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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended September 27, 2003

Commission File Number 0-20080

GALEY & LORD, INC.

(Exact name of registrant as specified in its charter)

212/465-3000

Registrant’s telephone number, including area code

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨ 

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes ¨ No x

The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last sale price on December 19, 2003, was approximately $55,000.

The number of shares outstanding of Common Stock, as of December 19, 2003, was 11,996,965 shares.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company’s definitive Proxy Statement to be filed pursuant to Regulation 14A for the 2004 annual meeting of stockholders of the Company are hereby incorporated by reference into Part III of this 10-K.

PART I

This 2003 Annual Report on Form 10-K 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 and apparel markets, raw materials and other costs, the level of the 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, and from time-to time, in the Company’s other reports filed with the Securities and Exchange Commission. In addition, such risks and uncertainties include those related to the Chapter 11 Filings (as defined below), including, without limitation, those detailed herein.

Proceedings Under Chapter 11 of the Bankruptcy Code

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 Wachovia Bank, National Association (formerly known as 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. Effective September 24, 2002, the Company exercised its right, as permitted under the DIP Financing Agreement (as defined below), to permanently reduce such maximum amount of revolving credit borrowings from $100 million to $75 million. Effective July 25, 2003, the Company further exercised its right, as permitted under the DIP Financing Agreement, to permanently reduce such maximum amount of revolving credit borrowings from $75 million to $50 million. For a description of the DIP Financing Agreement, see “- Liquidity and Capital Resources”.

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

The Debtors have also received authority to conduct certain other transactions that might be considered “outside the ordinary course” of business. The Debtors have sought and received authority to pay certain pre-petition personal and property taxes, to sell certain identified assets, to enter into certain financing agreements, and to retain a real estate professional to market and sell certain unused properties. Among other things, the Debtors have received authority to sell Klopman. This sale has not closed as of the date hereof. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note C – Discontinued Operations” to the Company’s consolidated financial statements contained herein.

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 entered three orders collectively approving the rejection of one executory contract and several unexpired leases. In addition, under the Bankruptcy Code, the Debtors must assume, assume and assign, or reject all unexpired leases of non-residential real property for which a Debtor is lessee within 60 days from the Filing Date. By orders dated April 29, 2002, August 16, 2002, December 11, 2002, April 17, 2003, and August 13, 2003, and December 17, 2003, the Bankruptcy Court extended this deadline up through and including April 12, 2004. The Debtors are in the process of reviewing their remaining executory contracts to determine which, if any, they will reject. The Debtors have proposed treatment for each such executory contract and unexpired lease as part of the proposed plan of reorganization, but that proposed treatment may change at any time prior to the confirmation of such plan. Further, there can be no assurance that the proposed plan will be confirmed, or that the proposed treatment therein will be approved. If the proposed plan is not confirmed, or if the treatment proposed therein is not approved, the Debtors will need to re-examine the potential treatment of each executory contract and unexpired lease. As such, 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 were required to submit and characterize claims against the Debtors. The Debtors are currently in the process of reviewing the claims that were filed against the Company. The ultimate amount of the claims allowed by the Court against the Company could be significantly different than the amount of the liabilities recorded by the Company.

On or about April 4, 2003, the Official Committee of General Unsecured Creditors (the “Committee”) filed a motion (the “Examiner Motion”) seeking the appointment of an examiner in the Debtors’ cases pursuant to Sections 1104(c)(1), 1104(c)(2) and 105(a) of the Bankruptcy Code and Bankruptcy Rules 2007.1 and 9014, and seeking an injunction prohibiting the Debtors from filing a Plan for at least 90 days from the appointment of such examiner. Both the Debtors and the agent for the Debtors’ pre-petition secured lenders filed objections to this motion, objecting to the relief requested therein and the purported factual predicate therefore. The Committee has withdrawn the Examiner Motion.

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On or around June 26, 2003, the Company filed a motion for authority to enter into an engagement agreement (the “Engagement Agreement”) with Alvarez & Marsal, Inc. (“A&M”). A&M will supplement existing management with professionals led by Mr. Peter A. Briggs, a managing director at A&M. Mr. Briggs will serve as chief restructuring officer (“CRO”) and report to Arthur C. Wiener, Chairman and Chief Executive Officer of the Company. Mr. Joseph A. Bondi and certain additional officers (together, the “Additional Officers”) will assist the CRO. On or about June 27, 2003, the Bankruptcy Court entered an order authorizing the Company, on an interim basis and as amended thereby, to enter into the Engagement Agreement, and to retain the CRO and Additional Officers. On or about July 18, 2003, the Bankruptcy Court entered a final order approving the retention of A&M and the CRO and Additional Officers.

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. The Plan could also involve the sale of the Debtors’ assets and/or stock. It is also possible that a sale of the Debtors’ assets and/or stock could be accomplished outside a plan of reorganization. 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. As of the date hereof, the Bankruptcy Court had entered eight orders collectively extending the Debtors’ exclusive right to file a Plan through and including November 15, 2003, and extending the Debtors’ exclusive right to solicit acceptances of such Plan through and including February 4, 2004. Both of these exclusivity periods may be further extended by the Bankruptcy Court for cause.

On December 18, 2003, the Debtors filed a proposed second amended Plan, along with a proposed second amended disclosure statement (“Disclosure Statement”) by which they intend to solicit acceptances to such Plan. Some of the key terms of the proposed Plan are:

On December 19, 2003, the Bankruptcy Court entered an order, among other things, approving the Disclosure Statement, and authorizing the Debtors to solicit votes on the Plan thereby. The Bankruptcy Court further established January 20, 2004 as both the deadline for voting on the Plan and the deadline to file objections, if any, to the Plan. Currently, a hearing before the Bankruptcy Court to consider confirmation of the Plan is scheduled for January 28, 2004.

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The proposed Plan, as amended, and the transactions contemplated thereunder are described in the Disclosure Statement, which is filed as Exhibit 2.1 to this Annual Report on Form 10-K. The Disclosure Statement includes detailed information about the proposed Plan. Nothing contained in this Form 10-K is intended to be, nor should it be construed as, a solicitation for a vote on the proposed Plan, which can only occur based on the official disclosure statement package.

Until the proposed Plan is confirmed by the Bankruptcy Court, its terms are subject to change. If the Debtors fail to obtain the requisite acceptance of such Plan during the exclusive solicitation period, or fail to file an alternative Plan and receive the requisite acceptances therefore during any extended exclusivity period that the Court may grant, 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. In addition, under the proposed Plan filed by the Debtors, the Company’s senior secured debtholders will receive all of the equity of the Company upon emergence and the Company’s current outstanding common stock will be cancelled. 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 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.

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.

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General

The Company was incorporated in Delaware in 1987 for the purpose of acquiring, in February 1988, substantially all of the assets of the Blends Apparel and Prints divisions of Burlington Industries, Inc. (“Burlington”). The Company acquired these businesses through its wholly-owned subsidiary Galey & Lord Industries, Inc. (“Industries”). Prior to April 1992, the Company was known as Galey & Lord Holdings, Inc., and Industries’ operating subsidiary was known as Galey & Lord, Inc. In June 1996, the Company, through a subsidiary of Industries, G&L Service Company, North America, Inc. (“G&L Service Company”), acquired the capital stock of Dimmit Industries, S.A. de C.V. (“Dimmit”) and certain related assets from Farah Incorporated. In January 1998, the Company acquired the apparel fabrics business of Dominion Textile, Inc. (“Dominion”), which primarily consists of subsidiaries and joint venture interests, which comprise the Swift Denim Group (“Swift”), the Klopman International Group (“Klopman”) and Swift Textiles Europe, Ltd. (“Swift Europe”). The Company conducts all of its operations through its subsidiaries and joint venture interests. Unless otherwise specified herein or the context otherwise requires, all references to the Company or the Registrant include the Company, Industries, G&L Service Company, and the subsidiaries and joint venture interests that comprise Dimmit, Swift, Swift Europe and Klopman.

The Company is a leading global manufacturer of textiles for sportswear, including cotton casuals, denim and corduroy. The Company also markets dyed and printed fabrics for use in home fashions.

The Company believes that it is the market leader in producing innovative woven sportswear fabrics as a result of its expertise in sophisticated and diversified finishing. Fabrics are designed in close partnership with customers. The Company sells its woven sportswear products to a diversified customer base.

The Company believes that it is one of the world’s largest producers of value-added denim, which it achieved through development of differentiated denim products. Accordingly, the Company believes that domestically most of its denim products are in the mid to upper range of the market.

On June 7, 1996, the Company, through its subsidiary, G&L Service Company, acquired the capital stock of Dimmit and certain related assets from Farah Incorporated for approximately $22.8 million in cash including certain costs related to the acquisition. Dimmit was composed of six manufacturing facilities located in Piedras Negras, Mexico for the purpose of sewing and finishing pants and shorts for the casual wear market. These facilities were part of the Galey & Lord Apparel segment. As discussed below, the Company closed all of G&L Service Company’s operations in the fourth quarter of fiscal 2001.

On January 29, 1998, the Company entered into a Master Separation Agreement with Polymer Group, Inc. (“Polymer”), DT Acquisition, Inc. (“DTA”), a subsidiary of Polymer, Dominion and certain other parties, pursuant to which the Company acquired (the “Acquisition”) the apparel fabrics business (the “Acquired Business”) of Dominion from DTA for a cash purchase price of approximately $466.9 million including certain costs related to the Acquisition. The Acquired Business primarily consists of subsidiaries and joint venture interests, which comprise the Swift Denim Group, the Klopman Group and Swift Europe. Swift Denim is one of the largest producers of denim in the world, Klopman is one of the largest suppliers of uniform fabrics in Europe and Swift Europe is a major international supplier of denim to Europe, North Africa and Asia. The total purchase price of the Acquisition was funded with borrowings under the Company’s credit facilities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.

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In the fourth quarter of fiscal 2000, the Company announced a series of strategic initiatives aimed at increasing the Company’s competitiveness and profitability by reducing costs. The principal manufacturing initiatives included (1) the completion of the Swift Denim-Hidalgo joint venture (discussed below), (2) the closing of the Company’s denim manufacturing facility in Erwin, North Carolina in December 2000 and (3) the closing of the Company’s yarn spinning operation at its Brighton Plant in Shannon, Georgia in December 2000. In addition, the Company provided for the elimination of duplicate personnel at the Company’s discontinued Klopman operation in Italy. Approximately 1,370 employees were terminated as a result of the initiatives, including production workers, administrative support and management.

On August 18, 2000, the Company completed a transaction which resulted in the formation of a 50/50 joint venture (the “Joint Venture”) in Mexico, Swift Denim-Hidalgo, pursuant to which the Company received a 50% equity interest in a newly formed Mexican entity which simultaneously acquired an existing denim manufacturing business (the “Existing Business”) from a group which included the Company’s partner in the Joint Venture. The Existing Business is a “state-of-the-art” denim fabric factory which commenced production in 1997. In exchange for a $14 million contribution comprised of cash, inventory and equipment, the Company received a 50% interest in the ownership of this joint venture. The Company, through its domestic and foreign subsidiaries, contributed $7.8 million in cash and inventory in fiscal 2000 and $5.0 million in inventory and equipment in fiscal 2001. The equipment contributed by the Company was from the Company’s Erwin facility which closed in December 2000.

In the fourth quarter of fiscal 2001, the Company announced additional actions due to a continuing difficult business environment. These actions included (1) the discontinuation of G&L Service Company, the Company’s garment making operations in Mexico and (2) the consolidation of its greige fabrics operations which included the closure of its Asheboro, North Carolina weaving facility and Caroleen, North Carolina spinning facility. In addition, the Company provided for the reduction of approximately 5% of its salaried overhead employees. The above actions resulted in the termination of approximately 3,300 Mexican employees and 500 U.S.-based employees. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Events”.

In fiscal 2002, the Company’s ownership interest percentages in the Swift Europe joint ventures were reduced from 50% to 33% due to additional shares being purchased by and issued to its equity partner. As part of this transaction, the equity partner provided a $25 million term loan facility to Swift Europe. In addition, Swift Europe paid off a 5.6 million Swiss Franc secured loan (which was payable in installments through 2009) to the Company during fiscal 2002.

In August 2002, the Company retained Rothschild Italia S.P.A., a financial advisor, to aid in the potential sale of its Klopman business. In July 2003, Dominion Textile International B.V., an indirect wholly-owned subsidiary of the Company (“Dominion”) and an investment group led by BS Private Equity (the “Purchaser”) entered into a Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company, through Dominion, agreed to sell to the Purchaser (the “Sale Transaction”) all of Klopman (pursuant to a sale of all or substantially all of the capital stock of each subsidiary which together constitute Klopman), for a net purchase price of € 22.4 million (before deduction for fees, costs and expenses). The consummation of the Sale Transaction was subject to a number of conditions, including, among other things, Bankruptcy Court approval, regulatory approval and satisfactory completion of environmental due diligence and appropriate environmental surveys. In the fourth quarter of fiscal 2003, all substantive issues were resolved clearing the way to dispose of this business segment and the Company classified the Klopman segment as held for sale at that time. On November 21, 2003, the Company received approval from the Bankruptcy Court to complete the Sale Transaction. Closure

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of the sale is pending consent of the Tunisian authorities, which the Company expects to receive shortly. The results of operations and statement of financial position for this segment have been reported in this Annual Report on Form 10-K as a discontinued operation for fiscal 2003 and for all prior years presented herein.

On December 11, 2003, the Company announced the reconfiguration of its Swift Denim production facility in Drummondville, Quebec. Under the reconfiguration, weaving and finishing of denim will be discontinued at the Drummondville Facility in approximately four months. Drummondville will continue to produce yarn for other Swift facilities. The reconfiguration will result in the termination of approximately 550 employees in Drummondville. After the reconfiguration, the facility will employ approximately 215 individuals in ringspun yarn production and related supporting functions.

As a result of this decision, the Company is anticipating $5.3 million of costs related to reconfiguring the plant primarily for employee termination benefits. The Company continues to evaluate the potential impairment costs of the reconfiguration and had not fully determined the impact of the reconfiguration of the Drummondville operations in accordance with Statement of Financial Accounting Standard No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” In accordance with Statement of Financial Accounting Standard No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company will accelerate the depreciation on those assets that are expected to be excess when the facility is reconfigured. No costs related to the reconfiguration of the plant were incurred in fiscal 2003.

Strategy

The Company’s strategy is (i) to be either first or second in each of the product categories it offers, (ii) to make products that can be distinguished from those made by its competitors, and (iii) to continue to modernize its facilities in order to maintain its competitive position.

Key tactics of the Company’s strategy include:

Emphasizing Customer Service. The Company is committed to being an industry leader in providing superior customer service. The key elements of this tactic include (i) providing timely and complete order delivery, (ii) building partnerships with customers, (iii) providing electronic data information services, and (iv) providing inventory management support.

Expanding International Operations. Through the expansion of international manufacturing capabilities and sales offices, the Company is better able to service both its core Swift Denim and Galey & Lord Apparel customers in North America and in various parts of the world. In addition, the Company continues to position itself to service its North American customers as they expand globally. The potential investment requirements and future financial results of further expansion have not yet been quantified. The Company currently has denim manufacturing facilities in the U.S. and through joint ventures has interests in facilities in Tunisia and Mexico, as well as sales offices or commission agents in Europe, South America and Asia. As of September 27, 2003, approximately 15% of the Company’s long-lived assets related to continuing operations were located outside of the United States.

The Company also has a marketing and product development partnership with Litton Mills in the Philippines whereby product produced by Litton is sold under the Swift Denim name to customers throughout the Pacific Rim.

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Increasing Manufacturing Efficiencies. The Company has invested in its manufacturing operations to provide for the flexible production of its broad line of value-added fabrics and to reduce production costs.

Products and Customers

The following chart sets forth the Company’s net sales for Galey & Lord Apparel and Swift Denim for each of the last three fiscal years. In the fourth quarter of fiscal 2003, the Company classified the Klopman segment as held for sale. Accordingly, the results of operations and statement of financial position for this segment have been reported in this Annual Report on Form 10-K as a discontinued operation for fiscal 2003 and for all prior years presented herein and have been excluded from the table below. See “Note C - Discontinued Operations” to the Company’s consolidated financial statements for further discussion. Included in the Galey & Lord Apparel segment are sales of the former Home Fashion Fabrics segment, which were presented as a separate segment in prior years. During fiscal 2002, the Company realigned its Home Fashion Fabrics’ management under the control of the Galey & Lord Apparel business segment. Prior year amounts have been reclassified to reflect this segment realignment.

For additional financial information with respect to the two segments and for geographical segment data, see “Note Q – Segment Information” to the Company’s consolidated financial statements contained herein.

Galey & Lord Apparel

Galey & Lord Apparel manufactures and sells woven cotton and cotton blended apparel, uniform and corduroy fabrics. From January 1997 to September 2001, the Company also sold garment packages to certain of its customers to a lesser extent. The Galey & Lord Apparel segment also purchases unfinished greige cloth from outside parties to be printed or dyed by independent suppliers in accordance with customer specifications for sale of fabric into home fashion end use markets.

The Company believes it has the largest domestic production capacity of cotton and cotton blended apparel fabrics. These fabrics are primarily used for the production of men’s and women’s pants and shorts. Because of its capital investment in sophisticated dyeing and finishing equipment, the Company is able to weave a limited number of substrates and to finish each of them into a variety of aesthetics. This enables the Company to work with its customers to provide new and unique products for the marketplace.

The Company is a vertically integrated manufacturer of woven cotton and cotton blended apparel fabrics with plants involved in spinning, weaving and dyeing and finishing. The Company supplements its spinning production with purchased yarn. The spun yarn is woven into greige fabric using high-speed

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air-jet looms. The Company dyes and finishes all of its woven cotton casual and uniform fabrics at its Society Hill, South Carolina manufacturing facility. The Company has significant assets devoted to creating value-added fabrics, including an extensive range of suede-finished fabrics. The finishing process used by the Company depends upon the type and style of fabrics being produced in accordance with customer specifications. Fabrics are woven by the Company based on projected sales but are dyed and finished according to customer specifications. As part of its Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, the Company consolidated certain of its greige fabrics operations, which included the closure of its Asheboro, North Carolina weaving facility and Caroleen, North Carolina spinning facility.

The Company maintains rigorous quality control throughout each production process. Testing and inspection occur at various stages in the spinning, weaving, dyeing and finishing processes. The Company’s plants use computers to monitor and control manufacturing processes and the flow of products.

The Company’s cotton and cotton-blended fabrics are sold principally to manufacturers of men’s and women’s wear. Fabrics produced for these markets are predominantly 100% cotton. The Company’s customers include brand name and private label manufacturers and chain stores. They include Levi’s, Haggar, Tropical Sportswear Int’l Corporation, VF Services, Polo Ralph Lauren, GAP, Inc., Liz Claiborne, American Trouser, Inc., and Oxford Industries. In addition, the Company sells to suppliers of mail order catalogs such as L.L. Bean Inc., Land’s End, Inc. and Eddie Bauer, Inc.

Galey & Lord Apparel’s uniform fabrics are distributed to the government, the industrial laundry market, the hospitality market and the healthcare market. Durability of fabric, compliance with strict specifications for use, continuity of color and customer service are the factors most important to the Company’s customers. Domestic customers for uniform fabrics include Riverside Manufacturing Co., Garment Corporation of America, Superior Uniform Group, Inc., Landau Uniforms Corp., and Kellwood Company.

The Company is the only vertically integrated manufacturer of corduroy in the U.S. and is the largest domestic manufacturer. The Company’s weaving, dyeing and finishing equipment and processes used to produce woven cotton, cotton-blended and uniform fabrics may also be used to produce corduroy. The ability to produce both corduroy and non-corduroy fabric using substantially the same equipment and processes allows the Company to schedule its production both economically and efficiently to meet changes in demand which varies seasonally (corduroy for the fall/winter selling season and cotton casual for the spring/summer selling season), and to maintain consistent levels of production throughout the entire year.

The Company manufactures corduroy fabrics in a variety of wales and weights. In addition to the traditional corduroy fabrics, the Company uses its finishing expertise to differentiate its products and produce new corduroy fabrics, including corduroy that stretches. Major corduroy customers are Levi’s, Gap, Inc., Tropical Sportswear Int’l Corporation, Polo, and Haggar. In addition, the Company sells to suppliers of mail order catalogs such as Land’s End and Eddie Bauer.

In June 1996, the Company acquired garment manufacturing facilities located in Piedras Negras, Mexico and later opened an additional garment manufacturing facility in Monclova, Mexico. This allowed the Company to offer its customers a finished package of fabric and garments from one source. Due to pricing pressures associated with a worldwide overcapacity of garment production, a strong U.S. dollar relative to Asian currencies and the impact of the Caribbean Basin Initiative (“CBI”), the

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Company closed all of its garment manufacturing facilities as part of its Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives.

The Company sells dyed and printed fabrics to the home furnishing market for use in bedspreads, comforters, curtains, accessories and certain upholstery applications. Prior to September 2001, the Company operated its own yarn and greige manufacturing facilities to produce home fashions greige fabric (undyed and unfinished) that was dyed and printed for its customers. Home fashions greige fabric was also sold to independent contractors for dyeing and finishing. However, as part of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, the yarn and greige manufacturing plants were closed and the Company began to purchase the greige fabric it requires to meet sales demand. The Company uses various suppliers to dye and print fabrics according to customers’ specifications. Home Fashion Fabrics’ major customers include Regency Home Fashions Inc. and V.K.O. Incorporated.

Swift Denim

The Company is one of the world’s largest producers of denim, operating under the trade name Swift Denim. Swift manufactures and markets a wide variety of denim products for apparel and non-apparel uses, such as home furnishings. These products are manufactured in a full range of colors, weights and finishes. In manufacturing denim, yarn is spun in its natural state, and then dyed prior to being woven into fabric. The woven fabric is then finished in a variety of ways.

Swift, recognized in the industry for product innovation, concentrates on product development on high value-added products that are developed primarily for the mid and upper ranges of distribution as determined by retail selling prices. The Company believes that Swift is the world’s largest producer of value-added denim. Swift has established leadership in developing differentiated denim products such as black denim, ring spun denim and character yarn products such as rough spun denim and rebel ring products. The Company believes that, domestically, most of its fabric offerings are in the mid to upper range of the differentiated market segment.

Through its joint venture, Swift Denim-Hidalgo, the Company is producing basic denim fabric in Mexico. The Company believes that the lower cost of production in Mexico will enable it to maintain its market share in all price points of denim fabric.

Swift enjoys a wide distribution, and its major customers include Levi’s, Polo Jeans Co., Tommy Hilfiger Corporation, GAP, Inc., Old Navy, Nautica, Guess, Inc., Abercrombie and Fitch, American Eagle Outfitters, Eddie Bauer, Inc., H.D. Lee Co. Inc. and Wrangler. It also is a supplier to private label programs through major apparel contractors including Aalfs Manufacturing Inc., PL Industries, Kentucky Apparel and Border Apparel and sells to mail order suppliers including Land’s End, Inc., L.L. Bean Inc., J. Crew Group Inc. and Eddie Bauer, Inc. Swift’s international customers include global brands such as Levi’s, Guess?, Eddie Bauer, Inc. and V.F. and large Canadian customers such as Wester Glove and Jack Spratt.

Klopman International

The Company is a leading supplier of polyester and cotton blended fabrics in Europe. Klopman is unique in being Europe’s only manufacturer dedicated solely to the production of fabrics for workwear, protectivewear and casual apparel. Klopman produces two high performance workwear fabrics, Superbandmaster 2000 and Indestructible 2000. These fabrics significantly extend the wear life of the garment while maintaining comfort and appearance. The workwear and careerwear fabrics are

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distributed primarily to the industrial laundry, hospitality and healthcare markets. Klopman has continued to expand its production and marketing of apparel and protectivewear fabrics.

Klopman operates a spinning, weaving and dyeing and finishing plant in Frosinone, Italy and a spinning and weaving facility in Tunisia. The Company’s European operations have executed a strategy to purchase greige fabric worldwide in order to achieve more competitive costs.

Klopman’s customers include the Kansas Group, Alexandra Workwear plc., Apparelmaster, CCM Limited, Alsico NV, Mulliez Freres, Amuco International SpA, Van Moer, Dickies, Haniel/Eurodress, Levi’s, Carhartt and G-Star.

In August 2002, the Company retained Rothschild Italia S.P.A., a financial advisor, to aid in the potential sale of its Klopman business. In July 2003, Dominion Textile International B.V., an indirect wholly-owned subsidiary of the Company (“Dominion”) and an investment group led by BS Private Equity (the “Purchaser”) entered into a Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company, through Dominion, agreed to sell to the Purchaser (the “Sale Transaction”) all of Klopman (pursuant to a sale of all or substantially all of the capital stock of each subsidiary which together constitute Klopman), for a net purchase price of € 22.4 million (before deduction for fees, costs and expenses). The consummation of the Sale Transaction was subject to a number of conditions, including, among other things, Bankruptcy Court approval, regulatory approval and satisfactory completion of environmental due diligence and appropriate environmental surveys. In the fourth quarter of fiscal 2003, all substantive issues were resolved clearing the way to dispose of this business segment and the Company classified the Klopman segment as held for sale at that time. On November 21, 2003, the Company received approval from the Bankruptcy Court to complete the Sale Transaction. Closure of the sale is pending consent of the Tunisian authorities, which the Company expects to receive shortly. The results of operations and statement of financial position for this segment have been reported in this Annual Report on Form 10-K as a discontinued operation for fiscal 2003 and for all prior years presented herein.

Sales and Marketing

The Company’s personnel work continually with customers to develop product lines well in advance of actual shipment. Sales personnel often present fabrics to customers in the form of commercially made sample garments rather than the traditional method of just showing fabrics. The Company believes this enables customers to bring products to market quicker and more efficiently.

The Company has separate sales and marketing groups for each of Galey & Lord Apparel, Swift and the Swift Europe joint venture (which markets denim in Europe). The Company’s sales and marketing personnel focus on merchandising and marketing products that are best suited or tailored for the customer’s market needs.

Combined sales to various divisions of Levi Strauss & Co., Inc. for fiscal 2003 and fiscal 2002 accounted for approximately 13% and 16%, respectively, of the Company’s total net sales. These divisions of Levi Strauss & Co., Inc. purchase fabrics from the Company independently of each other, and the loss of business from any one division would not necessarily affect the Company’s orders from other divisions. No other customer accounted for more than 10% of the Company’s total net sales during fiscal 2003 or fiscal 2002.

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At September 27, 2003, the Company had approximately 1,700 customer accounts related to its continuing operations.

Raw Materials and Services

The Company’s principal raw materials are cotton and polyester. Cotton is purchased either in bales or already processed from bales into spun yarn packages that can be directly used in the weaving process. Baled cotton is available from a large number of suppliers. The quantity of plantings, crop and weather conditions, agricultural policies, domestic uses, exports and market conditions can significantly affect the cost and availability of cotton, but, to date, the Company has not experienced any difficulty obtaining adequate supplies. The Company traditionally enters into contracts for cotton several months in advance of expected delivery to ensure availability. The prices associated with these contracts may be fixed either at the time the contract is signed or at a later date.

In addition to the above-noted factors impacting the cost of baled cotton, international trade issues such as fluctuations in currencies, trade laws, local industry subsidies and monetary policies also influence cotton pricing. These international factors have generally disadvantaged domestic cotton growers and users. In order to make the price of domestic cotton competitive with prices quoted in the world market, the U.S. Department of Agriculture (USDA) adopted a program under which rebates are paid to U.S. companies that purchase domestically grown cotton when domestic prices exceed world prices according to a formula based on the price difference. The Company has received cotton rebates when the program criteria have been met and government funding has been available and is currently receiving such rebates. Domestic interest groups and international governments and competitors have challenged and continue to challenge the U.S. cotton rebate program. The Company believes that any future discontinuance of the program by the USDA due to loss of U.S. government funding or as a result of external pressures could adversely impact its financial position and results of operations.

The price of polyester is determined by supply and demand and other uses of the petroleum production by-products used to produce polyester. While the Company currently purchases polyester from two principal sources, polyester is readily available from other suppliers. The Company has not experienced any difficulty in obtaining sufficient quantities of polyester, and although no assurances can be made, does not anticipate any difficulty in doing so in the future.

The Company purchases spun yarn to supplement its own production. As part of the Fiscal 2000 Strategic Initiatives and as amended thereafter, the Company entered into a long-term strategic partnership with Parkdale Mills, Inc. and affiliated companies (Parkdale) to purchase yarn. Parkdale is a highly modernized, state of the art yarn spinner that has the capability to supply the Company with high quality, cost competitive, ring and open-end yarns. Yarn is available from a number of suppliers, although the number of domestic suppliers has decreased significantly in recent years. The Company has not experienced any difficulty in obtaining sufficient quantities of yarn, and although no assurances can be made, does not anticipate any difficulty in doing so in the future.

The Company purchases its dyes and chemicals from several sources. Dyes and chemicals are available from a large number of suppliers, and the Company has not experienced any difficulty in obtaining sufficient quantities.

The Company utilizes several outside processors to dye or print greige fabric for sale into home fashion markets in accordance with customer specifications. The Company considers its relationships with the

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outside processors to be very strong and, to date, has not experienced any difficulty in meeting customer delivery dates. These services are also available from other providers.

Customer purchasing decisions for the Company’s segments are influenced by a number of factors, including quality, price, manufacturing flexibility, delivery time, customer service, product styling and differentiation. In addition, other factors such as durability of fabric, compliance with strict specifications for use and continuity of color are relevant to specific end uses, such as uniform apparel. Purchasing decisions also depend on where the cut-and sew operations for the program are located Competition among U.S. and foreign suppliers is affected by changing relative labor and raw material costs, lead times, political instability and infrastructure deficiencies of newly industrializing countries, ecological concerns, human resource laws, fluctuating currency exchange rates, individual government policies and international agreements regarding textile and apparel trade.

Trademarks and Patents

The Company owns, or has the right to use under license, various patents, trademarks and service marks. The Company’s “Galey & Lord”, “Swift Denim” and “Swift Textiles” trademarks are registered with many countries worldwide, including the U.S. Patent and Trademark Office. Other than the “Galey & Lord”, “Swift Denim” and “Swift Textiles” trademarks, the Company does not consider any of its patents, licensed technology, trademarks or service marks to be material to the conduct of its business.

Backlog

The Company’s order backlog related to continuing operations at September 27, 2003 was $47.3 million, a 46% decline from the September 28, 2002 backlog of $88.3 million. 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 are not as meaningful as they have been in the past with regard to the Company’s future sales.

Seasonality

The Company’s business is not highly seasonal. Galey & Lord Apparel’s product mix varies seasonally (with demand for corduroy fabric primarily in the fall/winter selling season and sportswear in the spring/summer selling season). Galey & Lord Apparel’s weaving, dyeing and finishing equipment and processes are configured to produce both corduroy and other woven fabrics, allowing the Company to adapt. Swift’s sales, consistent with the denim industry, are historically lower in the December quarter; however, to meet June and September customer demand, production is generally unaffected.

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Competition and Trade Regulation

The Company continues to position itself to service its North American customers as they expand globally. As a result, the textile industry is extremely competitive and in the past year has been faced with worldwide overcapacity. The Company believes that North American capacity will continue to be reduced through consolidation and rationalization. The Company competes with its competitors, both domestic and foreign, based on a combination of product styling and finish, quality, lead times, customer service and price. The Company’s results of operations and financial condition would be materially adversely affected if the Company was unable to compete effectively on the above criteria.

The United States textile industry has been and continues to be negatively impacted by existing worldwide trade practices. The establishment of the World Trade Organization in 1995 has resulted in the phase out of quotas on textiles and apparel through 2005. This phase out will gradually allow more low cost imports to enter the U.S.

U.S. government policy on an overall basis has not been favorable to the U.S. textile industry. The Company believes that the increasing flow of imports into the United States is partly due to the U.S. government’s historical strong dollar monetary policy as well as certain countries that fix their currency to the U.S. dollar. These policies allow foreign manufacturers to sell in the U.S. while a significant portion of their production costs are denominated in devalued local currencies or artificially valued local currencies. Further, the Company believes that as a result of the September 11, 2001 tragic events, the U.S. government has and may continue to grant trade concessions to textile producing nations providing assistance in its war on terrorism. These trade concessions would further harm the U.S. textile industry.

Certain U.S. government trade programs do provide some benefit to the U.S. textile industry as outlined below:

The U.S. Government has recently negotiated Central American Free Trade Agreement (“CAFTA”) with initially four countries. As currently written the agreement would remove virtually all trade barriers among the U.S. and the Central American countries of Honduras, Guatemala, El Salvador and Nicaragua and allows apparel makers in those countries to use U.S. fabrics in an arrangement similar to the textile provisions in NAFTA. The Agreement must be approved by Congress before it becomes effective.

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Galey & Lord Apparel

There are several major competitors in the finished cotton casual apparel fabrics business, none of which dominate the market. The Company’s major competitors include Delta Woodside Industries, Inc., Avondale Mills, Inc. and Milliken & Company. The Company’s technical expertise in finishing enables it to provide a number of value-added fabrics to differentiate itself from its competitors, including an extensive range of suede finished fabrics. The Company is the only vertically integrated domestic producer of corduroy fabrics. Competition to the Company’s corduroy business is mostly from imported garments.

The Company’s major domestic competitors in the workwear and careerwear business are Avondale Mills, Inc., Riegel Textile Corp., a division of Mount Vernon Mills, Inc., Milliken & Company and Springfield, LLC.

In the sale of home fashion fabrics, the Company competes with a number of printers and dyers offering similar services, including Dan River Inc., Santee Print Works Inc. and Slater Screen Print Works.

Swift Denim

The supply of U.S. denim is highly concentrated, with four denim manufacturers supplying more than 75% of the market. Cone Mills Corporation, Avondale Mills, Inc., Riegel Textile Corp., a division of Mount Vernon Mills, Inc. and Burlington are Swift’s major competitors.

Klopman International

Klopman is the leading pan-European manufacturer and marketer of fabric for workwear and protectivewear. It competes with domestic suppliers in each country it serves. Its major competitors in its principal markets are Lauffenmühle GmbH, Carrington Career and Workwear Fabrics and Royal Ten-Cate NV.

Other

In Europe, the Company believes that its joint venture, Swift Europe, is the leader in the value-added denim market with a rich mix of differentiated products. Its principal competitors include Kaihara in Japan, Hellenic Fabrics S.A. in Greece, Orta Anadolu in Turkey and Tavex Alogodoner, S.A. in Spain.

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Employees

At September 27, 2003, the Company had approximately 3,265 U.S. employees. Of these U.S. employees, approximately 3,055 were employed in manufacturing and 210 in administration and sales. Outside the U.S., at September 27, 2003, the Company had approximately 765 employees in Canada and approximately 760 employees elsewhere in the world, primarily in Europe. The majority of the Canadian employees are covered by collective bargaining agreements which expire in February 2009. The majority of the European employees are also covered by collective bargaining agreements which expire in fiscal 2004. Most of the European workforce are employees of the Klopman segment which, as discussed above, has been classified as held for sale in the fourth quarter of fiscal 2003 and is being reported in this Annual Report on Form 10-K as a discontinued operation for fiscal 2003 and for all prior years presented herein.

On December 11, 2003, the Company announced the reconfiguration of its Swift Denim production facility in Drummondville, Quebec. Under the reconfiguration, weaving and finishing of denim will be discontinued at the Drummondville Facility in approximately four months. Drummondville will continue to produce yarn for other Swift facilities. The reconfiguration will result in the termination of approximately 550 employees in Drummondville. After the reconfiguration, the facility will employ approximately 215 individuals in ringspun yarn production and related supporting functions.

Government Regulation

The Company is subject to various environmental laws and regulations in its operations governing the discharge, storage, handling and disposal of a variety of substances in the North American and European countries in which it operates. In particular, such laws include (i) in the United States; the Federal Water Pollution Control Act, the Federal Clean Air Act, the Resource Conservation Recovery Act (including amendments relating to underground tanks) and the Federal “Superfund” program, and (ii) in Canada; the Canadian Environmental Protection Act, the Hazardous Products Act, the Hazardous Material Information Review Act, the Fisheries Act, the Environmental Protection Act (Ontario), the Water Resources Act (Ontario) and the Environmental Quality Act (Quebec). In addition, the Company’s operations are governed by laws and regulations relating to workplace safety and worker health in the North American and European countries in which it operates. In particular, in the United States, the Occupational, Safety and Health Act and regulations thereunder, among other things, establish cotton dust, formaldehyde, asbestos and noise standards, and regulate the use of hazardous chemicals in the workplace. Additionally, in Canada, the Occupational Health and Safety Act (Ontario), the Act Respecting Occupational Health and Safety (Quebec) and their respective regulations establish standards for dust, noise and substances including, among others, asbestos and formaldehyde and regulate the use of hazardous chemicals in the workplace.

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The following table sets forth the general location, principal uses and approximate size of the Company’s principal properties and whether such properties are leased or owned:

The Company believes that its facilities are suitable to service its current level of sales and have additional capacity to satisfy its foreseeable needs.

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The Company is involved in various litigations arising in the ordinary course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, it is management’s opinion that the final resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

The Company and the other Debtors filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. See “Business – Proceedings under Chapter 11 of the Bankruptcy Code”.

None.

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PART II

The Company’s common stock, $.01 par value, (the “Common Stock”) was traded on the New York Stock Exchange (the “NYSE”) under the symbol “GNL” until the NYSE suspended trading of the Common Stock effective January 7, 2002 because the Company had fallen below NYSE’s continued listing standards. After the NYSE suspended trading in the Common Stock, the Common Stock began trading on the over-the-counter (“OTC”) electronic bulletin board under the symbol “GYLD” and subsequently, after the Chapter 11 Filings, it is trading on the OTC electronic bulletin board under the symbol “GYLDQ”. As of December 3, 2003, the Company had approximately 2,000 stockholders of record. The following table sets forth the high and low sales prices for the Common Stock for the periods indicated. The quotations used the table reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

No dividend or other distribution with respect to the Common Stock has ever been paid by the Company. The Company is currently unable to pay any dividends as a result of the Chapter 11 Filings. Any payment of future dividends and the amounts thereof will be dependent upon the Company’s emergence from bankruptcy protection, the earnings financial requirements, restrictive covenants under the Company’s credit facilities and other factors deemed relevant by the Company’s Board of Directors.

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SUMMARY OF SELECTED FINANCIAL DATA

(Amounts in thousands, except per share data)

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SUMMARY OF SELECTED FINANCIAL DATA (continued)

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SIGNIFICANT EVENTS

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 Wachovia Bank, National Association (formerly known as 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. Effective September 24, 2002, the Company exercised its right, as permitted under the DIP Financing Agreement (as defined below), to permanently reduce such maximum amount of revolving credit borrowings from $100 million to $75 million. Effective July 25, 2003, the Company further exercised its right, as permitted under the DIP Financing Agreement, to permanently reduce such maximum amount of revolving credit borrowings from $75 million to $50 million. For a description of the DIP Financing Agreement, see “- Liquidity and Capital Resources”.

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

The Debtors have also received authority to conduct certain other transactions that might be considered “outside the ordinary course” of business. The Debtors have sought and received authority to pay certain pre-petition personal and property taxes, to sell certain identified assets, to enter into certain financing agreements, and to retain a real estate professional to market and sell certain unused properties. Among other things, the Debtors have received authority to sell Klopman. This sale has not closed as of the date hereof. See “Note C – Discontinued Operations” to the Company’s consolidated financial statements contained herein.

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 entered three orders collectively approving the rejection of one executory contract and several unexpired leases. In addition, under the Bankruptcy Code, the Debtors must assume, assume and assign, or reject all unexpired leases of non-residential real property for which a Debtor is lessee within 60 days from the Filing Date. By orders dated April 29, 2002, August 16, 2002, December 11, 2002, April 17, 2003, and August 13, 2003, and December 17, 2003, the Bankruptcy Court extended this deadline up through and including April 12, 2004. The Debtors are in the process of reviewing their remaining executory contracts to determine which, if any, they will reject. The Debtors have proposed treatment for each such executory contract and unexpired lease as part of the proposed plan of reorganization,

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but that proposed treatment may change at any time prior to the confirmation of such plan. Further, there can be no assurance that the proposed plan will be confirmed, or that the proposed treatment therein will be approved. If the proposed plan is not confirmed, or if the treatment proposed therein is not approved, the Debtors will need to re-examine the potential treatment of each executory contract and unexpired lease. As such, 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 were required to submit and characterize claims against the Debtors. The Debtors are currently in the process of reviewing the claims that were filed against the Company. The ultimate amount of the claims allowed by the Court against the Company could be significantly different than the amount of the liabilities recorded by the Company.

On or about April 4, 2003, the Official Committee of General Unsecured Creditors (the “Committee”) filed a motion (the “Examiner Motion”) seeking the appointment of an examiner in the Debtors’ cases pursuant to Sections 1104(c)(1), 1104(c)(2) and 105(a) of the Bankruptcy Code and Bankruptcy Rules 2007.1 and 9014, and seeking an injunction prohibiting the Debtors from filing a Plan for at least 90 days from the appointment of such examiner. Both the Debtors and the agent for the Debtors’ pre-petition secured lenders filed objections to this motion, objecting to the relief requested therein and the purported factual predicate therefore. The Committee has withdrawn the Examiner Motion.

On or around June 26, 2003, the Company filed a motion for authority to enter into an engagement agreement (the “Engagement Agreement”) with Alvarez & Marsal, Inc. (“A&M”). A&M will supplement existing management with professionals led by Mr. Peter A. Briggs, a managing director at A&M. Mr. Briggs will serve as chief restructuring officer (“CRO”) and report to Arthur C. Wiener, Chairman and Chief Executive Officer of the Company. Mr. Joseph A. Bondi and certain additional officers (together, the “Additional Officers”) will assist the CRO. On or about June 27, 2003, the Bankruptcy Court entered an order authorizing the Company, on an interim basis and as amended thereby, to enter into the Engagement Agreement, and to retain the CRO and Additional Officers. On or about July 18, 2003, the Bankruptcy Court entered a final order approving the retention of A&M and the CRO and Additional Officers.

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. The Plan could also involve the sale of the Debtors’ assets and/or stock. It is also possible that a sale of the Debtors’ assets and/or stock could be accomplished outside a plan of reorganization. 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. As of the date hereof, the Bankruptcy Court had entered eight orders collectively extending the Debtors’ exclusive right to file a Plan through and including November 15, 2003, and extending the Debtors’ exclusive right to solicit acceptances of such Plan through and including February 4, 2004. Both of these exclusivity periods may be further extended by the Bankruptcy Court for cause.

On December 18, 2003, the Debtors filed a proposed second amended Plan, along with a proposed second amended disclosure statement (“Disclosure Statement”) by which they intend to solicit acceptances to such Plan. Some of the key terms of the proposed Plan are:

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On December 19, 2003, the Bankruptcy Court entered an order, among other things, approving the Disclosure Statement, and authorizing the Debtors to solicit votes on the Plan thereby. The Bankruptcy Court further established January 20, 2004 as both the deadline for voting on the Plan and the deadline to file objections, if any, to the Plan. Currently, a hearing before the Bankruptcy Court to consider confirmation of the Plan is scheduled for January 28, 2004.

The proposed Plan, as amended, and the transactions contemplated thereunder are described in the Disclosure Statement, which is filed as Exhibit 2.1 to this Annual Report on Form 10-K. The Disclosure Statement includes detailed information about the proposed Plan. Nothing contained in this Form 10-K is intended to be, nor should it be construed as, a solicitation for a vote on the proposed Plan, which can only occur based on the official disclosure statement package.

Until the proposed Plan is confirmed by the Bankruptcy Court, its terms are subject to change. If the Debtors fail to obtain the requisite acceptance of such Plan during the exclusive solicitation period, or fail to file an alternative Plan and receive the requisite acceptances therefore during any extended exclusivity period that the Court may grant, 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. In addition, under the proposed Plan filed by the Debtors, the Company’s senior secured debtholders will receive all of the equity of the Company upon emergence and the Company’s current outstanding common stock will be cancelled. 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 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.

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 Company’s 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 consummate the proposed Plan, as may be amended (or any other alternative Plan which may be proposed), and gain approval of the requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy Court, its ability, if necessary, to extend the term and maturity of the DIP Financing Agreement beyond February 15, 2004 or, if necessary, find alternative debtor-in-possession financing, its ability to comply with the DIP Financing Agreement or any alternative financing arrangement, 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

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recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.

In addition, a final Plan could materially change the amounts reported in the Company’s financial statements. The financial statements do not give effect to adjustments of the carrying value of assets or liabilities, the effects of any changes that may be made to the capital accounts or the effect on results of operations that might be necessary as a consequence of a plan of reorganization.

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 September 27, 2003 and September 28, 2002 are identified below (in thousands):

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 $10.3 million and $18.5 million associated with the Chapter 11 Filings in fiscal 2003 and fiscal 2002, respectively. Of these charges, $8.8 million and $7.3 million for fiscal 2003 and fiscal 2002, respectively, was for fees payable to professionals retained to assist with the Chapter 11 Filings and $1.5 million and $3.1 million for fiscal 2003 and fiscal 2002, respectively, were related to a key employee retention program. Approximately $7.7 million, incurred in the March quarter 2002, was related to the non-cash write-off of the unamortized discount on the 9 1/8% Senior Subordinated Notes and the non-cash write-off of related deferred financing fees. In addition, approximately $0.4 million, incurred in the September quarter 2002, was related to non-cash write-off of deferred financing fees related to the DIP Financing Agreement due to the reduction in the total commitment under the DIP Financing Agreement from $100 million to $75 million, effective September 24, 2002. Effective July 25, 2003, the Company further exercised its right, as permitted under the DIP Financing Agreement, to permanently reduce such maximum amount of revolving credit borrowings from $75 million to $50 million (the remaining deferred financing fees related to the DIP Financing Agreement were minimal).

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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.

Approximately 3,300 employees located in Mexico and 500 employees located in the U.S. 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 fiscal 2002, the Company recorded a change in estimate that decreased the plant closing costs by $1.4 million, primarily related to leases, as well as, additional fixed asset impairment charges of $0.9 million. During fiscal 2003, the Company recorded an additional change in estimate that decreased the plant closing costs by $0.2 million, also primarily related to leases. The Company sold its Asheboro, North Carolina facility and related equipment as well as all the G&L Service Company equipment in fiscal 2002. The Company expects that the sale of 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.

The table below summarizes the activity related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives plant closing accruals for the year ended September 27, 2003 (in thousands):

Of the lease cancellation and other accrual balance related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives outstanding at September 27, 2003, $0.9 million is included in liabilities subject to compromise. See discussion of “Bankruptcy Filing”.

In connection with the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, the Company has incurred run-out expenses related to the plant closings totaling $0.5 million before taxes in fiscal 2003. These expenses, which include equipment relocation, plant carrying costs and other costs, are primarily included in cost of sales in the consolidated statement of operations.

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As a result of the employees terminated due to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, the Company recognized a net benefit curtailment loss of $0.1 million in the September quarter 2001 related to its defined benefit pension plan.

In August 2001, the Company amended its Senior Credit Facility (as defined herein) to, among other things, exclude from covenant calculations the charges related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives discussed above. See “– Liquidity and Capital Resources”.

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 $62.8 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, $10.0 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 2001 and substantially all of the 1,370 employees were terminated. Severance payments were made in either a lump sum or over a maximum period of up to 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. During fiscal 2002 and fiscal 2003, the Company recorded additional fixed asset impairment charges related to the Erwin facility of $0.9 million and $0.2 million, respectively. During fiscal 2003, the Company also recorded an additional change in estimate that reduced plant closing costs by $0.2 million. The Company expects that the sale of the remaining real estate 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 Fiscal 2000 Strategic Initiatives plant closing accruals for the year ended September 27, 2003 (in thousands):

Of the lease cancellation and other accrual balance related to the Fiscal 2000 Strategic Initiatives outstanding at September 27, 2003, $1.7 million is included in liabilities subject to compromise. See discussion of “Bankruptcy Filing”.

The Company incurred run-out expenses totaling $1.1 million for fiscal 2003. These expenses, which include equipment relocation, plant carrying costs and other costs, are included primarily in cost of sales in the consolidated statement of operations.

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.

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Subsequent Events

On December 18, 2003, the Debtors filed a proposed second amended Plan, along with a proposed second amended disclosure statement (“Disclosure Statement”) by which they intend to solicit acceptances to such Plan. On December 19, 2003, the Bankruptcy Court entered an order, among other things, approving the Disclosure Statement, and authorizing the Debtors to solicit votes on the Plan thereby. The Bankruptcy Court further established January 20, 2004 as both the deadline for voting on the Plan and the deadline to file objections, if any, to the Plan. Currently, a hearing before the Bankruptcy Court to consider confirmation of the Plan is scheduled for January 28, 2004. For further discussion, see “Bankruptcy Filing” above.

On December 11, 2003, the Company announced the reconfiguration of its Swift Denim production facility in Drummondville, Quebec. Under the reconfiguration, weaving and finishing of denim will be discontinued in approximately four months. Drummondville will continue to produce yarn for other Swift facilities. The reconfiguration will result in the termination of approximately 550 employees in Drummondville. After the reconfiguration, the facility will employ approximately 215 individuals in ringspun yarn production and related supporting functions.

As a result of this decision, the Company is anticipating $5.3 million of costs related to reconfiguring the plant primarily for employee termination benefits. The Company continues to evaluate the potential impairment costs of the reconfiguration and had not fully determined the impact of the reconfiguration of the Drummondville operations in accordance with Statement of Financial Accounting Standard No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” In accordance with Statement of Financial Accounting Standard No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company will accelerate the depreciation on those assets that are expected to be excess when the facility is reconfigured. No costs related to the reconfiguration of the plant were incurred in fiscal 2003.

On December 17, 2003, Arthur C. Wiener, Chairman and CEO of the Company announced his forthcoming retirement which will take place when the Company emerges from bankruptcy.

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RESULTS OF OPERATIONS

The Company’s continuing operations are classified into two operating segments: (1) Galey & Lord Apparel and (2) Swift Denim. Results for fiscal 2003, 2002 and 2001 for each segment are shown below:

Included in the Galey & Lord Apparel segment are sales of the former Home Fashion Fabrics’ segment, which were presented as a separate segment in prior years. During fiscal 2002, the Company realigned its Home Fashion Fabrics’ management under the control of the Galey & Lord Apparel business unit. Prior year financial information has been reclassified to reflect this segment realignment for comparative purposes.

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FISCAL 2003 COMPARED TO FISCAL 2002

Net Sales

Net sales for fiscal 2003 were $436.8 million as compared to $546.1 million for fiscal 2002. The $109.3 million decrease in net sales resulted primarily from decreased sales volume due to weak demand in the retail market, as well as lower selling prices due to price pressure from imports, excess domestic capacity and the continued shift toward discount retailers and private label apparel.

Galey & Lord Apparel

Galey & Lord Apparel’s net sales for fiscal 2003 were $241.6 million, a $48.2 million decline over fiscal 2002 net sales of $289.8 million. $40.9 million of the sales decrease was due to a 16.7% decline in apparel fabric sales volume, partially offset by higher average apparel selling prices due to changes in sales mix. The remaining $7.2 million sales decline was due primarily to reduced greige fabric sales for home furnishings.

Swift Denim

Swift’s net sales for fiscal 2003 were $195.2 million as compared to $256.3 million in fiscal 2002. The $61.1 million decline in sales reflects a 25% drop in unit volume, a 2.6% decline in selling price, partially offset by a 4.5% improvement in product mix.

Operating Income (Loss)

The Company reported an operating loss of $17.8 million for fiscal 2003 compared to operating income of $14.5 million in fiscal 2002. This decrease was due to significantly lower sales volume at both of the Company’s operating divisions and is the result of weak retail demand for apparel, lost market share to imports and increased competition due to domestic overcapacity. In the latter half of fiscal 2003, the Company initiated an inventory reduction program that included production curtailments. Production curtailments in fiscal 2003 impacted results by approximately $1.4 million. In addition, during fiscal 2003, the Company recorded an impairment loss of $5.5 million related to the fair value of the Swift Denim trademarks.

Galey & Lord Apparel

Galey & Lord Apparel’s operating loss for fiscal 2003 was $6.0 million as compared to an operating loss of $4.5 million for fiscal 2002. This decrease was principally a result of reduced fabric sales due to a continued weak retail market, lower product margins due to competitive pricing, higher raw material and energy costs, and manufacturing capacity curtailments, as noted above. These losses were partially offset by reduced selling, general and administrative costs as well as reduced run-out costs associated with the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and Fiscal 2000 Strategic Initiatives.

Swift Denim

Swift’s operating loss for fiscal 2003 was $12.3 million compared to fiscal 2002 operating income of $21.6 million. This decline was primarily due to lower sales volume which resulted in curtailment of capacity (as noted above), lower selling prices due to price pressure from competition and unfavorable variances due to manufacturing inefficiencies and higher raw material and energy costs. In addition, the Company recorded an impairment loss of $5.5 million during fiscal year 2003 related to the fair value of the Swift Denim trademarks.

Income from Associated Companies

Income from associated companies was $7.0 million in fiscal 2003 as compared to $6.6 million in fiscal 2002. The income represents amounts from several joint venture interests that manufacture and sell denim products.

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Interest Expense

Interest expense from continuing operations was $19.8 million in fiscal 2003 compared to $33.0 million in fiscal 2002. The decrease in interest expense was primarily due to the discontinuation of the interest accrual on the Company’s 9 1/8% Senior Subordinated Notes due 2008 (“Subordinated Notes”) as of the Filing Date and lower prime and LIBOR base rates during fiscal 2003 as compared to fiscal 2002. The average interest rate paid by the Company on its bank debt, excluding the Subordinated Notes, in fiscal 2003 was 5.29% per annum as compared to 5.85% per annum in fiscal 2002.

Income Taxes

The Company’s overall tax rate for fiscal 2003 was approximately (.8%) as compared to (2.0%) for fiscal 2002. The rate is being impacted by the $28.4 million increase to the valuation allowance related to the nonrecognition of domestic net operating losses since it is more likely than not that some portion of the deferred tax assets may not be recognized.

Income (Loss) from Discontinued Operations

The Company’s loss from discontinued operations for fiscal 2003 was $46.6 million or $3.89 per common share, compared to income of $1.6 million, or $0.13 per common share, in fiscal 2002. In August 2002, the Company retained Rothschild-Italia S.P.A., a financial advisor, to aid in the potential sale of its Klopman business. In July 2003, Dominion Textile International B.V., an indirect wholly-owned subsidiary of the Company (“Dominion”) and an investment group led by BS Private Equity (the “Purchaser”) entered into a Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company, through Dominion, agreed to sell to the Purchaser (the “Sale Transaction”) all of Klopman (pursuant to a sale of all or substantially all of the capital stock of each subsidiary which together constitute Klopman), for a net purchase price of € 22.4 million (before deduction for fees, costs and expenses). The consummation of the Sale Transaction was subject to a number of conditions, including, among other things, Bankruptcy Court approval, regulatory approval and satisfactory completion of environmental due diligence and appropriate environmental surveys. In the fourth quarter of fiscal 2003, all substantive issues were resolved clearing the way to dispose of this business segment. On November 21, 2003, the Company received approval from the Bankruptcy Court to complete the Sale Transaction. Closure of the sale is pending consent of the Tunisian authorities, which the Company expects to receive shortly. The Company classified the Klopman segment as held for sale in the fourth quarter of fiscal 2003 and, consequently, the results of operations and statement of financial position for this segment have been reported in this Annual Report on Form 10-K as a discontinued operation for fiscal 2003 and for all prior years presented herein. In connection with this reclassification to a discontinued operation, the Klopman segment was adjusted from its carrying value of $74.1 million to its estimated fair value of $25.5 million in the fourth quarter of fiscal 2003. The resulting $48.6 million loss was included in the fiscal 2003 loss from operations of discontinued operations.

In accordance with EITF 87-24, the Company allocated $1.3 million in fiscal 2003 and $1.4 million in fiscal 2002 of interest expense related to the Senior Credit Facility to discontinued operations which was added to interest directly incurred by the Klopman segment.

Net Loss and Net Loss Per Share

The Company reported a net loss for fiscal 2003 of $176.1 million, or $14.68 per common share, inclusive of $10.3 million of reorganization costs, a $46.6 million loss related to discontinued operations and an $87.4 million loss from the cumulative effect of an accounting change compared to a net loss for fiscal 2002 of $29.4 million, or $2.45 per common share, inclusive of $18.5 million of reorganization costs and $1.6 million of income related to discontinued operations.

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FISCAL 2002 COMPARED TO FISCAL 2001

Net Sales

Net sales for fiscal 2002 were $546.1 million as compared to $714.6 million for fiscal 2001. The $168.5 million decrease in net sales primarily resulted from decreased sales volume due to discontinuation of the garment making operations, decreased sales volume due to the Erwin, North Carolina facility closure and poor retail environment as well as lower selling prices.

Galey & Lord Apparel

Galey & Lord Apparel’s net sales for fiscal 2002 were $289.8 million, a $125.7 million decrease over fiscal 2001 net sales of $415.5 million. $42.4 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. The remaining sales decrease was due to a 14.3% decline in fabric sales volume along with an 8.3% decline in prices, inclusive of product mix changes.

Swift Denim

Swift’s net sales for fiscal 2002 were $256.3 million as compared to $299.1 million in fiscal 2001. $17.3 million of the sales decrease was attributable to the reduction in manufacturing capacity resulting from the closure of the Erwin, North Carolina facility in December 2000. This remaining sales decrease was due to a 5.6% decline in volume and 3.5% decline in selling prices.

Operating Income (Loss)

The Company reported operating income of $14.5 million for fiscal 2002 compared to an operating loss of $39.3 million in fiscal 2001. During fiscal year 2002, the Company recorded losses related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and the Fiscal 2000 Strategic Initiatives of $5.6 million. During fiscal 2001, the Company recorded losses of $79.7 million related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and the Fiscal 2000 Strategic Initiatives. The Corporate operating loss for fiscal 2002 consisted principally of administrative expenses from the Company’s various holding companies as well as $1.1 million of financial advisor fees incurred in the December quarter of fiscal 2002.

Galey & Lord Apparel

Galey & Lord Apparel’s operating loss for fiscal 2002 was $4.5 million as compared to an operating loss of $54.6 million for fiscal 2001. Galey & Lord Apparel recorded losses of $2.4 million in fiscal year 2002 and $72.5 million in fiscal year 2001, respectively, related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and Fiscal 2000 Strategic Initiatives. The decrease in operating income, excluding the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and Fiscal 2000 Strategic Initiatives, is principally a result of reduced fabric sales due to a continuing decline in the market, lower fabric selling prices due to price competition, changes in product mix and lower-of-cost-or-market adjustment for LIFO inventories, partially offset by the elimination of losses in the garment operations which were closed in connection with the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and lower raw material prices and selling expenses. In addition, Galey & Lord Apparel’s inventory quantities were reduced during fiscal 2002 and, as a result, this reduction resulted in a liquidation of LIFO inventory quantities carried at higher costs prevailing in prior years as compared with fiscal 2002 costs, the effect of which increased cost of sales and decreased operating income by approximately $1.3 million.

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Swift Denim

Swift’s operating income for fiscal 2002 was $21.6 million compared to fiscal 2001 operating income of $16.4 million. Swift Denim recorded losses of $3.2 million in fiscal year 2002 and $6.8 million in fiscal year 2001, respectively, related to the Fiscal 2000 Strategic Initiatives. The increase in Swift’s operating income is principally due to the change in method of accounting for inventories to the last-in, first-out (LIFO) method, the impact of lower cotton prices and utility costs as well as positive changes in product mix. In addition, Swift recognized a $3.4 million gain in the current year related to curtailment of postretirement benefits for employees not retired as of December 31, 2001. The increase in operating income is partially offset by lower sales volume and a reduction in selling prices. Swift also recognized a $2.4 million gain in fiscal 2001 related to benefit curtailment at the Erwin facility as a result of the Fiscal 2000 Strategic Initiatives.

Income from Associated Companies

Income from associated companies was $6.6 million in fiscal 2002 as compared to $8.7 million in fiscal 2001. The income represents amounts from several joint venture interests that manufacture and sell denim products. The decline in income from associated companies principally results from the Company’s decreased ownership percentage in its European joint ventures as well as an overall softening in the European denim market.

Interest Expense

Interest expense was $33.0 million in fiscal 2002 compared to $57.9 million in fiscal 2001. The decrease in interest expense was primarily due to the discontinuation of the 9 1/8% Senior Subordinated Notes (“Subordinated Notes”) interest accrual as of the Filing Date and lower prime and LIBOR base rates during fiscal 2002 as compared to fiscal 2001. The average interest rate paid by the Company on its bank debt, excluding the Subordinated Notes, in fiscal 2002 was 5.85% per annum as compared to 8.74% per annum in fiscal 2001.

Income Taxes

The Company’s overall tax rate for fiscal 2002 was approximately (2.0%) as compared to 17.6% for fiscal 2001. Primarily, the fiscal 2002 rate is being impacted by the Job Creation and Worker Compensation Act of 2002, which became effective March 2002 and provided additional carryback periods resulting in a $1.2 million refund reflected in these financial statements. Additionally, the rate is being impacted by the $19.3 million increase to the valuation allowance related to the nonrecognition of domestic net operating losses since it is more likely than not that some portion of the deferred tax assets may not be recognized.

Income (Loss) from Discontinued Operations

The Company’s income from discontinued operations for fiscal 2002 was $1.6 million, or $0.13 per common share, compared to income of $2.3 million, or $0.19 per common share, in fiscal 2001. The Company classified the Klopman segment as held for sale in the fourth quarter of fiscal 2003. Consequently, the results of operations and statement of financial position for this segment have been reported in this Annual Report on Form 10-K as a discontinued operation for fiscal 2003 and for all prior years presented herein.

In accordance with EITF 87-24, the Company allocated $1.4 million in fiscal 2002 and $2.1 million in fiscal 2001 of interest expense related to the Senior Credit Facility to discontinued operations which was added to interest directly incurred by the Klopman segment.

Net Loss and Net Loss Per Share

The Company reported a net loss for fiscal 2002 of $29.4 million, or $2.45 per common share, inclusive of $18.5 million of reorganization costs and $1.6 million income related to discontinued operations compared to a net loss for fiscal 2001 of $70.1 million, or $5.85 per common share, inclusive of $2.3 million of income related to discontinued operations.

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Liquidity and Capital Resources

As previously discussed, the Company and each of its domestic subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. The matters described 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 have involved, and will continue to involve, or have resulted in, or will continue to 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 $17.1 million and $38.6 million at September 27, 2003 and September 28, 2002, 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 September 27, 2003, the Company’s borrowing availability under its DIP Financing Agreement was $42.5 million. The Company had no borrowings outstanding under the DIP Facility as of September 27, 2003 but had $7.5 million in outstanding letters of credit. The Company also had $6.1 million in outstanding letters of credit under the Senior Credit Facility. As of September 27, 2003, the Company’s Canadian operations had a total of $6.8 million of borrowing availability under the Canadian Loan Agreement (as defined below).

During fiscal 2003, the Company primarily utilized its available cash and Canadian Loan Facility to fund its operating and capital expenditure requirements.

During the March quarter 2002, Klopman 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 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).

The Company expects to spend approximately $13.2 million for capital expenditures related to continuing operations in fiscal 2004. The Company anticipates that approximately 40% of the forecasted capital expenditures will be used to enhance the its capabilities while the remaining 60% will be used to maintain existing capabilities. The Company’s continuing operations spent $11.3 million for capital expenditures in fiscal 2003 of which approximately 40% was used to enhance the its capabilities while the remaining 60% was used to maintain existing capabilities.

The Company has certain domestic defined benefit pension plans (the “Domestic Plans”). At September 27, 2003, the Domestic Plans’ unfunded accumulated benefit obligation exceeded its unrecognized service cost. Accordingly, under Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions”, an additional minimum pension liability of $12.9 million is reported as a separate component of equity in the balance sheet as part of accumulated other comprehensive loss. Annual minimum funding requirements for the Domestic Plans are actuarially determined based on values as of the beginning of the Domestic Plans’ year (January 1). Based on the valuation as of January 1, 2003, the Company’s minimum funding requirement will be approximately $2.5 million for the Company’s fiscal year 2004. Future minimum funding levels beyond the Company’s fiscal year 2004 will be based on the Domestic Plans’ valuation as of January 1, 2004 and, as such, are subject to the volatility of the stock market and other financial markets.

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 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

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amounts available under the DIP Financing Agreements and the Canadian Loan Agreement and certain other foreign bank loans (until such time as the sale of Klopman is completed), 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 and the Canadian Loan Agreement are not sufficient to meet future cash requirements, the Company may be required to reduce planned capital expenditures, sell assets or seek additional financing. While the Company does not believe this is likely, it 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.

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 Wachovia Bank, National Association (formerly known as 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). Effective September 24, 2002, the Company exercised its right, as permitted under the DIP Financing Agreement, to permanently reduce such maximum amount of revolving credit borrowings from $100 million to $75 million. As a result, $0.4 million of deferred debt fees related to the DIP financing agreement were written off in the September quarter 2002. Effective July 25, 2003, the Company further exercised its right, as permitted under the DIP Financing Agreement, to permanently reduce such maximum amount of revolving credit borrowings from $75 million to $50 million.

Under the terms of the final DIP financing agreement (as amended, the “DIP Financing Agreement”), the Company, as borrower, may make revolving credit borrowings (including up to $15 million for post-petition letters of credit which was reduced to $10 million by the Financing Extension, as defined below) in an amount not exceeding the lesser of $100 million (effective September 24, 2002, such amount was permanently reduced to $75 million and effective July 25, 2003, it was permanently reduced to $50 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) February 15, 2004, (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 (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 Wachovia 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) .50% 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 Wachovia 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

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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 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 September 27, 2003, 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 DIP Financing Agreement has been amended three times (collectively, the “Financing Extension”). It is currently set to expire on February 15, 2004. There can be no assurance that the DIP Financing Agreement will be further extended, if necessary. The Company has no current commitments or arrangements for additional debtor-in-possession financing and, if the DIP Financing Agreement is not extended, there can be no assurance that replacement debtor-in-possession financing will be available on acceptable terms (or that any such financing will be approved by the Bankruptcy Court) or at all.

The Financing Extension allows the Company to have a maximum aggregate principal amount of loans and letters of credit outstanding of $25 million and reduces the maximum aggregate amount available for letters of credit from $15 million to $10 million. As part of the Financing Extension, among other things, upon the sale of the capital stock of the entities which constitute Klopman and certain intellectual property rights thereof for no less than € 22.3 million, the Net Proceeds (as defined in the Financing Extension) from such sale will be repatriated to the Company and the Company will apply such repatriated funds in accordance with the DIP Financing Agreement and any orders approving the extension thereof.

The DIP Financing Agreement was also modified to provide for cash collateral for letters of credit from the proceeds of foreign repatriations, after the repayment of any outstanding loans under the DIP Financing Agreement.

Pre-Petition Senior Credit Facility

On January 29, 1998 the Company entered into a new credit agreement, as amended, (the “Senior Credit Facility”) with Wachovia Bank, National Association (formerly known as First Union National Bank), as agent and lender, and its 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.

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. Both the repayment resulting from the July 1999 Amendment and the February 2001 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 in February

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2001 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.

In September 2000, the Company amended the Senior Credit Facility to exclude charges related to the Company’s Fiscal 2000 Strategic Initiatives from the computation of the covenants. In March 2001, the Company further amended the Senior Credit Facility to allow for a more tax efficient European corporate structure. 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 as part of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. 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 the Senior Credit Facility. On January 24, 2002, the Company amended the 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 (as amended by the July 1999 Amendment), for the period beginning July 4, 1999 through February 15, 2001 the revolving line of credit borrowings bore interest at a per annum rate, at the Company’s option, of either (i) (a) the greater of the prime rate or the federal funds rate plus .50% plus (b) a margin of 1.75% or (ii) LIBOR plus a margin of 3.00%. Term Loan B and Term Loan C bore interest at a per annum rate, at the Company’s option, of (A) with respect to Term Loan B either (i)(a) the greater of the prime rate or federal funds rate plus .50%, plus (b) a margin of 2.25% or (ii) LIBOR plus a margin of 3.50% and (B) with respect to Term Loan C, either (i)(a) greater of the prime rate or federal funds rate plus .50%, plus (b) a margin of 2.50% or (ii) LIBOR plus a margin of 3.75%.

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 $304,645 through March 27, 2004, three quarterly payments of $28,636,594 and final amount of $24,303,053 on Term Loan B’s maturity of April 2, 2005 and (ii) Term Loan C is repayable in quarterly payments of $216,111 through April 2, 2005, three quarterly payments of $20,098,295 and a final amount of $17,024,140 on Term Loan C’s maturity of April 1, 2006. Under the Senior Credit Facility, as amended on December 22, 1998, July 3, 1999 and August 9, 2001, the revolving line of credit borrowings bear interest at a per annum rate, at the Company’s option, of either (i) (a) the greater of the prime rate or the federal funds rate plus .50% plus (b) a margin of 1.0%, 1.25%, 1.50%, 1.75%, 2.00% or 2.25%, based on the Company achieving certain leverage ratios (as defined in the Senior Credit Facility) or (ii) LIBOR plus a margin of 2.25%, 2.50%, 2.75%, 3.00%, 3.25% or 3.50%, based on the Company achieving certain leverage ratios. Term Loan B and Term Loan C bear interest at a per annum rate, at the Company’s option, of (A) with respect to Term Loan B either (i) (a) the greater of the prime rate or federal funds rate plus .50%, plus (b) a margin of 2.00%, 2.25%, 2.50% or 2.75%, based on the Company achieving certain leverage ratios or (ii) LIBOR plus a margin of 3.25%, 3.50%, 3.75% or 4.00%, based on the Company achieving certain leverage ratios and (B) with respect to Term Loan C, either (i) (a) the greater of the prime rate or federal funds rate plus .50%, plus (b) a margin of 2.25%, 2.50%, 2.75% or 3.00%, based on the Company achieving certain leverage ratios, or (ii) LIBOR plus a margin of 3.50%, 3.75%, 4.00% or 4.25%, based on the Company’s achieving certain leverage ratios.

At September 27, 2003, interest on the Company’s term loan and revolving credit borrowings were based on six-month market LIBOR rates averaging 1.14% and on a prime rate of 4.00%. The Company’s weighted average borrowing rate on these loans at September 27, 2003 was 5.01%, which includes spreads ranging from 3.5% to 4.25% on the LIBOR borrowings and a spread of 2.25% on the prime rate borrowings.

The Company’s obligations under the Senior Credit Facility, as amended pursuant to the July 1999 Amendment, are secured substantially by 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

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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.

The Senior Credit Facility contains certain covenants, including, without limitation, those limiting the Company’s and its subsidiaries’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its business, make certain investments or pay dividends. In addition, the Senior Credit Facility requires the Company to meet certain financial ratio tests and limits the amount of capital expenditures which the Company and its subsidiaries may make in any fiscal year.

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 9 1/8% 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 offerings 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.

On August 18, 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 primarily in Mexico. This amendment was completed to allow the Company sufficient flexibility in structuring its investment in the Swift Denim-Hidalgo joint venture discussed herein. See “Business – General”.

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.

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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, unless extended; 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. Effective July 24, 2002, the term loan was converted to U.S. dollars repayable in equal monthly installments of $150,000 U.S. dollars with the unpaid balance repayable in February 2004. Under the Canadian Loan Agreement, the interest rate on Drummondville’s borrowings initially was 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 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).

At September 27, 2003, interest on the Company’s term loan and revolving credit borrowings were based on one-month market LIBOR rates averaging 1.11%, on a U.S. prime rate of 4.00% and on a Canadian prime rate of 4.75%. The Company’s weighted average borrowing rate on these loans at September 27, 2003 was 4.15%, which includes a spread of 2.50% on the LIBOR borrowings and spreads ranging from .50% to 1.25% on the prime rate borrowings.

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 September 27, 2003, the Company was in compliance with the covenants of the Canadian Loan Agreement.

Tax Matters

At September 27, 2003, the Company had outstanding net operating loss carryforwards (“NOLs”) for U.S. federal and state tax purposes of approximately $168.3 million and $181 million, respectively, which will be carried forward for U.S. federal and state income tax purposes to offset future taxable income and will expire in 2004-2023 if unused. The Company has increased its valuation allowance from $33.1 million in fiscal 2002 to $61.5 million in fiscal 2003 related to domestic operating losses since it is more likely than not that some portion of the deferred tax assets may not be recognized.

Other

Pursuant to an agreement (the “Pension Funding Agreement”), dated January 29, 1998 with the Pension Benefit Guaranty Corporation (“PBGC”), the Company was required to provide $5.0 million additional funding to three defined benefit pension plans previously sponsored by Dominion, $3.0 million of which was paid at the closing of the Acquisition, $1.0 million was paid during the March quarter 1999 and the remaining $1.0 million was paid in the March quarter 2000. The Pension Funding Agreement also gives the PBGC a priority lien of $10.0 million on certain land and building assets of the Company to secure payment of any liability to the PBGC that might arise if one or more of the pension plans were terminated. The Company’s obligations under the Pension Funding Agreement terminate upon the earlier to occur of (a) the termination of the pension plans and (b) on or after January 30, 2003, if (i) the pension plans are fully funded for two consecutive years and (ii) the Company receives an investment grade rating on its debt.

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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 143, “Accounting for Asset Retirement Obligations” (“FAS 143”). The Statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. As required by FAS 143, the Company adopted this new accounting standard for fiscal year 2003. The adoption of FAS 143 did not have a material impact on the Company’s consolidated results of operations or financial position.

In October 2001, the FASB issued Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”). This Statement establishes a single accounting model for the impairment or disposal of long-lived assets. As required by FAS 144, the Company adopted this new accounting standard for fiscal year 2003. The adoption of FAS 144 did have a material impact on the Company’s consolidated results of operations and financial position. See “Note C – Discontinued Operations” in the Company’s consolidated financial statements contained herein.

In April 2002, the FASB issued Statement of Financial Accounting Standard No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“FAS 145”). This Statement eliminates an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and establishes that gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria for treatment as extraordinary. The Company adopted this standard for fiscal year 2003. The adoption of FAS 145 did not have a material impact on the Company’s consolidated results of operations or financial position.

In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“FAS 146”). This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. FAS 146 also establishes that fair value is the objective for initial measurement of the liability. The Company adopted this standard for fiscal year 2003. The adoption of FAS 146 did not have a material impact on the Company’s consolidated results of operations or financial position.

In April 2003, the FASB issued Statement of Financial Accounting Standard No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“FAS 149”). FAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement of Financial Accounting Standard No. 133 (“Accounting for Derivative Instruments and Hedging Activities,” as amended. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. The Company adopted this standard for contracts entered into or modified after June 30, 2003. The adoption of FAS 149 did not have a material impact on the Company’s consolidated results of operations or financial position.

In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“FAS 150”). This Statement requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. The Company adopted this standard for financial instruments entered into or modified after May 31, 2003. The adoption of FAS 150 did not have a material impact on the Company’s consolidated results of operations or financial position.

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries. FIN 46 is immediately effective for all variable interest entities created after January 31, 2003. For variable interest entities created prior to this date, the provisions of FIN 46 are effective for periods ending after December 15, 2003 for public companies. The Company does not believe the provisions of FIN 46 will have a material impact on the Company’s consolidated financial statements or related disclosures.

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CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The following discussion provides further information about accounting policies critical to the Company and should be read in conjunction with Note B – “Summary of Significant Accounting Policies” of this report.

Chapter 11 Filings: On February 19, 2002, the Company and the other Debtors filed voluntary petitions for reorganization under Chapter 11 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 of the Bankruptcy Code and are not the subject of any bankruptcy proceedings.

The accompanying consolidated financial statements are presented in accordance SOP 90-7. See “- Significant Events”.

Inventories: Inventories are stated at the lower of cost or market. On September 30, 2001, the Company changed its method of accounting for inventories to last-in, first-out (LIFO) method for its Swift Denim business which was acquired on January 28, 1998. Therefore, the LIFO method is used to cost substantially all of inventories at continuing operations at September 27, 2003. 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 $3.0 million of lower-of-cost-or-market (LCM) reserves were reversed in fiscal 2002 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.

Impairment of Goodwill and Other Intangible Assets: Effective as of the beginning of the Company’s fiscal 2003, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). This new standard eliminated the amortization of goodwill and intangible assets with indefinite useful lives (collectively, the “Intangible Assets”). Instead these assets must be tested at least annually for impairment. In the year of adoption, FAS 142 also requires the Company to perform an initial assessment of its reporting units to determine whether there is any indication that the Intangible Assets’ carrying value may be impaired. This transitional assessment is made by comparing the fair value of each reporting unit, as determined in accordance with the new standard, to its carrying value. To the extent the fair value of any reporting unit is less than its carrying value, which would indicate that potential impairment of Intangible Assets exists, a second transitional test is required to determine the amount of impairment.

For purposes of Intangible Assets impairment testing, FAS 142 requires that goodwill be assigned to one or more reporting units. The Company had assigned goodwill to the Swift Denim and Galey & Lord Apparel reporting units. In addition to goodwill, Swift Denim also owns several trademarks whose useful lives are considered to be indefinite.

The Company, with the assistance of an outside consultant, completed the initial transitional assessment of its reporting units in the first quarter of fiscal 2003 and has determined that potential impairment of Intangible Assets exists in both reporting units. During the second quarter of fiscal 2003, the Company completed its assessment and, accordingly, the goodwill balance of $65.2 million ($0.8 million and $64.4 million at the Galey & Lord Apparel and Swift Denim reporting units, respectively) was impaired and $22.2 million of the trademark (Swift Denim reporting unit) was impaired. The impairment write-down resulting from the transitional testing has been reported as a cumulative effect of an accounting change, retroactive to the first day of fiscal 2003.

FAS 142 requires that an intangible asset not subject to amortization be tested for impairment annually, or more frequently if events or changes in circumstances indicate the asset might be impaired. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess and the adjusted carrying amount of the intangible assets shall be its new accounting basis. The Company determined that impairment indicators existed with respect to Swift Denim in the June quarter 2003 due to the further softening in the

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retail environment in which Swift Denim operates. Accordingly, the fair value of the Swift Denim trademark was tested for impairment based on the expected value of future cash flows and, based on such testing, a non-cash impairment loss of $5.5 million was recorded on the Swift Denim trademark in the June quarter 2003.

Investment in and advances to associated companies: In the consolidated balance sheets, investments in and advances to associated companies represents several joint ventures with ownership interests ranging from 33% to 50%. These joint ventures are accounted for under the equity method of accounting. The results of the Swift Denim-Hidalgo joint venture, which manufactures denim in Mexico and was formed on August 18, 2001 with Grupo Dioral, is reported on a one-month lag.

At September 27, 2003 and September 28, 2002, the excess of the Company’s investment over its equity in the underlying net assets of its joint venture interests is approximately $9.7 million (net of accumulated amortization of $3.0 million) and prior to the adoption of FAS 142 as of the beginning of fiscal 2003, was being amortized on a straight-line basis over 20 years as a component of the equity in earnings of the unconsolidated associated companies. Upon adoption of FAS 142, the Company ceased amortizing the remaining investment over its equity in the underlying net assets of its joint venture interests. However, equity method goodwill will continue to be reviewed in accordance with Accounting Principles Board (“APB”) Opinion No. 18 “The Equity Method of Accounting for Investments in Common Stock.” The Company believes that no impairment of the equity method goodwill existed at September 27, 2003.

Revenue Recognition: The Company recognizes revenues from product sales when goods are shipped or when ownership is assumed by the customer. Consistent with recognized practice in the textile industry, the Company records a portion of its revenues on a bill and hold basis, invoicing goods that have been produced, packaged and made ready for shipment. The goods are effectively segregated from inventory which is available for sale. The risk of ownership of the goods has passed to the customer and remittance terms are consistent with all other sales by the Company. During fiscal 2003, 2002 and 2001, invoices issued under these terms represent 13%, 14% and 15% of revenue, respectively.

The Company classifies amounts billed to customers for shipping and handling in net sales and costs incurred for shipping and handling in cost of sales in the consolidated statements of operations.

Allowance for Doubtful Accounts: An allowance for losses is provided for known and potential losses arising from amounts owed by customers and quality claims. Reserves for quality claims are based on historical experience and known pending claims. The collectibility of customer accounts receivable is based on a combination of factors including the aging of accounts receivable, write-off experience and the financial condition of specific customers. Accounts are written off when they are no longer deemed to be collectible. General reserves are established based on the percentages applied to accounts receivables aged for certain periods of time and are supplemented by specific reserves for certain customer accounts where collection is no longer certain. Establishing reserves for quality claims and bad debts requires management judgment and estimates, which may impact the ending accounts receivable valuation, gross margins and the provision for bad debts.

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Foreign Currency Exposures

The Company’s earnings are affected by fluctuations in the value of its subsidiaries’ functional currency as compared to the currencies of its foreign denominated sales and purchases. Foreign currency options and forward contracts and natural offsets are used to hedge against the earnings effects of such fluctuations. 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. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which are a changed dollar value of the resulting sales and related expenses, changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive. The Company’s analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.

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. As of September 27, 2003, a 10% decline in market price would have a negative impact of approximately $4.0 million on the value of the contracts.

Interest Rate Exposures

In prior years, the Company entered into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate debt. At September 27, 2003, the Company did not have any interest rate swap agreements outstanding.

Derivative Financial Instruments

The Company follows the accounting provisions of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“FAS 133”), which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships.

The Company enters into energy purchase contracts to lock in natural gas prices when rates are attractive for its forecasted natural gas usage in the normal course of business. 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 uses natural gas in the ordinary course of its business and enters into energy purchase contracts, when deemed appropriate, to hedge the exposure to variability in expected future cash flows attributable to price fluctuations related to the forecasted purchases of natural gas. At September 27, 2003, the Company’s energy purchase contracts expire over the next twelve months.

Energy purchase contracts (which are settled in cash) that hedge forecasted 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 spot exchange rates and forward contract rates. The net loss was not material for the year ended September 27, 2003 and is included primarily in selling, general and administrative expenses in the consolidated statements of operations.

At September 27, 2003, the Company expects to reclassify approximately $70,000 of pre-tax gains on derivative instruments from accumulated other comprehensive income to earnings over the next twelve months. This reclassification will be made when the forecasted transactions occur.

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REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Stockholders

Galey & Lord, Inc.

We have audited the accompanying consolidated balance sheets of Galey & Lord, Inc. and subsidiaries as of September 27, 2003 and September 28, 2002, and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for each of the three years in the period ended September 27, 2003. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Galey & Lord, Inc. at September 27, 2003 and September 28, 2002, and the consolidated results of their operations and cash flows for each of the three years in the period ended September 27, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, on February 19, 2002, Galey & Lord, Inc. and each of its domestic subsidiaries filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”). The Company is currently operating its business under the jurisdiction of Chapter 11 and the United States Bankruptcy Court in the Southern District of New York (the “Bankruptcy Court”), and continuation of the Company as a going concern is contingent upon, among other things, the ability to formulate a plan of reorganization which will be approved by the requisite parties under the United States Bankruptcy Code and be confirmed by the Bankruptcy Court, the ability to comply with its debtor-in-possession financing facility, obtain adequate financing sources, and the Company’s ability to generate sufficient cash flows from operations to meet its future obligations. In addition, the Company has experienced operating losses in 2003, 2002 and 2001. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note A. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that may result from the outcome of this uncertainty.

As discussed in Note D to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets in fiscal 2003.

Ernst & Young LLP

Greensboro, North Carolina

November 7, 2003, except for Note U as to which the date is December 17, 2003

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GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share and share data)

See accompanying notes to consolidated financial statements.

46

GALEY & LORD, INC.

(DEBTORS-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)