GERBER CHILDRENSWEAR INC, 10-K, 1999-03-31

GERBER CHILDRENSWEAR INC
10-K, 1999-03-31
APPAREL & OTHER FINISHD PRODS OF FABRICS & SIMILAR MATL

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<PAGE> 1

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.

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I
Page
----
<S> <C> <C>
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
</TABLE>

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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.

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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.

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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

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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

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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

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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.

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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:

<TABLE>
<CAPTION>
Owned Approximate
Location Use or Leased Floor Space (Sq. Ft.)
- --------------------------------- -------------------------------- --------- ----------------------
<S> <C> <C> <C>
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
</TABLE>

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.

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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.

<TABLE>
<CAPTION>
1998
------------------------
HIGH LOW
------- -------
<S> <C> <C>
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
</TABLE>

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.

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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.

<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
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
</TABLE>

<TABLE>
<CAPTION>
Predecessor
Company Company
--------------------------------- --------------------
December 31,
--------------------------------------------------------
Balance Sheet Data: 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
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 -- --
</TABLE>

See following page for notes to the selected financial data.

11
<PAGE> 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).

<TABLE>
<S> <C>
Net Sales ........................... $ 1.5
Gross Margin ........................ .2
SG&A Expenses ....................... .2
Loss before interest and income taxes *
Net loss ............................ *
</TABLE>

* Less than $50,000.

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

<TABLE>
<S> <C>
Net Sales ........................... $ 6.7
Gross Margin ........................ 1.1
SG&A Expenses ....................... 1.4
Loss before interest and income taxes (.3)
Net loss ............................ (.2)
</TABLE>
(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
<PAGE> 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
<PAGE> 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
<PAGE> 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.

<TABLE>
<CAPTION>
Percent of Net Sales
------------------------------------------
Period from
January 22,
Year Ended Year Ended 1996 to
December 31, December 31, December 31,
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>

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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/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
</TABLE>

23
<PAGE> 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
<PAGE> 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
<PAGE> 26

Gerber Childrenswear, Inc.

Consolidated Balance Sheets

<TABLE>
<CAPTION>
December 31,
1998 1997
----------------------
(In thousands)
<S> <C> <C>
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
======================
</TABLE>

See accompanying notes.

F-3
<PAGE> 27

Gerber Childrenswear, Inc.

Consolidated Balance Sheets (Continued)

<TABLE>
<CAPTION>
December 31,
1998 1997
-------------------------
(In thousands)
<S> <C> <C>
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
=========================
</TABLE>

See accompanying notes.

F-4
<PAGE> 28

Gerber Childrenswear, Inc.

Consolidated Statements of Income and Comprehensive Income

<TABLE>
<CAPTION>
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)

<S> <C> <C> <C>
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
=========================================
</TABLE>

See accompanying notes.

F-5
<PAGE> 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)

<TABLE>
<CAPTION>
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
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 -- $ -- --
=========================================================================================
</TABLE>

See accompanying notes.

F-6
<PAGE> 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)

<TABLE>
<CAPTION>
Other
Class D Detachable Additional Compre-
Common Treasury Treasury Stock Paid-in hensive Retained Unearned
Stock Shares Stock Warrants Capital Income Earnings Compensation Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
==========================================================================================
</TABLE>

See accompanying notes.

F-7
<PAGE> 31

Gerber Childrenswear, Inc.

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Period from
January 22,
Year Ended Year Ended 1996 to
December 31, December 31, December 31,
1998 1997 1996
-----------------------------------------
(In thousands)
<S> <C> <C> <C>
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
</TABLE>

F-8
<PAGE> 32

Gerber Childrenswear, Inc.

Consolidated Statements of Cash Flows (Continued)

<TABLE>
<CAPTION>
Period from
January 22,
Year Ended Year Ended 1996 to
December 31, December 31, December 31,
1998 1997 1996
----------------------------------------
(In thousands)
<S> <C> <C> <C>
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 --
</TABLE>

See accompanying notes.

F-9
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 38

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

3. INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
December 31,
1998 1997
------------------------
<S> <C> <C>
Raw materials....... $11,863 $14,192
Work in process..... 13,515 12,507
Finished goods...... 61,642 44,342
------------------------
$87,020 $71,041
========================
</TABLE>

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):

<TABLE>
<CAPTION>
December 31,
1998 1997
------------------------
<S> <C> <C>
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
========================
</TABLE>

F-15
<PAGE> 39

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

5. INCOME TAXES

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

<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------

<S> <C> <C> <C>
United States... $21,281 $12,483 $15,724
International... 3,390 - -
-----------------------------------
$24,671 $12,483 $15,724
===================================
</TABLE>

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

<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
Current:
<S> <C> <C> <C>
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
=========================================
</TABLE>

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):

<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------

<S> <C> <C> <C>
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
====================================
</TABLE>

F-16
<PAGE> 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):

<TABLE>
<CAPTION>
December 31,
1998 1997
---------------------

Deferred tax assets:
<S> <C> <C>
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
=====================
</TABLE>

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):

<TABLE>
<CAPTION>
December 31,
1998 1997
----------------------

<S> <C> <C>
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
======================
</TABLE>

F-17
<PAGE> 41

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

7. OTHER ACCRUED LIABILITIES

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

<TABLE>
<CAPTION>
December 31,
1998 1997
---------------------

<S> <C> <C>
Royalties $ 8,224 $5,400
Other ... 2,850 3,313
---------------------
$11,074 $8,713
=====================
</TABLE>

8. LONG-TERM DEBT

Long-term debt consists of (in thousands):

<TABLE>
<CAPTION>
December 31,
1998 1997
----------------------
<S> <C> <C>
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
======================
</TABLE>

F-18
<PAGE> 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):

<TABLE>
<S> <C>
1999 $ 4,746
2000 6,683
2001 6,751
2002 5,397
2003 400
Thereafter 400
-------
$24,377
=======
</TABLE>

F-19
<PAGE> 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):

<TABLE>
<CAPTION>
Operating
Fiscal Year Ending in Capital Leases Leases
- --------------------------------- --------------------------
<S> <C> <C> <C>
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
---------
$--
=========
</TABLE>

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
<PAGE> 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):

<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
--------------------------- ---------------------------
1998 1997 1998 1997
----------------------------------------------------------
<S> <C> <C> <C> <C>
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 $ -- $ --
----------------------------------------------------------
</TABLE>

F-21
<PAGE> 45

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

10. EMPLOYEE BENEFIT PLANS (CONTINUED)

<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
--------------------------- ---------------------------
1998 1997 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
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% -- --
</TABLE>

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

<TABLE>
<CAPTION>
Pension Benefits 1998 1997 1996
----------------------------------------

<S> <C> <C> <C>
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
========================================
</TABLE>

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
<PAGE> 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
<PAGE> 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
<PAGE> 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:

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
=======================================================
</TABLE>

F-25
<PAGE> 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
<PAGE> 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:

<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
--------------------------
<S> <C> <C>

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 -- --
==========================
</TABLE>

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
<PAGE> 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:

<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
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
==========================================
</TABLE>

F-28
<PAGE> 52

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

18. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED)

<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
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
========================
</TABLE>

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
<PAGE> 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.

<TABLE>
<CAPTION>
1(st) 2(nd) 3(rd) 4(th)
Quarter Quarter Quarter Quarter Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(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
</TABLE>

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
<PAGE> 54

Gerber Childrenswear, Inc.

Notes to Consolidated Financial Statements (Continued)

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

<TABLE>
<CAPTION>
1(st) 2(nd) 3(rd) 4(th)
Quarter Quarter Quarter Quarter Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(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
</TABLE>

- ----------
* 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
<PAGE> 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:

<TABLE>
<CAPTION>
1997 1996
-------------------------
(In thousands, except
per share data)
<S> <C> <C>
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
</TABLE>

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
<PAGE> 56

SCHEDULE II

Gerber Childrenswear, Inc.

Supplemental Schedule of Valuation and Qualifying Accounts

(In thousands)

<TABLE>
<CAPTION>
Balance at Charged Balance at
Beginning to Cost and End of
Description of Period Expenses Deductions Period
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>

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

F-33

<PAGE> 1

GERBER CHILDRENSWEAR, INC.

1998 LONG-TERM PERFORMANCE INCENTIVE PLAN

1. PURPOSE. The purpose of the Gerber Childrenswear, Inc. 1998
Long-Term Performance Incentive Plan (the "Plan") is to advance the interests of
Gerber Childrenswear, Inc., a Delaware corporation (the "Company"), and its
stockholders by providing incentives to certain key employees of the Company and
its subsidiaries who contribute significantly to the strategic and long-term
performance objectives and growth of the Company.

2. ADMINISTRATION. The Plan shall be administered solely by the
Long-Term Performance Incentive Plan Compensation Committee (the "Committee") of
the Board of Directors (the "Board") of the Company, which Committee shall be
comprised solely of two or more Outside Directors who shall administer the Plan.
The term "Outside Director" shall mean a director who is both: (A) a
"Non-Employee Director" of the Company within the meaning of Rule 16b-3(1) under
the Securities Exchange Act of 1934, as amended, and (B) an "outside director"
of the Company within the meaning of Treasury Department regulation
ss. 1.162-27(e)(3).(2) References to the Committee hereunder shall include the
Board where appropriate. The membership of the Committee or such successor
committee shall be constituted so as to comply at all times with the applicable
requirements of Rule 16b-3.

The Committee has all the powers vested in it by the terms of the Plan
set forth herein, such powers to include exclusive authority (except as may be
delegated as permitted herein) to select the key employees and other key
individuals to be granted Awards under the Plan, to determine the type, size and
terms of the Award to be made to each individual selected, to modify the terms
of any Award that has been granted, to determine the time when Awards will be
granted, to establish performance objectives, to make any adjustments necessary
or desirable as a result of the granting of Awards to eligible individuals
located outside the United States and to prescribe the form of the instruments

- --------
(1) Generally, a director who: (1) is not currently an officer of the issuer
or a parent or subsidiary of the issuer, or otherwise currently employed by the
issuer or a parent or subsidiary of the issuer; (2) does not receive
compensation, either directly or indirectly, from the issuer or a parent or
subsidiary of the issuer, for services rendered as a consultant or in any
capacity other than as a director, except for certain de minimis amounts for
which disclosure would not be required pursuant to Item 404(a) of Regulation S-K
(generally, $60,000); (3) does not possess an interest in any other transaction
for which disclosure would be required pursuant to Item 404(a) of Regulation S-K
(generally, a transaction in which the amounts involved exceed $60,000); and (4)
is not engaged in a business relationship for which disclosure would be required
pursuant to Item 404(b) of Regulation S-K (generally, an officer or significant
owner of another entity with significant business ties -- purchases, sales,
services or loans, for example -- to the Company).

(2) Generally, a director who: (1) is not a current employee of the Company,
(2) is not a former employee of the Company who receives compensation for prior
services (other than benefits under a tax-qualified retirement plan) during the
taxable year with respect to which the director's status is being determined,
(3) has not been an officer of the Company or (4) does not receive remuneration
from the Company, either directly or indirectly, in any capacity other than as a
director.

<PAGE> 2

embodying Awards made under the Plan. The Committee is authorized to interpret
the Plan and the Awards granted under the Plan, to establish, amend and rescind
any rules and regulations relating to the Plan, and to make any other
determinations which it deems necessary or desirable for the administration of
the Plan. The Committee (or its delegate as permitted herein) may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any Award in the manner and to the extent the Committee deems necessary or
desirable to carry it into effect. Any decision of the Committee (or its
delegate as permitted herein) in the interpretation and administration of the
Plan, as described herein, shall lie within its sole and absolute discretion and
shall be final, conclusive and binding on all parties concerned. The Committee
may act only by a majority of its members in office, except that the members
thereof may authorize any one or more of their members or any officer of the
Company to execute and deliver documents or to take any other ministerial action
on behalf of the Committee with respect to Awards made or to be made to Plan
participants. No member of the Committee and no officer of the Company shall be
liable for anything done or omitted to be done by him, by any other member of
the Committee or by any officer of the Company in connection with the
performance of duties under the Plan, except for his own willful misconduct or
as expressly provided by statute. Determinations to be made by the Committee
under the Plan may be made by its delegates.

3. PARTICIPATION. Consistent with the purposes of the Plan, the
Committee shall have exclusive power (except as may be delegated as permitted
herein) to select the key employees of the Company and its subsidiaries who may
participate in the Plan and be granted Awards under the Plan. Eligible
individuals may be selected individually or by groups or categories, as
determined by the Committee in its discretion. No non-employee director of the
Company shall be eligible to receive an Award under the Plan.

4. AWARDS UNDER THE PLAN.

(a) Types of Awards. Awards under the Plan may include, but need not be
limited to, one or more of the following types, either alone or in any
combination thereof: (i) "Stock Options," (ii) "Stock Appreciation Rights,"
(iii) "Restricted Stock," or (iv) other awards including, but not limited to,
awards of, or options or similar rights granted with respect to, unbundled stock
units or components thereof, and awards made to participants who are foreign
nationals or are employed or performing services outside the United States.
Stock Options, which include "Nonqualified Stock Options" and "Incentive Stock
Options" (as defined in Section 422(b) of the Internal Revenue Code of 1986, as
amended (the "Code")) or combinations thereof, are rights to purchase common
shares of the Company having a par value of $.01 per share and stock of any
other class into which such shares may thereafter be changed (the "Common
Shares"). Nonqualified Stock Options and Incentive Stock Options are subject to
the terms, conditions and restrictions specified in Paragraph 5. Stock
Appreciation Rights are rights to receive (without payment to the Company) cash,
Common Shares, other Company securities (which may include, but need not be
limited to, unbundled stock units or components thereof, debentures, preferred
stock, warrants, securities convertible into Common Shares or other property
("Other Company Securities")) or property, or other forms of payment, or any
combination thereof, as determined by the Committee, based on the increase in
the value of the number of Common Shares specified in the Stock Appreciation
Right. Stock Appreciation Rights are subject to the terms, conditions and
restrictions specified in Paragraph 6. Shares of Restricted Stock are Common
Shares which are issued subject to certain restrictions pursuant to Paragraph 7.

<PAGE> 3

(b) Maximum Number of Shares that May be Issued. There may be issued
under the Plan (as Restricted Stock, pursuant to the exercise of Stock Options
or Stock Appreciation Rights, or in payment of or pursuant to the exercise of
such other Awards as the Committee, in its discretion, may determine) an
aggregate of not more than 750,000 Common Shares, subject to adjustment as
provided in Paragraph 13. Irrespective of the aggregate number of shares
authorized herein, each participant in the Plan shall be entitled to receive
grants of Stock Options and Stock Appreciation Rights with respect to no more
than 25,000 Common Shares in any calendar year. Common Shares issued pursuant to
the Plan may be either authorized but unissued shares, treasury shares,
reacquired shares, or any combination thereof. If any Common Shares issued as
Restricted Stock or otherwise subject to repurchase or forfeiture rights are
reacquired by the Company pursuant to such rights, or if any Award is canceled,
terminates or expires unexercised, any Common Shares that would otherwise have
been issuable pursuant thereto will be available for issuance under new Awards.

(i) Unless otherwise determined by the Committee in its
discretion, a participant to whom an Award of Restricted Stock has been
made (and any person succeeding to such participant's rights in
accordance with the Plan) shall have, after issuance of a certificate
for the number of Common Shares awarded and prior to the expiration of
the Restricted Period (as hereinafter defined) or the earlier
repurchase of such Common Shares as herein provided, ownership of such
Common Shares, including the right to vote the same and to receive
dividends or other distributions made or paid with respect to such
Common Shares (provided that such Common Shares, and any new,
additional or different shares, or Other Company Securities or
property, or other forms of consideration which the participant may be
entitled to receive with respect to such Common Shares as a result of a
stock split, stock dividend or any other change in the corporation or
capital structure of the Company, shall be subject to the restrictions
hereinafter described as determined by the Committee in its
discretion), subject, however, to the options, restrictions and
limitations imposed thereon pursuant to the Plan. Notwithstanding the
foregoing, a participant with whom an Award agreement is made to issue
Common Shares in the future, shall have no rights as a stockholder with
respect to Common Shares related to such agreement until issuance of a
certificate to him.

(ii) Unless otherwise determined by the Committee in its
discretion, a participant to whom a grant of Stock Options or Stock
Appreciation Rights is made (and any person succeeding to such a
participant's rights pursuant to the Plan) shall have no rights as a
stockholder with respect to any Common Shares or as a holder with
respect to other securities, if any, issuable pursuant to any such
Award until the date of the issuance of a stock certificate to him for
such Common Shares or other instrument of ownership, if any. Except as
provided in Paragraph 13, no adjustment shall be made for dividends,
distributions or other rights (whether ordinary or extraordinary, and
whether in cash, securities, other property or other forms of
consideration, or any combination thereof) for which the record date is
prior to the date such stock certificate or other instrument of
ownership, if any, is issued.

(iii) Any participant who is directly or indirectly the
beneficial owner of more than 10 per centum of any class of any equity
security which is registered pursuant to Section 12

<PAGE> 4

of the Exchange Act, or who is an officer of the Company, shall hold
his Restricted Stock, if any, for at least six months from the date of
grant and any other Award received by him for at least six months from
the date of acquisition of the Award before disposition of the Award or
its underlying Common Stock.

(d) Vesting. Rights acquired pursuant to an Award may be subject to
vesting as determined by the Committee in its sole discretion. In addition,
Stock Option Award agreements may provide for time accelerated restricted stock
award plan vesting.(3)

(e) Frequency of Grants. Unless otherwise determined by the Committee
in its discretion, Awards shall be granted once per year.

(f) Securities and Tax Law Compliance.

(i) Unless otherwise determined by the Committee in its
discretion, no Awards shall be granted unless counsel for the Company
shall be satisfied that such issuance will qualify as performance-based
compensation for purposes of Section 162(m) of the Code and that such
issuance will be in compliance with the Code and regulations issued
thereunder.

(ii) No Common Shares, Other Company Securities or property,
other securities or property, or other forms of payment shall be issued
hereunder with respect to any Award unless counsel for the Company
shall be satisfied that such issuance will be in compliance with
applicable federal, state, local and foreign legal, securities exchange
and other applicable requirements.

(iii) If the Committee determines that the listing,
registration or qualification upon any securities exchange or under any
law of Common Shares subject to any Stock Option, Stock Appreciation
Right or Restricted Stock grant is necessary or desirable as a
condition of, or in connection with, the granting of the same or the
issue or purchase of Common Shares thereunder, no such Stock Option or
Stock Appreciation Right may be exercised in

- --------
(3) Under a TARSAP vesting approach, the stock option will vest if the
participant is and has continually been employed by the Company from the date of
the Award to a specified future date but will be subject to acceleration upon
achievement of performance goals. The specified future date should be consistent
with the vesting date of non-performance (i.e., time) vesting options. If the
Company modifies the performance measures of a TARSAP feature by making the
thresholds easier to achieve, there would be a new measurement of the options
which could result in compensation expense to the Company.

<PAGE> 5

whole or in part and no Restricted Stock may be issued unless such
listing, registration or qualification is effected free of any
conditions not acceptable to the Committee.

5. STOCK OPTIONS. The Committee may grant or sell Stock Options either
alone, or in conjunction with Stock Appreciation Rights, either at the time of
grant or by amendment thereafter; provided that an Incentive Stock Option may be
granted only to an eligible employee of the Company or any parent or subsidiary
(as defined, for this purpose, in Section 424(f) of the Code) corporation. Each
Stock Option (referred to herein as an "Option") granted or sold under the Plan
shall be evidenced by an instrument in such form as the Committee shall
prescribe from time to time in accordance with the Plan and shall comply with
the following terms and conditions, and with such other terms and conditions,
including, but not limited to, restrictions upon the Option or the Common Shares
issuable upon exercise thereof, as the Committee, in its discretion, shall
establish:

(a) Subject to Section 5(g), the option price shall be at least the
fair market value of the Common Shares subject to such Option at the time the
Option is granted.

(b) The Committee shall determine the number of Common Shares to be
subject to each Option. The number of Common Shares subject to an outstanding
Option may be reduced on a share-for-share or other appropriate basis, as
determined by the Committee, to the extent that Common Shares under such Option
are used to calculate the cash, Common Shares, Other Company Securities or
property, or other forms of payment, or any combination thereof, received
pursuant to exercise of a Stock Appreciation Right attached to such Option.

(i) Except as provided in Paragraph 5(c)(ii) below, the Option
may not be sold, assigned, transferred, pledged, hypothecated or
otherwise disposed of, except by will or the laws of descent and
distribution, and shall be exercisable during the grantee's lifetime
only by him.

(ii) The Committee, in its sole discretion, may establish, as
permitted by applicable law, rules and conditions under which a grantee
may transfer an Option to such individuals or types of trusts that the
Committee may determine to be eligible for transfer.

(iii) Unless the Committee determines otherwise, the Option
shall not be exercisable for at least six months after the date of
grant, unless the grantee ceases employment before the expiration of
such six-month period by reason of his disability as defined in
Paragraph 11 or his death.

(d) The Option shall not be exercisable:

(i) after the tenth anniversary of the date it is granted. Any
Option may be exercised during such period only as set forth under
Paragraph 4(d) or at such time or times and in such installments as the
Committee may establish in its grant of the Option;

(ii) unless payment in full of the exercise price is made for
the shares being acquired thereunder at the time of exercise in
accordance with Paragraph 5(h) below; and

<PAGE> 6

(iii) unless the person exercising the Option has been, at all
times during the period beginning with the date of the grant of the
Option and ending on the date of such exercise, employed by the
Company, or a parent or subsidiary of the Company, or a corporation
substituting or assuming the Option in a transaction to which Section
424(a) of the Code, is applicable, except that:

(A) if such person shall cease such employment by
reason of his disability as described in Paragraph 11 or
early, normal or deferred retirement under an approved
retirement program of the Company (or such other plan or
arrangement as may be approved by the Committee, in its
discretion, for this purpose) while holding an Option which
has not expired and has not been fully exercised, such person,
at any time within one year (or such period determined by the
Committee) after the date he ceased such employment (but in no
event after the Option has expired), may exercise the Option
with respect to any shares as to which he could have exercised
the Option on the date he ceased such employment;

(B) if any person to whom an Option has been granted
shall die holding an Option which has not expired and has not
been fully exercised, his executors, administrators, heirs or
distributees, as the case may be, may, at any time within one
year (or such other period determined by the Committee) after
the date of death (but in no event after the Option has
expired), exercise the Option with respect to any shares as to
which the decedent could have exercised the Option at the time
of his death; or

(C) if such person shall cease employment with the
Company while holding an Option which has not expired and has
not been fully exercised, the Committee may determine to allow
such person at any time within the one year (or three months
in the case of an Incentive Stock Option) or such other period
determined by the Committee after the date he ceased such
employment (but in no event after the Option has expired), to
exercise the Option with respect to any shares as to which he
could have exercised the Option on the date he ceased such
employment.

(e) In the case of an Incentive Stock Option, the amount of the
aggregate fair market value of Common Shares (determined at the time of grant of
the Option) with respect to which Incentive Stock Options are exercisable for
the first time by an employee during any calendar year (under all such plans of
his employer corporation and its parent and subsidiary corporations) shall not
exceed $100,000.

(f) It is the intent of the Company that Nonqualified Stock Options
granted under the Plan not be classified as Incentive Stock Options, that the
Incentive Stock Options granted under the Plan be consistent with and contain or
be deemed to contain all provisions required under Section 422 (and the other
appropriate provisions) of the Code and any implementing regulations (and any
successor provisions thereof), and that any ambiguities in construction shall be
interpreted in order to effectuate such intent.

<PAGE> 7

(g) No Incentive Stock Option may be granted to any person who, at the
time of grant, owns stock of the Company (or any subsidiary) representing more
than 10% of the total combined voting power of all classes of stock of the
Company (or any subsidiary), unless such Incentive Stock Option shall at the
time of grant (a) have a termination date not later than the fifth anniversary
of the issuance date and (b) have an exercise price per share equal to at least
110% of the fair market value of a share of Common Stock on the date of grant.

(h) Payment. Options may be exercised, in whole or in part, upon
payment of the exercise price of the Common Shares to be acquired. Unless
otherwise determined by the Committee, payment shall be made (i) in cash
(including check, bank draft or money order), (ii) by delivery of outstanding
shares of Common Stock with a fair market value on the date of exercise equal to
the aggregate exercise price payable with respect to the Options(4), (iii) by
simultaneous sale through a broker reasonably acceptable to the Committee of
Common Shares acquired on exercise, as permitted under Regulation T of the
Federal Reserve Board, or (iv) by any combination of the foregoing.

In the event a participant elects to pay the exercise price
payable with respect to an Option pursuant to clause (ii) above, (A) only a
whole number of shares of Common Stock (and not fractional shares of Common
Stock) may be tendered in payment, (B) such participant must present evidence
acceptable to the Company that he or she has owned any such shares of Common
Stock tendered in payment of the exercise price (and that such tendered shares
of Common Stock have not been subject to any substantial risk of forfeiture) for
at least six months prior to the date of exercise, and (C) such Common Stock
must be delivered to the Company. Delivery for this purpose shall be made by
physical delivery of the certificate(s) for all such shares of Common Stock
tendered in payment of the price, accompanied by duly executed instruments of
transfer in a form acceptable to the Company. When payment of the exercise price
is made by delivery of Common Stock, the difference, if any, between the
aggregate exercise price payable with respect to the Option being exercised and
the fair market value of the share(s) of Common Stock tendered in payment (plus
any applicable taxes) shall be paid in cash. No participant may tender shares of
Common Stock having a fair market value exceeding the aggregate exercise price
payable with respect to the Option being exercised (plus any applicable taxes).

6. STOCK APPRECIATION RIGHTS. The Committee may grant Stock
Appreciation Rights either alone, or in conjunction with Stock Options, either
at the time of grant or by amendment thereafter. Each Award of Stock
Appreciation Rights granted under the Plan shall be evidenced by an instrument
in such form as the Committee shall prescribe from time to time in accordance
with the Plan and shall comply with the following terms and conditions, and with
such other terms and conditions, including, but not limited to, restrictions
upon the Award of Stock Appreciation Rights or the Common Shares issuable upon
exercise thereof, as the Committee, in its discretion, shall establish:

- --------
(4) If a participant exercises Options by delivering existing shares of Common
Stock, the participant must have held the shares for a minimum of six months to
avoid compensation accounting.

7
<PAGE> 8

(a) The Stock Appreciation Right shall be granted with a hurdle price
equal to at least the fair market value of the underlying Common Shares on the
date of such grant.

(b) The Committee shall determine the number of Common Shares to be
subject to each Award of Stock Appreciation Rights. The number of Common Shares
subject to an outstanding Award of Stock Appreciation Rights may be reduced on a
share-for-share or other appropriate basis, as determined by the Committee, to
the extent that Common Shares under such Award of Stock Appreciation Rights are
used to calculate the cash, Common Shares, Other Company Securities or property,
or other forms of payment, or any combination thereof, received pursuant to
exercise of an Option attached to such Award of Stock Appreciation Rights, or to
the extent that any other Award granted in conjunction with such Award of Stock
Appreciation Rights is paid.

(c) The Award of Stock Appreciation Rights may not be sold, assigned,
transferred, pledged, hypothecated or otherwise disposed of, except by will or
the laws of descent and distribution, and shall be exercisable during the
grantee's lifetime only by him. Unless the Committee determines otherwise, the
Award of Stock Appreciation Rights shall not be exercisable for at least six
months after the date of grant, unless the grantee ceases employment or
performance of services before the expiration of such six-month period by reason
of his disability as described in Paragraph 11 or his death.

(d) The Award of Stock Appreciation Rights shall not be exercisable:

(i) after the tenth anniversary of the date it is granted, or
in any manner or at any time other than as the Committee may establish;

(ii) in the case that the Award of Stock Appreciation Rights
is attached to an Option, unless such Option is at the time
exercisable; and

(iii) unless the person exercising the Award of Stock
Appreciation Rights has been, at all times during the period beginning
with the date of the grant thereof and ending on the date of such
exercise, employed by the Company, except that:

(A) if such person shall cease such employment or
performance of services by reason of his disability as
described in Paragraph 11 or early, normal or deferred
retirement under an approved retirement program of the Company
(or such other plan or arrangement as may be approved by the
Committee, in its discretion, for this purpose) while holding
an Award of Stock Appreciation Rights which has not expired
and has not been fully exercised, such person may, at any time
within one year (or such other period determined by the
Committee) after the date he ceased such employment (but in no
event after the Award of Stock Appreciation Rights has
expired), exercise the Award of Stock Appreciation Rights with
respect to any shares as to which he could have exercised the
Award of Stock Appreciation Rights on the date he ceased such
employment; or

(B) if any person to whom an Award of Stock
Appreciation Rights has been granted shall die holding an
Award of Stock Appreciation Rights which has not

<PAGE> 9

expired and has not been fully exercised, his executors,
administrators, heirs or distributees, as the case may be, may
at any time within one year (or such other period determined
by the Committee) after the date of death (but in no event
after the Award of Stock Appreciation Rights has expired),
exercise the Award of Stock Appreciation Rights with respect
to any shares as to which the decedent could have exercised
the Award of Stock Appreciation Rights at the time of his
death.

(e) An Award of Stock Appreciation Rights shall entitle the holder (or
any person entitled to act under the provisions of subparagraph 6(d)(iii)(B)
hereof) to exercise such Award and surrender unexercised the Option, if any, to
which the Stock Appreciation Right is attached (or any portion of such Option)
to the Company and to receive from the Company in exchange thereof, without
payment to the Company, that number of Common Shares having an aggregate value
equal to (or, in the discretion of the Committee, less than) the excess of the
fair market value of one share at the time of such exercise, over the exercise
price (or Option Price, as the case may be), times the number of shares subject
to the Award or the Option, or portion thereof, which is so exercised or
surrendered, as the case may be. The Committee shall be entitled in its
discretion to elect to settle the obligation arising out of the exercise of a
Stock Appreciation Right by the payment of cash or Other Company Securities or
property, or other forms of payment, or any combination thereof, as determined
by the Committee, equal to the aggregate value of the Common Shares it would
otherwise be obligated to deliver. Any such election by the Committee shall be
made as soon as practicable after the receipt by the Committee of written notice
of the exercise of the Stock Appreciation Right. The value of a Common Share,
Other Company Securities or property, or other forms of payment determined by
the Committee for this purpose shall be the fair market value thereof on the
last business day next preceding the date of the election to exercise the Stock
Appreciation Right, unless the Committee, in its discretion, determines
otherwise.

(f) A Stock Appreciation Right may provide that it shall be deemed to
have been exercised at the close of business on the business day preceding the
expiration date of the Stock Appreciation Right or of the related Option, or
such other date as specified by the Committee, if at such time such Stock
Appreciation Right has a positive value. Such deemed exercise shall be settled
or paid in the same manner as a regular exercise thereof as provided in
subparagraph 6(e) hereof.

(g) No fractional shares may be delivered under this Paragraph 6, but
in lieu thereof a cash or other adjustment shall be made as determined by the
Committee in its discretion.

7. RESTRICTED STOCK. Each Award of Restricted Stock under the Plan
shall be evidenced by an instrument in such form as the Committee shall
prescribe from time to time in accordance with the Plan and shall comply with
the following terms and conditions, and with such other terms and conditions as
the Committee, in its discretion, shall establish:

(a) The Committee shall determine the number of Common Shares to be
issued to a participant pursuant to the Award, and the extent, if any, to which
they shall be issued in exchange for cash, other consideration, or both.

(b) Restricted Stock awarded to a participant in accordance with the
Award shall be subject to the following restrictions until the expiration of
such period as the Committee shall

<PAGE> 10

determine, from the date on which the Award is granted (the "Restricted
Period"): (i) a participant to whom an award of Restricted Stock is made shall
be issued, but shall not be entitled to, a stock certificate, (ii) the
Restricted Stock shall not be transferable prior to the end of the Restricted
Period, (iii) certificates representing Shares of Restricted Stock granted under
the Plan will be held in escrow by the Company on the participant's behalf and
will bear an appropriate legend specifying the applicable restrictions thereon,
and the participant will be required to execute a blank stock power therefor,
(v) the Restricted Stock shall be forfeited and, if applicable, any stock
certificate representing Restricted Stock shall be returned to the Company and
all rights of the holder of such Restricted Stock to such shares and as a
shareholder shall terminate without further obligation on the part of the
Company if the participant's continuous employment or performance of services
for the Company shall terminate for any reason prior to the end of the
Restricted Period, and (vi) such other restrictions as determined by the
Committee in its discretion.

(c) The participant will be required to pay to the Company the
aggregate par value of any Common Shares of Restricted Stock (or such larger
amount as the Committee may determine to constitute capital under Section 154 of
the Delaware General Corporation Law, as amended) within ten days of the date of
grant, unless such Common Shares of Restricted Stock are treasury shares.

8. DEFERRAL OF COMPENSATION. The Committee shall determine whether or
not an Award shall be made in conjunction with deferral of the participant's
salary, bonus or other compensation, or any combination thereof, and whether or
not such deferred amounts may be:

(a) forfeited to the Company or to other participants or any
combination thereof, under certain circumstances (which may include, but need
not be limited to, certain types of termination of employment with the Company),

(b) subject to increase or decrease in value based upon the attainment
of or failure to attain, respectively, certain performance measures and/or,

(c) credited with income equivalents (which may include, but need not
be limited to, interest, dividends or other rates of return) until the date or
dates of payment of the Award, if any.

9. DEFERRED PAYMENT OF AWARDS. The Committee may specify that the
payment of all or any portion of cash, Common Shares, Other Company Securities
or property, or any other form of payment, or any combination thereof, under an
Award shall be deferred until a later date. Deferrals shall be for such periods
or until the occurrence of such events, and upon such terms, as the Committee
shall determine in its discretion. Deferred payments of Awards may be made by
undertaking to make payment in the future based upon the performance of certain
investment equivalents (which may include, but need not be limited to,
government securities, Common Shares, other securities, property or
consideration, or any combination thereof), together with such additional
amounts of income equivalents (which may be compounded and may include, but need
not be limited to, interest, dividends or other rates of return or any
combination thereof) as may accrue thereon until the date or dates of payment,
such investment equivalents and such additional amounts of income equivalents to
be determined by the Committee in its discretion.

10. AMENDMENT OR SUBSTITUTION OF AWARDS UNDER THE PLAN. The terms of
any outstanding Award under the Plan may be amended from time to time by the
Committee in its

<PAGE> 11

discretion in any manner that it deems appropriate (including, but not limited
to, acceleration of the date of exercise of any Award and/or payments
thereunder); provided that no such amendment shall adversely affect in a
material manner any right of a participant under the Award without his written
consent, unless the Committee determines in its discretion that there have
occurred or are about to occur significant changes in the participant's
position, duties or responsibilities, or significant changes in economic,
legislative, regulatory, tax, accounting or cost/benefit conditions which are
determined by the Committee in its discretion to have or to be expected to have
a substantial effect on the performance of the Company, or any subsidiary,
affiliate, division or department thereof, on the Plan or on any Award under the
Plan. The Committee may, in its discretion, permit holders of Awards under the
Plan to surrender outstanding Awards in order to exercise or realize the rights
under other Awards, or in exchange for the grant of new Awards, or require
holders of Awards to surrender outstanding Awards as a condition precedent to
the grant of new Awards under the Plan.

11. DISABILITY. For the purposes of this Plan, a participant shall be
deemed to have terminated his employment by the Company and its Affiliates by
reason of disability if the Committee shall determine that the physical or
mental condition of the participant by reason of which such employment
terminated was such at that time as would entitle him to payment of monthly
disability benefits under any Company disability plan. If the participant is not
eligible for benefits under any disability plan of the Company, he shall be
deemed to have terminated such employment by reason of disability if the
Committee shall determine that his physical or mental condition would entitle
him to benefits under any Company disability plan if he were eligible therefor.

12. TERMINATION OF A PARTICIPANT. For all purposes under the Plan, the
Committee shall determine whether a participant has terminated employment with
the Company. The transfer of an employee from the Company to a subsidiary, from
a subsidiary to the Company, or from one subsidiary to another shall not be
considered a termination of employment; nor shall it be considered a termination
of employment if an employee is placed on a leave of absence which is considered
by the Committee as continuing intact the employment relationship.

13. DILUTION AND OTHER ADJUSTMENTS. In the event of any change in the
outstanding Common Shares of the Company by reason of any stock split, dividend,
split-up, split-off, spin-off, recapitalization, merger, consolidation, rights
offering, reorganization, combination or exchange of shares, a sale by the
Company of all of its assets, any distribution to stockholders other than a
normal cash dividend, or other extraordinary or unusual event, if the Committee
shall determine, in its discretion, that such change equitably requires an
adjustment in the terms of any Award or the number of Common Shares available
for Awards, such adjustment may be made by the Committee and shall be final,
conclusive and binding for all purposes of the Plan.

In the event of the proposed dissolution or liquidation of the Company,
all outstanding Awards shall terminate immediately prior to the consummation of
such proposed action, unless otherwise provided by the Committee. In the event
of a proposed sale of all or substantially all of the assets of the Company, or
the merger of the Company with or into another corporation, all restrictions on
any outstanding Awards shall lapse and participants shall be entitled to the
full benefit of all such Awards immediately prior to the closing date of such
sale or merger, unless otherwise provided by the Committee.

<PAGE> 12

Without limitation of the foregoing, in connection with a Change in
Control (as defined below), the Committee may, in its discretion, (i) cancel any
or all outstanding Options under the Plan in consideration for payment to the
holders thereof of an amount equal to the portion of the consideration that
would have been payable to such holders pursuant to such transaction if their
Options had been fully exercised immediately prior to such transaction, less the
aggregate exercise price that would have been payable therefor, or (ii) if the
amount that would have been payable to the Option holders pursuant to such
transaction if their Options had been fully exercised immediately prior thereto
would be less than the aggregate exercise price that would have been payable
therefor, cancel any or all such Options for no consideration or payment of any
kind. Payment of any amount payable pursuant to the preceding sentence may be
made in cash or, in the event that the consideration to be received in such
transaction includes securities or other property, in cash and/or securities or
other property in the Committee's discretion. "Change in Control" means the
approval by the stockholders of the Company of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation (A)
which would result in all or a portion of the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (B) by which the corporate existence of the
Company is not affected and following which the Company's chief executive
officer and directors retain their positions with the Company (and constitute at
least a majority of the Board).

14. DESIGNATION OF BENEFICIARY BY PARTICIPANT. A participant may name a
beneficiary to receive any payment to which he may be entitled in respect of any
Award under the Plan in the event of his death, on a written form to be provided
by and filed with the Committee, and in a manner determined by the Committee in
its discretion. The Committee reserves the right to review and approve
beneficiary designations. A participant may change his beneficiary from time to
time in the same manner, unless such participant has made an irrevocable
designation. Any designation of beneficiary under the Plan (to the extent it is
valid and enforceable under applicable law) shall be controlling over any other
disposition, testamentary or otherwise, as determined by the Committee in its
discretion. If no designated beneficiary survives the participant and is living
on the date on which any amount becomes payable to such a participant's
beneficiary, such payment will be made to the legal representatives of the
participant's estate, and the term "beneficiary" as used in the Plan shall be
deemed to include such person or persons. If there are any questions as to the
legal right of any beneficiary to receive a distribution under the Plan, the
Committee in its discretion may determine that the amount in question be paid to
the legal representatives of the estate of the participant, in which event the
Company, the Board and the Committee and the members thereof, will have no
further liability to anyone with respect to such amount.

15. MISCELLANEOUS PROVISIONS.

(a) No employee or other person shall have any claim or right to be
granted an Award under the Plan. Determinations made by the Committee under the
Plan need not be uniform and may be made selectively among eligible individuals
under the plan, whether or not such eligible individuals are similarly situated.
The Committee may, at any time or from time to time, and on such terms and
conditions (that are consistent with and not in contravention of the other
provisions of this Plan) as

<PAGE> 13

the Committee may, in its sole discretion, determine, enter into agreements (or
take other actions with respect to Stock Options) for new Stock Options
containing terms (including exercise prices) more (or less) favorable than the
outstanding Stock Options. Neither the Plan nor any action taken hereunder shall
be construed as giving any employee any right to continue to be employed by the
Company, and the right to terminate the employment of any participants at any
time and for any reason is specifically reserved.

(b) No participant or other person shall have any right with respect to
the Plan, the Common Shares reserved for issuance under the Plan or in any
Award, contingent or otherwise, until written evidence of the Award shall have
been delivered to the recipient and all the terms, conditions and provisions of
the Plan and the Award applicable to such recipient (and each person claiming
under or through him) have been met.

(c) Except as may be approved by the Committee where such approval
shall not adversely affect compliance of the Plan with Rule 16b-3 under the
Exchange Act, a participant's rights and interest under the Plan may not be
assigned or transferred, hypothecated or encumbered in whole or in part either
directly or by operation of law or otherwise (except in the event of a
participant's death) including, but not by way of limitation, execution, levy,
garnishment, attachment, pledge, bankruptcy or in any other manner; provided,
however, that any Option or similar right (including, but not limited to, a
Stock Appreciation Right) offered pursuant to the Plan shall be transferable by
will or the laws of descent and distribution but shall be exercisable during the
participant's lifetime only by him.

(d) It is the intent of the Company that the Plan comply in all
respects with Rule 16b-3 under the Exchange Act, that any ambiguities or
inconsistencies in construction of the Plan be interpreted to give effect to
such intention and that if any provision of the Plan is found not to be in
compliance with Rule 16b-3, such provision shall be deemed null and void to the
extent required to permit the Plan to comply with Rule 16b-3.

(e) The Company shall have the right to deduct from any payment made
under the Plan any federal, state, local or foreign income or other taxes
required by law to be withheld with respect to such payment. It shall be a
condition to the obligation of the Company to issue Common Shares, Other Company
Securities or property, other securities or property, or other forms of payment,
or any combination thereof, upon exercise, settlement or payment of any Award
under the Plan, that the participant (or any beneficiary or person entitled to
act) pay to the Company, upon its demand, such amount as may be required by the
Company for the purpose of satisfying any liability to withhold federal, state,
local or foreign income or other taxes. If the amount requested is not paid, the
Company may refuse to issue Common Shares, Other Company Securities or property,
other securities or property, or other forms of payment, or any combination
thereof. Notwithstanding anything in the Plan to the contrary, the Committee
may, in its discretion, permit an eligible participant (or any beneficiary or
person entitled to act) to elect to pay a portion or all of the amount requested
by the Company for such taxes with respect to such Award, at such time and in
such manner as the Committee shall deem to be appropriate (including, but not
limited to, by authorizing the Company to withhold, or agreeing to surrender to
the Company on or about the date such tax liability is determinable, Common
Shares, Other Company Securities or property, other securities or property, or
other forms of payment, or any combination thereof, owned by such person or a
portion of such forms of payment that would otherwise be distributed, or have
been distributed, as the case

<PAGE> 14

may be, pursuant to such Award to such person, having a fair market value equal
to the amount of such taxes).

(f) The expenses of the Plan shall be borne by the Company.

(g) The Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Award under the Plan, and rights to the
payment of Awards shall be no greater than the rights of the Company's general
creditors.

(h) By accepting any Award or other benefit under the Plan, each
participant and each person claiming under or through him shall be conclusively
deemed to have indicated his acceptance and ratification of, and consent to, any
action taken under the Plan by the Company, the Board or the Committee or its
delegates.

(i) Fair market value in relation to Common Shares, Other Company
Securities or property, other securities or property or other forms of payment
of Awards under the Plan, or any combination thereof, as of any specific time
shall mean such value as determined by the Committee in accordance with
applicable law; provided that, the fair market value of a share of Common Stock
of the Company means, as of the date in question, the officially-quoted closing
selling price of the Common Stock (or if no selling price is quoted, the bid
price) on the principal securities exchange on which the Common Stock is then
listed for trading (including for this purpose the Nasdaq National Market) (the
"Market") for the immediately preceding trading day or, if the Common Stock is
not then listed or quoted in the Market, the fair market value shall be the fair
value of the Common Stock determined in good faith by the Board; provided,
however, that when shares received upon exercise of an option are immediately
sold in the open market, the net sale price received may be used to determine
the fair market value of any shares used to pay the exercise price or
withholding taxes and to compute the withholding taxes.

(j) The masculine pronoun includes the feminine and the singular
includes the plural wherever appropriate.

(k) The appropriate officers of the Company shall cause to be filed any
reports, returns or other information regarding Awards hereunder of any Common
Shares issued pursuant hereto as may be required by Section 13 or 15(d) of the
Exchange Act (or any successor provision) or any other applicable statute, rule
or regulation.

(l) The validity, construction, interpretation, administration and
effect of the Plan, and of its rules and regulations, and rights relating to the
Plan and to Awards granted under the Plan, shall be governed by the substantive
laws, but not the choice of law rules, of the State of Delaware.

16. PLAN AMENDMENT OR SUSPENSION. The Plan may be amended or suspended
in whole or in part at any time from time to time by the Board, but no amendment
shall be effective unless and until the same is approved by stockholders of the
Company where the failure to obtain such approval would adversely affect the
compliance of the Plan with Rule 16b-3 under the Exchange Act and with other
applicable law. No amendment of the Plan shall adversely affect in a material
manner any right

<PAGE> 15

of any participant with respect to any Award theretofore granted without such
participant's written consent, except as permitted under Paragraph 10.

17. PLAN TERMINATION. This Plan shall terminate upon the earlier of the
following dates or events to occur:

(a) upon the adoption of a resolution of the Board terminating the
Plan; or

(b) ten years from the date the Plan is initially approved and adopted
by the stockholders of the Company in accordance with Paragraph 18 hereof;
provided, however, that the Board may, prior to the expiration of such ten-year
period, extend the term of the Plan for an additional period of up to five years
for the grant of Awards other than Incentive Stock Options. No termination of
the Plan shall materially alter or impair any of the rights or obligations of
any person, without his consent, under any Award theretofore granted under the
Plan, except that subsequent to termination of the Plan, the Committee may make
amendments permitted under Paragraph 16.

18. STOCKHOLDER ADOPTION. On March 3, 1998, the Plan was approved by
the Board of Directors and approved and adopted by the stockholders of the
Company, in each case in accordance with applicable law and Rule 16b-3 under
the Exchange Act.

* * * * *

<PAGE> 1

EXHIBIT 10.23 LEASE AGREEMENT

INTRODUCTION

This LEASE AGREEMENT is entered into by PARQUES INDUSTRIALES AMISTAD
ALIANZAS, S.A. DE C.V., hereinafter referred to as the "LESSOR"; represented by
MR. MARCO RAMON AGUIRRE AND MR. JESUS MARIA RAMON AGUIRRE, President and
Vice-President of the Corporation, respectively; and G C W MEXICO, S.A. DE C.V.,
a Mexican Corporation, hereinafter referred to as the "LESSEE", represented by
Mr. Edward Kittredge, Chairman of the Board of Directors, in accordance with the
following recitals and clauses:

RECITALS:

I.-LESSOR THROUGH ITS REPRESENTATIVES, MESSRRS. MARCO RAMON AGUIRRE AND JESUS
MARIA RAMON AGUIRRE, STATES:

A) That it has executed a promise of purchase and sale agreement
with the Coahuila State Government, whereby LESSOR promised to
purchase and the Coahuila State Government promised to sell, a
tract of land of 36,940.14 square meters (hereinafter referred
to as the "Land") located in the City of Matamoros, State of
Coahuila, more specifically described in the blueprint
attached hereto as Exhibit "A" and forming a part hereof.

B) That a 74,000 Sq. Ft. industrial building (hereinafter
referred to as the "Building"), including 45,000 sq. ft. of
production space and 4,000 sq. ft. of exterior offices
(hereinafter the production space and the exterior offices
will be collectively referred to as the "Production Space"),
plus a 25,000 sq. ft. warehouse (hereinafter referred to as
the "Warehouse") and landscaping, will be constructed and made
available by LESSOR at the Land. The Building shall be
constructed in accordance to the drawings and specifications
attached to this contract as Exhibit "B" and forming a part
hereof. A blueprint of the Land and the Building (hereinafter
jointly referred to as the "Leased Property") is included in
EXHIBIT "B".

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C) That it desires to lease the Leased Property, to the LESSEE,
subject to the terms and conditions contained herein.

D) That the LESSOR and its representatives have all the authority
required to enter into this contract, which to this date has
not been limited nor revoked in any manner whatsoever.

II.- LESSEE THROUGH ITS REPRESENTATIVE, MR EDWARD KITTREDGE, STATES:

A) THAT IT is a Mexican corporation.

B) That desires to lease, the Leased Property, subject to the
terms and conditions contained herein.

C) That LESSEE and its representative, have all the authority
which is required to enter into this contract, which to this
date has not been limited nor revoked in any manner
whatsoever.

Based on the foregoing, the parties agree on the following:

LEASE TERM

SECTION 1.

1.01 The Lease term shall commence upon the date of Substantial Completion of
LESSOR'S Work (as said term is defined below) and delivery of possession of the
Leased Property to LESSEE ("Commencement Date") and end ten (10) calendar years
thereafter ("Lease Term"), unless terminated sooner or extended pursuant to
provisions of this Agreement. The scheduled commencement date ("Scheduled
Commencement Date") of the Lease Term is OCTOBER 26, 1998. Within five calendar
days after the Commencement Date, the parties shall each execute and deliver a
commencement date certificate ("Commencement Date Certificate") in the form
attached as EXHIBIT "C" of this Agreement. The term "Lease Term" as used in
this Agreement, includes any extension as defined in this Agreement, if the
right to perform such extension is exercised.

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<PAGE> 3

Notwithstanding the foregoing, the monthly rent payable hereunder shall
start to accrue on the later of the Scheduled Commencement Date or the
Commencement Date.

1.02 LESSOR shall deliver possession of the Leased Property to LESSEE
Substantially Completed (as such term is defined below) on or before the
Scheduled Commencement Date, or on such other date as may be determined as
expressly provided in this Agreement.

Notwithstanding the foregoing or anything in this Agreement to the
contrary, considering that the Production Space is scheduled to be completed by
LESSOR (including availability of water and electricity for use by LESSEE in the
Production Space) on or before October 12, 1998, LESSOR shall grant to LESSEE,
at no charge, on or prior to such date, beneficial occupancy of the Production
Space for purposes of placing and installing production equipment and machinery,
as well as to run samples of production with such machinery and equipment, as
long as such occupancy does not interfere with LESSOR'S Work. The occupancy by
LESSEE and use the Leased Property partially as set forth in this paragraph
shall not affect or modify in any way other terms and obligations of the parties
pursuant to this Agreement, including the duration of the Lease Term. LESSEE
shall be responsible for the safekeeping of any and all equipment placed by
LESSEE at the Production Space prior to the Commencement Date as set forth in
this paragraph, provided however, that LESSOR shall be liable towards LESSEE for
any damage to the same or loss, if such damage or loss is caused directly by
acts of LESSOR or its employees, agents or subcontractors. All such equipment
shall at all times be the sole property of LESSEE, and LESSOR shall carry out
any and all acts that may be necessary in order to protect the same from
becoming subject of any lien, attachment or encumbrance deriving from LESSOR'S
liabilities or claims against LESSOR.

1.03 The Leased Property shall be considered "Substantially Completed", whenever
the same is ready for installation and operation of manufacturing equipment, as
well as for use of office space, including without limitation readiness for use
of all utility services and installation of communication and computer systems
in accordance with EXHIBIT "B", including changes approved in writing by LESSEE,
and

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<PAGE> 4

LESSEE must approve said completion in writing, upon the occurrence of all of
the following:

1.03(A) Construction by LESSOR of the Leased Property in accordance
with the EXHIBIT "B" ("Lessor's Work") and delivery of a
certificate to that effect to LESSEE by LESSOR.

1.03(B) Acceptance by LESSEE that the utility services for the Building
specified in the EXHIBIT "B" including storm and sanitary sewer, water
and electricity, and telecommunications lines have been fully
installed, are operational for use by LESSEE and comply with LESSEE'S
utility requirements. LESSEE shall at its cost, execute directly with
the corresponding utility companies contracts for the supply of such
services, provided however, that any payment or contribution required
by any utility company (i.e. electricity, telephone, sewer or water)
for the supply of the corresponding utility service other than standard
hook-up and consumption fees shall be paid by LESSOR in order for the
Leased Property to be considered Substantially Completed.

1.03(C) All proposed means of ingress, egress, parking, loading,
manufacturing and office areas are available for use by LESSEE, as
specified in EXHIBIT "B".

1.03(D) All legally required permits or certificates have been issued
by all required governmental authorities and obtained by LESSOR
(including use of land and construction permits).

1.03(E) Remaining work to be done to render the Leased Property fully
completed shall consist solely of minor details of construction,
mechanical adjustments, or decoration, which will not interfere with
LESSEE'S use and enjoyment of the Leased Property and which will be
completed by LESSOR within ten (10) business days after Substantial
Completion. When such remaining work is finally completed by LESSOR and
accepted by LESSEE, Lessor's Work and the Leased Property shall be
considered as "Finally Completed". To this effect whenever the Leased
Property and LESSOR'S Work is finally completed the parties hereto
shall execute and deliver a Final Completion Certificate in the form of
EXHIBIT "D" attached hereto and made a part hereof.

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<PAGE> 5

1.03(F) Recording at the corresponding Public Registry of Property and
Commerce, of a public deed containing the purchase of the Land by
LESSOR, and evidencing that LESSOR is the owner of the Land, free and
clear of any and all liens and encumbrances, and legally capable of
leasing or selling the same to LESSEE.

1.04 "Lessor's Work" shall mean all works and services to be performed by LESSOR
in connection with the construction of the Building (as described in EXHIBIT
"B"), which shall be performed by LESSOR at LESSOR'S expense in a good and
workmanlike manner. Upon Substantial Completion of Lessor's Work, LESSOR shall
deliver to LESSEE a certificate of substantial completion ("Certificate of
Substantial Completion").

1.05 LESSOR represents and warrants that as of the date of the execution of this
Agreement, the Promise to Purchase and Sale Agreement is in full force and
effect, and that as of the Commencement Date it will hold good and marketable
title to the Land. LESSOR will obtain releases of all tenancies, liens, claims,
easements, and other encumbrances on the Land and shall furnish evidence of its
title (including a certificate of no liens issued by the corresponding public
registry of property) satisfactory to LESSEE on or before the Scheduled
Commencement Date.

1.06 Should LESSOR fail to deliver the Building in a Substantially Completed
form, by the Scheduled Commencement Date, except if such failure is due to Acts
of God, LESSOR shall pay to LESSEE for each day of delay from October 27, 1998
and until the day it renders the Building Substantially Completed and delivers
possession thereof to LESSEE, as penalty for the delay, the amount of $1,000
(One Thousand and 00/100 United States Dollars).

1.07 Considering this lease exceeds a term of six (6) years and pursuant to the
provisions of the Article 2883 Paragraph III of the Civil Code for the State of
Coahuila, both parties agree to register this Lease Agreement at the Public
Registry of Property and Commerce of the corresponding District.

1.08 LESSEE has the right to extend the Lease Term beyond the expiration date
provided in SECTION 1.01, upon the following terms and conditions:

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<PAGE> 6

1.08(A) Should LESSEE fully and faithfully perform all of the terms and
conditions of this Lease, LESSEE may extend the Lease Term for two
consecutive five (5) year optional periods, with the extended term to
begin on the day following the expiration date of the previous term, as
specified in SECTION 1.01 and this SECTION 1.08(a), provided however,
that if at the date of expiration of the original term, LESSEE is in
default beyond any grace period provided in this Lease, and/or in the
performance of any of the terms or provisions of this Lease, the
remaining optional extension periods shall be null and void. All the
terms, covenants and provisions of the original Lease Term, other than
rent amounts, shall apply to any extended lease term.

1.08(B) LESSEE may exercise the option to extend this Lease by giving
LESSOR notice of its intention to do so not later than One Hundred
Eighty (180) days prior to the expiration date of the original Lease
Term or any extension thereof as provided in SECTION 25 of this Lease.

1.09 At least Two Hundred Ten (210) days prior to the expiration date of the
original Lease term or any extension thereof, LESSOR shall notify LESSEE, in
writing and as provided in SECTION 25 hereof, reminding LESSEE to send its
notice to exercise the option to extend the Lease Term as provided in SECTION
1.08 (b). If LESSEE does not exercise its option to extend the Lease Term and
holds over and continues in possession of the Leased Property after the grace
period of sixty (60) days from the expiration of the term of this Lease, or the
extension of that term, as stated in SECTION 15, LESSEE will be deemed to be
occupying the Leased Property for an additional one (1) year term and not on an
indefinite term basis, subject to all the terms and conditions of this Lease.
Upon expiration of that one (1) year period, LESSEE shall vacate the Building.

LEASED PROPERTY & RENTAL

SECTION 2

2.01 In consideration of the mutual covenants and agreements set forth in this
Lease, and other good and valuable considerations, and subject to the provisions
hereof, LESSOR leases to LESSEE, and LESSEE leases from LESSOR, the Leased
Property, with all improvements and constructions thereon and to be constructed
by LESSOR in connection therewith. On the Commencement Date the parties

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<PAGE> 7

shall prepare an inventory of the Building's equipment owned by LESSOR, to be
attached hereto as an exhibit and made a part hereof.

2.02 The monthly rental payment for the Leased Property will start to accrue for
the benefit of LESSOR on the latest of the Scheduled Commencement Date or the
Commencement Date, and shall be as follows:

a) Production Space to consist of 49,000 SQ.FT., for the first
five (5) years of the Lease Term at $0.305 CENTS PER SQ. FT.,
for a monthly rent equal to $ 14,945.00 (FOURTEEN THOUSAND
NINE HUNDRED FORTY-FIVE AND 00/100 UNITED STATES DOLLARS) plus
applicable value added tax. Beginning the day after the fifth
year anniversary of the Lease Term the rent will consist of
$0.31 PER SQ. FT., for a monthly rent equal to $15,190.00
(FIFTEEN THOUSAND ONE HUNDRED NINETY AND 00/100 UNITED STATES
DOLLARS) plus applicable value added tax.

b) Warehouse to consist of 25,000 SQ. FT., at $0.29 CENTS PER SQ.
FT., for a monthly rent equal to $7,250.00 (SEVEN THOUSAND TWO
HUNDRED FIFTY AND 00/100 UNITED STATES DOLLARS) plus
applicable value added tax.

In the event the LESSEE requests LESSOR, within the term of this lease, to equip
the Warehouse as a Production Space, the monthly rental payment will be modified
considering the rate referred to in Subparagraph a) of this SECTION 2.02.

2.03 The LESSEE agrees to pay the LESSOR the amount of the "VALUE ADDED TAX" on
the rent each month.

2.04 The monthly rent shall be paid by LESSEE to LESSOR on the first business
day of each calendar month, in advance, with the understanding that if the date
in which the rent starts to accrue as provided above is not the first business
day of the calendar month, LESSEE shall pay on such date the proportional rent
for the remaining days of such month, which shall be calculated by dividing the
total monthly rent by the number of days remaining in such calendar month. A
late fee at the rate equal to $0.05 (five cents) per dollar of the amount due
shall also be due for payments made more than ten (10) days after the date such
payment was due.

2.05 The rent and all other payments will be paid in United States Dollars or in
Pesos Mexican Currency at the exchange rate published by Banco de Mexico on the
Official Daily Gazette of the Federation on the date of payment. Rental payments
shall be paid to LESSOR by check at the offices of PARQUES INDUSTRIALES AMISTAD
ALIANZAS, S.A. DE C.V., in Periferico Luis Echeverria 1560, Torre

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<PAGE> 8

Saltillo piso 12, Saltillo, Coahuila, Mexico, or at such other place as LESSOR
may hereinafter, in writing, designate.

2.06 LESSOR agrees to deliver to LESSEE, upon receipt of rental payments as
provided above, rental invoices which shall comply with all applicable legal and
tax requirements, including a break down of the value added tax.

2.07 The monthly rental payment for each five (5) year option extension period
to the Lease Term, will be increased at the beginning of the extension period by
adding two cents ($0.02) to the monthly rent applicable during the preceding
lease term then ending.

USE OF THE LEASED PROPERTY

SECTION 3

3.01 LESSEE or its agents will use the Leased Property and improvements located
thereon only to operate an industrial operation of the so called light-medium
industry and/or warehousing, including office facilities, parking and employees
cafeteria, unless LESSOR shall give LESSEE prior written consent for a different
use.

3.02 LESSEE shall not use, or permit the use of, the Leased Property in any
manner that results in waste of the Leased Property or constitutes a nuisance
nor shall LESSEE use, or permit the use of, the Leased Property for any illegal
purpose. LESSEE, at its own expense, will comply and will cause its officers,
employees, agents, and investors to comply with all applicable laws and
ordinances, and with all applicable rules and regulations of governmental
agencies concerning the use of the Leased Property.

3.03 LESSOR represents and warrants that any handling, transportation, storage,
treatment and use of hazardous and toxic substances that have occurred on the
Land prior to this date have been in compliance with all applicable federal,
state and local laws, regulations and ordinances, that no leak, spill, release,
discharge, emission or disposal of hazardous or toxic substances has occurred on
the Land to date, and that the soil, ground water, and soil vapor on or under
the Land are free of toxic and hazardous substances as of the date of execution
of this Agreement. Furthermore, LESSOR represents and warrants that as of the
Commencement Date, the Leased Property will not contain any asbestos or PCB's,
any underground storage tanks or any other kind of contaminated material as per
the applicable environmental laws and regulations. An environmental study that
evidences no contamination on the Land upon execution of this Agreement is

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<PAGE> 9

attached hereto as EXHIBIT "E", and made a part hereof for all purposes, with
the understanding, however, that the same shall not limit or restrict in any
manner whatsoever the obligations and liabilities of LESSOR contained in this
Agreement.

Notwithstanding the foregoing and anything herein to the contrary, if
any claim is ever made against LESSEE by any person or entity (including any
governmental authority) relating to any pollution or contamination from
hazardous, contaminating or toxic substances present at the Leased Property due
to no act or omission of LESSEE (i.e. pollution or substances which were present
at the Leased Property prior to the Commencement Date) or due to LESSOR'S breach
of its covenants hereunder or due to any of LESSOR'S representations and
warranties not being true and correct as of the Commencement Date, all costs of
removal incurred by, all liabilities imposed upon, and losses and damages
suffered by LESSEE because of the same shall be borne by LESSOR, and LESSOR
hereby agrees to indemnify, defend and hold LESSEE harmless from and against
such costs, liabilities, losses and damages, including without limitation, with
respect to any third party and/or authority claim for personal injury or
property damage and other claims, actions, administrative proceedings,
judgments, damages, lost profits, penalties, fines, costs, losses, reasonable
attorney's fees and expenses (through all levels or proceedings), consultants or
experts fees, and all costs incurred in enforcing this indemnity.

3.04 LESSEE shall assume all environmental liabilities derived from its
production process and/or storage by entering into this Agreement but only as of
the Commencement Date, and, thus will be responsible that the Leased Property
must be free of, and will not be subject to, any spill, accident or ecological
material or waste, including those that are deemed hazardous or dangerous under
the terms of the General Law of Ecological Equilibrium and Environmental
Protection, its Regulations or the Applicable Mexican Official Norms, and agrees
to save, indemnify, defend and hold the LESSOR harmless against any and all
claims, demands, cost recovery actions, administrative procedures, orders,
judgments, damages, process fees, lost profits, losses, reasonably attorneys and
consultants fees, encumbrances, liens, investigation and remediation costs,
compliance costs, liabilities, including sanctions, penalties, shut downs,
fines, interests and/or surcharges which LESSOR is required to pay due to any
act, omission, false statements or misinterpretations of LESSEE its employees or
agents, which directly or indirectly result in such claims, demands, cost
recovery actions, administrative procedures, orders, judgments, damages, process
fees, lost profits,

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<PAGE> 10

losses, reasonably attorneys and consultants fees, encumbrances, liens,
investigation and remediation costs, compliance costs, liabilities, including
sanctions, penalties, shut downs, fines, interests and/or surcharges, regarding
the Leased Property.

3.05 LESSEE shall not be responsible for environmental liabilities, as defined
by the General Law of Ecological Equilibrium and Environmental Protection, its
Regulations or the Applicable Mexican Official Norms, caused by any act of
another LESSEE within the same industrial property or any formal owner of the
Leased Property that is causing, directly or indirectly, environmental liability
emanating from the Leased Property.

MAINTENANCE, REPAIRS, & REPLACEMENTS

SECTION 4

THE RESPONSIBILITY FOR MAINTENANCE, REPAIR AND REPLACEMENT
SHALL BE GOVERNED BY THE FOLLOWING STIPULATIONS:

4.01 (A) LESSOR shall at all times during the lease term maintain and repair, at
its own cost and expense, the building foundation, structure of the roofs
(including supporting framework but excluding paint work, other than the
exterior paint of the Building which shall be maintained in its original
condition by LESSOR). LESSOR shall make all repairs caused by its negligence.

If LESSOR shall fail to make repairs for which it is responsible within three
business days if causing LESSEE'S normal business interruption or within eight
business days for other events after receiving written notice from LESSEE of the
need, LESSEE may make the repairs and in such event LESSOR shall pay to LESSEE
any cost related therewith upon demand.

4.02 As of the fifth anniversary of the Lease Term, LESSEE shall maintain and
repair at its own cost and expense, the interior of the building, including
interior and steel structure paint, surface of floors, access roads from the
Land's limit, paving, sanitary waste system lines from its hook-up limit, roof
insulation and complete built-up roof, including but not limited to the heating,
ventilation and air conditioning system, fire protection system, compressed
system, plumbing, electrical systems and landscaping. LESSOR warrants that the
Leased Property shall be free and clear of any and all defects for a term of
five years counted as from the Commencement Date, and therefore shall make any
and all repairs that may be required during such period, with the understanding
however, that LESSEE will make all repairs caused by its negligence.

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If LESSEE shall fail to make repairs for which it is responsible within thirty
days after receiving written notice from LESSOR of their need, LESSOR may make
the repairs and in such event LESSEE shall pay to LESSOR any cost in relation
thereof upon written request.

4.03 LESSEE agrees that the Leased Property will be returned to LESSOR in as
good condition as the same was received at the beginning of the Lease, normal
wear and tear excepted.

UTILITIES

SECTION 5

5.01 The LESSEE will contract and directly pay all public services required. The
LESSOR states that all necessary public services are available at the Leased
Property, with all of their corresponding connections and/or installations, the
LESSEE being responsible for the hookup and contracting of said services.

5.02 LESSEE shall pay all utility charges for water, electricity, heat, and
telephone service used in and about the Leased Property during the Lease Term,
or any extension thereof, all such charges to be paid by LESSEE directly to the
utility company or municipality furnishing the same, before the same shall
become delinquent.

5.03 LESSEE shall pay for the removal of all garbage and rubbish from the Leased
Property during the Lease Term on a monthly basis, with the understanding that
LESSOR shall deliver the Leased Property to LESSEE on the Commencement Date free
of any garbage or rubbish.

MODIFICATIONS

SECTION 6

6.01 LESSEE shall not make any structural alterations, additions, or
improvements to the Leased Property without the prior written consent of LESSOR,
which consent shall not be unreasonably withheld.

6.02 All alterations, additions or improvements made by LESSEE and affixed to
the Leased Property that are not removed within sixty (60) calendar days from
the termination of the Lease, shall become the property of LESSOR. LESSOR may,
however, require that LESSEE remove any and all alterations, additions and/or
improvements installed or made by LESSEE without LESSOR'S consent, and any other

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property placed on the Leased Property by LESSEE upon termination of the Lease.
In the event that LESSOR requires LESSEE to remove such alterations, additions,
or improvements, LESSEE shall repair any damage to the premises caused by such
removal. If whatever wire, pipe or ducts are left in the walls or floors, LESSEE
will provide LESSOR blueprints detailing the location of such wiring, piping and
ducting.

6.03 LESSEE shall be able to remove all machinery, equipment, or any other trade
fixtures installed by it in, on or about the Leased Property, as well as
fixtures that can be removed without structural damage to the building. In the
event such fixtures are abandoned, LESSEE must pay LESSOR any reasonable
expenses actually incurred by LESSOR to remove the fixture from the premises.

6.04 In the event LESSEE elects to construct substantial improvements or
additions to the Leased Property but which are less than 50,000 Sq. Ft., LESSEE
covenants to engage or hire an affiliate of LESSOR to carry out such
construction and development. The obligation of LESSEE under this Section 6.04
is subject, however, to the parties ability to negotiate and enter satisfactory
construction contracts including an agreement as to price, within a reasonable
commercial period not to exceed thirty days.

6.05 The parties expressly agree that in the event LESSEE requests LESSOR to
construct an expansion to the Leased Property consisting of an addition of at
least 50,000 Sq. Ft., the performance of the expansion shall be subject to the
following:

6.05 (A) If the expansion is to be delivered within the first five years of the
initial Lease Term, the rent per square foot for the new construction shall be
the same as the one stated for the Building within the initial Lease Term.

6.05 (B) If the expansion is to be delivered after the fifth anniversary of the
Lease Term, the price per square foot for the new construction shall be
calculated by adding two cents ($0.02) to the current rental rate.

6.05 (C) If the expansion is to be delivered after the tenth anniversary of the
Lease Term, the price per square foot for the new construction shall be
calculated by adding one cent ($0.01) to the current rental rate in force in
such time.

6.05 (D) The parties agree that the lease term for the expansion or expansions
performed in accordance to this SECTION 6.05 will have the same conclusion date
as the one provided in SECTION 1.01 or any extension thereof.

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TAXES

SECTION 7

7.01 LESSEE shall be liable for the payment of the respective value added tax
caused by this contract, as well as the real estate tax (predial) on the Leased
Property applicable during the Lease Term up to the maximum amount of $1,000.00
U.S. Cy. per year. Any excess thereof shall be borne and paid directly by
LESSOR. All other taxes shall be paid by LESSOR. Furthermore, any acquisition or
transfer tax resulting from the acquisition by LESSOR of the Leased Property
erected on the Land shall be borne and paid by LESSOR within the term set forth
in the applicable law.

If any such taxes for which LESSEE is liable hereunder are levied or assessed
against LESSOR or LESSOR'S property, LESSOR shall notify LESSEE in writing
within a reasonable time after such levy or assessment, the amounts of said
taxes, and LESSEE must notify LESSOR in writing within ten (10) days of receipt
of LESSOR'S notice if LESSEE intends in good faith to contest the assessment.
Thereafter, if LESSOR elects to pay the same, LESSEE shall pay to LESSOR, and
upon demand, that part of such taxes, related expenses and penalties for which
LESSEE is liable under this SECTION 7.01. LESSOR shall have the right to
terminate this lease agreement if LESSEE fails to reimburse those amounts in
taxes, related expenses and penalties LESSOR paid for LESSEE.

7.02 The LESSEE shall obey and comply with all Governmental Orders and their
requirements, rules, regulations, laws and ordinances of all legally constituted
authorities, in any way affecting this Lease, the above described Premises, the
Buildings and improvements now or hereafter thereon or the use of the same,
existing at any time during the continuance of this Lease (subject to the rights
of the Tenant to contest the validity of any such law, ordinance, rule,
regulation or other requirement).

LIABILITIES OF THE PARTIES

SECTION 8

8.01 The LESSEE or the LESSOR shall each be responsible for damages to the
Leased Property caused by their own fault or negligence, or that of their
agents, employees or visitors.

8.02 In the event that the LESSEE should be prevented due to damage or
destruction to the Leased Property where the repairs would cost less than 25% of
the price of the Building (excluding the price of land) that would be applicable
under section 19.01 (b) below, by any cause attributable to the LESSOR, or by
acts of God or force majeure, from partially using any part of the Leased
Property, the

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LESSOR may provide to LESSEE, if available, other suitable space which is
acceptable to LESSEE at its own discretion, that LESSOR may have from the date
of such event, during which time the rental payments will be decreased in
proportion to the damaged portion of the Leased Property. LESSEE will notify
LESSOR in writing of the damages to the Leased Property. LESSOR will rebuild the
Leased Property to its original condition within 90 (ninety) days after the
insurance company releases the Leased Property to begin reconstruction of same.
The LESSOR is not required to rebuild if the damage occurred within the last
one-hundred and eighty (180) days of the initial lease term or any extension,
unless the LESSEE notifies LESSOR in writing that LESSEE will extend its Lease
Agreement beyond the initial lease term through any option period provided in
the lease.

8.03(A) If the damage to the Leased Property totals or exceeds twenty-five
percent (25%) of the price of the Building (excluding the price of land) that
would be applicable under section 19.01 (b) below, and it is caused by acts of
God or force majeure, LESSOR shall, within ten (10) days after receiving notice
from LESSEE of such damage, notify to LESSEE the amount of days that it would
take LESSOR to rebuild the Leased Property to its original condition. If LESSOR
notifies LESSEE that the reconstruction would take more than 90 (ninety) days
after the insurance company releases the Leased Property to begin
reconstruction, the LESSEE shall have the right to terminate this Lease
Agreement by written notice to LESSOR or require LESSOR to make the repairs
within the time frame specified in LESSOR'S notice. If the LESSEE decides to
terminate this Agreement as provided in this paragraph, this Agreement shall
terminate and the LESSEE and LESSOR shall be released from any subsequent
obligations under this Agreement.

8.03(B) In the event that LESSEE requests in writing that LESSOR repairs and/or
rebuilds the Leased Property, LESSOR will do so within the time frame specified
in Section 8.02 or Section 8.03(a), as applicable. The LESSOR is not required to
rebuild if the damage occurred within the last one-hundred and eighty (180) days
of the initial lease term or any extension, unless the LESSEE notifies LESSOR in
writing that LESSEE will extend its Lease Agreement beyond the initial lease
term through any option period provided in the lease. If the LESSEE decides to
continue the present Agreement, the rent payable under same, shall be reduced,
on a monthly basis, in an amount equivalent to the percentage of the unusable
Leased Property, as hereinabove mentioned.

8.03(C) The term "original condition", as used in sections 8.03(a) and 8.03(b)
above, shall mean the condition in which the Leased Property was found
immediately prior to suffering the damage in question.

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8.04 The parties to this Agreement agree that the replacement value, and the
percentage of any damage or destruction, shall be determined in good faith by an
expert appointed by both parties to this Agreement.

INSURANCE & INDEMNITY

SECTION 9

The parties hereto, specifically agree that:

9.01 During the Lease Term, the LESSEE shall obtain and keep in force, insurance
policies over the Building in the type and in amount hereinafter mentioned:

a. An insurance to cover any loss or damage to the Building, caused by
fire, lightning, explosion, hurricane and hail, airplanes, vehicles and
smoke, earthquake and/or volcanic eruption, strikes, riots and
vandalism and any other risks (including glass insurance) now or
hereafter embraced by the so called "Extended Coverage" in Mexico, in
amounts sufficient to prevent LESSOR or LESSEE from becoming a
co-insurer under the terms of the applicable policies, but in any event
and at all times in an amount not less than one hundred (100%) percent
of the then "full insurance value" of the Building, which for the
purpose of this Section shall be deemed to be the cost of replacing the
Building less the cost of excavations, foundations and footings and
without any deductions for physical depreciation of the Building with
an automatic inflationary rider for the highest percentage available in
Mexico. Such "full insurance value" shall be determined from time to
time, but not more frequently than once every calendar year, by the
mutual agreement of the parties and in the event such agreement is not
reached, by the following procedure:

In the event LESSEE does not agree with the full insurable value of the
Building provided by LESSOR, each party, at its own expense will order
an appraisal performed by a certified Mexican Bank. Thus the full
insurable value will be determined as the average of the two appraisals
so performed.

b. General Public Liability Insurance, covering claims for injury or death
and property damage in the amount of five hundred thousand US Dollars
($500,000.00) per occurrence

c. Insurance against explosion of compressor or boiler in the amount of
five hundred thousand US Dollars ($500,000.00).

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d. Rental Interruption Insurance in the amount of one year rent, plus the
corresponding value added tax and a year payment of the respective property
tax and insurance premiums.

9.02 All insurance provided for in this Clause shall be issued under valid and
enforceable policies issued by Mexican Insurance Companies authorized to do
business in Mexico. LESSEE shall deliver to LESSOR the policies herein referred
to at the execution of this Lease, prior to the occupation of any portion of the
Leased Property.

9.03 All policies of insurance herein provide for, shall name LESSOR as the loss
payee, and said policies shall be subject to the provision of Section 25 hereof,
and if requested by LESSOR in writing to the provision of Section 14, herein.

9.04 Such policy issued by the insurer shall contain an agreement by the insurer
that such policy shall not be canceled without at least thirty days prior notice
to the LESSOR and to the LESSEE, and that any loss which shall be payable to
LESSOR shall be so paid, notwithstanding any act or negligence of LESSEE.

9.05 In case of a casualty to the Leased Property resulting in damage or
destruction to the Building, LESSEE shall promptly give written notice thereof
to the LESSOR and adjustment proceedings shall be then started immediately by
LESSOR.

All insurance money paid on account of such damage or destruction, less the
actual cost, fees, and expenses if any, incurred in connection with adjustment
of loss, shall be paid to the LESSOR, for the purpose of restoring, replacing or
rebuilding the Leased Property to the condition and character immediately prior
to such damage or destruction.

9.06 During the construction period of the Building and until the Commencement
Date, LESSOR shall carry "Builder's Risk" insurance which consist on risks
inherent to the construction of the Building, in amounts and with companies
satisfactory to LESSEE. Certificates of such insurance shall be delivered to
LESSEE within two (2) days after execution of this Agreement.

ENTRY ON LEASED PROPERTY BY LESSOR

SECTION 10

10.1 LESSEE will authorize entries by LESSOR into the Leased Property, and said
authorization shall not be unreasonably withheld by LESSEE. With this
authorization, or if authorization is unreasonably withheld LESSOR, its officer,
agents, employees and representatives, shall have the right to enter into and
upon all

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<PAGE> 17

parts of the Leased Property at all reasonable hours for purposes, including but
not limited to the prospective tenants, inspection, cleaning, maintenance,
repairs, alterations, or additions to the Leased Property as LESSOR may deem
necessary, but without any obligation to perform any of these functions, except
as expressly provided in this Lease, and such entry shall not interfere with the
LESSEE'S ability to conduct its business. Notwithstanding the foregoing, any
alterations or modifications will only be made if previously agreed upon by the
parties. The time for showing the premises to future tenants will be limited to
180 days prior to the conclusion of the lease term if no extension right has
been exercised by LESSEE.

LIENS ON THE LEASED PROPERTY
SECTION 11

11.01 LESSEE agrees that it will not permit any mechanic's or other liens to
stand against the Leased Property for work or materials furnished, provided
however, that LESSEE shall have the right to contest the validity of any lien or
claim. LESSEE herein guarantees that in the event of Labor claims (Civil riots,
strikes, etc.) he will pay for the final determination of the validity of any
lien and/or judgment rendered against LESSEE with all related costs and charges
flowing therefrom and shall have said lien released without cost to LESSOR.

ASSIGNMENT AND SUBLETTING

SECTION 12

12.01 LESSOR shall have the right during the Lease Term and after LESSEE has
taken possession of the Leased Property, to transfer in favor of a Mexican
financial institution any or all of its interests under the terms of this lease
with respect to its right to receive the monthly rental payment referred to in
Section 2 hereof, prior written notice given to LESSEE in connection thereof
setting forth the name of the institution and the effective date upon which
LESSOR shall thereafter continue to make payments of the rent to such assignee.
With respect to any other rights or obligations set forth in this Agreement,
LESSOR may transfer them only with the prior written consent of LESSEE. After
the Lease Term commences, such consent shall not be unreasonably withheld.

12.02 LESSEE shall not assign or sublet this Lease without the prior written
consent of the LESSOR. LESSOR may not unreasonably withhold its consent. LESSOR
may withhold this written consent if LESSEE is in default under this lease
agreement either during the initial lease period, including any option period or
month to month tenancy. Upon obtaining LESSOR'S consent, LESSEE may assign or

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<PAGE> 18

sublet the Leased Property to any person or corporation, provided that the
assignee assumes in full the obligations of LESSEE under the lease.
Notwithstanding this Section 12.02, LESSEE may, without LESSOR'S consent, assign
or sublet the Leased Property to any corporation which is controlled by or is
under common control of LESSEE, or to any corporation resulting from the merger
or consolidation of LESSEE, provided that the assignee assumes, in full, the
obligations of LESSEE under this Lease. Unless agreed to in writing, no such
assignment shall operate to relieve LESSEE from the obligations imposed under
this Lease.

DEFAULT

SECTION 13

13.01(A) In the event that LESSEE shall have failed to timely pay LESSOR three
(3) consecutive monthly rental payments within each calendar year of this Lease
beginning on the anniversary of said Lease , LESSOR may terminate this Lease on
giving LESSEE at least Thirty (30) days written notice of such intention. In the
event LESSEE elects this option, the Lease will be terminated on the date
designated on LESSOR'S notice.

13.01(B) Unless otherwise agreed to by LESSOR in writing, in the event LESSEE is
in violation of any other provisions of this Lease aside and apart from the
violations listed in 13.01(a), and such violation remains uncured for a period
of sixty (60) days after LESSOR, by written notice, has informed LESSEE of such
violations, LESSOR shall have the right to terminate this Lease unless LESSEE
has cured its violation within a period of sixty (60) days from the date of
written notice, unless otherwise agreed to by LESSOR in writing.

13.01(C) Unless otherwise agreed to by LESSOR in writing, in the case of a
default the cure of which has not been commenced within a period of sixty (60)
days after LESSOR, by written notice, has informed LESSEE of such violation,
then LESSEE shall be deemed to be in default and LESSOR may, at its option,
terminate this agreement and/or exercise any right or remedy provided by the law
or this agreement, including but not limited to the right of LESSOR to recover
the total amount of the Lease payments remaining under the Lease Agreement, with
the understanding however, that such amount shall in no event exceed the
equivalent of rents that would have been received by LESSOR at the eight (8th)
year of the Lease Term if no such termination had occurred.

13.02 A waiver by either LESSOR or LESSEE of a breach of this Lease by the other
party does not constitute a continuing waiver or a waiver of any subsequent
breach of this Lease.

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13.03 If LESSOR defaults in the performance of any terms, covenant or condition
required to be performed by it under this agreement, LESSEE may elect to:

13.03(A) Terminate this Lease if LESSOR has not cured any such default within 90
(ninety) days after receiving notice from LESSEE of the existence of such
default. The cure period set forth herein shall be of 30 (thirty) days only with
respect to all obligations of LESSOR to be performed by LESSOR on or prior to
the Scheduled Commencement Date

13.03(B) Pursuit of any of the remedies provided in this Lease by either LESSOR
or LESSEE shall not preclude pursuit of any of the other remedies provided in
this Lease or by law. Pursuit of any remedies provided in this Lease or by law
by either party shall not constitute a forfeiture or waiver of any of the
damages accruing to either party by reason of violation of any of the terms,
provisions, and covenants contained in this Lease, nor shall pursuit of any
remedies provided in this Lease by LESSOR constitute a waiver, or forfeiture or
waiver of any rent due to LESSOR under this Lease.

13.04 No waiver by either party of any default or violation or breach of any of
the terms, provisions and/or covenants contained in this Lease shall be deemed
or construed to constitute a waiver of any other violation or breach of any of
the terms, provisions and covenants of the Lease. Forbearance by either party to
enforce one or more of the remedies provided in this Lease or by law upon any
event of default shall not be deemed or construed to constitute a waiver of such
default. LESSOR'S acceptance shall not be construed as LESSOR'S waiver of the
default.

SUBROGATION

SECTION 14

14.01 LESSEE agrees to subordinate this Lease to any Deeds of Trust or mortgages
that might now or later constitute a lien upon the Building, or on improvements
in the Building, or on the Leased Property. LESSEE agrees to execute any
instruments that are required by any mortgages for the purpose of subjecting and
subordinating this Lease to the lien of any such Deed of Trust or mortgage. With
respect to any Deed of Trust or mortgage constituting a lien on the Building, or
improvements in the Building, or on the Leased Property, LESSOR has the right to
waive the applicability of this Section so that this Lease will not be subject
and subordinate to any such Deed of Trust or mortgage. Notwithstanding such
subordination, LESSEE'S right to quiet possession of the Premises shall not be
disturbed if LESSEE is not

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in default and so long as LESSEE shall pay the rent and observe and perform all
of the provisions of this Lease, unless this Lease is otherwise terminated
pursuant to its terms.

14.02 LESSEE agrees to subordinate this Lease to any Banking and/or Financing
Institutions and to the assignment of the monthly rental payments during the
term of this lease or any extension therefor to said Banking or Financing
Institution.

SURRENDER OF THE LEASED PROPERTY

SECTION 15

15.01 The LESSEE shall, on the last day of the term of this Agreement or its
extension or upon early termination as provided herein, surrender and deliver on
the corresponding date, the Leased Property to the possession and use of the
LESSOR, without delay, in the same condition in which the LESSEE received such,
except for normal wear and tear, and the effects of the elements and casualties
covered by insurance. All signs, inscriptions, canopies and installations of
similar nature made by the LESSEE shall be removed within sixty (60) calendar
days after expiration of the term of this Agreement or its extension, in such
period of time LESSEE shall be paying rent on a monthly basis until it
completely vacates the Leased Property.

15.02 All furniture, trade fixtures, machinery, business equipment, and
leasehold improvements, of any sort whatsoever, including fire protection
systems and HVAC systems, installed by the LESSEE, shall remain as property of
the LESSEE, unless the parties agree otherwise in writing, and shall be removed
by the LESSEE at the end of the term of this Agreement or its extension.

15.03 LESSEE shall, at its own expense, repair all damages resulting from the
installation or removal thereof, normal wear and tear excepted.

15.04 In the event that upon the expiration of the sixty (60) day grace period
after the expiration of the Initial Term LESSEE does not vacate and deliver the
Leased Property to the LESSOR according to the Lease Agreement, LESSEE shall pay
as new rent the amount established in Section 2.07 hereof, plus an amount
equivalent to ten percent (10%) of same within the term determined in Section
1.09.

15.05 The acceptance of said payment by the LESSOR, in accordance with the prior
paragraph, does not imply in any manner

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whatsoever the waiver by the LESSOR to any right to recover possession to the
Leased Property.

LESSOR'S RIGHT TO PERFORM LESSEE'S COVENANTS

SECTION 16

16.01 If at any time during the term of this Agreement, LESSEE fails to perform
one or more of its obligations assumed in this Agreement, LESSOR, after sixty
(60) calendar days written notice to LESSEE, and without waiving or releasing
the LESSEE from any of its obligations contained in this Agreement, may, but
shall be under no obligation to, perform acts which LESSEE has to perform in
accordance to this Agreement, and may take all such actions thereon as may be
necessary, and may enter to the Leased Property for such purpose, and perform
all the necessary works needed. All reasonable sums paid by LESSOR in connection
with the performance of any such obligations of LESSEE shall be payable by
LESSEE to LESSOR on demand.

LESSEE'S RIGHT TO PERFORM LESSOR'S COVENANTS

SECTION 17

17.01 If at any time during the term of this Agreement, LESSOR fails to perform
one or more if its obligations assumed in this Agreement, LESSEE after sixty
(60) calendar days written notice to LESSOR, and without waiving or releasing
the LESSOR from any of its obligations contained in this Agreement, may, but
shall be under no obligation to, perform any act which LESSOR has to perform in
accordance to this Agreement, and may take all such actions thereon as may be
necessary. All reasonable sums paid by LESSEE in connection with the performance
of any such obligations of LESSOR shall be payable by LESSOR to LESSEE on
demand.

GUARANTY

SECTION 18

18.01 In respect to this Lease Agreement, the LESSOR has obtained a guaranty
from LESSEE'S U.S. Parent Company, Gerber Childrenswear, Inc., attached hereto
as EXHIBIT "F" which provides a copy of a current financial statements. In the
event of a sublease or assignment, the new tenant must have sufficient financial
capacity to meet its obligations as tenant and provide to LESSOR'S satisfaction
a Letter of Guaranty from the new tenants parent company or an affiliate or a
third party, that guaranties all of the lease obligations under this lease
agreement.

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PURCHASE OPTION

SECTION 19

19.01 If LESSEE requests an expansion to the Leased Property consisting of at
least 50,000 sq. ft. of additional construction within the first five years of
the initial Lease Term, LESSEE shall have an option to purchase the Leased
Property from LESSOR, which may be exercised by LESSEE at any time during the
rest of the original Lease Term and any extensions thereof. Likewise, even if an
expansion to consist of a minimum of 50,000 sq. ft. is not requested, LESSEE
shall have the purchase option, but which shall be exercisable only throughout
the extensions to the initial Lease Term. The purchase option is subject to the
following terms and conditions:

19.01 (A) LESSEE shall notify LESSOR its intention to purchase ("Notice of
Intent") at least sixty (60) calendar days prior to the date in which he intends
to execute the purchase agreement. Once LESSOR receives the Notice of Intent it
shall provide LESSEE all necessary documents that shall be requested by the
Notary Public designated by LESSEE for the execution of the Purchase Agreement.

19.01 (B) The price of the Land shall be of $16.00 (Sixteen and 00/100 United
States Dollars) per square meter. The price of the Building shall be: a) $29.50
(Twenty-nine and 50/100 United States Dollars) for every square foot of the
Production Space or any authorized expansion performed with the same
specifications of the Production Space, and b) $23.75 (Twenty-three and 75/100
Dollars) for every square foot of the Warehouse or any authorized expansion
performed with the same specifications of the Warehouse. Any leasehold
improvements made by LESSEE at its own cost and expense shall not be included to
calculate the purchase price.

19.01 (C) The purchase shall be made in United States Dollars at the price that
results to apply the foregoing prices per square foot and per square meter to
the existent number of square feet and square meters, and shall take place on
the date LESSEE determines in its Notice of Intent before the Notary Public
LESSEE elects.

19.01(D) In the event LESSEE exercises its option to purchase, LESSEE shall pay
all transfer and value added taxes, notary and registration fees. LESSOR shall
pay all income tax arising from such sale.

19.01(E) The parties expressly agree that LESSEE shall continue paying monthly
rental payments on a monthly basis from the date of issuance of the Notice of
Intent to the date the Purchase Agreement

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takes place, likewise, it is understood that the payment of monthly rental
payment in no event will be considered as part of the Purchase Price.

19.02 The parties expressly agree that in the event LESSEE does not request
LESSOR an expansion to consist of a minimum of 50,000 sq. ft. within the first
five years of the Initial Term, the purchase option will not be exercisable by
LESSEE from the fifth to the tenth year of the Initial Lease Term.

19.03 The parties agree that in the event the purchase option is exercises by
LESSEE, LESSOR shall on or prior to the date designated by LESSEE for the
execution of the purchase agreement, LESSOR shall carry any and all acts
necessary, at its own cost and expense, in order for any and all liens,
encumbrances, mortgages and attachments on the Leased Property or any part
thereof to be cancelled, and to provide LESSEE with a certificate issued by the
corresponding Public Registry of Property and Commerce evidencing that the
Leased Property is free and clear of any and all liens, encumbrances, mortgages
and attachments.

PURCHASE/LEASE FIRST RIGHT OF REFUSAL

SECTION 20

20.01 Within the initial term of this Lease Agreement or any extension thereof,
LESSEE shall have a right of first refusal to purchase or lease the Lot No. 2
described and identified in the drawing enclosed to this Lease as EXHIBIT "G".
In the event LESSOR desires to accept an offer from a third party to purchase or
lease Lot No. 2, or any part thereof, LESSOR shall give LESSEE a written notice
of the terms or conditions of such sale or lease, including the identity of the
prospective purchaser or tenant. LESSEE shall give LESSOR, within thirty (30)
calendar days from the notice of LESSOR, written notice of its intention to
exercise right of first refusal. If LESSOR doesn't receive written notice of
LESSEE exercising its right of first refusal, LESSOR may freely sell or lease
the Lot No. 2 to the third party identified in its notice, under no more
favorable terms for such third party than those specified in said notice, within
a term not to exceed 90 (ninety) days, otherwise the procedure set forth herein
shall be observed again.

20.02 Subject to LESSOR'S acquisition of Lot No. 11, LESSOR shall grant LESSEE a
right of first refusal to purchase or lease the Lot No. 11 described and
identified in the drawing enclosed to this Lease as its EXHIBIT "G", at the same
price and under the terms as LESSOR could sell or lease to an apparel
manufacturer, bona fide. The right of first refusal shall be subject to the
procedure established in SECTION 20.01 hereof.

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20.03 The parties expressly agree that in the event LESSOR is unable, for any
reason, to acquire Lot No. 11 the right of first refusal granted under SECTION
20.02 shall be automatically canceled.

LEASE CONDITIONS FOR OTHER "BUILT TO SUIT" FACILITIES

SECTION 21

21.01 LESSOR hereby grants LESSEE the same lease price, terms and conditions
stated in this Lease Agreement in the event LESSEE requests LESSOR to perform
new "Built to Suit" Facilities for lease by LESSEE, to be located in properties
presently owned by LESSOR or any of its affiliates in the State of Coahuila,
except for properties owned by Amistad in the cities of Saltillo, Torreon and
Ramos Arizpe.

21.02 For the cities of Saltillo, Torreon and Ramos Arizpe, the parties hereby
expressly agree that the lease prices stated under this Agreement shall be
increased in one cent ($0.01) to the current rental rate in effect under this
Lease, additionally the parties agree to revise the prices to be included in the
purchase option of the respective Lease Agreement, which price shall be
determined in accordance to fair market prices.

21.03 The right conveyed to LESSEE under this SECTION 21 will be in effect for
two (2) years from the Commencement Date.

21.04 The parties expressly agree that the right herein conveyed does not in any
manner constitute a right of first refusal or a purchase/lease option for LESSEE
in regards to the properties presently owned by LESSOR or its affiliates in the
State of Coahuila, other than the Leased Property, Lot No. 11 and Lot No. 2.

HOLD HARMLESS

SECTION 22

22.01 The LESSOR agrees to indemnify, defend and to hold the LESSEE harmless
against any liabilities, including fines or charges of which the LESSEE is
requested payment owing to any act or omission of the LESSOR, which directly or
indirectly result in said liabilities, fines or charges.

22.02 The LESSEE agrees to indemnify, defend and to hold the LESSOR harmless
against any liabilities, including fines or charges of which the LESSOR is
requested payment owing to any act or

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omission of the LESSEE, which directly or indirectly result in said liabilities,
fines or charges.

22.03 LESSOR shall be the only employer of its personnel assigned to or
contracted for the performance of the LESSOR'S WORK and any other obligations of
LESSOR hereunder, and agrees to strictly comply with all its obligations as
employer with respect to said personnel under the Federal Labor Law, the Social
Security Law, the National Housing Fund for Employees Institute Law and all
other applicable laws and the regulations and ordinances issued under any such
applicable laws. No employee contracted by LESSOR for the performance of its
obligations shall be deemed employee of LESSEE.

LESSOR agrees to indemnify and hold LESSEE harmless in the event of:
(i) any labor claim filed by any worker or employee of LESSOR; and (ii) any
claim filed by the Mexican Social Security Institute, the National Housing Fund
for Employees Institute or any other governmental agency, due to the failure of
LESSOR to make payments of the respective quotas and taxes or to comply with any
of its obligations mentioned in the immediately preceding paragraph.

MODIFICATION TO THE CONTRACTUAL DOCUMENTS

SECTION 23

23.01 Unless otherwise agreed by the parties, any modification, release or
discharge of this Agreement or waiver of any of the provisions thereof, shall
not be valid or obligatory, unless made in writing and signed by both the LESSOR
and the LESSEE.

SOLE CONTRACTUAL DOCUMENT

SECTION 24

24.01 The parties agree that the present Agreement and the exhibits referenced
herein contain all the obligations and agreements between the parties concerning
the subject matter hereof, and, therefore, this Agreement is the sole
contractual document executed between the parties concerning the subject matter
hereof, and replaces any other Agreement, either oral or written, between the
parties.

NOTICES

SECTION 25

25
<PAGE> 26

25.01 All notices, demands and requests required under this Lease shall be in
writing. All such notices, demands and requests shall be deemed to have been
properly given if served personally or if sent by registered or certified mail
return receipt requested, or by means of recognized courier services, addressed
to LESSOR or LESSEE as the case may be, at its respective address last
designated by notice to the other party for that purpose. Until LESSOR and
LESSEE designated other addresses their addressee shall be as follows:

LESSOR: PARQUES INDUSTRIALES AMISTAD ALIANZAS, S.A. DE C.V.
Periferico Luis Echeverria 1560
Torre Saltillo piso 12
25280 Saltillo, Coahuila, Mexico.
At'n Lic. Marco Ramon Aguirre
cc. Legal Department.

LESSEE:
If made on or prior to the Commencement Date:

Battallon de San Patricio No. 111-1102
Valle Oriente
Garza Garcia, N.L. 66269
At'n Lic. Jorge Barrero

If made after the Commencement Date:

At the Leased Property

LANGUAGE

SECTION 26

26.01 This Agreement, in its original form is prepared in English. The parties
agree that a Spanish translation of this agreement shall be prepared to the
satisfaction of both parties within 30 (thirty) days after the date hereof, and
ratified before a notary public. In the event of conflict between the two
versions, the Spanish version shall prevail.

SUCCESSOR AND ASSIGNS

SECTION 27

27.01 The agreements, terms, covenants and conditions herein shall bind and
inure to the benefit of LESSOR and LESSEE and its

26
<PAGE> 27

respective heirs, personal representatives, successors, and its permitted
assigns.

DESCRIPTIVE HEADINGS

SECTION 28

28.01 The descriptive headings herein are for convenience only and shall not be
deemed to affect the meaning or construction of any provision hereof.

FORCE MAJEURE

SECTION 29

29.01 Neither LESSOR nor LESSEE shall be required to perform any term,
condition, or covenant in this Lease so long as such performance is delayed or
prevented by Force Majeure, which shall mean Acts of God, tornadoes, lighting,
floods, earthquakes, and any other natural cause not reasonably within the
control of LESSOR or LESSEE.

AMICABLE RESOLUTIONS

SECTION 30

30.01 The parties shall seek friendly resolution to any bona fide disagreement
or dispute arising out or relating to or affecting this Agreement in accordance
with the following provisions.

30.02 The parties shall try to accommodate the Agreement disputes to a
non-adjudicative friendly business oriented procedure (the "CPR"). The CPR shall
be carried out as follows, with the understanding that any party may at any
time, terminate the CPR process by means of written notice to the other party
and request the dispute to be resolved as provided in Section 31 below:

a) Should any Agreement dispute arise, the parties shall commence
the CPR by appointing their respective representatives (the
"Management Representatives"), who shall have authority to
negotiate a settlement on behalf of the party each one
represents.

b) Not later than 10 working days following their appointment,
the Management Representatives will mutually select and
appoint an acceptable mutual mediator (the "Neutral Advisor"),
who

27
<PAGE> 28

shall have the functions stated in this CPR. If by the
aforementioned term, the parties have not decided over who
will act as Neutral Advisor, then the arbitration procedure
may be followed pursuant to SECTION 31.

c) Within a 10 day term immediately following the appointment of
the Neutral Advisor, a formal meeting (the "Formal Meeting")
will be held before a panel consisting of the Neutral Advisor
and the Management Representatives.

The Formal Meeting shall be held at the place and time
selected by mutual agreement of the Management
Representatives, shall be supervised and conducted by the
Neutral Advisor, and shall have a duration of not more than
forty eight (48) hours.

d) Not later than 10 working days prior to the Formal Meeting,
the parties shall exchange through their Management
Representatives - and shall submit to the Neutral Advisor,
concise memoranda stating the issues in dispute and their
position in such respect, as well as all documents and
exhibits on which the parties intend to rely during the Formal
Meeting. Such memoranda, documents and exhibits shall be in
either English or Spanish language; nevertheless, such
memoranda, documents and exhibits shall be accompanied by a
Spanish translation if they are in English, and by an English
translation if they are in Spanish.

e) During the Formal Meeting each party will make an oral
presentation of this case, and each party shall be entitled to
a reply. The presentations and replies may be made in any
form, and by any individuals, other than the Management
Representatives, as desired by each party, and may be
supported by any of, but only, the memoranda, documents and
other exhibits submitted in accordance with Subparagraph d)
hereof. The use of witnesses and experts shall be permitted.
Presentations may not be interrupted, except that the Neutral
Advisor and the Management Representatives may ask clarifying
questions.

28
<PAGE> 29

The meeting shall not be recorded. However, persons attending
may take notes. Each Management Representative may have not
more than two advisors in attendance.

f) During the Formal Meeting, the Management Representatives
shall make all reasonable efforts to seek for a resolution to
the Agreement Dispute, to which effect they shall meet one or
more times, as necessary. By mutual agreement, other members
of their teams and an interpreter may invited to attend the
negotiations. The Neutral Advisor will attend the negotiations
and will give an oral opinion as to the issues raised during
the Formal Meeting.

g) Should the Management Representatives not reach a resolution
on the Agreement Dispute as stated in subparagraph f)
hereinabove, then, within a term of forty-eight hours
following the conclusion of the Formal Meeting, the Neutral
Advisor shall submit to the Management Representatives a
written proposal which shall contain an opinion on the issues
involved in the Agreement Dispute and an amicable bona fide
proposed resolution thereof.

h) Should the Management Representatives finally reach a
resolution to the Agreement Dispute, the terms of any
settlement thereof, shall be set forth in a written agreement
(the "Resolution Agreement") which shall be executed by the
Management Representatives not later than twenty-four hours
after the conclusion of the negotiations, or after the
submitting of the Neutral Advisor written proposal mentioned
in subparagraph g) hereinabove. The Resolution Agreement shall
be final and legally binding on the parties.

DISPUTE RESOLUTIONS

SECTION 31

31.01 This Agreement is to be governed by and construed in accordance with the
laws of Mexico.

29
<PAGE> 30

31.02 The Parties hereto irrevocably submit themselves for the interpretation of
this Agreement and solution of any controversy arising therefrom on or prior to
the Commencement Date to Arbitration under the rules of the International
Chamber of Commerce ("ICC"), and therefore, any controversy arising out of or in
connection with this Agreement, or the alleged breach, termination or validity
of this Agreement ("Controversy"), on or prior to the Commencement Date, shall,
upon the written request of a Party delivered to the other Party (a "Request
for Arbitration"), be finally settled by arbitration under the Rules of the ICC,
except as such rules may be modified herein.

The arbitration proceedings shall be conducted, and the award rendered,
in Mexico City, Federal District, Mexico, in the Spanish language. There shall
be three neutral arbitrators in accordance with the provisions below. Each Party
shall select one arbitrator within fifteen (15) days after a Request for
Arbitration is made, and the two arbitrators so appointed shall, within fifteen
(15) days after the appointment of the second of them, designate a third
arbitrator. The arbitrators shall select from among them that arbitrator that
shall serve as chairman, within fifteen (15) days following the date of the last
of their selection. If any appointment of the arbitrators is not made within the
terms set forth herein, the ICC shall make such appointment at the request of
any Party. The arbitrators shall be able to read, write and converse fluently in
English and Spanish and shall have expertise in the matter at issue.

In any arbitration proceeding under this Agreement, the arbitrators
shall be authorized to order specific performance of any obligation arising
under this Agreement.

The arbitrators shall decide the Controversy in accordance with the
national substantive laws of Mexico. The written decision of the arbitrators,
signed by a majority of them, shall be final and binding on the Parties. Upon
the receipt of such decision, each Party shall immediately (a) take such action,
(b) make such changes in the conduct of its business or (c) make such payments
or restitution, as the case may be, as such decision requires of it. The award
may be enforced by any court of competent jurisdiction.

The Party against which an award is made pursuant to this provisions,
shall pay all costs and expenses caused by the arbitral procedure in question,
including attorney's fees and the cost and expenses corresponding to the
arbitrators and the ICC.

The non-privileged books and papers of each Party to such arbitration
proceeding, so far as they may relate to matters

30
<PAGE> 31

submitted to arbitration, shall be open to the examination of the arbitrators
and the other Parties to such arbitration proceeding prior to the hearing.

31.03 The parties submit themselves for the resolution of any controversy
arising out of or in connection with this Agreement, after the Commencement
Date, to the jurisdiction of the competent courts where the Leased Property is
located, waving the right they may have to any other jurisdiction by reason of
their present or future domiciles.

MISCELLANEOUS

SECTION 32

32.01 In case any one or more of the provisions contained in this agreement
shall for any reason be held to be invalid, illegal, void, or unenforceable,
such provision shall not affect any other provision of the agreement, and this
agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been included in the agreement.

32.02 In the event of dispute between the parties hereto, the responsible party
will pay to the prevailing party reasonable attorney's fees as determined by the
competent court.

32.03 Time is of the essence of this agreement.

Executed in multiple counterparts this 1st day of October of 1998.

[SIGNATURES ON THE NEXT PAGE]

31
<PAGE> 32

LESSOR: PARQUES INDUSTRIALES AMISTAD ALIANZAS, S.A. DE C.V.

/s/ Marco Ramon Aguirre
--------------------------------------------
BY: MR. MARCO RAMON AGUIRRE
ITS: PRESIDENT

AND

/s/ Jesus Maria Ramon Aguirre
--------------------------------------------
BY: MR. JESUS MARIA RAMON AGUIRRE
ITS: VICE-PRESIDENT

LESSEE: G C W MEXICO, S.A. DE C.V.

/s/ Edward Kittredge
--------------------------------------------
BY: MR. EDWARD KITTREDGE
ITS: CHAIRMAN OF THE BOARD

WITNESS WITNESS

/s/ Claudia Valdez Saenz /s/ Jay Cope
- -------------------------------- ---------------------------------
PRINT NAME: Claudia Valdez Saenz PRINT NAME: Jay Cope
ADDRESS: _______________________ ADDRESS: ________________________

<PAGE> 1

EXHIBIT 10.24

WAIVER AND TERMINATION AGREEMENT

THIS WAIVER AND TERMINATION AGREEMENT (this "Waiver") is made as of August 14,
1998, by Citicorp Venture Capital, Ltd., a New York corporation ("CVC"), and
Gerber Childrenswear, Inc., a Delaware corporation (f/k/a GCIH, Inc. and
referred to herein as, tile "Company"). The Company and CVC are sometimes
referred to in this Waiver collectively as the "Parties" and individually as a
"Party." Capitalized terms used in this Waiver shall have thc meanings expressly
ascribed to them in this Waiver.

WHEREAS, the Company and various members of the Company's management (each a
"Manager") are party to the Manager Securities Purchase Agreements dated as of
February 28. 1997, July 25, 1997 or November 26, 1997 and described on Schedule
1 hereto (collectively. thc "Manager Agreements") pursuant to which the Company
sold, and the various employees purchased, shares of Stock; and

WHEREAS, the Company and Lawrence R. Glenn ("Glenn") are party to the Investor
Stock Purchase Agreement dated as of January 22, 1996 and described on Schedule
1 hereto (the "Investor Agreement") pursuant to which the Company sold, and
Glenn purchased, shares of Stock; and

WHEREAS, the Company and Joseph Medalie ("Medalie") are parties to the Director
Stock Purchase Agreement dated as of February 11, 1997 and described on Schedule
I hereto (thc "Director Agreement") pursuant to which the Company, sold and
Medalie purchased, shares of Stock; and

WHEREAS, pursuant to each of the Manager Agreements, the Stock is subject to
vesting over a live-year period beginning on the date of the relevant Manager
Agreement and ending on the fifth anniversary thereof (the "Five-Year Period");

WHEREAS pursuant to each of the Manager Agreements after the Five-Year Period
lapses, the Company (and CVC if the Company does not so elect) has a continuing
and perpetual right to repurchase the Vested Stock owned by a Manager, at a
price equal to the Vested Stock's Book Value, if such Manager's employment with
the Company is terminated for any reason at any time (the "Manager Repurchase
Options");

WHEREAS, pursuant to each of the Director Agreement and the Investor Agreement,
the Company is entitled to repurchase the Stock owned by Glenn and Medalie at
any time at a price al to the Stock's Book Value (the "Director Repurchase
Options");

WHEREAS, in connection with the initial public offering of the Company's common
stock (the "IPO"), the Company desires to waive and terminate its rights arising
under the each of thc Manager Repurchase Options and Director Repurchase
Options;

<PAGE> 2

WHEREAS, in connection with the IPO, CVC desires to waive and terminate its
rights arising under each of the Manager Repurchase Options;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, CVC and the Company hereby intend to be legally
bound as follows:

SECTION 1. CERTAIN DEFINITIONS.

"Book Value" has the meaning ascribed to it in each of the Manager
Agreements, tile Director Agreement and the Investor Agreement.

"Stock" means shares of capital stock of the Company purchased under
each of the Manager Agreements, the Director Agreement and the Investor
Agreement.

"Vested Stock" has the meaning ascribed to it in each of the Manager
Agreements.

SECTION 2. WAIVER AND TERMINATION.

a) The Company agrees and acknowledges that its past, present and future
rights to (i) repurchase Vested Stock arising under the Manager
Repurchase Options and (ii) repurchase Stock under the Director
Repurchase Options are hereby waived and terminated and the provisions
giving rise to such rights shall have no further force and effect for
now and for all times hereafter.

b) CVC agrees and acknowledges that its past, present and future rights to
repurchase Vested Stock arising under the Manager Repurchase Options
arc hereby waived and terminated and the provisions giving rise to such
rights shall have no further force and effect for now and for all times
hereafter.

SECTION 3. LIMITATION OF WAIVER. The Company and CVC expressly limit the waiver
and termination set forth in Section 2 to those rights arising under the Manager
Repurchase Options and Director Repurchase Options as expressly defined herein.
Except as expressly set forth herein, all such agreements and all rights and
obligations of the Parties arising under the Manager Agreements, the Directors
Agreement and the Investor Agreement shall continue in full force.
Notwithstanding anything contained herein, the Parties expressly reaffirm the
existence and survival of their rights under each Manager Agreement to
repurchase Stock prior to the lapsing of the Five-Year Period subject to the
terms and conditions set forth in the Manager Agreements.

SECTION 4. FURTHER ASSURANCES. The Company and CVC agree to take any further
action and execute any further documents as may be necessary to effectuate the
foregoing; provided that the expenses related to such further action are paid
for or reimbursed by the Company.

SECTION 5. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN
ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT PROVISIONS OR RULE (WHETHER OF THE STATE
OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE LAWS OF ANY OTHER
JURISDICTION OTHER THAN THE STATE OF NEW YORK TO BE APPLIED.

<PAGE> 3

IN WITNESS WHEREOF, the Parties hereto have executed this Waiver as of
the date first written above.

GERBER CHILDRENSWEAR, INC.

By: /s/ Richard L. Solar
---------------------------------
Name: Richard L. Solar
Title: Senior Vice President

CITICORP VENTURE CAPITAL, LTD.

By: /s/ John D. Weber
---------------------------------
Name: John D. Weber
Title: Vice President

<PAGE> 4

A. Manager Agreements

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Gerardo M. Arce.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Larry L. Bateman.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Charles W. Berry.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Ronald C. Boone.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Harvey Burak.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and LeeAnn Carroll.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Jay R. Cope.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Robert L. Gall.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and George J. Boltz.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Bobbie C. Greene.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and David R. Hamilton.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Kenneth R. Heatter.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Earle R. Keaton, Jr.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Douglas E. Klein.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Christine R. Lanigan.

<PAGE> 5

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Angela C. Lombardi.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Raymond R. McManus.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Jacqueline D. McNulty.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Jeffrey Mintz.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Deanna L. Parris.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and John Larry Pelt.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and David C. Pittman.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and James B. Robertson.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Marvin E. Roberts.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Jeanne E. Scanell.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Eugene L. Scarpa.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Lee M. Schaeffer.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Dwight Smith.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Dale F. Tarlow.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Philip V. Todaro.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Holly H. Waddell.

<PAGE> 6

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Deidre A. Wahlberg.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Ralph L. Wheeler.

Manager Securities Purchase Agreement dated as of February 28, 1997 by
and between GCIH, Inc. and Philip R. Whitaker.

Manager Securities Purchase Agreement dated as of July 25, 1997 by and
between GCIH, Inc. and Robert L. Gall.

Manager Securities Purchase Agreement dated as of July 25, 1997 by and
between GCIH, Inc. and David G. Phillips.

Manager Securities Purchase Agreement dated as of July 25, 1997 by and
between GCIH, Inc. and Raymond McManus.

Manager Securities Purchase Agreement dated as of September 30, 1997 by
and between GCIH, Inc. and Susan M. Vander Molen.

Manager Securities Purchase Agreement dated as of November 26, 1997 by
and between GCIH, Inc. and David Hamilton.

Manager Securities Purchase Agreement dated as of November 26, 1997 by
and between GCIH, Inc. and Robert P. Robertson.

B. Investor Agreement

Investor Stock Purchase Agreement dated as of January 22, 1996 by and
between GCIH, Inc. and Lawrence R. Glenn.

C. Director Agreement

Director Stock Purchase Agreement dated as of February 11, 1997 by and
between GCIH, Inc. and Joseph Medalie.

<PAGE> 1

EXHIBIT 21.1 - SUBSIDIARIES OF THE REGISTRANT

<TABLE>
<CAPTION>
Other Names Under Which
Subsidiary Jurisdiction of Incorporation Such Subsidiary Does Business
---------- ----------------------------- -----------------------------

<S> <C> <C>
GCW Holdings, Inc. Delaware None

Costura Dominicana, Inc. Delaware None

GCI IP Sub, Inc. Delaware None

Auburn Hosiery Mills, Inc Kentucky None

GCI Spainco, S.L. Spain None

Sport Socks Co. (Ireland) Ltd. Ireland None

Sport Socks Co. (UK) Limited United Kingdom None

Gerber Childrenswear Canada, Inc. Delaware None

Costura Matamoros S.A. de C.V. Mexico None

GCW Mexico S.A. de C.V. Mexico None
</TABLE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,780,000
<SECURITIES> 0
<RECEIVABLES> 40,431,000
<ALLOWANCES> 3,810,000
<INVENTORY> 87,020,000
<CURRENT-ASSETS> 132,761,000
<PP&E> 32,935,000
<DEPRECIATION> 7,711,000
<TOTAL-ASSETS> 185,738,000
<CURRENT-LIABILITIES> 50,015,000
<BONDS> 0
0
0
<COMMON> 171,000
<OTHER-SE> 98,755,000
<TOTAL-LIABILITY-AND-EQUITY> 185,738,000
<SALES> 278,496,000
<TOTAL-REVENUES> 278,496,000
<CGS> 209,458,000
<TOTAL-COSTS> 209,458,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 700,000
<INTEREST-EXPENSE> 5,808,000
<INCOME-PRETAX> 24,671,000
<INCOME-TAX> 8,646,000
<INCOME-CONTINUING> 16,025,000
<DISCONTINUED> 0
<EXTRAORDINARY> 266,000
<CHANGES> 0
<NET-INCOME> 15,759,000
<EPS-PRIMARY> 1.06
<EPS-DILUTED> .85

</TABLE>