UNITED STATES OF AMERICA
                  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 For the transition period from _____________ to
--------------

Commission File Number:      333-58059

                          Cluett American Corp.
        (Exact Name of Registrant as Specified in Its Charter)

Delaware                                                   22-2397044
(State or Other Jurisdiction of                            (I.R.S.
Employer
Incorporation or Organization)
Identification No.)

                48 West 38th Street New York, NY 10018
         (Address of Principal Executive Offices) (Zip Code)

   Registrant's Telephone Number, Including Area Code 212-984-8900

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

Title of Each class                               Name of each
exchange on which registered
None                                         None
-----------------------        ----------------------------------------

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

                                 None
                --------------------------------------
                           (Title of Class)

   Indicate by check mark whether  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 (section 229.405 of this chapter) is not contained herein,
and will not be contained,  to the best of registrant's knowledge, in definitive
proxy or information  statements  incorporated  by reference in Part III of this
form 10-K or any amendment to this Form 10-K. [ ]

   Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15
(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a
court.
Yes   X    No

   No stock is held by any  non-affiliates  of the registrant as of December 31,
1998.


<PAGE>


                          TABLE OF CONTENTS


PART I

Item 1.       Business

Item 2.       Properties

Item 3.       Legal Proceedings

Item 4.       Submission of Matters to a Vote of Security Holders


PART II

Item 5.       Market  for  Registrant's   Common  Equity  and  Related
               Stockholder Matters

Item 6.       Selected Financial Data

Item 7.       Management's   Discussion   and  Analysis  of  Financial
               Condition and Results of Operation

Item 7A.      Quantitative and Qualitative Disclosures about Market Risk

Item 8.       Financial Statements and Supplementary Data

Item 9.       Changes  in  and   Disagreements   with  Accountants  on
               Accounting and Financial Disclosures


PART III

Item 10.      Directors and Executive Officers of the Registrant

Item 11.      Executive Compensation

Item 12.      Security   Ownership   of  Certain   Beneficial   Owners  and
               Management

Item 13.      Certain Relationships and Related Transactions


PART IV

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


SIGNATURES

EXHIBIT INDEX








<PAGE>



                                PART I

Item 1.  Business

  Cluett American Corp.  (formerly known as Bidermann Industries Corp. ("BIC")),
a Delaware corporation  organized in 1982, and its subsidiaries (the "Company"),
primarily designs,  manufactures and markets men's socks and dress shirts in the
United States and Canada. The Company filed voluntary petitions for relief under
the provisions of Chapter 11 of the Federal Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of New York (the "Court") on July 17,
1995. On March 31, 1998, the Third Amended Plan of  Reorganization  (the "Plan")
was confirmed by the Court.  In connection  with the Company's  recapitalization
and  refinancing  consummated  on May 18, 1998,  the Company  entered into a new
Senior  Credit  Facility and issued its Senior  Subordinated  Notes due 2008 and
Senior  Exchangeable  Preferred  Stock  due 2010.  Cluett  American  Corp.  is a
wholly-owned  subsidiary  of  Cluett  American  Group,  Inc.  ("CAG").  CAG is a
wholly-owned   subsidiary  of  Cluett  American   Investment  Corp.  ("CAIC"  or
"Holdings"),  which was formerly  known as  Bidermann  Industries  U.S.A.,  Inc.
("BIUSA").

Overview

  Based on net sales, the Company  believes it is one of the leading  designers,
manufacturers and marketers of men's socks and dress shirts in the United States
and has a  significant  market  presence in women's and  children's  socks and a
growing presence in men's and women's sportswear.  While the Company serves most
channels of distribution,  its primary focus is on department and national chain
store retailers. The Company believes its core product offerings, GOLD TOE socks
and ARROW dress shirts,  provide  classic styles at price points which represent
exceptional value and appeal to a broad consumer base.

  The Company markets its products using widely recognized  Company-owned brands
such as GOLD TOE,  SILVER  TOE and ARROW in the sock  segment  and ARROW and its
related trade names,  including  DOVER,  KENT, ARROW "1851" and COLLARMAN in the
dress shirt segment.  The Company primarily sells its products to department and
national  chain stores to maintain its brand image and to achieve the relatively
higher selling prices and higher margins  characterized by sales to these retail
stores. Approximately 58% of the Company's net sales are derived from these core
offerings,  the  demand for which is  believed  to be stable  and  resistant  to
changing fashion trends.

  The Company also has licensed the exclusive  rights to manufacture  and market
certain  apparel  products  (generally  socks  and  shirts)  under  such  widely
recognized  brand names as Kenneth Cole,  Perry Ellis,  Nautica,  Jockey and The
North Face.  This diverse  portfolio of  Company-owned  and licensed brand names
enables the Company to offer different brands with unique value  propositions to
different channels of distribution.

  The Company identifies its reportable  segments based on the segment's product
offerings.  For the year ended  December 31,  1998,  the Company  conducted  its
business through three principal  segments:  the Sock Group, the Shirt Group and
the Designer Group. The reportable  segments are each managed separately as they
manufacture  and  distribute   distinct   products  with  different   production
processes.  The Company evaluates  performance based on net sales, gross profit,
operating  profit and EBITDA.  For the year ended December 31, 1998, the Company
realized  consolidated  net sales and EBITDA As Defined  of $373.1  million  and
$40.9 million,  respectively.  EBITDA As Defined is defined as operating  income
before  depreciation  and  amortization,  non cash  pension  income and facility
closing and  reengineering  costs. See (7) of Item 6 Selected  Financial Data on
pages 17 through 19 for a detailed discussion of EBITDA As Defined.

  The Sock Group  (43.2% of net sales for the fiscal  year  ended  December  31,
1998). The Sock Group is a market leader in department store sales of socks. The
Sock Group's  leading  brand,  GOLD TOE, was  established  in 1934 and generates
approximately  65% of the  Sock  Group's  net  sales  with the  remaining  sales
generated through  complementary private labels and through licensed brands such
as Perry Ellis, Nautica, Jockey and Arrow. The Sock Group offers a comprehensive
line of  products  across  multiple  price  points,  ages,  genders  and styles,
enabling  it  to  provide  its  customers  with  a  full  range  of  their  sock
requirements.  For the  fiscal  year ended  December  31,  1998,  the Sock Group
realized  net sales and EBITDA As Defined of $164.8  million and $31.4  million,
respectively.


<PAGE>



  The Shirt  Group  (48.1% of net sales for the fiscal year ended  December  31,
1998).  The Shirt  Group  designs,  manufactures  and markets  dress  shirts and
sportswear, focusing on men's cotton/polyester and all cotton dress shirts which
are sold under the ARROW brand and its related  trade  names,  including  DOVER,
KENT,  COLLARMAN  and ARROW  "1851".  Sportswear  products  manufactured  by the
Company  consist  primarily of men's and women's knitted and woven sport shirts,
which  are sold  primarily  under  the  TOURNAMENT,  KHAKI by  ARROW  and  ARROW
AMERICA'S  Sport  labels.  Because of the name  recognition  of its ARROW brand,
which was  established  in 1851,  the  Company is also able to license the ARROW
trademark for shirts  internationally  and non-shirt  products both domestically
and  internationally.  For the fiscal year ended  December 31,  1998,  the Shirt
Group realized net sales  (including  licensing fee revenue of $6.3 million) and
EBITDA As Defined  (including  net  licensing  income of $4.4 million) of $183.2
million and $14.2 million, respectively.

   The Designer  Group (7.6% of net sales for the fiscal year ended December 31,
1998). The Designer Group was established as a separate business unit in October
1995 and sells (i) dress and sport  shirts under  licensed  Kenneth  Cole,  Yves
Saint  Laurent  ("YSL")  and  Burberrys  trademarks,  (ii) dress socks under the
licensed Kenneth Cole and YSL trademarks and (iii) tailored  clothing and casual
pants under the YSL  trademark.  During the fiscal year ended December 31, 1998,
management  decided to exit the Burberrys and YSL businesses.  This decision was
driven by a lack of operating profitability in the Designer Group, combined with
a significant working capital requirement. Consequently, the Company has entered
into  agreements to terminate the Burberrys and YSL license  agreements and will
no longer  distribute  products  under these brands after June 30, 1999. The net
cost to exit the Burberrys and YSL businesses during 1998 was approximately $7.1
million. For the fiscal year ended December 31, 1998, the Designer Group had net
sales and EBITDA As Defined of $29.1 and $(0.5) million, respectively. Effective
January 1, 1999, for financial  reporting  purposes,  the dress and sport shirts
business under the Kenneth Cole trademark  will be  consolidated  into the Shirt
Group  financial  results and the dress sock  business  under the  Kenneth  Cole
trademark  will  be  consolidated   into  the  Sock  Group  financial   results.
Operationally,  Kenneth  Cole  dress  shirts and socks  will  remain  distinctly
separate  from the  Shirt  and Sock  Groups  in order  to  maintain  the  unique
qualities of a designer product.

     The net  sales  and  EBITDA  As  Defined  numbers  in the  preceding  three
paragraphs  include   intercompany   sales  of  $7.8  million.   For  additional
information about the Company's product categories and reportable segments,  see
Item 1 "Description of Business" on pages 5 through 7 and "Note 17 Segment Data"
of the Notes to the Consolidated  Financial Statements on pages F-8 through F-34
of the Consolidated Financial Statements.


<PAGE>


Description of Business

The Sock Group

  Founded in 1919, the Sock Group is one of the largest designers, manufacturers
and  marketers of socks in the United  States.  The Sock Group  distributes  its
products to most channels of  distribution,  although it has a concentration  in
the higher-margin department and national chain store segment.

  The United  States  sock  industry is a subset of the  overall  United  States
hosiery  industry.  The sock industry includes the manufacture of socks for men,
women, children and infants.  Within the sock industry, the two largest segments
are casual/dress and sport/athletic. Demand is driven by the basic replenishment
needs of the consumer and the general fashion trends prevalent in the market.

  The sale of socks as a percentage of total  hosiery sales has been  increasing
steadily over the last several  years.  The increased  demand has been driven by
the overall trend toward casual fashion.  In addition,  the volume of socks sold
at retailers has increased as more manufacturers, including the Sock Group, have
introduced  multi-pack  offerings for products that were  traditionally  sold in
single pair offerings.

  In response to these trends,  and in order to diversify its product offerings,
the Sock Group has expanded its product lines through new licensing  agreements,
private label products and brand extensions. The Sock Group, through its premier
GOLD TOE brand,  its SILVER TOE and  FRIDAY's  by Cluett  brands,  its  licensed
Jockey,  Perry  Ellis,  Nautica,  and Arrow  trademarks  and its  private  label
products,  is the most diversified sock company in the United States and is able
to offer its customers a majority of their sock requirements.

  The following  table shows the  percentage of the Company's net sales of socks
represented by the listed category:


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


         Gold Toe                         61%        63%        65%
         Other Branded                    20         20         18
         Private Label                    12         11         11
         Other(1)                          7          6          6
                                        ----       ----       ----

                     Total              100%       100%       100%
                                        ====       ====       ====

         Total net sales in millions  $141.1     $151.8      $164.8
                                       =====      =====       =====

(1) Includes transfers to outlet stores.

  GOLD TOE socks have  provided a strong  foundation  for the Sock Group and its
predecessors for most of its 79-year history.  The GOLD TOE trademark is used on
socks for all lifestyles  (dress,  casual and athletic) and all genders and ages
(men, women and children). GOLD TOE socks are marketed at wholesale at the upper
moderate  price range.  Its primary  competitors  include  private labels of the
various department stores for men's and women's socks.

  The Sock Group also markets Perry Ellis and Nautica  designer socks. The Perry
Ellis  label was added in 1993 and the  Nautica  label was added in 1996.  Perry
Ellis and Nautica are primarily a premium  quality,  men's designer  product for
the  department  store  class.  These lines enable the Sock Group to enhance its
position  in the upper  price  tier of this trade  class and expand its  product
line. Perry Ellis and Nautica socks are marketed in an upper price range.  Their
primary competitors include the brands `Polo' and `Tommy Hilfiger'.

  The Sock Group markets  moderate  price point socks under the ARROW and Jockey
trademarks.  ARROW and Jockey socks are marketed to men and women. Both products
have the  advantage  of  nationally  recognized  brand names.  Currently,  Sears
accounts  for the  majority  of the ARROW  sock  volume.  Jockey's  and  ARROW'S
competitors  include  `Hanes' by Sara Lee  Corporation  ("Sara Lee") and private
label manufacturers.

  The Sock Group also sells  socks  into the mass  market and  discount  channel
under the SILVER TOE, COLORMATCH and Jaclyn Smith brands. These offerings enable
the Company to access the large mass  merchant  channel  with a high quality and
differentiated  product. The Sock Group's primary competitors in this channel of
distribution  are  Renfro   Corporation   ("Renfro")  and  other  private  label
manufactures.

  The Sock  Group  supplies  a number of its key  customers  with  comprehensive
private label programs. Private label represents an opportunistic business which
leverages the Company's strong design and production  capabilities.  By offering
private label socks,  the Sock Group is capable of serving the full range of its
customer's product needs.

<PAGE>
The Shirt Group

  Founded in 1851,  the Shirt Group places its primary  focus on the dress shirt
segment of the  market,  representing  65% of its  revenues  for the fiscal year
ended December 31, 1998. The Shirt Group  distributes its products to department
stores,  specialty  stores,  national chain stores and selected discount stores,
although it has its highest  concentration  in the department and national chain
store segment.  Similar to the Sock Group,  the Shirt Group has  diversified its
product  offerings  through brand  extensions  and private label  products.  The
breadth  of  the  Shirt  Group's  product   offerings   allows  it  to  offer  a
comprehensive range of products to its customers.

  The Company's ARROW dress shirts are  principally  marketed under four labels:
DOVER,  KENT,  ARROW "1851" and COLLARMAN.  These labels have been  repositioned
over the past year to represent a good,  better and best  strategy for the ARROW
product lines.

  The following  table shows the percentage of the Company's net sales of shirts
represented by the listed category:



                                        1996    1997   1998
                                        -----   ----   ----
Dress Shirts:

Arrow...........................        59%     58%      58%
Other Dress Shirts..............         3       7        7
                                         -       -        -
              Total.............        62%     65%      65%

Sport Shirts....................        38%     35%      35%
                                        --      --       -- 
      Total Shirts..............       100%    100%     100%
                                       ===     ===      ===

Total net sales in millions.....     $ 194.7 $ 176.8  $ 183.2

DRESS SHIRTS
     Traditional  in styling,  the DOVER and KENT brands are names the  consumer
and retailer recognize as a good quality, moderately priced, dress shirt that is
a mainstay of the ARROW assortment.  This product line has allowed ARROW to be a
significant player in the blended oxfo rd cloth classification and is carried in
almost  every store where ARROW is sold.  Leveraging  the  strength of the DOVER
label, a new marketing  strategy was launched in 1998, and DOVER was extended to
include  blended  broadcloth  and blended  pinpoint  shirts.  A major design and
merchandising  effort was put into  these two new  product  offerings  to show a
broader fashion  assortment,  while maintaining the classic DOVER styling.  This
product   line  is  targeted  at  an  average   out-the-door   retail  price  of
approximately $18 to $22, and its major competitors are private label products.

  The ARROW "1851" label was launched in 1994 when ARROW was the first to market
wrinkle  free  shirts.  As with DOVER and KENT,  the ARROW  "1851"  wrinkle free
products are mostly cotton blends available in oxford,  broadcloth and pinpoint.
The wrinkle free oxford is the best selling wrinkle free shirt in the department
store channel.  The ARROW "1851" label reinforces  ARROW'S important position in
the blended oxford  classification.  Whereas DOVER and KENT are more traditional
in styling,  the ARROW "1851" label is available in more updated  fashion styles
and  available in 100%  cotton.  This product  line  represents  ARROW'S  better
quality shirt by offering the consumer fashion looks with either the enhancement
of the  wrinkle  free  process or the better  100%  cotton  fabric.  The primary
competition  for the ARROW "1851" label is private label  products.  The average
out-the-door retail price is approximately $23 to $27.

  COLLARMAN  is a product  line that was  launched  in 1996.  Designed to be the
highest  quality  shirt  in  the  ARROW  product  offering,   these  shirts  are
manufactured with cotton pinpoint oxford and broadcloth fabrics.  Although not a
large  portion of ARROW sales,  this  product has been placed in certain  better
department stores. The primary competition for the COLLARMAN is `Perry Ellis' by
Salant  Corporation  ("Salant").  The  average  out-the-door  retail  price  for
COLLARMAN is approximately $28 to $32.

  The Shirt  Group has  identified  the private  label shirt  market as a growth
opportunity with existing customers as well as other channels of distribution. A
separate sales team has been  established  to pursue this business  opportunity.
Using the Company's  expertise in design,  manufacturing and service,  the Shirt
Group can offer a competitive  advantage in helping  stores manage their private
label business.

SPORT SHIRTS
     The Company leverages the recognition of its well-known ARROW brand name in
its sportswear product lines. With the growth of the casual sportswear  business
and the higher priced designer  collections,  ARROW has identified a niche for a
branded,  moderately  priced product.  During the fiscal year ended December 31,
1998, the Company  repositioned its sportswear  labels with an emphasis on three
brands: TOURNAMENT, KHAKI by ARROW and ARROW AMERICA'S Sport, which are marketed
to provide a good, better, and best product line. Approximately 35% of the Shirt
Group's business is in sportswear.

<PAGE>
  The TOURNAMENT  brand is a moderately  priced,  mostly cotton blended  product
from ARROW.  Starting in 1997,  the Company began  marketing all of its moderate
priced sportswear,  primarily knit and woven shirts, under the TOURNAMENT brand.
TOURNAMENT sportswear is targeted at a retail price of approximately $18 to $22.
The major competitors of the TOURNAMENT brand are private label and `Supreme' by
Supreme International Corp. ("Supreme").

  The KHAKI by ARROW and ARROW AMERICA's Sport labels  represent higher quality,
100% cotton  sportswear  product.  Traditional  in styling,  these products were
marketed to give the  consumer a natural  fiber sport shirt at a retail price of
$25 to $30.  These product lines are primarily  focused on the better  specialty
stores and  traditional  department  stores.  The major  competitors are private
label products and `Chaps' by Warnaco Inc. ("Warnaco").

The Designer Group

      The Designer Group was established as a separate business unit in October,
1995 and sells:  (i) dress and sport shirts under its licensed Kenneth Cole, YSL
and  Burberrys  trademarks;  (ii) dress socks under the  licensed  Kenneth  Cole
trademark; and (iii) tailored clothing and casual pants under the YSL trademark.
During the fiscal year ended  December  31,  1998,  the Company  terminated  the
Burberrys  and YSL license  agreements  and will no longer  distribute  products
under these brands after June 30, 1999. Effective January 1, 1999, for financial
reporting  purposes,  net sales of dress shirts under the Kenneth Cole trademark
will be  consolidated  into the Shirt  Group and net sales for dress socks under
the Kenneth Cole trademark will be consolidated into the Sock Group.




<PAGE>


Marketing, Sales & Distribution

The Sock Group

  The Sock Group is a significant  supplier to many leading department store and
national  chain  retailers.  The Sock Group  segments  its use of brand names by
distribution  channel to  solidify  the  perceived  value of such  brands and to
maintain their integrity.  The Sock Group's top ten customers  accounted for 78%
of its total net sales in the fiscal year ended December 31, 1998.

  The Sock Group distributes its products through the following channels:

     SALES BY DISTRIBUTION CHANNEL FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998

     Department Stores and National Chains            88%
     Specialty Stores/Other                            1%
     Mass Merchants and Discounters                   11%
                                                      ---

         Total                                       100%

  Consistent  with  industry  practice,  the Sock Group does not  operate  under
long-term written supply agreements with its customers.

  To better  serve its  customers,  the Sock Group  installed  a vendor  managed
inventory system ("VMI") in 1998. The VMI provides the Sock Group with real time
information  on the sales of the Sock Group's  products by its  customers.  This
system  allows the Sock Group to ship  product  to a customer  immediately  upon
learning that such customer does not have adequate  inventory.  As a result, the
Sock Group no longer  needs to wait  until a request  comes  directly  from that
customer.

  In an effort to maximize the Sock Group's product exposure and increase sales,
the Sock Group works closely with its major customers to assist them in managing
their  entire  sock  category  and to promote the Sock  Group's  products to the
consumer.  In addition to frequent  personal  consultation with the employees of
these customers,  the Sock Group  periodically  meets with its customers' senior
management  to jointly  develop  merchandise  assortments  and plan  promotional
events  specifically  tailored  to  that  customer.   The  Sock  Group  provides
merchandising  assistance with store layouts,  fixture designs,  advertising and
point of sale  displays.  In addition,  the Sock Group  provides  customers with
preprinted,  customized  advertising  materials  designed to increase sales. The
Sock Group does not utilize national brand advertising  because it has found the
above described advertising techniques to be more cost effective.

  As a supplement to the Sock Group's primary distribution  channels,  the Shirt
Group  operates  five outlet stores for Sock Group  products.  These stores sell
irregulars, and for financial reporting purposes, the financial results of these
stores are consolidated into the US Retail division,  which is part of the Shirt
Group. The stores are located in factory outlet malls and average  approximately
1,200 square feet per store. During the fiscal year ended December 31, 1998, two
GOLD TOE outlet stores were closed and no new stores were opened.

  The Sock Group employs sales people who generally  have many years of industry
experience.  Most sales people are compensated  with a combination of salary and
discretionary bonus.



<PAGE>


The Shirt Group

  The Shirt Group is a significant supplier to many leading department store and
national chain  retailers.  Consistent with industry  practice,  the Shirt Group
does not operate under long-term  written supply  agreements with its customers.
The Shirt Group's top ten customers accounted for approximately 52% of total net
sales for the fiscal year ended December 31, 1998.

  The Shirt Group distributes its products through the following channels:

     SALES BY DISTRIBUTION CHANNEL FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998

     Department Stores and National Chains            69%
     Specialty Stores/Other                           13%
     Mass Merchants and Discounters                   18%
                                                      ---

         Total                                       100%

  In order to better serve its customers, the Shirt Group has installed a vendor
managed  inventory system with most of its major customers.  As a result of this
system,  the Shirt  Group is one of the few shirt  companies  that can  manage a
customer's  inventory.  As an  example,  this  system  allows the Shirt Group to
monitor inventory levels at a customer and initiate replenishment orders without
having to wait for the customer's direct request.  In addition,  the Shirt Group
utilizes a balance of off-shore sewing and domestic manufacturing to provide its
customers  with  timely  dress  shirt   replenishment.   As  a  result  of  this
manufacturing  strategy,  the  Shirt  Group can  deliver  its core  dress  shirt
offerings  within 48 hours of receiving an order.  This order  fulfillment  time
compares favorably to those competitors which rely on foreign  manufacturing for
a majority of their products where lead times can be as long as five weeks. As a
result,  management believes certain competitors must hold much higher inventory
levels to effectively compete with the Shirt Group.

  The Shirt Group works closely with its key accounts to assist them in managing
their  entire  dress  shirt and  sport  shirt  product  categories.  This  close
relationship  insures  increased sales and promotes  maximum product exposure of
the Shirt  Group's  products to the consumer.  In addition to frequent  personal
consultation  with the  buying  teams of these key  accounts,  the  Shirt  Group
frequently  meets with its  customers'  senior  management  to  jointly  develop
merchandise assortments and to plan promotional events specifically tailored for
that account.  The Shirt Group provides  merchandising  assistance with in-store
presentations, fixture designs, advertising and point of sale displays.

  The Shirt Group  employs  sales people who  generally  have  several  years of
experience in the men's shirt business. Because the turnover of buyers at retail
stores is high,  many  retailers  rely on the experience of their key vendors to
manage their business for them.  The Shirt Group has developed a  well-respected
expertise in managing such businesses for its key accounts. Most sales and sales
management  personnel are  compensated  with a combination  of salary and bonus,
based on established goals and objectives.

  As a supplement to its primary distribution channels, the Shirt Group operates
24 retail  outlet  stores in the United  States and Canada  which sell the Shirt
Group's products directly to consumers.  These stores generally sell irregulars,
discontinued  and off price goods.  The retail  stores offer a collection of the
Shirt Group's dress and sport shirts,  GOLD TOE socks and other products such as
ties and belts  supplied  by Arrow  licensees.  The main  purpose  of the retail
stores is to help  maintain  the ARROW  brand image by  controlling  the sale of
excess  inventory.  During the fiscal year ended  December 31,  1998,  three new
retail  outlet  stores were opened and 12 were closed.  The average size of each
store is approximately 3,000 square feet.

The Designer Group

  During  1998,  the  Designer  Group sold its licensed  Kenneth  Cole,  YSL and
Burberrys products to a variety of specialty and department  stores.  Similar to
the  Company's  other  divisions,  the Designer  Group  employs sales people who
generally  have  many  years of  industry  experience.  Most  sales  people  are
compensated with a combination of salary and  discretionary  bonus. As discussed
above,  the  Designer  Group  has  terminated  its  Burberrys  and YSL  licenses
effective  December  31,  1998 and  will not  distribute  products  under  these
trademarks after June 30, 1999.



<PAGE>


Raw Materials

The Sock Group

  The Sock Group relies on outside suppliers to meet its raw material needs. The
Sock  Group  has  developed  key  relationships  with each of the  largest  yarn
suppliers in the industry.  Due to its size,  management believes the Sock Group
has developed solid supplier  relationships  and  historically  has been able to
obtain competitive pricing.

  The Sock Group minimizes the effects of seasonal  variations in yarn prices by
securing  long-term  contracts for yarn based on its anticipated  needs for each
year. Sock manufacturers in the industry  typically  negotiate yarn contracts in
the third  quarter  of the year for the  following  year.  Selling  prices  with
retailers  are then  negotiated  in  January  and  February  based on those yarn
prices.  Historically,  this process has acted as a natural hedge against rising
yarn prices.

The Shirt Group

  The Shirt  Group also  relies on outside  suppliers  to meet its raw  material
needs,  namely fabric.  The Shirt Group maintains close  relationships  with the
largest suppliers of this material.  The Shirt Group is not heavily dependent on
any one particular supplier.

Manufacturing

The Sock Group

  The Sock Group  produces  its sock  products  through  domestic  manufacturing
facilities,  imports and subcontracting.  Approximately 74% of all production is
done at Sock Group-owned facilities, 18% is contracted in the United States with
other suppliers and 8% is imported.  The Sock Group operates three manufacturing
facilities  located  in  Newton  and  Burlington,   North  Carolina  and  Bally,
Pennsylvania.  The Sock Group's socks are primarily  made from cotton,  nylon or
acrylic  yarns.  These  yarns  are  knit on a  circular  knitting  machine  in a
tube-like  manner with additional  courses placed in the  construction to form a
pocket for the wearer's heel and toe. The sock is seamed to close the toe end of
the tube,  dyed to the proper color and packaged for retail store  presentation.
The Company has spent  approximately $16.2 million since 1995 upgrading the Sock
Group's primary facilities.

  The Sock  Group's  quality  control  program is  designed  to assure  that its
products  meet  predetermined  quality  standards.  The Sock  Group has  devoted
significant   resources  to  support  its  quality  improvement  efforts.   Each
manufacturing  facility is staffed with a quality  control team that  identifies
and resolves quality issues.

The Shirt Group

  The Shirt Group  produces  its shirt  products  through  owned North  American
manufacturing  facilities  and  subcontracting.  Approximately  44% of all dress
shirt  production  is  done at  North  American,  Shirt  Group-owned  or  leased
facilities,  and 56% is sourced  outside of North America.  All sport shirts are
sourced outside of North America. The Shirt Group owns or leases four facilities
located in Enterprise and Albertville,  Alabama, Austell, Georgia and Kitchener,
Ontario.

  For dress shirts,  the  manufacturing  process begins when rolls of fabric are
received  by the  Shirt  Group's  cutting  facilities.  The  fabric is cut using
automated  technology.  Piece goods are then assembled in bundles and shipped to
sewing plants in the United  States,  the Caribbean or Central  America.  Shirts
that are assembled in the Caribbean or Central  America comply with Rule 9802 of
the U.S.  Tariff Code.  This Rule  provides that duties are only assessed on the
value  that is  added to the  garment  in the  foreign  country.  At the  sewing
facilities,  collars, cuffs and sleeves are first assembled,  then sewn together
with the body of the shirt and, finally, the garments are inspected, pressed and
packaged. Sport shirts are sourced in the Far East and Central America.

  The  Shirt  Group  purchases  product  through   individual   purchase  orders
specifying  the price and quantity of the items to be produced.  Generally,  the
Shirt Group does not have any  long-term,  formal  arrangements  with any of the
suppliers which  manufacture  its products.  The Shirt Group believes that it is
the  largest  customer  of many of its  manufacturing  suppliers  and  that  its
long-standing  relationships  with its suppliers  provide the Shirt Group with a
competitive  advantage over its  competitors.  No single supplier is critical to
the Shirt Group's  production  needs, and the Shirt Group believes that an ample
number of  alternative  suppliers  exists  should the Shirt Group need to secure
additional or replacement production capacity.

<PAGE>
The Designer Group

  Kenneth Cole products are produced at domestic,  Company-owned  facilities and
imported.  No single supplier is critical to the Company's production needs, and
the Company believes that an ample number of alternative suppliers exists should
the Company need to secure additional or replacement production capacity.

Design

The Sock Group

  The Sock  Group's  primary  product  lines are timeless and are not subject to
change.  These core product lines  provide the Sock Group with a business  base,
which is carried  over from year to year,  and is the result of the Sock Group's
quality of design,  material and brand awareness.  The Sock Group does, however,
employ  separate  designers  and  merchandise   product  development  groups  as
necessary,  creating a structure that focuses on a brand's special qualities and
identity.  These  designers and merchants  consider  consumer  taste and fashion
trends when creating a product plan for their brand.

The Shirt Group

  The Shirt  Group's  primary  dress  shirt  product  lines  exhibit the similar
timeless  fashion  characteristics  as the  Sock  Group's  products  and are not
generally  subject to material  change,  while sport shirt styles tend to change
significantly  each  season.  Each Shirt  Group  brand  employs  separate  brand
designers similar to the Sock Group. The design teams begin creating new product
lines up to  twelve  months  in  advance  of a season  in order to  ensure  that
samples, packaging and marketing presentations are ready for introduction, which
is generally  five months prior to shipping.  Lead times will vary  depending on
whether or not the fabric and make is domestic or imported.

The Designer Group

  The in-house  design team at the Designer Group designs (i) dress shirts under
its licensed  Kenneth Cole  trademarks,  and (ii) dress socks under the licensed
Kenneth Cole trademark.  The Designer Group works with the licensor to develop a
"fashion  blueprint"  for the  products.  The  image,  colors  and styles of the
products  are  intended to be  consistent  with the other  products  sold by the
licensor and other companies using the particular brand name.  Products are made
in a wide range of fabrics that are given distinctive looks through a variety of
finishes, many of which are developed by the Designer Group.

Trademarks and License Agreements

The Sock Group

  The Sock Group  markets its  products  under its own  proprietary  trademarks,
trade  names and  customer-owned  private  labels,  as well as certain  licensed
trademarks  and trade  names.  The Sock Group uses  trademarks,  trade names and
private labels as  merchandising  tools to assist its customers in  coordinating
their product offerings and  differentiating  their products from those of their
competitors.

  The Sock Group owns various  trademarks  and trade names  including  GOLD TOE,
SILVER  TOE and ARROW.  These  trademarks  and trade  names  represent  value in
product  quality and design.  The Sock Group  regards its  trademarks  and trade
names as valuable assets and rigorously protects them against infringement.



<PAGE>


  The Sock Group holds the exclusive sock licenses for the following trademarks:


TRADEMARK                      TERRITORY               EXPIRATION
---------                      ---------               ----------

Perry Ellis and Perry Ellis    U.S., Canada and Mexico 12/31/1999 (1)
  America

Nautica                        U.S. and Canada         12/31/2001

Jockey/Jockey For Her          U.S. and Mexico         12/31/1999

The North Face                 U.S., Canada, Europe    12/31/2004 (1)
                               and Asia

Jaclyn Smith                   U.S.                    No termination date


(1) Option to renew.


  The Sock Group is only  partially  dependent on these  licensed  product lines
(for the fiscal year ended  December 31, 1998, 12% of the Sock Group's net sales
was derived from  licensed  products),  and the loss of any  individual  license
would  not  have  a  material   adverse  affect  on  the  Sock  Group's  overall
profitability.

  The Sock Group has licensed the GOLD TOE  trademark to two licensees in Mexico
and Colombia which provide for minimum  royalty  payments to be paid to the Sock
Group. The Sock Group intends to more fully exploit the strength of the GOLD TOE
brand by adding new licensees.

The Shirt Group

  The Shirt Group owns various trademarks and trade names,  including ARROW. The
ARROW trademark is widely  recognized in the industry and represents  excellence
and value in product  quality,  fashion and design.  The Shirt Group regards its
trademarks  and trade  names as valuable  assets and  rigorously  protects  them
against infringement.

  The Shirt Group licenses the ARROW and related  trademarks to 21 licensees for
use in territories outside the United States.  Through licensing alliances,  the
Shirt Group  combines its  consumer  insight and design,  marketing  and imaging
skills with the specific  product or  geographic  competencies  of its licensing
partners  to create  and  build new  businesses.  The  Shirt  Group's  licensing
partners,  who  are  often  leaders  in  their  respective  markets,   generally
contribute the majority of product  development  costs,  provide the operational
infrastructure required to support the business and own the inventory. The Shirt
Group works in close  collaboration  with its licensing  partners to ensure that
products are developed,  marketed and distributed to address the intended market
opportunities and present the Shirt Group's products consistently. While product
licensing partners may employ their own designers,  the Shirt Group oversees the
design of all their products.  The Shirt Group also works closely with licensing
partners to coordinate  marketing and  distribution  strategies.  For the fiscal
year ended  December 31, 1998, the Shirt Group had licensing fee revenue of $6.3
million.

  Most of the ARROW license agreements provide for a minimum royalty payment and
require  the  licensee to spend a  percentage  of net sales on  advertising  and
marketing of products.  The licenses are for three- or five-year terms which, in
most cases,  have  provisions for renewal terms if the licensee has not breached
the  agreement  and has met certain  sales  goals.  The Shirt Group also has the
right to supervise the quality of the licensed products.

  The Shirt Group also licenses the ARROW  trademark to United States  licensees
for use on neckwear, loungewear and men's fashion eyewear.



<PAGE>


The Designer Group

  The Designer  Group held the exclusive  United States  licenses for: (i) men's
shirts,  tailored clothing and socks under the YSL trademark,  (ii) men's shirts
under the Burberrys trademark and (iii) men's shirts and socks under the Kenneth
Cole  trademark.  The  Company  has  terminated  the  Burberrys  and YSL license
agreements and will no longer distribute  products under these brands after June
30, 1999.  The Kenneth Cole  license for dress shirts  expires in 2002,  and the
Kenneth Cole license for socks expires in 2003.

Backlog and Seasonality

  The amount of the Company's  backlog orders at any particular time is affected
by  a  number  of  factors,   including   seasonality   and  scheduling  of  the
manufacturing  and shipment of products.  In general,  the Company's  electronic
data  interchange  ("EDI")  system and vendor  managed  inventory  systems  have
resulted in  shortened  lead times  between  submission  of purchase  orders and
delivery and has lowered the level of backlog orders. Consequently,  the Company
believes  that the amount of its  backlog  is not an  appropriate  indicator  of
future production levels.

  The  industries  in which the Company  operates  are  cyclical.  Purchases  of
apparel  tend to decline  during  recessionary  periods  and also may decline at
other  times.  A recession  in the general  economy or  uncertainties  regarding
future economic  prospects could affect consumer  spending habits and could have
an  adverse  effect on the  Company's  results  of  operations.  Weak  sales and
resulting  markdown  requests from customers could also have a material  adverse
effect on the Company's business, results of operations and financial condition.

  The  Company's  business is seasonal,  with higher sales and income during its
third and fourth  quarters.  The third and  fourth  quarters  coincide  with the
Company's two peak retail  selling  seasons:  (i) the first season runs from the
start of the  back-to-school  and fall selling seasons,  beginning in August and
continuing through September;  and (ii) the second season runs from the start of
the Christmas selling season beginning with the weekend  following  Thanksgiving
and continuing through the week after Christmas.

  Also  contributing  to the strength of the third quarter is the high volume of
fall shipments to wholesale  customers  which are generally more profitable than
spring  shipments.  The slower spring selling season at wholesale  combines with
retail seasonality to make the first half of the year particularly weak.

Reliance On Certain Customers

  The Sock Group's ten largest customers  accounted for approximately 78% of its
net sales in 1998 and the Shirt  Group's ten  largest  customers  accounted  for
approximately  52% of its net sales for the fiscal year ended December 31, 1998.
The Company has no long-term  contracts  with these  customers,  and no customer
accounted  for more than 10% of the  Company's  total net  sales.  Although  the
Company has  long-standing  relationships  with these  customers,  a substantial
reduction in sales to these  customers  could have a material  adverse effect on
the financial condition and results of operations of the Company.

Employees

   As of December 31, 1998, the Company employed  approximately 3,134 persons on
a full-time basis and approximately 135 persons on a part-time basis,  including
1,435  persons in the Sock Group and 1,827  persons in the Shirt  Group.  Of the
total  employees,   2,151  were  engaged  in   manufacturing   and  distribution
operations,  and the remainder  were employed in executive,  marketing and sales
and purchasing  activities  and in the operation of the Company's  retail outlet
stores.  Approximately  34% of the Company's  3,269 employees are represented by
collective  bargaining  agreements with one union, which expire between February
28, 2000 and March 31, 2001.  The Company  believes that its relations  with its
employees are satisfactory.



<PAGE>


Competition and Industry Risks

  The apparel industry is highly competitive due to its fashion orientation, its
mix of large and small producers,  the flow of domestic and imported merchandise
and the wide diversity of retailing methods.  The Company competes with numerous
domestic  and  foreign  designers,  brands  and  manufacturers  of  apparel  and
accessories,  some of which may be significantly larger and more diversified and
have  greater  financial  and  other  resources  than  the  Company.   Increased
competition  from these and future  competitors  could  reduce sales and prices,
adversely affecting the Company's results of operations.

   Although the Company  believes that most of its products are fashion staples,
some of the Company's products, such as those distributed by the Designer Group,
are subject to changing  fashion  tastes and styles.  The  Company's  success in
these product  lines depends on its ability to anticipate  and react to consumer
demands in a timely manner.  If the Company  misjudges these markets,  it may be
faced with  significant  excess  inventory  which could have a material  adverse
effect on the Company's financial condition and results of operations.

  The  Sock  Group's  primary  sock  competitors  are:  Sara  Lee  (`Hanes'  and
`Champion'  brands);  Renfro (`Gitano' and  `Fruit-of-the-Loom'  brands);  Royce
Hosiery Mills, Inc.  (`Dockers' and `Levi' brands);  Kayser-Roth  (`Burlington,'
`Hue'  and `No  Nonsense'  brands);  American  Essentials  (`Calvin  Klein'  and
`American Essentials' brands) and Hot Sox (`Polo,' `Hot Sox,' `Chaps' and `Ralph
Lauren'  brands).  The Company  believes,  however,  that it manufactures a more
extensive  line of socks for both genders and  children  and in a broader  price
range than any of its competitors.

  The Shirt Group's primary dress shirt  competitors  are:  Phillips-Van  Heusen
Corporation  (`Van Heusen' and `Geoffrey  Beene' brands);  Salant (`Perry Ellis'
and `John Henry' brands);  Smart Shirt (private label shirt division of Kellwood
Company);  Capital Mercury  (private label shirts);  and Oxford  Industries Inc.
(private label shirts).  The Shirt Group's primary sports shirt competitors are:
Warnaco  (`Chaps' brand);  Polo/ Ralph Lauren L.P. (`Polo' brand);  Phillips-Van
Heusen Corporation (`Van Heusen' brand); and Supreme (`Supreme' brand).

  The Designer Group's primary competitors are numerous high-end designer labels
including `Perry Ellis', `DKNY', `Tommy Hilfiger' and `Polo'.

   The Company has historically  benefited from import  restrictions  imposed on
foreign  competitors in the apparel  industry.  The extent of import  protection
afforded to domestic  manufacturers such as the Company,  however, has been, and
is likely to remain,  subject to considerable  political  deliberation.  General
Agreements on Trade and Tariffs ("GATT") will eliminate, over a number of years,
restrictions on imports of apparel.  In addition,  on January 1, 1994, the North
American  Free  Trade  Agreement  ("NAFTA")  became  effective.  Each  of  these
agreements  will reduce  import  constraints  previously  imposed on some of the
Company's  competitors  and will increase the  likelihood of  competition on the
basis of price.

Information Systems

  The  Company  has  invested  $7.5  million  since  1995  in   state-of-the-art
information systems which have dramatically improved operations and management's
access to information.  The Company's  information system provides,  among other
things,  comprehensive order processing,  production,  accounting and management
information  for  the  marketing,  manufacturing,   importing  and  distribution
functions of the Company's business. The Company's  distribution  facilities and
administrative  offices  are linked by the  computer  system.  The  Company  has
implemented  a software  program that enables the Company to track,  among other
things, orders, manufacturing schedules,  inventory, sales and mark-downs of its
products.  In addition,  to support the  Company's  replenishment  program,  the
Company has an EDI system  through  which certain  customers'  orders are placed
with the Company.  The Company also has a vendor managed  inventory  system with
certain customers through which customers' orders are automatically placed.



<PAGE>


Environmental Matters

  The Company is subject to various federal,  state and local environmental laws
and regulations  concerning,  among other things,  wastewater discharges,  storm
water flows,  air  emissions,  ozone  depletion  and solid waste  disposal.  The
Company's  plants  generate very small  quantities  of hazardous  waste that are
either  recycled  or disposed of  off-site.  Most of its plants are  required to
possess one or more discharge permits.

  Environmental  regulation  applicable to the Company's  operations is becoming
increasingly  more stringent.  The Company  continues to incur capital and other
expenditures  each year in order to comply with  current  and future  regulatory
standards.  The  Company  does not  expect,  however,  that the  amount  of such
expenditures in the future will have a material  adverse effect on its financial
condition,  results  of  operations  or  competitive  position.  There can be no
assurance,  however, that future changes in federal, state or local regulations,
interpretations of existing  regulations,  or the discovery of currently unknown
problems or conditions  will not require  substantial  additional  expenditures.
Similarly,  the extent of the Company's liability,  if any, for past failures to
comply with laws, regulations and permits applicable to its operations cannot be
determined.

Item 2.   Properties

Facilities

   The Company's principal executive offices are located at 48 West 38th Street,
New  York,  NY  10018.  The  following  table  summarizes  certain   information
concerning certain of the Company's facilities:


                           APPROX.
  LOCATION                 USE               SQUARE FEET  OWNED/LEASED
  --------                 ---               -----------  ------------

Shirt Group:
  Enterprise, AL           Manufacturing      50,000      Owned
  Kitchener, Ontario       Manufacturing     145,000      Owned
  Kitchener, Ontario       Distribution      125,000      Leased
  Albertville, AL          Manufacturing      57,000      Leased
  Austell, GA.             Manufacturing     
                            /Distribution    593,000      Owned
  Toronto, Ontario         Showroom            8,100      Leased
  New York NY              Showroom 
                            /Administrative   30,000      Leased
  Atlanta, GA              Administrative     45,760      Leased
Sock Group:
  Bally, PA                Manufacturing     155,000      Owned
  Newton, NC               Manufacturing      81,600      Owned
  Burlington, NC           Manufacturing     251,400      Owned
  Newton, NC               Warehouse          36,000      Leased
  Mebane, NC               Distribution      150,000      Leased
  New York, NY             Showrooms          11,000      Leased
  Boyertown, PA            Warehouse          35,000      Leased
  Pottstown, PA            Dye Facility       20,500      Leased
  Burlington, NC           Office Space        8,300      Leased
Designer Group:
  New York, NY             Showroom            9,200      Leased

  In  addition,  the  Company  operates  28  outlet  stores  on leased
premises.  The  Company  believes  that its  existing  facilities  are
well  maintained  and in good  operating  condition  and are otherwise
adequate for its present and  foreseeable  level of operations for the
next few years.
Item 3.   Legal Proceedings

  From time to time,  the  Company  is  involved  in various  legal  proceedings
arising from the ordinary  course of its business  operations,  such as personal
injury claims, employment matters and contractual disputes. The Company believes
that its potential  liability with respect to proceedings  currently  pending is
not material in the aggregate to the Company's  consolidated  financial position
or results of operations.

  On July 17, 1995, BIUSA and sixteen of its subsidiaries  (the "Debtors") filed
voluntary petitions for relief under the provisions of Chapter 11 of the Federal
Bankruptcy Code in the Court. On March 31, 1998, the Plan of Reorganization (the
"Plan") was confirmed by the Court.

<PAGE>
  In connection with the bankruptcy proceedings, the Company incurred bankruptcy
reorganization costs in 1995, 1996, 1997 and 1998 of $2.8 million, $6.1 million,
$6.1 million and $2.5 million respectively, for professional fees. Additionally,
in 1998,  the  Company  incurred  $35.0  million in  post-petition  interest  on
pre-petition  debt.  In 1995,  the Company  also  established  a reserve of $9.8
million related to estimated costs  associated with rejecting leases for certain
office space, facilities, retail stores and equipment and incurred costs of $4.8
million  related to fees in  obtaining  Debtor-in-Possession  financing  and the
write-off of capitalized  deferred finance costs on the  pre-petition  debt, and
$3.5 million related to potential claims and related litigation matters.  During
the bankruptcy  period from 1995 through 1998,  the Company  attempted to settle
all  bankruptcy  claims  through  negotiations  with the  Company's  vendors and
lessors. In certain cases, the vendors and lessors accepted settlements for less
than the claim amount originally filed. For example, the Company's liability for
lease  rejection  claims was  reduced to the  extent  the  lessors  were able to
mitigate their losses.  As a result of these on-going  negotiations in 1997, the
Company recognized  approximately  $10.0 million in credits resulting from these
negotiated  settlements  with various  vendors and lessors.  Settlements  during
1995, 1996 and 1998 were not  significant.  All settlements were approved by the
Court.  The Company does not anticipate any future  adjustments  with respect to
disputed claims or other events related to the bankruptcy.


 Item 4.   Submission of Matters to a Vote of Security Holders

   During the  fourth  quarter of 1998,  no matter  was  submitted  to a vote of
security  holders  of the  Company  by means of the  solicitation  of proxies or
otherwise.


                               PART II


Item 5.  Market   for   Registrant's   Common   Equity   and   Related
Stockholder Matters

      All of the Company's  outstanding common stock is held by CAG and there is
no established  public  trading  market for such stock.  The Company has paid no
dividends to common  stockholders  since inception and does not have any present
intention to commence payment for any cash dividends.  The Company's  ability to
pay such  dividends  is  limited  by the  terms of its  Senior  Credit  Facility
agreement and the Indenture  relating to its 10 1/8% Senior  Subordinated  Notes
due 2008 and its 12 1/2%  Senior  Exchangeable  Preferred  Stock due  2010.  The
Company  intends to retain earnings to provide funds for operation and expansion
of the Company's businesses and to repay outstanding indebtedness.



<PAGE>


Item 6. Selected Financial Data

  The  following  table  sets forth  summary  historical  financial  data of the
Company  for each of the five years  ended  December  31,  1998.  The  following
summary  financial data with respect to the three years ended December 31, 1998,
are derived from the Consolidated  Financial  Statements  included  elsewhere in
this  document  which  have  been  audited  by  Ernst & Young  LLP,  independent
auditors,  as indicated in their report included elsewhere herein. The following
summary  financial  data  should  be  read  in  conjunction  with  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
the Financial Statements and notes thereto included elsewhere in this document.



                              1994   1995   1996   1997   1998
                              ----   ----   ----   ----   ----

                             (Unaudited)
                                               (DOLLARS
                                  IN MILLIONS)

STATEMENT OF OPERATIONS
DATA:
Net sales                     $536.8 $486.7 $369.0 $363.5 $373.1
                             
Cost of goods sold (1)         391.5  369.8  273.8  253.7  264.3
                             ------------------------------------
Gross profit                                              
                               145.3  116.9   95.2  109.8  108.8
Selling, general and                                      
administrative expense         145.4  137.9   86.3   76.3   82.4
Facility closing and                                      
 reengineering costs (2)         -     22.5   11.6    2.5    2.4
                             ------------------------------------
Operating income                                          
(loss)                          (0.1) (43.5)  (2.7)  31.0   24.0
Interest expense, net                                     
                                24.6   22.7   16.9   15.2   20.4
Write-down of intangible                                  
 assets (3)                     74.7    -      -      -      -
Other expense (income),net(4)   (0.3)   0.5    3.2    1.2    2.1
Bankruptcy reorganization                                 
 costs (credits) (5)             -     20.9    6.1   (3.9)  37.5
Income (loss) before                                      
provision for income taxes     (99.1) (87.6) (28.9)  18.5  (36.0)
Provision for income                                      
taxes                            1.8    1.5    1.3    1.3    0.8
                             ====================================
Net income (loss)                                         
                              (100.9) (89.1) (30.2)  17.2  (36.8)
                             ====================================


OTHER FINANCIAL DATA:
Capital expenditures           $13.8   $6.1   $9.8  $10.8  $11.8
Depreciation and                                          
 amortization(6)                15.3   13.3   10.9    8.1    8.7
Cash flows provided by
(used in):
  Operating activities        $(16.0)  $0.4  $16.7  $13.0 $(30.9)
  Investing activities         (10.3)  25.3   (8.3)  (7.5) (11.7)
  Financing activities         (22.7) (26.1)  13.3   (1.3)  35.5
EBITDA As                                                 
Defined(7)                      13.9   (7.8)  17.4   39.6   40.9
Adjusted Net Sales(8)                                     
                               406.0  388.9  361.8  359.8  369.2
Adjusted EBITDA(7)(8)            0.6   (8.5)  18.7   40.2   41.6
Adjusted EBITDA margin           0.1%  (2.2)%  5.2%  11.2%  11.3%
                                                      
Working capital(9)            $141.5 $116.9  $82.1  $82.2  $81.4                
                              
Total assets                   321.5  252.9  211.1  220.0  220.8
Total long-term debt, net
of current
  portion(10)                  150.4    3.6    8.6    2.0  235.7
Debt subject to                                           
  compromise                   -      161.1  146.0  145.6    -
Preferred stock                 16.4   17.4   18.7   20.0   51.3
Total stockholder's equity                                
(deficit)                       46.9  (44.3) (74.2) (56.8)(149.0)


(1) In 1995, the Company  recorded a charge of  approximately  $14.0 million for
the write-down of inventory, which is included in cost of goods sold.


<PAGE>


(2) Over the  four-year  period  1995-1998  facility  closing and  reengineering
costs,   which  totaled  $39.0   million,   included  $15.5  million  for  plant
closings,$10.5  million for store closings,  $2.4 million for Other Segments (as
defined herein), $1.6 million for relocation and severance, and $8.9 million for
software, systems development and implementation and other consulting costs.

(3) Represents the write-off of the remaining  excess of the purchase price over
the fair value of net assets acquired  (goodwill and other  intangibles)recorded
in  connection  with the  acquisition  of the Shirt  Group and the Sock Group in
1990.

(4) In 1996 the Company began  liquidating  its  investments  in its Mexican and
Guatemalan  subsidiaries  and wrote off $3.1  million  previously  recorded as a
component of equity for foreign currency translation.  In 1997, other expense is
primarily  attributable to foreign  exchange  losses.  In 1998, other expense is
comprised primarily of failed deal costs and litigation reserves.

(5) Bankruptcy reorganization costs (credits) consist of the following:



                                        YEAR ENDED DECEMBER 31,          

                               1994    1995    1996     1997     1998       
                               ----    ----    ----     ----     ----       
                                            (DOLLARS IN MILLIONS)
     
Professional fees               --    $ 2.8   $ 6.1    $ 6.1   $  2.5
Post petition interest paid 
 in accordance with the Plan    --       --      --       --     35.0
Adjustment to lease rejection
 and other pre-petition
 Liabilities                    --      9.8      --    (10.0)      --
Write off deferred financing 
 costs                          --      3.5      --       --       --
Fees related to obtaining
 the DIP Facility               --      1.3      --       --       --
Claims and related litigation   --      3.5      --       --       --
                              ------------------------------------------ 
                              $ --    $20.9   $ 6.1    $(3.9)  $ 37.5   
                              ==========================================


(6) Depreciation and amortization  excludes  amortization of deferred  financing
costs of $3.6  million in 1994,  $5.2  million in 1995 and $1.0  million in 1998
which is included in interest expense.


<PAGE>


(7) EBITDA As Defined is defined as operating  income  before  depreciation  and
amortization,  non-cash  pension income and facility  closing and  reengineering
costs. Adjusted EBITDA represents EBITDA As Defined adjusted for Other Segments.
EBITDA As Defined  should not be considered in isolation or as a substitute  for
net income,  cash flows from operating  activities and other income or cash flow
statement  data  prepared  in  accordance  with  generally  accepted  accounting
principle or as a measure of  profitability  or  liquidity.EBITDA  As Defined is
presented  because it is a widely  accepted  financial  indicator of a company's
ability to service and/or incur  indebtedness  and because certain  covenants in
the Company's borrowing  arrangements are tied to similar measures;  however, it
is not  necessarily  comparable  to other  similarly  titled  captions  of other
companies due to differences in methods of calculation.The calculation of EBITDA
As Defined and Adjusted EBITDA is shown below:

           

                                           YEAR ENDED DECEMBER 31,

                                 1994     1995       1996       1997      1998
                                 ---------------------------------------------
                                             (DOLLARS IN MILLIONS)

Operating income (loss)       $  (0.1)  $ (43.5)  $   (2.7)   $  31.0   $ 24.0
Depreciation and amortization    15.3      13.3       10.9        8.1      8.7
Non-cash pension income          (1.3)     (0.1)      (2.4)      (2.0)    (1.2)
Facility closing and 
 reengineering costs               --      22.5       11.6        2.5      2.3
Cost of exiting the Burberrys 
 & YSL businesses                  --        --         --         --      7.1
                              ------------------------------------------------
EBITDA As Defined                13.9      (7.8)      17.4       39.6     40.9
EBITDA from Other Segments (8)   13.3       0.7       (1.3)      (0.6)    (0.7)
                              ------------------------------------------------
Adjusted EBITDA               $   0.6   $  (8.5)    $ 18.7   $   40.2   $ 41.6
                              ================================================




(8) Adjusted Net Sales and Adjusted  EBITDA  represent  historical net sales and
EBITDA  As  Defined  adjusted  for (i) the sale of the Ralph  Lauren  Womenswear
license and  associated  operating  assets which was  completed in October 1995,
(ii) the sales of the operations of Arrow de Mexico and Arrow  Guatemala in 1997
and (iii) the decision to close certain Canadian retail stores which was made in
December 1996 (collectively,  the "All other").(9) Working capital is defined as
current assets (less cash and cash equivalents) minus current  liabilities (less
current maturities of long-term debt).

(10) On July 17, 1995,  $161.1  million of long-term  debt was  reclassified  to
liabilities subject to compromise.





<PAGE>


Item 7.  Management's  Discussion and Analysis of Financial  Condition
and Results of Operations

Overview

     In June 1995, the predecessor to the Company,  Bidermann  Industries Corp.,
hired  Bryan  Marsal as Chief  Executive  Officer.  As a result of an  impending
liquidity  crisis,  it became apparent that the Company had serious  operational
and financial problems.  The financial problems arose as a result of a number of
years of poor  operating  performance  resulting in higher and higher  levels of
debt and  accrued  interest.  As a  consequence,  the  Company's  trade and bank
creditors  were  becoming  increasingly  unwilling to extend  credit.  As credit
tightened,  it became  increasingly  difficult to operate the business.  In July
1995, the Company sought  bankruptcy  protection to obtain  financing and to buy
time to develop an operating and repayment plan.

   The  operating  plan  that was  developed  in the  fall of 1995  and  refined
throughout  the  bankruptcy  consisted  of the  following  key  components:  (i)
eliminate the costly and inefficient  centralized  corporate overhead structure;
(ii) refocus the Shirt Group back to its core  competencies  in dress shirts and
implement tighter control over sales forecasting and production planning;  (iii)
identify  and  dispose of  non-core  or  underperforming  assets;  (iv)  support
historically under-served core operations with appropriate increases in capital.

   Prior to June 1995,  the Company had developed a very  extensive  centralized
corporate  overhead  structure.   The  size  of  this  structure,  the  spending
philosophy of corporate  management and the lack of accountability  made this an
ineffective  and  costly  approach.  In the Fall of 1995 / Spring  of 1996,  the
Company  aggressively  dismantled this corporate  overhead  structure  through a
combination of  eliminating  certain costs and  transferring  the balance of the
overhead to the operating units. This transfer resulted in a substantially  less
expensive and more accountable and responsive structure.

   Prior to June 1995,  the Shirt  Group had  embarked  on a plan of  increasing
revenues by aggressively  trying to build a wholesale  sportswear business and a
Company  owned and  operated  retail  store  group.  Focus on the Shirt  Group's
traditional strengths in dress shirts had been eroded.  Beginning in Spring 1997
(it took  longer  to  effect  change  due to the  lead  time on  purchased  line
introductions), the Shirt Group refocused itself on its traditional strengths in
dress  shirts,  substantially  reduced  its  emphasis  on  higher  fashion  risk
sportswear,  and  aggressively  moved to close  75% of its  retail  stores.  The
remaining  retail stores were  converted to a pure outlet store format where the
Shirt Group's production excesses are disposed.

   The Company determined that certain assets were non-core or  underperforming;
these  assets  included  the   Arrow-retail   store  division  in  the  US,  the
Canadian-retail  store division,  Ralph Lauren  Womenswear  (license was soon to
expire), Mexico and Central American shirt operations, tailored clothing and the
Burberrys and YSL men's tops licenses. From October 1995 to mid-1998 the Company
disposed of these assets and eliminated the support or cost structure associated
with these assets.

   Prior to June,  1995,  the Company  had  inadequately  supported  the capital
requirements  of  the  sock  business.   With  the  liquidity  provided  by  the
bankruptcy,  the Sock Group was able to close plants,  consolidate  distribution
centers, and significantly  upgrade or modernize its equipment and systems. As a
result,  the cost of goods sold and  administrative  expenses  of the Sock Group
have been significantly reduced.

   Key  operational  restructurings  at the Sock Group from 1996 to 1998 include
the following:  (i) absorption of all previously centralized  administrative and
support  services;  (ii)  relocation  of the New York  office  and  showroom  to
substantially  less  expensive  space;  (iii)  closure  of  the  Halifax,  North
Carolina,  knitting facility which  significantly  reduced excess  manufacturing
capacity;  (iv) closure of the  Henderson,  North  Carolina,  knitting  facility
further reducing excess manufacturing  capacity;  (v) and consolidation of three
smaller distribution facilities into one larger distribution center.

   Key operational  restructurings  at the Shirt Group from 1996 to 1998 include
the following:  (i) absorption of all previously centralized  administrative and
support   services;   (ii)   relocation  of  NewYork   office  and  showroom  to
substantially  less  expensive  space;  (iii)  development  and  transfer  to an
advanced information  technology (i.e., an overall information system change was
implemented);  (iv)  consolidation  of two large  distribution  centers into the
Austell,  Georgia  distribution  center; (v) closure of the Cedartown,  Georgia,
sewing facility  reducing  excess  manufacturing  capacity;  (vi) closure of the
Costa Rican sewing  facility and  transfer of related  production  to lower cost
vendors;  (vii) closure of 43 retail stores in the US and Canada; (viii) closure
of the Mexico and Guatamala operations and replacement with licensees.

<PAGE>

   Key  operational  restructurings  at the  Designer  Group  from  1996 to 1998
include  the  following:  (i)  relocation  of New York  office and  showroom  to
substantially  less  expensive but more  efficient  space;  (ii) transfer of all
administrative and support services to the Shirt Group to reduce expense through
improved overhead absorption; (iii) terminated and exited unprofitable Burberrys
and YSL license arrangements, requiring a significant downsizing of the Designer
Group organization.

   Key operational  restructurings at the corporate or parent level form 1996 to
1998 include the following:  (i) transfer or elimination of 90% of all corporate
overhead;  (ii)  closure of  Secaucus,  New Jersey  administrative,  billing and
information technology center; (iii) relocation of New York offices and residual
corporate staff to substantially less space.

  The  following  is a  discussion  of the  financial  condition  and results of
operations of the Company for the years ended December 31, 1996,  1997 and 1998.
This discussion should be read in conjunction with the "Selected Financial Data"
and the audited consolidated financial statements of the Company and the related
notes thereto included elsewhere in this document.

  Throughout the period, the Sock Group has continued to perform well. Net sales
in this group grew from $134.6 million in 1995 to $164.8 million for 1998.  This
performance  results from continued  strength in GOLD TOE and new license brands
and brand extensions.

  From 1995 to 1998,  net sales in the Shirt Group  declined from $230.6 million
to  $183.2  million.  Despite  declining  sales,  as a  result  of  management's
initiatives,  gross profit margin  increased from 19.0% in 1995 (which  includes
the effect of $11.0 million of inventory write-downs) to 28.2% for 1998.

  In addition to the direct sale of apparel products,  the Company generates fee
income  through  the  licensing  of the ARROW and GOLD TOE  brands.  License fee
revenue  fell $5.5  million in 1996  primarily  as a result of the sale of Ralph
Lauren  Womenswear  and  declined by $1.7 million in 1997 and by $0.5 million in
1998,  primarily due to a sales decrease at the Arrow Asian licensees  caused by
economic  recessions.  This  level of  depressed  sales in Asia is  expected  to
continue in the near future.

   The Company's fiscal year ends on December 31st of each calendar year.



<PAGE>


Results Of Operations

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

  The  following  table sets forth,  for the  periods  indicated,  statement  of
operations data as a percentage of net sales.


                                     1998                1997
                               ---------------     ---------------
                                     (DOLLARS IN MILLIONS)

        Net Sales               $373.1  100.0%      $363.5  100.0%
        Cost of Sales            264.3   70.8        253.7   69.8
        Gross Profit             108.8   29.2        109.8   30.2
        Selling, general and             
         administrative expense   82.4   22.1         76.3   21.0
        Facility closing and                        
         reengineering costs       2.4    0.6          2.5    0.7
        Operating Income          24.0    6.4         31.0    8.5
        Interest expense          20.4    5.5         15.2    4.2
        Other expense/(income)     2.1    0.6          1.2    0.3
        Bankruptcy                
         reorganization           37.5   10.5         (3.9)  (1.1) 
        Provision for income                     
         taxes                     0.8    0.2          1.3    0.4
        Net income (loss)       $(36.8)  (9.9)%     $ 17.2    4.7%
                                 


  Net Sales.  Net sales for the year ended  December  31,  1998  increased  $9.6
million,  to $373.1  million  compared with net sales of $363.5  million for the
year  ended  December  31,  1997.  In 1998,  total net sales for the Sock  Group
increased  8.6% to $164.8  million  from  $151.8  million in 1997.  This  strong
revenue  performance  was  primarily  due  to  the  Company's  expanded  product
offerings in the GOLD TOE family of socks and licensed brands including  Nautica
and  Jockey.  Net sales in the Shirt  Group of $183.2  million  represent a 3.6%
increase  from 1997.  The key  contributor  of the increase was the US Wholesale
business  which was 7.0%  ahead of last year.  These  increases  were  offset by
reduced sales in the Designer  Group where net sales for 1998 were $29.1 million
compared  to  $39.8  million  in  1997.  As is  indicated  above,  during  1998,
management  decided to exit the Burberrys and YSL  businesses  which make up the
bulk of the Designer  Group's  sales.  The Shirt  Group's net sales also include
license fee income of $6.3 million for the year ended December 31, 1998 compared
to $6.7 million for the year ended  December  31, 1997.  The decrease in license
fee income is a result of erosion in  royalties  from  ARROW's  Asian  licensees
offset by a 15% ARROW royalty improvement in Europe,  Africa,  South America and
the United States.

  Gross  Profit.  Gross  profit for the year ended  December  31, 1998 of $108.8
million,  decreased  $1.0 million,  compared with gross profit of $109.8 million
for 1997.  Gross  profit  margins for the year were off  slightly,  declining to
29.2% of net sales from 30.2% in 1997.  This  decline  was driven  primarily  by
gross margin  deterioration  at the Designer  Group where gross  margins fell to
9.6% in 1998 from 25.3% in 1997.  This  decline is largely  attributable  to the
cost of exiting the Burberrys and YSL businesses in 1998. The Sock Group's gross
profit  increased  $3.4 million to $52.5 million for the year ended December 31,
1998 while gross margin  deteriorated  slightly,  to 31.7% in 1998 from 32.2% in
1997, as a result of  unfavorable  mix changes and a general 3% wage  inflation.
The Shirt Group's  gross profit  increased  $2.5 million,  from $49.2 million to
$51.6  million in fiscal years 1997 and 1998,  respectively,  while gross margin
increased  to 28.2% in 1998  compared to 27.8% for 1997.  This  improvement  was
attributable to reduced off-price  selling,  lower excess inventories and better
execution of deliveries.

  Selling,   General  and   Administrative   Expenses.   Selling,   general  and
administrative  expenses  for the year ended  December 31, 1998  increased  $6.1
million to $82.4  million  compared  with  selling,  general and  administrative
expenses of $76.3  million for the year ended  December 31, 1997.  This increase
relates to increased  advertising  at Arrow;  higher  distribution  expense from
volume  increases,  excessive  overtime  and a Sock  Group  distribution  center
consolidation  cost; and increased  selling expense  associated with new product
line and distribution channel initiatives.

     Facility  Closing and  Reengineering  Costs.  The Company  recorded pre-tax
non-recurring  charges of $2.4 million for the year ended  December 31, 1998 and
$2.5  million for the year ended  December 31,  1997.  These costs  related to a
series of actions the Company has taken towards  consolidation  of manufacturing
plants in the Sock Group and  closure of several  domestic  outlet and  Canadian
retail stores.

<PAGE>

  Operating  Income.  Operating  income  decreased to $24.0 million in 1998 from
$31.0 million in 1997,  almost  entirely due to the $7.1 million cost of exiting
the Burberrys and YSL businesses in the Designer Group.

  Interest  Expense.  Interest  expense  increased $5.2 million in 1998 over the
prior year,  $20.4 million in 1998 versus $15.2  million in 1997.  This increase
results from the higher debt levels existing after the Recapitalization that was
completed on May 18, 1998.

  Bankruptcy  Reorganization Costs. Bankruptcy reorganization costs for the year
ended December 31, 1998 increased  $41.4 million to $37.5 million  compared with
bankruptcy  reorganization  credits of $3.9 million for the year ended  December
31, 1997. This increase in bankruptcy reorganization costs resulted from payment
of post-petition interest, default interest, and fees to creditors in accordance
with the terms of the Plan.

  Net Income  (Loss).  Net loss for the year ended  December  31,  1998 of $36.8
million is primarily due to increased bankruptcy  reorganization  costs. The net
income for the same period in 1997 was $17.2 million.


YEAR ENDED  DECEMBER  31,  1997  COMPARED TO YEAR ENDED  DECEMBER  31,
1996

  The following table sets forth,  for the periods  indicated,  the statement of
operations data as a percentage of net sales.


                                     1997               1996
                               ---------------    ---------------
                                       (DOLLARS IN MILLIONS)

        Net Sales              $363.5   100.0%    $369.0   100.0%
        Cost of Sales           253.7    69.8      273.8    74.2      
        Gross Profit            109.8    30.2       95.2    25.8        
        Selling, general and           
         administrative expense  76.3    21.0       86.3    23.4           
        Facility closing and                             
         reengineering costs      2.5     0.7       (2.7)   (0.7)
        Interest expense         15.2     4.2       16.9     4.6
        Other expense/(income)    1.2     0.3        3.2     0.9
        Bankruptcy                                    
         reorganization          (3.9)   (1.1)       6.1     1.7
        Provision  for  income                          
         taxes                    1.3     0.4        1.3     0.4
        Net income (loss)      $ 17.2     4.7%    $(30.2)   (8.2)%         
                                 
                                 

  Net Sales.  Net sales were $363.5 million in 1997, a slight  decrease from net
sales of $369.0 million  recorded in 1996. Net sales in the Sock Group increased
7.6% to $151.8  million in 1997 from $141.1 million in 1996 and net sales in the
Shirt Group  decreased  9.2% to $176.8  million in 1997 from  $194.7  million in
1996.  The increase in net sales in the Sock Group was  primarily due to women's
sock sales and a full year of sales for new  licensed  brands,  such as Nautica.
The  reduction  in net sales for the Shirt Group was due to the  elimination  of
certain  product lines and the  elimination of inventory  liquidations  taken in
1996 which did not occur in 1997. Net sales includes  license fee income of $6.7
million in 1997  compared to $8.6 million in 1996.  The reduction in license fee
income was caused by decreased  sales by Arrow's Asian licensees which represent
approximately 47% of license fee income.

  Gross Profit. Gross profit increased to $109.8 million (30.2% of net sales) in
1997 from $95.2 million (25.8% of net sales) in 1996.  Gross profit for the Sock
Group  was $49.1  million  (32.2% of net  sales)  in 1997 as  compared  to $41.3
million  (29.3% of net sales) in 1996.  The increase in the Sock  Group's  gross
profit was  attributable to the overall  increase in sales and improved  product
mix towards higher margin  products.  Gross profit for the Shirt Group was $49.2
million  (27.8% of net sales) in 1997 versus $46.4 million  (23.8% of net sales)
in 1996 as a result of an improved product mix, an overall  reduction in returns
and allowances and lower labor costs.

  Selling,   General  and   Administrative   Expenses.   Selling,   general  and
administrative expenses decreased to $76.3 million in 1997 from $86.3 million in
1996. Selling, general and administrative expenses were reduced primarily due to
(i) cost savings of $3.1 million realized in the Shirt Group's  consolidation of
distribution  centers (ii) a reduction in national  advertising  expenditures of
$4.3  million,  (iii) the  reduction of  administrative  positions  resulting in
approximately $2.0 million in savings,  and (iv) further reductions in corporate
overhead of $0.6 million.

<PAGE>

  Facility  Closing  and  Reengineering  Costs.  The  Company  recorded  pre-tax
non-recurring  charges of $2.5 million in 1997 and $11.6 million in 1996 related
to a series of actions the Company has taken towards shutdown of Canadian retail
operations,  administrative  personnel  reductions,  and  implementation  of new
information systems.  The Company believes that these initiatives  significantly
reduced operating expenses and product costs.

  Operating  Income (Loss).  Operating income increased to $31.0 million in 1997
from an operating loss of $2.7 million in 1996.

  Interest  Expense.  Interest  expense  decreased to $15.2 million in 1997 from
$16.9 million in 1996,  primarily due to reduced  borrowings under the Company's
Debtor-In-Possession ("DIP") Credit Facility.

  Bankruptcy  Reorganization.  Bankruptcy  reorganization  costs were a net $3.9
million credit  (approximately  $6.1 million  expense offset by $10.0 million in
credits  resulting  from  favorable  lease  settlements)  in 1997 and  primarily
include court costs and legal and other  professional  fees incurred to litigate
and settle the bankruptcy.  During the bankruptcy period from 1995 through 1997,
the Company attempted to settle all bankruptcy claims through  negotiations with
the Company's  vendors and lessors.  In certain  cases,  the vendors and lessors
accepted  settlements  for less  than the claim  amount  originally  filed.  For
example,  the Company's  liability for lease rejection claims was reduced to the
extent the lessors  were able to  mitigate  their  losses.  As a result of these
on-going  negotiations  in 1997,  the  Company  recognized  approximately  $10.0
million in credits  resulting  from these  negotiated  settlements  with various
vendors and lessors.  Settlements during 1995 and 1996 were not significant. All
settlements were approved by the United States Bankruptcy Court for the Southern
District of New York.

  Net Income  (Loss).  Net income  increased to $17.2 million in 1997 from a net
loss of $30.2  million in 1996.  The increase was  primarily  due to the factors
discussed above and a credit of $10.0 million in 1997  representing the reversal
of excess  accruals taken in  anticipation  of certain lease rejection and other
pre-petition claims.


Liquidity and Capital Resources

   On March 31, 1998,  the  Company's  and  Holdings'  Plan was confirmed by the
Court.  On May 18, 1998, the Plan was consummated  completing  Holdings (and its
subsidiaries)  bankruptcy proceeding which began on July 17, 1995. In connection
with the Plan and pursuant to a subscription agreement dated March 30, 1998 (the
"Subscription  Agreement"),  Vestar  Capital  Partners III, L.P. or a designated
affiliate ("Vestar"),  Alvarez & Marsal, Inc. or a designated affiliate ("A&M"),
a turnaround  management  firm  assisting  the Company,  and certain  members of
existing  management  made  a  $68.0  million  equity  investment  (the  "Equity
Investment")  in Holdings.  Vestar provided  approximately  $61.3 million of the
Equity  Investment  in the form of a $24.8 million  common equity  investment in
Holdings (the "Holdings Common Stock") and a $36.5 million investment in Class C
Junior Preferred Stock (the "Class C Junior Preferred  Stock").  A&M and certain
members of management provided additional equity investments of $4.9 million and
$1.8 million in Holdings Common Stock, respectively. The balance of the Holdings
Common Stock is held by the  shareholders  that were  shareholders  prior to the
bankruptcy ("Old Equity").

   The Company and  Holdings  used the Equity  Investment  in  conjunction  with
borrowings under a new $160.0 million senior credit facility,  $112.0 million in
proceeds from the Company's  issuance of Senior  Subordinated Notes Due 2008 and
$48.1 million in net proceeds from the issuance of Senior Exchangeable Preferred
Stock Due 2010,  collectively the "Offerings," to effect a recapitalization (the
"Recapitalization")  under which all of  Holdings'  and the  Company's  existing
pre-petition    obligations    and   all   borrowings    under   the   Company's
debtor-in-possession facility, were paid in full.


<PAGE>



   The following  table sets forth the uses of funds of Holdings and the Company
after giving effect to the  Recapitalization and the application of the proceeds
therefrom:

                                   The  
                                 Company      Holdings     Total
                                 -------      --------     -----
                                        (Dollars In Millions)
Uses of Funds:
Payment of Allowed Claims         $168.9       $122.6     $291.5
Payment     of      Estimated       12.4         24.3       36.7
Post-Petition Interest
Refinancing of Existing Debt         7.0            -        7.0
Estimated Fees and Expenses         13.5          5.4       18.9
                                    ----          ---       ----
                                  $201.8       $152.3     $354.1
                                  ======       ======     ======

   In connection with the Offering,  the Company issued 500,000 shares of Senior
Exchangeable  preferred  Stock  ("Preferred  Stock") Due 2010 and  received  net
proceeds of $48.1 million. Each preferred share has a liquidation  preference of
$100. The holders of the Preferred Stock will be entitled to receive,  as and if
dividends are declared by the Board of  Directors,  out of funds the Company has
legally available therefore,  cumulative preferential dividends from the date of
issuance of the  Preferred  Stock  accruing at the rate per share of 12 1/2% per
annum,  payable  semiannually in arrears on May 15 and November 15 of each year,
commencing  on November 15, 1998,  to the holders of record as of the  preceding
May 1 and  November  1. On or prior to May 15,  2003,  the  Company  may, at its
option,  pay dividends in cash or in additionally  fully paid and non-assessable
shares of Preferred Stock having an aggregate  Liquidation  Preference  equal to
the amount of such  dividends.  As of December 31, 1998,  the Company has issued
30,730 additional shares of Preferred Stock to holders of record on November 15,
1998.

     The Senior Credit Facility is comprised of three  different  loans: a $50.0
million  revolving credit facility (the  "Revolver"),  a $50.0 million term loan
("Term A"),  and a $60.0  million term loan ("Term B"). As of December 31, 1998,
there was outstanding $49.0 million, $59.7 million and $8.4 million with respect
to the Term A loan, Term B loan and the Revolver, respectively. The Revolver and
the  Term A loan  mature  in  2004.  The Term B loan  matures  in  2005.  At the
Company's option,  interest rates for borrowings under the Revolver and the Term
A loans are based on either LIBOR plus 225 basis points or the alternative  base
rate (the  greater of the  NationsBank  prime rate or the Fed Funds rate plus 50
basis  points)  plus 125 basis  points.  Interest on the Term B loan is based on
LIBOR plus 250 basis points or, at the Company's  option,  the alternative  base
rate plus 150 basis points.  In connection with the amendments  discussed below,
the rates for the Revolver and Term A and Term B loans were  amended,  effective
December  30, 1998.  The interest  rate for the Revolver and the Term A loan was
modified to LIBOR plus 250 basis  points or the  alternative  base rate plus 150
basis  points,  and  interest on the Term B loan was  modified to LIBOR plus 300
basis points or the alternative base rate plus 200 basis points. The alternative
interest rates continue to be at the Company's option.

   The Senior Credit  Facility (which was amended on December 18, 1998 and March
19,  1999,  with a  December  30,  1998  effective  date)  contains  a number of
covenants that, among other things,  restrict the ability of the Company and its
subsidiaries, other than pursuant to specified exceptions, to dispose of assets,
incur  additional  indebtedness,   incur  guarantee  obligations,   repay  other
indebtedness,  pay dividends,  create liens on assets,  enter into leases,  make
investments,  loans  or  advances,  make  acquisitions,  engage  in  mergers  or
consolidations,  make  capital  expenditures,  enter  into  sale  and  leaseback
transactions,  change  the  nature  of  their  business  or  engage  in  certain
transactions with subsidiaries and affiliates and otherwise  restrict  corporate
activities.  In  addition,  under the  Senior  Credit  Facility  the  Company is
required to comply with specified financial ratios and tests,  including minimum
fixed charge coverage and interest  coverage ratios and maximum leverage ratios,
including a senior leverage ratio and a total leverage  ratio,  each of which is
tested  as of the  last  day of  each  fiscal  quarter  of the  Company.

   Borrowings under the Senior Credit Facility bear interest at a rate per annum
equal to a margin  over,  at the  Company's  option,  LIBOR or a Base Rate.  The
Senior  Credit  Facility  is  secured  by  substantially  all the  assets of the
Company's   domestic   subsidiaries,   guaranteed  by  the  Company's   domestic
subsidiaries and contains customary  covenants and events of default,  including
substantial  restrictions  on the  Company's  ability  to declare  dividends  or
distributions.  The Senior  Credit  Facility is subject to mandatory  prepayment
with the proceeds of certain asset sales,  certain equity  issuances and certain
funded debt  issuances for borrowed  money,  and with a portion of the Company's
Excess Cash Flow (as defined in the Senior Credit Facility).

<PAGE>

   On May 18,  1998,  the  Company  issued  $112.0  million  of 10 1/8 %  Senior
Subordinated  Notes due 2008 (the  "Notes")  pursuant to an indenture  agreement
(the  "Indenture").  Interest is paid  semiannually on May 15 and November 15 of
each year, commencing November 15, 1998. The Company is not required to make any
mandatory  redemption or sinking fund payment with respect to the Notes prior to
maturity.  The Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after Many 15, 2003 at the redemption price plus accrued
and unpaid interest.  The Notes are subordinate in priority to the Senior Credit
Facility.

   In addition to the Notes,  on May 18, 1998,  the Company issued $13.0 million
in new Senior  Subordinated Notes (the "Parity Notes") to Old Equity. The Parity
Notes  have the same terms as the Notes and are  treated as a single  class with
the Notes for all purposes under the Indenture,  including  without  limitation,
ranking, waivers, amendments, events of default and remedies, offers to purchase
and  redemptions.  The  Parity  Notes  are  senior  in right of  payment  to the
Preferred  Stock.  As of December  31, 1998,  there was $13.0  million in Parity
Notes outstanding.  (The Notes and the Parity Notes are collectively referred to
as the ("Exchange Notes")).

     Other than upon a Change of Control (as defined by the  Indenture)  or as a
result of certain  asset  sales,  the  Company  will not be required to make any
principal payments in respect of the Exchange Notes until maturity.  The Company
will be  required  to make  interest  payments  with  respect to both the Senior
Credit Facility and the Exchange Notes and dividend payments with respect to the
Preferred  Stock  (if  permitted  under  the  Senior  Credit  Facility  and  the
Indenture).

  The Company  typically  makes capital  expenditures  related  primarily to the
maintenance and improvement of  manufacturing  facilities.  In fiscal 1996, 1997
and 1998,  capital  expenditures  were $9.8  million,  $10.8  million  and $11.8
million, respectively.

  The Company's principal sources of cash to fund these capital requirements are
net cash  provided by operating  activities  as well as  borrowings,  if needed,
under its Senior Credit Facility. In 1996, 1997 and 1998, the Company's net cash
provided (used) by operations  totaled $16.7 million,  $13.0 million and ($30.9)
million,  respectively.  The significant  decrease in cash provided by operating
activities in 1998 was primarily  due to the  settlement of certain  prepetition
liabilities,  which were paid  during the second  quarter of 1998 in  accordance
with the Plan.

  In 1996, 1997 and 1998, net cash provided  (used) by investing  activities was
$(8.3)  million,  $(7.5) million and $(11.7)  million,  respectively.  In fiscal
1996,  1997 and 1998,  net cash  provided  (used) by  financing  activities  was
$(13.3) million, $(1.3) million and $35.5 million, respectively.

  The Company has a substantial  amount of  indebtedness.  The Company relies on
internally generated funds and, to the extent necessary, on borrowings under the
Revolver  to meet  its  liquidity  needs.  In  addition,  the  Company  may make
selective acquisitions and would rely on internally generated funds, and, to the
extent  necessary,  on  borrowings  under such Revolver or from other sources to
finance such  acquisitions.  The  Company's  ability to borrow is limited by the
Senior Credit  Facility and the  limitations on the  incurrence of  indebtedness
under the Indenture.

  Based upon the current  level of  operations  and revenue  growth,  management
believes  that cash flow from  operations  and  available  cash,  together  with
available borrowings under the Senior Credit Facility,  are adequate to meet the
Company's  future  liquidity  needs until at least the end of 1999.  The Company
may, however,  need to refinance all or a portion of the principal of the Senior
Credit  Facility on or prior to maturity and there can be no assurance  that the
Company will be able to effect any such  refinancing on commercially  reasonable
terms or at all.  In  addition,  there can be no  assurance  that the  Company's
business will generate  sufficient cash flow from  operations,  that anticipated
revenue  growth and  operating  improvements  will be  realized  or that  future
borrowings  will be  available  under the Senior  Credit  Facility  in an amount
sufficient to (i) enable the Company to service its indebtedness  (including the
Exchange Notes),  (ii) make periodic payments of cash dividends on the Preferred
Stock,  (iii) redeem any of the Preferred Stock for cash or, to make payments of
principal  or cash  interest  on the  Exchange  Notes  or (iv)  fund  its  other
liquidity needs.

     The  Company's  Canadian  division  (Cluett  Peabody  Canada Inc.  ("Cluett
Canada"))  entered into a Loan  Agreement  dated  August 8, 1997 (the  "Canadian
Facility")   between   Cluett   Canada  and   Congress   Financial   Corporation
("Congress"), as the lender. The Canadian Facility provides for a revolving loan
facility of up to $15.0 million  Canadian  dollars,  which amount may be reduced
based upon the value of accounts  receivable  outstanding  and inventory held by
Cluett Canada, or upon the good faith  determination by Congress that the amount
should be reduced to reflect,  among other things,  loss contingencies or risks,
letters of credit and events of default of Cluett Canada.  The Canadian Facility
has an initial term of three years and continues  year to year  thereafter.  The
lender under the Canadian  Facility has a first  priority lien on  substantially
all of the assets of Cluett  Canada.  As of December 31, 1998,  $3.6 million was
outstanding under the Canadian Facility.

<PAGE>

Income Taxes

   See  Note 9  "Income  Taxes"  of the  Notes  to  the  Consolidated  Financial
Statements  included on pages F-8  through  F-34 of the  Consolidated  Financial
Statements.

New Accounting Pronouncements

     See Note 2 "New Accounting Pronouncements" of the Notes to the Consolidated
Financial  Statements  included on pages F-8 through  F-345 of the  Consolidated
Financial Statements.

Year 2000 Risk

   The Year 2000 issue is the result of computer  programs  being  written using
two  digits  rather  than four to define  the  applicable  year.  The  Company's
computer  equipment and software and devices with embedded  technology  that are
time-sensitive  may recognize a date using "00" as the year 1900 rather than the
year 2000.  This could  result in system  failures  or  miscalculations  causing
disruptions of operations,  including, among other things, a temporary inability
to process  transactions,  send invoices,  or engage in similar normal  business
activities.

   The Company has undertaken  various  initiatives  intended to ensure that its
computer  equipment and software will function properly with respect to dates in
the year 2000 and thereafter. For this purpose, the term "computer equipment and
software"   includes  systems  that  are  commonly  thought  of  as  information
technology  ("IT")  systems,   including   accounting,   data  processing,   and
telephone/PBX systems, cash registers,  hand-held terminals, scanning equipment,
and  other  miscellaneous  systems,  as well as  systems  that are not  commonly
thought  of as IT  systems,  such  as  alarm  systems,  sprinkler  systems,  fax
machines, or other miscellaneous systems. Both IT and non-IT systems may contain
imbedded  technology,  which complicates the Company's Year 2000 identification,
assessment,  remediation, and testing efforts. Based upon its identification and
assessment  efforts to date,  the Company  believes that certain of the computer
equipment  and  software  it  currently   uses  will  require   replacement   or
modification.  In  addition,  in  the  ordinary  course  of  replacing  computer
equipment  and software,  the Company  attempts to obtain  replacements  that it
believes are Year 2000 compliant. Utilizing both internal and external resources
to identify  and assess  needed  Year 2000  remediation,  the Company  currently
anticipates  that its Year 2000  identification,  assessment,  remediation,  and
testing efforts,  will be completed by June 30, 1999, and that such efforts will
be completed prior to any currently anticipated impact on its computer equipment
and software.

                                                       PERCENT
   YEAR 2000 INITIATIVE                               TIME FRAME     COMPLETE
   --------------------                               ----------     --------

   Initial IT Systems Assessment                     December 1998     100%
   Remediation and Testing of Central/Distributed
     Systems                                         June 1999          75%
   Remediation and Testing of Store/Distribution
     Systems                                         June 1999          75%
   Upgrades to Telephone/PBX/Other systems           December 1998     100%
   EDI Trading Partner Conversions                   June 1999          85%
   Identification, Assessment, Remediation,
     & Testing of Desktop Systems                    June 1999          85%
   Identification, Assessment and Testing of
     Non-IT Systems                                  December 1998     100%


   The Company  has also  mailed  letters to its  significant  vendors,  service
providers and customers to determine  the extent to which  interfaces  with such
entities  are  vulnerable  to Year 2000  issues and  whether  the  products  and
services purchased from or by such entities are Year 2000 compliant. As of March
24, 1999,  the Company had received  responses  from  approximately  19% of such
third  parties,  and 100% of the  companies  that have  responded  have provided
written  assurances that they expect to address all their  significant Year 2000
issues on a timely basis.

<PAGE>
 
  The  Company  believes  that  the  cost  of  its  Year  2000  identification,
assessment,  remediation,  and testing efforts, as well as currently anticipated
costs to be incurred by the  Company  with  respect to Year 2000 issues of third
parties,  will not  exceed  $200,000,  which  expenditures  will be funded  from
operating cash flows. Such amount represents less than 1% of the Company's total
actual and anticipated IT  expenditures  for fiscal 1997 through fiscal 1999. As
of January 30, 1999,  the Company had incurred costs of  approximately  $194,000
related to its Year 2000 identification,  assessment,  remediation,  and testing
efforts.  All of the $194,000  relates to analysis,  repair,  or  replacement of
existing software,  upgrades to existing software,  or evaluation of information
received from  significant  vendors,  service  providers,  or  customers.  Other
non-Year  2000 IT efforts have not been  materially  delayed or impacted by Year
2000 initiatives.  The Company presently  believes that the Year 2000 issue will
not pose significant operational problems for the Company.  However, if all Year
2000 issues are not properly identified, or assessment, remediation, and testing
are not effected  timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's  results of  operations  or adversely  affect the Company's
relationships with customers, vendors, or others. Additionally,  there can be no
assurance  that the Year 2000 issues of other  entities will not have a material
adverse impact on the Company's systems or results of operations.

   The Company has begun, but not yet completed, a comprehensive analysis of the
operational  problems  and costs  (including  loss of  revenues)  that  would be
reasonably  likely to result from the  failure by the Company and certain  third
parties to complete efforts to achieve Year 2000 compliance on a timely basis. A
contingency  plan has not been  developed  for dealing with the most  reasonably
likely  worst  case  scenario,  and  such  scenario  has  not yet  been  clearly
identified.   The  Company   currently  plans  to  complete  such  analysis  and
contingency planning by December 31, 1999.

   The  Company  has engaged an  independent  expert to  evaluate  its Year 2000
identification, assessment, remediation, and testing efforts.

   The costs of the Company's Year 2000 identification, assessment, remediation,
and testing efforts and the dates on which the Company believes it will complete
such  efforts are based upon  management's  best  estimates,  which were derived
using numerous  assumptions  regarding  future  events,  including the continued
availability of certain  resources,  third-party  remediation  plans,  and other
factors.  There  can be no  assurance  that  these  estimates  will  prove to be
accurate  and actual  results  could  differ  materially  from  those  currently
anticipated.  Specific  factors  that  could  cause  such  material  differences
include,  but are not limited to, the availability and cost of personnel trained
in Year 2000 issues, the ability to identify,  assess,  remediate,  and test all
relevant computer codes and imbedded technology,  and similar uncertainties.  In
addition,  variability of  definitions  of  "compliance  with Year 2000" and the
myriad of different products and services, and combinations thereof, sold by the
Company  may  lead to  claims  whose  impact  on the  Company  is not  currently
estimable.  No assurance can be given that the  aggregate  cost of defending and
resolving  such  claims,  if any,  will  not  materially  adversely  affect  the
Company's results of operations.  Although some of the Company's agreements with
manufacturers  and others from whom it  purchases  products  for resale  contain
provisions   requiring   such  parties  to  indemnify  the  Company  under  some
circumstances,  there can be no assurance that such indemnification arrangements
will cover all of the Company's liabilities and costs related to claims by third
parties related to the Year 2000 issue.

Cautionary Statement Regarding Forward-Looking Statements

   This Annual Report on Form 10-K contains certain statements that describe the
Company's beliefs concerning future business  conditions and the outlook for the
Company based on currently  available  information.  The preceding  Management's
Discussion  and  Analysis  contains  forward-looking  statements  regarding  the
Company's  performance,  liquidity  and the  adequacy of its capital  resources.
These forward looking  statements are subject to risks,  uncertainties and other
factors  which  could  cause  the  Company's  actual  results,   performance  or
achievement to differ  materially  from those  expressed in, or implied by these
statements.  These risks,  uncertainties  and other factors  include but are not
limited to, the following: (i) the financial strength of the retail industry and
the level of  consumer  spending  for  apparel, (ii) the  Company's  ability  to
develop,  market and sell its products, (iii) increased  competition  from other
manufacturers of men's dress shirts and socks, (iv) general economic conditions,
(v) hiring and retaining effective team members,  (vi) sourcing merchandise from
domestic and  international  vendors,  and (vii) any  unanticipated  problems or
delays in the completion by the Company to become Year 2000 ready or the failure
of the  Company's  vendors or customers to do so.  Therefore,  while  management
believes that there is a reasonable  basis for the  forward-looking  statements,
undue reliance should not be placed on those statements.

<PAGE>

Item 7A. Quantitative and Qualitative disclosures about  Market Risk

Market Risk Factors

     The Company has market risk  exposure  from  changes in interest  rates and
foreign  currency  exchange  rates.  The Company  operates under a senior credit
facility at variable interest rates.  Interest expense is primarily  affected by
the general level of U.S.  interest  rates,  LIBOR and European base rates.  The
Company is subject to risk from  sales and loans to its  foreign  subsidiary  as
well as sales,  purchases from third party  customers,  suppliers and creditors,
denominated in foreign currencies. Currently, the Company does not engage in any
material derivative type instruments in order to hedge against interest rate and
Canadian foreign currency exchange rate fluctuations. However, the Company feels
it is limited in its exposure of foreign currency  exchange rate changes as most
inventory purchase contracts are denominated in US Dollars.

Floating Interest Rate Risk:

   In order to assess the impact of changes in interest rate on future  earnings
and cash flow, the Company assumed a 1% (100 basis points)  unfavorable shift in
the  underlying  interest  rate would result in additional  interest  expense of
$1,200,000.  Additionally,  as a result of the  third  amendment  to the  Senior
Credit  Facility,  the  interest  rate on the  Revolver  and  Term A loans  were
increased  by 25  basis  points  and the  interest  rate on the  Term B loan was
increased by 50 basis points.  The incremental  cost to the Company on an annual
basis for these increased interest rates is approximately $500,000.

Fixed Interest Rate Risk:
   The fair value of long-term  fixed interest rate debt and fixed interest rate
preferred stock is also subject to interest rate risk. Generally, the fair value
of fixed interest rate debt and preferred  stock will increase as interest rates
fall and  decrease  as  interest  rates  rise.  A  hypothetical  100 basis point
increase in the prevailing interest rates at December 31, 1998 would result in a
decrease  in fair  value  of  total  long-term  debt  and  preferred  stock,  by
approximately $8,900,000.

Currency:
   Our  Canadian  operations  represented   approximately  11%  of  consolidated
long-lived assets and consolidated net operating  revenues for 1998.  Because of
our international  operations, we are exposed to translation risk when the local
currency  statements of income are  translated  into U.S.  dollars.  As currency
exchange   rates   fluctuate,   translation  of  the  statements  of  income  of
international  businesses  into U.S.  dollars will affect the  comparability  of
revenues and expenses between years.  None of the components of our consolidated
statements of income was materially  affected by exchange rate  fluctuations  in
1998, 1997, or 1996.

The Company's revenues are denominated in each international  subsidiary's local
currency;  thus, the Company is not exposed to currency  transaction risk on its
revenues.  The  Company  is  exposed  to  currency  transaction  risk on certain
purchases of raw materials and equipment by its international  subsidiaries.  At
December 31, 1998, a hypothetical 10% adverse movement in foreign exchange rates
applied to the underlying  exposures  described  above would not have a material
effect on our results of operations.



<PAGE>


Item 8. Consolidated Financial Statements and Supplementary Data


              INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                       PAGE

Report of Independent Auditors                                         F-2

Consolidated Financial Statements:

  Consolidated Balance Sheets as of December 31, 1997 and 1998         F-3

  Consolidated Statements of Operations for the years ended
   December 31, 1996, 1997 and 1998                                    F-4

  Consolidated Statements of Stockholder's Deficit for the years
   Ended December 31, 1996, 1997 and 1998                              F-5

  Consolidated Statements of Cash Flows for the years ended
   December 31, 1996, 1997 and 1998                                    F-6

Notes to Consolidated Financial Statements                             F-8



























                                 F-1


<PAGE>


                    REPORT OF INDEPENDENT AUDITORS


Board of Directors
Cluett American Corp. and Subsidiaries

We have audited the accompanying  consolidated balance sheets of Cluett American
Corp. and subsidiaries  (formerly  Bidermann  Industries  Corp.), a wholly owned
subsidiary of Cluett American Investment Corp. ("Holdings"),  as of December 31,
1997  and  1998,  and  the  related   consolidated   statements  of  operations,
stockholder's  deficit  and cash flows for each of the three years in the period
ended  December  31, 1998.  Our audits also  included  the  financial  statement
schedule  listed in the Index at Item  14(a).  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 financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial position of Cluett American
Corp.  at  December  31,  1997 and 1998 and the  consolidated  results  of their
operations  and their  cash flows for each of three  years in the  period  ended
December 31, 1998, 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,  present fairly
in material respects the information set forth therein.


                              /s/ Ernst & Young LLP

Atlanta, Georgia
March 19, 1999























                                 F-2


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS


                                                   DECEMBER 31,
                                               1997            1998
                                               ----            ----
                                              (DOLLARS IN THOUSANDS)
ASSETS
Current assets:
  Cash and cash equivalents               $    10,019     $    2,868
  Accounts receivable, net                     48,442         46,786
  Inventories                                  78,236         74,599
  Prepaid expenses and other current assets     4,234          3,972
                                                -----          -----
Total current assets                          140,931        128,225

Property, plant and equipment, net             47,698         48,124

Deferred financing costs                           --         11,198
Pension assets                                 30,227         31,383
Other noncurrent assets                         1,161          1,845

Total assets                              $   220,017     $  220,775
                                          ===========     ==========

LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
  Accounts payable and accrued expenses      $ 46,486       $ 42,439
  Short-term debt and current portion 
   of long-term debt                            9,172         10,248
  Income taxes payable                          2,153          1,475
                                                -----          -----
Total current liabilities                      57,811         54,162

Due to parent                                  27,613         27,974
Long-term debt and capital lease obligations    1,960        235,681
Other noncurrent liabilities                      500            111
Liabilities subject to compromise             168,932             --
Dividends payable                                  --            605
Senior exchangeable preferred stock, 
 cumulative, $.01 par value:
 authorized 4,950,000, issued
 and outstanding 530,730 shares 
 (liquidation preference)                          --         51,288
Preferred stock, cumulative, $1 par value:
 authorized 50,000 shares, issued and
 outstanding 15,000 shares                     20,009             --

Stockholder's deficit:
  Common  stock,  $1 par value:  
   authorized,  issued  and  outstanding
   2,000 shares in 1997 (1000 BIC, 1,000 CDC)
   and 1,000 shares in 1998 (1,000 CAC)             2              1
  Additional paid-in capital                  173,592        116,919
  Accumulated deficit                        (228,099)      (264,933)
  Other comprehensive income                   (2,303)        (1,033)
                                               ------         ------ 
Total stockholder's deficit                   (56,808)      (149,046)
                                              --------      ---------
Total liabilities and stockholder's deficit  $220,017       $220,775
                                             ========       ========

See accompanying notes.
                                 F-3


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF OPERATIONS



                                                  YEAR ENDED DECEMBER 31,

                                             1996          1997           1998
                                             ---------------------------------
                                                   (DOLLARS IN THOUSANDS)

Net sales                                  $ 369,040    $ 363,528    $  373,123
Cost of goods sold                           273,800      253,677       264,325
                                             -------      -------       -------
Gross profit                                  95,240      109,851       108,798
Selling, general and administrative expenses  86,309       76,341        82,442
Facility closing and reengineering costs      11,603        2,469         2,366
                                              ------        -----         -----
Operating income (loss)                       (2,672)      31,041        23,990
Interest expense, net                         16,928       15,233        20,355
Other expense, net                             3,226        1,169         2,131
                                               -----        -----         -----
Income (loss) before reorganization costs 
 (credits) and income taxes                  (22,826)      14,639         1,504
Bankruptcy reorganization costs (credits)      6,128       (3,883)       37,528
                                               -----       ------        ------
Income (loss) before provision for 
 income taxes                                (28,954)      18,522       (36,024)
Provision for income taxes                     1,246        1,326           810
                                               -----        -----           ---
Net income (loss)                          $ (30,200)   $  17,196    $  (36,834)
                                           =========    =========    ========== 
        


                       See accompanying notes.


















                                 F-4


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT

                        (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                 ADDITIONAL                      OTHER
                                 COMMON STOCK     PAID-IN     ACCUMULATED    COMPREHENSIVE
                                SHARES  AMOUNT    CAPITAL       DEFICIT         INCOME          TOTAL

<S>                             <C>     <C>     <C>           <C>             <C>           <C>       
Balance at December 31, 1995    2,000   $   2   $ 176,239     $ (215,095)     $  (5,419)    $  (44,273)
  Net loss                         --      --          --        (30,200)            --        (30,200)
  Foreign currency translation
   adjustment(1)                   --      --          --             --          1,569          1,569
                                                                                               -------
  Comprehensive loss                                                                           (28,631)
                                                                                               ------- 
  Accretion of dividend on 
   redeemable preferred stock      --      --      (1,312)            --             --         (1,312)
                                -----   -----      -------       -------          -----         ------- 
Balance at December 31, 1996    2,000       2     174,927       (245,295)        (3,850)       (74,216)

  Net income                       --      --          --         17,196             --         17,196
  Foreign currency translation                  
   adjustment (1)                  --      --          --             --          1,547          1,547
                                                                                               --------
  Comprehensive income                                                                          18,743
                                                                                               --------
  Accretion of dividend on 
   redeemable preferred stock      --      --      (1,335)            --             --         (1,335)
                                -----   -----      -------       -------          -----         -------
Balance at December 31, 1997    2,000       2     173,592      (228,099)         (2,303)       (56,808)

  Net loss                         --      --          --       (36,834)             --        (36,834)

  Foreign currency translation 
   adjustment (1)                  --      --          --            --           1,270          1,270
                                                                                  -----         -------
  Comprehensive loss                                                                           (35,564)
                                                                                               ------- 
  Accretion of dividend on 
   redeemable preferred stock      --      --     (2,078)            --              --        (2,078)
  Distribution to CAIC             --      --    (87,522)            --              --       (87,522)
  Contribution of intercompany
   debt due to CAIC                --      --     27,609             --              --        27,609
  Distribution to CAIC for 
   debt purchase                   --      --    (13,000)            --              --       (13,000)
  Contribution of preferred 
    stock from CAIC                --      --     22,086             --              --        22,086
  Contribution of CDC to CAC 
   from CAIC                   (1,000)     (1)        --             --              --            (1)

  Accretion of dividend on 
   Senior exchangeable 
   preferred stock                 --      --     (3,678)            --              --        (3,678)

  Accretion of fees on Senior 
   exchangeable preferred
    stock                          --      --        (90)            --              --           (90)
                                -----   -----      -------       -------          -----         -------

Balance at December 31, 1998    1,000   $   1   $ 116,919    $ (264,933)       $ (1,033)     $ (149,046)
                                =====   =====   =========    ==========        ========      ========== 

<FN>
(1)  Comphensive income items are shown before related tax effects.  The aggregate income tax expense related to the total of other 
     comphensive income items is $533, $526 and $432, for 1996, 1997 and 1998, respectively.

                       See accompanying notes.
</FN>

</TABLE>
                                 F-5


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                      YEAR ENDED DECEMBER 31,
                                                                    --------------------------
                                                                    1996       1997       1998
                                                                    --------------------------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                                              <C>          <C>       <C>
OPERATING ACTIVITIES
Net income (loss)                                                $(30,200)    $17,196   $(36,834)
Adjustment to reconcile net income (loss) 
  to net cash and cashequivalents provided by 
  (used in) operating activities:
   Write-off of foreign currency translation adjustment             3,100         --         --
  Write-down of property, plant and equipment                         742         --      1,094
  Write-down of deferred acquisition cost                              --         --        489
  Depreciation and amortization                                    10,935      8,105      9,652
  Gain on sale of fixed assets                                         --       (348)        --
  Adjustments (1997) Payments (1998) of liabilities subject to
    compromise-reorganization                                          --    (10,000)   (22,442)
  Accrual of professional fees, potential claims and related
  litigation matters-reorganization                                 6,128      6,117         --

Changes in operating assets and liabilities:
  Accounts receivable                                               8,217      3,917      1,070
  Inventories                                                      21,308     (6,980)     2,629
  Prepaid expenses and other current assets                         3,789        178        197
  Pension and other noncurrent assets                              (1,499)    (1,808)   (13,772)
  Accounts payable and accrued expenses                            (4,573)    (4,430)    (3,871)
  Income taxes payable                                                (76)       521       (678)
  Other liabilities                                                (1,298)      (448)       435
  Due to parent                                                        --         --     27,974
  Effect of changes in foreign currency                               121        930      3,190
                                                                      ---        ---      -----
Net cash and cash equivalents provided by (used in) operating
  Activities                                                       16,694     12,950    (30,867)
                                                                   ------     ------    ------- 

INVESTING ACTIVITIES
Purchase of fixed assets                                           (9,835)   (10,778)   (11,841)
Proceeds on disposal of fixed assets                                1,566      3,327        152
                                                                    -----      -----        ---
Net cash and cash equivalents used in investing activities         (8,269)    (7,451)   (11,689)
                                                                   ------     ------    ------- 
FINANCING ACTIVITIES
Issuance of preferred stock                                           --         --      48,125
Distribution to parent                                                --         --     (87,522)
Net borrowings under line-of-credit agreement                         --         --       3,126
Proceeds from DIP credit facility                                 53,300     16,398          --
Principal payments on DIP credit facility                        (55,300)   (16,795)         --
Proceeds from issuance of long term debt                           4,971      2,246     222,000
Principal payments on long term debt                             (16,294)    (3,113)     (1,300)
Payments on pre-petition liabilities                                  --         --    (146,490)
Principal payments on capital lease                                   --         --      (2,406)
                                                                   -----      -----      ------ 
Net cash and cash equivalents provided by (used in) financing
  Activities                                                     (13,323)    (1,264)     35,533
Effect of foreign currency translation                                (2)        --        (128)
                                                                      --      -----       ----- 
Net change in cash and cash equivalents                           (4,900)     4,235      (7,151)
Cash and cash equivalents at beginning of year                    10,684      5,784      10,019
                                                                  ------      -----      ------
Cash and cash equivalents at end of year                         $ 5,784   $ 10,019     $ 2,868
                                                                 =======   ========     =======

<FN>
                       See accompanying notes.
</FN>
                                 
</TABLE>
                                      F-6

<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                      YEAR ENDED DECEMBER 31

                                                                      1996       1997       1998
                                                                      --------------------------
                                                                        (DOLLARS IN THOUSANDS)

<S>                                                              <C>         <C>        <C>
SUPPLEMENTAL DISCLOSURES Cash paid during the year:
  Interest                                                        $  8,773   $  7,649   $ 17,073
                                                                  ========   ========   ========
  Income taxes                                                    $    674   $  1,163   $  1,236
                                                                  ========   ========   ========



<FN>

                       See accompanying notes.
</FN>
</TABLE>

















                                 F-7


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1998

1. Background

   Cluett American Corp. (formerly known as Bidermann Industries Corp. ("BIC")),
a Delaware corporation  organized in 1982, and its subsidiaries (the "Company"),
primarily designs,  manufactures and markets men's socks and dress shirts in the
United States and Canada. The Company filed voluntary petitions for relief under
the provisions of Chapter 11 of the Federal Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of New York (the "Court") on July 17,
1995.  On March 31, 1998,  the  Company's  and the  Company's  parent's,  Cluett
American Investment Corp. ("Holdings") Third Amended Plan of Reorganization (the
"Plan") was confirmed by the Court.  On May 18, 1998,  the Plan was  consummated
completing  Holdings'  (and  its  subsidiaries)   bankruptcy   proceedings.   In
connection  with the Plan and pursuant to a subscription  agreement  dated as of
March  30,1998,  Vestar  Capital  Partners III,  L.P. or a designated  affiliate
("Vestar"),  Alverez & Marsal,  Inc.  or a  designated  affiliate  ("A&M"),  and
certain members of existing  management  (collectively,  the "Equity Investors")
made a $68.0 million equity  investment  (the "Equity  Investment") in Holdings.
Vestar provided approximately $61.3 million of the Equity Investment in the form
of a $24.8 million common equity  investment in Holdings (the  "Holdings  Common
Stock") and a $36.5 million  investment in Class C Junior  Preferred  Stock. A&M
and certain members of management  provided additional Equity Investment of $4.9
million and $1.8 million in Holdings Common Stock, respectively.  The balance of
the Holdings  Common Stock is held by the  shareholders  that were  shareholders
prior to the bankruptcy ("Old Equity").

   The Company and  Holdings  used the Equity  Investment  in  conjunction  with
borrowings under a new $160.0 million senior credit facility,  $112.0 million in
proceeds from the Company's  issuance of Senior  Subordinated Notes Due 2008 and
$48.1 million in net proceeds from the issuance of Senior Exchangeable Preferred
Stock Due 2010, to complete its recapitalization (the "Recapitalization")  under
which all of Holdings' and the Company's existing  pre-petition  obligations and
all borrowings under the Company's  debtor-in-possession  facility, were paid in
full. In addition, the Company issued $13.0 million in Senior Subordinated Notes
Due 2008 (the  "Parity  Notes") to Old  Equity as part of the  Recapitalization.
These notes are identical in, and rank in parity with, the $112.0 million Senior
Subordinated Notes Due 2008.


2. Significant Accounting Policies

Principles of Consolidation

  The  consolidated   financial   statements  include  all  subsidiary
companies of the Company.  Significant intercompany  transactions have
been eliminated in the consolidation

Cash Equivalents

  The Company  considers all highly liquid  investments with a maturity of three
months or less when purchased to be cash equivalents.

Accounts Receivable

  The Company's  principal customers are retail stores and chains located in the
United States and in the countries where its foreign subsidiaries are domiciled,
primarily  Canada.  Royalty and licensing income is earned from a worldwide base
of licensees  engaged in the sale and  manufacture of textiles and apparel.  The
Company generally does not require collateral on accounts receivable.
                                 F-8


<PAGE>



                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. Significant Accounting Policies (Continued)

Inventory Valuation

  Inventories are stated at the lower of cost  (first-in,  first-out) or market.
During  1998,  the  Company  incurred  a charge  for the  liquidation  of excess
inventory   related  to  exiting  of  the  Burberrys   and  YSL   businesses  of
approximately $3.0 million, which is included in cost of goods sold.

Property, Plant and Equipment

  Property,  plant  and  equipment  are  stated  at  cost  and  are  depreciated
(including  depreciation of assets recorded under capital leases) principally by
the  straight-line  method  over the  estimated  useful  lives of the  assets as
follows:


     Buildings                          32-39 years
     Site improvements                  15-39 years
     Machinery, equipment and other      3-10 years
     Leasehold improvements             The lesser of the lease term or
                                        estimated useful life

Deferred Financing Fees

   In connection with the Recapitalization transactions discussed in Note 1, the
Company capitalized  transaction costs of $12.1 million.  Theses costs are being
amortized to interest expense over the lives of the related debt agreements.

Income Taxes

     The Company accounts for income taxes under the provisions of SFAS No. 109;
accordingly, deferred income taxes are provided at the enacted marginal rates on
the differences  between the financial  statement and income tax bases of assets
and liabilities. The Company and subsidiaries file a consolidated federal income
tax return and  separate,  consolidated  or unitary  state and local  income tax
returns in accordance with the filing requirements and options applicable in the
jurisdiction  in which income tax returns are  required.  Income tax expense for
the Company is presented in the accompanying  financial statements calculated on
a separate return basis.

Use Of Estimates

   Management  uses a  number  of  estimates  and  assumptions  relating  to the
reporting of assets and liabilities and the disclosure of contingent  assets and
liabilities  in preparing the  consolidated  financial  statements in conformity
with generally accepted  accounting  principles.  The Company regularly assesses
these  estimates  and,  while it is reasonably  possible that actual results may
differ from these estimates,  management believes that material changes will not
occur in the near term.

Revenue Recognition

  The Company  recognizes  revenue  when the  apparel is shipped.  Fees from the
licensing  of  trademarks  and  processes  relating  to the  textile and apparel
industry are  recognized  ratably over the period of time for fixed license fees
and based on estimated sales for variable  royalty fees. The Company  recognized
licensing fees of $8.6 million,  $6.9 million and $6.3 million in 1996, 1997 and
1998,  respectively,  which  are  included  in net  sales  in  the  accompanying
statements of operations.  Customer  returns and  allowances  have been provided
based on estimated returns (see Note 5).

                                 F-9


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. Significant Accounting Policies (Continued)

Software

   In March 1998, the American  Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1,  Accounting For The Costs Of Computer Software
Developed For Or Obtained For Internal-Use. The SOP is effective for the Company
beginning  January 1, 1999. The SOP will require the  capitalization  of certain
costs  incurred  after the date of adoption in  connection  with  developing  or
obtaining  software for internal-use.  The Company currently expenses such costs
as incurred. The Company has not yet assessed what the impact of the SOP will be
on the Company's  future earnings or financial  position.  The Company  expensed
$2.3  million,  $0.4 million and $0 of such costs  during  1996,  1997 and 1998,
respectively.


New Accounting Pronouncements

   As of January 1, 1998, the Company adopted the Financial Accounting Standards
Board's ("FASB") Statement No. 130, "Reporting  Comprehensive Income" ("SFAS No.
130").  SFAS No. 130  establishes  new rules for the  reporting  and  display of
comprehensive income and its components; however, the adoption of this Statement
had no impact on the Company's net income or shareholder's deficit. SFAS No. 130
requires foreign currency translation adjustments,  which prior to adoption were
reported   separately  in  shareholder's   deficit,  to  be  included  in  other
comprehensive  income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.

   Effective  January 1, 1998,  the  Company  adopted  FASB  Statement  No. 131,
"Disclosures About Segments Of An Enterprise And Related Information" ("SFAS No.
131"). SFAS No. 131 supercedes FASB Statement No. 14,  "Financial  Reporting for
Segments of a Business  Enterprise".  SFAS No. 131 establishes standards for the
way that public business enterprises report selected information about operating
segments  in  interim  and  annual  financial  statements.  SFAS  No.  131  also
establishes  standards  for related  disclosures  about  products and  services,
geographic  areas,  and major  customers.  The  adoption of SFAS No. 130 did not
affect the  results of  operations  or  financial  position,  but did affect the
disclosure of segment information. See Note 17.

   In February 1998, the FASB issued Statement No. 132, "Employer's  Disclosures
About Pensions And Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
revises employers'  disclosures about pensions and other postretirement  benefit
plans.  It does not change the  measurement or recognition of those plans.  This
statement  standardizes  the  disclosure  requirements  for  pensions  and other
postretirement   benefits  to  the  extent   practicable,   requires  additional
information on changes in the benefit  obligation and fair values of plan assets
that will facilitate  financial  analysis,  and eliminates certain  disclosures.
SFAS No. 132 is effective for financial  statements beginning after December 15,
1997 and the  Company  adopted  SFAS No. 132 on  January  1, 1998.  There was no
impact  on net  income  or  shareholder's  deficit  from  the  adoption  of this
statement.

   In June 1998, the FASB issued  Statement No. 133,  "Accounting For Derivative
Instruments  And Hedging  Activities"  ("SFAS No. 133"),  which is effective for
fiscal  quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133
establishes standards for derivative  instruments,  including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity  recognize all derivatives as either assets or liabilities in the
balance  sheet  measured at fair value.  The Company  will adopt SFAS No. 133 on
January 1, 2000.  Management has not determined how SFAS No. 133 will impact the
Company's financial statements.





                                 F-10


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. Significant Accounting Policies (Continued)

Foreign Currency Translation

  The Company  translates the financial  statements of its foreign  subsidiaries
from the local  (functional)  currencies to U.S. dollars in accordance with SFAS
No. 52 "Foreign Currency Translation".  Substantially all assets and liabilities
of the Company's foreign subsidiaries are translated at year-end exchange rates,
while revenue,  expenses and cash flow are translated at average  exchange rates
prevailing during the year. Translation adjustments arising from certain foreign
operations of the Company are reflected as a separate component of stockholder's
deficit.  Selling,  general and  administrative  expense  includes an  aggregate
exchange loss on transactions of approximately $88,000, $816,000 and $41,000, in
1996, 1997 and 1998, respectively.

Advertising Costs

   The Company expenses advertising costs as incurred. The Company charged $11.8
million,  $9.5 million and $9.3 million to advertising expense in 1996, 1997 and
1998 respectively.

Concentrations of Credit Risk and Financial Instruments

  Financial  instruments  which subject the Company to credit risk are primarily
trade accounts receivable. Concentration of credit risk with respect to accounts
receivable  is  limited  due to the large  number  and  diversity  of  customers
comprising  the  Company's  customer  base. No single  customer  accounted for a
significant amount of the accounts receivables at December 31, 1998.  Management
believes  the risk  associated  with trade  accounts  receivable  is  adequately
provided for in the allowance for doubtful accounts (see Note 5).

Reclassifications

   Certain amounts in the prior years'  financial  statements and footnotes have
been reclassified to conform to the current year presentation.

3. Preferred Stock

   In connection with the Offering, the Company issued 500,000 shares of 12 1/2%
Senior  Exchangeable  Preferred Stock ("Preferred  Stock") Due 2010 and received
net proceeds of $48.1 million. Each preferred share has a liquidation preference
of $100. The holders of the Preferred Stock will be entitled to receive,  as and
if dividends are declared by the Board of Directors out of funds the Company has
legally available therefore,  cumulative preferential dividends from the date of
issuance of the Preferred  Stock  accruing at the rate per share of 12 1/2 % per
annum,  payable  semiannually in arrears on May 15 and November 15 of each year,
commencing  on November 15, 1998,  to the holders of record as of the  preceding
May 1 and  November  1. On or prior to May 15,  2003,  the  Company  may, at its
option,  pay dividends in cash or in additionally  fully paid and non-assessable
shares of Preferred Stock having an aggregate  liquidation  preference  equal to
the  amount  of such  dividends.  The  carrying  value  of  Senior  Exchangeable
Preferred Stock reflects accretion of $90,000 in transaction fees. Additionally,
on November 15, 1998,  the Company  declared and paid a stock dividend of 30,730
shares on its  Preferred  Stock to holders of record as of the close of business
on November 15, 1998.



                                 F-11


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. Facility Closing and Reengineering Costs


In connection with developing a plan of reorganization  during 1995, the Company
developed and implemented a program  designed to reduce  operating  expenses and
improve overall  productivity.  During 1996, 1997 and 1998, the Company incurred
expenses of $11.6  million,  $2.5  million and $2.4  million,  respectively,  in
implementing  this plan.  The  principal  components  of these  expenses  are as
follows:

Facility  Closings -- During 1996, 1997 and 1998, the Company recorded  expenses
of approximately $6.5 million, $1.0 million and $1.6 million,  respectively, for
costs incurred in connection  with closing 3 outlet stores in both 1996 and 1997
and 3 retail  stores in 1996, as well as closing 2  manufacturing  facilities in
1996. In 1998, the Company consolidated certain distribution  centers,  closed a
sock knitting facility and disposed of certain under performing assets.

The significant cost components  related to the retail and outlet store closings
are primarily lease rejections,  fixed asset write-offs,  inventory  write-downs
and, to a lesser extent,  severance pay. The significant  components  related to
closing manufacturing facilities are fixed asset write-downs,  facility shutdown
and environmental clean-up costs and severance related expenses.

Other Operating Expenses -- In addition to the above items, the Company incurred
other operating expenses of $5.1 million,  $1.4 million and $0.8million in 1996,
1997 and 1998,  respectively,  primarily  related to certain  professional  fees
incurred to  restructure  and operate the Company during  Bankruptcy,  the write
down of impaired fixed assets and for system conversions.

  The provision and related  ending  accruals for these costs are  summarized as
follows (in thousands):
<TABLE>
<CAPTION>                                  
                                       Facility Closing            Other Operating Expense
                                     -------------------     --------------------------------------
                                                                                                     (Gain)
                                                                                                      Loss
                                                              System    Professional                   on
                                     Plant & DC   Retail    Conversion      Fees      Relocation    Disposal   Total
                                     ----------   ------    ----------      ----      ----------    --------   -----
<S>                                    <C>        <C>        <C>         <C>            <C>          <C>       <C>
Balance as of December 31, 1995        $ 2,890    $2,420     $     --    $     --       $    --      $   --    $ 5,350
Expense                                  4,329     2,204        4,145          82           843          --     11,603
Applied                                 (6,646)     (774)      (3,315)        (82)         (748)         --    (11,565)
                                        ------      ----       ------         ---          ----         ---    ------- 
Balance as of December 31, 1996            573     3,850          830          --            95          --      5,348
Expense                                    635       413          942         604           224        (349)     2,469
Applied                                 (1,208)   (3,523)      (1,436)       (604)         (319)        349     (6,741)
                                        ------    ------       ------        ----          ----         ---     ------ 
Balance as of December 31, 1997             --       740          336          --            --          --      1,076        
Expense                                  1,022       640           --          --            --         704      2,366 
Applied                                   (675)     (943)        (292)         --            --        (704)    (2,614)
                                          ----      ----         ----         ---           ---        ----     ------ 
Balance as of December 31, 1998        $   347    $  437     $     44    $     --       $    --      $   --    $   828
                                       =======    ======     ========    ========       =======      ======    =======
  
               
</TABLE>
       


                                 F-12


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. Accounts Receivable

  Allowances provided for accounts receivable are as follows:

                                                  DECEMBER 31,
                                               1997        1998       
                                               ----        ----       
                                            (DOLLARS IN THOUSANDS)

Doubtful accounts                           $ 1,802       $ 1,568
Customer allowances                           8,171         6,894
                                              -----         -----
                                            $ 9,973       $ 8,462
                                            =======       =======

6. Inventories

  Inventories consist of the following:

                                                  DECEMBER 31,
                                               1997        1998
                                               ----        ----
                                            (DOLLARS IN THOUSANDS)

Finished goods                              $65,558       $60,134
Work in process                               4,326         4,189
Raw materials and supplies                    8,352        10,276
                                              -----        ------
                                            $78,236       $74,599
                                            =======       =======

7. Property, Plant and Equipment

  Property, plant and equipment consist of the following:

                                                  DECEMBER 31,
                                               1997        1998
                                               ----        ----
                                            (DOLLARS IN THOUSANDS)

Land                                        $ 2,120       $ 2,091
Buildings and site improvements              25,764        24,267
Machinery, equipment and other               78,034        81,200
Construction in progress                      2,804         4,875
                                              -----         -----
                                            108,722       112,433
Less accumulated depreciation               (61,024)      (64,309)
                                            -------       ------- 
                                            $47,698       $48,124
                                            =======       =======


  Included  in  the  amounts  above  is  property  held  under  capital   leases
(principally  a  distribution  facility)  of $8.5 million and $0.8  million,  at
December 31, 1997 and 1998, respectively.


                                 F-13
<PAGE>
                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. Long-Term Obligations and Financing Agreements

   The  classification  of the  Company's  long-term  obligations  and financing
arrangements, including accrued interest, is as follows:

                                                            DECEMBER 31,
                                                         1997          1998
                                                         ------------------
                                                       (DOLLARS IN THOUSANDS)
Short-term debt and current portion of LTD:
Current portion of capital lease obligation           $   724       $     12
Canadian Facility                                       2,192          3,636
CDG operating facility                                  6,256             --
Senior Credit Facility:
     Revolving Credit facility                             --          3,000
     Term Loan A                                           --          3,600
                                                          ---          -----
Total short-term                                        9,172         10,248

Long-term debt:
   Liabilities Subject to Compromise:
      Revolving credit facility                        52,638             --
      Term loan                                        70,459             --
      Accrued interest                                 22,532             --
      Trade accounts and expenses payable              18,238             --
      Lease rejection liabilities                       5,065             --
Capital lease obligations                               1,960            231
Senior credit facility:
     Revolving credit facility                             --          5,350
     Term A and  B Loans                                   --        105,100
Senior subordinated notes (includes the Parity Notes)      --        125,000
                                                          ---        -------
Total long-term                                       170,892        235,681
                                                      -------        -------
Total Indebtedness                                   $180,064       $245,698
                                                     ========       ========

     In  conjunction  with the  Chapter 11 filing,  The Company  arranged  for a
Debtor-in-Possession  credit facility (the "DIP facility").  Interest charged on
borrowings  under the DIP facility was prime plus 3/4 of 1% and an  availability
fee of 1/2 of 1% of the unused  portion of the  credit  facility.  There were no
amounts outstanding from the DIP facility at December 31, 1997, and the facility
matured on October 17, 1998.




                                 F-14

<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

   8. Long-Term Obligations and Financing Agreements (Continued)


  At December 31,  1997,  the amount due to parent  relates to two  transactions
that occurred in 1991 and 1992. Holdings loaned the Company $15.0 million in the
form of an interest  bearing note in 1991. The balance of this note plus accrued
interest  (interest  was  accrued  until  bankruptcy)  was  approximately  $18.5
million.  Additionally,  Holdings loaned  approximately $9.1 million to Consumer
Direct  Corporation,  a wholly-owned  subsidiary of the parent, in 1992 in order
for the  stores to enter  favorable  pricing  and supply  agreements  with other
subsidiaries of Holdings. As a condition of the Plan, these intercompany amounts
were contributed to equity by Holdings.

     At December 31, 1998,  the amount due to parent related to an allocation of
post-petition  interest incurred on Holdings'  pre-petition debt and the receipt
of proceeds from the sale of Holdings Common Stock to the management  investors,
as  described in Note 1. In  addition,  the Company does not expect  Holdings to
provide further financing in the future.

     On May 18, 1998,  the Company  entered into a $160.0  million senior credit
facility (the "Senior Credit Facility"). The Senior Credit Facility is comprised
of three  different  loans:  a $50.0  million  revolving  credit  facility  (the
"Revolver"),  a $50.0 term loan ("Term A"), and a $60.0 million term loan ("Term
B"). As of December 31, 1998,  approximately $49 million, $59.7 million and $8.4
million  was  outstanding  on the Term A loan,  the  Term B loan  and  Revolver,
respectively.  The Revolver and the Term A loan mature in 2004.  The Term B loan
matures in 2005. At the Company's option, interest rates for borrowing under the
Revolver  and the Term A loan are based on either LIBOR plus 225 basis points or
the alternative base rate (the greater of the NationsBank  prime rate or the Fed
Funds rate plus 50 basis points) plus 125 basis  points.  Interest on the Term B
loan is based on LIBOR plus 250 basis points or, at the  Company's  option,  the
alternative  base rate plus 150 basis points.  In connection with the amendments
discussed below, the rates for the Revolver and the Term A and Term B loans were
amended, effective December 30, 1998. The interest rate for the Revolver and the
Term A loan was modified to LIBOR plus 250 basis points or the alternative based
rate plus 150 basis  points,  and  interest  on the Term B loan was  modified to
LIBOR plus 300 basis points or the alternative  base rate plus 200 basis points.
The alternative interest rates continue to be at the Company's option.

   The  obligations  of  the  Company  under  the  Senior  Credit  Facility  are
unconditionally   and   irrevocably   guaranteed  by  the   Company's   domestic
subsidiaries  (the  "Guarantors").  See Note 18. In addition,  the Senior Credit
Facility  is secured by first  priority  or  equivalent  security  interests  in
substantially  all  tangible  and  intangible  assets  of the  Company  and  the
Guarantors,  including all the capital  stock of, or other equity  interests in,
each  direct or  indirect  domestic  subsidiary  of the  Company  and 65% of the
capital stock of, or other equity  interests in, each direct foreign  subsidiary
of the  Company  or  any  Guarantor  (to  the  extent  permitted  by  applicable
contractual and legal provisions).

   The Term A and Term B loans (and in the case of (i),  the  Revolver)  will be
subject to mandatory  prepayment  (i) with the proceeds of certain  asset sales,
(ii) on an annual basis with 50% of the  Company's  excess cash flow (as defined
in the Senior  Credit  Facility),  (iii)  with the  proceeds  of certain  equity
offerings and (iv) with the proceeds from the issuance of certain funded debt of
borrowed money.
                                 F-15



<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. Long-Term Obligations and Financing Agreements (Continued)

   The Senior Credit Facility  contains a number of covenants that,  among other
things,  restrict  the ability of the Company and its  subsidiaries,  other than
pursuant  to  specified  exceptions,  to  dispose of  assets,  incur  additional
indebtedness,   incur  guarantee  obligations,  repay  other  indebtedness,  pay
dividends, create liens on assets, enter into leases, make investments, loans or
advances, make acquisitions,  engage in mergers or consolidations,  make capital
expenditures,  enter into sale and leaseback transactions,  change the nature of
their  business  or  engage  in  certain   transactions  with  subsidiaries  and
affiliates and otherwise restrict corporate activities.  In addition,  under the
Senior  Credit  Facility  the  Company  is  required  to comply  with  specified
financial ratios and tests, including minimum fixed charge coverage and interest
coverage ratios and maximum leverage  ratios,  including a senior leverage ratio
and a total leverage  ratio,  each of which is tested as of the last day of each
fiscal quarter of the Company and its subsidiaries.

   The Senior Credit Facility includes a cross-default  provision which makes it
a  default  under  the  Senior  Credit   Facility  if,  with  respect  to  other
indebtedness  in excess of $2.5  million of  Holdings  and the  Company  and its
subsidiaries,  any such  party  defaults  in any  payment  with  respect to such
indebtedness  or defaults  in a manner  that  permits  such  indebtedness  to be
accelerated or such indebtedness is in fact accelerated.

   The  consequences  of a default under the Senior Credit Facility are that the
administrative  agent  may,  upon the  request  and  direction  of the  required
lenders, take any of the following actions: (i) terminate the commitments,  (ii)
accelerate the Company's obligations under the Senior Credit Facility, declaring
them immediately due and payable,  (iii) require the credit parties to establish
a cash collateral account as security for outstanding letters of credit and (iv)
enforce  any and all other  rights  and  interests  existing  under  the  credit
documents.  As of December 31 1998, there was $117.1 million  outstanding  under
the Senior Credit Facility.

  On May  18,  1998,  the  Company  issued  $112.0  million  of 10  1/8%  Senior
Subordinated Notes due 2008 and $13.0 million in Parity Notes (collectively, the
"Notes").  Interest is paid semiannually on May 15 and November 15 of each year,
which  began on  November  15,  1998.  The  Company is not  required to make any
mandatory  redemption or sinking fund payment with respect to the Notes prior to
maturity.  The Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after May 15, 2003 at the redemption prices set forth in
the agreement  plus accrued and unpaid  interest.  The Notes are  subordinate in
priority to the Senior Credit Facility.

     The  Company's  Canadian  division  (Cluett  Peabody  Canada Inc.  ("Cluett
Canada"))  entered into a Loan  Agreement  dated  August 8, 1997 (the  "Canadian
Facility")   between   Cluett   Canada  and   Congress   Financial   Corporation
("Congress"), as the lender. The Canadian Facility provides for a revolving loan
facility of up to  $15,000,000  Canadian  dollars,  which  amount may be reduced
based upon the value of accounts  receivable  outstanding  and inventory held by
Cluett Canada, or upon the good faith  determination by Congress that the amount
should be reduced to reflect,  among other things,  loss contingencies or risks,
letters of credit and event of default of Cluett Canada.  The Canadian  Facility
has an initial term of three years and continues  year to year  thereafter.  The
lender under the Canadian  Facility has a first  priority lien on  substantially
all of the assets of Cluett  Canada.  As of December 31, 1998,  $3.6 million was
outstanding under the Canadian Facility.

   The scheduled  maturities of the Notes and Term A and B loans  outstanding at
December 31, 1998 are summarized as follows:  $3.6 million in 1999, $5.6 million
in 2000, $8.6 million in 2001,  $12.1 million in 2002, $14.6 million in 2003 and
$189.2 million thereafter.
                                 F-16



<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. Income Taxes

   The  Company  accounts  for income  taxes in  accordance  with  Statement  of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109").  This  standard  requires  the uses of the  liability  method.  Under the
liability  method,  deferred  income taxes reflect the net tax effect  (measured
using  currently  enacted tax rates) of  temporary  differences  resulting  from
events that have been recognized in the financial  statements and will result in
taxable or  deductible  amounts in future  years  based on enacted tax rates and
laws that will be in effect when the differences are expected to reverse.

    The Company files a  consolidated  federal  income tax return with Holdings,
its parent  company.  As of  December  31,  1998,  the  Company  had federal net
operating loss ("NOL")  carryforwards of approximately  $238 million.  These NOL
carryforwards  are  scheduled  to expire from the year 2005  through  2018.  The
Internal Revenue Code and Treasury Regulations prescribe a limitation on the use
of NOL carryforwards following an ownership change. The Company experienced such
an  ownership  change as a result of its Plan of  Reorganization  following  the
Company's exit from Chapter 11 of the United States  Bankruptcy  Code on May 18,
1998.  Therefore,  the Company's use of its NOL  carryforwards may be limited in
future years.

   Based on the  Company's  history of  earnings,  its Chapter 11 filing and the
limitation on the use of its NOL carryforwards,  the Company's entire balance of
net  deferred  tax assets has been  reduced by a  valuation  allowance  of $78.6
million as it was not assured that such assets would be realized in the future.

  Undistributed earnings of foreign subsidiaries deemed permanently invested for
which no  deferred  income  taxes have been  provided  were  approximately  $6.8
million, $5.1 million and $0 at December 31, 1996, 1997 and 1998, respectively.

  The  significant   components  of  the  Company's   deferred  tax  assets  and
liabilities are as follows:

                                                            DECEMBER 31,
                                                         1997        1998
                                                         ----        ----
                                                       (DOLLARS IN THOUSANDS) 
Deferred tax liabilities:
  Cancellation of debt income                         $  10,200   $      -
  Depreciation                                            2,067      3,493
  Pension income                                          4,332      5,078
  Other                                                   1,187        326
                                                          -----        ---
Total deferred tax liabilities                           17,786      8,897
Deferred tax assets:
  Net operating loss carryforwards                       61,374     80,984
  AMT Credits                                               265        119
  Restructuring reserves                                  2,528        173
  Note receivable reserves                                1,931          -
  Litigation reserve                                          -        544
  Interest to parent                                      1,056        484
  Allowance for bad debts                                 1,154        187
  Inventory overhead cost adjustment, net                   632      1,064
  Other                                                   4,120      3,906
                                                          -----      -----
Total deferred tax assets                                73,060     87,461
Valuation allowance for deferred tax assets             (55,274)   (78,564)
                                                        -------    ------- 
Net deferred taxes                                    $      --   $     --
                                                      =========   ========  


                                 F-17


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9. Income Taxes (Continued)

  The provision for income taxes consisted of the following:

                                                    YEAR ENDED DECEMBER 31,
                                               1996       1997        1998
                                               ----------------------------
                                                  (DOLLARS IN THOUSANDS)
 Current:
  Federal                                    $   --      $4,606     $ (146)
  State and local                               350         485        550
  Foreign(1)                                    896         575        406
  Benefit of net operating loss carry forward    --      (4,340)        --
                                                ---      ------        ---   
                                             $1,246      $1,326     $  810
                                             ======      ======     ======


(1) Includes  approximately  $691, $500 and $442 relating to foreign withholding
taxes for 1996, 1997 and 1998 respectively.  The 1998 foreign provision includes
foreign local benefit of $36.



  A reconciliation  of the statutory  federal income tax provision  (benefit) to
the Company's provision for income taxes is as follows:


                                                  YEAR ENDED DECEMBER 31
                                                  1996     1997      1998
                                                  ----     ----      ----
                                                  (DOLLARS IN THOUSANDS)

 Computed at statutory rate                   $ (8,529)  $ 4,139   $(14,562)
 Effect on federal income tax expense of:
  State  and  local  income  taxes,  net  of  
   federal income tax benefit                      232       320        363
  Differential attributed to foreign
   operations                                    1,820     1,172        268
  Changes in valuation allowance for 
   deferred tax assets                           7,563    (4,340)    14,812
  Other, net                                       160        35        (71)
                                                   ---        --        --- 
                                              $  1,246   $ 1,326   $    810
                                              ========   =======   ========








                                 F-18


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10. Employee Benefit Plans

  The Company has a qualified defined benefit pension plan covering  essentially
all  employees  of the Company in the United  States.  Commencing  in 1997,  the
pension plan  employs a cash balance form of benefit that  provides for benefits
based on salary,  age and  service.  The benefit  available  for  certain  union
employees  under the plan is based on a flat  dollar  per year of  service.  The
Company's  practice  is to  fund  amounts  that  are  required  by  statute  and
applicable  regulations  and which are tax  deductible.  Assets of the plans are
investments  in  cash  equivalents,  publicly-traded  fixed  income  and  equity
securities,  and real estate.  Assets are valued using a method which recognizes
the difference  between actual and expected  market values over a period of five
years.

  At December 31, 1997 and 1998,  the funded status of the  Company's  qualified
defined benefit pension plan was as follows:

                                                       DECEMBER 31,
                                                      1997      1998
                                                      ----      ----
                                                  (DOLLARS IN THOUSANDS)

Benefit Obligation Information
Benefit obligation at beginning of year              $71,121  $74,073
Service cost                                           1,675    1,724
Interest cost                                          5,345    5,346
Actuarial loss/(gain)                                 (1,856)   3,794
Benefits paid                                         (6,955)  (8,232)
Amendments                                             4,101        -
Special termination benefits                             877      642
                                                         ---      ---
Benefit obligation at end of year                    $74,073  $77,582
                                                     =======  =======
                                                      

Fair Value of Plan Assets
Fair value of plan assets at beginning of year      $ 99,586 $109,129
Actual return on plan assets                          16,498   12,347
Benefits paid                                         (8,232)  (6,955)
                                                      ------   ------ 
Fair value of plan assets at end of year            $109,129 $113,244


Reconciliation of Funded Status, Amounts Not recognized, and
Amounts Recognized
Funded status                                        $35,056  $35,662
Unrecognized prior service cost                        3,592    3,222
Unrecognized loss/(gain)                                 539      765
Unrecognized reversion value discount                 (8,960)  (8,266)
                                                      ------   ------ 
Prepaid benefit costs                                $30,227  $31,383
                                                     =======  =======




                                 F-19


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. Employee Benefit Plans (Continued)

  The Company's two  nonqualified  benefit  plans had benefit  obligations  that
exceeded  plan assets at December 31, 1996 and 1997. As of December 31, 1996 and
1997,  these plans had net liabilities of $1,018,000  which relate  primarily to
vested  benefits.  These  liabilities  are  included in  liabilities  subject to
compromise at December 31, 1997. In 1998, these liabilities were satisfied.  Net
pension expense for these plans was not material in 1997.

  Net pension  benefit of the Company's  qualified  defined benefit plan for the
years ended December 31, 1996, 1997 and 1998 include the following components:


                                                   1996       1997      1998
                                                   -------------------------
                                                      (IN THOUSANDS)

   Service cost                                   $ 1,449    $ 1,675  $ 1,724
   Interest cost                                    4,779      5,345    5,346
   Actual return on plan assets                   (12,661)   (16,498) (12,347)
   Amortization of unrecognized reversion 
    value discount                                 (1,230)    (1,230)  (1,230)
   Loss deferred for later recognition              4,483      8,030    4,474
                                                    -----      -----    -----
                                                   (3,180)    (2,678)  (2,033)
   Other benefit charges:
   Early retirement program / special 
    retirement benefits                               809        642      877
                                                      ---        ---      ---
   Net pension benefit                            $(2,371)   $(2,036) $(1,156)
                                                  =======    =======  ======= 


  The assumptions used in determining the funded status of the Company's defined
benefit  pension plans for the years ended December 31, 1996, 1997 and 1998 were
discount  rates of 8.0%,  7.5% and 7.0%  respectively,  and an  average  rate of
increase in  compensation  levels ranging from 3.25% to 13.25%  depending on the
participant's  age at the valuation  date. In addition,  the expected  long-term
rate of return on plan assets was 9.5% for all periods.

  During 1990, in connection  with the  acquisition of certain  businesses,  the
Company adjusted the actuarial  valuation of certain estimated pension assets to
reflect  their  net  realizable  value  based  upon a planned  reversion  to the
Company.  In August  1991,  the Company  decided not to revert the assets.  As a
result of this change,  the excess pension assets are being  recognized over the
Average  Future  Working  Lifetime of the plan  participants,  estimated to be a
period of 14 years. Amortization of this amount was $1,230,000 in 1996, 1997 and
1998, and is included in pension benefit for each  respective  year. The Company
periodically performs an actuarial valuation of these pension assets and adjusts
the  amount of the  pension  assets  and the  annual  amortization  based on the
results of the valuation.

  As of January 1, 1997, the Company's  defined benefit pension plan was amended
into a cash  balance  pension  plan.  Provisions  of the plan in effect prior to
January 1, 1997 continue to apply to participants  who terminated,  retired,  or
became  disabled prior to January 1, 1997 and not reemployed  after December 31,
1996. As of January 1, 1997, active  participants'  account balances were valued
equal to the present value of the lump sum accrued benefit payable as of January
1, 1997 under the plan provisions in effect prior to January 1, 1997. Also as of
January 1, 1997, certain union employees formerly covered under a multi-employer
plan began accruing benefits through the Cluett Retirement Plan.



                                 F-20


<PAGE>
                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. Employee Benefit Plans (Continued)

  The Company  also has defined  contribution  pension  plans  covering  certain
employees.  Contributions  and  costs  are  either  a  percent  of each  covered
employee's  salary or basic  contribution.  The Company funds  contributions  to
these  plans as they come due.  Payments  charged to  expenses  for these  plans
amounted  to  approximately  $655,000,  $0  and  $0  in  1996,  1997,  and  1998
respectively.

  In addition,  the Company  participated  in  multiemployer  pension plans that
provided  defined  benefits  to  employees  covered  by  collective   bargaining
agreements.  Payments charged to expense for the multiemployer plans amounted to
approximately $435,000 in 1996. Participation in the multiemployer pension plans
terminated January 1, 1997.

11. Commitments and Contingencies

     The Company  and certain of its  subsidiaries  are party to  litigation  in
connection  with the normal conduct of their  businesses.  In March 1999, a jury
rendered a verdict against the Company in a lawsuit brought by a former employee
for disability  discrimination arising out of the termination of her employment.
The Company has,  based on this  adverse  verdict,  established  a reserve as of
December  31,  1998 for  $1,600,000  for the  award  of  damages,  interest  and
attorneys' fees. The Company intends to appeal the judgment which would stay the
payment of the judgment until the appeal is decided.  Management believes, based
in part on the opinion of counsel,  that its potential liability with respect to
other  proceedings  currently  pending is not  material in the  aggregate to the
Company's consolidated financial position or results of operations.

  The Company  leases certain land,  buildings and equipment  under both capital
and  noncancelable  operating  leases that expire in various years through 2013.
Certain of the operating leases contain rent escalation  clauses and require the
Company to pay maintenance  costs,  property taxes and insurance  obligations on
the leased property. Future minimum lease payments under noncancelable operating
leases and capital  leases,  together  with the present value of the net minimum
lease payments as of December 31, 1998 are as follows:


                                             CAPITAL    OPERATING
                                             LEASES      LEASES
                                             ------      ------
                                           (DOLLARS IN THOUSANDS)
Year payable:
  1999                                       $  35     $  3,555
  2000                                          35        2,693
  2001                                          35        1,422
  2002                                          35        1,168
  2003                                          30          798
  Later                                        258        1,146
                                               ---        -----
Total minimum lease payments                   428    $  10,782
                                                      =========
Amount representing interest                  (185)
                                              ---- 
Present value of net minimum lease payments    243
Current portion                                 12
                                                --
Long-term portion                            $ 231
                                             =====


                                 F-21



<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. Commitments and Contingencies (Continued)

  Rent expense amounted to  approximately  $5.2 million in 1996, $3.9 million in
1997 and $4.3 million in 1998.  The Company has  approximately  $14.3 million of
open  letters of credit  outstanding  at December  31, 1998 for the  purchase of
finished goods inventory from foreign vendors.  In addition,  approximately $2.6
million of stand-by letters of credit were also outstanding.

12. Subsidiary Operations

   In 1996, the Company began the process of  liquidating  its investment in its
Mexican and Guatemalan  subsidiaries.  Accordingly,  a translation adjustment of
approximately  $3.1  million  previously  recorded as a component  of equity was
expensed and is included in other expense, net.

  During 1996,  Canadian  management  assessed the  Company's  operations in the
Canadian  retail stores and concluded that the Company should close these stores
other than retaining three of the Company's Canadian outlet stores to dispose of
certain discounted inventory items. The resulting charge of $2.6 million in 1996
for closure  costs has been  included in the  financial  statements  in facility
closing and reengineering  costs and included charges to write down fixed assets
($0.9 million) and inventory ($0.5 million) to net realizable  value and accrual
of  salaries,  severance  and other  operating  costs to close the stores  ($1.2
million).

     On June 17, 1997,  the Company  entered an agreement  with an individual to
sell 100% of the stock of the Guatemalan  subsidiary for $100,000.  On September
30,  1997,  the  Company  entered  an  agreement  with  an  individual  to  sell
substantially  all of  the  assets  of  the  Company's  Mexican  subsidiary  for
approximately  $1.4  million.  Substantially  all of the  proceeds  were used to
reduce  intercompany   obligations  of  the  Mexican  subsidiary.   The  Company
recognized  a net gain of $348,000  on the sale of its  Mexican  and  Guatemalan
subsidiaries.

13. Licensing Agreements

     Certain of the Company's  subsidiaries have licensing agreements which give
them the  exclusive  rights to use certain  trademarks,  logos and related trade
names in connection  with the  manufacture and sale of certain men's and women's
apparel in specified  territories.  License fees are based on percentages of net
sales,  as defined,  for the various  products sold, but not less than specified
minimum amounts. The licensing agreements have various renewal dates. Certain of
the license agreements  contain automatic  renewals and are  noncancelable.  The
renewal terms range to five years and expire in various years through 2003.

  Future minimum license fees payable in the five years succeeding  December 31,
1998 are as follows (in thousands):

     Year payable:
     1999                        $   1,090
     2000                              566
     2001                              695
     2002                              955
     2003                              763
     Thereafter                         --

                                 F-22
<PAGE>
                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. Related Party Transactions

   The Company had an 8.74%  outstanding  loan  receivable  from an officer (and
principal indirect  stockholder) for approximately $4.5 million. The accumulated
accrued interest on the loan was approximately $1.4 million at December 31, 1996
and1997.  In July of 1993,  the  officer  filed for  personal  protection  under
Chapter  11  bankruptcy   regulations.   The  Company  recorded  a  reserve  for
approximately  $5.8 million against the unpaid  interest and principal  balances
outstanding  at December 31, 1994.  As part of the Plan,  principal  and accrued
interest related to this note was forgiven on May 18, 1998.

  Subsequent to the  emergence  from  bankruptcy,  Holdings  allocated  interest
expense  of $24.3  million  related to  post-petition  interest  on  prepetition
obligations to the Company. This amount is included in bankruptcy reorganization
costs.

  Pursuant to a  management  advisory  agreement  (the  "Management  Agreement")
entered  into in  connection  with the  reorganization  of the  Company in 1998,
Vestar receives an annual  advisory fee equal to $500,000  (prorated to $250,000
for  1998)  in  consideration  for  certain  advisory  and  consulting  services
(excluding  investment banking or other financial advisory services and full- or
part-time  employment by Holdings or any of its  subsidiaries of any employee or
partner  of Vestar  and its  affiliates,  in each case for which  Vestar and its
affiliates shall be entitled to receive additional  compensation).  Holdings has
agreed to reimburse  Vestar for expenses  incurred in  connection  with,  and to
indemnify  Vestar and its  affiliates  for any  liabilities  arising from,  such
advisory and  consulting  services.  In  connection  with the  Offering,  Vestar
received  a  one-time  transaction  fee of  $3.25  million.  For the  year-ended
December 31, 1998, the Company paid Vestar approximately  $250,000 in management
fees.


15. Risks, Uncertainties and Significant Concentrations

   The  Company  manufactures  and  sources a portion  of its  products  and raw
materials from foreign  subsidiaries or vendors.  The Company  attempts to limit
the concentration  with any one manufacturer or vendor.  The Company believes it
has alternative  manufacturing  and raw material  sources  available to meet its
current and future production  requirements in the event the Company is required
to change  current  manufacturers  or vendors  are  unavailable  to fulfill  the
Company's needs.

The Company's  principal  customer base, the retail  industry,  has  experienced
significant  changes and  difficulties  over the past several  years,  including
consolidation  of ownership,  increased  centralization  of buying decisions and
restructurings.  The Company  cannot  predict  what  effect,  if any,  continued
changes within this industry will have on the Company's operations.


16. Fair Value of Financial Instruments

   The  carrying  amount  of cash and  cash  equivalents,  accounts  receivable,
short-term borrowings, accounts payable and accrued liabilities approximate fair
value  due to the  short  maturities  of these  instruments.  The fair  value of
long-term debt was  approximately  $222.5 million (book value of $235.5 million)
at December 31, 1998. The fair value of the senior exchangeable  Preferred Stock
was approximately $45.7 million (book value of $51.3 million).






                                 F-23


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. Segment Data

     The  Company is  organized  by  product  line in three  business  segments.
Foreign sales,  primarily  Canadian,  were approximately 9.9% 9.4% and 9.1% , in
1996,  1997 and 1998,  respectively.  There were no  customers  for which  sales
exceeded 10% during the three-year period presented.

  In 1996,  the Company  made a strategic  decision  to halt its  production  of
shirts in  Guatemala  and Mexico,  to exit its retail  business in Canada and to
close all but three of its Canadian retail outlet stores. In 1996, the Company's
Latin  American  operations  represented  $2.9  million  in net sales and had an
operating loss (before  facility closing costs) of $0.4 million and the Canadian
retail stores  represented  $4.3 million in net sales and had an operating  loss
(before  facility closing costs) of $1.3 million.  In addition,  the Company has
incurred a number of one-time costs  associated  with the  restructuring  of its
operations  and  has  incurred  a  number  of  bankruptcy  reorganization  costs
associated  with operating  under Chapter 11. The financial  results  associated
with  the  Ralph  Lauren,   Latin  American,   Canadian  retail  operations  and
unallocated corporate overhead charges, are referred to collectively as the "All
other".

                                   1996         1997          1998
                                   ----         ----          ----
                                       (Dollars in Thousands)
Net Sales
   Sock                        $ 141,113     $151,788      $164,760
   Shirt                         194,705      176,753       183,169
   Designer                       32,327       39,839        29,129
   All other                       7,221        3,749         3,909
   Intercompany                   (6,326)      (8,602)       (7,844)
                                  ------       ------        ------ 
                                $369,040     $363,528      $373,123
Gross Profit
   Sock                           41,308       49,143        52,497
   Shirt                          46,364       49,193        51,649
   Designer                        5,344       10,103         2,791
   All other                       2,224        1,412         1,861
                                   -----        -----         -----
                                 $95,240     $109,851      $108,798
Selling, General and Administrative
   Sock                           22,232       25,874        26,454
   Shirt                          45,932       38,319        40,650
   Designer                        8,678       10,781        10,415
   All other                       9,467        1,367         4,923
                                   -----        -----         -----
                                 $86,309      $76,341       $82,442
Operating Income excluding facility closing and reengineering
   Sock                           19,076       23,269        26,043
   Shirt                             432       10,874        10,998
   Designer                       (3,334)        (678)       (7,624)
   All other                      (7,243)          44        (3,062)
                                  ------           --        ------ 
                                  $8,931      $33,510       $26,355
Identifiable Assets
   Sock                           69,279       77,841        80,766
   Shirt                          97,293       92,412        89,040
   Designer                       15,349       16,232         7,947
   All other                       3,331        1,110           309
                                   -----        -----           ---
                                $185,252     $187,595      $178,062
                                 
                                      F-24

<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. Segment Data (Continued)
                                     1996        1997         1998
                                     ----        ----         ----
                                        (Dollars in Thousands)
Depreciation and Amortization
   Sock                             5,014        4,640        5,403
   Shirt                            5,197        3,424        3,231
   Designer                             -           11           26
   All other                          435            -            -
                                      ---          ---          ---    
                                  $10,646       $8,075       $8,660
Capital expenditure
   Sock                             3,887        7,475        7,987
   Shirt                            5,904        3,075        3,769
   Designer                            28          129           67
   All other                           12            -           18
                                       --          ---           --
                                   $9,831      $10,679      $11,841

Reconciliation  of  Reportable  Segments Net Sales,  Operating  income
and Identifiable assets

                                     1996        1997         1998
                                     ----        ----         ----
Net Sales
Total net sales for reportable 
 segments                         368,145      368,381      377,058
Other net sales                     7,221        3,749        3,909
Eliminations of intersegment 
 net sales                         (6,326)      (8,602)      (7,844)
                                   ------       ------       ------ 
Total consolidated net sales      369,040      363,528      373,123

Operating Profit (Loss)
Total operating profit or loss 
 for reportable segments           16,174       34,281       29,417
Other operating profit or loss     (1,661)        (558)        (628)
Eliminations of intersegement 
 operating profit (loss)             (139)           -            -
Unallocated amounts:
 Other corporate income (expense)  (5,443)         603       (2,433)
 Facility closing and 
  reengineering costs             (11,603)      (2,469)      (2,366)
                                  -------       ------       ------ 
Total operating profit (loss)      (2,672)      31,041       23,990

Assets
Total assets for reportable 
 segments                         181,921      186,485      177,753
Other assets                        3,331        1,110          309
Unallocated amounts:
 Deferred finance costs                 -            -       11,198     
 Pension assets                    28,191       30,227       31,383
 Other unallocated amounts         (2,349)       2,195          132
                                   ------        -----          ---
Consolidated total                211,094      220,017      220,775

Capital Expenditures
Total capital expenditure for 
 reportable segments                9,819       10,677       11,823
Adjustments                            16          101           18
                                       --          ---           --
Consolidated total                  9,835       10,778       11,841

                                 F-25

<PAGE>



                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. Segment Data (Continued)

                                    1996        1997         1998
                                    ----        ----         ----
                                        (Dollars in Thousands)
Depreciation & Amortization
Total D&A for reportable segments  10,210      8,075        8,660
Adjustments                           725         30          992
                                      ---         --          ---
Consolidated total                 10,935      8,105        9,652

Geographic Information
Net Sales
United States                     332,335    329,358      339,276
Foreign                            36,705     34,170       33,847
                                   ------     ------       ------
Total                             369,040    363,528      373,123

Operating Income (Loss)
United States                         230     29,327       25,205
Foreign                            (2,902)     1,714       (1,215)
                                   ------      -----       ------ 
Total                              (2,672)    31,041       23,990

Identifiable Assets
United States                     189,364    197,621      201,026
Foreign                            21,730     22,396       19,749
                                   ------     ------       ------
 Total                            211,094    220,017      220,775

18. Guarantor Subsidiaries

   The Company's  payment  obligations  under the Senior Credit Facility and the
Senior Subordinated Notes (the "Notes") are fully and unconditionally guaranteed
on a joint and several basis by its current domestic subsidiaries,  principally:
Cluett Peabody & Co., Inc., Great American Knitting Mills, Inc., Cluett Designer
Group  Inc.,   Consumer  Direct   Corporation  and  Arrow  Factory  Stores  Inc.
(collectively the "Guarantor Subsidiaries").  Each of the Guarantor Subsidiaries
is a direct or indirect  wholly-owned  subsidiary of the Company.  The Company's
payment  obligations  under  the  Notes  are  not  guaranteed  by the  remaining
subsidiaries:  Bidermann  Womenswear  Corp.  (formerly  Ralph Lauren  Womenswear
Inc.),  Cluett,  Peabody  Canada Inc.,  Arrow de Mexico S.A. de C.V.,  and Arrow
Inter-America & Co., Ltd. (collectively the "Non-Guarantor  Subsidiaries").  The
obligations of each Guarantor Subsidiary under its Guarantee are subordinated to
such  subsidiary's  obligations  under its  guarantee  of the new Senior  Credit
Facility.

   Presented  below is condensed  consolidating  financial  information  for CAC
("Parent   Company"),   the  Guarantor   Subsidiaries   and  the   Non-Guarantor
Subsidiaries.  In the Company's opinion, separate financial statements and other
disclosures  concerning  each of the  Guarantor  Subsidiaries  would not provide
additional information that is material to investors.  Therefore,  the Guarantor
Subsidiaries  are  consolidated  in  the  presentation  below.   Investments  in
subsidiaries  are  accounted  for by CAC on the  equity  method  of  accounting.
Earnings of  subsidiaries  are,  therefore,  reflected  in the Parent  Company's
investments in and advances to/from  subsidiaries account and earnings (losses).
The  elimination  entries  eliminate  investments in  subsidiaries,  the related
stockholder's deficit and other intercompany balances and transactions.

   In 1997 and 1998,  the Company  allocated  external  interest  expense to its
subsidiaries, based on a percentage of net sales.
                                   F-26


<PAGE>



                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. Guarantor Subsidiaries (Continued)
<TABLE>
<CAPTION>
                                SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
                                            DECEMBER 31,1997

                                             (DOLLARS IN THOUSANDS)

                                                          PARENT        GUARANTOR      NON-GUARANTOR
                                                          COMPANY      SUBSIDIARIES     SUBSIDARIES    ELIMINATIONS     CONSOLIDATED
                                                          -------      ------------     -----------    ------------     ------------
<S>                                                     <C>              <C>              <C>             <C>             <C>
ASSETS
Current assets:
Cash and cash equivalents                               $      --        $   9,551        $     468       $      --       $  10,019
Accounts receivable, net                                       --           45,494            2,948              --          48,442
Inventories                                                    --           63,806           14,430              --          78,236
Prepaid expenses and other current assets                      --            3,359              875              --           4,234
                                                        ---------        ---------        ---------       ---------       ---------

Total current assets                                           --          122,210           18,721              --         140,931
Investment in subsidiaries                                (49,496)              --               --          49,496              --
Intercompany receivable (payable)                          15,000          (15,000)              --              --              --
Property, plant and equipment, net                             --           44,035            3,663              --          47,698
Pension assets                                                 --           30,227               --              --          30,227
Other noncurrent assets                                        --            1,149               12              --           1,161
                                                        ---------        ---------        ---------       ---------       ---------
Total assets                                            $ (34,496)       $ 182,621        $  22,396       $  49,496       $ 220,017
                                                        =========        =========        =========       =========       =========


LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses                   $      --        $  41,930        $   4,556       $      --       $  46,486
Short-term debt and current portion of
    long-term debt                                             --            6,980            2,192              --           9,172
Income taxes payable                                           --            1,799              354              --           2,153
                                                        ---------        ---------        ---------       ---------       ---------
Total current liabilities                                      --           50,709            7,102              --          57,811
Due to Parent                                                  --           27,613               --              --          27,613
Long-term debt and capital lease obligations                   --            1,619              341              --           1,960
Other noncurrent liabilities                                   --              100              400              --             500
Liabilities subject to compromise                              --          168,932               --              --         168,932
Preferred stock, $1 par value:
 authorized 50,000 shares, issued
 and outstanding 15,000 shares                             20,009               --               --              --          20,009

Stockholder's deficit                                     (54,505)         (66,352)          14,553          49,496         (56,808)
                                                        ---------        ---------        ---------       ---------       ---------
Total liabilities and
  stockholder's deficit                                 $ (34,496)       $ 182,621        $  22,396       $  49,496       $ 220,017
                                                        =========        =========        =========       =========       =========
</TABLE>






                                 F-27



<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. Guarantor Subsidiaries (Continued)
<TABLE>
<CAPTION>
                                                    SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
                                                                     DECEMBER 31,1998

                                                                  (DOLLARS IN THOUSANDS)

                                                              PARENT       GUARANTOR      NON-GUARANTOR
                                                              COMPANY     SUBSIDIARIES     SUBSIDARIES   ELIMINATIONS   CONSOLIDATED
                                                              -------     ------------     -----------   ------------   ------------
<S>                                                         <C>             <C>             <C>            <C>            <C>
ASSETS
Current assets:
Cash and cash equivalents                                   $      --       $   2,396       $     472      $      --      $   2,868
Accounts receivable, net                                           --          42,599           4,187             --         46,786
Inventories                                                        --          63,158          11,441             --         74,599
Prepaid expenses and other current assets                          --           3,168             804             --          3,972
                                                            ---------       ---------       ---------      ---------      ---------
Total current assets                                               --         111,321          16,904             --        128,225

Investment in subsidiaries                                    (86,330)             --              --         86,330             --
Intercompany receivable (payable)                              15,000         (15,000)             --             --             --

Property, plant and equipment, net                                 --          46,112           2,012             --         48,124

Deferred finance costs                                         11,198              --              --         11,198
Pension assets                                                      --          31,383              --             --         31,383
Other noncurrent assets                                            --           1,012             833             --          1,845
                                                            ---------       ---------       ---------      ---------      ---------
Total assets $                                                (71,330)      $ 186,026          19,749      $  86,330      $ 220,775
                                                            =========       =========       =========      =========      =========


LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses                       $      --       $  37,781       $   4,658      $      --      $  42,439
Short-term debt and current portion of
  long-term debt                                                   --           6,600           3,648             --         10,248
Income taxes payable                                               --           1,268             207             --          1,475
                                                            ---------       ---------       ---------      ---------      ---------
Total current liabilities                                          --          45,649           8,513             --         54,162
Due to Parent                                                      --          27,974              --             --         27,974
Long-term debt and capital lease obligations                       --         235,450             231             --        235,681
Other noncurrent liabilities                                       --             111              --             --            111
Dividends payable                                                 605              --              --             --            605
Senior exchangeable preferred stock,
 cumulative, $.01 par value: authorized
 4,950,000, issued and outstanding 530,730
 shares (liquidation preference)                               51,288              --              --             --         51,288

Stockholder's deficit                                        (123,223)       (123,158)         11,005         86,330       (149,046)
                                                            ---------       ---------       ---------      ---------      ---------
Total liabilities and stockholder's deficit                 $ (71,330)      $ 186,026       $  19,749      $  86,330      $ 220,775
                                                            =========       =========       =========      =========      =========

</TABLE>


                                   F-28


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. Guarantor Subsidiaries (Continued)

       SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                     YEAR ENDED DECEMBER 31, 1996

                        (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                 PARENT       GUARANTOR    NON-GUARANTOR
                                                                 COMPANY    SUBSIDIARIES    SUBSIDARIES  ELIMINATIONS   CONSOLIDATED
<S>                                                           <C>             <C>             <C>            <C>          <C>
Net sales                                                     $      --       $ 332,335       $ 36,705       $    --      $ 369,040
Cost of goods sold                                                   --         246,696         27,104            --        273,800 
                                                                    ---         -------         ------           ---        ------- 
Gross profit                                                         --          85,639          9,601            --         95,240 

Selling, general and administrative                                  --          76,892          9,417            --         86,309 
Facility closing and reengineering costs                             --           8,517          3,086            --         11,603 
                                                                    ---           -----          -----           ---         ------ 
Operating income (loss)                                              --             230         (2,902)           --         (2,672)

Loss on investments in subsidiaries                             (30,200)             --             --        30,200             -- 
Interest expense, net                                                --          13,686          3,242            --         16,928 
Other (income) expense, net                                          --            (835)         4,061            --          3,226 
                                                                    ---            ----          -----           ---          ----- 
Income (loss) before reorganization costs
 and income taxes                                               (30,200)        (12,621)       (10,205)       30,200        (22,826)
                                                                                                              
Bankruptcy reorganization costs                                      --           6,128             --            --          6,128
                                                                                                                         
Income (loss) before provision for                              (30,200)        (18,749)       (10,205)       30,200        (28,954)
 income taxes

Provision for income taxes                                           --           1,042            204            --          1,246
                                                                    ---           -----            ---           ---          ----- 
Net income (loss)                                             $ (30,200)      $ (19,791)      $(10,409)      $30,200     $ (30,200)
                                                               =========       =========       ========       =======     ========= 
                                                                                                                      
                                                                                                                          



</TABLE>












                                   F-29



<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. Guarantor Subsidiaries (Continued)

       SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                     YEAR ENDED DECEMBER 31, 1997

                          (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                 PARENT      GUARANTOR     NON-GUARANTOR
                                                                 COMPANY    SUBSIDIARIES    SUBSIDARIES  ELIMINATIONS   CONSOLIDATED
                                                                 -------    ------------    -----------  ------------   ------------
<S>                                                         <C>             <C>             <C>            <C>            <C>
Net sales                                                   $      --       $ 329,358       $ 34,170       $     --       $ 363,528
Cost of goods sold                                                 --         229,303         24,374             --         253,677 
                                                                  ---         -------         ------            ---         -------
Gross profit                                                       --         100,055          9,796             --         109,851

Selling, general and administrative expenses                       --          66,817          9,524             --          76,341
Facility closing and reengineering costs                           --           3,911         (1,442)            --           2,469
                                                                  ---           -----         ------            ---           -----
Operating income                                                   --          29,327          1,714             --          31,041

Income on investments in subsidiaries                          17,196              --             --        (17,196)             --
Interest expense, net                                              --          12,275          2,958             --          15,233
Other expense, net                                                 --             853            316             --           1,169
                                                                  ---             ---            ---            ---           -----
Income (loss) before reorganization costs
  (credits) and income taxes                                   17,196          16,199         (1,560)       (17,196)         14,639

Bankruptcy reorganization credits                                  --          (3,883)            --             --          (3,883)
                                                                  ---          ------            ---            ---          ------ 
Income (loss) before provision for income
  taxes                                                        17,196          20,082         (1,560)       (17,196)         18,522 

Provision for income taxes                                         --           1,326             --             --           1,326 
                                                                  ---           -----            ---            ---           ----- 
Net income (loss)$                                          $   17,196      $  18,756       $ (1,560)      $(17,196)      $  17,196
                                                            ==========      =========       ========       ========       =========
                                                                                                                          
                                                                                                                         


  


</TABLE>



                                 F-30


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. Guarantor Subsidiaries (Continued)

       SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                       YEAR ENDED DECEMBER 31, 1998

                          (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                             PARENT       GUARANTOR      NON-GUARANTOR
                                                            COMPANY      SUBSIDIARIES     SUBSIDARIES   ELIMINATIONS    CONSOLIDATED
                                                            -------      ------------     -----------   ------------    ------------
<S>                                                        <C>             <C>             <C>             <C>            <C>
Net sales                                                  $      --       $ 339,276       $  33,847       $      --      $ 373,123
Cost of goods sold                                                --         239,479          24,846              --        264,325
                                                           ---------       ---------       ---------       ---------      ---------
Gross profit                                                      --          99,797           9,001              --        108,798

Selling, general and administrative                               --          72,866           9,576              --         82,442
Facility closing and reengineering costs                          --           1,726             640              --          2,366
                                                           ---------       ---------       ---------       ---------      ---------
Operating income (loss)                                           --          25,205          (1,215)             --         23,990

Loss on investments in subsidiaries                          (36,834)             --              --          36,834             --
Interest expense, net                                             --          16,907           3,448              --         20,355
Other expense, net                                                --           2,131              --              --          2,131
                                                           ---------       ---------       ---------       ---------      ---------
Income (loss) before reorganization
 costs and income taxes                                      (36,834)          6,167          (4,663)         36,834          1,504

Bankruptcy reorganization costs                                   --          37,528              --              --         37,528
                                                           ---------       ---------       ---------       ---------      ---------
Loss before provision for income taxes                       (36,834)        (31,361)         (4,663)         36,834        (36,024)

Provision for income taxes                                        --             851             (41)             --            810
                                                           ---------       ---------       ---------       ---------      ---------
Net loss                                                   $ (36,834)      $ (32,212)      $  (4,622)      $  36,834      $ (36,834)
                                                           =========       =========       =========       =========      =========



</TABLE>



                                   F-31


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. Guarantor Subsidiaries (Continued)

     SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                      YEAR-END DECEMBER 31, 1996

                          (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                PARENT       GUARANTOR    NON-GUARANTOR
                                                                COMPANY     SUBSIDIARIES   SUBSIDARIES   ELIMINATIONS   CONSOLIDATED
                                                                -------     ------------   -----------   ------------   ------------
<S>                                                            <C>            <C>            <C>            <C>            <C>
OPERATING ACTIVITIES
Net loss                                                       $(30,200)      $(19,791)      $(10,409)      $ 30,200       $(30,200)
Adjustment to reconcile net loss to net cash and cash equivalents
 provided by (used in) operating activities:
  Loss on investments in subsidiaries                            30,200             --             --        (30,200)            --
  Write-down of property, plant and equipment                        --            742             --             --            742
  Write-down foreign currency translation adjustment                 --             --          3,100             --          3,100 
  Depreciation and amortization                                      --         10,501            434             --         10,935
  Accrual of professional fees, potential
   claims and related litigation matters-reorganization              --          6,128             --             --          6,128
Changes in operating assets and liabilities                          --         18,858          7,131             --         25,989
                                                               --------       --------       --------       --------       --------
Net cash and cash equivalents provided by
 operating activities                                                --         16,438            256             --         16,694

INVESTING ACTIVITIES
Purchase of fixed assets                                             --         (9,167)          (668)            --         (9,835)
Proceeds on disposal of fixed assets                                 --            927            639             --          1,566
                                                               --------       --------       --------       --------       --------
Net cash and cash equivalents 
(used in) investing activities                                       --         (8,240)           (29)            --         (8,269)

FINANCING ACTIVITIES
Proceeds from DIP credit facility                                    --         53,300             --             --         53,300
Principal payments on DIP credit facility                            --        (55,300)            --             --        (55,300)
Proceeds from issuance of long term debt                             --          4,971             --          4,971
Principal payments on long term debt                                 --        (15,931)          (363)            --        (16,294)
                                                               --------       --------       --------       --------       --------
Net cash and cash equivalents (used in)
 provided by financing activities                                    --        (12,960)           371             --        (13,323)

Effect of foreign currency translation                               --             --             (2)            --             (2)
                                                               --------       --------       --------       --------       --------
Net change in cash and cash equivalents                              --         (4,762)          (138)            --         (4,900)
Cash and cash equivalents at beginning of year                       --         10,340            344             --         10,684
                                                               --------       --------       --------       --------       --------
Cash and cash equivalents at end of year                       $     --       $  5,578       $    206       $     --       $  5,784
                                                               ========       ========       ========       ========       ========


</TABLE>


                                   F-32


<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. Guarantor Subsidiaries (Continued)

     SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                      YEAR-END DECEMBER 31, 1997

                          (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                PARENT       GUARANTOR     NON-GUARANTOR
                                                                COMPANY     SUBSIDIARIES    SUBSIDARIES  ELIMINATIONS   CONSOLIDATED
                                                                -------     ------------    -----------  ------------   ------------
<S>                                                            <C>            <C>            <C>            <C>            <C>
OPERATING ACTIVITIES
Net income (loss)                                              $ 17,196       $ 18,756       $ (1,560)      $(17,196)      $ 17,196
Adjustment to reconcile net income (loss) to
net cash and cash equivalents provided by
(used in) operating activities:
(Income) on investments in subsidiaries                         (17,196)            --             --         17,196             --
  Depreciation and amortization                                      --          7,779            326             --          8,105
  Gain on sale of assets                                             --             --           (348)            --           (348)
  Accrual of professional fees, potential
   claims and related litigation matters-reorganization              --          6,117             --             --          6,117
  Adjustments of liabilities subject to compromise                   --        (10,000)            --             --        (10,000)
Changes in operating assets and liabilities                          --         (7,746)          (374)            --         (8,120)
                                                                    ---         ------           ----            ---         ------ 
Net cash and cash equivalents provided by (used
in) operating activities                                             --         14,906         (1,956)            --         12,950

INVESTING ACTIVITIES
Purchase of fixed assets                                             --        (10,554)          (224)            --        (10,778)
Proceeds on disposal of fixed assets                                 --          1,786          1,541             --          3,327
                                                                    ---          -----          -----            ---          -----
Net cash and cash equivalents provided by
(used in) investing activities                                       --         (8,768)         1,317             --         (7,451)

FINANCING ACTIVITIES
Proceeds from DIP credit facility                                    --         16,398             --             --         16,398
Principal payments on DIP credit facility                            --        (16,398)          (397)            --        (16,795)
Proceeds from issuance of long term debt                             --            456          1,790             --          2,246
Principal payments on long term debt                                 --         (2,621)          (492)            --         (3,113)
                                                                    ---         ------           ----            ---         ------ 
Net cash and cash equivalents provided by (used
 in) financing activities                                            --         (2,165)           901             --         (1,264)


Net change in cash and cash equivalents                              --          3,973            262             --          4,235
Cash and cash equivalents at beginning of year                       --          5,578            206             --          5,784
                                                                    ---          -----            ---            ---          -----
Cash and cash equivalents at end of year                       $     --       $  9,551       $    468       $     --       $ 10,019
                                                               ========       ========       ========       ========       ========


</TABLE>

                                 F-33



<PAGE>


                CLUETT AMERICAN CORP. AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. Guarantor Subsidiaries (Continued)

       SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                     YEAR ENDED DECEMBER 31, 1998

                          (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                PARENT       GUARANTOR    NON-GUARANTOR
                                                                COMPANY     SUBSIDIARIES   SUBSIDARIES   ELIMINATIONS   CONSOLIDATED
                                                                -------     ------------   -----------   ------------   ------------
<S>                                                           <C>            <C>            <C>            <C>            <C>
OPERATING ACTIVITIES
Net loss                                                      $ (86,330)     $ (32,212)     $  (4,622)     $  86,330      $ (36,834)
Adjustment  to  reconcile  net loss to net cash
 and  cash  equivalents  used in operating activities:
  Loss on investments in subsidiaries                            86,330             --             --        (86,330)            --
  Write-down of deferred acquisition activities                      --            489             --             --            489
  Write-down of property, plant and equipment                        --          1,094             --             --          1,094
  Depreciation                                                       --          9,340            312             --          9,652
Adjustments of liabilities subject to compromise                     --        (22,442)            --             --        (22,442)
Changes in operating assets and liabilities                          --         13,640          3,534             --         17,174
                                                                    ---         ------          -----            ---         ------
Net cash and cash equivalents used in
 operating activities                                                --        (30,091)          (776)            --        (30,867)

INVESTING ACTIVITIES
Purchase of fixed assets                                             --        (11,482)          (359)            --        (11,841)
Proceeds on disposal of fixed assets                                 --            152             --             --            152
                                                                    ---            ---            ---            ---            ---
Net cash and cash equivalents used in
investing activities                                                 --        (11,330)          (359)            --        (11,689)

FINANCING ACTIVITIES
Issuance of preferred stock                                          --         48,125             --             --         48,125
Distribution to parent                                               --        (87,522)            --             --        (87,522)
Net proceeds from DIP credit facility                                --          2,124          1,002             --          3,126
Net proceeds from issuance of long term debt                         --        222,000             --             --        222,000
Principal payments on long term debt                                 --         (1,300)            --             --         (1,300)
Principle payments on pre-petition                                   --       (146,490)            --             --       (146,490)
Principle payments on capital lease                                  --         (2,377)           (29)            --         (2,406)
                                                                    ---         ------            ---            ---         ------ 
Net cash and cash equivalents provided by
  financing activities                                               --         34,560            973             --         35,533

Effect of foreign currency translations                              --             --           (128)            --           (128)
                                                                    ---            ---           ----            ---           ---- 
Net change in cash and cash equivalents                              --         (6,861)          (290)            --         (7,151)
Cash and cash equivalents at beginning of year                       --          9,551            468             --         10,019
                                                                    ---          -----            ---            ---         ------
Cash and cash equivalents at end of year                      $      --      $   2,690      $     178      $      --      $   2,868
                                                              =========      =========      =========      =========      =========


</TABLE>


                                   F-34

<PAGE>


Item 9.  Changes in and  disagreements  with Accountants on Accounting
and Financial Disclosures

None.
                               PART III


Item 10.Directors and Executive Officers of the Registrant

  Set forth below are the names and  positions of the  directors  and  executive
officers of Holdings,  CAG and the Company. All directors hold office until the
next annual meeting of stockholders of Holdings,  CAG and the Company, and until
their  successors  are duly elected and  qualified.  All  officers  serve at the
pleasure of the Board of Directors.
<TABLE>
<CAPTION>

NAME
AGE                               POSITION(S)
------------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>      <C>
Bryan P. Marsal          48       Director and Chief Executive Officer of Holdings, CAG and the Company

James A. Williams        56       Director of Holdings, CAG and the Company; President and Chief Executive Officer of the Sock Group

Robert J. Riesbeck       35       Executive Vice President--Chief Operating and Financial Officer of  the Shirt Group

Kathy D. Wilson          39       Senior Vice President and Chief Financial Officer of the Sock Group

William S. Sheely        40       Executive Vice President--Operations of the Sock Group

W. Todd Walter           33       Vice President and Chief Financial Officer of Holdings, CAG and the Company

Steven J. Kaufman        52       Vice President and General Counsel of Holdings, CAG and the Company

Norman W. Alpert         40       Director of Holdings, CAG and the Company

Sander M. Levy           37       Director of Holdings, CAG and the Company

Daniel S. O'Connell      45       Director of Holdings, CAG and the Company

Steven M. Silver         30       Director of Holdings, CAG  and the Company

Neil P. DeFeo            52       Director of Holdings, CAG  and the Company

</TABLE>

     BRYAN P.  MARSAL is a founding  Managing  Director  of A&M, a firm that was
formed in 1983. Mr. Marsal has been Chief Executive Officer of the Company since
1995. Mr. Marsal is a director of Timex Corporation and Aearo  Corporation.  Mr.
Marsal received both a B.B.A. and an M.B.A. from the University of Michigan.

     JAMES A. WILLIAMS is President of the Sock Group.  Mr.  Williams joined the
Sock Group in July 1986 as Senior Vice  President--Sales  and  Marketing and was
promoted to his current  position as President in August 1991. Mr. Williams is a
director of Ithaca Industries,  Inc. and Esprit de Corp. and is the Chairman and
a director of Maidenform  Worldwide Inc. Prior to joining the Company, he worked
for 15 years for  Adams-Millis  Corporation,  where his last position was Senior
Vice  President--Sales  and Marketing.  Mr.  Williams earned a B.S. in chemistry
from the University of Southern Mississippi.

     ROBERT J. RIESBECK is the Executive Vice  President -- Chief  Operating and
Financial Officer of the Shirt Group. Mr. Riesbeck joined the Company in July of
1995 as Vice  President--Finance of the Shirt Group. He was named Executive Vice
President,  Chief Operating and Financial  Officer of the Shirt Group in January
1997.  He served as Chief  Financial  Officer of  Holdings,  CAG and the Company
until the  appointment  of Mr.  Walter in March of 1999.  Prior to  joining  the
Company,  Mr. Riesbeck worked for six years in various financial and operational
roles for Crystal Brands, an apparel manufacturer.  Mr. Riesbeck received a B.S.
in Business Administration-Accounting from the University of Akron and an M.B.A.
from the University of Connecticut and is also a C.P.A.

     KATHY D. WILSON is the Senior Vice President and Chief Financial Officer of
the Sock Group.  Ms.  Wilson  joined the Company in January 1994 and became Vice
President of Finance in April 1994.  During the three years prior to joining the
Company,  Ms.  Wilson  had a  consulting  practice  in  Singapore  for the hotel
industry.  She also worked five years with various  accounting firms. Ms. Wilson
earned a B.S. in Business  Administration  - Accounting  from the  University of
North Carolina and is also a C.P.A.

     WILLIAM S. SHEELY is the Executive Vice  President--Operations  of the Sock
Group. Mr. Sheely joined the Company as Vice President of Finance and Controller
of the Sock Group in February  1993 and was promoted to his current  position of
Executive Vice President -Operations in April 1994. Prior to his tenure with the
Company,  Mr. Sheely was controller at Kayser-Roth's  sock division where he was
employed for seven years, and with Springs  Industries for five years in various
financial  positions.  Mr.  Sheely  is a  graduate  of the  University  of South
Carolina where he received a B.S. in Business Administration - Accounting and is
also a C.P.A.
   W. TODD WALTER is a Director of A&M and became the Chief Financial Officer of
Holdings, CAG and the Company effective March 1999. Mr. Walter joined A&M in May
1996 and has served in  various  financial  and  operating  positions  at client
companies.  Between June 1992 and April 1996, Mr. Walter was a Vice President in
the Special Loan Group at Chemical  Bank in New York.  Mr.  Walter  earned a B.A
degree from  Middlebury  College and an M.B.A.  degree from the Darden  Graduate
School of Business Administration, University of Virginia.

     STEVEN J. KAUFMAN is Vice President and General Counsel of the Company. Mr.
Kaufman joined the Company in April 1990 as Vice President and General  Counsel.
Prior to joining the Company,  he was an Assistant  General Counsel of The Times
Mirror Company for 10 years and a corporate  associate for six years with Fried,
Frank, Harris, Shriver and Jacobson. Mr. Kaufman earned a J.D. from the Yale Law
School and a B.A. from Columbia College.

     NORMAN W.  ALPERT is a  Managing  Director  of  Vestar  and was a  founding
partner of Vestar at its inception in 1988.  Mr. Alpert is Chairman of the Board
of Directors of Advanced Organics,  Inc., International AirParts Corporation and
Aearo Corporation,  and a director of Russell-Stanley  Holdings,  Inc., Siegel &
Gale Holdings,  Inc. and Remington  Products Company,  L.L.C.,  all companies in
which Vestar or its affiliates have a significant  equity  interest.  Mr. Alpert
received an A.B. degree from Brown University.

     SANDER M. LEVY is a Managing  Director of Vestar and was a founding partner
of Vestar at its  inception in 1988.  Mr. Levy  received a B.S.  degree from The
Wharton  School of the  University  of  Pennsylvania  and an M.B.A.  degree from
Columbia University.

     DANIEL S. O'CONNELL is the Chief  Executive  Officer and founder of Vestar.
Mr.  O'Connell  is a director of Advanced  Organics,  Inc.,  Aearo  Corporation,
Siegel & Gale Holdings, Inc., Russell-Stanley Holdings, Inc., Remington Products
Company,  L.L.C. and is a member of the Advisory Board of Insight Communications
Company,  L.P.,  all  companies  in  which  Vestar  or  its  affiliates  have  a
significant  equity interest.  Mr. O'Connell  received an A.B. degree from Brown
University and an M.P.P.M. degree from Yale University School of Management.

     STEVEN M. SILVER is a Vice President of Vestar. Mr. Silver joined Vestar in
May of 1995.  Between  July 1990 and July  1993,  Mr.  Silver  was an analyst in
Wasserstein  Perella & Co.'s  mergers  and  acquisitions  groups in New York and
London.  Mr. Silver is a member of the Advisory Board of Insight  Communications
Company,  L.P. Mr.  Silver  holds a B.A.  degree from Yale College and an M.B.A.
degree from Harvard University.

     NEIL P.  DEFEO has  served as  President,  Chief  Executive  Officer  and a
Director of Remington Products Company,  L.L.C. since January 1997. Mr. DeFeo is
a director of Driscoll Strawberry Associates,  Inc. From 1993 to 1996, Mr. DeFeo
was Group Vice President,  U.S. Operations for The Clorox Company.  For 25 years
prior to 1993,  Mr.  DeFeo  worked  for  Procter & Gamble in  various  executive
positions,  including Vice President and Managing Director,  Worldwide Strategic
Planning,  Laundry  and  Cleaning  Products.  Mr.  DeFeo  holds a B.S.E.E.  from
Manhattan College.

Compliance with Section 16(a) of the Exchange Act

   Each of the then directors and executive officers of the Company was required
to file an Initial Statement of Beneficial  Ownership of Securities on Form 3 to
report his or her  beneficial  ownership of equity  securities of the Company by
October 26, 1998,  the effective  date of the Company's  registration  statement
under the  Securities  Exchange  Act of 1934,  as  amended,  relating to the New
Preferred  Stock.  Through an oversight such forms were not filed until early in
1999. None of such directors or officers  reported  beneficial  ownership of any
equity securities of the Company.

Item 11. Executive Compensation

  The following table sets forth the cash and noncash compensation earned by the
Chief  Executive  Officer and the four other most highly  compensated  executive
officers of Holdings, CAG and the Company.

<PAGE>
                      SUMMARY COMPENSATION TABLE
<TABLE>                         
<CAPTION>
                                                                      LONG-TERM
                                                                     COMPENSATION
                                                                        AWARDS
                                                                      ----------
                                           ANNUAL COMPENSATION        SECURITIES      ALL
                                        ---------------------------   UNDERLYING     OTHER
                                        YEAR    SALARY($)  BONUS($)   OPTIONS (#) COMPENSATION
                                        ----    ---------  --------   ----------- ------------
<S>                                     <C>     <C>        <C>              <C>   <C>
Bryan P. Marsal(1) .................    1998    700,000          0          0          0
  Chief Executive Officer of .......    1997    700,000          0          0          0
  Holdings and the Company .........    1996    700,000          0          0          0

James A. Williams ..................    1998    412,000    400,000          0          0
  President of the Sock Group ......    1997    400,000    410,000          0          0
                                        1996    400,000          0          0          0

Philip L. Molinari .................    1998    330,000    150,000          0     52,000(2)
  President of the Shirt Group .....    1997    320,000          0          0          0
                                        1996    400,000          0          0          0

Robert J. Riesbeck .................    1998    235,000    124,000          0          0
  Executive Vice President and Chief    1997    181,000          0          0          0
  Operating and Financial Officer ..    1996    146,000     25,000          0          0
  of the Shirt Group

William S. Sheely ..................    1998    162,000    156,000          0          0
  Executive Vice President .........    1997    156,000    150,000          0          0
  --Operations of the Sock Group ...    1996    150,000          0          0          0

</TABLE>

     (1)  Compensation  paid to A&M. A&M also received,  for services other than
those of Mr. Marsal,  compensation of $815,000,  $738,000, and $257,000 for each
of 1996, 1997, and 1998, respectively.

     (2)  Accrued  vacation  pay  and  deferred  compensation  paid  at  time of
termination of employment.


Employment and Severance Agreements

     Mr.  Williams  entered  into an  employment  agreement  with the Sock Group
effective  as of March 7, 1997,  pursuant  to which he serves as  President  and
Chief Executive  Officer of the Sock Group. Such employment  agreement  provides
for Mr.  Williams to receive an annual base salary of $400,000.  Mr. Williams is
also  entitled to annual  incentive  bonuses  under the Sock  Group's  executive
management  incentive  plan,  with  no  guaranteed  minimum  bonus  amount.  The
employment  agreement  continues until  terminated (a) by the Sock Group with or
without cause or (b) by Mr.  Williams with cause or upon 90 days notice.  In the
event that Mr.  Williams'  employment  is  terminated  without cause by the Sock
Group or with cause by Mr. Williams,  Mr. Williams will be entitled to severance
pay in an amount equal to two times the sum of $400,000 plus his average  annual
bonus calculated from prior years, up to a maximum severance of $1,200,000.

     Each of Mr.  Sheely,  Ms.  Wilson,  Mr.  Riesbeck and Mr.  Kaufman (each an
"Employee") have entered into severance agreements. Each Employee is entitled to
severance  pay equal to his or her current  base salary for a period of one year
(excluding bonus  compensation) upon the occurrence of the termination of his or
her employment  without cause.  These severance payments cease upon the Employee
becoming   a   full-time   employee   or   full-time    consultant    (including
self-employment) of another entity. Each of the severance  agreements  described
in this paragraph  terminates one year from the date of the  consummation of the
Plan.

     Mr.  Molinari's  employment with the Company  terminated as of December 31,
1998. Mr. Molinari will receive severance  payments equal to his base salary for
a period of up to one year. In addition,  the Company  exercised its call rights
and purchased the shares of Holdings  Common Stock owned by Mr.  Molinari at the
initial purchase price paid by Mr. Molinari in May 1998.

Bonus Plans

     Executive officers along with certain other employees (the  "Participants")
of each  of the  Shirt  Group  and  the  Sock  Group  participate  in  incentive
compensation  plans pursuant to which the  Participants  are eligible to receive
bonus  compensation  based upon annual minimum  EBITDA (as defined)  targets and
upon the weighing of certain other  performance  criteria by Bryan P. Marsal and
the Compensation Committee of the Board of Directors.  Yearly bonus awards under
the incentive plans are limited to 100% of the respective  Participant's  annual
salary.
<PAGE>
Management Equity Participation

     In  connection  with  the  Recapitalization,  Holdings  (i)  permitted  the
Management  Investors  to  subscribe  in the  aggregate  for up to  5.1%  of the
outstanding  Holdings  Common Stock (the  "Purchased  Stock") and (ii) adopted a
stock option plan (the "Option Plan")  providing for options to purchase  shares
of Holdings Common Stock  ("Options") to be granted to the Management  Investors
at the  consummation of the  Recapitalization  and to certain other employees of
Holdings  and its  subsidiaries  from time to time  thereafter,  in each case in
order to provide additional  compensation and financial incentives to Management
Investors and such other employees. The Option Plan may be amended, suspended or
terminated by the Holdings' Board of Directors at any time.

     Purchased Stock. On May 18, 1998 (the "the Recapitalization closing date"),
the  Management  Investors  became  holders of an  aggregate  of $1.8 million of
Purchased Stock,  representing 5.1% of the outstanding  Holdings Common Stock on
the  Recapitalization  closing date.  All Purchased  Stock is subject to certain
forfeiture  provisions  referred to in the paragraph  entitled  "Puts and Calls"
below.

     Stock Options.  On the  Recapitalization  closing date,  Holdings agreed to
grant  nonqualified  Options to purchase 5% of Holdings Common Stock (on a fully
diluted  basis).  Such  Options  will (i) vest and become  exercisable  in equal
installments in each of the five years following the grant date, (ii) expire ten
years from the grant date,  or earlier in certain  instances of  termination  of
employment and upon certain change of control events, and (iii) have an exercise
price  equal  to  $98.01  (the  per  share  price  at  which  Vestar,  A&M,  the
Co-Investors  and the Management  Investors  acquired  shares of Holdings Common
Stock   in  the   Recapitalization).   From   time   to   time   following   the
Recapitalization,  the  Board  of  Directors  of  Holdings,  or  a  compensation
committee  thereof,  may grant these or additional Options under the Option Plan
to various employees of Holdings,  the Company and their  subsidiaries on terms,
including vesting schedule,  term and exercise price, determined by the Board of
Directors or such committee in accordance with the Option Plan.

     Puts  And  Calls.  Purchased  Stock,  Options  and  Holdings  Common  Stock
purchased  upon the  exercise of Options will be subject to certain put and call
provisions  relating to the death,  disability,  retirement  and  termination of
employment of the holder.  Put and call prices will vary depending on the number
of years since grant or purchase, the reason the put or call became exercisable,
and the fair market value and initial  purchase  price of Holdings  Common Stock
subject to the put or call. Under certain  circumstances,  Holdings is permitted
(i) to defer  exercise of the put or call to the extent  prohibited by financing
agreements or other  instruments,  and (ii) to pay the purchase  price under the
put or call in prime-rate junior  subordinated  notes with maturities up to five
years.

Compensation of Directors

     Directors  of the  Company  who are  neither  employees  of the Company nor
affiliated with Vestar receive annual  compensation of $20,000 payable quarterly
for services in such capacity.  Other directors do not receive any  compensation
for services in such capacity.

Compensation Committee Interlocks and Insider Participation

     Directors Alpert and Levy, each of whom is affiliated with Vestar,  are the
members of the Compensation  Committee which reviews the future compensation and
benefits of the Company's executive officers and key employees.

     Since the  Recapitalization,  each of these individuals has had an interest
in  transactions  or  business  relationships  involving  the  Company.  See the
information   contained  in  Item  13,   "Certain   Relationships   and  Related
Transactions", which is incorporated herein by reference.

Report on Executive Compensation

     The compensation of the Company's  executive  officers for 1998,  including
the  compensation  reported above for the Chief  Executive  Officer and the four
other most  highly  compensated  executive  officers  of  Holdings,  CAG and the
Company,  had been established  during the bankruptcy  proceedings  prior to the
Reorganization and prior to the tenure of the current Board of Directors,  which
was elected in connection with the Reorganization.

     In  December  1998,  the  Board of  Directors  established  a  Compensation
Committee  to review the  future  compensation  and  benefits  of the  Company's
executive officers and key employees.


<PAGE>


Item  12.  Security   Ownership  of  Certain   Beneficial  Owners  and
Management

  All of the issued and  outstanding  shares of common  stock of the Company are
held by CAG, which is a wholly-owned subsidiary of Holdings. The following table
sets  forth,  as  of  February  28,  1999,  certain  information  regarding  the
beneficial  ownership  of the voting  securities  of Holdings by each person who
beneficially owns more than 5% of any class of Holdings voting securities and by
the directors and certain executive officers of Holdings,  individually,  and by
the directors and executive officers of Holdings as a group. Except as indicated
below,  the address for each of the persons listed below is c/o Cluett  American
Corp., 48 W 38th Street, New York, NY 10018.


                                                 HOLDINGS COMMON STOCK
                                               -------------------------
                                               SHARES BENEFICIALLY OWNED
                                               -------------------------  
                                                NUMBER OF    PERCENT OF
                                                  SHARES       COMMON
5% STOCKHOLDERS:
  Vestar Capital Partners  III, L.P. .........    217,285      60.8%(1)
    245 Park Avenue
    New York, New York 10017
  A&M ........................................     49,995      14.0%(1)
    599 Lexington Avenue
    Suite 2700
    New York, New York 10022
  Societe Anonyme D'Etudes et de Participation
Industrielles
    et Commerciales ..........................     24,699       6.9%(1)
    114 rue de Turenne
    75003 Paris
  Cerebus Partners, L.P ......................     20,622       5.8%(1)
    450 Park Avenue
    New York, New York 10022
OFFICERS AND DIRECTORS:
  Bryan P. Marsal(2) .........................     49,995      14.0%
  James A. Williams ..........................      4,388       1.2%
  Norman W. Alpert(3) ........................    217,285      60.8%
  Sander M. Levy(3) ..........................    217,285      60.8%
  Daniel S. O'Connell(3) .....................    217,285      60.8%
  Steven M. Silver(3) ........................    217,285      60.8%
  Robert J. Riesbeck .........................      2,041      (4)
  Kathy D. Wilson ............................      2,041      (4)
  William S. Sheely ..........................      1,633      (4)
  Steven J. Kaufman ..........................        816      (4)
  Philip L. Molinari .........................         --      --
  All executive officers and directors as a
  group (11 persons)(2)(3)  ..................    278,199      78.0%


     (1) For a discussion of certain voting arrangements among these holders see
Item 13. "Certain  Relationship  and Related  Transactions--Stock  Ownership and
Stockholder's  Agreement".  Each of Vestar,  A&M, Societe Anonyme D'Etudes et de
Participation  Industrielles  et Commerciales  ("SAEPIC") and Cerebus  Partners,
L.P.  disclaims the existence of a group and disclaims  beneficial  ownership of
Holdings Common Stock not owned of record by them.

     (2) Includes  shares owned by A&M. Mr. Marsal  disclaims the existence of a
group and disclaims  beneficial  ownership of the Holdings Common Stock not held
by him.

     (3) Includes shares owned by Vestar. Each of Mr. Alpert, Mr. O'Connell, Mr.
Levy, and Mr. Silver disclaims the existence of a group and disclaims beneficial
ownership of the Holdings Common Stock not held by him.

     (4) Less than 1%.


 Item 13.  Certain Relationships and Related Transactions


Issuance Of Shares Pursuant To Recapitalization

   In connection with the Plan and pursuant to the Subscription  Agreement,  the
Equity  Investors made the Equity  Investment in Holdings.  Approximately  $52.7
million of the Equity  Investment  was provided by Vestar in the form of a $21.3
million  common equity  investment in Holdings  Common Stock and a $31.4 million
investment  in  Holdings  Class C Junior  Preferred  Stock.  Approximately  $8.6
million of the Equity Investment was provided by the Co-Investors in the form of
a $3.5 million investment in Holdings Common Stock and a $5.1 million investment
in Holdings Class C Preferred Stock. A&M and the Management  Investors  provided
the remaining  Equity  Investment in the form of a $4.9 million and $1.8 million
investment in Holdings  Common Stock,  respectively.  Each of these issuances of
securities  were made in reliance on Section 4(2) of the Securities Act of 1993,
as amended (the  "Securities  Act"). The balance of the Holdings Common Stock is
held by former stockholders of Holdings.

Stock Ownership And Stockholders' Agreement

   In the  Recapitalization:  (i)  Vestar  acquired  60.8%  of  the  outstanding
Holdings Common Stock, (ii) A&M acquired 14% of the outstanding  Holdings Common
Stock,  (iii) the  Management  Investors  acquired in the aggregate  5.1% of the
outstanding Holdings Common Stock, and (iv) the Co-Investors acquired 10% of the
outstanding Holdings Common Stock.  Following the  Recapitalization,  the former
stockholders  of  Holdings  (the  "Original  Equity  Holders")  retained  in the
aggregate  10.1% of the  outstanding  Holdings  Common  Stock.  There  can be no
assurance  as to how long any of Vestar,  A&M,  the  Management  Investors,  the
Co-Investors  or the Original  Equity Holders will hold their shares of Holdings
Common Stock,  although certain transfers by them may be restricted as described
below.

   Vestar,  A&M, the  Co-Investors and the Management  Investors  (including any
employees of Holdings and its  subsidiaries  who purchase  Holdings Common Stock
from, or are granted options by, Holdings following the  Recapitalization)  (the
foregoing parties,  collectively,  the "Initial Investors") and SAEPIC have, and
certain  other  Original  Equity  Holders have  (SAEPIC and such other  Original
Equity Holders, the "Participating  Original Equity Holders";  together with the
Initial   Investors,   the   "Participating   Stockholders"),   entered  into  a
Stockholders'  Agreement  (the  "Stockholders'  Agreement")  which provides for,
among other things, the matters described below.

   Transfers Of Holdings Common Stock And Holdings  Preferred Stock.  Subject to
certain  limitations,  transfers of Holdings  securities by A&M, the  Management
Investors,  the Co-Investors and the Participating  Original Equity Holders will
be restricted  unless the  transferee  agrees to become a party to, and be bound
by, the Stockholders'  Agreement.  In addition,  subject to certain limitations,
A&M, the Management Investors,  the Co-Investors and the Participating  Original
Equity  Holders  will  agree  that,   unless  a  public   offering  of  Holdings
securities(a  "Holdings Public  Offering") has occurred,  they will not transfer
any  Holdings  securities  for a period of five years  other  than as  described
below.  Under  certain  circumstances,  the transfer of Holdings  securities  by
Participating Stockholders to their respective affiliates will be permitted.

   Election Of Directors.  Subject to certain requirements and exceptions,  each
Participating  Stockholder  will vote all of the Holdings  Common Stock owned or
held of record by such Participating  Stockholder so as to elect to the Board of
Directors  of  Holdings  and each of its  subsidiaries:  (i) four  designees  of
Vestar, (ii) three additional  designees of Vestar who are not affiliates of any
Participating  Stockholder or employees of Holdings or any of its affiliates and
(iii)  three  designees  of A&M and the  Management  Investors.  The  number  of
designees  to which  Vestar and A&M and the  Management  Investors  are entitled
decrease  according to a formula based on the number of shares owned as compared
to the number acquired in the Recapitalization.  Mr. Marsal shall be Chairman of
the Board of  Directors  and a designee of A&M and the  Management  Investors so
long as he remains Chief Executive Officer of Holdings.  See Item 10. "Directors
and  Executive  Officers  of the  Registrant"  for a  discussion  of the present
officers and directors and their relationship to Vestar and A&M.

   Other Voting Matters. So long as Vestar and its affiliates continue to own at
least  one-half of the shares of Holdings  Common Stock  acquired by them in the
Recapitalization,  each Participating Stockholder (excluding the Original Equity
Holders)  will vote all of its  Holdings  Common  Stock in favor of adopting and
approving any action adopted and approved by the Holdings Board of Directors.

   Tag-Along  Rights. So long as no Holdings Public Offering shall have occurred
and Vestar and its affiliates  continue to own at least  one-third of the shares
of Holdings  Common Stock acquired by them in the  Recapitalization,  subject to
certain  exceptions,  with respect to any proposed  transfer of Holdings  Common
Stock or Holdings Class C Junior Preferred Stock by Vestar, other than transfers
to  affiliates,  each  other  Participating  Stockholder  will have the right to
require that the proposed transferee purchase a corresponding  percentage of any
shares of Holdings Common Stock or Holdings Class C Junior  Preferred  Stock, as
the case may be, owned by such  Participating  Stockholder at the same price and
upon the same terms and conditions.

   Drag-Along Rights. So long as no Holdings Public Offering shall have occurred
and Vestar and its affiliates  continue to own at least  one-third of the shares
of Holdings  Common Stock acquired by them in the  Recapitalization,  subject to
certain  limitations,  each  Participating  Stockholder  will be  obligated,  in
connection  with an offer by a third party to Vestar to purchase  (pursuant to a
sale of stock, a merger or otherwise) all of the outstanding  shares of Holdings
Common  Stock  or  Holdings  Class  C  Junior   Preferred   Stock  held  by  the
Participating  Stockholders (other than shares not purchased in order to reserve
availability of recapitalization  accounting treatment),  to transfer all of its
shares of Holdings  Common Stock or Holdings Class C Junior  Preferred  Stock to
such third party on the terms of the offer accepted by Vestar.

   Participation  Rights.  So long as no  Holdings  Public  Offering  shall have
occurred and Vestar and its affiliates continue to own at least one-third of the
shares of Holdings Common Stock acquired by them in the Recapitalization,  under
certain  circumstances,  if  Holdings or its  subsidiaries  propose to issue any
common stock to an Initial Investor or  Participating  Original Equity Holder or
to an affiliate thereof,  each other Initial Investor or Participating  Original
Equity Holder shall have the  opportunity to purchase such Holdings Common Stock
on a pro rata basis.

<PAGE>
   Right Of First  Refusal.  After  five  years and prior to a  Holdings  Public
Offering,  if A&M, a Management  Investor,  the  Co-Investors or a Participating
Original Equity Holder or any of their transferees receives an offer to purchase
any  Holdings  securities  held by it, other than from its  affiliate,  and such
Participating  Stockholder or transferee  wishes to accept such offer, then such
Participating  Stockholder  or  transferee  shall  be  required  to  offer  such
securities  first to Holdings (or its designee) on the same terms and conditions
(provided  that Holdings may pay cash  consideration  equivalent to any non-cash
consideration offered) before accepting such third-party offer.

   Registration Rights.  Subject to certain limitations,  upon a written request
by Vestar, its affiliates or its transferees, Holdings will use its best efforts
to effect the  registration of all or part of the Holdings Common Stock owned by
Vestar or such affiliate or  transferee,  provided that (i) Holdings will not be
required to effect more than one registration within any 360-day period and (ii)
no more than six such  registrations  may be  requested,  unless the  requesting
party agrees to pay all costs and expenses thereof.

   Incidental Registration. Under certain circumstances, if Holdings proposes to
register  shares of Holdings  Common Stock, it will, upon the written request of
any  Participating  Stockholder,  use  all  reasonable  efforts  to  effect  the
registration of such Participating Stockholder's common stock.

   Termination.  The  Stockholders'  Agreement will terminate (i) in full on the
earliest of (A) the Initial Investors and their affiliates owning less than 5%of
the  outstanding  Holdings  Common Stock (on a fully  diluted  basis) or (B) the
Participating Stockholders,  including their affiliates and transferees,  owning
less than 50% of the  outstanding  Holdings  Common  Stock  (on a fully  diluted
basis) and (C) ten years after the  Recapitalization and (ii) as to any Holdings
securities,  on the  date  such  securities  are sold in a  public  offering  or
pursuant to Rule 144.

Other Relationships

   Management Advisory Agreement. Holdings will pay a $500,000 annual management
fee to Vestar in  consideration  for certain  advisory and  consulting  services
provided by Vestar  (excluding  investment  banking or other financial  advisory
services  and  full-  or  part-time   employment  by  Holdings  or  any  of  its
subsidiaries of any employee or partner of any of Vestar and its affiliates,  in
each case for which  Vestar  and its  affiliates  shall be  entitled  to receive
additional  compensation).  Holdings has agreed to reimburse Vestar for expenses
incurred in connection  with, and to indemnify Vestar and its affiliates for any
liabilities   arising  from,  such  advisory  and  consulting   services.   Upon
consummation  of the Offerings,  Vestar  received a one-time  transaction fee of
$3.25 million. In management's opinion, their fees reflect the benefits received
by Holdings and the Company.

   Management  Loans.  At the closing of the  Recapitalization,  Holdings loaned
$1.35 million to A&M, and $0.9 million to the Management Investors,  in order to
provide A&M and such Management  Investors with funds to be applied to a portion
of the purchase price of the Holdings  Common Stock to be issued to A&M and such
Management Investors in connection with the Recapitalization. Such loans (i) are
secured by pledges of the  Holdings  common stock  purchased  by the  respective
borrowers,  (ii) have a term of seven  years,  (iii) bear  interest at an annual
rate of 5.69%,  and (iv) are subject to  mandatory  prepayment  (a) with the net
proceeds of any sales of Holdings  Common Stock and (b) in full in certain other
events including,  in the case of the Management Investors, if the employment by
Holdings and its subsidiaries of such Management  Investor terminates other than
as a result of death, disability or retirement.  The terms of these loans may be
more favorable to Management  Investors than terms  obtainable from an unrelated
third-party.




<PAGE>


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

(a)    (1) Financial Statements

           Included in Part II, Item 8

           Consolidated Balance Sheets as of December 31,
           1998 and December 31, 1997

           Consolidated Statements of Income for the years ended
           December 31, 1998, December 31, 1997 and December 31, 1996

           Consolidated Statements of Cash Flow for the years
           ended December 31, 1998, December 31, 1997 and December 31, 1996

           Notes to Consolidated Financial Statements

       (2) Financial Statement Schedules

           Schedule II - Valuation and Qualifying
           Accounts

     All  other  schedules  for  which  provision  is  made  in  the  applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related  instructions  or are in applicable  and  therefore  have been
omitted.

       (3) List of Exhibits




 EXHIBIT
   NO.                                             DESCRIPTION OF EXHIBIT
--------------------------------------------------------------------------------

   2.1 Third Amended plan of  Reorganization of Cluett American Corp. and Cluett
     American Investment Corp.  (incorporated by reference to Exhibit 2.1 to the
     Company's  Registration Statement on Form S-4 (Reg. No. 333-58059) filed on
     June 30, 1998).

   2.2  Subscription  Agreement  dated  as of  March  30,  1998  among
     Bidermann  Industries U.S.A.,  Inc., Vestar Capital Partners III,
     L.P.  and Alvarez & Marsal,  Inc.  (incorporated  by reference to
     Exhibit 2.2 to the Company's  Registration  Statement on Form S-4
     (Reg. No. 333-58059) filed on June 30, 1998).

   2.3  Stockholders'  Agreement  dated as of May 18, 1998 among Cluett American
     Investment  Corp.,  Vestar  Capital  Partners  III,  L.P.,  A&M  Investment
     Associates #7, LLC, the  Co-Investors  named therein,  the Original  Equity
     Holders  named  therein  and  the   Management   Investors   named  therein
     (incorporated  by  reference to Exhibit 2.3 to the  Company's  Registration
     Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998).

   2.4  Joinder  Agreement  dated  as of June 30,  1998  among  Cluett  American
     Investment  Corp.,  Vestar  Capital  Partners  III,  L.P.  and  each  other
     signatory thereto (an "Additional Stockholder")  (incorporated by reference
     to Exhibit 2.4 to the  Company's  Registration  Statement on Form S-4 (Reg.
     No. 333-58059) filed on June 30, 1998).

   3.1  Restated   Certificate  of   Incorporation   of  Cluett  American  Corp.
     (incorporated  by  reference to Exhibit 3.1 to the  Company's  Registration
     Statement on Form S-4 (Reg. No.
     333-58059) filed on June 30, 1998).

   3.2 Bylaws of Cluett American Corp.  (incorporated  by reference to
     Exhibit 3.2 to the Company's  Registration  Statement on Form S-4
     (Reg. No. 333-58059) filed on June 30, 1998).

   4.1 Indenture  between  Cluett  American  Corp.  and The Bank of New York, as
     Trustee  (incorporated  by  reference  to  Exhibit  4.1  to  the  Company's
     Registration Statement on Form S-4 (Reg. No.
     333-58059) filed on June 30, 1998).

   4.2 Exchange  Debenture  Indenture  between  Cluett  American Corp.
     and The Bank of New York, as Trustee  (incorporated  by reference
     to Exhibit 4.2 to the  Company's  Registration  Statement on Form
     S-4 (Reg. No. 333-58059) filed on June 30, 1998).

   4.3 Certificate of Designations of the 12 1/2% Senior Exchangeable  Preferred
     Stock Due 2010  (incorporated  by reference to Exhibit 4.3 to the Company's
     Registration Statement on Form S-4 (Reg.
     No. 333-58059) filed on June 30, 1998).

   4.4 Form of 10 1/8%  Senior  Subordinated  Notes  Due 2008  (incorporated  by
     reference to Exhibit 4.4 to the  Company's  Registration  Statement on Form
     S-4 (Reg. No. 333-58059) filed on June 30, 1998).

   4.5 Form of 10 1/8% Series B Senior Subordinated Notes Due 2008 (incorporated
     by reference to Exhibit 4.5 to the Company's Registration Statement on Form
     S-4 (Reg. No. 333-58059) filed on June 30, 1998).

   4.6  Form  of  12  1/2%  Senior   Exchangeable   Preferred   Stock  Due  2010
     (incorporated  by  reference to Exhibit 4.6 to the  Company's  Registration
     Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998).

   4.7 Form of 12 1/2%  Series B Senior  Exchangeable  Preferred  Stock Due 2010
     (incorporated  by  reference to Exhibit 4.7 to the  Company's  Registration
     Statement on Form S-4 (Reg. No.
     333-58059) filed on June 30, 1998).

   4.8 Note  Registration  Rights  Agreement  dated May 18,  1998  among  Cluett
     American Corp.,  NationsBanc  Montgomery Securities LLC and NatWest Capital
     Markets Limited  (incorporated by reference to Exhibit 4.8 to the Company's
     Registration  Statement on Form S-4 (Reg. No.  333-58059) filed on June 30,
     1998).

   4.9 Preferred Stock  Registration  Rights  Agreement dated May 18, 1998 among
     Cluett American Corp.,  NationsBanc  Montgomery  Securities LLC and NatWest
     Capital  Markets Limited  (incorporated  by reference to Exhibit 4.9 to the
     Company's  Registration Statement on Form S-4 (Reg. No. 333-58059) filed on
     June 30, 1998).

   10.1  $160,000,000  Credit  Agreement  dated as of May 18, 1998 among  Cluett
     American Corp., as the Borrower, NationsBank, N.A., as Administrative Agent
     and Collateral Agent,  NationsBanc  Montgomery  Securities LLC, as Arranger
     and Syndication  Agent,  and lenders  (incorporated by reference to Exhibit
     10.1 to the Company's Registration Statement on Form S-4 (Reg. No.
     333-58059) filed on June 30, 1998).

   10.2 First  Amendment to the Credit  Agreement and  Assignment  dated May 27,
     1998 by an among Cluett American Corp.,  Cluett American  Investment Corp.,
     Cluett American Group, Inc. and certain subsidiaries, the Existing Lenders,
     New Lenders,  and agents  (incorporated by reference to Exhibit 10.2 to the
     Company's  Registration Statement on Form S-4 (Reg. No. 333-58059) filed on
     June 30, 1998).

   *10.2.1 Second  Amendment to the Credit  Agreement  and  Assignment  dated as
     December  18,  1998 by an among  Cluett  American  Corp.,  Cluett  American
     Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the
     Existing  Lenders,  New  Lenders,  and agents  (filed  herewith  as Exhibit
     10.2.1).

   *10.2.2 Third  Amendment to the Credit  Agreement and Assignment  dated as of
     March  19,  1999  by  an  among  Cluett  American  Corp.,  Cluett  American
     Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the
     Existing  Lenders,  New  Lenders,  and agents  (filed  herewith  as Exhibit
     10.2.2).

   10.3  Security  Agreement  dated as of May 18,  1998 made by Cluett
     American  Corp.,   Cluett  American   Investment  Corp.,   Cluett
     American   Group,   Inc.  and  certain   Subsidiaries  of  Cluett
     American  Investment  Corp.  in favor  of  NationsBank,  N.A.  as
     agent   (incorporated   by  reference  to  Exhibit  10.3  to  the
     Company's   Registration   Statement   on  Form  S-4  (Reg.   No.
     333-58059) filed on June 30, 1998).

   10.4  Pledge  Agreement  dated as of May 18,  1998  made by  Cluett
     American  Corp.,   Cluett  American   Investment  Corp.,   Cluett
     American   Group,   Inc.  and  certain   Subsidiaries  of  Cluett
     American  Investment  Corp.  in favor of  NationsBank,  N.A.,  as
     agent   (incorporated   by  reference  to  Exhibit  10.4  to  the
     Company's   Registration   Statement   on  Form  S-4  (Reg.   No.
     333-58059) filed on June 30, 1998).

   10.5 Joinder  Agreement  dated as of May 18,  1998 by and  between  Bidermann
     Tailored  Clothing,  Inc., and NationsBank,  N.A., in its capacity as Agent
     under that certain Credit Agreement dated as of May 18, 1998  (incorporated
     by  reference to Exhibit 10.5 to the  Company's  Registration  Statement on
     Form S-4/A (Reg. No.
     333-58059) filed on September 3, 1998).

   10.6 CDN  $15,000,000  Loan  Agreement  dated as of August  8,  1997  between
     Cluett,  Peabody  Canada Inc.,  as the  Borrower,  and  Congress  Financial
     Corporation  (Canada), as Lender (incorporated by reference to Exhibit 10.6
     to the Company's  Registration  Statement on Form S-4 (Reg. No.  333-58059)
     filed on June 30, 1998).

   +10.7  Employment  Agreement  dated  March 7,  1997 by and  between
     Great  American  Knitting  Mills,  Inc.  and  James  A.  Williams
     (incorporated  by  reference  to  Exhibit  10.7 to the  Company's
     Registration  Statement on Form S-4/A (Reg. No.  333-58059) filed
     on September 3, 1998).

   +10.8  Severance  Agreement  dated  as of  August  8,  1997  by and
     between   Cluett,   Peabody  &  Co.,   Inc.  and  Phil   Molinari
     (incorporated  by  reference  to  Exhibit  10.8 to the  Company's
     Registration  Statement on Form S-4/A (Reg. No.  333-58059) filed
     on September 3, 1998).

   +10.9  Severance  Agreement  dated as of May 5, 1997 by and between
     Great   American   Knitting   Mills,   Inc.  and  William  Sheely
     (incorporated  by  reference  to  Exhibit  10.9 to the  Company's
     Registration  Statement on Form S-4/A (Reg. No.  333-58059) filed
     on September 3, 1998).

   +10.10  Severance  Agreement dated as of May 5, 1997 by and between
     Great   American   Knitting   Mills,   Inc.   and  Kathy   Wilson
     (incorporated  by  reference  to Exhibit  10.10 to the  Company's
     Registration  Statement on Form S-4/A (Reg. No.  333-58059) filed
     on September 3, 1998).

   +10.11   Advisory   Agreement  dated  May  18,  1998  among  Cluett
     American  Investment  Corp.,  Cluett  American  Corp.  and Vestar
     Capital  Partners  (incorporated by reference to Exhibit 10.11 to
     the  Company's  Registration  Statement  on Form S-4/A (Reg.  No.
     333-58059) filed on September 3, 1998).

   10.12  Secured  Promissory  Note  dated May 18,  1998 made by A&M  Investment
     Associates  #7,  LLC  in  favor  of  Cluett   American   Investment   Corp.
     (incorporated  by reference to Exhibit 10.12 to the Company's  Registration
     Statement on Form S-4/A (Reg. No.
     333-58059) filed on September 3, 1998).

   10.13  Form of  Secured  Promissory  Note  made  by the  Management
     Investors   in  favor  of  Cluett   American   Investment   Corp.
     (incorporated  by  reference  to Exhibit  10.13 to the  Company's
     Registration  Statement on Form S-4/A (Reg. No.  333-58059) filed
     on September 3, 1998).

   +10.14  Severance  Agreement  dated  as of  August  8,  1997 by and
     between   Cluett,   Peabody  &  Co.,  Inc.  and  Robert  Riesbeck
     (incorporated  by  reference  to Exhibit  10.14 to the  Company's
     Registration  Statement on Form S-4/A (Reg. No.  333-58059) filed
     on October 15, 1998).

   +10.15  Severance  Agreement  dated as of January  16,  1996 by and
     between   Bidermann   Industries  Corp.  and  Steven  J.  Kaufman
     (incorporated  by  reference  to Exhibit  10.15 to the  Company's
     Registration  Statement on Form S-4/A (Reg. No.  333-58059) filed
     on October 15, 1998).

   21List of  Subsidiaries  (incorporated  by  reference  to Exhibit 10.6 to the
     Company's Registration Statement on Form S-4 (Reg.
     No. 333-58059) filed on June 30, 1998).

   24Powers  of  Attorney  (included  on  pages  II-5--II-11)  (incorporated  by
     reference to Exhibit 24 to the Company's Registration Statement on Form S-4
     (Reg. No. 333-58059) filed on June 30, 1998).

   *27 Financial Data Schedule (filed herewith as Exhibit 27)

   99.1  Form  of  Note  Letter  of   Transmittal   (incorporated   by
     reference   to  Exhibit  99.1  to  the   Company's   Registration
     Statement  on Form S-4  (Reg.  No.  333-58059)  filed on June 30,
     1998).

   99.2 Form of Preferred Stock Letter of Transmittal (incorporated by reference
     to Exhibit 99.2 to the Company's  Registration  Statement on Form S-4 (Reg.
     No. 333-58059) filed on June 30, 1998).

   99.3 Form of Note Notice of Guaranteed Delivery (incorporated by reference to
     Exhibit 99.3 to the Company's  Registration Statement on Form S-4 (Reg. No.
     333-58059) filed on June 30, 1998).

   99.4 Form of Preferred Stock Notice of Guaranteed  Delivery  (incorporated by
     reference to Exhibit 99.4 to the Company's  Registration  Statement on Form
     S-4 (Reg. No. 333-58059) filed on June 30, 1998).

   +  This is a management contract or compensatory plan or
      arrangement

   *  Filed herewith

(b) No report was filed on Form 8-K during the quarter covered by this report.

(c)Exhibits:  See (a)(3) above for a listing of the exhibits included as part of
   this report.

(d)Financial Statement  Schedules:  See (a)(1) and (a)(2) above for a listing of
   the financial statements and schedules submitted as part of this report.







<PAGE>





                              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.

                        CLUETT AMERICAN CORP.
                        (Registrant)

         By: /s/ Bryan P. Marsal
         -------------------------------
         Name:  Bryan P. Marsal
         Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER

         Date:  March 29, 1999
         -------------------------------



  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.


              /s/ Bryan P. Marsal
         ---------------------------------
         Name:  Bryan P. Marsal
         Title: Director, President and Chief Executive Officer

         Date:  March 29, 1999
         ----------------------------------



              /s/ W. Todd Walter
         -----------------------------------
         Name:    W. Todd Walter
         Title:   Vice  President and Chief  Financial and  Accounting
                  Officer

         Date:    March 29, 1999
         -----------------------------------



              /s/ James A. Williams
         -----------------------------------
         Name:    James A. Williams
         Title:   Director

         Date:    March 25, 1999
         -----------------------------------




              /s/ Norman W. Alpert
         -----------------------------------
         Name:    Norman W. Alpert
         Title:   Director

         Date:    March 29, 1999
         -----------------------------------



              /s/ Steven M. Silver
         -----------------------------------
         Name:    Steven M. Silver
         Title:   Director

         Date:    March 29, 1999
         -----------------------------------



              /s/ Sander M. Levy
         -----------------------------------
         Name:    Sander M. Levy
         Title:   Director

         Date:    March 29, 1999
         -----------------------------------



              /s/ Daniel S. O'Connell
         -----------------------------------
         Name:    Daniel S. O'Connell
         Title:   Director

         Date:    March 29, 1999
         -----------------------------------



             
         -----------------------------------
         Name:    Neil Defeo
         Title:   Director

         Date:
         -----------------------------------





<PAGE>






                            EXHIBIT INDEX

 10.2.1 Second  Amendment  to the Credit  Agreement  and  Assignment  dated as
     December 18, 1998

 10.2.2 Third Amendment to the Credit  Agreement and Assignment  dated as
     of March 19, 1999

   27   Financial Data Schedule



<PAGE>


Item 14 (d).  Financial Statement Schedules



                             SCHEDULE II

                        CLUETT AMERICAN CORP.

                  VALUATION AND QUALIFYING ACCOUNTS

                            (IN THOUSANDS)

<TABLE>
<CAPTION>
COLUMN A                            COLUMN B       COLUMN C          COLUMN D     COLUMN E
--------                            --------  --------------------   --------     --------
                                                   ADDITIONS
                                              --------------------         
                                              CHARGED TO   CHARGED                BALANCE
                                     BEGINNING COSTS AND  TO OTHER                 AT END
DESCRIPTION                           BALANCE  EXPENSES   ACCOUNTS  DEDUCTIONS    OF YEAR
-----------                           -------  --------   --------  ----------    -------
<S>                                   <C>       <C>       <C>        <C>          <C>
YEAR ENDED DECEMBER 31, 1996:
    Deduction from asset account:
    Allowance for Doubtful Accounts   $ 3,778   $   591         --   $ 1,077(1)   $ 3,292
    Customer Allowances                11,858     9,388         --     9,124(1)    12,122
        Total                          15,636     9,979         --    10,201(1)    15,414

YEAR ENDED DECEMBER 31, 1997:
    Deduction from asset account:
    Allowance for Doubtful Accounts     3,292      (717)        --       773(1)     1,802
    Customer Allowances                12,122     6,877         --    10,828(1)     8,171
        Total                          15,414     6,160         --    11,601(1)     9,973

PERIOD ENDED DECEMBER 31, 1998 :
Deduction from asset account:
    Allowance for Doubtful Accounts     1,802       382         --       616(1)     1,568
    Customer Allowances                 8,171    12,474         --    13,751(1)     6,894
        Total                         $ 9,973   $11,493         --   $12,874(1)   $ 8,462




<FN>
(1)  Charged to costs and expenses
</FN>
</TABLE>