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EXHIBIT 1


MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

        The accompanying consolidated financial statements and all information in the Annual Report have been prepared by management and approved by the Board of Directors for the Company. The consolidated financial statements were prepared in accordance with accounting principles generally accepted in Canada and, where appropriate, reflect management's best estimates and judgements. Management is responsible for the accuracy, integrity and objectivity of the consolidated financial statements within reasonable limits of materiality and for the consistency of financial data included in the text of the Annual Report with that contained in the consolidated financial statements.

        To assist management in the discharge of these responsibilities, the Company maintains a system of internal controls designed to provide reasonable assurance that its assets are safeguarded, that only valid and authorized transactions are executed and that accurate, timely and comprehensive financial information is prepared.

        The Company's Audit Committee is appointed by the Board of Directors annually and is comprised of non-management directors. The Audit Committee meets with management as well as with the independent auditors to satisfy itself that management is properly discharging its financial reporting responsibilities and to review the consolidated financial statements and the independent auditors' report. The Audit Committee reports its findings to the Board of Directors for consideration in approving the consolidated financial statements for presentation to the shareholders. The independent auditors have direct access to the Audit Committee of the Board of Directors.

        The consolidated financial statements have been independently audited by KPMG LLP, Chartered Accountants, on behalf of the shareholders, in accordance with generally accepted auditing standards. Their report outlines the nature of their audit and expresses their opinion on the consolidated financial statements of the Company.

(Signed) H. Greg Chamandy
Chairman of the Board
and Chief Executive Officer

November 27, 2002		   (Signed) Laurence G. Sellyn
Executive Vice-President, Finance
and Chief Financial Officer


AUDITORS' REPORT TO THE SHAREHOLDERS

        We have audited the consolidated balance sheets of Gildan Activewear Inc. as at September 29, 2002 and September 30, 2001 and the consolidated statements of earnings, retained earnings and cash flows for the years ended September 29, 2002, September 30, 2001 and October 1, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with Canadian generally accepted auditing standards and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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.

        In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at September 29, 2002 and September 30, 2001 and the results of its

43


operations and its cash flows for the years ended September 29, 2002, September 30, 2001 and October 1, 2000 in accordance with Canadian generally accepted accounting principles.

(Signed) KPMG LLP
Chartered Accountants
Montreal, Canada

November 27, 2002		    

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CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

September 29, 2002 and September 30, 2001
(In Canadian dollars)

 
   2002
   2001
Assets            
Current assets:            
  Cash and cash equivalents   $ 70,905,497   $ —
  Accounts receivable     87,746,113     125,525,468
  Inventories     112,970,468     178,350,875
  Prepaid expenses and deposits     3,656,987     4,265,223
  Future income taxes (note 8)     5,028,000     6,915,000
   
 
      280,307,065     315,056,566
Fixed assets (note 2)     209,247,348     153,571,566
Future income taxes (note 8)     —     1,081,000
Other assets (note 3)     7,084,926     6,941,740
   
 
    $ 496,639,339   $ 476,650,872
   
 
Liabilities and Shareholders' Equity            
Current liabilities:            
  Accounts payable and accrued liabilities   $ 82,167,747   $ 98,199,045
  Income taxes payable     3,063,050     2,312,168
  Current portion of long-term debt (note 4)     6,249,039     6,415,790
   
 
      91,479,836     106,927,003
Long-term debt (note 4)     114,866,404     153,224,648
Future income taxes (note 8)     20,385,000     17,646,000
Shareholders' equity:            
  Share capital (note 5)     104,924,975     100,361,637
  Contributed surplus     322,866     322,866
  Retained earnings     164,660,258     98,168,718
   
 
      269,908,099     198,853,221
   
 
Commitments and contingent liabilities (note 7)            
    $ 496,639,339   $ 476,650,872
   
 

        See accompanying notes to consolidated financial statements.

On behalf of the Board:

(Signed) H. Greg Chamandy
Director		   (Signed) Robert M. Baylis
Director

45

CONSOLIDATED STATEMENTS OF EARNINGS

Years ended September 29, 2002, September 30, 2001 and October 1, 2000
(In Canadian dollars)

 
   2002
   2001
   2000
Sales   $ 600,660,380   $ 504,867,353   $ 459,208,329
Cost of sales (note 9)     431,996,459     398,566,740     328,191,271
   
 
 
Gross profit     168,663,921     106,300,613     131,017,058
Selling, general and administrative expenses (note 9)     63,926,673     76,074,745     48,309,004
   
 
 
Earnings before the undernoted items     104,737,248     30,225,868     82,708,054
Depreciation and amortization (note 9)     17,591,885     16,208,560     9,380,214
Interest (note 4)     13,341,823     13,628,350     10,233,019
Debt prepayment charge (note 4)     —     —     2,344,682
   
 
 
      30,933,708     29,836,910     21,957,915
   
 
 
Earnings before income taxes     73,803,540     388,958     60,750,139
Income taxes (recovery) (note 8)     7,312,000     (427,000 )   6,145,000
   
 
 
Net earnings   $ 66,491,540   $ 815,958   $ 54,605,139
   
 
 
Earnings per share: (note 10)                  
  Basic   $ 2.33   $ 0.03   $ 1.97
  Diluted     2.26     0.03     1.88

        See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

Years ended September 29, 2002, September 30, 2001 and October 1, 2000
(In Canadian dollars)

 
   2002
   2001
   2000
Retained earnings, beginning of year   $ 98,168,718   $ 97,352,760   $ 42,747,621
Net earnings     66,491,540     815,958     54,605,139
   
 
 
Retained earnings, end of year   $ 164,660,258   $ 98,168,718   $ 97,352,760
   
 
 

        See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended September 29, 2002, September 30, 2001 and October 1, 2000
(In Canadian dollars)

 
   2002
   2001
   2000
  
Cash and cash equivalents, beginning of year   $ —   $ 33,492,381   $ —  
Cash flows from operating activities:                    
  Net earnings     66,491,540     815,958     54,605,139  
  Adjustments for:                    
    Depreciation and amortization     17,591,885     16,208,560     9,380,214  
    Future income taxes     5,013,000     (268,000 )   4,279,000  
    Loss (gain) on disposal of fixed assets     949,092     7,534     (66,373 )
    Foreign exchange loss (gain)     3,443,038     (416,640 )   (2,299,110 )
  Net changes in non-cash working capital balances:                    
    Accounts receivable     38,170,839     (13,129,676 )   (4,250,638 )
    Inventories     65,380,407     (56,636,049 )   (23,036,446 )
    Prepaid expenses and deposits     599,018     (225,444 )   (1,637,740 )
    Accounts payable and accrued liabilities     (21,026,308 )   39,545,292     5,334,171  
    Income taxes payable     1,488,272     1,755,409     (2,024,976 )
   
 
 
 
      178,100,783     (12,343,056 )   40,283,241  
Cash flows from financing activities:                    
  (Decrease) increase in revolving bank loan     (35,083,026 )   35,083,026     (10,340,350 )
  Repayment of capital leases     (5,119,718 )   (5,164,290 )   (4,934,576 )
  Increase in other long-term debt     2,974,000     —     104,839,000  
  Repayment of other long-term debt     (6,433,817 )   (2,209,780 )   (46,935,717 )
  Issue of common shares, net     4,563,338     986,726     1,790,789  
  Increase in deferred financing charges     (1,086,020 )   (405,514 )   (1,935,983 )
   
 
 
 
      (40,185,243 )   28,290,168     42,483,163  
Cash flows from investing activities:                    
  Decrease in loans     150,000     150,000     150,000  
  Purchase of fixed assets, net of disposals     (65,764,900 )   (49,149,541 )   (46,897,766 )
  Decrease (increase) in advances     —     259,153     (452,004 )
  Increase in other assets     (1,545,301 )   (542,352 )   (2,322,444 )
   
 
 
 
      (67,160,201 )   (49,282,740 )   (49,522,214 )
Effect of exchange rate changes on cash and cash equivalents     150,158     (156,753 )   248,191  
   
 
 
 
Cash and cash equivalents, end of year   $ 70,905,497   $ —   $ 33,492,381  
   
 
 
 

Supplemental disclosure of cash flow information (note 14)

        See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 29, 2002, September 30, 2001 and October 1, 2000

(In Canadian dollars)

Gildan Activewear Inc. (the "Company") is incorporated under the Canada Business Corporations Act. Its principal business activity is the manufacture and sale of activewear apparel. The Company's fiscal year ends on the first Sunday following September 28. All references to 2002, 2001 and 2000 represent the fiscal years ended September 29, 2002, September 30, 2001 and October 1, 2000.

1.    SIGNIFICANT ACCOUNTING POLICIES:

        The consolidated financial statements are expressed in Canadian dollars and have been prepared in accordance with accounting principles generally accepted in Canada. These principles conform, in all material respects, with accounting principles generally accepted in the United States, except as described in note 16. The principal accounting policies of the Company are summarized as follows:

(a)
Principles of consolidation:

        The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation.

(b)
Cash and cash equivalents:

        The Company considers all liquid investments with maturities of three months or less when acquired to be cash equivalents.

(c)
Inventories:

        Inventories are stated at the lower of cost and market value. Cost is established based on the first-in, first-out method. Market value is defined as replacement cost for raw materials and net realizable value for work in process and finished goods.

(d)
Fixed assets:

        Fixed assets are recorded at cost. Depreciation and amortization are calculated on a straight-line basis at the following annual rates:

Asset
   Rate
Buildings and improvements   21/2% to 20%
Equipment   62/3% to 25%
Equipment under capital leases   5% to 25%
(e)
Deferred charges:

        The costs of obtaining long-term financing are deferred and amortized on a straight-line basis over the term of the related debt, ranging over a period of 3 to 7 years. Plant start-up costs are deferred and amortized over 2 years. The amortization of these charges is included in depreciation and amortization.

(f)
Use of estimates:

        The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(g)
Foreign exchange:

        Monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange at the balance sheet date. Other balance sheet items denominated in foreign currencies are translated at the

48


rates prevailing at the respective transaction dates. Income and expenses denominated in foreign currencies are translated at average rates prevailing during the year. Gains or losses on foreign exchange are recorded in the consolidated statements of earnings.

        The foreign subsidiaries are considered to be integrated foreign operations and their accounts have been translated using the temporal method with translation gains and losses included in the consolidated statements of earnings.

        In November 2001, the Canadian Institute of Chartered Accountants ("CICA") issued revisions to Handbook Section 1650 "Foreign Currency Translation". The new recommendations eliminate the deferral and amortization of unrealized foreign currency translation gains and losses on foreign currency denominated monetary items that have a fixed or ascertainable life extending beyond the end of the fiscal year following the current reporting period. The new recommendations also require the disclosure of foreign exchange gains (losses) included in the consolidated statements of earnings which, for fiscal 2002, amounted to $(968,633) (2001 — ($1,906,216); 2000 — $2,750,207). The change was adopted retroactively. There is no impact on the Company's consolidated financial position, results of operations and cash flows as a result of adopting these recommendations.

(h)
Revenue recognition:

        Sales are recognized upon shipment of products to customers since title passes upon shipment. At the time of sale, estimates are made based upon existing programs for customer price discounts and rebates. Accruals required for new programs which relate to prior sales are recorded at the time the new program is introduced.

(i)
Financial instruments:

        The Company may periodically use derivative financial instruments, such as forward foreign exchange contracts and cross-currency swap and cross-currency interest rate swap arrangements to manage risks related to fluctuations in exchange rates and interest rates. Derivative financial instruments are not used for trading purposes. Forward foreign exchange contracts are entered into with maturities of no longer than twelve months. Gains and losses on forward foreign exchange contracts are recognized through income and generally offset transaction losses or gains on the foreign currency cash flows, which they are intended to hedge. Gains and losses on swap arrangements are recognized and charged to income on a basis that corresponds with changes in the related underlying item.

(j)
Income taxes:

        The Company utilizes the asset and liability method for accounting for income taxes which requires the establishment of future tax assets and liabilities, measured at substantially enacted tax rates, for all temporary differences caused when the tax bases of assets and liabilities differ from those reported in the financial statements. Future income tax assets are evaluated and if realization is not considered to be more likely than not, a valuation allowance is provided.

(k)
Stock-based compensation plans:

        In December 2001, the CICA issued Handbook Section 3870, with respect to the accounting for stock-based compensation and other stock-based payments. The new recommendations, which are effective for fiscal years beginning on or after January 1, 2002, require that all stock-based payments to non-employees, and employee awards that are direct awards of stock, call for settlement in cash or other assets, or are stock appreciation rights that call for settlement by the issuance of equity instruments, granted on or after adoption of the standard be accounted for using the fair value method. The Company presently does not have any such awards which must be accounted for using the fair value method. For all other stock-based employee compensation awards, the new standards permit the Company to continue to follow its existing policy of using the settlement date method of accounting. Under this method, no compensation expense is recognized when such stock-based compensation awards are issued to employees.

        The Company has employee share purchase plans and a stock option plan which are described in notes 5 and 6 respectively. No compensation expense is recognized under the stock-based compensation

49


plans. Any consideration paid by employees on exercise of stock options or purchase of stock is credited to share capital.

        The Company will be adopting these recommendations prospectively starting in the first quarter of fiscal 2003. The new standards will require that the Company disclose the pro forma effect of accounting for all stock-based awards granted following adoption of the standard using the fair value-based method. In the first year of application, comparative disclosures need not be provided for prior years.

(l)
Employee future benefits:

        The Company offers group defined contribution plans to eligible employees whereby the Company matches employees' contributions up to a fixed percentage of the employee's salary. Contributions by the Company to trustee-managed investment portfolios are expensed as incurred. The Company does not provide its employees with post-retirement defined benefit pensions, health, insurance and other benefits.

(m)
Earnings per share:

        Basic earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding for the year. Diluted earnings per share are computed in the same manner except the weighted average number of common shares outstanding for the period is increased to include additional shares from the assumed exercise of options, if dilutive. The number of additional shares is calculated by assuming that outstanding options are exercised and that the proceeds from such exercises are used to repurchase common shares at the average share price for the period.

(n)
Research and investment tax credits and government grants:

        Research and investment tax credits and government grants are recorded as a reduction of the related expense or the cost of the assets acquired. Tax credits are recorded in the accounts when reasonable assurance exists that they will be realized.

2.    FIXED ASSETS:

 
   2002
 
   Cost
   Accumulated depreciation & amortization
   Net book value
Land   $ 15,154,082   $ —   $ 15,154,082
Buildings and improvements     64,899,283     5,869,949     59,029,334
Equipment     150,127,748     33,010,768     117,116,980
Equipment under capital leases     28,329,528     10,382,576     17,946,952
   
 
 
    $ 258,510,641   $ 49,263,293   $ 209,247,348
   
 
 
 
   2001
 
   Cost
   Accumulated depreciation & amortization
   Net book value
Land   $ 13,938,449   $ —   $ 13,938,449
Buildings and improvements     42,990,460     4,086,042     38,904,418
Equipment     97,179,841     25,183,783     71,996,058
Equipment under capital leases     27,966,675     8,225,379     19,741,296
Construction in progress     8,991,345     —     8,991,345
   
 
 
    $ 191,066,770   $ 37,495,204   $ 153,571,566
   
 
 

        Depreciation expense in fiscal 2002 was $15,297,250 (2001 — $13,265,489; 2000 — $8,294,238).

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        During fiscal 2002, fixed assets were acquired at an aggregate cost of $74,526,963 (2001 — $55,908,925; 2000 — $48,917,442), $1,024,508 of which were acquired by means of capital leases (2001 — $88,928; 2000 — nil).

3.    OTHER ASSETS:

 
   2002
   2001
Loans to directors and officers (note 11)   $ 900,000   $ 1,050,000
Deferred charges, net of accumulated amortization     2,722,500     2,932,454
Prepaid equipment rental     940,651     1,089,741
Deposits     1,157,775     366,145
Cross-currency swap     1,164,000     1,207,500
Other     200,000     295,900
   
 
    $ 7,084,926   $ 6,941,740
   
 

4.    LONG-TERM DEBT:

 
   2002
   2001
Secured:            
Senior notes (US$70,000,000)   $ 110,271,000   $ 106,173,000
Revolving bank loan     —     35,083,026
Obligations under capital leases, bearing interest at rates varying from 5.21% to 16.08%, maturing at various dates through 2005     7,026,062     11,067,506
Term loans, bearing interest at rates from 7.58% to 8.15%, maturing at various dates through 2004     687,951     6,901,131
   
 
      117,985,013     159,224,663
Current portion of secured debt     5,570,277     6,300,015
   
 
    $ 112,414,736   $ 152,924,648
   
 

Unsecured:
 
 
 
 
 
 
Term loans, bearing interest at rates up to 6% per annum, maturing at various dates through 2008   $ 3,130,430   $ 415,775
Current portion of unsecured debt     678,762     115,775
   
 
    $ 2,451,668   $ 300,000
   
 
Total unsecured and secured long-term debt   $ 114,866,404   $ 153,224,648
   
 

        Included in interest expense is an amount of $13,439,948 (2001 — $13,720,931; 2000 — $10,008,673) of interest on long-term debt.

        The senior notes are repayable in four equal annual installments commencing in June 2004, bear interest at 9.51% on US$55,000,000 and 9.88% on US$15,000,000 and are secured by tangible and intangible property of the Company.

        During fiscal 2000, the foreign currency risk associated with the senior notes was fully hedged through the use of a cross-currency interest rate swap arrangement under which the Company had fixed repayments on the senior notes of US$70,000,000 into CDN$104,839,000. All quarterly interest payments relating to this debt were converted to Canadian dollars to yield an effective interest rate of 8.705% on $82,373,500 and 9.1% on $22,465,500 for the term of the debt, for a composite rate of 8.79% for fiscal 2000.

        During fiscal 2001, the Company cancelled US$55 million of the cross-currency interest rate swap arrangement. A gain of approximately $1.6 million was realized on the cancellation of the swap arrangement

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which amount is being deferred and amortized over the term of the senior notes. As at September 29, 2002, approximately $1.0 million (2001 — $1.3 million) of the gain remains deferred on the consolidated balance sheet in accounts payable and accrued liabilities. The combined effective interest rate on the senior notes for fiscal 2002 was 9.43% (2001 was 9.42%) excluding the effect of the amortization of the gain realized on the cancellation of the swap.

        The Company has a revolving term credit facility for a maximum of $150,000,000 or the equivalent amount thereof in US dollars which matures in July 2005. The facility is secured by a first ranking moveable hypothec and security interest on the majority of the Company's accounts receivable, inventories, intangible assets, equipment and tangible moveable assets. There was no balance outstanding under this facility at September 29, 2002. The effective interest rate at September 30, 2001 was 6.88% on US dollar denominated loans and 5.63% on Canadian dollar denominated loans under this facility.

        During fiscal 2000, the Company used the proceeds of its issue of senior notes to repay its unsecured debentures and all of the outstanding indebtedness under its revolving bank facility. A prepayment penalty and the write-off of the unamortized deferred financing costs related to these loans, totalling $2,344,682, were expensed as a debt prepayment charge in the consolidated statement of earnings.

        Under various financing arrangements with its bankers and other long-term lenders, the Company is required to meet certain covenants. The Company was in compliance with all of these covenants as at September 29, 2002 and September 30, 2001.

        Principal payments due on long-term debt, other than obligations under capital leases, are as follows:

Fiscal year
    
2003   $ 1,290,280
2004     28,243,399
2005     28,213,393
2006     28,218,133
2007     28,074,176
Thereafter     50,000
   
    $ 114,089,381
   

        Future minimum lease payments under capital leases are as follows:

Fiscal year
    
2003   $ 5,247,143
2004     2,153,096
2005     47,828
   
Total minimum lease payments     7,448,067
Less imputed interest     422,005
   
    $ 7,026,062
   

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5.    SHARE CAPITAL:

 
   2002
   2001
 
   Shares
   Book value
   Shares
   Book value
Authorized without limit as to number and without par value:                    
  First preferred shares, issuable in series, non-voting                    
  Second preferred shares, issuable in series, non-voting                    
  Class A subordinate voting shares, participating, one vote per share                    
  Class B multiple voting shares, participating, eight votes per share                    

Issued and outstanding:
 
 
 
 
 
 
 
 
 
 
  Class A subordinate voting shares:                    
    Total outstanding, beginning of year   22,095,460   $ 95,278,241   21,942,952   $ 94,291,515
    Shares issued under employee share purchase plan   8,096     181,721   2,376     60,310
    Shares issued pursuant to exercise of stock options   723,408     4,381,617   150,132     926,416
   
 
 
 
    Total outstanding, end of year   22,826,964     99,841,579   22,095,460     95,278,241
  Class B multiple voting shares   6,094,000     5,083,396   6,094,000     5,083,396
   
 
 
 
    28,920,964   $ 104,924,975   28,189,460   $ 100,361,637
   
 
 
 

        The Company has employee share purchase plans which allow eligible employees to authorize payroll deductions of up to 10% of their salary to purchase, from treasury, Class A subordinate voting shares of the Company at a price of 90% of the then current stock price as defined in the plans. Employees purchasing shares under the plans must hold the shares for a minimum of one year. The Company has reserved 700,000 Class A subordinate voting shares for issuance under the plans.

6.    STOCK OPTION PLAN:

        The Company has established a stock option plan (the "Plan"). Under the Plan, the Company may grant options to purchase Class A subordinate voting shares at the then current market price to officers, other key employees and directors of the Company. Options vest ratably over a two to four-year period from the date of grant and expire no more than ten years after the date of grant. The Plan provides that the number of Class A subordinate voting shares reserved for issuance upon the exercise of options granted thereunder shall not exceed 2,768,888 shares.

        Changes in outstanding options were as follows:

 
   Number
   Weighted average price
Options outstanding, October 1, 2000   1,647,236   $ 7.66
Granted   596,540     27.61
Exercised   150,132     6.17
   
 
Options outstanding, September 30, 2001   2,093,644     13.45
Granted   163,552     19.68
Exercised   723,408     6.06
Cancelled   104,834     11.24
   
 
Options outstanding, September 29, 2002   1,428,954   $ 18.07
   
 

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        The following table summarizes information about stock options outstanding and exercisable at September 29, 2002:

 
   Options outstanding
    
    
 
    
    
   Weighted average remaining contractual life (yrs)
   Options exercisable
Range of exercise prices
   Number
   Weighted average exercise price
   Number
   Weighted average exercise price
$5.15–$5.75   323,032   $ 5.27   5.85   245,701   $ 5.18
$6.63–$9.75   189,521     8.47   6.60   56,782     9.35
$14.38–$19.70   228,032     16.70   8.28   25,500     14.38
$20.00–$25.68   408,569     24.44   8.25   19,257     24.05
$27.00–$35.12   279,800     31.17   8.43   5,000     27.90
   
 
 
 
 
    1,428,954   $ 18.07   7.53   352,240   $ 7.87
   
 
 
 
 

7.    COMMITMENTS AND CONTINGENT LIABILITIES:

(a)
The minimum annual lease payments under operating leases are approximately as follows:

Fiscal year
    
2003   $ 4,369,000
2004     2,158,000
2005     1,787,000
2006     1,573,000
2007     1,269,000
Thereafter     3,314,000
   
    $ 14,470,000
   
(b)
As at September 29, 2002, there were contractual obligations outstanding of approximately $10,388,000 for the acquisition of fixed assets (2001 — $17,059,000).

(c)
The Company is a party to claims and litigation arising in the normal course of operations. The Company does not expect the resolution of these matters to have a materially adverse effect on the financial position or results of operations of the Company.

8.    INCOME TAXES:

        The income tax provision differs from the amount computed by applying the combined Canadian federal and provincial tax rates to earnings before income taxes. The reasons for the difference and the related tax effects are as follows:

 
   2002
   2001
   2000
  
Combined basic Canadian federal and provincial income taxes   $ 25,979,000   $ 149,000   $ 23,262,000  
Increase (decrease) in income taxes resulting from:                    
  Manufacturing and processing credit     (195,000 )   821,000     (686,000 )
  Effect of different tax rates on earnings of foreign subsidiaries     (22,639,000 )   (4,861,000 )   (18,982,000 )
  Effect of non-deductible expenses and other     4,167,000     3,464,000     2,551,000  
   
 
 
 
    $ 7,312,000   $ (427,000 ) $ 6,145,000  
   
 
 
 

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        The components of income tax expense (recovery) are as follows:

 
   2002
   2001
   2000
Current income taxes   $ 2,299,000   $ (159,000 ) $ 1,866,000
Future income taxes     5,013,000     (268,000 )   4,279,000
   
 
 
    $ 7,312,000   $ (427,000 ) $ 6,145,000
   
 
 

        Future income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's future tax position are as follows:

 
   2002
   2001
Future income tax assets:            
  Share issue costs and other   $ 1,412,000   $ 2,039,000
  Inventory     2,427,000     3,661,000
  Reserves and accruals     1,189,000     2,296,000
   
 
      5,028,000     7,996,000
Future income tax liabilities:            
  Fixed assets and other     20,385,000     17,646,000
   
 
Net future income tax liability   $ 15,357,000   $ 9,650,000
   
 

        Management believes that all future income tax assets will more likely be realized than not and accordingly no valuation allowance has been made.

9.    UNUSUAL ITEMS:

        The following unusual costs were incurred in fiscal 2001 and are included in the consolidated statement of earnings:

 
   2001
Charged to:      
Cost of sales:      
  Cotton contract loss (a)   $ 14,308,667
  Restructuring costs (b)     3,582,617
   
    $ 17,891,284
   
Selling, general and administration:      
  Abandoned acquisition related costs (c)   $ 15,014,936
  Restructuring costs (b)     2,996,000
   
    $ 18,010,936
   
Depreciation and amortization:      
  Restructuring costs (b)   $ 779,470
   
Total   $ 36,681,690
   
(a)
The Company recorded a provision for losses which are expected to arise from commitments for the future purchase of raw materials at substantially higher than current market prices.

(b)
The Company relocated its distribution center and closed various manufacturing facilities in order to consolidate them into other lower cost operations. The costs incurred consisted mainly of lease costs, severance payments and the write-off of deferred start-up costs. As at September 29, 2002, the remaining provision, amounting to $2.0 million (2001 — $2.8 million), relates to future obligations under

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(c)
The Company incurred direct costs related to a proposed business acquisition which was not completed. Accordingly, the costs were expensed in the year. In addition, an action was filed by the target company against the Company alleging possession and use of confidential information by a former employee of the plaintiff who was in the employ of the Company. In October 2001, the Company and plaintiff agreed to an amicable out-of-court settlement of all outstanding issues in this matter. The litigation settlement and legal costs incurred by the Company to defend the lawsuit were charged to income in fiscal 2001.

10.  EARNINGS PER SHARE:

        A reconciliation between basic and diluted earnings per share is as follows:

 
   2002
   2001
   2000
Earnings per share:                  
  Basic weighted average number of common shares outstanding     28,491,495     28,145,989     27,762,471
   
 
 
  Basic earnings per share   $ 2.33   $ 0.03   $ 1.97
   
 
 
Diluted earnings per share:                  
  Basic weighted average number of common shares outstanding     28,491,495     28,145,989     27,762,471
  Plus impact of stock options     870,060     1,080,384     1,263,296
   
 
 
  Diluted common shares     29,361,555     29,226,373     29,025,767
   
 
 
  Diluted earnings per share   $ 2.26   $ 0.03   $ 1.88
   
 
 

        Excluded from the above calculation are 144,800 (2001 — 645,120) stock options ranging in prices from $34.58 to $35.12 (2001 — $20.00 to $34.58) which were deemed to be antidilutive because the exercise prices were greater than the average market price of the common shares. All options outstanding for fiscal 2000 were dilutive.

11.  RELATED PARTY TRANSACTIONS:

        The loans to directors and officers (see note 3) are non-interest bearing and the balance is repayable in seven equal and consecutive annual installments of $150,000.

        During fiscal 2001, in conjunction with a reorganization of Harco Holdings Ltd., the Company acquired the property at which the Company's principal knitting facility and executive offices are located. The land and building had a market value of approximately $6.8 million. As part of the consideration, the Company assumed the mortgage on the building, amounting to approximately $2.8 million at the time of the transaction. The balance of the proceeds, amounting to approximately $4.0 million, was utilized to discharge the full amount of the Harco Holdings Ltd. indebtedness to the Company. Prior to the purchase of the land and building, the Company had a rental agreement with Harco Holdings Ltd.

        The Company had the following related party transactions:

 
   2002
   2001
   2000
Interest income   $ —   $ 25,847   $ 137,004
Rent expense     —     123,656     741,938

        The Company paid $475,108, $1,170,061 and $194,395 for fiscal years 2002, 2001 and 2000 respectively primarily to a firm connected with an outside director of the Company for professional services rendered. The amounts paid for fiscal 2001 related to legal fees incurred in conjunction with the proposed acquisition, related lawsuit and general legal advice. The Company believes that such remuneration was based on normal terms for business transactions between unrelated parties.

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12.  FINANCIAL INSTRUMENTS:

(a)
Foreign currency risk management:

        A substantial portion of the Company's sales are denominated in US dollars. The Company used the revenue stream in US dollars as a natural hedge against purchases of fixed assets and expenses denominated in US dollars. From time to time, the Company also uses forward foreign exchange contracts and cross-currency swap arrangements to hedge its foreign exchange exposure on cash flows related to payables, accounts receivable and cash in US dollars, pounds sterling and Euros. In addition, the Company uses a cross-currency interest rate swap to hedge a portion of its foreign currency denominated long-term debt against fluctuations in exchange rates.

        During fiscal 2001, the Company designated US$55 million of its accounts receivable denominated in US dollars as a hedge against the exchange risk related to a corresponding amount of long-term debt. Accordingly, exchange gains or losses from the designated accounts receivable were offset against the exchange gains or losses on conversion of US$55 million of long-term debt. The designation of the accounts receivable as a hedge was terminated with the adoption of the new recommendations on foreign currency.

        The following table summarizes the Company's commitments to buy and sell foreign currency as at September 29, 2002 and September 30, 2001:

 
   Notional amount
   Exchange rate
   Maturity
   Notional Canadian equivalent
2002:                    
Buy contracts:                    
  Foreign exchange contracts   Euro 2,185,000   1.5460   October 2002   $ 3,378,000
2001:                    
Buy contracts:                    
  Foreign exchange contracts   US $18,000,000   1.5775   October 2001   $ 28,395,000
    Euro 4,630,900   1.4367   October 2001     6,653,000
Sell contracts:                    
  Foreign exchange contracts   Euro   646,000   1.4505   October 2001   $ 937,000

        A forward foreign exchange contract represents an obligation to buy or sell a foreign currency and a swap agreement represents an obligation to exchange principal and/or interest amounts with a counterparty. Credit risk exists in the event of failure by a counterparty to meet its obligations. The Company reduces this risk by dealing only with highly rated counterparties, normally major North American financial institutions.

(b)
Credit risk:

        The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents and trade receivables.

        The Company invests available cash in short-term deposits with Canadian chartered banks.

        Concentration of credit risk with respect to trade receivables is limited due to the Company's credit evaluation process and, other than for two customers which collectively represent approximately 26% of sales for 2002 (2001 — 26%; 2000 — 30%), to the dispersion of a large number of customers across many geographic areas within Canada, the United States, the United Kingdom and Europe. The Company regularly monitors its credit risk exposure to these and other customers and takes steps to mitigate the risk of loss, including obtaining credit insurance.

        The Company's extension of credit is based on an evaluation of each customer's financial condition and the Company's ability to obtain credit insurance coverage for that customer. Allowances are maintained for potential credit losses consistent with the credit risk, historical trends, general economic conditions and other information.

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(c)
Fair value disclosure:

        Fair value estimates are made as of a specific point in time, using available information about the financial instrument. These estimates are subjective in nature and often cannot be determined with precision.

        The Company has determined that the carrying value of its short-term financial assets and liabilities approximates fair values as at the balance sheet dates because of the short-term maturity of those instruments.

        The fair value of long-term debt is $123,862,362 (2001 — $167,012,442) compared to a carrying value of $119,949,622 (2001 — $159,640,438) as at September 29, 2002. The fair value of the cross-currency interest rate swap at September 29, 2002 was $3,010,092 (2001 — $2,316,000) and the carrying value was $1,164,000 (2001 — $1,207,500). The fair value of loans to directors and officers is not significantly different from its carrying value. The method of calculating fair values for the financial instruments is described below.

        The fair value of the Company's long-term debt bearing interest at fixed rates was calculated using the present value of future payments of principal and interest discounted at the current market rates of interest available to the Company for the same or similar debt instruments with the same remaining maturities. For long-term debt bearing interest at variable rates, the fair value is considered to approximate the carrying value.

        The fair value of the swap was determined based on market rates prevailing at the balance sheet date obtained from the Company's financial institution and represented the estimated amount that the Company would receive to settle the contract at September 29, 2002.

(d)
Interest rate risk:

        The Company's exposure to interest rate fluctuations is with respect to the use of its bank facility which bears interest at floating rates.

13.  SEGMENTED INFORMATION:

        The Company manufactures and sells activewear apparel. The Company operates in one business segment.

(a)
Major customers and revenues by geographic areas:

(i)
Percentages related to individual customers accounting for greater than 10% of total sales are as follows:

 
   2002
   2001
   2000
Company A   14.8%   14.9%   19.2%
Company B   10.7%   10.7%   10.4%

 
   2002
   2001
   2000
International   $ 537,472,747   $ 442,099,830   $ 404,179,507
Canada     63,187,633     62,767,523     55,028,822
   
 
 
    $ 600,660,380   $ 504,867,353   $ 459,208,329
   
 
 

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(b)
Fixed assets by geographic areas are as follows:

 
   2002
   2001
   2000
Canada   $ 123,723,507   $ 93,890,431   $ 76,074,820
Caribbean basin and Central America     52,983,181     28,084,930     16,714,660
United States     24,832,233     25,329,557     15,396,461
Mexico     7,708,427     6,266,648     3,327,771
   
 
 
    $ 209,247,348   $ 153,571,566   $ 111,513,712
   
 
 

14.  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 
   2002
   2001
   2000
Cash paid during the year for:                  
  Interest   $ 13,587,113   $ 13,172,660   $ 9,849,329
  Income taxes     795,141     1,196,166     4,361,531
Non-cash transactions:                  
  Acquisition of fixed assets through the assumption of debt and settlement of amounts due to the Company     —     6,800,000     —
  Additions to fixed assets included in accounts payable and accrued liabilities     6,470,616     1,337,900     1,956,567
   
 
 
Cash and cash equivalents consist of:                  
  Cash balances with banks   $ 45,700,697   $ —   $ 10,992,381
  Short-term investments     25,204,800     —     22,500,000
   
 
 
    $ 70,905,497   $ —   $ 33,492,381
   
 
 

15.  COMPARATIVE FIGURES:

        Certain of the comparative figures have been reclassified in order to conform with the current year's presentation.

16.  CANADIAN AND UNITED STATES ACCOUNTING DIFFERENCES:

        The consolidated financial statements of the Company are expressed in Canadian dollars and are prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), which conform, in all material respects, with those generally accepted in the United States except as described below:

(a)
Consolidated statements of earnings:
 
   2002
   2001
   2000
  
Net earnings in accordance with Canadian GAAP   $ 66,491,540   $ 815,958   $ 54,605,139  
Swap revenue (i)     416,000     2,448,000     —  
Start-up costs (ii)     221,252     693,187     (1,222,128 )
Tax effect of above adjustments     (262,000 )   (779,000 )   290,000  
   
 
 
 
Net earnings in accordance with United States GAAP   $ 66,866,792   $ 3,178,145   $ 53,673,011  
   
 
 
 
Earnings per share under United States GAAP:                    
  Basic   $ 2.35   $ 0.11   $ 1.93  
  Diluted     2.28     0.11     1.85  
   
 
 
 
Weighted average number of common shares outstanding under United States GAAP:                    
  Basic     28,491,495     28,145,989     27,762,471  
  Diluted     29,361,555     29,226,373     29,025,767  
   
 
 
 

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60

(b)
Consolidated statements of cash flows:
 
   2002
   2001
   2000
  
Cash and cash equivalents, United States GAAP,beginning of year   $ —   $ 33,492,381   $ —  
Changes due to United States GAAP:                    
  Operating activities on a Canadian basis     178,100,783     (12,343,056 )   40,283,241  
  Start-up costs     221,252     693,187     (1,222,128 )
   
 
 
 
Operating activities cash flow, United States GAAP     178,322,035     (11,649,869 )   39,061,113  
  Investing activities on a Canadian basis     (67,160,201 )   (49,282,740 )   (49,522,214 )
  Start-up costs     (221,252 )   (693,187 )   1,222,128  
   
 
 
 
Investing activities cash flow, United States GAAP     (67,381,453 )   (49,975,927 )   (48,300,086 )
Financing activities on a Canadian basis and under United States GAAP     (40,185,243 )   28,290,168     42,483,163  
Effect of exchange rate changes on cash and cash equivalents     150,158     (156,753 )   248,191  
   
 
 
 
Cash and cash equivalents, United States GAAP, end of year   $ 70,905,497   $ —   $ 33,492,381  
   
 
 
 
(c)
Consolidated balance sheets:

        Differences between Canadian and United States GAAP are not material in the presentation of the assets, liabilities and shareholders' equity. However, the following differences should be noted:

 
   2002
   2001
  
Other assets under Canadian GAAP   $ 7,084,926   $ 6,941,740  
Start-up costs     (736,690 )   (957,941 )
Cross-currency swap     1,846,000     1,108,000  
   
 
 
Other assets under United States GAAP   $ 8,194,236   $ 7,091,799  
   
 
 
Accounts payable and accrued liabilities under Canadian GAAP   $ 82,167,747   $ 98,199,045  
Reversal of deferred gain on cross-currency swap     (1,018,000 )   (1,340,000 )
   
 
 
Accounts payable and accrued liabilities under United States GAAP   $ 81,149,747   $ 96,859,045  
   
 
 
Future income tax liabilities under Canadian GAAP   $ 20,385,000   $ 17,646,000  
Future taxes related to GAAP adjustments     751,000     489,000  
   
 
 
Future income tax liabilities under United States GAAP     21,136,000   $ 18,135,000  
   
 
 
Shareholders' equity under Canadian GAAP   $ 269,908,099   $ 198,853,221  
United States GAAP cumulative net earnings adjustments     1,376,310     1,001,059  
   
 
 
Shareholders' equity under United States GAAP   $ 271,284,409   $ 199,854,280  
   
 
 
(d)
Comprehensive income:

        Under United States GAAP, SFAS No. 130, "Reporting Comprehensive Income" establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and all other changes in shareholders' equity that do not result from transactions with shareholders. These changes include cumulative foreign currency translation adjustments. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations.

        Since there are no elements within the consolidated financial statements which would be classified as comprehensive income, a separate financial statement of comprehensive income is not required.

        Comprehensive income is the same as net income under United States GAAP.

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(e)
Supplementary information:

        Under United States GAAP and SEC rules, separate disclosure is required for the following statement of earnings and balance sheet items. There is no similar requirement under Canadian GAAP.

 
   2002
   2001
   2000
Statements of earnings:                  
  Rental expenses   $ 1,917,000   $ 2,905,000   $ 5,850,000
  Advertising expenses     8,189,000     7,762,000     7,238,000
Balance sheets:                  
  Accounts payable     41,223,580     25,337,000     41,830,000
  Accrued liabilities     39,926,167     71,522,000     17,037,000
  Allowance for doubtful accounts, price discounts and rebates     26,956,000     13,597,000     8,434,000
(f)
New accounting standards:

        In June 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141, which replaces APB Opinion No. 16, revises the accounting standards for business combinations and is effective for acquisitions initiated after June 30, 2001. SFAS No. 142, which replaces APB Opinion No. 17, revises the standards in accounting for goodwill and other intangibles and is effective for fiscal years after December 15, 2001. Similar standards have been adopted by the Canadian Institute of Chartered Accountants. These new standards have no material impact on the Company at the present time.

        In August 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets. This Statement is effective for the Company's fiscal year beginning September 30, 2002. The Company does not expect SFAS No. 143 to have a material impact on its financial statements.

        In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 establishes a single accounting model, based on the framework established in Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", for long-lived assets to be disposed of by sale, and resolves implementation issues related to SFAS No. 121. This Statement is effective for the Company's fiscal year beginning September 30, 2002. The Company does not expect SFAS No. 144 to have a material impact on its financial statements.

        In April 2002, FASB issued SFAS No 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections". SFAS No. 145 will be effective for the Company's fiscal year beginning October 5, 2003. The Company does not expect SFAS No. 145 to have a material impact on its financial statements.

        In June 2002, FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". This Statement is effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect SFAS No. 146 to have a material impact on its financial statements.

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