Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2002

OR

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

For the transition period from _________ to _________

Commission File No. 0-21496

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

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

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

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

Common Stock, $.01 par value
Title of each Class

     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 o  No x  

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    x  

     Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x   No  o  

     The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $1,229,223 at May 15, 2003. The number of shares of Common Stock outstanding at May 15, 2003, was 49,896,816.

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

     Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date:49,896,816 at May 15, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

     None

Table of Contents

TABLE OF CONTENTS

Part I

1

Table of Contents

Item 1. Business

     General

On June 1, 2003, WestPoint Stevens Inc., a Delaware corporation (the “Company”), and several of its subsidiaries (together with the Company, the “Debtors”) filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). On June 2, 2003, the Bankruptcy Court approved a series of the Company’s “first-day” motions that will enable the Company to continue regular operations throughout the reorganization proceedings. The Bankruptcy Court also approved, under interim order, access to $175 million in debtor-in-possession financing for use by the Company, pursuant to a Post-Petition Credit Agreement, dated as of June 2, 2003, among WestPoint Stevens Inc. and certain of its subsidiaries, the financial institutions named therein and Bank of America, N.A. and Wachovia Bank, National Association (the “DIP Credit Agreement”). A copy of the DIP Credit Agreement constitutes Exhibit No. 99.2 to the Current Report on Form 8-K, which the Company filed with the Securities and Exchange Commission on June 5, 2003 (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — DIP Credit Agreement”).

Since filing the Chapter 11 petition, the Debtors have been operating as debtors-in-possession under Chapter 11 and conducting business in the ordinary course. Pursuant to the Bankruptcy Code, pre-petition obligations of the Debtors (including obligations under debt instruments) generally may not be enforced against the Debtors, and any actions to collect pre-petition indebtedness are automatically stayed, unless the stay is lifted by the Bankruptcy Court. In addition, as debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases.

The Company has reached an agreement in principle with the holders of approximately 52% of the outstanding aggregate principal amount of its Senior Notes on the terms of a financial restructuring to be implemented through the Chapter 11 process. For information concerning the circumstances that led to the Company’s Chapter 11 filing and proposed terms of the financial restructuring which it will seek to implement, see “ — Chapter 11 Filing” below. For information with respect to the Company’s current liquidity and financial resources, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” below.

The Company which was organized in 1987, is the successor corporation to West Point-Pepperell, Inc. through a series of mergers occurring in December 1993. The Company is a leading manufacturer, marketer and distributor of an extensive range of bed and bath home fashions (“Home Fashions”) products. The Company’s trademark brands include ATELIER MARTEX®, CHATHAM®, GRAND PATRICIAN®, MARTEX®, PATRICIAN®, UTICA®, STEVENS®, LADY PEPPERELL®, LUXOR®, and VELLUX®. In addition, certain Home Fashions products are manufactured and sold pursuant to licensing agreements under designer names that include, among others, Ralph Lauren Home, Sanderson, Glynda Turley, Simmons Beautyrest and Disney Home. The Company is also a manufacturer of the Martha Stewart and Joe Boxer bed and bath lines. The Company’s products are marketed through leading department stores, mass merchants, specialty stores, institutional channels, and WestPoint Stevens Stores Inc.

The Company estimates that it has one of the largest market shares in both the domestic sheet and pillowcase market and the domestic bath towel market. With the acquisition of the Chatham Consumer Products Division of CMI Industries, Inc. in January 2001, the Company has the largest market share in domestic blankets. The Company also has significant market share in the domestic accessories market, which includes comforters, bedspreads, bed pillows, throw pillows, and mattress pads, among others.

As a result of a strategic review of the Company’s businesses, manufacturing, other facilities, and products during the year 2000, the Company’s Board of Directors approved a $222.0 million pre-tax charge to cover the cost of implementing a restructuring plan having eight key elements designed to streamline operations and improve profitability (the “Eight-Point Plan”). The majority of the charge, $203.2 million pretax, was recorded during the year 2000, and the remaining $18.8 million pretax charge was recorded in 2001. Of the $203.2 million pretax charge recorded in 2000, $85.3 million was reflected in cost of goods sold, the majority of which reflected inventory write-off, and $117.9 million was reflected in a reduction of goodwill and fixed assets in addition to severance benefits and other costs. The Eight-Point Plan addressed 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. Since the adoption of the Eight-Point Plan, the Company closed four plants and terminated and paid severance (including continuing termination benefits) to approximately 1,700 employees. The restructuring charge was completed in the

2

Table of Contents

fourth quarter of 2001. For a more complete discussion of the Eight-Point Plan, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

On September 20, 2002, the Company announced that its Board of Directors had approved additional restructuring initiatives to increase asset utilization, lower manufacturing costs and increase cash flow and profitability through reallocation of production assets from bath products to basic bedding products and through rationalization of WestPoint Stevens Stores Inc. The Company expects the latest restructuring initiatives to result in a $36.5 million pretax charge for restructuring, impairment and other charges. Approximately $20 million of the pretax charge is expected to be non-cash items with annual pretax savings estimated at $10 million once the restructuring initiatives are fully implemented. The charges for the restructuring initiatives began in the third quarter of 2002 and will continue throughout 2003.

As a result of the restructuring initiatives in 2002, the Company announced the closure of its Rosemary (NC) towel finishing facility and the conversion of its Rosemary (NC) towel fabrication and distribution facilities to basic bedding facilities. The Company announced on April 25, 2003, that the Rosemary towel fabrication and distribution facilities would be closed rather than converted to basic bedding facilities. The Company closed three retail stores in 2002. The Company expects that closure of other retail stores and other facilities will be announced in future periods.

The cost of the manufacturing and retail store rationalization and certain overhead reduction costs were reflected in a restructuring and impairment charge of $6.6 million, before taxes, in 2002. The components of the restructuring and impairment charge included $4.4 million for the impairment of fixed assets and $2.2 million in reserves to cover cash expenses related to severance benefits.

For a comprehensive discussion of the Company’s overall financial condition, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

     Products

The Company markets a broad range of manufactured and sourced bed, bath and basic bedding products, including:

	Bed and Bath Products, including:

		• bath accessories;
		• bath rugs;
		• bath towels;
		• beach towels;
		• bedskirts;
		• bedspreads;
		• comforters and duvet covers;
		• decorative throw pillows;
		• drapes and valances;
		• quilts;
		• scatter rugs;
		• sheets and pillowcases;
		• shower curtains;
		• table covers; and

	Basic Bedding Products, including

		• bed pillows;
		• flocked blankets;
		• mattress pads;
		• natural fill pillows, comforters and featherbeds; and
		• woven blankets and throws.

Such products are made from a variety of fabrics, such as chambray, twill, sateen, flannel, linen, cotton and cotton blends and are available in a wide assortment of colors and patterns. The Company has positioned itself as a single-source supplier to retailers of bed and bath products, offering a broad assortment of products across multiple price points. Such product and price point breadth allows the Company to provide a comprehensive product offering for each major distribution channel.

3

Table of Contents

     Trademarks and Licenses

The Company’s products are marketed under well-known and firmly established trademarks, brand names and private labels. The Company uses trademarks, brand names and private labels as merchandising tools to assist its customers in coordinating their product offerings and differentiating their products from those of their competitors. Registered trademarks include ATELIER MARTEX®, CHATHAM®, GRAND PATRICIAN®, MARTEX®, PATRICIAN®, UTICA®, STEVENS®, LADY PEPPERELL®, LUXOR® and VELLUX®. In addition, products are manufactured and sold pursuant to licensing agreements under designer names that include, among others, Ralph Lauren Home, Disney Home, Sanderson, Glynda Turley and Simmons Beautyrest. A portion of the Company’s sales is derived from licensed designer brands. The license agreements for the Company’s designer brands generally are for a term of two or three years. Some of the licenses are automatically renewable for additional periods, provided that certain sales thresholds set forth in the license agreements are met. No single license has accounted for more than 13% of the Company’s total sales volume during any of the last five fiscal years. Although the Company has no reason to believe that it will lose any of its licenses, the loss of a significant license could have an adverse effect upon the Company’s business, which effect could be material. The licensing agreements with fixed expiration dates are: Ralph Lauren Home, December 31, 2005 (with an option to renew until December 31, 2008); Glynda Turley, December 31, 2003; Simmons Beautyrest, June 30, 2004; and Disney Home, December 31, 2005. By letter dated May 28, 2003, Disney Enterprises, Inc. notified the Company that the license agreement would expire December 31, 2003, because performance goals had not been reached. In its letter to the Company Disney also expressed its interest in entering into negotiations beginning on January 1, 2004, for a new license agreement for some of the items previously licensed to the Company.

     Marketing

The Company is committed to developing and maintaining integral relationships with its customers through “Strategic Partnering,” a program designed to improve customers’ operating results by leveraging the Company’s merchandising, manufacturing and inventory management skills. “Strategic Partnering” includes Electronic Data Interchange (“EDI”) direct electronic entry systems, “Quick Response” and “Vendor Managed Inventory” customer delivery programs and point-of-sale processing. The Company incorporates Strategic Partnering into its planning, manufacturing and shipping systems, in order to enable it to efficiently and economically anticipate and respond to customers’ inventory requirements. As a result, the Company is better able to plan and forecast its own production and inventory requirements. Sales and marketing of the Company’s Home Fashions products are conducted through an organizational format consisting of divisions for Bed and Bath Products and Basic Bedding Products, each with supporting domestic sales, marketing and merchandising teams and international sales and marketing teams. Distribution specific teams focused on targeted key accounts are linked with product management, operations, customer service and distribution to service each segment of retail.

The Bed and Bath Products Division and the Basic Bedding Products Division focus sales on the following channels of distribution:

		• catalogs;
		• chain stores;
		• department stores;
		• mass merchants;
		• specialty stores;
		• warehouse clubs; and
		• healthcare and hospitality institutions.

For the Bed and Bath Products Division and the Basic Bedding Products Division marketing is comprised of the following functions that create products and services in direct response to recognized consumer trends:

		• design;
		• marketing;
		• advertising;
		• licensing;
		• consumer research; and
		• product innovation.

For the Bed and Bath Products Division and the Basic Bedding Products Division merchandising is comprised of the following functions:

		• product management;
		• business management;

4

Table of Contents

		• productivity analysis;
		• stock keeping unit, or SKU, control; and
		• design technology.

The Retail/International Division is comprised of the following operating units:

		• Europe — which has distribution facilities and sales offices located in the United Kingdom supplying European department stores for private label, company brands and licensed programs such as Ralph Lauren Home.
		• Americas — which markets to all major stores in Canada, Mexico and other parts of Latin America with US-made and foreign sourced products.
		• WestPoint Stevens Stores Inc. — a wholly-owned subsidiary of the Company (“WestPoint Stores”). WestPoint Stores currently consists of 52 geographically dispersed, value-priced outlets throughout the United States and in Canada, most of which are located in factory outlet shopping centers. The products sold in WestPoint Stores are first quality (including overstocks), seconds, discontinued items and other products.

The Company works closely with its major customers to assist them in merchandising and promoting its products to consumers. In addition, the Company periodically meets with its customers in an effort to maximize product exposure and sales and to jointly develop merchandise assortments and plan promotional events specifically tailored to the customer. The Company provides merchandising assistance with store layouts, fixture designs, advertising and point-of-sale displays. A national consumer and trade advertising campaign and comprehensive internet website have served to enhance brand recognition. The Company also provides its customers with suggested customized advertising materials designed to increase its product sales. A heightened focus on consumer research provides needed products on a continual basis.

Approximately 82% of the Company’s total sales in 2002 were made to retail establishments in the United States, including catalog retailers, chain and department stores, mass merchants, specialty bed and bath stores, warehouse clubs and WestPoint Stores. Finished products are distributed to retailers directly from the Company’s plants. The majority of the remaining portion of the Company’s sales of Home Fashions products are through the institutional channel, which includes hospitality and healthcare establishments, as well as laundry supply businesses. In addition to domestic sales, the Company distributes its Home Fashions products for eventual sale to certain foreign markets, principally Australia, Canada, Mexico, the United Kingdom, continental Europe, the Middle East and the Far East. International operations accounted for approximately 5% of the total sales of the Company in 2002.

     Inventory Management, Electronic Communication and Delivery

The Company has been recognized as a leader and innovator of advanced technology, having led the industry with advanced, innovative e-commerce applications and has been selected as a preferred vendor for customers’ web exchange pilot programs, Quick Response, EDI and Vendor Management Inventory. The Company utilizes collaborative planning, forecasting and replenishment practices supported by systems from i2Technologies, Inc., including its retail merchandising and inventory replenishment system (Inforem®) combined with its forecasting and planning system (Demand Planner®). It also deploys Hyperion business intelligence technologies for inventory optimization and performance measurement to complement the Company’s highly integrated core business systems, including its supply chain, sourcing and logistics systems. The Company combines the use of an advanced, customer order fulfillment system, real-time radio frequency and in-line label printing distribution systems, and in-house transportation to compress the order to delivery cycle time, maintain low inventory levels, and achieve high customer scorecard objectives. The Company has placed a strong emphasis on the supply chain and logistics function, and believes that continued investment in planning, sourcing, distribution and transportation capabilities will enhance its ability to provide its customers with superior service.

     Customers

The Company is pursuing strategic relationships with key merchandisers. An important component of the Company’s strategy is to increase its share of shelf and floor space by strengthening its partnership with its customers. The Company is working closely with retailers and is sharing information and business practices with them to improve service and achieve higher profitability for both the retailer and the Company.

The Company’s Home Fashions products are sold to catalog retailers, chain stores, mass merchants, department stores, specialty stores, warehouse clubs, and its own retail stores. The Company’s six largest customers, Federated Department Stores, Inc., J.C. Penney Company, Inc., Kmart Corporation, Sears Roebuck & Co., Inc., Target Corporation and Wal-Mart Stores, Inc. accounted

5

Table of Contents

for approximately 51% of the net sales of the Company during the fiscal year ended December 31, 2002. In 2002, sales to Target Corporation and Kmart Corporation were 14% and 12%, respectively of the net sales of the Company. Each of such customers has purchased goods from the Company in each of the last 10 years. Although the Company has no reason to believe that it will lose the business of any of its largest customers, a loss of any of the largest accounts (or a material portion of any thereof) would have an adverse effect upon the Company’s business, which could be material.

On January 22, 2002, Kmart Corporation filed a voluntary petition for reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code. Kmart Corporation subsequently received approval of its plan of reorganization and emerged from Chapter 11 on May 6, 2003. In conjunction with the restructuring, Kmart Corporation initially announced the closing of 284 retail store locations and, on January 14, 2003, announced the closing of 318 additional stores. The collective closings represent approximately 28% of its total store base.

     Manufacturing

The Company currently uses the latest manufacturing and distribution equipment and technologies in its mills. Management therefore believes that the Company is one of the most efficient manufacturers in the home fashions industry. Over the past five years, the Company has spent approximately $480 million to modernize its manufacturing and distribution systems and has spent approximately $46 million of that amount during 2002. The capital expenditures have been used to, among other things, replace projectile looms with faster, more efficient air jet looms and further automate the Company’s cut and sew operations. Air jet looms produce at higher speeds than projectile looms, yielding fewer defects, requiring less maintenance and providing cleaner and safer working environments. Using air jet technology, compressed air propels the filling yarn at high speeds, with robotics handling the cutting and tucking of the filling yarn. The Company intends to invest approximately $50 million in capital improvements in the aggregate in 2003, which includes the further automation of the cut and sew operations and continued modernization and upgrading of distribution centers, upgrading of open end spinning and conversion of certain bath product manufacturing operations to pillow and comforter manufacturing. These capital programs have resulted, and are expected to continue to result, in improved product quality, increased efficiency and capacity, lower costs and shorter response time to customer orders. As of June 17, 2003, the Company (including its subsidiaries) owns and utilizes 22 manufacturing facilities and leases 5 manufacturing facilities. These facilities are located primarily in the Southeastern United States. See “Item 2. Properties.”

     Sourcing

The Company has had a long-standing history of domestic and international sourcing of selected component products such as specialty yarns and specialty greige sheeting fabric for use in domestic production of Home Fashion products. Historically the percentage of sourced components used in domestic production was not material. However, following the implementation of the Eight-Point Plan in 2000 increased focus was placed on global sourcing. As such, the Company today views sourcing as a means to drive business growth and improve profitability by providing products and services that accelerate product and packaging innovation resulting in a competitive market advantage. In 2002, the Company imported both component and finished products from 21 countries and has established strong relationships in several key export countries to include China, India and Pakistan. To accelerate speed to market and improve customer service, in 2001 the Company successfully implemented Third Party Logistic’s operations on the east coast and on the Mexican border. The Company continues to increase the number of vendors and sourced product categories and estimates that sales from sourced products accounted for roughly 20% of the Company’s sales in 2002. Through global sourcing operations, the categories of product offerings by the Company to its customers has been significantly expanded to increase focus on high growth product categories such as bath accessories, rugs and quilts.

The Company’s policy on sourcing prohibits the purchase of merchandise that is produced in whole or in part by indentured, prison or illegal immigrant or child labor. The Company requires that vendors certify the locations used for the production of products it purchases and that the vendors submit to compliance inspections from the Company or its representatives to ensure that the Company does not do business with suppliers who violate human rights.

     Raw Materials

The principal raw materials used in the manufacture of Home Fashions products are cotton of various grades and staple lengths, polyester and nylon in staple and filament form. Cotton, polyester and nylon presently are available from several sources in quantities sufficient to meet the Company’s requirements. The Company is not dependent on any one supplier as a source of raw materials. Since cotton is an agricultural product, its supply and quality are subject to weather patterns, disease and other factors. The price of cotton is also influenced by supply and demand considerations, both domestically and worldwide, and by the cost of

6

Table of Contents

polyester. Although the Company has always been able to acquire sufficient quantities of cotton for its operations in the past, any shortage in the cotton supply by reason of weather, disease or other factors could adversely affect the Company’s operations. The price of man-made fibers such as polyester and nylon is influenced by demand, manufacturing capacity and costs, petroleum prices, cotton prices and the cost of polymers used in producing man-made fibers. Any significant prolonged petrochemical shortages could significantly affect the availability of man-made fibers and cause a substantial increase in demand for cotton, resulting in decreased availability and, possibly, increased price. The Company also purchases substantial quantities of dyes and chemicals. Dyes and chemicals have been and are expected to continue to be available in sufficient supply from a wide variety of sources.

     Seasonality; Cyclicality; Inventory

Traditionally, the home fashions industry has been seasonal, with peak sales in the fall. In accordance with industry practice, the Company increases its Home Fashions’ inventory levels during the first six months of the year to meet customer demands for the fall peak season. The Company’s commitment to EDI, Quick Response, and Vendor Managed Inventory, however, has facilitated a more even distribution of products throughout the calendar year and reduced some of the need to stockpile inventory to meet peak season demands.

The home fashions industry is also cyclical. While the Company’s performance may be negatively affected by downturns in consumer spending, management believes the effects thereof are somewhat mitigated by the Company’s large market shares and broad distribution base.

     Backlog Orders

The backlog of the Company’s unfilled customer orders believed by management to be firm was approximately $83.2 million at June 1, 2003, as compared with approximately $81.6 million at June 1, 2002. The Company does not believe that its backlogs are a meaningful indicator of its business due in part to its use of Vendor Managed Inventory systems.

     Competition

The home fashions industry is highly competitive. The Company competes on the basis of price, quality, design and customer service, among other factors. In the sheet and towel markets, the Company competes primarily with Springs Industries, Inc. and Pillowtex Corporation. In the other bedding and accessories markets, the Company competes with many companies, most of which are much smaller in size than the Company. The Company has pursued a competitive strategy focused on providing the best fashion, quality, service and value to its customers and to the ultimate consumer. The Company believes that there has been an increase in the sale of imported Home Fashion products in the domestic market and is actively pursuing its own foreign sourcing opportunities to meet the demand for such products. The Company believes the level of foreign competition has been increasing. There can be no assurance that foreign competition will not grow to a level that could have an adverse effect upon the Company’s ability to compete effectively.

     Other Operations

The Company’s operations also include Grifftex Chemicals (“Grifftex”), which formulates chemicals primarily used in the Company’s finishing processes, and WestPoint Stevens Graphics (“Graphics”), which prints product packaging and labeling. Neither Grifftex nor Graphics represents a material portion of the Company’s business.

     Research and Development

Management believes that research and development in product innovation and differentiation is important to maintain the Company’s competitive edge. The Company continually seeks to develop new specialty finishes and finishing techniques that would improve fabric quality and enhance fabric aesthetics. Research also is conducted to develop new products in response to changing customer demands and environmental concerns. The Company has continued to invest in product development to maintain a leadership position in the market place.

     Environmental Matters

The Company is subject to various federal, state and local environmental laws and regulations governing, among other things, the storage, handling, usage, discharge and disposal of a variety of hazardous and non-hazardous substances and wastes used in or

7

Table of Contents

resulting from its operations, including, but not limited to, the Water Pollution Control Act, as amended; the Clean Air Act, as amended; the Resource Conservation and Recovery Act, as amended; the Toxic Substances Control Act; and the Comprehensive Environmental Response, Compensation and Liability Act.

The Company’s operations also are governed by laws and regulations relating to employee safety and health, principally the Occupational Safety and Health Act and regulations thereunder which, among other things, establish exposure limitations for cotton dust, formaldehyde, asbestos and noise, and regulate chemical, physical and ergonomic hazards in the workplace.

Although the Company does not expect that compliance with any of the aforementioned laws and regulations will have a material adverse effect on its capital expenditures, earnings or competitive position in the foreseeable future, there can be no assurances that environmental 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.

     Employees

The Company (including its subsidiaries) employed approximately 14,706 active employees as of June 2, 2003. The Company believes that its relations with all of its employees are excellent. The Company has not experienced a strike or work stoppage by any of its unionized employees during the past 20 years. Currently, less than 10% of the Company’s employees are unionized.

The Company has developed an effective employee relations and communications program that includes rules and regulations for employee conduct and procedures for employee complaints. This long-standing program focuses on and, in the view of management, has resulted in, strong, positive employee relations practices, good working conditions, progressive human resources policies and expansive safety programs.

     Recent Developments

In its Form 10-Q filed for the quarter ended September 30, 2002, the Company reported that the independent issuer of receivables-backed commercial paper under the Company’s Trade Receivables Program had indicated that it would not extend the maturity date of its agreement with the Company for another year, but would work with the Company to effect an orderly transition to another financing provider. On January 15 and February 10, 2003, the Company announced amendments to the maturity dates of its Trade Receivables Program extending it to February 17 and March 31, 2003, respectively. On March 28, 2003, the Company and WPS Receivables Corporation (“WPSRC”), the Company’s wholly-owned “bankruptcy remote” receivables subsidiary (which is not a Debtor in the Company’s current Chapter 11 proceedings), entered into a loan and security agreement (the “Receivables Loan Agreement”) with Congress Financial Corporation (Southern), as Agent (“Congress”), pursuant to which the lenders thereunder agreed to provide receivables-backed loans as part of the Company’s Trade Receivables Program. Under the terms of the Trade Receivables Program, the Company agreed to sell, on an ongoing basis and without recourse for credit loss on the receivables, its accounts receivable portfolio to WPSRC. WPSRC used the receivables as collateral for loans pursuant to the Receivables Loan Agreement. Proceeds from the loans and collections on receivables were used by WPSRC to purchase receivables from the Company. The Company maintained the balance in the designated pool of accounts receivable sold by selling its new receivables on a revolving basis as they were created. The Receivables Loan Agreement permitted outstanding loans of up to $160.0 million against the accounts receivable portfolio. The interest payable by WPSRC on the loans under the Receivables Loan Agreement is a 2-month LIBOR rate plus 2.50%. See “Item 8. Financial Statements and Supplemental Data — Notes to Consolidated Financial Statements — 3. Indebtedness and Financial Arrangements.” On June 4, 2003, Congress notified WPRSC that, as a result of the Company’s Chapter 11 filing, Congress was terminating the Receivables Loan Agreement and that no further loans would be made thereunder. Congress will continue to apply proceeds of receivables previously pledged to it to reduce the obligations of WPRSC to Congress under the Receivables Loan Agreement. The Company currently believes that all outstanding loans under the Receivables Loan Agreement will be repaid in full from such proceeds. The Company is currently financing its accounts receivable through borrowings under the DIP Credit Agreement and expects to continue to do so during the pendency of its Chapter 11 proceedings.

     Chapter 11 Filing

As noted above, on June 1, 2003, the Company and the other Debtors filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. Since that date, the Debtors have been operating as debtors-in-possession under Chapter 11. A brief chronology of the circumstances that led to such filing is set forth below.

8

Table of Contents

Despite the restructuring initiatives which the Company undertook in 2000 and 2002 (see “- General” above), during 2003 the Company continued to experience financial difficulty related primarily to restrictive covenants under its Senior Credit Facility and its overleveraged debt structure. The Company therefore entered into negotiations with its Senior Credit Facility lenders to amend the Senior Credit Facility to permit certain restructuring, impairment and other charges and to revise certain financial ratios and minimum EBITDA covenants in its Senior Credit Facility. The Company and such lenders were unable to agree to amend the Senior Credit Facility and the Company continued to experience financial difficulties which led to a default under its Senior Credit Facility and Second-Lien Facility. Effective March 31, 2003, the Senior Credit Facility lenders and Second-Lien Facility lenders agreed to refrain from exercising any rights or remedies in respect of the Company’s failure to comply with financial and other covenants until June 10, 2003. As the June 10 deadline approached, the Company’s board of directors determined that, in order to be able to operate successfully in today’s market environment and compete with increasing foreign competition, it would be necessary for the Company to reduce its debt burden and de-lever its balance sheet. Thus, on May 16, 2003, the board of directors approved the retention of Rothschild Inc., an independent financial advisor, to evaluate alternatives aimed at reducing the existing debt structure and strengthening the balance sheet. After negotiations with its Senior Lenders regarding various alternatives, the Company concluded it would be in the best interests of its creditors and shareholders to effect a consensual restructuring under Chapter 11 of the U.S. Bankruptcy Code and filed its Chapter 11 petition on June 1, 2003.

The Company has reached an agreement in principle with the holders of approximately 52% of the aggregate principal amount of its Senior Notes on the terms of a financial restructuring to be implemented through the Chapter 11 process. An outline of such terms is set forth in the revised Restructuring Proposal, dated as of June 1, 2003, which constitutes Exhibit 99.1 to the Current Report on Form 8-K, which the Company filed with the Securities and Exchange Commission on June 9, 2003. As indicated therein, the agreement in principle is subject to numerous conditions and further agreements, including the entry of an order confirming the plan of reorganization contemplated by the proposal as required by Chapter 11. Consequently, there can be no assurance that any of the transactions described in the Restructuring Proposal will be undertaken or consummated.

On June 2, 2003, the Bankruptcy Court approved a series of the Company’s “first day” motions that will enable the Company to continue regular operations throughout the reorganization proceeding. These motions authorized, among other things, normal payment of employee salaries, wages and benefits; continued participation in workers’ compensation insurance programs; payment to vendors for post-petition delivery of goods and services; payment of certain pre-petition obligations to customers; and continued payment of utilities. The Bankruptcy Court also approved, under interim order, access to $175 million in debtor-in-possession financing for use by the Company, pursuant to the DIP Credit Agreement. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — DIP Credit Agreement.”

     Other Factors

Except for historical information contained herein, certain matters set forth in this Annual Report on Form 10-K are forward looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. Such risks and uncertainties may be attributable to important factors which include but are not limited to the following: uncertainties related to the Company’s having filed a Chapter 11 petition and the reorganization proceedings resulting therefrom; product margins may vary from those projected; raw material prices may vary from those assumed; additional reserves may be required for bad debts, returns, allowances, governmental compliance costs, or litigation; there may be changes in the performance of financial markets or fluctuations in foreign currency exchange rates; unanticipated natural disasters could have a material impact upon results of operations; there may be changes in the general economic conditions which affect customer payment practices or consumer spending; competition for retail and wholesale customers, pricing and transportation of products may vary from time to time due to seasonal variations or otherwise; customer preferences for our products can be affected by competition, or general market demand for domestic or imported goods or the quantity, quality, price or delivery time of such goods; there could be an unanticipated loss of a material customer or a material license; the availability and price of raw materials could be affected by weather, disease, energy costs or other factors. In addition, consideration should be given to any other risks and uncertainties discussed in other documents filed by the Company with the Securities and Exchange Commission. The Company assumes no obligation to update publicly any forward-looking statements, whether as the result of new information, future events, or otherwise.

Item 2. Properties

The Company’s properties are owned or leased directly and indirectly through its subsidiaries. Management believes that the Company’s facilities and equipment are in good condition and sufficient for current operations. The Company owns office space in West Point, Georgia, and Lanett and Valley,

9

Table of Contents

Alabama, and leases various additional office space, including approximately 140,000 square feet in New York City, of which approximately 36,000 square feet is subleased to other tenants. The Company also leases approximately 26,000 square feet elsewhere for other administrative, storage and office space.

The Company and its subsidiaries own and utilize 22 manufacturing facilities located in Alabama, Florida, Georgia, Indiana, Maine, North Carolina, South Carolina and Virginia which contain in the aggregate approximately 8,728,000 square feet of floor space and lease 5 manufacturing facilities in Alabama, Georgia, Louisiana, Nevada and North Carolina which contain in the aggregate approximately 591,000 square feet of floor space.

The Company owns a chemical plant containing approximately 43,000 square feet of floor space from which Grifftex Chemicals operates. In addition, the Company owns a printing facility consisting of 38,000 square feet in which Graphics prints product packaging and labeling.

The Company and its subsidiaries also own 13 distribution centers and warehouses for their operations which contain approximately 3,805,000 square feet of floor space. In addition, the Company and its subsidiaries lease 7 distribution outlets and warehouses containing approximately 730,000 square feet of floor space.

WestPoint Stores owns 2 retail stores and leases its 50 other retail stores, all of which are dispersed throughout the United States and Canada.

The owned properties of the Company are subject to liens held by the Company’s secured lenders. See “Item 8. Financial Statements and Supplemental Data — Notes to Consolidated Financial Statements — 2 Indebtedness and Financial Arrangements.”

Item 3. Legal Proceedings

On October 5, 2001, a purported stockholder class action suit, entitled Norman Geller v. WestPoint Stevens Inc., et al. (the “Geller action”), was filed against the Company and certain of its current and former 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 actions were consolidated by Order dated January 25, 2002. Plaintiffs served a Consolidated Amended Complaint (the “Amended Complaint”) on March 29, 2002. The Amended Complaint asserts 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 Holcombe T. Green, Jr. as “controlling persons” under § 20(a) of the Exchange Act. The Amended Complaint alleges 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 and that certain Individual Defendants wrongfully sold or pledged Company stock at inflated prices for their benefit. The Amended Complaint refers 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.

On June, 6, 2002, Defendants filed Motions to Dismiss Plaintiffs’ Amended Complaint. On February 3, 2003, the Court denied Defendants’ Motions to Dismiss. The action will proceed to class certification and discovery.

On March 11, 2002, a shareholder derivative action, entitled Gordon Clark v. Holcombe T. Green, Jr., et al.(the“Clark action”), 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.

On July 1, 2002, a shareholder derivative action, entitled John Hemmer v. Holcombe T. Green, Jr., et al.(the “Hemmer action”), was filed against Mr. Green and certain of the Company’s other directors including Messrs. Hugh M. Chapman, John F. Sorte and Ms. M. Katherine Dwyer 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.

10

Table of Contents

By agreements between the parties, the Clark and Hemmer actions were both stayed pending the Court’s decision on Defendants’ Motions to Dismiss in the Geller action. The Company has negotiated an extension of the stay agreement in the Hemmer action and is currently negotiating for an extension of the stay agreement in the Clark action.

The Company believes that the allegations in all of the actions are without merit and intends to contest the actions vigorously on behalf of its officers and directors.

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.

The Company has been named as a defendant in three separate purported class action suits seeking reparation for the historic enslavement of African Americans in the United States. Eddlee Bankhead v. Lloyd’s of London, et al. (the “Bankhead action”) was filed on September 3, 2002, in the United States District Court for the Southern District of New York. Timothy Hurdle and Chester Hurdle v. FleetBoston Financial Corporation, et al. was initially filed in the California Superior Court for San Francisco County on September 10, 2002, but has since been removed to the United States District Court California Northern District (San Francisco). Julie Mae Wyatt-Kerwin v. J.P. Morgan Chase was filed January 21, 2003, in the United States District Court for the Southern District of Texas. All three cases have been consolidated with related cases in the U.S. District Court for the Northern District of Illinois. The factual basis for all three suits is the claim that the defendants profited from the slave labor of the plaintiff classes’ ancestors prior to 1865 and, specifically, that Pepperell Manufacturing, predecessor to WestPoint Stevens Inc., utilized cotton from southern planters who in turn purchased finished product to clothe their slaves. The California suit alleges that such practices amount to an “unfair business practice” in violation of the California Business and Professional Code.

The purported class includes all descendants of African American slaves. The relief sought includes an accounting, the appointment of an independent historical commission, imposition of a constructive trust, restitution of the value of slave labor and defendants’ unjust enrichment, disgorgement of illicit profits and compensatory and punitive damages. The Company believes that the Complaints are without merit and intends to contest the actions vigorously.

On June 1, 2003, the Company and the other Debtors filed the petition under Chapter 11 of the Bankruptcy Code which is discussed elsewhere in this Annual Report on Form 10-K.

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.

11

Table of Contents

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

During the fourth quarter of fiscal year 2002, no matters were submitted by the Company to a vote of its security holders.

Part II

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

The Common Stock of the Company is listed on the Over the Counter Bulletin Board (“OTCBB”) under the ticker symbol WSPT. Such listing became effective on January 30, 2003. Prior thereto, the Company’s Common Stock was listed on the New York Stock Exchange (“NYSE”) under the ticker symbol WXS from October 15, 1999.

The following table presents the high and low sales prices of the Company’s Common Stock, as reported by the NYSE for each full quarterly period within the two most recent fiscal years:

The Company paid dividends of $.02 per share on March 1 and June 1, 2001. Under its existing credit facilities, as amended June 29, 2001, the Company is not permitted to pay dividends. For an additional discussion of these restrictions on the payment of dividends see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

As of March 14, 2003, there were approximately 5,196 holders of the Company’s Common Stock. Of that total, approximately 303 were stockholders of record and approximately 4,893 held their stock in nominee name through the Depository Trust Company.

The Company currently anticipates that all of the currently outstanding shares of its Common Stock will be cancelled pursuant to the plan of reorganization which it will propose under Chapter 11 of the Bankruptcy Code.

     Website Access

Our website address is www.westpointstevens.com. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports at our investor relations website, www.investorwestpoint.com/performance/index.html, under the heading “SEC Filings.” These reports are available on our investor relations website as soon as reasonably practicable after we electronically file them with the SEC. The information on our website is not part of or incorporated by reference in this Annual Report on Form 10-K.

12

Table of Contents

     Equity Compensation Plan Information

The following table sets forth information as of December 31, 2002 (except as otherwise specified in the footnotes).

13

Table of Contents

Item 6. Selected Financial Data

The selected historical financial data presented below for 2002, 2001 and 2000 were derived from the Audited Consolidated Financial Statements of the Company and its subsidiaries as of and for the years ended December 31, 2002, 2001 and 2000 (the “Consolidated Financial Statements”), and should be read in conjunction therewith, including the notes thereto and the other financial information included elsewhere in this report.

See footnotes on following page.

14

Table of Contents

15

Table of Contents

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

As more fully disclosed above (see “Item 1. Business — Chapter 11 Filing”), the Company and several of its subsidiaries filed a petition under Chapter 11 of the Bankruptcy Code on June 1, 2003. By reason thereof, the Company’s creditors were automatically stayed from taking certain “enforcement” actions under their respective agreements with the Company unless the stay is lifted by the Bankruptcy Court. In addition, the Company has entered into the DIP Credit Agreement, which is more fully described below.

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern. Except as otherwise disclosed, these principles assume that assets will be realized and liabilities will be discharged in the ordinary course of business. The Company is currently operating as a debtor-in-possession under Chapter 11 of the Bankruptcy Code, and its continuation as a going concern is contingent upon, among other things, its ability to gain approval of the plan of reorganization by the requisite parties under the Bankruptcy Code and be confirmed by the Bankruptcy Court, comply with the DIP Credit Agreement, return to profitability, generate sufficient cash flows from operations and obtain financing sources to meet future obligations. There is no assurance that the Company will be able to achieve any of these results. The Company’s consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.

Whether as a result of its proceeding under Chapter 11 or otherwise, the Company may sell or otherwise dispose of assets, and liquidate or settle liabilities, for amounts other than those reflected in the financial statements. Additionally, the amounts reported on the consolidated balance sheet could materially change because of changes in business strategies and the effects of any proposed plan or reorganization.

Senior Credit Facility and Second-Lien Facility Amendments

In the third quarter of 2002, the Company’s Senior Credit Facility and Second-Lien Facility were amended primarily to permit certain restructuring, impairment and other charges, and to modify certain financial ratios and the minimum EBITDA covenant.

Effective March 31, 2003, the Company’s Senior Credit Facility was amended primarily to provide for an interim facility limitation and to add an unused commitment fee. Under the interim facility limitation, the Company’s outstanding borrowings and letters of credit under the Senior Credit Facility were limited to the following amounts for the periods indicated: $546.0 million for the period April 1, 2003 through April 26, 2003; $530.0 million for the period April 27, 2003 through May 17, 2003; $525.0 million for the period May 18, 2003 through June 10, 2003.

At the option of the Company and effective with the last amendment to the Senior Credit Facility, interest under the Senior Credit Facility is payable monthly, either at the prime rate plus 5.25% or at LIBOR plus 7.00%, compared to prime rate plus 2.75% or LIBOR plus 4.50% in effect at December 31, 2002. The Company is also obligated to pay a facility fee in an amount equal to 0.50% of each Bank’s commitment under the Revolver, and an unused commitment fee in an amount equal to 1.00% of the difference between the revolver commitment and the daily outstanding loans and letters of credit.

At March 31, 2003, the Company was not in compliance with certain of its covenants under the Senior Credit Facility and Second-Lien Facility. Effective March 31, 2003, the Company’s lenders under the Senior Credit Facility and Second-Lien Facility temporarily waived the defaults for the period March 31, 2003 through and including June 10, 2003. At December 31, 2002, the Company classified all of its outstanding debt under all of its various credit agreements as current as a result of the Company’s inability to obtain temporary waivers discussed above through the end of 2003 and the potential for the acceleration of the loans outstanding under all of its various credit agreements.

Second-Lien Facility

On June 29, 2001, the Company announced the closing of a $165.0 million Second-Lien Facility with a maturity date of February 28, 2005. Net proceeds from the transaction, after payment of approximately $16.3 million of related transaction fees and expenses, were used to reduce outstanding borrowings under the Senior Credit Facility as well as provide additional liquidity for working capital and general corporate purposes. Effective with the closing of the Second-Lien Facility, the revolving commitment under the Senior Credit Facility was reduced to $717.5 million from $800.0 million. Interest under the Second-Lien Facility is payable quarterly at an interest rate of prime plus 8% increasing each quarter after June 30, 2002 by .375% but in no event less

16

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued

Second-Lien Facility—Continued

than 15%. Loans under the Second-Lien Facility are secured by a second priority lien on the assets securing the existing Senior Credit Facility. The approximately $16.3 million of related transaction fees and expenses were capitalized as deferred financing fees and are being amortized over the remaining term of the facility.

DIP Credit Agreement

The Company is a party to the DIP Credit Agreement which provides a facility consisting of revolving credit loans of up to $300 million (with a sublimit of $75 million for letters of credit) with a term of one year. At its option, the Company may extend the term for up to two successive periods of six months each.

Advances under the DIP Credit Agreement bear interest at a fluctuating rate per annum equal to LIBOR plus a margin of 2.75% or, at the Company’s option, prime plus a margin of 0.625%. Each margin is subject to quarterly adjustments, commencing November 1, 2003, pursuant to a pricing matrix, based on average availability, having a range of 2.25% to 3.00% for LIBOR based loans and 0.25% to 1.00% for prime based loans. The DIP Credit Agreement also has an unused line fee of 0.5% per annum, subject to quarterly adjustments as above having a range of 0.375% to 0.75%.

The DIP Credit Agreement contains a number of covenants, including among others, affirmative and negative covenants with respect to certain financial tests and other indebtedness, as well as restrictions against the declaration or payment of dividends, the making of certain intercompany advances and the disposition of assets without consent. The DIP Credit Agreement also contains Events of Default (as defined in the DIP Credit Agreement) including among others, a failure to pay the principal and interest of the obligations when due, default with respect to any Debt (as defined in the DIP Credit Agreement) and a failure by the Company to comply with any provisions of the Financing Orders (as defined in the DIP Credit Agreement). A copy of the DIP Credit Agreement constitutes Exhibit No. 99.2 to the Current Report on Form 8-K, which the Company filed with the Securities and Exchange Commission on June 5, 2003.

Restructuring, Impairment, 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 was designed to streamline operations and improve profitability. The Eight-Point Plan addressed 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.

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.

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.

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

17

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued

Restructuring, Impairment, and Other Charges—Continued

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.

Since the adoption of the Eight-Point Plan, the Company 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. Given the disruptive nature of the restructuring activity that included significant machinery relocation and realignment in 2000 and 2001, the Company did not see any significant benefit from the restructuring plan until 2002. During 2002 the Company experienced lower cost of sales in part due to increased manufacturing efficiencies as a result of the restructuring plan.

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

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.
 

On September 20, 2002, the Company announced that its Board of Directors had approved additional restructuring initiatives to increase asset utilization, lower manufacturing costs and increase cash flow and profitability through reallocation of production assets from bath products to basic bedding products and through rationalization of its retail stores division. The Company expects the restructuring initiatives to result in a $36.5 million pretax charge for restructuring, impairment and other charges. Approximately $20 million of the pretax charge is expected to be non-cash items with annual pretax savings estimated at $10 million once the restructuring initiatives are fully implemented. All charges have been recorded in accordance with Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The charges for the restructuring initiatives began in the third quarter of 2002 and will continue throughout 2003.

18

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued

Restructuring, Impairment, and Other Charges—Continued

As a result of the restructuring initiatives in 2002, the Company announced the closure of its Rosemary (NC) towel finishing facility and the conversion of its Rosemary (NC) towel fabrication and distribution facilities to basic bedding facilities. The Company announced on April 25, 2003 that the Rosemary (NC) towel fabrication and distribution facilities that were previously disclosed as being converted to basic bedding facilities will now be closed. The Company also announced the closure of three retail stores. Closure of other retail stores and other facilities may be announced in future periods.

The cost of the manufacturing and retail store rationalization and certain overhead reduction costs were reflected in a restructuring and impairment charge of $6.6 million, before taxes, in 2002. The components of the restructuring and impairment charge included $4.4 million for the impairment of fixed assets and $2.2 million in reserves to cover cash expenses related primarily to severance benefits.

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

During 2002, other costs of the restructuring initiatives of $11.6 million, before taxes, were recognized consisting of inventory writedowns of $10.5 million primarily related to the rationalization of its retail store division and other expense of $1.1 million, consisting primarily of related unabsorbed overhead, all reflected in cost of goods sold.

19

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued

Results of Operations

The table below is a summary of the Company’s operating results for the years ended December 31, 2002, 2001 and 2000. The following discussion is limited to an analysis of the results of continuing operations (in millions of dollars and as percentages of net sales).

2002 Compared with 2001

Net Sales. Net sales for the year ended December 31, 2002 increased $46.3 million, or 2.6%, to $1,811.4 million compared with net sales of $1,765.1 million for the year ended December 31, 2001. The increase was due to management’s focus on expanding sales with key retailers that resulted in growth in all major product categories except sheets.

For the year ended December 31, 2002, bed products sales were $1,053.0 million compared with $1,024.3 million in 2001, bath products sales were $549.0 million compared with $524.0 million in 2001 and other sales (consisting primarily of sales from the Company’s mill stores and foreign operations) were $209.3 million compared with $216.9 million in 2001.

Gross Earnings/Margins. Gross earnings for the year ended December 31, 2002 of $393.6 million increased $15.3 million, or 4.0%, compared with $378.3 million for 2001 and reflect gross margins of 21.7% in 2002 and 21.4% in 2001. Included in gross earnings for the years ended December 31, 2002 and 2001 were costs related to restructuring initiatives of $11.6 million and $13.7 million, respectively, as previously discussed. Gross earnings and margins improved in 2002 due to increased sales and lower raw material costs, primarily cotton, and lower costs related to restructuring initiatives, that more than offset increased promotional activity, increased royalties, increased pension expense and under-absorbed overhead due to production curtailment.

Operating Earnings/Margins. Selling, general and administrative expenses increased $6.6 million, or 2.6%, in 2002 compared with 2001, and as a percentage of net sales represent 14.6% in 2002 and 2001. The increase in selling, general and administrative expenses in 2002 was primarily due to increased sales levels. Selling, general and administrative expenses included additional bad debt expense for Kmart Corporation accounts receivable of $10.4 million and $11.0 million in 2002 and 2001, respectively. Restructuring and impairment charges of $6.6 million and $5.0 million were incurred in 2002 and 2001, respectively, related to the Company’s Eight-Point Plan, as previously discussed.

Operating earnings for the year ended December 31, 2002 were $122.3 million, or 6.8% of sales, and increased $7.0 million, or 6.1%, compared with operating earnings of $115.3 million, or 6.5% of sales, for 2001. Included in operating earnings for the years ended December 31, 2002 and 2001 were costs related to restructuring initiatives of $18.2 million and $18.7 million, respectively, as previously discussed. The increase in operating earnings in 2002 resulted from higher sales levels and reduced raw material costs that more than offset increased promotional activity, increased royalties, increased pension expense and under-absorbed overhead due to production curtailment, as well as increased selling, general and administrative expenses.

20

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued

Results of Operations—Continued

2002 Compared with 2001—Continued

Interest Expense. Interest expense for the year ended December 31, 2002 of $135.5 million decreased $6.1 million compared with interest expense for the year ended December 31, 2001. The decrease in interest expense was due primarily to lower average debt levels and lower average interest rates on the Company’s variable rate bank debt.

Other Expense-Net. Other expense-net decreased $9.7 million for the year ended December 31, 2002 to $6.6 million from $16.3 million for the year ended December 31, 2001. Charges in 2002 included amortization of deferred financing fees of $9.6 million that were offset by miscellaneous income items including $1.8 million from an unconsolidated subsidiary, and $1.2 million from gain on sale of assets. The decline in 2002 reflects the absence of charges from 2001 including a $7.5 million non-cash charge to adjust to market value its basis in an unconsolidated limited liability corporation, $2.3 million in charges for cotton derivatives in accordance with Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities, and also included the amortization of deferred financing fees of $6.9 million, less certain miscellaneous items.

Income Tax Expense (Benefit). The Company’s effective tax rate differed from the federal statutory rate primarily due to state income taxes and non-deductible items.

Net Loss. Net loss for fiscal year 2002 was $12.7 million, or a loss of $0.25 per share diluted, and net loss for 2001 was $27.3 million, or a loss of $0.55 per share diluted. Included in net loss for the years ended December 31, 2002 and 2001 were costs related to restructuring initiatives, net of taxes, of $11.7 million and $11.9 million, respectively, as previously discussed.

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

2001 Compared with 2000

Net Sales. Net sales for the year ended December 31, 2001 decreased $50.8 million, or 2.8%, to $1,765.1 million compared with net sales of $1,815.9 million for the year ended December 31, 2000. The decrease resulted from difficult conditions at retail for all of 2001 that caused a decline in sales across all product categories with the exception of basic bedding accessories. Sales were also negatively impacted by increased promotional pricing activity due to the weak retail sales environment.

For the year ended December 31, 2001, bed products sales were $1,024.3 million compared with $1,054.0 million in 2000, bath products sales were $524.0 million compared with $551.8 million in 2000 and other sales (consisting primarily of sales from the Company’s mill stores and foreign operations) were $216.9 million compared with $210.1 million in 2000.

Gross Earnings/Margins. Gross earnings for the year ended December 31, 2001 of $378.3 million decreased $10.1 million, or 2.6%, compared with $388.4 million for 2000 and reflect gross margins of 21.4% in both 2001 and 2000. Included in gross earnings for the years ended December 31, 2001 and 2000 were costs related to restructuring initiatives of $13.7 million and $85.3 million, respectively, as previously discussed. Gross earnings deteriorated in 2001 due to increased raw material costs, primarily cotton, and a weakness in retail markets that resulted in increased promotional activity and lower sales that necessitated selected production downtime and resulted in under absorption of fixed costs, partially offset by lower costs related to restructuring initiatives in 2001 compared to 2000.

Operating Earnings/Margins. Selling, general and administrative expenses increased $13.7 million, or 5.6%, in 2001 compared with 2000, and as a percentage of net sales represent 14.6% in 2001 and 13.5% in 2000. The increase in selling, general and administrative expenses in 2001 was primarily due to increased bad debt expense and expenses associated with the acquired Chatham blanket unit that were partially offset by reduced litigation reserves. Restructuring and impairment charges of $5.0 million and $109.2 million were incurred in 2001 and 2000, respectively, related to the Company’s Eight-Point Plan, as previously discussed.

21

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued

Results of Operations—Continued

2001 Compared with 2000—Continued

Operating earnings for the year ended December 31, 2001 were $115.3 million, or 6.5% of sales, and increased $80.4 million, compared with operating earnings of $34.9 million, or 1.9% of sales, for 2000. Included in operating earnings for the years ended December 31, 2001 and 2000 were costs related to restructuring initiatives of $18.7 million and $194.5 million, respectively, as previously discussed. The increase in operating earnings in 2001 resulted from lower costs related to restructuring initiatives, partially offset by increased raw material costs and a weakness in retail markets that resulted in increased promotional activity and lower sales that necessitated selected production downtime and resulted in under absorption of fixed costs, as well as increased selling, general and administrative expenses.

Interest Expense. Interest expense for the year ended December 31, 2001 of $141.6 million increased $19.3 million compared with interest expense for the year ended December 31, 2000. The increase in interest expense was due primarily to higher average debt levels and higher average interest rates on the Company’s variable rate bank debt and Second-Lien Facility.

Other Expense-Net. Other expense-net increased $4.9 million for the year ended December 31, 2001 to $16.3 million from $11.4 million for the year ended December 31, 2000. Included in other expense-net for the year ended December 31, 2000 were costs related to restructuring initiatives of $8.7 million, as previously discussed. Other expense-net in 2001 was comprised of a $7.5 million non-cash charge to adjust to market value its basis in an unconsolidated limited liability corporation, $2.3 million in charges for cotton derivatives in accordance with Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities, and also included the amortization of deferred financing fees of $6.9 million, less certain miscellaneous items. Other expense-net in 2000 included the amortization of deferred financing fees of $3.2 million, less certain miscellaneous items, plus costs associated with the Company’s Eight-Point Plan of $8.7 million. The primary asset of the limited liability corporation was an airplane that was sold during the year for less than its book value and generated $3.3 million in cash.

Income Tax Expense (Benefit). The Company’s effective tax rate differed from the federal statutory rate primarily due to state income taxes and non-deductible items.

Net Loss. Net loss for fiscal year 2001 was $27.3 million, or a loss of $0.55 per share diluted, and net loss for 2000 was $63.3 million or a loss of $1.28 per share diluted. Included in net loss for the years ended December 31, 2001 and 2000 were costs related to restructuring initiatives, net of taxes, of $11.9 million and $130.1 million, respectively, as previously discussed.

Diluted per share amounts are based on 49.6 million average shares outstanding for both the 2001 and 2000 periods, respectively.

Critical Accounting Policies and Estimates

These policies are considered “critical” because they have the potential to have a material impact on the Company’s financial statements, and because they require judgments and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.

The Company’s Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions. See Note 1 — Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements. Management believes that the following are some of the more critical judgment areas in the application of the Company’s accounting policies that currently affect financial condition and results of operations.

Basis of Presentation. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern. Except as otherwise disclosed, these principles assume that assets will be realized and liabilities will be discharged in the ordinary course of business. The Company is currently operating as a debtor-in-possession under Chapter 11 of the Bankruptcy Code, and its continuation as a going concern is contingent upon, among other things, its ability to gain approval of the plan of reorganization by the requisite parties under the Bankruptcy Code and be confirmed by the Bankruptcy Court, comply with the DIP Credit Agreement, return to profitability, generate

22

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued

Critical Accounting Policies and Estimates—Continued

sufficient cash flows from operations and obtain financing sources to meet future obligations. There is no assurance that the Company will be able to achieve any of these results. The Company’s consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.

The Company’s consolidated financial statements do not reflect adjustments that may be made in accordance with AICPA Statement of Position 90-7 (“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”) (“SOP 90-7”), which the Company will adopt for its financial reporting in periods ending after June 1, 2003 assuming that the Company will continue as a “going concern”. In the Chapter 11 proceedings, substantially all unsecured liabilities as of the Petition Date are subject to compromise or other treatment under a plan of reorganization which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. For financial reporting purposes, liabilities and obligations whose treatment and satisfaction is dependent on the outcome of the Chapter 11 proceedings are segregated and classified as Liabilities Subject to Compromise in the consolidated balance sheet under SOP 90-7. The ultimate amount of and settlement terms for such liabilities are subject to an approved plan of reorganization and, accordingly, are not presently determinable. Pursuant to SOP 90-7, professional fees associated with the Chapter 11 proceedings will be expensed as incurred and reported as reorganization costs. Also, interest expense will be reported only to the extent that it will be paid during the pendency of the Chapter 11 proceedings or if or when it is probable that it will be an allowed claim.

Accounts Receivable. The Company maintains returns and allowances reserves as well as reserves for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The estimation process requires management to make assumptions based on historical results, future expectations, the economic and competitive environment, changes in credit worthiness of customers, and other relevant factors. Changes in these key assumptions can have a significant impact on ultimate cash collections.

The Company believes that the accounting estimate related to the establishment of the allowance for doubtful accounts and the associated provisions in the results of operations is a “critical accounting estimate” because: (1) it requires Company management to make assumptions about the future collectibility of current balances due, as well as the future economic viability of the Company’s customer base; and (2) the impact of changes in actual collections versus these estimates could have a material impact on the Company’s financial statements. In selecting these assumptions, the Company uses historical trending of write-offs, returns and allowances, overdue status and credit ratings of its customers, estimates of ultimate recoverability from customers in bankruptcy, and other current market indicators about general economic conditions that might impact the collectibility of accounts.

During 2001, the Company recorded $11.0 million of bad debt expense to increase its allowance for doubtful accounts as a result of the January 22, 2002 bankruptcy filing of Kmart. As a result of the further deterioration of Kmart’s financial condition during 2002, the Company recorded additional bad debt expense of $10.4 million related to its Kmart pre-petition receivables. Management believes that its estimates are conservative; however, if the financial condition of the Company’s customers (including, but not limited to Kmart) were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories. The Company maintains market reserves for estimated obsolete, excess, aged or off-quality inventories in order to properly state inventories at lower of cost or market (net realizable value). Differences between the cost of inventory and the estimated market value are based upon assumptions about future demand, channels of distribution, and market conditions. Changes in these market assumptions can have a significant impact on the estimated net realizable value of inventories.

The Company believes that the accounting estimates related to the establishment of inventory market reserves and the associated provisions in the results of operations is a “critical accounting estimate” because: (1) it requires Company management to make assumptions about future product demand and overall sales prices; and (2) the impact of changes in realized sales prices versus these estimates could have a material impact on the Company’s financial statements. In selecting these assumptions, the Company uses historical trending of write-downs, and other current market indicators about general economic conditions that might impact the realizability of inventories. As a result of our consideration of these factors, during 2002, the Company recorded $10.5 million of inventory write-downs primarily related to its retail stores as a result of restructuring initiatives and poor economic conditions.

23

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued

Critical Accounting Policies and Estimates—Continued

Additional inventory write-downs of $74.2 million were recorded in 2000 under the Eight-Point Plan as a result of decreased market demand and overall rationalization efforts. Management believes that its estimates are conservative; however, if market conditions were to deteriorate, resulting in a markdown of sales prices, additional reserves may be required.

Long-lived Asset Recovery. A significant portion of the Company’s total assets consists of long-lived assets, consisting primarily of property, plant and equipment (“PP&E”) and goodwill. Changes in the Company’s intended use of these assets, as well as changes in broad economic or industry factors, may cause the estimated period of use or the value of these assets to change.

PP&E are evaluated for impairment whenever indicators of impairment exist. Accounting standards require that if an impairment indicator is present, the Company must assess whether the carrying amount of the asset is unrecoverable by estimating the sum of the future cash flows expected to result from the asset, undiscounted and without interest charges. If the carrying amount is less than the recoverable amount, an impairment charge must be recognized, based on the fair value of the asset.

The Company believes that the accounting estimate related to asset impairment is a “critical accounting estimate” because: (1) it requires Company management to make assumptions about future revenues and costs of sales over the life of the asset; and (2) the impact of recognizing an impairment could be material to the Company’s financial statements. Management’s assumptions about future revenues and cost of sales require significant judgment and could differ from actual results due to changing market conditions and overall product demand.

During 2002 and 2000, the Company identified certain PP&E that became impaired as a result of restructuring initiatives and related plant closures. The writedown of PP&E during 2002 and 2000 resulted in a total of $4.4 million and $66.8 million of PP&E being impaired, respectively. These impairments represent less than 1% and 9% of consolidated net PP&E as of December 31, 2002 and December 31, 2000, respectively.

Goodwill. Goodwill is reviewed at least annually for impairment, or more frequently if indicators of impairment exist. Goodwill impairment is tested by comparing the net book value of the reporting unit to fair value. The Company believes that the accounting estimate related to goodwill is a “critical accounting estimate” because: (1) it requires Company management to make assumptions about fair values, and (2) the impact of recognizing an impairment could be material to the financial statements.

Management completed an impairment analysis of goodwill in the fourth quarter of 2002. This test was performed internally, and entity fair value was estimated using quoted market prices of the Company’s equity and debt securities. As of December 31, 2002, no impairment existed.

Legal Reserves. We are a party to legal proceedings with respect to a variety of matters in the ordinary course of business. Except as described in Note 10 to the consolidated financial statements included herein, the Company does not believe that any legal proceedings to which it is a party would have a material adverse impact on its business or prospects.

In accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, the Company accrues legal costs that are expected to be incurred to defend against certain litigation. Estimates of legal reserves are determined in consultation with outside counsel. The Company believes that the accounting estimate related to legal reserves is a “critical accounting estimate” because: (1) it requires management to make estimates of the ultimate legal liability to defend a case, and (2) changes in the estimated amount or timing of legal costs can significantly impact results of operations. Outside of foreseeable legal costs, if it is not currently possible to estimate the impact, if any, that the ultimate resolution of legal proceedings will have on our financial statements, no accrual is made, consistent with Statement 5.

Employee Benefit Plan Assumptions. Retirement benefits are a significant cost of doing business for the Company and represent obligations that will be settled far in the future. Retirement benefit accounting is intended to reflect the recognition of the future benefit costs over the employee’s approximate service period based on the terms of the plans and the investment and funding decisions made by the Company. The accounting requires that management make assumptions regarding such variables as the return on assets, the discount rate and future health care costs. Changes in these key assumptions can have a significant impact on the projected benefit obligation and periodic benefit cost incurred by the Company.

The Company believes that the accounting estimate related to retirement benefit accounting is a “critical accounting estimate” because: (1) it requires Company management to make assumptions about discount rates, future health care costs, and future

24

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued

Critical Accounting Policies and Estimates—Continued

return on assets funding the obligation; and (2) the impact of changes in actual performance versus these estimates would have on the projected benefit obligation reported on our balance sheet and the benefit cost could be material. The method of determining pension obligations requires assumptions concerning market performance. Market performance has fluctuated in the recent past and could have continued volatility in the future. In selecting these assumptions, the Company uses historical experience as well as objective indices as benchmarks, and tests the benchmarks against historical industry data on these assumptions provided by an independent actuary.

An increase in the discount rate and in the expected return on assets would reduce the reported benefit obligations and benefit costs. In contrast, if the discount rate in 2002 were 25 basis points lower, it would generate an $8.0 million increase in the benefit obligations reported on the balance sheet, and a $1.5 million increase in the benefit costs. Similarly, if the expected return on assets assumption were 25 basis points lower, it would generate a $0.7 million increase in the benefit costs. Reasonable changes in the estimate of health care cost assumptions would not materially affect the benefit obligations or related benefit costs for a single year.

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

So long as the Company remains under the protection of Chapter 11 of the U.S. Bankruptcy Code, its principal sources of liquidity are expected to be cash generated from its operations and funds available under the DIP Credit Agreement. The maximum commitment under the DIP Credit Agreement is $300 million, of which as of June 3, 2003, the Company has access to $175 million under an interim order of the Bankruptcy Court. For additional information about the DIP Credit Agreement, see “-DIP Credit Agreement” above.

During the pendency of its Chapter 11 proceedings, the Company’s principal uses of cash will be administrative expenses of the proceedings, operating expenses and debt service (including both interest payments under the DIP Credit Agreement and whatever payments may be made in respect of pre-petition debt).

Adequacy of Capital Resources

As a result of the uncertainty surrounding the Company’s current circumstances, it is difficult to predict the Company’s actual liquidity needs and sources at this time. However, based on current and anticipated levels of operations, and efforts to effectively manage working capital, the Company anticipates that its cash flows from operations, together with cash on hand, cash generated from asset sales, and amounts available under the DIP Credit Agreement, will be adequate to meet its anticipated cash requirements during the pendency of the Chapter 11 proceedings.

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

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

25

Table of Contents

Item 7A. Qualitative and Quantitative Disclosures About Market Risk

The Company is exposed to various market risks, including changes in certain commodity prices and interest rates. These exposures primarily relate to the acquisition of raw materials and changes in interest rates.

Commodities Risk. The Company selectively uses commodity futures contracts, forward purchase commodity contracts and option contracts primarily to manage its exposure to cotton commodity price risk. The Company does not hold or issue derivative instruments for trading purposes.

At December 31, 2002 and 2001, the Company, in its normal course of business, had entered into various commodity futures contracts and forward purchase commodity contracts. Based on year-end forward cotton prices, the Company’s futures contracts and forward purchase contracts at December 31, 2002 (which covered a portion of its 2003 needs) had a net deferred gain of approximately $4.0 million. At December 31, 2001, the net deferred loss was approximately $3.8 million. During the first and second quarters of 2001, the fair value of certain cotton options then outstanding which did not qualify for hedge accounting in the amount of $2.3 million was classified as Other expense-net.

Based on a sensitivity analysis for commodities that assumes a decrease of 10% in such commodity prices, the hypothetical net deferred loss for the combined commodity positions at December 31, 2002 is estimated to be approximately $3.7 million ($8.1 million at December 31, 2001). Actual commodity price volatility is dependent on many varied factors impacting supply and demand that are impossible to forecast. Therefore, actual changes in fair value over time could differ substantially from the hypothetical change disclosed above.

Interest Rate Risk. At December 31, 2002 and 2001, the Company’s floating interest rate debt outstanding was $612.8 million (of which $165.0 million was the Second-Lien Facility) and $672.5 million (of which $165.0 million was the Second-Lien Facility), respectively. A 100 basis point increase in market rates would increase interest expense and decrease income before income taxes by approximately $4.5 million and $5.1 million for the years ended December 31, 2002 and 2001, respectively. The amount was determined by calculating the effect of the hypothetical interest rate change on the Company’s floating interest rate debt excluding the Second-Lien Facility. Based on market rates at December 31, 2002 and 2001, a 100 basis point increase in market rates would not increase the minimum interest rate under the Second-Lien Facility.

The fair market value of long-term fixed interest rate debt is also subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair market value of the Company’s total long-term fixed interest rate debt at December 31, 2002 was approximately $300.5 million, which was below its carrying value by approximately $699.5 million. At December 31, 2001, the estimated fair market value of the Company’s long-term fixed interest rate debt was approximately $312.3 million, which was below its carrying value by approximately $687.7 million. A hypothetical 100 basis point decrease in the prevailing interest rates at December 31, 2002 would result in an increase in the fair market value of total long-term fixed interest rate debt by approximately $2.6 million ($8.6 million at December 31, 2001). Fair market values are determined from quoted market prices where available or based on estimates.

26

Table of Contents

Item 8. Financial Statements and Supplementary Data

Consolidated Financial Statements for the years ended December 31, 2002, 2001 and 2000

27

Table of Contents

Report of Ernst & Young LLP, Independent Auditors

Board of Directors and Stockholders
WestPoint Stevens Inc.

We have audited the accompanying consolidated balance sheets of WestPoint Stevens Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of WestPoint Stevens Inc. and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

The accompanying financial statements have been prepared assuming that WestPoint Stevens Inc. will continue as a going concern. As discussed in Note 2 to the financial statements, on June 1, 2003, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”). The Company is currently operating its business under the jurisdiction of Chapter 11 and the United States Bankruptcy Court in the Southern District of New York (the “Bankruptcy Court”), and continuation of the Company is contingent upon, among other things, the ability to formulate a plan of reorganization which will be approved by the requisite parties under the United States Bankruptcy Code and be confirmed by the Bankruptcy Court, the ability to comply with its debtor-in-possession financing facility, obtain adequate financing sources, and the Company’s ability to generate sufficient cash flows from operations to meet its future obligations. In addition, the Company has experienced recurring net losses and has maintained a net capital deficiency in 2002, 2001, and 2000. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that may result from the outcome of this uncertainty.

As discussed in Note 1 to the financial statements, in 2002 the Company changed its method of accounting for goodwill to conform to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Also, as discussed in Notes 1 and 8 to the financial statements, in 2001 the Company changed its method of accounting for derivative instruments and hedging activities to conform to Statement of Financial Accounting Standards No. 133, Derivative Instruments and Hedging Activities.

     /s/Ernst & Young LLP

Atlanta, Georgia
February 3, 2003, except for
Note 2 and paragraphs 1, 4, 5,
9 and 11 in Note 3, as to which
the date is June 2, 2003

28

Table of Contents

WESTPOINT STEVENS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

See accompanying notes.

29

Table of Contents

WESTPOINT STEVENS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

See accompanying notes.

30

Table of Contents

WESTPOINT STEVENS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)