WESTPOINT STEVENS INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(X BOX) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

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

For the transition period from _______ to _______

Commission File Number 0-21496

WESTPOINT STEVENS INC.
(Exact name of registrant as specified in its charter)


DELAWARE (State or other jurisdiction of incorporation or organization)		36-3498354 (I.R.S. Employer Identification No.)

507 West Tenth Street
West Point, Georgia 31833
(Address of principal executive offices, including Zip Code)

(706) 645-4000
(Registrant’s telephone number, including area code)

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 BOX) No (BOX)

Common shares outstanding at August 2, 2002: 49,649,157 shares of Common Stock, $.01 par value.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Operations (Unaudited)
	Condensed Consolidated Statements of Cash Flows (Unaudited)
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)
	Notes to Condensed Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II - OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT INDEX
SEPARATION AGREEMENT AND GENERAL RELEASE

INDEX


		Page No.


PART I.	FINANCIAL INFORMATION




	Item 1. Financial Statements




	Condensed Consolidated Balance Sheets: June 30, 2002 (Unaudited) and December 31, 2001	3




	Condensed Consolidated Statements of Operations (Unaudited);Three and Six Months Ended June 30, 2002 and June 30, 2001	4




	Condensed Consolidated Statements of Cash Flows (Unaudited); Six Months Ended June 30, 2002 and June 30, 2001	5




	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited); Six Months Ended June 30, 2002	6




	Notes to Condensed Consolidated Financial Statements (Unaudited)	7-15




	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16-23




PART II.	OTHER INFORMATION




	Item 1. Legal Proceedings	24-26




	Item 4. Submission of Matters to a Vote of Security Holders	27




	Item 6. Exhibits and Reports on Form 8-K	28

WESTPOINT STEVENS INC.

Condensed Consolidated Balance Sheets
(In thousands)


		June 30,			December 31,
		2002			2001

		(Unaudited)
Assets




Current Assets




	Cash and cash equivalents	$	6,609		$	3,170




	Accounts receivable		175,526			105,136




	Inventories		452,961			397,192




	Prepaid expenses and other current assets		28,621			29,613

Total current assets			663,717			535,111









Property, Plant and Equipment, net			729,066			749,326









Other Assets




	Deferred financing fees		28,237			32,879




	Other assets		4,745			4,243




	Goodwill		47,288			47,288

		$	1,473,053		$	1,368,847

Liabilities and Stockholders’ Equity (Deficit)




Current Liabilities




	Senior Credit Facility	$	171,036		$	107,501




	Accrued interest payable		3,444			3,856




	Accounts payable		68,465			67,218




	Other accrued liabilities		139,304			114,466

Total current liabilities			382,249			293,041




Long-Term Debt			1,565,000			1,565,000




Noncurrent Liabilities




	Deferred income taxes		180,283			182,822




	Pension and other liabilities		104,287			106,351

Total noncurrent liabilities			284,570			289,173




Stockholders’ Equity (Deficit)			(758,766	)		(778,367	)

		$	1,473,053		$	1,368,847

See accompanying notes

WESTPOINT STEVENS INC.

Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)


		Three Months Ended					Six Months Ended
		June 30,					June 30,

		2002		2001			2002		2001

Net sales		$	449,572	$	401,659		$	884,716	$	820,272




Cost of goods sold			345,800		329,949			673,143		658,856

	Gross earnings		103,772		71,710			211,573		161,416









Selling, general and administrative expenses			65,613		63,801			134,513		127,876




Restructuring and impairment charge			—		—			—		5,008

	Operating earnings		38,159		7,909			77,060		28,532









Interest expense			33,371		34,303			66,715		68,533




Other expense-net			1,682		903			4,079		4,291






	Income (loss) before income tax expense (benefit)		3,106		(27,297	)		6,266		(44,292	)




Income tax expense (benefit)			1,115		(9,800	)		2,255		(15,895	)

Net income (loss)		$	1,991	$	(17,497	)	$	4,011	$	(28,397	)











Basic net income (loss) per common share		$	.04	$	(.35	)	$	.08	$	(.57	)

Diluted net income (loss) per common share		$	.04	$	(.35	)	$	.08	$	(.57	)






Basic average common shares outstanding			49,662		49,593			49,657		49,576




	Dilutive effect of stock options and stock bonus plan		1		—			—		—

Diluted average common shares outstanding			49,663		49,593			49,657		49,576

See accompanying notes

WESTPOINT STEVENS INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)


			Six Months Ended
			June 30,

			2002			2001

Cash flows from operating activities:




	Net income (loss)		$	4,011		$	(28,397	)




	Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:




		Depreciation and other amortization		41,617			40,941




		Deferred income taxes		7,821			(12,130	)




		Changes in working capital		(72,144	)		(57,197	)




		Other-net		1,766			(4,332	)

Net cash used for operating activities				(16,929	)		(61,115	)






Cash flows from investing activities:




	Capital expenditures			(21,895	)		(33,991	)




	Net proceeds from sale of assets			728			651




	Purchase of business			—			(8,363	)

Net cash used for investing activities				(21,167	)		(41,703	)






Cash flows from financing activities:




	Senior Credit Facility:




		Borrowings		426,197			719,712




		Repayments		(362,662	)		(746,613	)




	Trade Receivables Program			(22,000	)		(12,600	)




	Cash dividends paid			—			(2,015	)




	Proceeds from Second-Lien Facility			—			165,000




	Fees associated with refinancing			—			(14,761	)

Net cash provided by financing activities				41,535			108,723

Net increase in cash and cash equivalents				3,439			5,905




Cash and cash equivalents at beginning of period				3,170			167

Cash and cash equivalents at end of period			$	6,609		$	6,072

See accompanying notes

WESTPOINT STEVENS INC.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)
(In thousands)


						Common
						Stock
						and Capital
						in												Accumulated
						Excess of												Other
				Common		Par			Treasury Stock						Accumulated			Comprehensive			Unearned
				Shares		Value			Shares			Amount			Deficit			Income (Loss)			Compensation			Total

Balance, January 1, 2002					71,100	$	395,903			(21,529	)	$	(418,781	)	$	(680,789	)	$	(69,386	)	$	(5,314	)	$	(778,367	)




	Comprehensive income (loss):




		Net income			—		—			—			—			4,011			—			—			4,011




		Foreign currency translation adjustment																	(1,065	)					(1,065	)




		Cash flow hedges:




			Net derivative gains, net of tax expense of $1,142																2,027						2,027

	Comprehensive income																								4,973

	Issuance of stock pursuant to Stock Bonus Plan including tax expense				—		822			72			765			—			—			—			1,587




	Issuance of Restricted Stock						(25	)		6			42			—			—			(17	)		—




	Amortization of compensation				—		—			—			—			—			—			945			945




	Net operating loss benefit				—		12,300			—			—			—			—			—			12,300




	Stock dividends pursuant to Stock Bonus Plan				—		—			—			—			(204	)		—			—			(204	)

Balance, June 30, 2002					71,100	$	409,000			(21,451	)	$	(417,974	)	$	(676,982	)	$	(68,424	)	$	(4,386	)	$	(758,766	)

See accompanying notes

WESTPOINT STEVENS INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for WestPoint Stevens Inc. (the “Company”) for the year ended December 31, 2001.

Certain amounts in the prior periods condensed consolidated financial statements have been reclassified to conform to the current period presentation.

2. Inventories

The Company uses the last-in, first-out (“LIFO”) method of accounting for substantially all inventories for financial reporting purposes. Interim determinations of LIFO inventories are necessarily based on management’s estimates of year-end inventory levels and costs. Subsequent changes in these estimates, including the final year-end LIFO determination, and the effect of such changes on earnings are recorded in the interim periods in which they occur.

Inventories consisted of the following at June 30, 2002 and December 31, 2001 (in thousands of dollars):


	June 30,		December 31,
	2002		2001

Finished goods	$	222,884	$	176,043




Work in process		178,636		170,854




Raw materials and supplies		51,441		50,295




LIFO reserve		—		—

	$	452,961	$	397,192

WESTPOINT STEVENS INC.

Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)

3. Indebtedness and Financial Arrangements

Indebtedness is as follows (in thousands of dollars):


		June 30,		December 31,
		2002		2001

Short-term indebtedness:




	Senior Credit Facility	$	171,036	$	107,501

Long-term indebtedness:




	Senior Credit Facility	$	400,000	$	400,000




	7.875% Senior Notes due 2005		525,000		525,000




	7.875% Senior Notes due 2008		475,000		475,000




	Second-Lien Facility		165,000		165,000

		$	1,565,000	$	1,565,000

The Company has included $400 million of the Senior Credit Facility in long-term debt at June 30, 2002 because the Company intends that at least that amount would remain outstanding during the next twelve months.

At June 30, 2002 and December 31, 2001, $130.6 million and $152.6 million, respectively, of accounts receivable had been sold pursuant to a trade receivables program (the “Trade Receivables Program”) and the sale is reflected as a reduction of accounts receivable in the accompanying Condensed Consolidated Balance Sheets. In January 2002, the Company amended and extended the maturity date of its existing Trade Receivables Program with an independent issuer of receivables backed commercial paper until January 2003.

4. Restructuring, Impairment and Other Charges

In 2000, the Company announced that its Board of Directors had approved the new Eight-Point Plan, which was created to be the guiding discipline for the Company in a global economy. The Board also approved a $222 million pretax charge for restructuring, impairment and other charges to cover the cost of implementing the Eight-Point Plan that is designed to streamline operations and improve profitability. The Eight-Point Plan addresses the following points: 1) expand brands; 2) explore new licensing opportunities; 3) rationalize manufacturing; 4) reduce overhead; 5) increase global sourcing; 6) improve inventory utilization; 7) enhance supply chain and logistics; and 8) improve capital structure.

WESTPOINT STEVENS INC.

Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)

4. Restructuring, Impairment and Other Charges—Continued

During 2000, the Company conducted an intense evaluation of its manufacturing process flow and capacity and how they relate to market demand. The Company adopted a plan to close certain manufacturing plants and consolidate manufacturing operations in an arrangement that will reduce costs and enable more efficient production. The Company also evaluated its internal support and administrative functions and adopted a plan to consolidate as well as outsource certain internal support and administrative functions.

As a result of the manufacturing rationalization, the Company announced the closure of its Rosemary (NC) terry greige facility, its Union (SC) pillow and mattress pad facility, its Seneca (SC) sheeting facility and its Whitmire (SC) yarn facility. The manufacturing rationalization also included capacity reductions at its Rosemary (NC) terry finishing and fabrication facilities and the conversion of its Carter (AL) sheeting facility to a terry facility. These plant closings enable the Company to consolidate its manufacturing in locations that allow the most efficient work flow.

The cost of the manufacturing rationalization and certain overhead reduction costs were reflected in a restructuring and impairment charge of $109.2 million, before taxes, in 2000 and a restructuring and impairment charge of $5.0 million, before taxes, in 2001. The components of the restructuring and impairment charge in 2000 included $66.8 million for the impairment of fixed assets, $23.7 million for the impairment of goodwill and other assets and $18.7 million in reserves to cover cash expenses related to severance benefits of $14.7 million and other exit costs, including lease terminations, of $4.0 million. The components of the restructuring and impairment charge in 2001 included $7.0 million in reserves to cover cash expenses related to severance benefits and a reduction in reserves for other exit costs of $2.0 million.

The recorded charge of $66.8 million for the impairment of fixed assets and $23.7 million for the impairment of goodwill and other assets discussed in the preceding paragraph are associated with the Company’s closure and capacity reduction of certain facilities as discussed in the second preceding paragraph. None of the impairment charges related to enterprise goodwill. The Company did not record any impairment charges related to assets transferred to other facilities. The Company decided to abandon all remaining assets. Accordingly, an indication of impairment exists, as these assets will not generate future cash flow. Furthermore, the Company believes that there is no acceptable market for these assets as it is unwilling to sell the assets to a competitor. Accordingly, the fair value of these assets was determined by the Company to be minimal.

WESTPOINT STEVENS INC.

Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)

4. Restructuring, Impairment and Other Charges—Continued

Since the adoption of the Eight-Point Plan, the Company has terminated and agreed to pay severance (including continuing termination benefits) to approximately 1,700 employees. The restructuring charge approved in 2000 was completed in the fourth quarter of 2001.

The following is a summary of the restructuring and impairment activity in the related reserves (in millions):


					Employee			Other
		Writedown			Termination			Exit			Total
		Assets			Benefits			Costs			Charge

2000 Restructuring and Impairment Charge:




	Second Quarter	$	87.9		$	4.6		$	3.4		$	95.9




	Third Quarter		—			5.8			0.3			6.1




	Fourth Quarter		2.6			4.3			0.3			7.2

Total 2000 Charge			90.5			14.7			4.0			109.2




2001 Restructuring and Impairment Charge:




	First Quarter		—			5.0			—			5.0




	Fourth Quarter		—			2.0			(2.0	)		—

Total 2001 Charge			—			7.0			(2.0	)		5.0




Writedown Assets to Net Recoverable Value			(90.5	)		—			—			(90.5	)




2000 Cash Payments			—			(4.7	)		(0.3	)		(5.0	)




2001 Cash Payments			—			(15.0	)		(0.1	)		(15.1	)




2002 Cash Payments			—			(0.6	)		—			(0.6	)

Balance at June 30, 2002		$	—		$	1.4		$	1.6		$	3.0

During 2000, other costs of the Eight-Point Plan and other charges of $94.0 million, before taxes, were recognized including inventory writedowns of $74.2 million; claims of $5.0 million; other expenses of $6.1 million consisting primarily of $2.2 million for the relocation of machinery, $2.4 million of related unabsorbed overhead and other expenses of $1.5 million all reflected in cost of goods sold; and other costs of $8.7 million consisting primarily of $5.7 million of unusual contractual severance and other expenses of $3.0 million reflected in Other expense-net. During 2001, other costs of the Eight-Point Plan of $13.7 million, before taxes, were recognized consisting primarily of $10.0 million for the relocation of machinery, $3.0 million of related unabsorbed overhead and other expenses of $0.7 million all reflected in cost of goods sold.

WESTPOINT STEVENS INC.

Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)

5. Comprehensive Income (Loss)

Comprehensive income (loss) for the three and six months ended June 30, 2002 and 2001 is as follows (in thousands):


		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2002			2001			2002			2001

Net income (loss)		$	1,991		$	(17,497	)	$	4,011		$	(28,397	)




Foreign currency translation adjustment			(1,459	)		422			(1,065	)		727




Gain (loss) on derivative instruments, net of tax:




	Cumulative effect of adopting Statement No. 133		—			—			—			(968	)




	Net changes in fair value of derivatives		1,164			(2,545	)		1,728			(15,693	)




	Net (gains) losses reclassified from other comprehensive income into earnings		276			5,644			299			4,208

Comprehensive income (loss)		$	1,972		$	(13,976	)	$	4,973		$	(40,123	)

6. Deferred Financing Fees

Included in “Other expense-net” in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2002 is the amortization of deferred financing fees of $2.3 million and $4.6 million, respectively, compared with $1.2 million and $2.2 million, respectively, for the three and six months ended June 30, 2001.

7. Recently Adopted Accounting Standards

Effective January 1, 2002, the Company adopted the requirements of Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142 prohibits the amortization of goodwill

WESTPOINT STEVENS INC.

Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)

7. Recently Adopted Accounting Standards—Continued

and intangible assets with indefinite useful lives. During the second quarter and first six months of 2001, amortization of goodwill was $0.2 million and $0.4 million after taxes, respectively. Excluding the impact of goodwill amortization, the net loss for the second quarter and first six months of 2001 would have been $17.3 million, or $0.35 per share diluted, and $28.0 million, or $0.56 per share diluted, respectively.

The Company applied Statement 142 beginning in the first quarter of 2002. The Company is required to test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. In accordance with Statement 142, the Company was required to perform the first of the required January 1, 2002 impairment test of goodwill by June 30, 2002. The Company has completed the transitional goodwill impairment test required and determined that there currently is no impairment to its recorded goodwill balances.

8. Income Taxes

The Company has federal and state net operating loss carryovers (“NOL’s”), a portion of which were generated prior to an ownership change that took place in 1992. Because of the complex tax rules related to these carryforwards and the uncertainty of ultimately realizing benefit from the losses, the Company did not record full benefit for these NOL’s.

WESTPOINT STEVENS INC.

Notes To Condensed Consolidated Financial Statements (continued)
(Unaudited)

8. Income Taxes—Continued

During the second quarter of 2002, certain contingencies related to the NOL’s were resolved and the Company reevaluated its position on the tax benefits associated with these carryforwards. As a result of this analysis, the Company recorded a $12.3 million benefit in the second quarter. Because the NOL’s involved were generated prior to emergence from bankruptcy, the accounting rules of Statement of Position 90-7 (Financial Reporting by Entities in Reorganization under the Bankruptcy Code) require that the benefit be recorded in equity rather than in the income statement.

9. Litigation and Contingent Liabilities

The Company was a defendant in a complaint entitled Pratt v. WestPoint Stevens Inc., et al., alleging that the Company and other named and unnamed defendants (including two named employees of the Company) had harmed the six named plaintiffs and caused property damage under various common law tort claims including: nuisance, trespass, negligence, wantonness and strict liability. The claims were based upon routine discharges of wastewater from the Company’s Opelika Finishing Plant and the Plaintiffs sought an unspecified amount in compensatory and punitive damages. The parties settled the case for an immaterial amount in the third quarter of 2002.

On October 5, 2001, a purported stockholder class action suit, entitled Norman Geller v. WestPoint Stevens Inc., et al., was filed against the Company and certain of its officers and directors in the United States District Court for the Northern District of Georgia. (A subsequent and functionally identical complaint was also filed.) The Complaints allege that, during the putative class period (i.e., February 10, 1999 to October 10, 2000), WestPoint Stevens and certain of its officers and directors caused false and misleading statements to be issued regarding, inter alia, alleged overcapacity and excessive inventories of the Company’s towel-related products and customer demand for such products. The Complaints refer to WestPoint Stevens’ press releases and quarterly and annual reports on Securities Exchange Commission Forms 10-Q and 10-K, which discuss the Company’s results and forecasts for the Fiscal years 1999 and 2000. Plaintiffs allege that these press releases and public filings were false and misleading because they failed to disclose that the Company allegedly “knew sales would be adversely affected in future quarters and years.” Plaintiffs also allege in general terms that the Company materially overstated revenues by making premature shipments of products.

WESTPOINT STEVENS INC.

Notes To Condensed Consolidated Financial Statements (continued)
(Unaudited)

9. Litigation and Contingent Liabilities—Continued

The Complaints assert claims against all Defendants under § 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and against the Company and Defendant Green as “controlling persons” under § 20(a) of the Exchange Act. The actions were consolidated by Order dated January 25, 2002. Pursuant to court order the Plaintiffs filed a Consolidated Amended Complaint. The Company and individual Defendants moved for dismissal of that complaint on June 4, 2002.

The Company believes that the allegations are without merit and intends to contest the action vigorously, on behalf of itself and its officers and directors.

On March 11, 2002, a shareholder derivative action, entitled Gordon Clark v. Holcombe T. Green, Jr., et al., was filed against certain of the Company’s directors and officers in the Superior Court of Fulton County, Georgia. The Complaint alleges that the named individuals breached their fiduciary duties by acting in bad faith and wasting corporate assets. The Complaint also asserts claims under Georgia Code Ann. §§ 14-2-740 to 14-2-747, and 14-2-831. The claims are based on the same or similar facts as are alleged in the Geller action. By agreement of the parties the answers to the Complaint will not be due until Defendants’ Motion to Dismiss, filed in the Geller action, is resolved by the United States District Court.

On July 1, 2002, a shareholder derivative action, entitled John Hemmer v. Holcombe T. Green, Jr., et al., was filed against Mr. Green and certain of the Company’s other directors in the Court of Chancery in the State of Delaware in and for New Castle County. The Complaint alleges that the named individuals breached their fiduciary duties and knowingly or recklessly failed to exercise oversight responsibilities to ensure the integrity of the Company’s financial reporting. The Complaint also asserts that certain of the named individuals used proprietary Company information in selling or pledging Company stock at inflated prices for their benefit. The claims are based on the same or similar facts as are alleged in the Geller action. By agreement of the parties the answers to the Complaint will not be due until Defendants’ Motion to Dismiss, filed in the Geller action, is resolved by the United States District Court.

On March 21, 2002, an Adversary Complaint of Debtors and Debtors in Possession Against WestPoint Stevens Inc. was filed by Pillowtex, Inc., a Delaware corporation, et al., and Pillowtex Corporation, et al., against the Company in the United States Bankruptcy Court for the District of Delaware. Pillowtex Corporation and its related and affiliated companies (“Pillowtex”) as Debtors and Debtors in Possession allege breach of a postpetition contract (the “Sale Agreement”) dated January 31, 2001, among Pillowtex, Ralph Lauren Home Collection, Inc. (“RLH”) and Polo Ralph Lauren Corporation (“PRLC”) collectively referred to as “Ralph Lauren”, and the Company. Pillowtex alleges that the Company refused to perform its purchase obligation under the Sales Agreement and is liable to it for $4,800,000 plus potentially significant other consequential damages. The Company believes that the complaint is without merit and intends to contest the action vigorously.

WESTPOINT STEVENS INC.

Notes To Condensed Consolidated Financial Statements (continued)
(Unaudited)

9. Litigation and Contingent Liabilities—Continued

The Company is subject to various federal, state and local environmental laws and regulations governing, among other things, the discharge, storage, handling and disposal of a variety of hazardous and nonhazardous substances and wastes used in or resulting from its operations and potential remediation obligations thereunder. Certain of the Company’s facilities (including certain facilities no longer owned or utilized by the Company) have been cited or are being investigated with respect to alleged violations of such laws and regulations. The Company is cooperating fully with relevant parties and authorities in all such matters. The Company believes that it has adequately provided in its financial statements for any expenses and liabilities that may result from such matters. The Company also is insured with respect to certain of such matters. The Company’s operations are governed by laws and regulations relating to employee safety and health which, among other things, establish exposure limitations for cotton dust, formaldehyde, asbestos and noise, and regulate chemical and ergonomic hazards in the workplace.

Although the Company does not expect that compliance with any of such laws and regulations will adversely affect the Company’s operations, there can be no assurance such regulatory requirements will not become more stringent in the future or that the Company will not incur significant costs in the future to comply with such requirements.

The Company and its subsidiaries are involved in various other legal proceedings, both as plaintiff and as defendant, which are normal to its business. It is the opinion of management that the aforementioned actions and claims, if determined adversely to the Company, will not have a material adverse effect on the financial condition or operations of the Company taken as a whole.

WESTPOINT STEVENS INC.

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

Impairment, Restructuring and Other Charges

As a result of a strategic review of the Company’s businesses, manufacturing and other facilities, and products in the second quarter of 2000, the Company’s Board of Directors approved a $222.0 million pretax charge to cover the cost of implementing an Eight-Point Plan that is designed to streamline operations and improve profitability.

The Eight-Point Plan addresses the following points: 1) expansion of brands; 2) exploration of new licensing opportunities; 3) rationalization of manufacturing operations; 4) reduction in overhead expense; 5) increase in global sourcing; 6) improvement of inventory utilization; 7) enhancement of supply chain and logistics functions; and 8) improvement in capital structure. The Company estimates the implementation of the Eight-Point Plan will generate annual pretax savings of $38.0 million starting in 2002. The estimated annual pretax savings of $38.0 million (of which $35.0 million are estimated cash savings primarily in the form of labor and overhead savings and $3.0 million are estimated depreciation savings) will be reflected for the most part as a reduction in cost of goods sold and to a lesser extent as a reduction in general and administrative expenses.

As of March 2, 2002, four plant closings have been announced under the Eight-Point Plan. On October 2, 2000, the Rosemary greige plant, a towel plant located in Roanoke Rapids, North Carolina, and the Liebhardt basic bedding plant in Union, South Carolina, were scheduled for closing. On January 29, 2001, the Seneca plant, a sheeting plant in Seneca, South Carolina, was scheduled for closing. On March 1, 2001, the Whitmire yarn plant in Whitmire, South Carolina, was scheduled for closing. In addition to these closings, a reduction in the workforce of the remaining finishing and fabricating facilities at the Rosemary complex was announced on February 5, 2001. These plant closings will enable the Company to consolidate its manufacturing in locations that allow the most efficient work flow.

WESTPOINT STEVENS INC.

Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Impairment, Restructuring and Other Charges—Continued

The following is a summary of the restructuring and impairment activity in the related reserves (in millions):


					Employee			Other
		Writedown			Termination			Exit			Total
		Assets			Benefits			Costs			Charge

2000 Restructuring and Impairment Charge:




	Second Quarter	$	87.9		$	4.6		$	3.4		$	95.9




	Third Quarter		—			5.8			0.3			6.1




	Fourth Quarter		2.6			4.3			0.3			7.2

Total 2000 Charge			90.5			14.7			4.0			109.2









2001 Restructuring and Impairment Charge:




	First Quarter		—			5.0			—			5.0




	Fourth Quarter		—			2.0			(2.0	)		—

Total 2001 Charge			—			7.0			(2.0	)		5.0









Writedown Assets to Net Recoverable Value			(90.5	)		—			—			(90.5	)




2000 Cash Payments			—			(4.7	)		(0.3	)		(5.0	)




2001 Cash Payments			—			(15.0	)		(0.1	)		(15.1	)




2002 Cash Payments			—			(0.6	)		—			(0.6	)

Balance at June 30, 2002		$	—		$	1.4		$	1.6		$	3.0

WESTPOINT STEVENS INC.

Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Impairment, Restructuring and Other Charges—Continued

During 2000, other costs of the Eight-Point Plan and other charges of $94.0 million, before taxes, were recognized including inventory writedowns of $74.2 million; claims of $5.0 million; other expenses of $6.1 million consisting primarily of $2.2 million for the relocation of machinery, $2.4 million of related unabsorbed overhead and other expenses of $1.5 million, all reflected in cost of goods sold; and other costs of $8.7 million consisting primarily of $5.7 million of unusual contractual severance and other expenses of $3.0 million reflected in Other expense-net. During 2001, other costs for the completion of the Eight-Point Plan of $13.7 million, before taxes, were recognized consisting primarily of $10.0 million for the relocation of machinery, $3.0 million of related unabsorbed overhead and other expenses of $0.7 million all reflected in cost of goods sold.

Results of Operations: Three and Six Months Ended June 30, 2002

The table below is a summary of the Company’s operating results for the three and six months ended June 30, 2002 and June 30, 2001 (in millions of dollars).


	Three Months Ended						Six Months Ended
	June 30,						June 30,

	2002			2001			2002			2001

Net sales	$	449.6		$	401.7		$	884.7		$	820.3




Gross earnings	$	103.8		$	71.7		$	211.6		$	161.4




Restructuring and impairment charge		—			—			—		$	5.0




Operating earnings	$	38.2		$	7.9		$	77.1		$	28.5




Interest expense	$	33.4		$	34.3		$	66.7		$	68.5




Other expense-net	$	1.7		$	0.9		$	4.1		$	4.3




Income (loss) from operations before taxes	$	3.1		$	(27.3	)	$	6.3		$	(44.3	)




Income (loss) from operations	$	2.0		$	(17.5	)	$	4.0		$	(28.4	)









Gross margin		23.1	%		17.9	%		23.9	%		19.7	%




Operating margin		8.5	%		2.0	%		8.7	%		3.5	%

WESTPOINT STEVENS INC.

Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Results of Operations: Three Months Ended June 30, 2002

Net Sales. Net sales for the three months ended June 30, 2002 increased $47.9 million, or 11.9% to $449.6 million compared with net sales of $401.7 million for the three months ended June 30, 2001. Increases in sales across all product categories, especially basic bedding products and other bedding accessories and towels, led to the improved sales performance.

For the three months ended June 30, 2002, bed products sales were $251.3 million compared with $218.4 million last year; bath products sales were $150.5 million compared with $133.0 million last year; and other sales (consisting primarily of sales from the Company’s retail stores and foreign operations) were $47.7 million compared with $50.3 million last year.

Gross Earnings/Margins. Gross earnings for the three months ended June 30, 2002 increased $26.3 million, or 34.0%, to $103.8 million compared with $77.5 million for the same period of 2001, excluding charges associated with the Eight-Point Plan, and reflect gross margins of 23.1% in 2002 versus 19.3% in 2001. Gross earnings and margins increased primarily as a result of lower raw material costs, improved manufacturing efficiencies, and a more profitable mix of revenues. Included in the cost of goods sold in the second quarter of 2001 are charges associated with the Eight- Point Plan of $5.7 million, the majority of which reflects costs for equipment relocation and unabsorbed overhead due to reduced running schedules. Including the charges, gross earnings for the three months ended June 30, 2002 increased $32.1 million, or 44.7%, to $103.8 million compared with $71.7 million for the same period of 2001.

Operating Earnings/Margins. Selling, general and administrative expenses increased $1.8 million, or 2.8%, in the second quarter of 2002 compared with the same period of last year, but as a percentage of net sales decreased to 14.6% in the 2002 period compared with 15.9% in the 2001 period. The increase in selling, general and administrative expenses in the second quarter of 2002 reflected higher revenues for the period.

Before charges associated with the Eight-Point Plan, operating earnings for the second quarter of 2002 increased 179.5% to $38.2 million, or 8.5% of sales, compared with operating earnings of $13.7 million, or 3.4% of sales, for the same period in 2001. Including the charges, operating earnings for the three months ended June 30, 2002 increased $30.3 million to $38.2 million compared with $7.9 million for the same period of 2001.

Interest Expense. Interest expense for the three months ended June 30, 2002 of $33.4 million decreased $0.9 million compared with interest expense of $34.3 million for the three months ended June 30, 2001. The decrease was due primarily to lower interest rates on the Company’s variable rate bank debt for 2002 compared with corresponding 2001 average interest rate levels.

WESTPOINT STEVENS INC.

Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Results of Operations: Three Months Ended June 30, 2002—Continued

Other Expense - Net. Other expense - net in the second quarter of 2002 consisted primarily of the amortization of deferred financing fees of $2.3 million, less certain miscellaneous income items. Other expense - net in the second quarter of 2001 of $0.9 million consisted primarily of the amortization of deferred financing fees of $1.2 million, less certain miscellaneous income items.

Income Tax Expense. The Company’s effective tax rate differed from the federal statutory rate primarily due to state income taxes and nondeductible items.

Net Income. Net income, before charges associated with the Eight-Point Plan, increased $15.8 million, to $2.0 million, or $0.04 per share diluted, from a net loss of $13.8 million, or a loss of $0.28 per share diluted, in the same period of last year. After the charges, net income for the second quarter of 2002 was $2.0 million, or $0.04 per share diluted, compared with a loss of $17.5 million, or a loss of $0.35 per share diluted, for the same period of last year.

Diluted per share amounts are based on 49.7 million and 49.6 million average shares outstanding for 2002 and 2001, respectively.

Results of Operations: Six Months Ended June 30, 2002

Net Sales. Net sales for the six months ended June 30, 2002, increased 7.9% or $64.4 million to $884.7 million compared with $820.3 million a year ago. Sales increased in all product categories and more than offset declines in the Company’s retail stores division and international sales.

For the six months ended June 30, 2002, bed products sales were $517.4 million compared with $451.4 million last year, bath products sales were $271.4 million compared with $267.4 million last year and other sales (consisting primarily of sales from the Company’s retail stores and foreign operations) were $95.9 million compared with $101.4 million last year.

Gross Earnings/Margins. Excluding charges associated with the Eight-Point Plan, gross earnings for the six months ended June 30, 2002 increased $40.4 million or 23.6%, to $211.6 million compared with $171.2 million for the same period of 2001 and reflect gross margins of 23.9% for the 2002 period versus 20.9% for the 2001 period. Gross earnings and margins increased as a result of lower raw material costs, improved manufacturing efficiencies, and a more profitable mix of revenues. Included in the cost of goods sold in the first six months of 2001 are charges associated with the Eight-Point Plan of $9.7 million, the majority of which reflected equipment relocation costs. Including the charges, gross earnings for the six months ended June 30, 2002 increased $50.2 million, or 31.1% to $211.6 million compared with $161.4 million for the same period of 2001.

WESTPOINT STEVENS INC.

Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Results of Operations: Six Months Ended June 30, 2002—Continued

Operating Earnings/Margins. Selling, general and administrative expenses increased $6.6 million or 5.2%, in the first six months of 2002 compared with the same period of last year, and as a percentage of net sales represent 15.2% in the 2002 period versus 15.6% in the 2001 period. The increase in selling, general and administrative expenses in the first six months of 2002 was primarily due to increased reserves for bad debt expense of $5.0 million the majority of which was associated with the bankruptcy filing of Kmart.

Before charges associated with the Eight-Point Plan, operating earnings for the first six months of 2002 increased 78.1% to $77.1 million or 8.7% of sales, compared with operating earnings of $43.3 million, or 5.3% of sales for the same period in 2001. This increase reflected increased sales, decreased raw material costs, improved manufacturing efficiencies, and a more profitable mix of revenues. Including the charges, operating earnings for the six months ended June 30, 2002 increased $48.5 million, or 170.1%, to $77.1 million compared with $28.5 million for the same period of 2001.

Interest Expense. Interest expense for the six months ended June 30, 2002 of $66.7 million decreased $1.8 million compared with interest expense of $68.5 million for the six months ended June 30, 2001. The decrease was due primarily to lower interest rates on the Company’s variable rate bank debt in the first six months of 2002 compared with 2001.

Other Expense - Net. Other expense - net in the first six months of 2002 consisted primarily of the amortization of deferred financing fees of $4.6 million, less certain miscellaneous income items. For the first six months of 2001, other expense - net of $4.3 million includes a $2.3 million charge for cotton derivatives in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and also includes the amortization of deferred financing fees of $2.2 million, less certain miscellaneous income items.

Income Tax Expense. The Company’s effective tax rate differed from the federal statutory rate primarily due to state income taxes and nondeductible items.

Net Income. Net income, before charges associated with the Eight-Point Plan, increased $23.0 million to $4.0 million, or $0.08 per share diluted, from a net loss of $19.0 million, or a loss of $0.38 per share diluted, in the same period of last year. After the charges, the net loss for the first six months of 2001 was $28.4 million, or a loss of $0.57 per share diluted.

Diluted per share amounts are based on 49.7 million and 49.6 million average shares outstanding for the 2002 and 2001 periods, respectively.

WESTPOINT STEVENS INC.

Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Results of Operations: Three and Six Months Ended June 30, 2002—Continued

Effects of Inflation

The Company believes that the relatively moderate rate of inflation over the past few years has not had a significant impact on its sales or profitability.

Liquidity and Capital Resources

The Company’s principal sources of liquidity are expected to be cash from its operations and funds available under the Senior Credit Facility. At August 2, 2002, the maximum commitment under the Senior Credit Facility was $717.5 million and the Company had unused borrowing availability under the Senior Credit Facility totaling $153.6 million. The Senior Credit Facility contains covenants, which, among other things, limit indebtedness and require the maintenance of certain financial ratios, minimum EBITDA and minimum net worth (as defined). The Senior Credit Facility provides for a $25.0 million reduction in the revolver commitment on each of the following dates: November 1, 2002, February 1, 2003, August 1, 2003 and November 1, 2003 and further provides for a $17.5 million reduction in the revolver commitment on February 1, 2004 at which time the revolver commitment will be $600.0 million. The Senior Credit Facility further provides that any increase in the Trade Receivables Program above the current $160.0 million limit, up to a $200.0 million limit, would reduce the revolver commitment under the Senior Credit Facility by a similar amount.

On January 22, 2002, Kmart Corporation filed a voluntary petition for reorganization under Chapter 11 of Title 11 of the United States Code. Kmart Corporation subsequently received approval of its debtor-in-possession financing and is currently working towards a restructuring and emergence from Chapter 11 in 2003. In conjunction with the restructuring, Kmart Corporation announced the closing of 284 retail store locations. This represents roughly 13% of its total store base. The Company has reviewed its sales and profit projections for Kmart Corporation for 2002 and believes that the recent Chapter 11 filing for bankruptcy protection by Kmart Corporation will not have a material adverse effect on the Company’s future operations. If Kmart’s financial condition should deteriorate further, the impact to the Company could become more significant.

At June 30, 2002, the Company was in compliance with all its covenants under the Senior Credit Facility and Second-Lien Facility, and based on management’s projections of 2002 results expects to remain in compliance with all the covenants under its credit agreements. If market conditions should deteriorate resulting in a lowering of management’s projections for 2002, issues could arise as to compliance with covenants under its credit agreements.

WESTPOINT STEVENS INC.

Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Results of Operations: Three and Six Months Ended June 30, 2002—Continued

Liquidity and Capital Resources—Continued

The Company’s principal uses of cash for the next several years will be operating expenses, capital expenditures and debt service requirements related primarily to interest payments. The Company spent approximately $60.5 million in 2001 on capital expenditures and intends to invest approximately $50.0 million in 2002. The Senior Credit Facility does not permit cash dividends.

The Board of Directors has approved the purchase of up to 27 million shares of the Company’s common stock, subject to the Company’s debt limitations. At June 30, 2002, approximately 3.6 million shares remained to be purchased under these programs. The Senior Credit Facility does not permit stock repurchases.

The Company, through a “bankruptcy remote” receivables subsidiary, has a Trade Receivables Program that provides for the sale of accounts receivable on a revolving basis at rates more favorable than the Senior Credit Facility. In January 2002, the Company amended and extended the maturity date of its existing Trade Receivables Program with an independent issuer of receivables backed commercial paper until January 2003. Under the terms of the Trade Receivables Program, the Company has agreed to sell on an ongoing basis, and without recourse, an undivided ownership interest in its accounts receivable portfolio. The Company maintains the balance in the designated pool of accounts receivable sold by selling undivided interests in new receivables as existing receivables are collected. The agreement permits the sale of up to $160.0 million of accounts receivable. The cost of the Trade Receivables Program is charged to selling expense in the accompanying Consolidated Statements of Operations and is estimated to total approximately $5.0 million in 2002, compared with $6.5 million in 2001. At June 30, 2002 and December 31, 2001, $130.6 million and $152.6 million, respectively, of accounts receivable had been sold pursuant to the Trade Receivables Programs and the sale is reflected as a reduction of accounts receivable in the accompanying Consolidated Balance Sheets.

Debt service requirements for interest payments in 2002 are estimated to total approximately $135.0 million (excluding amounts related to the Trade Receivables Program) compared with interest payments of $143.0 million in 2001. The Company’s long-term indebtedness has no scheduled principal reduction requirements during 2002.

Management believes that cash from the Company’s operations and borrowings under its credit agreements will provide the funding necessary to meet the Company’s anticipated requirements for capital expenditures, operating expenses and to enable it to meet its anticipated debt service requirements.

WESTPOINT STEVENS INC.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company believes that the allegations are without merit and intends to contest the action vigorously, on behalf of itself and its officers and directors.

On March 11, 2002, a shareholder derivative action, entitled Gordon Clark v. Holcombe T. Green, Jr., et al., was filed against certain of the Company’s directors and officers in the Superior Court of Fulton County, Georgia. The Complaint alleges that the named individuals breached their fiduciary duties by acting in bad faith and wasting corporate assets. The Complaint also asserts claims under Georgia Code Ann. §§ 14-2-740 to 14-2-747, and 14-2-831. The claims are based on the same or similar facts as are alleged in the Geller action. By agreement of the parties the answers to the Complaint will not be due until Defendants’ Motion to Dismiss, filed in the Geller action, is resolved by the United States District Court.

WESTPOINT STEVENS INC.

PART II - OTHER INFORMATION - Continued

Item 1. Legal Proceedings—Continued

WESTPOINT STEVENS INC.

PART II - OTHER INFORMATION - Continued

Item 1. Legal Proceedings—Continued

WESTPOINT STEVENS INC.

PART II — OTHER INFORMATION—Continued

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

The Company’s 2002 Annual Meeting of Stockholders was held on May 8, 2002. At the 2002 Annual Meeting, the following matters were voted upon by the stockholders:

1. Election of two directors to serve for a term of three years.

2. Ratification of appointment of Ernst & Young LLP, independent certified public accountants, as auditors of the Company for fiscal 2002.

3. Stockholder proposal regarding actions to ensure that the Company does not do business with suppliers who manufacture items or harvest raw materials using child labor.

The following is a table setting forth the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, as to each of the above matters.

1. Election of Director


			Authority
Nominee	For		Withheld

M. L. “Chip” Fontenot		37,473,310		241,094




Joseph R. Gladden, Jr.		37,489,850		224,554

2. Appointment of Ernst & Young LLP


For	Against		Abstain

37,487,107		157,357		69,940

3. Stockholder Proposal Concerning Child Labor


For	Against		Abstain		Broker Non-Votes

2,930,844		27,049,702		304,253		7,429,605

WESTPOINT STEVENS INC.

PART II — OTHER INFORMATION—Continued

Item 6. Exhibits and Reports on Form 8-K

a.)


Exhibit
Number		Description of Exhibit

10.1		Separation Agreement and General Release dated as of March 20, 2002, between WestPoint Stevens Inc. and Lanny Bledsoe as ratified and approved by the Compensation Committee of the Board of Directors of WestPoint Stevens Inc. on April 3, 2002.

b.) No report on Form 8-K was filed by the Company during the quarter ended June 30, 2002.

WESTPOINT STEVENS INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		WESTPOINT STEVENS INC. Registrant









		/s/ L. Dupuy Sears L. Dupuy Sears Senior Vice President-Finance and Chief Financial Officer

Date: August 14, 2002

WESTPOINT STEVENS INC.

EXHIBIT INDEX

EXHIBIT

NUMBER

NUMBER

Separation Agreement and General Release dated As of March 20, 2002, between WestPoint Stevens Inc. and Lanny Bledsoe as ratified and approved by the Compensation Committee and the Board of Directors of WestPoint Stevens Inc. on April 3, 2002.