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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





---




FORM 10-Q





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the quarterly period ended June 29, 2002





OR





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




For the transition period fromto





Commission File Number 0-20080





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GALEY & LORD, INC.


(Exact name of registrant as specified in its charter)





DELAWARE (State or other
jurisdiction of incorporation or organization)

56-1593207 (IRS
Employer (Identification No.)





980 Avenue of the Americas New
York, New York (Address of principal executive offices)

10018 Zip
Code





212/465-3000


Registrants telephone number, including area code





Not
Applicable


Former name, former address and former fiscal year, if changed since last report.





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





Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest
practical date.





Common Stock, $.01 Par Value11,996,966 shares as of August 9, 2002.





Exhibit Index at page 58





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##### Table of Contents




INDEX





GALEY & LORD, INC.





PagePART I.

FINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited)Consolidated Balance SheetsJune 29, 2002, June 30, 2001 and September 29, 2001

3Consolidated Statements of OperationsThree months and nine months ended June 29, 2002 and June 30, 2001

4Consolidated Statements of Cash FlowsNine months ended June 29, 2002 and June 30, 2001

5Notes to Consolidated Financial StatementsJune 29, 2002

6-31Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

32-53Item 3.

Quantitative and Qualitative Disclosures About Market Risk

54-55PART II.

OTHER INFORMATIONItem 1.

Legal Proceedings

56Item 2.

Changes in Securities and Use of Proceeds

56Item 3.

Defaults upon Senior Securities

56Item 4.

Submission of Matters to a Vote of Security Holders

56Item 5.

Other Information

56Item 6.

Exhibits and Reports on Form 8-K

56SIGNATURES

57EXHIBIT INDEX

58




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##### Table of Contents




PART I.    FINANCIAL INFORMATION





Item 1.Financial Statements





GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





CONSOLIDATED BALANCE SHEETS


(Amounts in thousands)





June 29, 2002


June 30, 2001


September 29, 2001*(Unaudited)


(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
25,489


$
7,143


$
9,157Trade accounts receivable


156,454



163,531



145,366Sundry notes and accounts receivable


6,506



3,715



4,802Inventories


154,336



164,854



166,820Income taxes receivable


2,855



2,269



2,945Deferred income taxes






9,776



Prepaid expenses and other current assets


6,072



4,432



4,371Total current assets


351,712



355,720



333,461Property, plant and equipment, at cost


432,071



480,041



455,909Less accumulated depreciation and amortization


(187,596
)


(191,052
)


(191,471
)244,475



288,989



264,438Investments in and advances to associated companies


38,042



40,822



38,897Deferred charges, net


5,848



11,891



12,039Other non-current assets


1,710



1,662



1,506Intangibles, net


112,192



145,784



114,374$
753,979


$
844,868


$
764,715LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Liabilities not subject to compromise:Current liabilities:Long-term debtcurrent

$
313,026


$
4,724


$
4,670Trade accounts payable


34,859



60,713



53,503Accrued salaries and employee benefits


23,813



25,124



22,759Accrued liabilities


33,615



37,290



35,529Income taxes payable


4,676



4,460



5,600Total current liabilities


409,989



132,311



122,061Long-term liabilities:Long-term debt


32,350



617,029



634,821Other long-term liabilities


13,410



17,163



17,814Total long-term liabilities


45,760



634,192



652,635Deferred income taxes


3,298



24,011



3,003Total liabilities not subject to compromise


459,047



790,514



777,699Liabilities subject to compromise


326,507







Stockholders equity (deficit):Common stock


124



124



124Contributed capital in excess of par value


41,686



40,609



40,878Retained Earnings (Accumulated deficit)


(61,362
)


33,648



(37,609
)Treasury stock, at cost


(2,247
)


(2,247
)


(2,247
)Accumulated other comprehensive income (loss)


(9,776
)


(17,780
)


(14,130
)Total stockholders equity (deficit)


(31,575
)


54,354



(12,984
)$
753,979


$
844,868


$
764,715


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|* |  | Condensed from audited financial statements.
|- |  | --------------------------------------------




See accompanying notes to consolidated financial statements.




3




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##### Table of Contents




GALEY & LORD, INC.


(DEBTORS-IN-POSSESION)





CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


(Amounts in thousands except per share data)





Three Months Ended


Nine Months EndedJune 29, 2002


June 30, 2001


June 29, 2002


June 30, 2001Net sales

$
196,567


$
220,161


$
500,995


$
673,553Cost of sales


180,592



198,572



462,408



606,933Gross profit


15,975



21,589



38,587



66,620Selling, general and administrative expenses


7,743



7,904



24,383



25,463Amortization of intangibles


823



1,201



2,462



3,591Plant closing costs










(440
)


(587
)Net gain on benefit plan curtailments










(3,375
)


(2,327
)Operating income


7,409



12,484



15,557



40,480Interest expense (contractual interest of $13,066 and $38,984 for the three and nine months ended June 29, 2002,
respectively)


6,222



14,431



28,794



46,230Equity in (income) loss from associated companies


(1,354
)


(2,689
)


(5,594
)


(6,427
)Income (loss) before reorganization items and income taxes


2,541



742



(7,643
)


677Reorganization items


4,442







14,323



Income tax expense (benefit):Current


701



2,095



1,492



7,529Deferred


48



(2,200
)


295



(7,963
)Net income (loss)

$
(2,650
)

$
847


$
(23,753
)

$
1,111Net income (loss) per common share:Basic:Average common shares outstanding


11,997



11,997



11,997



11,981Net income (loss) per common shareBasic

$
(0.22
)

$
.07


$
(1.98
)

$
.09Diluted:Average common shares outstanding


11,997



12,007



11,997



12,003Net income (loss) per common shareDiluted

$
(0.22
)

$
.07


$
(1.98
)

$
.09





See accompanying notes to consolidated financial statements.




4




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##### Table of Contents




GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(Amounts in thousands)





Nine Months EndedJune 29, 2002


June 30, 2001Cash flows from operating activities:Net income (loss)

$
(23,753
)

$
1,111Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation of property, plant and equipment


22,155



24,323Amortization of intangible assets


2,462



3,591Amortization of deferred charges


2,893



2,234Deferred income taxes


295



(7,963
)Non-cash compensation


808



936(Gain)/loss on disposals of property, plant and equipment


60



78Undistributed income from associated companies


(5,594
)


(6,427
)Impairment of fixed assets


898



Net gain on benefit plan curtailments


(3,375
)


(2,327
)Non-cash reorganization write-offs


7,690



Other






165Changes in assets and liabilities:(Increase)/decrease in accounts receivablenet


(8,556
)


32,812(Increase)/decrease in sundry notes & accounts receivable


(1,221
)


1,856(Increase)/decrease in inventories


14,981



926(Increase)/decrease in prepaid expenses and other current assets


(1,458
)


(537
)(Increase)/decrease in other non-current assets


(185
)


62(Decrease)/increase in accounts payabletrade


(8,747
)


1,540(Decrease)/increase in accrued liabilities


19,215



1,645(Decrease)/increase in income taxes payable


(925
)


3,695(Decrease)/increase in other long-term liabilities


(626
)


(2,659
)(Decrease)/increase in plant closing costs


(7,109
)


(8,864
)Net cash provided by (used in) operating activities


9,908



46,197Cash flows from investing activities:Property, plant and equipment expenditures


(5,749
)


(20,324
)Proceeds from sale of property, plant and equipment


5,921



907Distributions received from associated companies


5,020



3,076Investment in affiliates






(750
)Other


2,213



(794
)Net cash provided by (used in) investing activities


7,405



(17,885
)Cash flows from financing activities:Increase/(decrease) in revolving line of credit


(2,420
)


(11,105
)Principal payments on long-term debt


(12,765
)


(31,063
)Issuance of long-term debt


17,303



12,094Payment of bank fees and loan costs


(3,418
)


(540
)Net cash provided by (used in) financing activities


(1,300
)


(30,614
)Effect of exchange rate changes on cash and cash equivalents


319



(196
)Net increase/(decrease) in cash and cash equivalents


16,332



(2,498
)Cash and cash equivalents at beginning of period


9,157



9,641Cash and cash equivalents at end of period

$
25,489


$
7,143





See accompanying notes to consolidated financial statements.




5




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##### Table of Contents

GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)





NOTE ABankruptcy Filing





On February 19, 2002 (the Filing Date), Galey & Lord, Inc. (the Company) and each of its domestic subsidiaries (together with the Company, the
Debtors) filed voluntary petitions for reorganization (the Chapter 11 Filings or the Filings) under Chapter 11 of Title 11, United States Code (the Bankruptcy Code) in the United States Bankruptcy
Court for the Southern District of New York (Case Nos. 02-40445 through 02-40456 (ALG)). The Chapter 11 Filings pending for the Debtors are being jointly administered for procedural purposes only. The Debtors direct and indirect foreign
subsidiaries and foreign joint venture entities did not file petitions under Chapter 11 and are not the subject of any bankruptcy proceedings.





During the pendency of the Filings, the Debtors remain in possession of their properties and assets and management continues to operate the businesses of the Debtors as debtors-in-possession pursuant
to Sections 1107(a) and 1108 of the Bankruptcy Code. As debtors-in-possession, the Debtors are authorized to operate their businesses, but may not engage in transactions outside of the ordinary course of business without the approval of the
Bankruptcy Court, after notice and the opportunity for a hearing.





On the Filing Date, the Debtors filed a motion
seeking authority for the Company to enter into a credit facility of up to $100 million in debtor-in-possession (DIP) financing with First Union National Bank (the Agent) and Wachovia Securities, Inc. On February 21, 2002,
the Bankruptcy Court entered an interim order approving the credit facility and authorizing immediate access of up to $30 million. On March 19, 2002, the Bankruptcy Court entered a final order approving the entire $100 million DIP financing.





Under the terms of the final DIP financing agreement (the DIP Financing Agreement), the Company, as
borrower, may make revolving credit borrowings (including up to $15 million for post-petition letters of credit) in an amount not exceeding the lesser of $100 million or the Borrowing Base (as defined in the DIP Financing Agreement). The DIP
Financing Agreement will terminate and the borrowings thereunder will be due and payable upon the earliest of (i) August 19, 2003, (ii) the date of the substantial consummation of a plan of reorganization that is confirmed pursuant to an order by
the Bankruptcy Court or (iii) the acceleration of the revolving credit loans made by any of the banks who are a party to the DIP Financing Agreement and the termination of the total commitment under the DIP Financing Agreement pursuant to the DIP
Financing Agreement. Amounts borrowed under the DIP Financing Agreement bear interest at the rate per annum at the Companys option, of either




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE ABankruptcy Filing (Continued)





(i) (a) the higher of the prime rate or the federal funds rate plus .50% plus (b) a margin of 2.00% or (ii) LIBOR plus a margin of 3.25%. There is an unused
commitment fee of either (A) at such time as First Union National Bank is no longer the sole bank, at the rate of (i) .75% per annum on the average daily unused total commitment at all times during which the average total commitment usage is less
than 25% of the total commitment and (ii) .5% per annum on the average daily unused total commitment at all times during which the average total commitment usage is more than or equal to 25% of the total commitment; or (B) at all times that First
Union National Bank is the sole bank, at a rate of .50% per annum on the average daily unused total commitment. There are letter of credit fees payable to the Agent equal to LIBOR plus 3.25% on the daily average letters of credit outstanding and to
a fronting bank, its customary fees plus .25% for each letter of credit issued by such fronting bank.





Borrowings
under the DIP Financing Agreement are guaranteed by each of the Debtor subsidiaries. In general, such borrowings constitute allowed super-priority administrative expense claims, and are secured by (i) a perfected first priority lien pursuant to
Section 364(c)(2) of the Bankruptcy Code, upon all property of the Company and the Debtor subsidiaries that was not subject to a valid, perfected and non-avoidable lien on the Filing Date, (ii) a perfected junior lien, pursuant to Section 364(c)(3)
of the Bankruptcy Code upon all property of the Company and the Debtor subsidiaries already subject to valid, perfected, non-avoidable liens, and (iii) a perfected first priority senior priming lien, pursuant to Section 364(d)(1) of the Bankruptcy
Code, upon all property of the Company and the Debtor subsidiaries already subject to a lien that presently secures the Companys and the Debtor subsidiaries pre-petition indebtedness under the existing pre-petition credit agreement,
whether created prior to or after the Filing Date (subject to certain specific existing or subsequently perfected liens). This security interest is subject to certain explicit exceptions.





The DIP Financing Agreement contains covenants restricting the Company and the Debtor subsidiaries from consolidating or merging with and into another person, disposing of
assets, incurring additional indebtedness and guarantees, creating liens and encumbrances on properties, modifying its or their business, making capital expenditures in excess of $22.5 million through the maturity date or $15.2 million during any 12
month period, declaring and paying dividends, making investments, loans or advances, and creating super-priority claims. There are certain limitations on affiliate transactions and on costs and expenses incurred




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE ABankruptcy Filing (Continued)





in connection with the closing of production facilities. The DIP Financing Agreement also requires the Company and the Debtor subsidiaries to achieve certain
levels of EBITDA (as defined) as specified therein. At June 29, 2002, the Company was in compliance with the covenants of the DIP Financing Agreement.





The DIP Financing Agreement also provides for the mandatory prepayment of all or a portion of outstanding borrowings upon repatriation of funds from foreign subsidiaries or the sale of assets, or in
the event outstanding loans exceed the Borrowing Base.





The Bankruptcy Court has approved payment of certain of
the Debtors pre-petition obligations, including, among other things, employee wages, salaries, and benefits, and certain critical vendor and other business-related payments necessary to maintain the operation of their businesses. The Debtors
have retained, with Bankruptcy Court approval, legal and financial professionals to advise the Debtors in the bankruptcy proceedings and the restructuring of their businesses, and certain other ordinary course professionals. From time to
time the Debtors may seek Bankruptcy Court approval for the retention of additional professionals.





By orders
dated June 6, 2002, and July 24, 2002, the Bankruptcy Court authorized the implementation of various employee programs for the Debtors. These programs include:





Stay Bonus and Emergence PlansThese Plans provide for payments totaling $5.2 million for 62 employees including executive officers. Payments
under the Stay Bonus Plan are in four equal payments beginning in August 2002 and ending the later of June 2003 or Emergence. The Emergence Plan provides for a single payment upon emergence.





Enhanced Severance ProgramPursuant to this program, certain employees, including executive officers, are entitled to enhanced
severance payments under certain terms and conditions.





Discretionary Transition Payment
PlanThis plan allows the Debtors to offer incentives to certain employees during a transition period at the end of which such employees would be terminated, in the event such incentives become necessary (the Debtors have no current plans
to significantly reduce headcount).





Discretionary Retention PoolThis plan provides
the Chief Executive Officer discretionary authority to offer incentives to employees (including new employees) not otherwise participating in




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







|NOTE |  | ABankruptcy Filing (Continued)
|---- |  | -------------------------------




other portions of the plan.





Performance
Incentive PlanThe Debtors are negotiating with their senior lenders and their unsecured creditors committee a proposed performance incentive plan, pursuant to which certain employees, including executive officers, would be entitled to an
additional bonus in the event certain personal and/or company performance goals were achieved.





The Debtors must,
subject to Bankruptcy Court approval and certain other limitations, assume, assume and assign, or reject each of their executory contracts and unexpired leases. In this context, assumption means, among other things, re-affirming their
obligations under the relevant lease or contract and curing all monetary defaults thereunder. In this context, rejection means breaching the relevant contract or lease as of the Filing Date, being relieved of on-going obligations to
perform under the contract or lease, and being liable for damages, if any, for the breach thereof. Such damages, if any, are deemed to have accrued prior to the Filing Date by operation of the Bankruptcy Code. The Bankruptcy Court has approved the
rejection of one executory contract and several unexpired leases, and the Debtors are in the process of reviewing their remaining executory contracts and unexpired leases to determine which, if any, they will reject. At this time the Debtors cannot
reasonably estimate the ultimate liability, if any, that may result from rejecting and/or assuming executory contracts or unexpired leases, and no provisions have yet been made for these items.





The Bankruptcy Court established October 1, 2002 as the bar date as of which all claimants are required to submit and characterize claims against the
Debtors. The amount of the claims filed by the creditors could be significantly different than the amount of the liabilities recorded by the Company.





The consummation of a plan or plans of reorganization (a Plan) is the principal objective of the Chapter 11 Filings. A Plan would, among other things, set forth the means for satisfying
claims against and interests in the Company and its Debtor subsidiaries, including setting forth the potential distributions on account of such claims and interests, if any. Pursuant to the Bankruptcy Code, the Debtors had the exclusive right for
120 days from the Filing Date (through and including June 18, 2002) to file a Plan, and for 180 days from the Filing Date (through and including August 17, 2002) to solicit and receive the votes necessary to confirm a Plan. On or about June 18,
2002, the Bankruptcy Court entered an order extending the exclusive right to file a plan through and including October 1, 2002, and extending the exclusive right to solicit and receive the votes necessary to confirm such plan through and including
December 1, 2002. Both of these exclusivity periods may be further extended by the Bankruptcy Court for cause. If the Debtors fail to file a Plan during the exclusive filing period or if the Debtors fail to obtain the requisite acceptance of such
Plan during the exclusive solicitation




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE ABankruptcy Filing (Continued)





period, any party-in-interest, including a creditor, an equity holder, a committee of creditors or equity holders, or an indenture trustee, may file its own Plan
for the Debtors. Confirmation of a Plan is subject to certain statutory findings by the Bankruptcy Court. Subject to certain exceptions as set forth in the Bankruptcy Code, confirmation of a Plan requires, among other things, a vote on the Plan by
certain classes of creditors and equity holders whose rights or interests are impaired under the Plan. If any impaired class of creditors or equity holders does not vote to accept the Plan, but all of the other requirements of the Bankruptcy Code
are met, the proponent of the Plan may seek confirmation of the Plan pursuant to the cram down provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court may still confirm a Plan notwithstanding the non-acceptance of
the Plan by an impaired class, if, among other things, no claim or interest receives or retains any property under the Plan until each holder of a claim senior to such claim or interest has been paid in full. As a result of the amount of
pre-petition indebtedness and the availability of the cram down provisions, the holders of the Companys capital stock may receive no value for their interests under any Plan. Because of such possibility, the value of the
Companys outstanding capital stock and unsecured instruments are highly speculative. In addition, there can be no assurance that a Plan will be proposed by the Debtors or confirmed by the Bankruptcy Court, or that any such Plan will be
consummated.





It is not possible to predict the length of time the Company will operate under the protection of
Chapter 11 and the supervision of the Bankruptcy Court, the outcome of the bankruptcy proceedings in general, or the effect of the proceedings on the business of the Company or on the interest of the various creditors and stakeholders. Since the
Filing Date, the Debtors have conducted business in the ordinary course. Management is in the process of evaluating their operations as part of the development of a Plan. During the pendency of the Chapter 11 Filings, the Debtors may, with
Bankruptcy Court approval, sell assets and settle liabilities, including for amounts other than those reflected in the financial statements. The administrative and reorganization expenses resulting from the Chapter 11 Filings will unfavorably affect
the Debtors results of operations. In addition, under the priority scheme established by the Bankruptcy Code, most, if not all, post-petition liabilities must be satisfied before most other creditors or interest holders, including
stockholders, can receive any distribution on account of such claim or interest.





The accompanying consolidated
financial statements are presented in accordance with American Institute of Certified Public Accountants




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE ABankruptcy Filing (Continued)





Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7), assuming that the
Company will continue as a going concern. The Company is currently operating under the jurisdiction of Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of the company as a going concern is contingent upon, among other
things, its ability to formulate a Plan which will gain approval of the requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy Court, its ability to comply with the DIP Financing Agreement, and its ability to return to
profitability, generate sufficient cash flows from operations, and obtain financing sources to meet future obligations. These matters raise substantial doubt about the Companys ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.





In the Chapter 11 Filings, substantially all unsecured liabilities as of the Filing Date are subject to
compromise or other treatment under a Plan which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. Generally, all actions to enforce or otherwise effect repayment of pre-petition liabilities, as
well as all pending litigation against the Debtors, are stayed while the Debtors continue their business operations as debtors-in-possession. The ultimate amount of and settlement terms for liabilities subject to compromise are subject to an
approved Plan and accordingly are not presently determinable. The principal categories of obligations classified as liabilities subject to compromise under the Chapter 11 Filings as of June 29, 2002 are identified below (in thousands):


91/8% Senior Subordinated Notes

$
300,000Interest accrued on above debt


12,775Accounts payable


11,421Accrued expenses


2,311$
326,507





Pursuant to SOP 90-7, professional fees associated with the Chapter
11 Filings are expensed as incurred and reported as reorganization items. Interest expense is reported only to the extent that it will be paid during the Chapter 11 Filings or that it is probable that it will be an allowed claim. The Company
recognized a charge of $4.4 million and $14.3 million associated with the Chapter 11 Filings for the three and nine months ended June 29, 2002, respectively. Of these charges, $2.9 million and $5.1 million for the three and nine months ended June
29, 2002,




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE ABankruptcy Filing (Continued)





respectively, were for fees payable to professionals retained to assist with the Chapter 11 Filings. In addition, $1.5 million for both the three and nine months
ended June 29, 2002 was related to incentive and retention programs and approximately $7.7 million, incurred in the March quarter 2002, was related to the non-cash write-off of the unamortized discount on the 91/8% Senior Subordinated Notes and the non-cash write-off of related deferred financing fees.





NOTE BBasis of Presentation





The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Investments in affiliates in which the Company owns 20 to 50 percent of the voting stock are
accounted for using the equity method. Intercompany items have been eliminated in consolidation.





Certain prior
period amounts have been reclassified to conform to current year presentation.





The accompanying unaudited
consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the consolidated financial position of the Company as of June 29, 2002 and the consolidated results of operations and cash
flows for the periods ended June 29, 2002 and June 30, 2001. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for a full year. These financial statements should be read in
conjunction with the financial statements and footnotes included in the Companys Annual Report on Form 10-K for the fiscal year ended September 29, 2001.




12




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE CInventories





The components of inventory at June 29, 2002, June 30, 2001, and September 29, 2001 consisted of the following (in thousands):





June 29, 2002


June 30, 2001


September 29, 2001Raw materials

$
4,979


$
4,524


$
4,760Stock in process


18,127



29,858



19,015Produced goods


122,696



125,612



140,742Dyes, chemicals and supplies


12,817



11,236



11,152158,619



171,230



175,669Adjust to LIFO cost


9,143



(450
)


757Lower-of-cost-or-market reserves


(13,426
)


(5,926
)


(9,606
)$
154,336


$
164,854


$
166,820





On September 30, 2001, the Company changed its method of accounting
for inventories to last-in, first-out (LIFO) for its Swift Denim business which was acquired on January 28, 1998. The Company believes that utilizing LIFO for the Swift Denim business will result in a better matching of costs with revenues and
provide consistency in accounting for inventory among the Companys North American operations. The Company also believes the utilization of LIFO is consistent with industry practice. Approximately $0.4 million and $2.7 million of
lower-of-cost-or-market (LCM) reserves were reversed in the three and nine months ended June 29, 2002, respectively, due to the change from FIFO to LIFO. In implementing the change in inventory method for Swift Denim, the opening fiscal 2002
inventory value under LIFO is the same as the year ending FIFO inventory value at September 29, 2001. The cumulative effect of implementing LIFO on prior periods and the pro forma effects of retroactive application is not determinable.







13




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE DLong-Term Debt





Long-term debt consists of the following (in thousands):





June 29, 2002

June 30, 2001

September 29, 2001Long-term debt not subject to compromise:Long-term debtcurrentDebtor-in-Possession Financing

$


$


$
Senior Credit Facility:Revolving Credit Note


119,874





Term Loan B


108,785


1,219


1,219Term Loan C


77,169


864


864Other borrowings with various rates and maturities


7,198


2,641


2,587313,026


4,724


4,670Long-term debtSenior Credit Facility:Revolving Credit Note





100,600


123,100Term Loan B





112,346


112,041Term Loan C





79,696


79,48091/8% Senior Subordinated Notes





298,999


299,037Canadian Loan:Revolving Credit Note


6,880


8,418


5,849Term Loan


4,987


6,805


6,105Italian Credit Agreements


19,818


4,253


3,406Other borrowings with various rates and maturities


665


5,912


5,80332,350


617,029


634,821Total long-term debt not subject to compromise


345,376


621,753


639,491Long-term debt subject to compromise:91/8% Senior Subordinated Notes


300,000





$
645,376

$
621,753

$
639,491





Debtor-in-Possession Agreement





As discussed in Note A above, the Company and the Debtor subsidiaries entered into the DIP Financing Agreement pursuant to which the
Company, as borrower, may make revolving credit borrowings (including up to $15 million for post-petition letters of credit) in an amount not exceeding the lesser of $100 million or the Borrowing Base (as defined in the DIP Financing Agreement). See
Note A above for a description of the DIP Financing Agreement.




14




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE DLong-Term Debt (Continued)





Pre-Petition Senior Credit Facility





On July 13, 1999, the Company amended its credit agreement, dated as of January 29, 1998 (the Senior Credit Facility), as amended, with First Union National Bank, as agent and lender and
its syndicate of lenders. The amendment became effective as of July 3, 1999 (the July 1999 Amendment). In August 2001, the Company amended the Senior Credit Facility (the August 2001 Amendment) which, among other things,
replaced the Adjusted Leverage Ratio covenant (as defined in the August 2001 Amendment) with a minimum EBITDA covenant (as defined in the August 2001 Amendment) until the Companys December quarter 2002, waived compliance by the Company with
the Adjusted Fixed Charge Coverage Ratio (as defined in the August 2001 Amendment) until the Companys December quarter 2002 and modified the Companys covenant related to capital expenditures. The August 2001 Amendment also excludes, for
covenant purposes, charges related to closure of facilities announced on July 26, 2001. The August 2001 Amendment also increased the interest rate spread on all borrowings under the Companys revolving line of credit and term loans by 100 basis
points for the remainder of the term of its Senior Credit Facility. On January 24, 2002, the Company amended its Senior Credit Facility to provide for an overadvance of $10 million, none of which was drawn prior to the overadvance expiration on
February 23, 2002.





Under the Senior Credit Facility, the Company is required to make mandatory prepayments of
principal annually in an amount equal to 50% of Excess Cash Flow (as defined in the Senior Credit Facility), and also in the event of certain dispositions of assets or debt or equity issuances (all subject to certain exceptions) in an amount equal
to 100% of the net proceeds received by the Company therefrom. Based on fiscal 2001 results, the Company was not required to make an Excess Cash Flow payment with respect to fiscal 2001.





As a result of the February 2001 funding of the Companys Canadian Loan Agreement (as defined below), the Company repaid $12.7 million principal amount of its U.S.
term loan balance and reduced the maximum amount of borrowings under its U.S. revolving line of credit by $12.3 million to $187.7 million. The repayment of the Term Loan B and Term Loan C principal balances ratably reduced the remaining quarterly
principal payments. The reduction in the U.S. revolving line of credit facility resulted in a write-off of $0.1 million of deferred debt charges which is included in selling, general and administrative expenses in the March quarter 2001.





During the March quarter 2002, Klopman International used existing cash balances and borrowings under its credit
agreements to complete a capital




15




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE DLong-Term Debt (Continued)





reduction of $20.2 million with its European parent holding company (which is a wholly-owned subsidiary of the Company). In April 2002, $19.5 million was
transferred from the Companys European holding company to the Company in the United States. The Company then utilized the cash to repay its $7.4 million outstanding balance under its DIP Financing Agreement (as defined below) as well as repay
$5.0 million, $4.2 million, and $2.9 million of the Companys pre-petition revolving line of credit, Term Loan B, and Term Loan C borrowings, respectively under the pre-petition Senior Credit Facility.





As a result of the Chapter 11 Filings, the Company and each of the Debtor subsidiaries are currently in default of the Senior Credit
Facility. (See Note ABankruptcy Filing)





Canadian Loan Agreement





In February 2001, the Companys wholly owned Canadian subsidiary, Drummondville Services Inc. (Drummondville), entered
into a Loan Agreement (the Canadian Loan Agreement) with Congress Financial Corporation (Canada), as lender. The Canadian Loan Agreement provides for (i) a revolving line of credit under which Drummondville may borrow up to an amount
equal to the lesser of U.S. $16.0 million or a borrowing base (comprised of eligible accounts receivable and eligible inventory of Drummondville, as defined in the Canadian Loan Agreement), and (ii) a term loan in the principal amount of U.S. $9.0
million, which was originally borrowed and denominated in Canadian dollars.





Under the Canadian Loan Agreement,
the revolving line of credit expires in February 2004 and the principal amount of the term loan is repayable in equal monthly installments of $229,500 CDN with the unpaid balance repayable in February 2004; provided, however, that the revolving line
of credit and the maturity of the term loan may be extended at the option of Drummondville for up to two additional one year periods subject to and in accordance with the terms of the Canadian Loan Agreement. Under the Canadian Loan Agreement, the
interest rate on Drummondvilles borrowings initially is fixed through the second quarter of fiscal year 2001 (March quarter 2001) at a per annum rate, at Drummondvilles option, of either LIBOR plus 2.75% or the U.S. prime rate plus .75%
(for borrowings in U.S. dollars) or the Canadian prime rate plus 1.5% (for borrowings in Canadian dollars). Thereafter, borrowings will bear interest at a per annum rate, at Drummondvilles option, of either (i) the U.S. prime rate plus 0%,
..25%, .50%, .75%, or 1.0% (for borrowings in U.S. dollars), (ii) the Canadian prime rate plus .75%, 1.0%, 1.25%, 1.50%, or 1.75% (for borrowings in Canadian dollars), or (iii) LIBOR plus 2.00%, 2.25%, 2.50%, 2.75% or 3.00% (for borrowings in U.S.
dollars ), all based on




16




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE DLong-Term Debt (Continued)





Drummondville maintaining certain quarterly excess borrowing availability levels under the revolving line of credit or Drummondville achieving certain fixed
charge coverage ratio levels (as set forth in the Canadian Loan Agreement).





Drummondvilles obligations
under the Canadian Loan Agreement are secured by all of the assets of Drummondville. The Canadian Loan Agreement contains certain covenants, including without limitation, those limiting Drummondvilles ability to incur indebtedness (other than
incurring or paying certain intercompany indebtedness), incur liens, sell or acquire assets or businesses, pay dividends, make loans or advances or make certain investments. In addition, the Canadian Loan Agreement requires Drummondville to maintain
a certain level of tangible net worth (as defined in the Canadian Loan Agreement). At June 29, 2002, the Company was in compliance with the covenants of the Canadian Loan Agreement.




17




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE ENet Income (Loss) Per Common Share





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





Three Months Ended

Nine Months EndedJune 29, 2002


June 30, 2001

June 29, 2002


June 30, 2001Numerator:Net income (loss)

$
(2,650
)

$
847

$
(23,753
)

$
1,111Denominator:Denominator for basic earnings per share


11,997



11,997


11,997



11,981Effect of dilutive securities: stock options






10






22Diluted potential common shares denominator for diluted earnings per shareadjusted weighted average shares and
assumed exercises


11,997



12,007


11,997



12,003





Incremental shares for diluted earnings per share represent the
dilutive effect of options outstanding during the quarter. Options to purchase 161,149 shares and 87,450 shares of common stock were outstanding during the three months and nine months ended June 29, 2002 and June 30, 2001, respectively, but were
not included in the computation of diluted earnings per share because the options exercise price was greater than the average market price of the common shares. Options to purchase 798,150 shares of common stock were outstanding during the
three months and nine months ended June 29, 2002 and June 30, 2001, respectively, but were not included in the computation of diluted earnings per share pursuant to the contingent share provisions of Financial Accounting Standards Board Statement
No. 128, Earnings Per Share. Vesting of these options is contingent upon the market price of common shares reaching certain target prices, which were greater than the average market price of the common shares.





NOTE FBenefit Plans





The Company and its U.S. subsidiaries sponsor noncontributory defined benefit pension plans covering substantially all domestic employees. The plans provide retirement benefits for all qualified salaried employees and qualified
non-union wage employees based generally on years of service and average compensation. Retirement benefits for qualified union wage employees are based generally on a flat dollar amount for each year of service. The Companys funding policy is
to contribute annually the amount recommended by the plans actuary. Plan assets, which consist of common stocks, bonds and cash equivalents, are maintained in trust accounts.





On September 20, 2001, the Company froze the accrual of future retirement benefits under its U.S. defined benefit plans effective December 31,




18




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE FBenefit Plans (Continued)





2001. The resulting curtailment gain was offset by unamortized actuarial losses.





The Company provides health care and life insurance benefits to certain retired employees and their dependents. The plans are unfunded and approved claims are paid by the
Company. The Companys cost is partially offset by retiree premium contributions. Effective December 31, 2001, the Company curtailed benefits to employees who were not retired as of December 31, 2001 and, accordingly, a net benefit curtailment
gain of $3.4 million was recognized in the first quarter of fiscal 2002.





NOTE GStockholders Equity





Comprehensive income represents the change in stockholders equity during the period from non-owner sources. Currently,
changes from non-owner sources consist of net income, foreign currency translation adjustments and gains on derivative instruments. Total comprehensive income (loss) for the three and nine months ended June 29, 2002 was $5.4 million and $(19.4)
million, respectively, and for the three and nine months ended June 30, 2001 was $(0.1) million and $(3.0) million, respectively.





Activity in Stockholders Equity is as follows (in thousands):





Current Year Comprehensive Income (Loss)


Common Stock

Contributed Capital

Accumulated Deficit


Treasury Stock


Accumulated Other Comprehensive Income (Loss)


TotalBalance at September 29, 2001





$
124

$
40,878

$
(37,609
)

$
(2,247
)

$
(14,130
)

$
(12,984
)Compensation earned related to stock options









808














808Comprehensive income (loss):Net income (loss) for nine months ended June 29, 2002

$
(23,753
)








(23,753
)










(23,753
)Foreign currency translation adjustment


4,378

















4,378



4,378Gain (loss) on derivative instruments


(24
)
















(24
)


(24
)Total comprehensive income (loss)

$
(19,399
)Balance at June 29, 2002





$
124

$
41,686

$
(61,362
)

$
(2,247
)

$
(9,776
)

$
(31,575
)





Accumulated Other Comprehensive Income (Loss) at June 29, 2002
represents a $9.8 million loss related to foreign currency translation adjustment.




19




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE HIncome Taxes





The components of income tax expense (benefit) are as follows (in thousands):





Three Months Ended


Nine Months EndedJune 29, 2002


June 30, 2001


June 29, 2002


June 30, 2001Current tax provision:Federal

$
(52
)

$



$
(1,252
)

$
5State


(13
)


22







68Foreign


766



2,073



2,744



7,456Total current tax provision


701



2,095



1,492



7,529Deferred tax provision:Federal






(2,275
)






(7,576
)State






(219
)






(598
)Foreign


48



294



295



211Total deferred tax provision


48



(2,200
)


295



(7,963
)Total provision for income taxes

$
749


$
(105
)

$
1,787


$
(434
)





The Companys overall tax rate differed from the statutory
rate principally due to the nonrecognition of the U.S. tax benefits on the domestic net operating loss carryforwards. The result is an overall tax expense rate which is higher than the statutory rate.





At June 29, 2002, the Company had outstanding net operating loss carryforwards (NOLs) for U.S. federal tax purposes of
approximately $143 million and state tax purposes of approximately $132 million. The federal NOLs will expire in years 2018-2021, and the state NOLs will expire in years 2003-2021. In accordance with the Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, a valuation allowance of $28.2 million related to domestic operating income losses has been established since it is more likely than not that some portion of the deferred tax assets will not be
realized.





The Job Creation and Worker Compensation Act of 2002 became effective on March 9, 2002 and provided a 5
year carryback for net operating losses incurred in tax years ending in 2001 and 2002. As a result the Company carried back net operating losses from the year ended September 29, 2001. Due to the tax law change, the Company recorded a $1.2 million
tax benefit in the March quarter 2002 and $0.1 million tax benefit in the June quarter 2002. Substantially all of the income tax refund was received in the June quarter 2002.




20




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE IFiscal 2001 Cost Reduction and Loss Avoidance Initiatives





In the fourth quarter of fiscal 2001, the Company announced additional actions (the Fiscal 2001 Cost Reduction and Loss
Avoidance Initiatives) taken as a result of the very difficult business environment which the Company continued to operate in throughout fiscal 2001. The Companys goal in taking these actions was future loss avoidance, cost reduction,
production capacity rationalization and increased cash flow. The principal manufacturing initiatives included discontinuation of G&L Service Company, the Companys garment making operations in Mexico, and the consolidation of its greige
fabrics operations. The discontinuation of G&L Service Company included the closure of the Dimmit facilities in Piedras Negras, Mexico, the Alta Loma facilities in Monclova, Mexico and the Eagle Pass Warehouse in Eagle Pass, Texas. The
consolidation of the Companys greige fabrics operations included the closure of its Asheboro, North Carolina weaving facility and Caroleen, North Carolina spinning facility. In addition to the principal manufacturing initiatives above, the
Company also provided for the reduction of approximately 5% of its salaried overhead employees.





In the fourth
quarter of fiscal 2001, the Company recorded $63.4 million before taxes of plant closing and impairment charges and $4.9 million before taxes of losses related to completing garment customer orders all related to the Fiscal 2001 Cost Reduction and
Loss Avoidance Initiatives. The components of the plant closing and impairment charges included $30.4 million for goodwill impairments, $20.3 million for fixed asset impairments, $7.5 million for severance expense and $5.2 million for the write-off
of leases and other exit costs. In the December quarter 2001, the Company recorded a change in estimate that increased the fixed asset impairment charge by $0.2 million and decreased the plant closing costs by $1.3 million. The Company recorded an
additional change in estimate in the March quarter 2002 that increased the fixed asset impairment charge by $0.7 million.





Approximately 3,300 Mexican employees and 500 U.S. employees were terminated as a result of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. All production at the affected facilities ceased in early September 2001 by
which time substantially all the affected employees were terminated. During the first quarter of fiscal 2002, the Company sold its Asheboro, North Carolina facility and related equipment as well as a portion of the G&L Service Company equipment.
The Company disposed of the remainder of the G&L Service Company equipment in the March quarter 2002. The Company expects that the sale of the remainder of the real estate and equipment in connection with the Fiscal 2001 Cost Reduction and Loss
Avoidance Initiatives could take an additional 12 months or longer to complete.




21




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE IFiscal 2001 Cost Reduction and Loss Avoidance Initiatives (Continued)





The table below summarizes the activity related to the Fiscal 2001 Cost Reduction and Loss Avoidance
Initiatives plant closing accruals for the nine months ended June 29, 2002 (in thousands):





Accrual Balance
at September 29, 2001

Cash Payments


Change in Estimate


Accrual Balance at June
29, 2002Severance benefits

$
1,992

$
(1,347
)

$



$
645Lease cancellation and other


5,027


(2,522
)


(1,338
)


1,167$
7,019

$
(3,869
)

$
(1,338
)

$
1,812





The Company incurred run-out expenses totaling $0.3 million and
$2.7 million for the three and nine months ended June 29, 2002, respectively. These expenses, which include efficiency losses, equipment relocation, losses on inventories of discontinued styles, plant carrying costs and other costs, are included
primarily in cost of sales in the consolidated statement of operations.





NOTE JFiscal 2000 Strategic Initiatives





During the fourth quarter of fiscal 2000, the Company announced a series of strategic initiatives (the
Fiscal 2000 Strategic Initiatives) aimed at increasing the Companys competitiveness and profitability by reducing costs. The initiatives included completing a joint venture in Mexico, closing two of the Companys plants,
consolidating some operations, outsourcing certain yarn production and eliminating excess employees in certain operations. The cost of these initiatives was reflected in a plant closing and impairment charge totaling $63.6 million before taxes in
the fourth quarter of fiscal 2000. The original components of the plant closing and impairment charge included $49.3 million for fixed asset write-offs, $10.8 million for severance expense and $3.5 million for the write-off of leases and other exit
costs. During fiscal 2001, the Company recorded a change in estimate for severance benefits that  reduced the plant closing charge by $0.6 million. All production at the  affected facilities ceased during the December quarter of fiscal
2000 and substantially all of the 1,370 employees have been terminated. Severance payments were made in either a lump sum or over a maximum period of up to




22




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE JFiscal 2000 Strategic Initiatives (Continued)





eighteen months. During fiscal 2001, the Company sold a portion of the Erwin facility as well as substantially all of the equipment at the Erwin facility and the
Brighton facility. The Company expects that the sale of the remaining real estate and equipment related to the Fiscal 2000 Strategic Initiatives could take an additional 12 months or longer to complete.





The table below summarizes the activity related to the plant closing accruals for the nine months ended June 29, 2002 (in thousands):





Accrual Balance
at September 29, 2001

Cash Payments


Accrual Balance at June
29, 2002Severance benefits

$
1,817

$
(1,487
)

$
330Lease cancellation and other


2,402


(415
)


1,987$
4,219

$
(1,902
)

$
2,317





As a result of the employees terminated due to the Fiscal 2000
Strategic Initiatives, the Company recognized a net curtailment gain of $2.4 million in fiscal 2001 related to its defined benefit pension and post-retirement medical plans.





NOTE KSegment Information





The Companys
operations are classified into four business segments: Galey & Lord Apparel, Swift Denim, Klopman International and Home Fashion Fabrics. The Company is principally organized around differences in products; however, one segment exists primarily
due to geographic location. The business segments are managed separately and distribute products through different marketing channels. Galey & Lord Apparel manufactures and sells woven cotton and cotton blended apparel fabrics. Swift Denim
manufactures and markets a wide variety of denim products for apparel and non-apparel uses. Klopman International manufactures principally workwear and careerwear fabrics as well as woven sportswear apparel fabrics primarily for consumption in
Europe. Home Fashion Fabrics sells dyed and printed fabrics to the home furnishing trade for use in bedspreads, comforters, curtains and accessories as well as greige fabrics (undyed and unfinished) which it sends to independent contractors for
dyeing and finishing.





The Company evaluates performance and allocates resources based on operating income;
therefore, certain expenses, principally net interest expense and income taxes, are excluded from the chief operating decision




23




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE KSegment Information (Continued)





makers assessment of segment performance. Accordingly, such expenses have not been allocated to segment results. The corporate segments
operating income (loss) represents principally the administrative expenses from the Companys various holding companies. Additionally, the corporate segment assets consist primarily of corporate cash, deferred bank charges and investments in
and advances to associated companies.





Information about the Companys operations in its different industry
segments for the three and nine months ended June 29, 2002 and June 30, 2001 is as follows (in thousands):





Three Months Ended


Nine Months EndedJune 29, 2002


June 30, 2001


June 29, 2002


June 30, 2001Net Sales to External CustomersGaley & Lord Apparel

$
81,699


$
103,258


$
208,923


$
322,931Swift Denim


80,585



78,103



190,107



234,450Klopman International


32,211



35,351



93,522



106,123Home Fashion Fabrics


2,072



3,449



8,443



10,049Consolidated

$
196,567


$
220,161


$
500,995


$
673,553Operating Income (Loss)(1)Galey & Lord Apparel

$
795


$
4,289


$
(3,050
)

$
19,901Swift Denim


5,050



6,640



18,428



16,825Klopman International


2,489



3,425



4,491



8,876Home Fashion Fabrics


(709
)


(1,489
)


(2,123
)


(3,862
)Corporate


(216
)


(381
)


(2,189
)


(1,260
)7,409



12,484



15,557



40,480Interest expense


6,222



14,431



28,794



46,230Income from associated companies(2)


(1,354
)


(2,689
)


(5,594
)


(6,427
)Reorganization items(3)


4,442







14,323



Income (loss) before income taxes

$
(1,901
)

$
742


$
(21,966
)

$
677








June 29, 2002

June 30, 2001Assets(4)Galey & Lord Apparel

$
232,559

$
280,971Swift Denim


334,471


341,324Klopman International


115,133


106,588Home Fashion Fabrics


4,124


53,914Corporate


67,692


62,071$
753,979

$
844,868


---

|(1) |  | Operating income (loss) for the three and nine months ended June 29, 2002 includes run-out charges and plant closing and impairment costs related to the Fiscal
2001 Cost Reduction and Loss Avoidance Initiatives of $0.1 million and $1.2 million, respectively, for Galey & Lord Apparel and $0.2 million and $1.1 million, respectively, for
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|
|



24




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE KSegment Information (Continued)





| | Home |  | Fashion Fabrics. In addition, Swift Denims operating income includes run-out charges related to the Fiscal 2000 Strategic Initiatives of $0.5 million and
$1.2 million for the three and nine months ended June 29, 2002, respectively.
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Net of amortization of $163, $163, $489 and $489, respectively.
|--- |  | ---------------------------------------------------------------

|(3) |  | Reorganization items for the three months ended June 29, 2002 include $2.9 million of professional fees associated with the Chapter 11 filings and $1.5 million
of expenses related to incentive and retention programs. Reorganization items for the nine months ended June 29, 2002 includes $7.7 million for the non-cash write-off of the unamortized discount on the 91/8% Senior Subordinated Notes and the non-cash write-off of the related deferred financing fees, $5.1 million of professional fees associated with the
Chapter 11 Filings and $1.5 million of expenses related to incentive and retention programs.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Excludes intercompany balances and investments in subsidiaries which are eliminated in consolidation.
|--- |  | -----------------------------------------------------------------------------------------------------






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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE LSupplemental Condensed Consolidating Financial Information





The following summarizes condensed consolidating financial information for the Company, segregating Galey & Lord, Inc. (the
Parent) and guarantor subsidiaries from non-guarantor subsidiaries. The guarantor subsidiaries are wholly-owned subsidiaries of the Company and guarantees are full, unconditional and joint and several. Separate financial statements of
each of the guarantor subsidiaries are not presented because management believes that these financial statements would not be material to investors.





June 29, 2002Parent


Guarantor Subsidiaries


Non-Guarantor Subsidiaries


Eliminations


Consolidated(in thousands)Financial PositionCurrent assets:Trade accounts receivable

$



$
107,217


$
49,237


$



$
156,454Inventories






115,168



39,168







154,336Other current assets


2,114



23,868



16,351



(1,411
)


40,922Total current assets


2,114



246,253



104,756



(1,411
)


351,712Property, plant and equipment, net






163,730



80,745







244,475Intangibles






112,192











112,192Other assets


17,902



5,787



34,912



(13,001
)


45,600$
20,016


$
527,962


$
220,413


$
(14,412
)

$
753,979Liabilities not subject to compromise:Current liabilities:Long-term debtcurrent

$
305,828


$
5,246


$
1,952


$



$
313,026Trade accounts payable






15,863



18,996







34,859Accrued liabilities


18,741



22,209



16,495



(17
)


57,428Other current liabilities






1,006



3,670







4,676Total current liabilities


324,569



44,324



41,113



(17
)


409,989Long-term debt






665



31,685







32,350Other non-current liabilities


(1,363
)


6,764



12,718



(1,411
)


16,708Total liabilities not subject to compromise


323,206



51,753



85,516



(1,428
)


459,047Net intercompany balance


(584,390
)


630,976



(46,586
)






Liabilities subject to compromise


312,775



13,732











326,507Stockholders equity (deficit)


(31,575
)


(168,499
)


181,483



(12,984
)


(31,575
)$
20,016


$
527,962


$
220,413


$
(14,412
)

$
753,979




26




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE LSupplemental Condensed Consolidating Financial Information (Continued)





June 30, 2001Parent


Guarantor Subsidiaries


Non- Guarantor Subsidiaries


Eliminations


Consolidated(in thousands)Financial PositionCurrent assets:Trade accounts receivable

$



$
117,025


$
46,506


$



$
163,531Inventories






129,806



35,048







164,854Other current assets


3,668



12,490



11,177







27,335Total current assets


3,668



259,321



92,731







355,720Property, plant and equipment, net






207,995



80,994







288,989Intangibles






145,784











145,784Other assets


176,273



5,723



38,916



(166,537
)


54,375$
179,941


$
618,823


$
212,641


$
(166,537
)

$
844,868Current liabilities:Trade accounts payable

$



$
39,480


$
21,233


$



$
60,713Accrued liabilities


25,626



18,658



18,144



(14
)


62,414Other current liabilities


2,203



1,296



5,685







9,184Total current liabilities


27,829



59,434



45,062



(14
)


132,311Net intercompany balance


(496,314
)


582,092



(85,778
)






Long-term debt


591,641



5,912



19,476







617,029Other non-current liabilities


2,431



29,329



9,819



(405
)


41,174Stockholders equity


54,354



(57,944
)


224,062



(166,118
)


54,354$
179,941


$
618,823


$
212,641


$
(166,537
)

$
844,868







27




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE LSupplemental Condensed Consolidating Financial Information (Continued)





Three Months Ended June 29, 2002Parent


Guarantor Subsidiaries


Non-Guarantor Subsidiaries

Eliminations


Consolidated(in thousands)Results of OperationsNet sales

$



$
139,849


$
58,269

$
(1,551
)

$
196,567Gross profit






9,538



6,437






15,975Operating income (loss)


(253
)


3,600



4,062






7,409Reorganization items


(4,442
)













(4,442
)Interest expense, income taxes and other, net


(8,134
)


13,661



90






5,617Net income (loss)

$
3,439


$
(10,061
)

$
3,972

$



$
(2,650
)





Nine Months Ended June 29, 2002Parent


Guarantor Subsidiaries


Non-Guarantor Subsidiaries


Eliminations


Consolidated(in thousands)Results of OperationsNet sales

$



$
351,671


$
152,922


$
(3,598
)

$
500,995Gross profit






21,306



17,281







38,587Operating income (loss)


(1,851
)


6,166



11,242







15,557Reorganization items


(14,323
)














(14,323
)Interest expense, income taxes and other, net


(21,421
)


47,063



(655
)






24,987Net income (loss)

$
5,247


$
(40,897
)

$
11,897


$



$
(23,753
)




28




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE LSupplemental Condensed Consolidating Financial Information (Continued)





Three Months Ended June 30, 2001Parent


Guarantor Subsidiaries


Non-Guarantor Subsidiaries

Eliminations


Consolidated(in thousands)Results of OperationsNet sales

$



$
161,115


$
70,934

$
(11,888
)

$
220,161Gross profit






11,871



9,718






21,589Operating income (loss)


(282
)


5,329



7,437






12,484Interest expense, income taxes and other, net


(1,781
)


12,898



419


101



11,637Net income (loss)

$
1,499


$
(7,569
)

$
7,018

$
(101
)

$
847





Nine Months Ended June 30, 2001Parent


Guarantor Subsidiaries


Non-Guarantor Subsidiaries

Eliminations


Consolidated(in thousands)Results of OperationsNet sales

$



$
503,939


$
203,844

$
(34,230
)

$
673,553Gross profit






39,074



27,546






66,620Operating income (loss)


(973
)


21,176



20,277






40,480Interest expense, income taxes and other, net


(3,014
)


40,593



2,003


(213
)


39,369Net income (loss)

$
2,041


$
(19,417
)

$
18,274

$
213


$
1,111







29




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE LSupplemental Condensed Consolidating Financial Information (Continued)





Nine Months Ended June 29, 2002Parent


Guarantor Subsidiaries


Non-Guarantor Subsidiaries


Eliminations


Consolidated(in thousands)Cash FlowsCash provided by (used in) operating activities

$
21,596


$
(21,332
)

$
9,644


$



$
9,908Cash provided by (used in) investing activities


(651
)


2,378



13,971



(8,293
)


7,405Cash provided by (used in) financing activities


(20,935
)


32,417



(21,075
)


8,293



(1,300
)Effect of exchange rate change on cash and cash equivalents










319







319Net change in cash and cash equivalents


10



13,463



2,859







16,332Cash and cash equivalents at beginning of period


5



4,623



4,529







9,157Cash and cash equivalents at end of period

$
15


$
18,086


$
7,388


$



$
25,489







30




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##### Table of Contents



GALEY & LORD, INC.


(DEBTORS-IN-POSSESSION)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 29, 2002


(Unaudited)







NOTE LSupplemental Condensed Consolidating Financial Information (Continued)





Nine Months Ended June 30, 2001Parent


Guarantor Subsidiaries


Non-Guarantor Subsidiaries


Eliminations


Consolidated(in thousands)Cash FlowsCash provided by (used in) operating activities

$
7,344


$
28,672


$
10,843


$
(662
)

$
46,197Cash provided by (used in) investing activities


21,748



(15,014
)


(25,281
)


662



(17,885
)Cash provided by (used in) financing activities


(29,094
)


(13,150
)


11,630







(30,614
)Effect of exchange rate change on cash and cash equivalents










(196
)






(196
)Net change in cash and cash equivalents


(2
)


508



(3,004
)






(2,498
)Cash and cash equivalents at beginning of period


10



4,194



5,437







9,641Cash and cash equivalents at end of period

$
8


$
4,702


$
2,433


$



$
7,143







31




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##### Table of Contents




Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations





Bankruptcy Filing





On February 19, 2002 (the Filing Date), Galey & Lord,
Inc. (the Company) and each of its domestic subsidiaries (together with the Company, the Debtors) filed voluntary petitions for reorganization (the Chapter 11 Filings or the Filings) under Chapter 11
of Title 11, United States Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Southern District of New York (Case Nos. 02-40445 through 02-40456 (ALG)). The Chapter 11 Filings pending for the Debtors are being
jointly administered for procedural purposes only. The Debtors direct and indirect foreign subsidiaries and foreign joint venture entities did not file petitions under Chapter 11 and are not the subject of any bankruptcy proceedings.





During the pendency of the Filings, the Debtors remain in possession of their properties and assets and
management continues to operate the businesses of the Debtors as debtors-in-possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code. As debtors-in-possession, the Debtors are authorized to operate their businesses, but may not engage
in transactions outside of the ordinary course of business without the approval of the Bankruptcy Court, after notice and the opportunity for a hearing.





On the Filing Date, the Debtors filed a motion seeking authority for the Company to enter into a credit facility of up to $100 million in debtor-in-possession (DIP) financing with First
Union National Bank (the Agent) and Wachovia Securities, Inc. On February 21, 2002, the Bankruptcy Court entered an interim order approving the credit facility and authorizing immediate access of up to $30 million. On March 19, 2002, the
Bankruptcy Court entered a final order approving the entire $100 million DIP financing. For a description of the DIP Financing Agreement, see Liquidity and Capital Resources.





The Bankruptcy Court has approved payment of certain of the Debtors pre-petition obligations, including, among other things, employee wages, salaries, and benefits,
and certain critical vendor and other business-related payments necessary to maintain the operation of their businesses. The Debtors have retained, with Bankruptcy Court approval, legal and financial professionals to advise the Debtors in the
bankruptcy proceedings and the restructuring of their businesses, and certain other ordinary course professionals. From time to time the Debtors may seek Bankruptcy Court approval for the retention of additional professionals.





By orders dated June 6, 2002, and July 24, 2002, the Bankruptcy Court authorized the implementation of various
employee programs for the Debtors. These programs include:




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##### Table of Contents




Stay Bonus and Emergence PlansThese Plans provide
for payments totaling $5.2 million for 62 employees including executive officers. Payments under the Stay Bonus Plan are in four equal payments beginning in August 2002 and ending the later of June 2003 or Emergence. The Emergence Plan provides for
a single payment upon emergence.





Enhanced Severance ProgramPursuant to this program,
certain employees, including executive officers, are entitled to enhanced severance payments under certain terms and conditions.





Discretionary Transition Payment PlanThis plan allows the Debtors to offer incentives to certain employees during a transition period at the end of which such employees would be
terminated, in the event such incentives become necessary (the Debtors have no current plans to significantly reduce headcount).





Discretionary Retention PoolThis plan provides the Chief Executive Officer discretionary authority to offer incentives to employees (including new employees) not otherwise participating in
other portions of the plan.





Performance Incentive PlanThe Debtors are negotiating
with their senior lenders and their unsecured creditors committee a proposed performance incentive plan, pursuant to which certain employees, including executive officers, would be entitled to an additional bonus in the event certain personal and/or
company performance goals were achieved.





The Debtors must, subject to Bankruptcy Court approval and certain other
limitations, assume, assume and assign, or reject each of their executory contracts and unexpired leases. In this context, assumption means, among other things, re-affirming their obligations under the relevant lease or contract and
curing all monetary defaults thereunder. In this context, rejection means breaching the relevant contract or lease as of the Filing Date, being relieved of on-going obligations to perform under the contract or lease, and being liable for
damages, if any, for the breach thereof. Such damages, if any, are deemed to have accrued prior to the Filing Date by operation of the Bankruptcy Code. The Bankruptcy Court has approved the rejection of one executory contract and several unexpired
leases, and the Debtors are in the process of reviewing their remaining executory contracts and unexpired leases to determine which, if any, they will reject. At this time the Debtors cannot reasonably estimate the ultimate liability, if any, that
may result from rejecting and/or assuming executory contracts or unexpired leases, and no provisions have yet been made for these items.





The Bankruptcy Court established October 1, 2002 as the bar date as of which all claimants are required to submit and characterize claims against the Debtors. The amount of the claims filed by the creditors could
be significantly different than the amount of the liabilities recorded by the Company.





The consummation of a plan
or plans of reorganization (a Plan) is the principal objective of the Chapter 11 Filings. A Plan would,




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##### Table of Contents

among other things, set forth the means for satisfying claims against and interests in the Company and its Debtor subsidiaries, including
setting forth the potential distributions on account of such claims and interests, if any. Pursuant to the Bankruptcy Code, the Debtors had the exclusive right for 120 days from the Filing Date (through and including June 18, 2002) to file a Plan,
and for 180 days from the Filing Date (through and including August 17, 2002) to solicit and receive the votes necessary to confirm a Plan. On or about June 18, 2002, the Bankruptcy Court entered an order extending the exclusive right to file a plan
through and including October 1, 2002, and extending the exclusive right to solicit and receive the votes necessary to confirm such plan through and including December 1, 20002. Both of these exclusivity periods may be further extended by the
Bankruptcy Court for cause. If the Debtors fail to file a Plan during the exclusive filing period or if the Debtors fail to obtain the requisite acceptance of such Plan during the exclusive solicitation period, any party-in-interest, including a
creditor, an equity holder, a committee of creditors or equity holders, or an indenture trustee, may file its own Plan for the Debtors. Confirmation of a Plan is subject to certain statutory findings by the Bankruptcy Court. Subject to certain
exceptions as set forth in the Bankruptcy Code, confirmation of a Plan requires, among other things, a vote on the Plan by certain classes of creditors and equity holders whose rights or interests are impaired under the Plan. If any impaired class
of creditors or equity holders does not vote to accept the Plan, but all of the other requirements of the Bankruptcy Code are met, the proponent of the Plan may seek confirmation of the Plan pursuant to the cram down provisions of the
Bankruptcy Code. Under these provisions, the Bankruptcy Court may still confirm a Plan notwithstanding the non-acceptance of the Plan by an impaired class, if, among other things, no claim or interest receives or retains any property under the Plan
until each holder of a claim senior to such claim or interest has been paid in full. As a result of the amount of pre-petition indebtedness and the availability of the cram down provisions, the holders of the Companys capital stock
may receive no value for their interests under any Plan. Because of such possibility, the value of the Companys outstanding capital stock and unsecured instruments are highly speculative. In addition, there can be no assurance that a Plan will
be proposed by the Debtors or confirmed by the Bankruptcy Court, or that any such Plan will be consummated.





It is
not possible to predict the length of time the Company will operate under the protection of Chapter 11 and the supervision of the Bankruptcy Court, the outcome of the bankruptcy proceedings in general, or the effect of the proceedings on the
business of the Company or on the interest of the various creditors and stakeholders. Since the Filing Date, the Debtors have conducted business in the ordinary course. Management is in the process of evaluating their operations as part of the
development of a Plan. During the pendency




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##### Table of Contents

of the Chapter 11 Filings, the Debtors may, with Bankruptcy Court approval, sell assets and settle liabilities, including for amounts other than
those reflected in the financial statements. The administrative and reorganization expenses resulting from the Chapter 11 Filings will unfavorably affect the Debtors results of operations. In addition, under the priority scheme established by
the Bankruptcy Code, most, if not all, post-petition liabilities must be satisfied before most other creditors or interest holders, including stockholders, can receive any distribution on account of such claim or interest.





The Companys consolidated financial statements are presented in accordance with American Institute of Certified Public Accountants
Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7), assuming that the Company will continue as a going concern. The Company is currently operating under the
jurisdiction of Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of the Company as a going concern is contingent upon, among other things, its ability to formulate a Plan which will gain approval of the requisite parties
under the Bankruptcy Code and confirmation by the Bankruptcy Court, its ability to comply with the DIP Financing Agreement, and its ability to return to profitability, generate sufficient cash flows from operations, and obtain financing sources to
meet future obligations. These matters raise substantial doubt about the Companys ability to continue as a going concern. The Companys consolidated financial statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.





In the Chapter 11 Filings, substantially all unsecured liabilities as of the Filing Date are subject to compromise or other treatment under a Plan which must be confirmed by the Bankruptcy Court after
submission to any required vote by affected parties. Generally, all actions to enforce or otherwise effect repayment of pre-petition liabilities, as well as all pending litigation against the Debtors, are stayed while the Debtors continue their
business operations as debtors-in-possession. The ultimate amount of and settlement terms for liabilities subject to compromise are subject to an approved Plan and accordingly are not presently determinable. The principal categories of obligations
classified as liabilities subject to compromise under the Chapter 11 Filings as of June 29, 2002 are identified below (in thousands):





91/8% Senior Subordinated Notes

$
300,000Interest accrued on above debt


12,775Accounts payable


11,421Accrued expenses


2,311$
326,507




35




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##### Table of Contents




Pursuant to SOP 90-7, professional fees associated with the Chapter 11 Filings
are expensed as incurred and reported as reorganization items. Interest expense is reported only to the extent that it will be paid during the Chapter 11 Filings or that it is probable that it will be an allowed claim. The Company recognized a
charge of $4.4 million and $14.3 million associated with the Chapter 11 Filings for the three and nine months ended June 29, 2002, respectively. Of these charges, $2.9 million and $5.1 million for the three and nine months ended June 29, 2002,
respectively, were for fees payable to professionals retained to assist with the Chapter 11 Filings. In addition, $1.5 million for both the three and nine months ended June 29, 2002 was related to incentive and retention programs and approximately
$7.7 million, incurred in the March quarter 2002, was related to the non-cash write-off of the unamortized discount on the 91/8% Senior Subordinated Notes and the non-cash write-off of related deferred financing fees.





Results of
Operations





The Companys operations are primarily classified into four operating segments: (1) Galey
& Lord Apparel, (2) Swift Denim, (3) Klopman International and (4) Home Fashion Fabrics. Results for the three and nine months ended June 29, 2002 and June 30, 2001 for each segment are shown below:





Three Months Ended

Nine Months EndedJune 29, 2002

June 30, 2001

June 29, 2002

June 30, 2001(Amounts in thousands)Net Sales per SegmentGaley & Lord Apparel

$
81,699

$
103,258

$
208,923

$
322,931Swift Denim


80,585


78,103


190,107


234,450Klopman International


32,211


35,351


93,522


106,123Home Fashion Fabrics


2,072


3,449


8,443


10,049Total

$
196,567

$
220,161

$
500,995

$
673,553




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##### Table of Contents




Three Months Ended


Nine Months EndedJune 29, 2002


June 30, 2001


June 29, 2002


June 30, 2001(Amounts in thousands)Operating Income (Loss) per Segment As ReportedGaley & Lord Apparel

$
795


$
4,289


$
(3,050
)

$
19,901Swift Denim


5,050



6,640



18,428



16,825Klopman International


2,489



3,425



4,491



8,876Home Fashion Fabrics


(709
)


(1,489
)


(2,123
)


(3,862
)Corporate


(216
)


(381
)


(2,189
)


(1,260
)$
7,409


$
12,484


$
15,557


$
40,480Operating Income (Loss) per Segment Excluding Strategic Initiatives(1)Galey & Lord Apparel

$
893


$
4,426


$
(1,889
)

$
22,044Swift Denim


5,534



7,777



19,664



20,185Klopman International


2,489



3,425



4,491



8,876Home Fashion Fabrics


(526
)


(1,489
)


(1,063
)


(3,862
)Corporate


(216
)


(381
)


(2,189
)


(1,129
)$
8,174


$
13,758


$
19,014


$
46,114


---

|(1) |  | For a description of the Companys Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, see Note I to the Consolidated Financial Statements. For a
description of the Companys Fiscal 2000 Strategic Initiatives, see Note J to the Consolidated Financial Statements.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




June Quarter 2002 Compared to June Quarter 2001





Net
Sales





Net sales for the June quarter 2002 (third quarter of fiscal 2002) were $196.6 million as compared
to $220.2 million for the June quarter 2001 (third quarter of fiscal 2001).





Galey & Lord
Apparel    Galey & Lord Apparels net sales for the June quarter 2002 were $81.7 million, a $21.6 million decrease as compared to the June quarter 2001 net sales of $103.3 million. Approximately $12.4 million of
the decrease was due to the discontinuation of the Companys garment making operations in September 2001 which was included as part of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. Overall, fabric selling prices, inclusive of
product mix changes, declined approximately 9.0%. A 1.7% decline in fabric volume also contributed to the net sales decrease.





Swift Denim    Swift Denims net sales for the June quarter 2002 were $80.6 million as compared to $78.1 million in the June quarter 2001. The $2.5 million increase was primarily attributable to
a 4.7% increase in volume and a 2.8% increase in mix partially offset by a 4.3% decline in selling prices.




37




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##### Table of Contents




Klopman International    Klopman
Internationals net sales for the June quarter 2002 were $32.2 million, a $3.2 million decline as compared to the June quarter 2001 net sales of $35.4 million. The decline was primarily attributable to a 13.7% decrease in sales volume offset by
a 5.7% increase in net sales due to exchange rate changes used in translation.





Home Fashion
Fabrics    Net sales for Home Fashion Fabrics for the June quarter 2002 were $2.1 million compared to $3.4 million for the June quarter 2001. The $1.3 million decrease in net sales primarily resulted from reduced volume
and was partially offset by favorable mix.





Operating Income (Loss)





Operating income for the June quarter 2002 was $7.4 million as compared to $12.5 million for the June quarter 2001. Excluding the charges related to the Fiscal 2001
Cost Reduction and Loss Avoidance Initiatives and the Fiscal 2000 Strategic Initiatives, the June quarter 2002 operating income would have been $8.2 million. Excluding the charges related to the Fiscal 2000 Strategic Initiatives, the June quarter
2001 operating income would have been $13.8 million.





Galey & Lord
Apparel    Galey & Lord Apparels operating income was $0.8 million for the June quarter 2002 as compared to $4.3 million for the June quarter 2001. Excluding the run-out costs associated with the Fiscal 2001
Cost Reduction and Loss Avoidance Initiatives, Galey & Lord Apparels operating income for the June quarter 2002 would have been $0.9 million as compared to $4.4 million for the June quarter 2001 excluding the Fiscal 2000 Strategic
Initiatives. The decrease in operating income is principally a result of lower fabric selling prices due to price competition and changes in product mix, partially offset by lower raw material prices and the elimination of losses in the garment
operations which were discontinued in connection with the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives.





Swift Denim    Swift Denims operating income was $5.1 million for the June quarter 2002 compared to $6.6 million for the June quarter 2001. Excluding the run-out costs related to the Fiscal
2000 Strategic Initiatives, operating income for the June quarter 2002 and June quarter 2001 would have been $5.5 million and $7.8 million, respectively. The decrease in Swift Denims operating income is principally due to a decline in selling
prices, foreign currency exchange losses and higher selling, general and administrative expenses. This decline was partially offset by positive changes in product mix and improvement in raw material variances, principally lower cotton prices.




38




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##### Table of Contents




Klopman International    Klopman
Internationals operating income in the June quarter 2002 decreased $0.9 million to $2.5 million as compared to the June quarter 2001 operating income of $3.4 million. The decrease principally reflects the impact of lower volume, unfavorable
sales mix and effect of exchange rates used in translation.





Home Fashion
Fabrics    Home Fashion Fabrics reported an operating loss of $0.7 million for the June quarter 2002 as compared to an operating loss of $1.5 million for the June quarter 2001. Excluding the costs associated with the
Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, Home Fashion Fabrics operating loss for the June quarter 2002 would have been $0.5 million. The decrease in operating loss is due to lower fixed costs as a result of the Fiscal 2001
Cost Reduction and Loss Avoidance Initiatives.





Corporate    The corporate
segment reported an operating loss for the June quarter 2002 of $0.2 million as compared to an operating loss for the June quarter 2001 of $0.4 million. The corporate segments operating income (loss) typically represents the administrative
expenses from the Companys various holding companies.





Income from Associated Companies





Income from associated companies was $1.4 million in the June quarter 2002 as compared to $2.7 million in the June quarter 2001. The
income represents amounts from several joint venture interests that manufacture and sell denim products. The decline in income from associated companies primarily resulted from the Companys decreased ownership in its European joint ventures as
well as an overall softening in the European denim market.





Interest Expense





Interest expense was $6.2 million for the June quarter 2002 compared to $14.4 million for the June quarter 2001. The decrease in interest expense was primarily due to
the discontinuation of the 91/8% Senior Subordinated Notes (Subordinated Notes) interest accrual as
of the Filing Date and lower prime and LIBOR base rates in the June quarter 2002 as compared to the June quarter 2001. The average interest rate paid by the Company on its bank debt, excluding the Subordinated Notes, in the June quarter 2002 was
5.73% per annum as compared to 7.6% per annum in the June quarter 2001.





Income Taxes





The Companys overall tax rate for the June quarter 2002 differed from the statutory rate principally due to the nonrecognition of
the U.S. tax benefits on the domestic net operating loss carryforwards. The result is an overall tax expense rate which is higher than the statutory rate.




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Net Income (Loss) and Net Income (Loss) Per Share





Net loss for the June quarter 2002 was $2.7 million or $0.22 per common share, compared to net income for the June quarter 2001 of $0.8
million or $.07 per common share. Excluding the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, Fiscal 2000 Strategic Initiatives, and reorganization items as a result of the Chapter 11 Filings (see Bankruptcy Filing above),
the Companys net income for the June quarter 2002 would have been $2.4 million or $.20 per common share. Excluding the Fiscal 2000 Strategic Initiatives, the Companys net income for the June quarter 2001 would have been $1.7 million or
$.14 per share.





First Nine Months of Fiscal 2002 Compared to First Nine Months of Fiscal 2001





Net Sales





Net sales for the first nine months of fiscal 2002 were $501.0 million as compared to $673.6 million for the first nine months of fiscal 2001.





Galey & Lord Apparel    Galey & Lord Apparels net sales for the first nine months of
fiscal 2002 were $208.9 million, a $114.0 million decrease as compared to the first nine months of fiscal 2001s net sales of $322.9 million. The decrease in net sales was primarily attributable to a 20.2% decrease in fabric sales volume.
Approximately $34.4 million of the decrease was due to the discontinuation in September 2001 of the Companys garment making operations announced as part of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. The remainder of the
decrease was due to the continuing difficult domestic retail environment and a reduction in average selling prices. Overall, average selling prices, inclusive of product mix changes, declined approximately 9.5%.





Swift Denim    Swift Denims net sales for the first nine months of fiscal 2002 were $190.1 million
as compared to $234.5 million in the first nine months of fiscal 2001. The $44.4 million decrease was primarily attributable to a 16.6% decrease in volume and a 3.4% decline in selling prices partially offset by a 1.1% increase in mix. Approximately
$17.3 million of the volume decrease was due to the reduction in manufacturing capacity resulting from the closure of the Erwin, North Carolina Facility in December 2000. The remainder of the decrease was due to the effect of the decline in demand
at retail which occurred in the December quarter 2001 and, to some extent, in the March quarter 2002.





Klopman International    Klopman Internationals net sales for the first nine months of fiscal 2002 were $93.5 million, a $12.6 million decrease as compared to the first nine months of fiscal
2001 net sales of $106.1 million. The decrease was primarily attributable to an




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10.3% decline in sales volume and a 2.4% decline in selling prices inclusive of product mix changes offset by a 1.0% increase in net sales due
to exchange rate changes used in translation.





Home Fashion Fabrics    Net sales
for Home Fashion Fabrics for the first nine months of fiscal 2002 were $8.4 million compared to $10.0 million for the first nine months of fiscal 2001. The $1.6 million decline in net sales primarily resulted from lower volume partially offset by
changes in product mix.





Operating Income (Loss)





Operating income for the first nine months of fiscal 2002 was $15.6 million as compared to $40.5 million for the first nine months of fiscal 2001. Excluding the run-out
costs associated with the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and Fiscal 2000 Strategic Initiatives, operating income for the first nine months of fiscal 2002 would have been $19.0 million. Excluding the charges related to the
Fiscal 2000 Strategic Initiatives, the first nine months of fiscal 2001 operating income would have been $46.1 million.





Galey & Lord Apparel    Galey & Lord Apparels operating loss was $3.1 million for the first nine months of fiscal 2002 as compared to operating income of $19.9 million for the first
nine months of fiscal 2001. Excluding the run-out costs associated with the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, Galey & Lord Apparels operating loss for the first nine months of fiscal 2002 would have been $1.9
million as compared to operating income of $22.0 million for the first nine months of fiscal 2001 excluding the Fiscal 2000 Strategic Initiatives. The decrease in operating income was principally a result of reduced fabric sales due to a continuing
decline in the market, lower fabric selling prices due to price competition and change in product mix, partially offset by lower raw material prices and the elimination of losses in the garment operations which were discontinued in connection with
the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives.





Swift
Denim    Operating income for the first nine months of fiscal 2002 for Swift Denim was $18.4 million, a $1.6 million increase as compared to the first nine months of fiscal 2001 operating income of $16.8 million.
Excluding the run-out costs related to the Fiscal 2000 Strategic Initiatives, operating income for the first nine months of fiscal 2002 and the first nine months of fiscal 2001 would have been $19.7 million and $20.2 million, respectively. The
decrease in Swift Denims operating income is principally due to lower sales volume, a reduction in selling prices, foreign currency exchange losses and some curtailment of manufacturing schedules. The decrease is partially offset by positive
changes in product mix, lower utility costs, reduction of lower-of-cost-or-market (LCM) reserves due to the change in method of accounting for inventories to the last-in, first-out




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(LIFO) inventory method, impact of lower cotton prices and lower fixed manufacturing costs due to the closure of the Erwin facility in December
2000. Swift also recognized a benefit curtailment gain of $3.4 million in the current year related to the curtailment of postretirement benefits for employees not retired as of December 31, 2001 compared to a gain of $2.4 million recognized in the
prior year related to benefit curtailment at the Erwin facility.





Klopman
International    Klopman Internationals operating income in the first nine months of fiscal 2002 decreased $4.4 million to $4.5 million as compared to the first nine months of fiscal 2001 operating income of $8.9
million. The decrease principally reflects $2.6 million related to the impact of lower selling prices and changes in product mix and $2.0 million related to the decrease in sales volume.





Home Fashion Fabrics    Home Fashion Fabrics reported an operating loss for the first nine months of fiscal 2002 of $2.1 million as
compared to an operating loss for the first nine months of fiscal 2001 of $3.9 million. Excluding the costs associated with the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, Home Fashion Fabrics operating loss for the first nine
months of fiscal 2002 would have been $1.1 million. The decrease in operating loss was due to lower fixed costs as a result of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives.





Corporate    The corporate segment reported an operating loss for the first nine months of fiscal 2002 of $2.2 million as compared to an
operating loss for the first nine months of fiscal 2001 of $1.3 million. The increase in the operating loss is primarily due to financial consultant expenses incurred in the first quarter of fiscal 2002 prior to the bankruptcy filing. The corporate
segments operating income (loss) typically represents the administrative expenses from the Companys various holding companies.





Income from Associated Companies





Income from associated companies was $5.6 million in the
first nine months of fiscal 2002 as compared to $6.4 million in the first nine months of fiscal 2001. The income represents amounts from several joint venture interests that manufacture and sell denim products. The decline in income from associated
companies primarily resulted from the Companys decreased ownership in its European joint ventures as well as an overall softening in the European denim market.





Interest Expense





Interest expense was $28.8 million for
the first nine months of fiscal 2002 compared to $46.2 million for the first nine months of fiscal 2001. The decrease in interest expense was primarily due to the discontinuation of the Subordinated Notes interest accrual as of the Filing Date as
well as lower prime and LIBOR base rates in the first




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nine months of fiscal 2002 as compared to the first nine months of 2001. The average interest rate paid by the Company on its bank debt,
excluding the Subordinated Notes, in the first nine months of fiscal 2002 was 5.91% per annum as compared to 9.0% per annum in the first nine months of fiscal 2001.





Income Taxes





The Companys overall tax rate differed
from the statutory rate principally due to the nonrecognition of the U.S. tax benefits on the domestic net operating loss carryforwards. The result is an overall tax expense rate which is higher than the statutory rate.





The Job Creation and Worker Compensation Act of 2002 became effective on March 9, 2002 and provided a 5 year carryback for net operating
losses incurred in tax years ending in 2001 and 2002. As a result the Company carried back net operating losses from the year ended September 29, 2001. Due to the tax law change, the Company recorded a $1.2 million tax benefit in the March quarter
2002 and a $0.1 million tax benefit in the June quarter 2002. Substantially all of the income tax refund was received in the June quarter 2002.





Net Income (Loss) and Net Income (Loss) Per Share





The net loss for the first nine months
of fiscal 2002 was $23.8 million or $1.98 per common share compared to a net income for the first nine months of fiscal 2001 of $1.1 million or $.09 per common share. Excluding the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, the
Fiscal 2000 Strategic Initiatives, and reorganization items as a result of the Chapter 11 Filings (see Bankruptcy Filing above), the Companys net loss for the first nine months of fiscal 2002 would have been $6.2 million or $.51
per common share. Excluding the Fiscal 2000 Strategic Initiatives, the Companys net income for the first nine months of fiscal 2001 would have been $4.6 million or $.39 per common share.





Order Backlog





The
Companys order backlog at June 29, 2002 was $130.1 million, a 0.5% increase from the June 30, 2001 backlog of $129.5 million. The June 30, 2001 backlog included $4.9 million related to the Companys garment operations which were exited in
connection with the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. Over the past several years, many apparel manufacturers, including many of the Companys customers, have modified their purchasing procedures and have shortened lead
times from order to delivery. Accordingly, the Company believes that order backlogs may not be as meaningful as they have in the past with regard to the Companys future sales.





Liquidity and Capital Resources





As previously discussed, the Company and each of its domestic subsidiaries filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the Bankruptcy Code. The matters described




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under this caption Liquidity and Capital Resources, to the extent that they relate to future events or expectations, may be
significantly affected by the Chapter 11 Filings. Such proceedings will involve, or result in, various restrictions on the Debtors activities, limitations on financing, the need to obtain Bankruptcy Court approval for various matters and
uncertainty as to relationships with vendors, suppliers, customers and others with whom the Debtors may conduct or seek to conduct business.





The Company and its subsidiaries had cash and cash equivalents totaling $25.5 million and $7.1 million at June 29, 2002 and June 30, 2001, respectively. As a result of the Chapter 11 Filings, the
Companys ability to borrow under its Senior Credit Facility (as defined below) was frozen and replaced with the Companys DIP Financing Agreement (as defined below). As of June 29, 2002, the Companys borrowing availability under its
DIP Financing Agreement was $97.2 million. As of June 29, 2002, the Companys Canadian operations also had a total of U.S. $6.2 million of revolving credit borrowing availability under the Canadian Loan Agreement (as defined below).





During the June quarter 2002, the Company primarily utilized its available cash to fund the Companys
operating and investing requirements.





During the March quarter 2002, Klopman International used existing cash
balances and borrowings under its credit agreements to complete a capital reduction of $20.2 million with its European parent holding company (which is a wholly-owned subsidiary of the Company). In April 2002, $19.5 million was transferred from the
Companys European holding company to the Company in the United States. The Company then utilized the cash to repay its $7.4 million outstanding balance under its DIP Financing Agreement (as defined below) as well as repay $5.0 million, $4.2
million, and $2.9 million of the Companys pre-petition revolving line of credit, Term Loan B, and Term Loan C borrowings, respectively under the pre-petition Senior Credit Facility (as defined below).





Debtor-in-Possession Financing Agreement





Under the terms of the final DIP financing agreement (the DIP Financing Agreement) among the company and the Debtor subsidiaries and First Union National Bank (the Agent) and Wachovia Securities,
Inc., the Company, as borrower, may make revolving credit borrowings (including up to $15 million for post-petition letters of credit) in an amount not exceeding the lesser of $100 million or the Borrowing Base (as defined in the DIP Financing
Agreement). The DIP Financing Agreement will terminate and the borrowings thereunder will be due and payable upon the earliest of (i) August 19, 2003, (ii) the date of the substantial consummation of a plan of reorganization that is confirmed
pursuant to an order by the Bankruptcy Court or (iii) the acceleration of the revolving credit loans made by any of the banks who are a party




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to the DIP Financing Agreement and the termination of the total commitment under the DIP Financing Agreement pursuant to the DIP Financing
Agreement. Amounts borrowed under the DIP Financing Agreement bear interest at the rate per annum at the Companys option, of either (i) (a) the higher of the prime rate or the federal funds rate plus .50% plus (b) a margin of 2.00% or (ii)
LIBOR plus a margin of 3.25%. There is an unused commitment fee of (A) at such time as First Union National Bank is no longer the sole bank, at the rate of (i) .75% per annum on the average daily unused total commitment at all times during which the
average total commitment usage is less than 25% of the total commitment and (ii) .5% per annum on the average daily unused total commitment at all times during which the average total commitment usage is more than or equal to 25% of the total
commitment; or (B) at all times that First Union National Bank is the sole bank, at a rate of .50% per annum on the average daily unused total commitment. There are letter of credit fees payable to the Agent equal to LIBOR plus 3.25% on the daily
average letters of credit outstanding and to a fronting bank, its customary fees plus .25% for each letter of credit issued by such fronting bank.





Borrowings under the DIP Financing Agreement are guaranteed by each of the Debtor subsidiaries. In general, such borrowings constitute allowed super-priority administrative expense claims, and are
secured by (i) a perfected first priority lien pursuant to Section 364(c)(2) of the Code, upon all property of the Company and the Debtor subsidiaries that was not subject to a valid, perfected and non-avoidable lien on the Filing Date, (ii) a
perfected junior lien, pursuant to Section 364(c)(3) of the Code upon all property of the Company and the Debtor subsidiaries already subject to valid, perfected, non-avoidable liens, and (iii) a perfected first priority senior priming lien,
pursuant to Section 364(d)(1) of the Code, upon all property of the Company and the Debtor subsidiaries already subject to a lien that presently secures the Companys and the Debtor subsidiaries pre-petition indebtedness under the
existing pre-petition credit agreement, whether created prior to or after the Filing Date (subject to certain specific existing or subsequently perfected liens). This security interest is subject to certain explicit exceptions.





The DIP Financing Agreement contains covenants restricting the Company and the Guarantors from consolidating or merging with
and into another person, disposing of assets, incurring additional indebtedness and guarantees, creating liens and encumbrances on properties, modifying its or their business, making capital expenditures in excess of $22.5 million through the
maturity date or $15.2 million during any 12 month period, declaring and paying dividends, making investments, loans or advances, and creating super-priority claims. There are certain limitations on affiliate transactions and on costs and expenses
incurred in connection with the closing of production facilities. The DIP Financing Agreement also requires the Company and the Debtor




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subsidiaries to achieve certain levels of EBITDA (as defined) as specified therein. At June 29, 2002, the Company was in compliance with the
covenants of the DIP Financing Agreement.





The DIP Financing Agreement also provides for the mandatory prepayment
of all or a portion of outstanding borrowings upon repatriation of funds from foreign subsidiaries or the sale of assets, or in the event outstanding loans exceed the Borrowing Base.





Pre-Petition Senior Credit Facility





On January 29, 1998
the Company entered into a new credit agreement (as amended, the Senior Credit Facility) with First Union National Bank, as agent and lender, and, as of March 27, 1998, with a syndicate of lenders. The Senior Credit Facility provides for
(i) a revolving line of credit under which the Company may borrow up to an amount (including letters of credit up to an aggregate of $30.0 million) equal to the lesser of $225.0 million or a borrowing base (comprised of eligible accounts receivable
and eligible inventory, as defined in the Senior Credit Facility), (ii) a term loan in the principal amount of $155.0 million (Term Loan B) and (iii) a term loan in the principal amount of $110.0 million (Term Loan C). In
July 1999, the Company amended its Senior Credit Facility (the July 1999 Amendment) pursuant to which the Company, among other things, repaid $25 million principal amount of its term loan balance using available borrowings under its
revolving line of credit and reduced the maximum amount of borrowings under the revolving line of credit by $25 million to $200 million. The repayment of the Term Loan B and Term Loan C principal balances ratably reduced the remaining quarterly
principal payments.





Under the Senior Credit Facility, the revolving line of credit expires on March 27, 2004 and
the principal amount of (i) Term Loan B is repayable in quarterly payments of $293,397 through March 27, 2004, three quarterly payments of $27,579,329 and final amount of $23,405,783 on Term Loan Bs maturity of April 2, 2005 and (ii) Term Loan
C is repayable in quarterly payments of $208,132 through April 2, 2005, three quarterly payments of $19,356,265 and a final amount of $16,395,608 on Term Loan Cs maturity of April 1, 2006.





The Companys obligations under the Senior Credit Facility are secured by substantially all of the assets of the Company and each of its domestic subsidiaries
(including a lien on all real property owned in the United States), a pledge by the Company and each of its domestic subsidiaries of all the outstanding capital stock of its respective domestic subsidiaries and a pledge of 65% of the outstanding
voting capital stock, and 100% of the outstanding non-voting capital stock, of certain of its respective foreign subsidiaries. In addition, payment of all obligations under the Senior Credit Facility is guaranteed by each of the Companys
domestic subsidiaries. Under the Senior Credit Facility, the Company is required to make mandatory prepayments of principal annually in an amount equal to 50% of Excess




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Cash Flow (as defined in the Senior Credit Facility), and also in the event of certain dispositions of assets or debt or equity issuances (all
subject to certain exceptions) in an amount equal to 100% of the net proceeds received by the Company therefrom. Based on fiscal 2001 results, the Company was not required to make an Excess Cash Flow payment with respect to fiscal 2001.





As a result of the February 2001 funding of the Companys Canadian Loan Agreement (as defined below), the
Company repaid $12.7 million principal amount of its U.S. term loan balance and reduced the maximum amount of borrowings under its U.S. revolving line of credit by $12.3 million to $187.7 million. The repayment of the Term Loan B and Term Loan C
principal balances ratably reduced the remaining quarterly principal payments. The reduction in the U.S. revolving line of credit facility resulted in a write-off of $0.1 million of deferred debt charges which is included in selling, general and
administrative expenses in the March quarter 2001.





During the March quarter 2002, Klopman International used
existing cash balances and borrowings under its credit agreements to complete a capital reduction of $20.2 million with its European parent holding company (which is a wholly-owned subsidiary of the Company). (See Liquidity and Capital
Resources above)





As a result of the Chapter 11 Filings, the Company and the Debtor subsidiaries are
currently in default under the Senior Credit Facility. (See Bankruptcy Filing above)





Pre-Petition Senior Subordinated
Debt





In February 1998, the Company closed its private offering of $300.0 million aggregate principal amount
of 91/8% Senior Subordinated Notes Due 2008 (the Notes). In May 1998, the Notes were exchanged for
freely transferable identical Notes registered under the Securities Act of 1933. Net proceeds from the offering of $289.3 million (net of initial purchasers discount and offering expenses), were used to repay (i) $275.0 million principal
amount of bridge financing borrowings incurred to partially finance the acquisition of the apparel fabrics business of Dominion Textile, Inc. on January 29, 1998 and (ii) a portion of the outstanding amount under a revolving line of credit provided
for under the Senior Credit Facility (as defined herein). Interest on the Notes is payable on March 1 and September 1 of each year.





In August 2000, the Company and its noteholders amended the indenture, dated February 24, 1998 (the Indenture), entered into in connection with the Notes to amend the definition of Permitted
Investment in the Indenture to allow the Company and its Restricted Subsidiaries (as defined in the Indenture) to make additional investments (as defined in the Indenture) totaling $15 million at any time outstanding in one or more joint
ventures which conduct manufacturing operations




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primarily in Mexico. This amendment was completed to allow the Company sufficient flexibility in structuring its investment in the Swift
Denim-Hidalgo joint venture.





The Notes are general unsecured obligations of the Company, subordinated in right of
payment to all existing and future senior indebtedness of the Company and its subsidiaries and senior in right of payment to any subordinated indebtedness of the Company. The Notes are unconditionally guaranteed, on an unsecured senior subordinated
basis, by Galey & Lord Industries, Inc., Swift Denim Services, Inc., G&L Service Company North America, Inc., Swift Textiles, Inc., Galey & Lord Properties, Inc., Swift Denim Properties, Inc. and other future direct and indirect domestic
subsidiaries of the Company.





The Notes are subject to certain covenants, including, without limitation, those
limiting the Company and its subsidiaries ability to incur indebtedness, pay dividends, incur liens, transfer or sell assets, enter into transactions with affiliates, issue or sell stock of restricted subsidiaries or merge or consolidate the
Company or its restricted subsidiaries.





As a result of the Chapter 11 Filings, the Company and the Debtor
subsidiaries are currently in default under the Notes and the Indenture. As of the Filing Date, the Company discontinued its interest accrual on the Notes and wrote off $7.7 million of deferred debt fees and the remaining discount on the Notes.





Canadian Loan Agreement





In February 2001, the Companys wholly owned Canadian subsidiary, Drummondville Services Inc. (Drummondville), entered into a Loan Agreement (the Canadian Loan Agreement)
with Congress Financial Corporation (Canada), as lender. The Canadian Loan Agreement provides for (i) a revolving line of credit under which Drummondville may borrow up to an amount equal to the lesser of U.S. $16.0 million or a borrowing base
(comprised of eligible accounts receivable and eligible inventory of Drummondville, as defined in the Canadian Loan Agreement), and (ii) a term loan in the principal amount of U.S. $9.0 million.





Under the Canadian Loan Agreement, the revolving line of credit expires in February 2004 and the principal amount of the term loan is repayable in equal monthly
installments of $229,500 CDN with the unpaid balance repayable in February 2004; provided, however, that the revolving line of credit and the maturity of the term loan may be extended at the option of Drummondville for up to two additional one year
periods subject to and in accordance with the terms of the Canadian Loan Agreement. Under the Canadian Loan Agreement, the interest rate on Drummondvilles borrowings initially is fixed through the second quarter of fiscal year 2001 (March
quarter 2001) at a per annum rate, at Drummondvilles option, of either LIBOR plus 2.75% or




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the U.S. prime rate plus .75% (for borrowings in U.S. dollars) or the Canadian prime rate plus 1.5% (for borrowings in Canadian dollars).
Thereafter, borrowings will bear interest at a per annum rate, at Drummondvilles option, of either (i) the U.S. prime rate plus 0%, .25%, .50%, .75%, or 1.0% (for borrowings in U.S. dollars), (ii) the Canadian prime rate plus .75%, 1.0%,
1.25%, 1.50%, or 1.75% (for borrowings in Canadian dollars), or (iii) LIBOR plus 2.00%, 2.25%, 2.50%, 2.75% or 3.00%, all based on Drummondville maintaining certain quarterly excess borrowing availability levels under the revolving line of credit or
Drummondville achieving certain fixed charge coverage ratio levels (as set forth in the Canadian Loan Agreement).





Drummondvilles obligations under the Canadian Loan Agreement are secured by all of the assets of Drummondville. The Canadian Loan Agreement contains certain covenants, including without limitation, those limiting
Drummondvilles ability to incur indebtedness (other than incurring or paying certain intercompany indebtedness), incur liens, sell or acquire assets or businesses, pay dividends, make loans or advances or make certain investments. In addition,
the Canadian Loan Agreement requires Drummondville to maintain a certain level of tangible net worth (as defined in the Canadian Loan Agreement).





Tax Matters





At June 29, 2002, the Company had outstanding net operating loss carryforwards
(NOLs) for U.S. federal tax purposes of approximately $143 million and state tax purposes of approximately $132 million. The federal NOLs will expire in years 2018-2021 if unused, and the state NOLs will expire in years 2003-2021 if
unused. In accordance with the Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, a valuation allowance of $28.2 million related to domestic operating income losses has been established since it is more
likely than not that some portion of the deferred tax asset will not be realized.





The Job Creation and Worker
Compensation Act of 2002 became effective on March 9, 2002 and provided a 5 year carryback for net operating losses incurred in tax years ending in 2001 and 2002. As a result the Company carried back net operating losses from the year ended
September 29, 2001. Due to the tax law change, the Company recorded a $1.2 million tax benefit in the March quarter 2002 and a $0.1 million tax benefit in the June quarter 2002. Substantially all of the income tax refund was received in the June
quarter 2002.





Adequacy of Capital Resources





As discussed above, the Company and the Debtor subsidiaries are operating their businesses as debtors-in-possession under Chapter 11 of the Bankruptcy Code. In addition to
the cash requirements necessary to fund ongoing operations, the Company anticipates that it will incur significant professional fees and other restructuring costs




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in connection with the Chapter 11 Filings and the restructuring of its business operations. As a result of the uncertainty surrounding the
Companys current circumstances, it is difficult to predict the Companys actual liquidity needs and sources at this time. However, based on current and anticipated levels of operations, and efforts to effectively manage working capital,
the Company anticipates that its cash flow from operations together with cash on hand, cash generated from asset sales, and amounts available under the DIP Financing Agreements, the Canadian Loan Agreement and certain other foreign bank loans
(entered into by the non-Debtor subsidiaries), will be adequate to meet its anticipated cash requirements during the pendency of the Chapter 11 Filings.





In the event that cash flows and available borrowings under the DIP Financing Agreement, the Canadian Loan Agreement and other foreign bank loans are not sufficient to meet future cash requirements,
the Company may be required to reduce planned capital expenditures, sell assets or seek additional financing. The Company can provide no assurance that reductions in planned capital expenditures or proceeds from asset sales would be sufficient to
cover shortfalls in available cash or that additional financing would be available or, if available, offered on acceptable terms.





As a result of the Chapter 11 Filings, the Companys access to additional financing is, and for the foreseeable future will likely continue to be, very limited. The Companys long-term liquidity requirements and the
adequacy of the Companys capital resources are difficult to predict at this time, and ultimately cannot be determined until a plan of reorganization has been developed and confirmed by the Bankruptcy Court in connection with the Chapter 11
Filings.





Other





The Company expects to spend approximately $9.1 million for capital expenditures in fiscal 2002, of which $5.7 million was spent in the first nine months of fiscal 2002. The Company anticipates that approximately 15% of the
forecasted capital expenditures will be used to increase the Companys capacity while the remaining 85% will be used to maintain existing capacity.





Euro Conversion





On January 1, 1999, eleven of the fifteen
member countries of the European Union (the Participating Countries) established fixed conversion rates between their existing sovereign currencies (legacy currencies) and the Euro. Between January 1, 1999 and December 31,
2001, the Euro was used solely for non-cash transactions. During that time period, the Euro traded on currency exchanges and was the basis of valuing legacy currencies which continued to be legal tender. Beginning January 1, 2002, the participating
countries began issuing new Euro-denominated bills and coins for use in cash transactions and




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withdrawing bills and coins denominated in the legacy currencies. As of February 28, 2002, the legacy currencies are no longer legal tender for
cash transactions, however, in most Participating Countries, bills and coins denominated in the legacy currencies may be exchanged at banks for Euros through the end of 2002.





The Companys European operations export the majority of its sales to countries that are Participating Countries. As the European pricing policy has historically been
based on local currencies, the Company believes that as a result of the Euro conversion the uncertainty of the effect of exchange rate fluctuations will be greatly reduced. In addition, the Companys principal competitors are also located
within the Participating Countries. The Company believes that the conversion to the Euro has eliminated much of the advantage or disadvantage coming from exchange rate fluctuation resulting from transactions involving legacy currencies in
Participating Countries. Accordingly, competitiveness is solely based on price, quality and service. While the Company believes the increased competitiveness based on these factors will provide the Company with a strategic advantage over smaller
local companies, it cannot assess the magnitude of this impact on its operations.





As contemplated by the
Companys Euro conversion plan, invoicing of products in both local currencies and the Euro began January 1, 1999. The conversion of the Companys financial reporting and information systems was completed during the Companys 2001
fiscal year. The costs related to the conversion were not material to the Companys operating results or liquidity.





IMPACT OF
RECENTLY ISSUED ACCOUNTING STANDARDS





In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, (FAS 141) and No. 142, Goodwill and Other Intangible Assets (FAS 142). For all business combinations initiated after June 30, 2001, FAS
141 eliminates the pooling-of-interests method of accounting and requires the purchase method of accounting, including revised recognition criteria for intangible assets other than goodwill. Under FAS 142, which is effective for years beginning
after December 15, 2001, the Companys fiscal year 2003, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Intangible assets
that have finite lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of, (FAS 121). The Company has not yet determined what the effect of FAS 142 will be on the earnings and financial position of the Company.




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In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (FAS 143), which is effective for years beginning after June 15, 2002, the Companys fiscal year 2003. FAS 143 addresses legal
obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. The standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Any associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset and
expensed over the life of the asset. The Company has not yet determined what the effect of FAS 143 will be on the earnings and financial position of the Company.





In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(FAS 144), which is effective for fiscal years beginning after December 15, 2001, the Companys fiscal year 2003. FAS 144 clarifies accounting and reporting for assets held for sale, scheduled for abandonment or other disposal, and
recognition of impairment loss related to the carrying value of long-lived assets. The Company has not yet determined what the effect of FAS 144 will be on the earnings and financial position of the Company.





In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Obligations
Associated with Disposal Activities (FAS 146), which is effective for disposal activities initiated after December 31, 2002. FAS 146 requires that a liability for a disposal obligation should be recognized and measured at its fair
value when it is incurred. The Company has not yet determined what the effect of FAS 146 will be the on earnings and financial position of the Company.





Forward Looking Statements





This Form 10-Q contains
statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements include statements regarding the
intent and belief of current expectations of the Company and its management team. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among other things, competitive and economic factors in the textile, apparel and home furnishings markets, raw
materials and other costs, the level of the




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Companys indebtedness, interest rate fluctuations, weather-related delays, general economic conditions, governmental legislation and
regulatory changes, the long-term implications of regional trade blocs and the effect of quota phase-out and lowering of tariffs under the WTO trade regulations and other risks and uncertainties that may be detailed herein, or in the Companys
Annual Report on Form 10-K for the fiscal year ended September 29, 2001. In addition, such risks and uncertainties include those related to the Chapter 11 Filings, including, without limitation, those detailed herein.




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Item 3.Quantitative and Qualitative Disclosures about Market Risk





Information relative to the Companys market risk sensitive instruments by major category at September 29, 2001 is presented under Item 7a of the registrants Annual Report on Form 10-K for the fiscal year ended September
29, 2001.





Foreign Currency Exposures





The Company conducts its business in various foreign currencies and, as a result, is exposed to movements in foreign currency exchange rates. To protect against the volatility of forecasted foreign
currency sales and purchases and accounts receivable and payable denominated in foreign currencies, the Company uses natural offsets and forward contracts. As of June 29, 2002, the result of a uniform 10% change in the value of the U.S. dollar
relative to currencies of countries in which the Company manufactures or sells its products would not be material.





Cotton Commodity
Exposures





Purchase contracts are used to hedge against fluctuations in the price of raw material cotton.
Increases or decreases in the market price of cotton may effect the fair value of cotton commodity purchase contracts. A 10% decline in market price as of June 29, 2002 would have a negative impact of approximately $2.0 million.





Derivative Financial Instruments





The Company uses forward exchange contracts to reduce the effect of fluctuating foreign currencies on sales, purchases, short-term assets and commitments. These short-term assets and commitments principally related to
accounts receivable and trade payable positions and fixed asset purchase obligations. The Company does not utilize derivative financial instruments for trading or other speculative purposes. The Company actively evaluates the creditworthiness of the
financial institutions that are counterparties to derivative financial instruments, and it does not expect any counterparties to fail to meet their obligations.





Cash Flow Hedging Strategy





The Company conducts its
business in various foreign currencies and, as a result, is exposed to movements in foreign currency exchange rates. To protect against the volatility of forecasted foreign currency cash flows resulting from sales or purchases denominated in other
than the Companys functional currencies over the next year, the Company has instituted a foreign currency hedging program. The Company hedges portions of its forecasted sales and purchases denominated in foreign currencies with forward
contracts.




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Item 3.Quantitative and Qualitative Disclosures about Market
Risk





Derivative Financial Instruments (Continued)





Foreign currency forward contracts that hedge forecasted sales and purchases are designated as cash flow hedges. The amount of gain or loss resulting from hedge
ineffectiveness for these contracts is attributable to the difference in the spot exchange rates and forward contract rates. The net loss was not material for the three and nine months ended June 29, 2002 and is included in cost of sales in the
consolidated statement of income.





Fair Value Hedging Strategy





The Company also maintains foreign currency forward contracts to hedge receivables and payables denominated in foreign currencies. These
contracts are designated as fair value hedges. The gain or loss resulting from hedge ineffectiveness for these contracts is attributable to the difference in spot exchange rates and forward contract rates. The net loss was not material for the three
and nine months ended June 29, 2002 and is included in cost of sales in the consolidated statement of income.




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PART II.    OTHER INFORMATION





Item 1.Legal Proceedings





For a discussion of Chapter 11 Filings, see Note
ABankruptcy Filing in the Notes to Consolidated Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations.





Item 2.Changes in Securities and Use of Proceeds (not applicable)





Item
3.Defaults Upon Senior Securities





The commencement of the Chapter 11
Filings constitutes an event of default under the Senior Credit Facility, the 91/8% Senior Subordinated Notes
and the Indenture related thereto, and the Companys South Carolina Job and Economic Development Authority Bonds (JEDA Bonds). The payment of interest accruing under the 91/8% Senior Subordinated Notes and the JEDA Bonds after February 19, 2002 is stayed in connection with the Chapter 11 Filings.





Item 4.Submission of Matters to a Vote of Security Holders (not applicable)





Item
5.Other Information (not applicable)





Item 6.Exhibits and Reports on Form 8-K





(a)  ExhibitsThe exhibits
to this Form 10-Q are listed in the accompanying Exhibit Index





(b)  Reports on Form 8-KNone




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SIGNATURES





Pursuant to the requirements 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.





GALEY & LORD, INC. (Registrant)By:

/s/    LEONARD F.
FERROLeonard F. Ferro Vice
President








Date    August 13, 2002




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EXHIBIT INDEX





Exhibit Number

Description

Sequential Page No.10.77

First Amendment to the Galey & Lord Retirement Savings Plan (401(k)), as Amended and Restated.99.1

Chief Executive Officers Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.99.2

Chief Accounting Officers Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.




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