved operating efficiency, increased production in owned facilities and a
greater percentage of products made offshore.

16
17

Selling, general & administrative expenses, excluding stock
compensation. Selling, general and administrative expenses (excluding stock
compensation) as a percentage of net sales were 13.7% in 1997, versus 12.9% in
1996. The increase was principally due to expanding the Company's merchandising
and selling efforts to support sales growth, plus the cost in 1997 to relocate
central distribution activities into a lower cost facility in another state.

Stock compensation. In 1997, stock compensation of $9.5 million
was incurred in connection with the sale of stock below its fair market value to
certain executives and managers of the Company.

Income before interest and income taxes. Income before interest
and income taxes was $18.3 million in 1997, compared to $22.0 million in 1996.
Excluding stock compensation, 1997 income before interest and income taxes would
have been $27.7 million, or 13.7% of net sales compared to 11.9% in 1996. The
improvement resulted from the increased sales and improved gross margin
percentage.

Interest expense, net. Interest expense, net, was $5.8 million
for 1997 compared to $6.3 million for 1996. This decrease was primarily due to
decreased average debt outstanding and a more favorable rate structure for 1997
as compared to 1996.

Provision for income taxes. Provision for income taxes was $4.8
million in 1997 compared to $6.2 million in 1996. The effective tax rate was
38.2% for 1997 as compared to 39.7% for 1996. The higher effective tax rate in
1996 was primarily due to permanent non-deductible items associated with the
acquisition of the Company.

Extraordinary item, net. In connection with the Recent
Acquisition, the senior credit facility was replaced. The deferred financing
costs associated with this old facility were written off and charged to
operations in 1997. This expense, along with the associated prepayment
penalties, was approximately $0.7 million (net of a tax benefit of $0.5 million)
in 1997.

Net income. As a result of the above, net income was $7.0 million
for 1997 and $9.5 million for 1996. Excluding the impact of the stock
compensation, net income for 1997 would have been $12.9 million, a 35.8%
increase over 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary cash needs are working capital, capital
expenditures, and debt service. The Company has financed its working capital,
capital expenditures and debt service requirements primarily through internally
generated cash flow, in addition to funds borrowed under the Company's Credit
Agreement.

For the Apparel segment, working capital requirements vary
throughout the year. Working capital increases during the first half of the year
as inventory, primarily blanket sleepers, builds to support peak shipping
periods. The Hosiery segment is less seasonal and, while working capital tends
to increase slightly during the second half of the year, the variation is small.

Net cash (used in) provided by operating activities was $(3.9) million,
$(5.0) million and $32.3 million for 1998, 1997 and 1996, respectively. The
decrease in net cash provided by operating activities for 1998 and 1997 compared
to 1996 is primarily due to an increase in inventory and accounts receivable.
Inventory increased $15.9 million and $15.0 million in 1998 and 1997,
respectively. The higher inventories in 1998 resulted from inefficiencies in the
Company's production planning system (which is currently being upgraded) and
inefficiencies still occurring at the Company's new distribution center. The
higher inventories in 1997 represented higher levels of safety stocks maintained
on hand to minimize delivery time and properly service customers to limit
disruptions to customers during the transition to a new distribution warehouse
in 1997 and as a result of the need to keep more inventory on hand due to
increased reliance on offshore sourcing. The increase in accounts receivable of
$2.9 million and $8.1 million in 1998 and 1997 is primarily due to the timing of
sales and collections. In addition, accounts receivable for 1997 compared to
1996 was higher due to (i) shipments being made earlier in the fourth quarter of
1996, as compared to later in the fourth quarter of 1997, (ii) the inclusion of
$7.5 million of accounts receivable by Auburn at December 31, 1997 due to the
December 1997 acquisition of Auburn and (iii) the shipping by the Company of
certain orders later in December 1997 than typical, and increased shipments
during December 1997, resulting in higher receivables balances at December 31,
1997. The decrease in accrued expenses in 1998

17
18

compared to 1997 was primarily related to (i) the payment of the 1997 stock
compensation withholding taxes of approximately $4.6 million, (ii) $2.1 million
reduction of corporate incentives and (iii) $2.8 million reduction in interest
due to the repayment of all or a portion of the senior subordinated note
payable, junior subordinated note payable and term loan in connection with the
Company's Offering. Income taxes payable increased (decreased) $10.3 million and
$(10.2) million in 1998 and 1997, respectively. The change year over year
primarily related to differences in the timing of payments and due to the tax
impact of stock compensation late in 1997. The increase in net cash provided by
operating activities from January 22, 1996 to December 31, 1996 was primarily
due to (i) a $10.5 million decrease in inventory due to a corporate focus on
decreasing slow moving inventories, (ii) an increase of $10.3 million in 1996 in
accrued expenses and accounts payable, and (iii) a $6.0 million increase in 1996
income tax payable.

The Company invested $5.0 million, $4.2 million and $1.0 million
in capital expenditures during 1998, 1997 and 1996, respectively. These
expenditures consisted primarily of normal replacement of manufacturing
equipment, purchases of office equipment and upgrades to information systems. In
addition, the Company relocated its distribution center in 1997 resulting in a
one-time capital expenditure of $2.0 million. The Company is budgeting an
aggregate of $9.2 million for capital expenditures in 1999 including $3.4
million to replace or upgrade manufacturing equipment, $1.9 million for new
knitting/toe closing machines and $3.4 million to upgrade MIS systems. Gerber's
portion of the overall capital expenditures, $5.6 million, includes $3.4 million
for MIS systems upgrades; which the Company believes, if fully implemented,
could provide efficiencies in the areas of product development, forecasting and
planning.

Net cash provided by (used in) financing activities was $10.0
million, $30.3 million and $(17.7) million for 1998, 1997 and 1996,
respectively. The increase in cash provided by financing activities for 1998 and
1997 consisted of borrowings under the Company's revolving credit agreement to
fund the seasonally increased working capital needs as well as higher inventory
levels maintained. In addition, in 1998 the Company used the net proceeds of
$48.7 million from its Offering and the exercise of the over-allotment option
to: (a) repay a senior subordinated note in the aggregate principal amount of
$22.5 million; (b) repay a junior subordinated note in the aggregate principal
amount of $11.0 million; (c) repay certain other indebtedness of the Company in
the aggregate principal amount of $14.8 million; and (d) redeem 2,828.4 shares
of the Company's redeemable preferred stock in the aggregate amount of
approximately $0.4 million held by certain of its officers.

Under the terms of a ten year license agreement between the
Company and GPC, the initial term of which expires in 2006, the Company is not
required to pay royalty fees to GPC until the year 2002. Commencing in 2002, the
Company is required to pay an escalating royalty fee as a percentage of net
sales of Gerber licensed products throughout the term of the license agreement
and in each year of the two consecutive five-year renewal terms if such renewal
terms are negotiated. The Company is recording charges against earnings in
accordance with generally accepted accounting principles in order to ensure a
straight-line effect of the total royalty expense expected to be incurred over
the initial ten year license term. The charges recorded prior to 2002 represent
non-current liabilities that will begin to be paid to GPC in 2002. The
initiation of such royalty payments in year 2002 may adversely affect the
Company's cash flow.

In connection with the acquisition of Auburn, the Company's
then-existing senior credit facility was refinanced and replaced with a new
Credit Agreement which consisted of a $40.0 million term loan to finance the
Acquisition and a $60.0 million revolving facility to fund current working
capital requirements. The Company had approximately $15.3 million outstanding
and $37.6 million available under the revolving credit portion of the Credit
Agreement at December 31, 1998. The Credit Agreement subjects the Company to
standard covenants and events of default. As of December 31, 1998, the Company
was in compliance with all such covenants and was not in default.

Auburn's Irish subsidiary maintains an IR(pound)1.6 million loan
facility (U.S. $2.4 million as of December 31, 1998) with the National Irish
Bank consisting of a combined term loan, overdraft, guarantee and foreign
exchange line. This facility is subject to annual review. The overdraft facility
and foreign exchange line are available at the Company's discretion with each
term loan draw down subject to the National Irish Bank's approval. At present,
the Irish subsidiary has no outstanding balances under any portion of the loan
facility. In addition, the Irish subsidiary has received capital and employment
grants from the Industrial Development Authority (the "IDA") which could become
repayable to the IDA (if certain conditions are not met) in the aggregate amount
of up to IR(pound)1,815,800 (U.S. $2.7 million) as of December 31, 1998. Auburn
is a party to two loan agreements with the County of Logan,

18
19

Kentucky related to the issuance in 1989 of two series of industrial revenue
bonds of which approximately $2.2 million remained outstanding at December 31,
1998.

The Company believes that cash generated from operations,
together with amounts available under the Credit Agreement and the Irish
subsidiary's loan facility with the National Irish Bank, will be adequate to
meet its working capital, capital expenditures, and debt service requirements
for the next 12 months.

INFLATION

In general, costs are affected by inflation and the Company may
experience the effects of inflation in future periods. The Company does not
currently consider the impact of inflation to be significant in the businesses
or countries in which the Company operates.

RECENT ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). This statement established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Adoption of FAS 133 is not anticipated to have a material impact on the
Company's financial statements.

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

The Company considered the provisions of Financial Reporting
Release No. 48 "Disclosure of Accounting Policies for Derivative Financial
Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative
and Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments."
The Company had no holdings of derivative financial or commodity-based
instruments at December 31, 1998. A review of the Company's other financial
instruments and risk exposures at that date revealed that the Company had
exposure to interest rate and foreign currency exchange rate risks.

INTEREST RATES

The Company's balance sheet consists of a revolving credit
facility and a term loan that are subject to interest rate risk. Both loans are
priced at floating rates of interest, with a basis of LIBOR or prime rate at the
Company's option. As a result of these factors, at any given time, a change in
interest rates could result in either an increase or decrease in the Company's
interest expense. At December 31, 1998, the Company performed sensitivity
analysis to assess the potential effect of a 1% increase or decrease in interest
rates and concluded that near-term changes in interest rates should not
materially affect the Company's financial position, results of operations or
cash flows.

FOREIGN CURRENCY EXCHANGE RATES

The Company's earnings are affected by fluctuations in the value
of the U.S. Dollar as compared to foreign currencies, predominately in European
countries, as a result of the sale of its products in foreign markets and
translation adjustments associated with the conversion of the Company's foreign
subsidiaries into the reporting currency (U.S. Dollar). As such, the Company's
exposure to changes in foreign currency exchange rates could impact the
Company's financial position, results of operations or cash flows. At December
31, 1998, the Company performed sensitivity analysis to assess the potential
effect of a 10% increase or decrease in foreign exchange rates and concluded
that near-term changes in exchange rates should not materially affect the
Company's financial position, results of operations or cash flows. This
calculation assumes that each exchange rate would change in the same direction
relative to the U.S. Dollar. In addition to the direct effects of changes in
exchange rates, which are a changed dollar value of the resulting sales, changes
in exchange rates also affect the volume of sales or the foreign currency sales
price as competitors' products become more or less attractive. The Company's
sensitivity

19
20

analysis of the effects of changes in foreign currency exchange rates did not
factor in a potential change in sales levels or local currency prices.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See Index to Consolidated Financial Statements which appears on
page F-1 herein.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information required by this Item will be contained in the
Company's definitive Proxy Statement for its Annual Meeting of Stockholders, to
be filed on or before April 30, 1999, and such information is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

20
21

PART IV

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

(1) Listing of Documents.

(a) Financial Statements. The financial statements filed as part
of this report are listed on the Index to Consolidated Financial
Statements on page F-1.

(b) Financial Statement Schedules.

(i) Schedule II - Supplemental Schedule of Valuation and
Qualifying Accounts

All other schedules for which provision is made in
the applicable regulations of the Securities and
Exchange Commission are not required under the
related instructions, are inapplicable or not
material, or the information called for thereby is
otherwise included in the financial statements and
therefore have been omitted.

(2) Reports on Form 8-K.

None.

(3) Exhibits.

Exhibit
Number Description
- ------- --------------------------------------------------------------

3.1 (1) Form of Amended and Restated Certificate of Incorporation of
the registrant.
3.2 (1) Form of Amended and Restated Bylaws of the registrant.
4.1 (1) Form of certificate representing shares of Common Stock, $0.01
par value per share.
4.2 (1) Credit Agreement by and among GCIH, Auburn, GCI, the domestic
subsidiaries of the same and various lending institutions
dated as of April 3, 1998.
4.3 (1) First Amendment to Credit Agreement by and among GCIH, Auburn,
GCI, the domestic subsidiaries of the same and various lending
institutions dated as of April 3, 1998.
4.4 (1) Second Amendment to Credit Agreement by and among GCIH,
Auburn, GCI, the domestic subsidiaries of the same and various
lending institutions dated as of June 4, 1998.
4.5 (2) Gerber Childrenswear, Inc. 1998 Long-Term Performance
Incentive Plan, dated as of March 3, 1998.
10.1 (1) Stock Purchase Agreement by and between GPC and GCIH dated as
of December 14, 1995.
10.2 (1) Form of Executive Stock Purchase Agreement between GCIH and
certain of its Executives, each dated January 22, 1996.
10.3 (1) Form of Manager Securities Purchase Agreement between GCIH and
certain of its Managers.
10.4 (1) Securities Purchase Agreement by and between GCIH and CVC,
dated as of January 22, 1996.
10.5 (1) Form of Director Stock Purchase Agreement between GCIH and
certain of its directors.
10.6 (1) Amended and Restated Registration Rights Agreement by and
between GCIH, Citicorp Venture Capital, Ltd., and other
stockholders of GCIH, dated as of June 5, 1998.
10.7 (1) Stock Purchase Agreement by and among GCIH, James P. Manning,
Eileen Manning and Certain Charitable Remainder Trusts dated
as of November 12, 1997.
10.8 (1) Share Purchase Agreement by and among GCIH, James P. Manning
and Eileen Manning dated as of December 16, 1997.
10.9 (1) Amended and Restated Senior Subordinated Credit Agreement
dated as of December 17, 1997 by and among GCIH, GCI, CMP and
others.
10.10 (1) Subordination and Intercreditor Agreement by and among
Nationsbank, CMP, GCI and others dated as of December 17,
1997.
10.11 (1) 12% Junior Subordinated Note in the face amount of
$11,000,000, issued by GCIH to GPC as of December 29, 1997.
10.12 (1) License Agreement by and between Warner Bros. Division of Time
Warner Entertainment Company, L.P. and GCI dated as of March
12, 1998.
10.13 (1) License Agreement by and between GPC and GCI dated as of
January 22, 1996.

21
22

10.14 (1) License Agreement among The Kendall Company, GPC, and Soft
Care Apparel, Inc. (n/k/a GCI), dated as of July 31, 1986, as
amended pursuant to that certain Letter Agreement dated
January 19, 1996 by and among The Kendall Company, GPC, GCI
and GCIH.
10.15 (1) Trademark License Agreement between Auburn and Wilson Sporting
Goods Co. dated April 29, 1997; as sublicensed to Sport Socks
Ireland as of October 1, 1997, effective as of January 1,
1998; as amended as of December 5, 1997.
10.16 (1) Lease Agreement by and between GCI and Operadora Zona Franca
De la Romana, S.A. for property located at Zona Franca
Industrial La Romana (Sewing, Packaging).
10.17 (1) Lease Agreement by and between GCI and Operadora Zona Franca
De la Romana, S.A. for property located at Altos Buvillaverde.
10.18 (1) Lease Agreement by and between GCI and Operadora Zona Franca
De la Romana, S.A. for property located at Altos Buvillaverde.
10.19 (1) Lease Amendment by and between GCI and the Industrial
Development Board of the City of Evergreen, Alabama, dated as
of August 28, 1997, and assignment and assumption agreement
and resolution of the Industrial Development Board dated as of
the same date.
10.20 (1) Lease Agreement between GCI and Highland Properties, LLC dated
as of November 25, 1996, and amendments thereto, for the lease
of the Greenville facility.
10.21 (1) Severance Agreement by and between GPC, GCI and David E. Uren,
dated as of March 18, 1995.
10.22 (1) Form of Amendment No. 1 to the Executive Stock Purchase
Agreement.
10.23 (2) Lease Agreement by and between GCW Mexico, S.A. de C.V. and
Parques Industriales Amistad Alaianzas, S.A. de C.V. for
property located in Matamoros, Mexico.
10.24 (2) Waiver and termination agreement by and between Citicorp
Venture Capital, Ltd. and GCI related to Manager, Investor,
Director and Executive Stock Purchase Agreements.
21.1 (2) Subsidiaries of the registrant.
27 (2) Financial Data Schedule.

- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement
#333-47327 on Form S-1 filed on June 10, 1998 with the Securities and
Exchange Commission, and herein incorporated by reference.
(2) Filed herewith.

The Company will furnish a copy of any of the above exhibits not included herein
upon the written request of such stockholder and the payment to the Company of
the reasonable expenses incurred by the Company in furnishing such copy or
copies.

22
23

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.

GERBER CHILDRENSWEAR, INC.
(Registrant)

DATE: March 26, 1999 By: /s/ Richard L. Solar
----------------------------------
Name: Richard L. Solar
Title: Senior Vice President and
Chief Financial Officer

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

Signature Title Date
--------- ----- ----

/s/ Edward Kittredge Director, Chairman, Chief Executive March 26, 1999
- ---------------------------------------------- Officer and President
Edward Kittredge (Principal Executive Officer)

/s/ Richard L. Solar Director, Senior Vice President and March 26, 1999
- ---------------------------------------------- Chief Financial Officer
Richard L. Solar (Chief Financial Officer)

/s/ David E. Uren Vice President of Finance, Secretary March 26, 1999
- ---------------------------------------------- and Treasurer
David E. Uren (Chief Accounting Officer)

/s/ Richard Cashin Director March 26, 1999
- ----------------------------------------------
Richard Cashin

/s/ Lawrence R. Glenn Director March 26, 1999
- ----------------------------------------------
Lawrence R. Glenn

/s/ James P. Manning Director March 26, 1999
- ----------------------------------------------
James P. Manning

/s/ Joseph Medalie Director March 26, 1999
- ----------------------------------------------
Joseph Medalie

/s/ John D. Weber Director March 26, 1999
- ----------------------------------------------
John D. Weber

23
24

Gerber Childrenswear, Inc.

Index to Consolidated Financial Statements

Report of Independent Auditors..............................................F-2
Consolidated Balance Sheets at December 31, 1998 and 1997...................F-3
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 1998 and 1997 and
the period from January 22, 1996 to December 31, 1996.......................F-5
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1998 and 1997 and the
period from January 22, 1996 to December 31, 1996...........................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 and the period from January 22,
1996 to December 31, 1996...................................................F-8
Notes to Consolidated Financial Statements.................................F-10

F-1
25

Report of Ernst & Young LLP, Independent Auditors

Board of Directors
Gerber Childrenswear, Inc.

We have audited the accompanying consolidated balance sheets of Gerber
Childrenswear, Inc. as of December 31, 1998 and 1997 and the related
consolidated statements of income and comprehensive income, changes in
shareholders' equity and cash flows for the years ended December 31, 1998 and
1997 and the period from January 22, 1996 to December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14 (1)(b).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Gerber
Childrenswear, Inc. at December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for the years ended December 31, 1998 and
1997 and the period from January 22, 1996 to December 31, 1996, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

/s/ ERNST & YOUNG LLP

Greenville, South Carolina
March 3, 1999

F-2
26

Gerber Childrenswear, Inc.

Consolidated Balance Sheets

December 31,
1998 1997
----------------------
(In thousands)

ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 1,780 $ 536
Accounts receivable, net of allowances for doubtful accounts of $1,487,000
(1998) and $876,000 (1997) (Note 8) .................................... 36,621 34,506
Income taxes receivable .................................................. -- 4,635
Inventories (Notes 3 and 8) .............................................. 87,020 71,041
Deferred income taxes (Note 5) ........................................... 4,806 399
Other .................................................................... 2,534 1,273
----------------------
Total current assets ....................................................... 132,761 112,390

Property, plant and equipment, net (Notes 4 and 8) ......................... 25,224 24,569
Deferred income taxes (Note 5) ............................................. 4,678 2,281
Excess of cost over fair value of net assets acquired, net ................. 20,607 21,840
Debt issuance costs, net ................................................... 880 1,448
Other ...................................................................... 1,588 1,363
----------------------

$185,738 $163,891
======================

See accompanying notes.

F-3
27

Gerber Childrenswear, Inc.

Consolidated Balance Sheets (Continued)

December 31,
1998 1997
-------------------------
(In thousands)

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 11,815 $ 14,759
Accrued expenses (Note 6) .................................................. 12,387 24,099
Income taxes payable ....................................................... 5,666 --
Current portion of obligations under capital leases (Note 9) ............... 101 119
Revolving credit loan payable (Note 8) ..................................... 15,300 250
Current portion of long-term debt (Note 8) ................................. 4,746 7,286
-------------------------
Total current liabilities .................................................... 50,015 46,513

Accrued pension and post-retirement benefit cost (Note 10) ................... 6,092 5,058
Other accrued liabilities (Note 7) ........................................... 11,074 8,713
Obligations under capital leases, less current portion (Note 9) .............. -- 104
Long-term debt, less current portion (Note 8) ................................ 19,631 69,474
Redeemable preferred stock, 12% non-voting, cumulative, par value $.01 per
share, 117,402.7 shares authorized, 116,452 outstanding (1997); (liquidation
and redemption value of $100 per share) including accrued dividends of
$2,965,000 (Note 11) ....................................................... -- 14,610

Commitments and contingent liabilities (Note 20)

Shareholders' equity (Note 12):
Common Stock, par value $.01, 20,774,000 shares authorized, 8,352,949
shares outstanding (1998) ................................................. 84 --
Common Stock, Class A, par value $.01 per share, 750,000.0 shares
authorized, 587,328.3 shares outstanding (1997) ........................... -- 7
Common Stock, Class B, par value $.01 per share, 11,842,000 shares
authorized, 8,692,315 shares outstanding (1998); 250,000 shares
authorized, 166,915.3 shares outstanding (1997) ........................... 87 2
Common Stock, Class C with 225 votes per share, par value $.01 per share,
2,500 shares authorized and outstanding (1997) ............................ -- --
Common Stock, non-voting Class D, par value $.01 per share, 191,250
shares authorized, none issued (1997) ..................................... -- --
Treasury stock ............................................................. (33) (75)
Detachable stock warrants .................................................. 189 189
Additional paid-in capital ................................................. 69,776 6,537
Other comprehensive income ................................................. 745 --
Retained earnings .......................................................... 28,511 13,526
-------------------------
99,359 20,186
Less unearned compensation under restricted stock plan ..................... 433 767
-------------------------
Total shareholders' equity ................................................... 98,926 19,419
-------------------------
$ 185,738 $ 163,891
=========================

See accompanying notes.

F-4
28

Gerber Childrenswear, Inc.

Consolidated Statements of Income and Comprehensive Income

Period from
January 22,
Year Ended Year Ended 1996 to
December 31, December 31, December 31,
1998 1997 1996
-------------------------------------------
(In thousands, except for per share data)

Net sales ............................................... $ 278,496 $ 202,037 $ 185,223
Cost of sales ........................................... 209,458 146,294 138,608
-----------------------------------------
Gross margin ............................................ 69,038 55,743 46,615

Expenses:
Selling, general and administrative expenses (Note 12) 38,559 37,231 23,894
Other ................................................. -- 231 689
-----------------------------------------
38,559 37,462 24,583
-----------------------------------------
Income before interest and income taxes ................. 30,479 18,281 22,032
Interest expense, net of interest income ................ 5,808 5,798 6,308
-----------------------------------------
Income before income taxes .............................. 24,671 12,483 15,724
Provision for income taxes (Note 5) ..................... 8,646 4,764 6,244
-----------------------------------------
Income before extraordinary item ........................ 16,025 7,719 9,480
Extraordinary item, net of income tax benefit of $163,000
(1998) and $452,000 (1997) (Note 15) .................. (266) (708) --
-----------------------------------------
Net income .............................................. 15,759 7,011 9,480
Foreign currency translation ............................ 745 -- --
-----------------------------------------
Comprehensive income .................................... $ 16,504 $ 7,011 $ 9,480
=========================================

Net income .............................................. $ 15,759 $ 7,011 $ 9,480
Less preferred stock dividends .......................... (774) (1,637) (1,328)
-----------------------------------------
Net income available to common shareholders ............. $ 14,985 $ 5,374 $ 8,152
=========================================

Per share amounts:
Earnings per common share:
Income before extraordinary item ..................... $ 1.08 $ .55 $ .72
Extraordinary item ................................... (.02) (.07) --
-----------------------------------------
Net income ............................................ $ 1.06 $ .48 $ .72
=========================================
Earnings per common share - assuming dilution:
Income before extraordinary item .................... $ .87 $ .41 $ .53
Extraordinary item .................................. (.02) (.04) --
-----------------------------------------
Net income ............................................ $ .85 $ .37 $ .53
=========================================

See accompanying notes.

F-5
29

Gerber Childrenswear, Inc.

Consolidated Statement of Changes in Shareholders' Equity

Years Ended December 31, 1998 and 1997 and Period from
January 22, 1996 to December 31, 1996

(In thousands, except share data)

Class A Class A Class B Class B Class C Class C Class D
Common Common Common Common Common Common Common Common Common
Shares Stock Shares Stock Shares Stock Shares Stock Shares
-----------------------------------------------------------------------------------------

Balance at January 22, 1996 ............. -- $-- 661,655.1 $ 7 144,594.9 $ 1 2,500 $ -- --
Net income ............................ -- -- -- -- -- -- -- -- --
Dividend on redeemable preferred stock -- -- -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------
Balance at December 31, 1996 ............ -- -- 661,655.1 7 144,594.9 1 2,500 -- --
Repurchase of shares for treasury ..... -- -- (74,326.8) -- (30,929.6) -- -- -- --
Pursuant to restricted stock plan:
Shares issued ....................... -- -- -- -- 53,250.0 1 -- -- --
Amortization ........................ -- -- -- -- -- -- -- -- --
Forfeitures ......................... -- -- -- -- -- -- -- -- --
Net income ............................ -- -- -- -- -- -- -- -- --
Dividend on redeemable preferred stock -- -- -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------
Balance at December 31, 1997 ............ -- -- 587,328.3 7 166,915.3 2 2,500 -- --
Repurchase of shares for treasury ..... -- -- -- -- -- -- -- -- --
Recapitalization and reorganization ... 4,177,220 42 (587,328.3) (7) 8,580,463.7 86 (2,500) -- --
Initial public offering ............... 4,140,000 41 -- -- -- -- -- -- --
Conversion of stock ................... 55,064 1 -- -- (55,064) (1) -- -- --
Pursuant to restricted stock plan:
Amortization ........................ -- -- -- -- -- -- -- -- --
Forfeitures ......................... -- -- -- -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- -- -- -- --
Net income ............................ -- -- -- -- -- -- -- -- --
Dividend on redeemable preferred stock -- -- -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------
Balance at December 31, 1998 ............ 8,372,284 $ 84 -- $-- 8,692,315 $ 87 -- $ -- --
=========================================================================================

See accompanying notes.

F-6
30

Gerber Childrenswear, Inc.

Consolidated Statement of Changes in Shareholders' Equity (Continued)

Years Ended December 31, 1998 and 1997 and Period from
January 22, 1996 to December 31, 1996

(In thousands, except share data)

Other
Class D Detachable Additional Compre-
Common Treasury Treasury Stock Paid-in hensive Retained Unearned
Stock Shares Stock Warrants Capital Income Earnings Compensation Total
------------------------------------------------------------------------------------------

Balance at January 22, 1996 ............. $ -- -- $ -- $ 189 $ 752 $-- $ -- $ -- $ 949
Net income ............................ -- -- -- -- -- -- 9,480 -- 9,480
Dividend on redeemable preferred stock -- -- -- -- -- -- (1,328) -- (1,328)
------------------------------------------------------------------------------------------
Balance at December 31, 1996 ............ -- -- -- 189 752 -- 8,152 -- 9,101
Repurchase of shares for treasury ..... -- 105,256.4 (128) -- -- -- -- -- (128)
Pursuant to restricted stock plan:
Shares issued ....................... -- (53,250.0) 53 -- 5,857 -- -- (1,000) 4,911
Amortization ........................ -- -- -- -- -- -- -- 161 161
Forfeitures ......................... -- -- -- -- (72) -- -- 72 --
Net income ............................ -- -- -- -- -- -- 7,011 -- 7,011
Dividend on redeemable preferred stock -- -- -- -- -- -- (1,637) -- (1,637)
------------------------------------------------------------------------------------------
Balance at December 31, 1997 ............ -- 52,006.4 (75) 189 6,537 -- 13,526 (767) 19,419
Repurchase of shares for treasury ..... -- 20,835 (42) -- -- -- -- -- (42)
Recapitalization and reorganization ... -- (53,506.4) 84 -- 14,805 -- -- -- 15,010
Initial public offering ............... -- -- -- -- 48,617 -- -- -- 48,658
Conversion of stock ................... -- -- -- -- -- -- -- -- --
Pursuant to restricted stock plan:
Amortization ........................ -- -- -- -- -- -- -- 151 151
Forfeitures ......................... -- -- -- -- (183) -- -- 183 --
Foreign currency translation adjustment -- -- -- -- -- 745 -- -- 745
Net income ............................ -- -- -- -- -- -- 15,759 -- 15,759
Dividend on redeemable preferred stock -- -- -- -- -- -- (774) -- (774)
------------------------------------------------------------------------------------------
Balance at December 31, 1998 ............ $ -- 19,335 $ (33) $ 189 $69,776 $745 $28,511 $ (433) $98,926
==========================================================================================

See accompanying notes.

F-7
31

Gerber Childrenswear, Inc.

Consolidated Statements of Cash Flows

Period from
January 22,
Year Ended Year Ended 1996 to
December 31, December 31, December 31,
1998 1997 1996
-----------------------------------------
(In thousands)

Operating activities
Net income ................................................ $ 15,759 $ 7,011 $ 9,480
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation ........................................... 4,527 1,976 1,339
Amortization of goodwill and acquisition costs ......... 1,130 84 83
Amortization of debt issuance costs and discount ....... 283 478 412
Amortization of deferred income ........................ (340) -- --
Provision for allowance for doubtful accounts .......... 700 252 791
Provision for deferred income taxes .................... (6,798) 3,461 (5,391)
Compensation expense pursuant to restricted stock
plan (noncash) ....................................... -- 4,858 --
Amortization pursuant to restricted stock plan ......... 151 161 --
Gain on disposal of assets ............................. (28) (2) --
Extraordinary item ..................................... 266 708 --
Other .................................................. 2 -- --
Changes in operating assets and liabilities:
Accounts receivable .................................. (2,908) (8,051) (2,289)
Inventories .......................................... (15,876) (15,048) 10,487
Other assets ......................................... (776) 538 (500)
Accounts payable ..................................... (1,813) 253 3,668
Accrued expenses ..................................... (12,542) 3,824 6,627
Income taxes payable ................................. 10,344 (10,204) 6,000
Accrued pension and post-retirement benefit cost ..... 1,034 1,037 1,034
Other accrued liabilities ............................ 2,980 3,628 510
------------------------------------
Net cash (used in) provided by operating activities ....... (3,905) (5,036) 32,251

Investing activities
Collections on notes receivable ........................... -- 207 3,226
Purchases of property, plant and equipment ................ (5,029) (4,180) (1,047)
Proceeds from sale of property, plant and equipment ....... 84 445 --
Purchase of Auburn Holdings, Inc., net of cash acquired and
seller receivables ...................................... -- (38,840) --
------------------------------------
Net cash (used in) provided by investing activities ....... (4,945) (42,368) 2,179

F-8
32

Gerber Childrenswear, Inc.

Consolidated Statements of Cash Flows (Continued)

Period from
January 22,
Year Ended Year Ended 1996 to
December 31, December 31, December 31,
1998 1997 1996
----------------------------------------
(In thousands)

Financing activities
Borrowings under revolving credit agreement ................... $ 88,240 $ 88,824 $ 162,903
Repayments under revolving credit agreement ................... (73,190) (88,574) (177,755)
Proceeds from long-term borrowings ............................ -- 41,600 --
Principal payments on long-term borrowings .................... (53,156) (10,205) (2,875)
Principal payments on capital leases .......................... (132) (88) --
Proceeds from initial public offering, net of expenses ........ 48,658 -- --
Repurchase of common stock .................................... (42) (128) --
Repurchase of preferred stock ................................. (374) (95) --
Proceeds from sale of restricted stock ........................ -- 53 --
Debt issuance costs ........................................... -- (1,039) --
--------------------------------------
Net cash provided by (used in) financing activities ........... 10,004 30,348 (17,727)
--------------------------------------

Effect of foreign exchange rate changes on cash ............... 90 -- --
--------------------------------------

Net increase (decrease) in cash and cash equivalents .......... 1,244 (17,056) 16,703
Cash and cash equivalents at beginning of period .............. 536 17,592 889
--------------------------------------
Cash and cash equivalents at end of period .................... $ 1,780 $ 536 $ 17,592
======================================

Supplemental disclosure of cash flow information
Noncash items:
Conversion of redeemable preferred stock into capital
stock ..................................................... $ 15,010 -- --
Reduction of notes payable, offset by reduction of notes
receivable ................................................ -- $ 1,500 --

See accompanying notes.

F-9
33

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements

December 31, 1998

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Gerber Childrenswear, Inc. (formerly known as GCIH, Inc., and referred to herein
as, the "Company") acquired 100% of the outstanding stock of certain apparel
operations from Gerber Products Company. The acquisition was effective as of the
start of business on January 22, 1996 and was accounted for as a purchase. The
purchase price was allocated to the net assets acquired based on their
respective fair values and the balance was treated as excess of cost over fair
value of net assets acquired. The total cost of the acquisition was
approximately $74 million. The excess of the cost over fair value of net assets
acquired is being amortized over twenty years on a straight-line basis.

The acquisition was funded in part by long-term borrowings and a note payable to
the seller. The stock purchase agreement provided for the adjustment of the $74
million purchase price based on net working capital, as defined, at January 22,
1996. Calculated net working capital as defined resulted in a reduction of the
purchase price by $4.7 million. This was collected through cash receipts of $3.2
million in 1996 and a $1.5 million reduction in the junior subordinated note
payable to Gerber Products Company in 1997.

On December 17, 1997, the Company acquired Auburn Hosiery Mills, Inc. ("Auburn")
and Sport Socks Company (Ireland) Limited ("Sport Socks") for $28 million and
$12 million in cash, respectively. Both companies are engaged in the production
and sale of various styles of socks to retail chain stores. The acquisitions
were financed through a term loan of $40 million. The acquisitions have been
recorded using the purchase method of accounting. Accordingly, the purchase
price has been allocated to assets and liabilities of the acquired companies
based on their estimated fair values as of the effective date of acquisition.
The purchase price exceeded the fair value of net assets acquired by
approximately $20 million, which is being amortized on a straight-line basis
over twenty years. The results of operations of Auburn and Sport Socks are
included in the accompanying consolidated financial statements from the date of
acquisition.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries GCI IP Sub. Inc., Gerber Childrenswear Canada,
Inc., Costura Dominicana, Inc. and GCW Holdings, Inc. All material intercompany
balances and transactions have been eliminated in consolidation.

EARNINGS PER COMMON SHARE

Earnings per common share are calculated by dividing net income by the weighted
average shares outstanding in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Immediately prior to and in connection
with the consummation of the Company's initial public offering in June 1998, the
Company declared a 15.4693 to 1 stock split. All references to the weighted
average shares and per share amounts elsewhere in the consolidated financial
statements and the related footnotes have been restated as appropriate to
reflect the effect of the split for all periods presented.

F-10
34

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION

Substantially all revenue is recognized when products are shipped to customers.

ROYALTY EXPENSE RECOGNITION

The Company has certain royalty agreements and recognizes royalty expenses for
products sold under such agreements over the life and terms of the specific
royalty agreements on an accrual basis.

One such ten-year royalty agreement with Gerber Products Company contains a
"royalty-free" period for the first six years and escalating royalty rates for
the last four years of the agreement. The Company has estimated the total
royalties to be paid over the life of the agreement based on estimated sales
during the last four years and is recording current charges to operations for
these royalties on a straight line basis over the ten-year term of the
agreement.

CONCENTRATION OF CREDIT RISK

The Company manufactures infant apparel and products that are primarily sold to
retail entities throughout the United States. The Company's primary customers
are mass merchants and discount stores. Sales to three customers represented
approximately 57%, 65% and 60% for 1998, 1997 and 1996, respectively. Sales to
one customer were 42% in 1998 and 44% in 1997 and 1996. The Company performs
periodic credit evaluations of their customers and generally does not require
collateral for credit sales.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents. At certain times,
the amount of cash deposited at a bank may exceed the limit on insured deposits.

Undesignated cash is invested each night through participation in a bank
investment plan and bears interest at a variable rate. Under this agreement, the
bank sells securities that are direct obligations of or are fully guaranteed by
the United States government to the Company each night and repurchases the
investments the next business day.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method.

F-11
35

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DEBT ISSUANCE COSTS

Debt issuance costs are being amortized over the lives of the related debt.
Accumulated amortization amounted to approximately $226,000 and $224,000 at
December 31, 1998 and 1997, respectively. Amortization expense is included in
interest expense in the accompanying statements of income.

ADVERTISING

Advertising costs of approximately $5,241,000, $5,071,000 and $3,250,000 for
fiscal years 1998, 1997 and 1996, respectively, were expensed as incurred.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation of property,
plant and equipment is computed by the straight-line method over the estimated
useful lives of the assets for financial reporting purposes and computed based
upon "Modified Accelerated Cost Recovery System" guidelines for income tax
reporting purposes.

INCOME TAXES

The Company accounts for its income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Deferred income
taxes are recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments", requires disclosure of fair value information
about financial instruments for which it is practicable to estimate that value.
The carrying amounts reported in the balance sheet for cash and long-term debt
approximate their fair value. The carrying amounts of variable-rate debt
approximate fair value due to interest rates adjusting to market rates.

EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED

The excess of investments in consolidated subsidiaries over the net asset value
at acquisition ("goodwill") is being amortized on a straight-line basis over
periods not exceeding twenty years. On an annual basis the Company reviews the
recoverability of goodwill based primarily upon an analysis of undiscounted cash
flows from the acquired businesses. Accumulated amortization amounted to
approximately $1,286,000 and $167,000 at December 31, 1998 and 1997,
respectively.

F-12
36

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FOREIGN CURRENCY TRANSLATION

The financial statements of all foreign subsidiaries were prepared in their
respective local currencies and translated into U.S. dollars based on the
current exchange rate at the end of the period for the balance sheet and a
weighted average rate for the period on the statements of income.

FORWARD EXCHANGE CONTRACTS

The Company utilizes forward foreign currency exchange contracts to minimize
currency exchange risk. The Company does not utilize financial instruments for
trading or other speculative purposes. The terms of these contracts are
generally less than one year. Unrealized gains or losses resulting from changes
in currency exchange rates are recognized currently.

STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price of
underlying stock on the date of grant, no compensation expense is recorded. The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123").

NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). This statement established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Adoption of FAS 133 is not anticipated to have a material impact on the
Company's financial statements.

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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

F-13
37

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECLASSIFICATIONS

Certain 1997 and 1996 amounts have been reclassified to conform to current
presentations.

2. RECAPITALIZATION, MERGER AND INITIAL PUBLIC OFFERING

Immediately prior to and in connection with the consummation of the Company's
Initial Public Offering ("Offering"), GCIH, Inc. (former parent of Gerber
Childrenswear, Inc.) and Gerber Childrenswear, Inc. consummated a series of
transactions pursuant to which the certificate of incorporation of GCIH, Inc.
was amended and restated ("Recapitalization") to provide for the
reclassification of its authorized common stock into two classes of capital
stock (Common Stock and Class B Common Stock). Each share of the Common Stock
has one vote per share and the Class B Common Stock has no voting rights. The
amended and restated certificate also provides that each share of Class B Common
Stock will be convertible at the option of the holder at any time into one share
of Common Stock and each share of Common Stock held by a holder of Class B
Common Stock will be convertible at the option of the holder at any time into
one share of Class B Common Stock.

Prior to the consummation of the Offering and immediately after giving effect to
the Recapitalization, Gerber Childrenswear, Inc. was merged into GCIH, Inc. with
GCIH, Inc. being the surviving entity (the "Merger"). The amended and restated
certificate provided for the change of the corporate name from GCIH, Inc. to
Gerber Childrenswear, Inc. The Merger resulted in a tax-free liquidation of the
non-surviving entity. The following capital stock transactions occurred in
connection with the Merger. All of the Company's Class A and Class C Common
Stock outstanding as of the Merger were exchanged for either shares of Class B
Common Stock (new Class B) or Common Stock pursuant to a stock split of 15.4693
to 1. All of the outstanding shares of the Company's Class B Common Stock (old
Class B) of the Company were exchanged for shares of the Company's Common Stock
at a specified ratio of 15.4693 to 1. All of the outstanding warrants to
purchase shares of Class D Common Stock of the Company were exchanged into
warrants to purchase shares of the Class B Common Stock (new Class B) of the
Company at a specified ratio of 15.4693 to 1. Upon consummation of the Merger,
113,623.6 shares of the Company's Redeemable Preferred stock were converted into
1,241,537 shares of Common Stock of the Company and 2,828.4 shares were redeemed
for cash equal to the liquidation value per share at the time of the Merger. The
Company retired all shares held in the treasury.

During June 1998, the Company consummated its Offering with 4,140,000 shares
(including the exercise of the underwriters' over-allotment option) of its
Common Stock being sold at a price of $13.00 per share. The net proceeds from
the Offering were $48.7 million and were used to: (a) repay a senior subordinate
note in the aggregate principal amount of $22.5 million; (b) repay a junior
subordinate note in the aggregate principal amount of $11.0 million; (c) repay
certain other indebtedness of the company in the aggregate principal amount of
$14.8 million; and (d) redeem 2,828.4 shares of the Company's redeemable
preferred stock in the aggregate amount of approximately $0.4 million held by
certain of its officers.

F-14
38

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

3. INVENTORIES

Inventories consist of the following (in thousands):

December 31,
1998 1997
------------------------

Raw materials....... $11,863 $14,192
Work in process..... 13,515 12,507
Finished goods...... 61,642 44,342
------------------------
$87,020 $71,041
========================

Inventory markdowns are periodically recorded based on analysis by the Company
in order to reflect inventories at the lower of cost or market. If the cost of
the inventories exceeds their market value, provisions are made currently for
the difference between the cost and the market value. Provision for potentially
obsolete, irregular or slow moving inventory is made based on management's
analysis of inventory levels, future sales forecasts and expected sales prices.

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following (in thousands):

December 31,
1998 1997
------------------------

Land ............................... $ 783 $ 742
Buildings and leasehold improvements 9,284 9,060
Machinery and equipment ............ 18,692 14,997
Furniture and other equipment ...... 2,637 1,750
Vehicles ........................... 299 291
Construction in progress ........... 1,240 948
------------------------
32,935 27,788
Less accumulated depreciation ...... 7,711 3,219
------------------------
$25,224 $24,569
========================

F-15
39

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

5. INCOME TAXES

Income before provision for income taxes consisted of (in thousands):

1998 1997 1996
-----------------------------------

United States... $21,281 $12,483 $15,724
International... 3,390 - -
-----------------------------------
$24,671 $12,483 $15,724
===================================

Current and deferred income tax expense are as follows (in thousands):

1998 1997 1996
-----------------------------------------
Current:

Federal ............... $ 13,847 $ 1,168 $ 10,379
State ................. 1,259 135 1,256
International ......... 344 -- --
-----------------------------------------
Total current ........... 15,450 1,303 11,635

Deferred:
Inventory reserves .... (3,932) 372 (1,019)
Postretirement benefits (228) (220) (232)
Accrued royalty ....... (1,059) (1,309) (716)
Inventory methods ..... 11 2,676 (750)
Other ................. (1,596) 1,942 (2,674)
-----------------------------------------
Total deferred .......... (6,804) 3,461 (5,391)
-----------------------------------------
Income tax expense ...... $ 8,646 $ 4,764 $ 6,244
=========================================

Income tax expense is different from the amount that would result from applying
the U.S. Federal statutory tax rate to income before income taxes as follows (in
thousands):

1998 1997 1996
------------------------------------

Tax at U.S. Federal statutory rate .............. $ 8,635 $4,244 $5,346
State income tax, net of U.S. Federal tax benefit 641 412 519
International rate difference ................... (947) -- --
Other ........................................... 317 108 379
------------------------------------
Income tax expense .............................. $ 8,646 $4,764 $6,244
====================================

F-16
40

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

5. INCOME TAXES (CONTINUED)

The components of the Company's net deferred tax assets are as follows (in
thousands):

December 31,
1998 1997
---------------------

Deferred tax assets:

Inventory reserves ......... $ 4,579 $ 647
Postretirement benefits .... 1,957 1,729
Accrued royalty ............ 3,084 2,025
Other ...................... 4,236 3,915
---------------------
Total deferred tax assets .... 13,856 8,316

Deferred tax liabilities:
Depreciation ............... 1,715 2,404
Inventory methods .......... 1,937 1,926
Other ...................... 720 1,306
---------------------
Total deferred tax liabilities 4,372 5,636
---------------------
Net deferred tax assets ...... $ 9,484 $2,680
=====================

Income taxes paid were approximately $7,481,000, $11,734,000 and 5,638,000 in
1998, 1997 and 1996, respectively.

6. ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

December 31,
1998 1997
----------------------

Interest ........................ $ 66 $ 2,914
Salaries, wages and payroll taxes 3,039 7,618
Incentives ...................... 1,541 3,610
Advertising ..................... 912 1,684
Self-insurance reserves ......... 409 1,828
Royalties ....................... 1,399 1,194
Other ........................... 5,021 5,251
----------------------
$12,387 $24,099
======================

F-17
41

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

7. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following (in thousands):

December 31,
1998 1997
---------------------

Royalties $ 8,224 $5,400
Other ... 2,850 3,313
---------------------
$11,074 $8,713
=====================

8. LONG-TERM DEBT

Long-term debt consists of (in thousands):

December 31,
1998 1997
----------------------

Term loan with a bank, principal due on a quarterly payment schedule
through September 30, 2002 ................................................... $21,821 $38,500
Senior subordinated note payable with interest accruing at 12%; one-half of
principal is due in January 2003 with remaining balance in January 2004 ...... -- 22,500
Junior subordinated note payable to Gerber Products Company with interest
accruing at 12%; principal is due January 2006 ............................... -- 11,000
Note payable to a bank with interest accruing at 8.75%; principal and
interest payable in monthly installments of $15,992 .......................... -- 1,583
Industrial Revenue Bond, payable in annual principal installments of
$100,000 through March 1, 1999, then annual principal installments of $200,000
through March 1, 2004, plus interest at a floating rate not to
exceed 14% (3.2% - 4.45% in 1998 and 3.3% - 4.9% in 1997) .................... 1,100 1,200
Industrial Revenue Bond, payable in annual principal installments of
$100,000 through October 1, 1999, then annual principal installments of
$200,000 through October 1, 2004, plus interest at a floating interest rate
not to exceed 14% (3.2% - 4.45% in 1998 and 3.3% - 4.9% in 1997) ............. 1,100 1,200
Other .......................................................................... 356 921
----------------------
24,377 76,904
Less current portion ........................................................... 4,746 7,286
Less unamortized discount ...................................................... -- 144
----------------------
$19,631 $69,474
======================

F-18
42

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

8. LONG-TERM DEBT (CONTINUED)

Substantially all of the Company's property, plant and equipment, accounts
receivable, and inventory have been pledged as collateral for the above debt.
The loan agreements require the Company to maintain certain financial ratios and
restricts the payment of dividends.

The term loan and revolving credit facility may be maintained from time to time,
at the Company's option, as (a) Base rate loans which bear interest at a rate
equal to the greater of 1) the Federal Funds Rate plus 1/2 of 1%, or 2) the
prime rate; plus an applicable percentage based on the current Leverage Ratio,
or a (b) Eurodollar loan which accrues interest at the LIBOR rate plus an
applicable percentage based on the current Leverage Ratio. The term loan's
interest rate at December 31, 1998 and 1997 was 6.3% and 7.4%, respectively. The
Company's revolving credit facility had $15,300,000 and $250,000 outstanding at
December 31, 1998 and 1997, respectively. The revolving credit facility's
interest rate at December 31, 1998 and 1997 was 6.9% and 8.8%, respectively. The
revolving credit loan permits the Company to borrow up to a maximum of
$60,000,000 subject to specified levels of eligible inventory, eligible
inventory on order under letters of credit, and accounts receivable with the
total amount reduced by outstanding letters of credit. At December 31, 1998 and
1997, the Company had available borrowings up to approximately $37,600,000 and
$50,000,000, respectively. The Company also had outstanding letters of credit in
conjunction with purchases from foreign vendors of approximately $3,519,000 and
$5,747,000 at December 31, 1998 and 1997, respectively.

Beginning in 1999, the revolving credit facility and term loan agreement require
mandatory principal prepayments annually based on excess cash flow, as defined.

The Company has available a foreign credit facility which had no outstanding
balance at December 31, 1998 and $735,000 outstanding at December 31, 1997. This
credit facility permits the Company to borrow up to a maximum of $1,938,000 on a
long-term basis and $447,000 as a bank overdraft. All amounts outstanding at
December 31, 1997 relate to the long-term portion.

Total interest paid was approximately $8,449,000, $6,000,000 and $3,142,000 in
fiscal years 1998, 1997 and 1996, respectively.

The aggregate annual maturities of long-term debt at December 31, 1998 are as
follows (in thousands):

1999 $ 4,746
2000 6,683
2001 6,751
2002 5,397
2003 400
Thereafter 400
-------
$24,377
=======

F-19
43

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

9. LEASES

The Company leases buildings, machinery and equipment under operating leases
with various renewal terms and expiring in various years through 2012. Three of
these leases contain renewal options totaling 20 years.

Future minimum lease payments as of December 31, 1998 under leases classified as
capital leases and operating leases, are as follows (in thousands):

Operating
Fiscal Year Ending in Capital Leases Leases
- --------------------------------- --------------------------

1999 ............................ $106 $1,603
2000 ............................ -- 1,099
2001 ............................ -- 982
2002 ............................ -- 932
2003 ............................ -- 883
Thereafter ......................... -- 1,735
--------------------------
Total minimum lease payments .............. 106 $7,234
===========
Less amounts representing interest ........ 5
---------
Present value of net minimum lease payments 101
Less current portion ...................... 101
---------
$--
=========

Rent expense totaled approximately $2,220,000, $2,292,000 and $2,318,000 for the
years ended December 31, 1998 and 1997 and for the period from January 22, 1996
to December 31, 1996, respectively.

Assets recorded under capital leases, net of accumulated amortization, were
approximately $1,400,000 and $1,600,000 at December 31, 1998 and 1997,
respectively. The assets recorded under capital leases are pledged as collateral
for the capital lease obligations. Amortization of assets recorded under capital
lease obligations is included with depreciation expense.

F-20
44

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

10. EMPLOYEE BENEFIT PLANS

The Apparel segment of the Company has a non-contributory defined benefit
pension plan that covers substantially all full-time domestic employees.
Benefits are based on the employee's years of service and, for salaried
employees, each employee's compensation during the last five years of
employment. The Company's funding policy is to make the minimum annual
contributions required by applicable regulations. The plan assets are invested
primarily in mutual funds via the Gerber Childrenswear, Inc. Retirement Plans
Master Trust and in a group annuity contract with an insurance company.

The Apparel segment also sponsors a defined benefit postretirement health care
plan covering all full-time domestic employees. The plan is contributory, with
retiree contributions adjusted annually, and contains other cost sharing
features such as deductibles and coinsurance. The accounting for the plan
anticipates future cost-sharing changes to the written plan that are consistent
with the Company's expressed intent to increase the retiree contribution rate
annually for the expected general inflation rate for that year. The Company's
policy is to fund the cost of medical benefits in amounts determined at the
discretion of management. In conjunction with the acquisition (Note 1), Gerber
Products Company assumed the accumulated benefit obligation for retirees.

Change in benefit obligations and change in plan net assets, as estimated by
consulting actuaries, as of December 31, 1998 and 1997 are as follows (in
thousands):

Pension Benefits Postretirement Benefits
--------------------------- ---------------------------
1998 1997 1998 1997
----------------------------------------------------------

Change in benefit obligation
Benefit obligation at beginning of year ...... $ 25,418 $ 25,169 $ 3,690 $ 3,807
Service cost ............................... 883 851 483 423
Interest cost .............................. 1,746 1,709 215 222
Amendments ................................. -- -- -- --
Actuarial losses (gains) ................... 403 (765) (526) (733)
Benefits paid .............................. (1,657) (1,546) (54) (29)
----------------------------------------------------------
Benefit obligation at end of year ............ 26,793 25,418 3,808 $ 3,690
----------------------------------------------------------

Change in plan assets
Fair value of plan assets at beginning of year 26,514 24,465 -- --
Actual return on plan assets ............... 3,523 3,595 -- --
Company contributions ...................... -- -- 54 29
Benefits paid .............................. (1,657) (1,546) (54) (29)
----------------------------------------------------------
Fair value of plan assets at end of year ..... $ 28,380 $ 26,514 $ -- $ --
----------------------------------------------------------

F-21
45

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

10. EMPLOYEE BENEFIT PLANS (CONTINUED)

Pension Benefits Postretirement Benefits
--------------------------- ---------------------------
1998 1997 1998 1997
-----------------------------------------------------------

Reconciliation of prepaid/(accrued)
Funded status of plan (underfunded) $ 1,587 $ 1,096 $(3,808) $(3,690)
Unrecognized net actuarial gain ... (2,461) (1,542) (1,410) (922)
-----------------------------------------------------------
Accrued benefit cost .............. (874) (446) (5,218) (4,612)
-----------------------------------------------------------

Weighted average assumptions
Discount rate obligations ......... 7.00% 7.25% 7.00% 7.25%
Discount rate for expense ......... 7.25% 7.25% 7.25% 7.25%
Expected return on plan assets .... 9.00% 9.00% -- --
Rate of compensation increase ..... 4.00% 5.50% -- --

Net pension and postretirement cost included the following components at
December 31, 1998, 1997 and 1996 (in thousands):

Pension Benefits 1998 1997 1996
----------------------------------------

Service cost - benefits earned during the period $ 883 $ 851 $ 845
Interest cost on projected benefit obligation .. 1,746 1,709 1,541
Actual return on plan assets ................... (2,196) (2,116) (1,917)
----------------------------------------
Net periodic pension cost ...................... $ 433 $ 444 $ 469
========================================

Postretirement Benefits 1998 1997 1996

Service cost - benefits earned during the period $ 483 $ 423 $ 418
Interest cost on projected benefit obligation .. 215 222 227
Amortization of net gain ....................... (62) (29) (15)
----------------------------------------
Net periodic postretirement cost ............... $ 636 $ 616 $ 630
========================================

The weighted-average annual assumed rate of increase in the per capita cost of
covered medical benefits is 8.0 percent to 9.5 percent and is assumed to
decrease gradually to 5.5 percent by 2003 and remain at that level thereafter.

F-22
46

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

10. EMPLOYEE BENEFIT PLANS (CONTINUED)

The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, increasing the assumed health care cost trend
rate by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1998 by approximately
$698,000 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for 1998 by approximately $138,000.
Decreasing the assumed health care cost trend rate by one percentage point in
each year would decrease the accumulated postretirement benefit obligation as of
December 31, 1998 by approximately $588,000 and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for 1998 by
approximately $115,000.

Gerber Childrenswear, Inc. also has an investment retirement plan for salaried
employees which provides for salaried employees and Company contributions. The
Company will match 50% of the employee's contributions up to a maximum company
match of 3% of the employee's compensation. In addition, the Company has a
defined contribution plan for the benefit of its full-time hourly employees. The
Company contributes one and one-half percent of each participant's annual
compensation to the plan. Employees are not allowed to contribute to this plan.
Effective January 1, 1997, these two plans were merged together. Total expense
under these plans was approximately $447,000, $439,000 and $230,000 for 1998,
1997 and 1996, respectively.

Sport Socks has a defined contribution pension plan. The assets of the plan are
held in an independently administered fund. Total expense under the plan was
approximately $140,000 in 1998. There was no plan expense recognized between
December 17, 1997 and December 31, 1997.

Auburn has a defined contribution plan covering all employees who have two years
of service with at least 1,000 hours each year. The contribution is determined
by its Board of Directors annually. Effective June 1, 1998, the plan was amended
and restated whereby the Company will match 50% of the employee's contributions
up to a maximum company match of 3% of the employee's compensation. Total
expense under the plan was $171,000 in 1998. There was no plan expense
recognized between December 17, 1997 and December 31, 1997.

11. REDEEMABLE PREFERRED STOCK

The outstanding redeemable preferred stock had a scheduled redemption date of
January 31, 2007 at $100 per share plus all accrued and unpaid dividends
thereon. In connection with the Company's Offering in June 1998, 113,623.6
shares of the redeemable preferred stock were converted into 1,241,537 shares of
Common Stock of the Company and 2,828.4 shares were redeemed for cash equal to
the liquidation value per share at that time.

F-23
47

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

12. SHAREHOLDERS' EQUITY

During 1997, the Company sold shares of its Class B common stock to certain
employees for $1 per share. The total proceeds for the shares were $50,750 and
the total fair value for the shares was approximately $5,836,000. Some of these
shares were immediately vested while others vest over a five-year period. At the
time of issuance of the unvested shares, the difference between the amount paid
by the employees and the fair market value was credited to additional paid-in
capital with a corresponding charge to unearned compensation. The unearned
compensation is amortized to earnings over five years on a straight-line basis.
Amortization expense for 1998 and 1997 was $151,000 and $161,000, respectively.
Previously amortized amounts for shares forfeited are credited to compensation
expense in the year of forfeiture. At the time of issuance of the shares which
were vested, the difference between the amount paid by the employees and the
fair market value was credited to additional paid-in capital with a
corresponding charge to expense for $4,858,000.

Certain shareholders have demand registration rights with respect to shares of
common stock owned by them.

In connection with obtaining the $22,500,000 note payable for the acquisition of
Gerber Childrenswear, Inc., the Company issued a warrant to the lender to
purchase 2,958,503 shares of Class B Common Stock (non-voting Class D common
stock prior to Merger) at a nominal price. The warrant, in whole or in part, may
be exercised at anytime through January 22, 2006. The recorded value of the
warrant at the date of issuance was approximately $189,000 (based on the
relative fair values of the warrant and the note) and reduced the face amount of
the note payable.

13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate fair value due to the short-maturity
of these instruments.

Receivables: The carrying amounts reported in the balance sheet for receivables
approximate their fair value.

Long and short-term liabilities: The carrying amounts of the Company's long and
short-term borrowings approximate their fair value based on the Company's
analysis of long and short term rates available for similar financing.

F-24
48

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Forward exchange contracts: The fair value of the Company's forward foreign
currency exchange contracts is estimated by reference to quoted prices. The
contract value and estimated fair value of uncommitted contracts at December 31,
1998 was approximately $3,982,000 and $4,235,000, respectively. The contract
value and estimated fair value of uncommitted contracts at December 31, 1997 was
approximately $9,620,000 and $10,637,000, respectively.

14. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

1998 1997 1996
-------------------------------------------------------

Numerator:
Income before extraordinary item ............................ $ 16,025,000 $ 7,719,000 $ 9,480,000
Preferred stock dividends ................................... (774,000) (1,637,000) (1,328,000)
-------------------------------------------------------
Income available to common shareholders ..................... 15,251,000 6,082,000 8,152,000
Extraordinary item, net ..................................... (266,000) (708,000) --
-------------------------------------------------------
Numerator for basic and diluted earnings per share - net income
available to common shareholders ............................ $ 14,985,000 $ 5,374,000 $ 8,152,000
=======================================================

Denominator:
Denominator for basic earnings per share - weighted-average
shares ..................................................... 14,121,279 11,105,797 11,350,599
Effect of dilutive securities:
Warrants ................................................... 2,958,335 2,958,333 2,957,514
Nonvested stock and Options ................................ 545,600 654,398 1,160,197
-------------------------------------------------------
Denominator for diluted earnings per share - adjusted weighted-
average shares .............................................. 17,625,214 14,718,528 15,468,310
=======================================================

Basic earnings per share ...................................... $ 1.06 $ .48 $ .72
=======================================================

Diluted earnings per share .................................... $ .85 $ .37 $ .53
=======================================================

F-25
49

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

15. EXTRAORDINARY ITEM

In June 1998, the Company repaid senior and junior subordinated notes in the
principal amount of $22.5 million and $11.0 million, respectively. The write-off
of unamortized discount and loan costs totaling $266,000 (net of an income tax
benefit of $163,000) is included as an extraordinary item in the accompanying
statements of income for the year ended December 31, 1998.

In December 1997, the Company repaid its term note payable in the principal
amount of $6,500,000. The Company was required to pay a prepayment penalty of
$160,000 in connection with this transaction. The write-off of unamortized loan
costs and prepayment penalty totaling $708,000 (net of the income tax benefit of
$452,000) is included as an extraordinary item in the accompanying statement of
income for the year ended December 31, 1997.

16. CASUALTY EVENT

In late September 1998, the Company's three plants in the Dominican Republic
sustained property damage and began to experience business interruption losses
associated with Hurricane Georges. The Company has maintained property damage
insurance and is currently working with its insurance providers in determining
the estimated proceeds for the loss.

The Company's loss of production and current inefficiencies (business
interruption) in the Dominican Republic plants were recovered during the first
quarter of 1999. The Company has maintained business interruption insurance and
is currently working with its insurance providers in determining the estimated
loss value of production/sales. The final outcome/settlement of this claim can
not be presently determined and thus no amounts have been recorded in the
statement of income for the year ended December 31, 1998. The final outcome may
or may not have a material impact on the statement of income in the year in
which an outcome/settlement is made; however, the Company does not believe that
the final outcome/settlement will have a material impact on the Company's
financial position, although there can be no assurance that this will be the
case.

17. LONG-TERM PERFORMANCE INCENTIVE PLAN AND EXECUTIVE DEFERRAL PLAN

In June 1998, the Company adopted a Long-Term Performance Incentive Plan (the
"Incentive Plan") designed to provide incentives to present and future key
employees of the Company and its subsidiaries as may be selected by the
Compensation Committee of the Board of Directors (the "Committee"). The
Incentive Plan provides for the granting to Participants the following types of
incentive awards: stock options, stock appreciation rights, restricted stock,
performance units, performance grants and other awards deemed appropriate by the
Committee. An aggregate of 750,000 shares of Common Stock will be reserved for
issuance under the Incentive Plan. The Incentive Plan affords the Company
latitude in tailoring incentive compensation for the retention of key employees.
This plan also limits the number of shares each participant in the plan shall be
entitled to receive to no more than 25,000 shares of Common Stock in any
calendar year and is scheduled to terminate ten years from the inception date of
the Plan.

F-26
50

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

17. LONG-TERM PERFORMANCE INCENTIVE PLAN AND EXECUTIVE DEFERRAL PLAN (CONTINUED)

During 1998, options were granted to certain officers of the Company at prices
equal to the market value of the shares at the date of grant and generally vest
and become exercisable ratably over a five year period, commencing one year
after the grant date and expire not more than ten years after the date of grant.
The following table summarizes the transactions of the Incentive Plan during
1998:

Weighted Average
Shares Exercise Price
--------------------------

Outstanding at beginning of year -- --
Granted ..................... 34,000 $ 10.98
Exercised ................... -- --
Forfeited ................... -- --
Expired ..................... -- --
--------------------------
Outstanding at end of year ..... 34,000 $ 10.98
==========================

Options exercisable at year-end -- --
==========================

As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123"), the Company applies APB 25 and
related interpretations in accounting for stock options; accordingly, no
compensation expense has been recognized by the Company for its Incentive Plan
in 1998. Had compensation expense been determined based upon the fair value of
the stock options at grant date consistent with the method of FAS 123, the
Company's net income and earnings per share would have not been materially
different from amounts reported.

Effective January 1, 1998, the Company established an Executive Deferral Plan
for certain officers of the Company. The Plan enables participants to defer
income on a pre-tax basis and is not funded. Participants are credited interest
at current market rates. The charge to interest expense was approximately
$24,000 in 1998.

F-27
51

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

18. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS

The Company operates in two business segments: apparel and hosiery. The apparel
segment consists of the production and sale of infant and toddler's sleepwear,
playwear, underwear, bedding and cloth diapers to mass merchandise outlets in
the United States under the Gerber trademark and private labels. The hosiery
segment, which was acquired on December 17, 1997, consists of the production and
sale of sport socks under the Wilson, Coca Cola, and Dunlop names to major
retailers in the United States and Europe.

Net sales, income (loss) before interest and income taxes, depreciation and
amortization, and capital additions are reported based on the operations of each
business segment or geographic region. Assets are those used exclusively in the
operations of each business segment or geographic region, or which are allocated
when used jointly.

The following tables present sales and other financial information by business
segment and geographic region for the years 1998, 1997 and the period from
January 22, 1996 to December 31, 1996:

1998 1997 1996
------------------------------------------

Business Segments (In thousands)
Net sales:
Apparel ........................................... $212,403 $ 200,526 $185,223
Hosiery ........................................... 66,093 1,511 --
------------------------------------------
Total net sales ..................................... $278,496 $ 202,037 $185,223
==========================================

Income (loss) before interest and income taxes:
Apparel ........................................... $ 25,414 $ 18,322 $ 22,032
Hosiery ........................................... 5,065 (41) --
------------------------------------------
Total income (loss) before interest and income taxes: $ 30,479 $ 18,281 $ 22,032
==========================================

Depreciation and amortization:
Apparel ........................................... $ 2,853 $ 2,472 $ 1,834
Hosiery ........................................... 3,087 66 --
------------------------------------------
Total depreciation and amortization ................. $ 5,940 $ 2,538 $ 1,834
==========================================

F-28
52

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

18. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED)

1998 1997 1996
----------------------------------------

Capital additions:
Apparel ................................... $ 3,657 $ 4,180 $ 1,047
Hosiery ................................... 1,372 -- --
----------------------------------------
Total capital additions ..................... $ 5,029 $ 4,180 $ 1,047
========================================
Assets:
Apparel ................................... $136,246 $113,200
Hosiery ................................... 49,492 50,691
------------------------
Total assets ................................ $185,738 $163,891
========================
Inventories (included in assets):
Apparel ................................... $ 79,748 $ 62,485
Hosiery ................................... 7,272 8,556
------------------------
Total inventories (included in assets) ...... $ 87,020 $ 71,041
========================
Geographic Areas

Net sales:
United States ............................. $256,253 $202,037 $185,223
All other ................................. 22,243 -- --
----------------------------------------
Total net sales ............................. $278,496 $202,037 $185,223
========================================
Income before interest and income taxes:
United States ............................. $ 26,789 $ 18,281 $ 22,032
All other ................................. 3,690 -- --
----------------------------------------
Total income before interest and income taxes $ 30,479 $ 18,281 $ 22,032
========================================
Assets:
United States ............................. $161,175 $144,691
All other ................................. 24,563 19,200
------------------------
Total assets ................................ $185,738 $163,891
========================

The Apparel segment had sales to Wal-Mart and two other customers that accounted
for 40%, 11% and 10% of total Apparel sales in 1998, respectively; 43%, 10%, and
11% of total Apparel sales in 1997, respectively; 44%, 6%, and 10% of total
Apparel sales in 1996, respectively. The Hosiery segment had sales to Wal-Mart
that accounted for 45% and 80% of that segment's sales for 1998 and 1997 (two
week period), respectively.

F-29
53

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of unaudited financial data regarding the Company's
quarterly results of operations.

1(st) 2(nd) 3(rd) 4(th)
Quarter Quarter Quarter Quarter Total
--------------------------------------------------------------------------

(In thousands, except per share amounts)
1998
Net sales .......................... $ 64,647 $ 63,879 $ 73,879 $ 76,091 $ 278,496
Gross margin ....................... 17,435 17,371 17,811 16,421 69,038
Income before extraordinary item ... 3,420 3,883 4,262 4,460 16,025
Extraordinary item, net - loss on
early extinguishment of debt ..... -- (266) -- -- (266)
Net income ......................... 3,420 3,617 4,262 4,460 15,759

Basic earnings per share:
Income before extraordinary item . .27 .28 .26 .27 1.08
Extraordinary item, net .......... -- (.02) -- -- (.02)
Net income ......................... .27 .26 .26 .27 1.06

Diluted earnings per share:
Income before extraordinary item . .21 .23 .21 .22 .87
Extraordinary item, net .......... -- (.02) -- -- (.02)
Net income ......................... .21 .21 .21 .22 .85

The fourth quarter of 1998 reflects favorable adjustments of approximately
$1,000,000 (net of income taxes), which included reductions in incentives, or
$0.05 per diluted share.

F-30
54

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - (CONTINUED)

1(st) 2(nd) 3(rd) 4(th)
Quarter Quarter Quarter Quarter Total
--------------------------------------------------------------------------

(In thousands, except per share amounts)
1997
Net sales .......................... $ 45,350 $ 40,162 $ 60,323 $ 56,202 $ 202,037
Gross margin ....................... 12,696 12,122 16,837 14,088 55,743
Income (loss) before extraordinary
item ............................. 2,524 2,104 4,834 (1,743) 7,719
Extraordinary item, net - loss on
early extinguishment of debt ..... -- -- -- (708) (708)
Net income (loss) .................. 2,524 2,104 4,834 (2,451) 7,011

Basic earnings per share:
Income (loss) before extraordinary
item ........................... .19 .16 .40 (.20) .55
Extraordinary item, net .......... -- -- -- (.07) (.07)
Net income (loss) .................. .19 .16 .40 (.27) .48

Diluted earnings per share:
Income (loss) before extraordinary
item ........................... .14 .12 .30 (.20)(*) .41
Extraordinary item, net .......... -- -- -- (.07)(*) (.04)
Net income (loss) .................. .14 .12 .30 (.27)(*) .37

- ----------
* Same as basic - no incremental shares are included due to loss in the
quarter.

20. COMMITMENTS AND CONTINGENT LIABILITIES

EMPLOYMENT CONTRACTS

The Company has employment contracts in the normal course of business with three
of its officers with remaining terms of approximately two years.

YARN CONTRACTS

The Company depends on certain raw materials such as yarn for the manufacturing
of its products. In order to hedge against price increases of yarn, the Company
actively manages its cost through contracts with its yarn suppliers with terms
of up to one year. The Company has contracts to purchase up to approximately
14,600,000 pounds of yarn in 1999. Contract prices are equal to or below current
market prices.

F-31
55

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

21. PRO FORMA INFORMATION (UNAUDITED)

On December 17, 1997, the Company acquired Auburn and Sport Socks. The following
summarized unaudited pro forma financial information assumes the acquisitions
had occurred on January 1 of each year:

1997 1996
-------------------------
(In thousands, except
per share data)

Net sales ...................... $270,100 $246,921
Income before extraordinary item 6,625 10,856
Net income ..................... 5,917 10,856
Basic earnings per share ....... .39 .84
Diluted earnings per share ..... .29 .62

The amounts are based upon certain assumptions and estimates and do not reflect
any benefit from economies which might be achieved from combined operations. The
pro forma results do not necessarily represent results which would have occurred
if the acquisition had taken place on the basis assumed above, nor are they
indicative of the results of future combined operations.

F-32
56

SCHEDULE II

Gerber Childrenswear, Inc.

Supplemental Schedule of Valuation and Qualifying Accounts

(In thousands)

Balance at Charged Balance at
Beginning to Cost and End of
Description of Period Expenses Deductions Period
- --------------------------------------------------------------------------------------------

Year ended December 31, 1998:
Allowance for doubtful accounts $876 700 89(1) $1,487

Year ended December 31, 1997:
Allowance for doubtful accounts 791 252 167(1) 876

Period ended December 31, 1996:
Allowance for doubtful accounts -- 791 -- 791

(1) Allowances, uncollected amounts and credit balances written off against
reserve, net of recoveries.

F-33