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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x            Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 28, 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 Number 000-49835

PILLOWTEX CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (704) 939-2000

Securities Registered Pursuant to Section 12(b) of the Act:
None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value

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

Indicate by check mark 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 the voting stock held by non-affiliates of the Registrant at June 28, 2002 was $115,133,421.

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

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:

Indicate by check whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes x No o

As of March 20, 2003, Registrant had 19,095,215 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Unless the context otherwise requires, references to “Pillowtex” or the “Company” include Pillowtex Corporation, a Delaware corporation, and its subsidiaries. Pillowtex’s filings with the Securities and Exchange Commission (the “SEC”), including its Annual Report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and any amendments to the foregoing, are available free of charge on the Company’s website at www.pillowtex.com, as soon as reasonably practicable after the Company files such material with the SEC.

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements identified by the use of the words “will,” “would,” “could,” “should,” “anticipates,” “believes,” “expects,” “estimates,” “intends,” or similar expressions and other statements that are not historical facts. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by such statements. Factors that could cause the Company’s actual results in future periods to differ materially from those expressed in or implied by such statements include, but are not limited to, the following:

•         Pillowtex’s consolidated financial statements included elsewhere in this Annual Report have been prepared assuming Pillowtex will continue as a “going concern,” even though there is substantial doubt about Pillowtex’s ability to continue as a “going concern” due to the uncertainties as to the results of future negotiations with the Company’s revolver and term loan lenders as to revised financial covenants and therefore as to the adequacy of the Company’s financial resources to meet its anticipated cash requirements for the second half of 2003 and future periods.

•         The Company’s ongoing review of its strategic alternatives, which may include a sale of the business, sales of assets or restructuring options, which could include a bankruptcy proceeding.

•         The restrictions on the conduct of the Company’s business as a result of the provisions contained in the Exit Revolver Facility and Exit Term Loan and uncertainties as to the results of future negotiations with the Company’s revolver and term loan lenders as to revised financial covenants.

•         The Company’s access to capital markets will be limited for the foreseeable future.

•         The Company could have difficulty in attracting and retaining customers, top management, and other key personnel and labor as a result of its financial condition.

•         As a result of its financial condition, the Company could have difficulty in maintaining existing or creating new relationships with suppliers or vendors, which may stop providing supplies or services to the Company or provide them only on “cash on delivery,” “cash on order,” or other terms that could have an adverse impact on the Company’s cash flow.

•         The Company faces significant competitive pressures.

•         The price and availability of certain raw materials used by the Company are subject to rapid and significant change.

•         The Company may be affected by changes in general retail industry conditions.

•         The Company’s success may depend in part on the goodwill associated with and protection of the brand names owned by the Company.

Certain of these factors, as well as other such factors, are discussed herein in greater detail under “Item 1. Business - Risk Factors” below. In making these forward-looking statements, the Company does not undertake to update them in any manner except as may be required by law.

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PART I

ITEM 1.         BUSINESS

General

Founded in 1954, Pillowtex is one of the largest North American designers, manufacturers, and marketers of home textile products. Pillowtex’s extensive product offerings include a full line of utility and fashion bedding and complementary bedroom textile products, as well as a full line of bathroom and kitchen textile products. As a leading supplier across all distribution channels, Pillowtex sells its products to mass merchants, department stores, and specialty retailers. The Company also markets its products to wholesale clubs, catalog merchants, institutional distributors, and international customers and on the Internet.

Pillowtex, through its operating subsidiaries, manufactures and markets its products utilizing established and well-recognized Pillowtex-owned brand names. In addition, through licensing agreements, Pillowtex currently has rights to manufacture and market bedding products under other well-known brand names. The Company also manufactures products for customers under their own brand names.

Pillowtex’s diverse portfolio of top brand names allows it to differentiate Pillowtex’s products from those of its competitors. Pillowtex also provides distinct brand names for different channels of retail distribution and for different price points.

Pillowtex is organized into two major operating divisions: Bed and Bath Division and Pillow and Pad Division. The Bed and Bath Division manufactures and sells sheets and other fashion bedding textiles, towels, bath rugs, and kitchen textile products. The Pillow and Pad Division manufactures and sells bed pillows, down comforters, and mattress pads. See note 19 of the notes to the Company’s consolidated financial statements included elsewhere in this Annual Report for financial information regarding segments.

Chapter 11 Proceedings and Reorganization

On November 14, 2000 (the “Petition Date”), Pillowtex Corporation, a Texas corporation (“Old Pillowtex”), and substantially all of its domestic subsidiaries (collectively with Old Pillowtex, the “Debtors”), including Fieldcrest Cannon, Inc. (“Fieldcrest Cannon”), filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The chapter 11 cases for the Debtors (the “Chapter 11 Cases”) were jointly administered for procedural purposes. From the Petition Date until May 24, 2002, the Debtors operated their businesses as debtors-in-possession pursuant to the Bankruptcy Code. On May 2, 2002, Old Pillowtex announced that the Bankruptcy Court had confirmed the Debtors’ Second Amended Joint Plan of Reorganization, with certain modifications (as so modified, the “Plan”). On May 24, 2002 (the “Effective Date”), the Plan became effective and the Debtors successfully emerged from their chapter 11 bankruptcy proceedings.

Pursuant to the Plan, the following transactions were completed on or about the Effective Date:

•         all of Old Pillowtex’s issued and outstanding common stock and preferred stock were cancelled without consideration;

•         Old Pillowtex merged with and into Pillowtex, a wholly-owned Delaware subsidiary of Old Pillowtex, with Pillowtex as the surviving corporation (the “Merger”);

•         certain indebtedness of the Debtors was cancelled in exchange for cash, common stock, par value $0.01 per share, of Pillowtex (“Common Stock”), and/or warrants to purchase shares of Common Stock (“Warrants”);

•         designated post-petition loans having an aggregate principal amount of $150 million were cancelled in exchange for the issuance by Pillowtex of $150 million aggregate principal amount of notes under a new secured term loan (the “Exit Term Loan”) (the principal amount of the Exit Term Loan was immediately reduced on the Effective Date by $38.6 million (see note 11 to the Company’s consolidated financial statements included elsewhere in this Annual Report for a more detailed description of the Exit Term Loan));

•         executory contracts or unexpired leases to which any Debtor was a party were assumed, assumed and assigned, or rejected;

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•         industrial revenue bonds in the aggregate principal amount of $11.4 million were reinstated;

•         members of the boards of directors and officers of Pillowtex and the other reorganized Debtors were elected and began serving their respective terms; and

•         the overall corporate structure was simplified through the restructuring and dissolution of certain of Old Pillowtex’s subsidiaries.

On the Effective Date, (a) 18,600,000 shares of Common Stock and Warrants initially exercisable to purchase 3,529,412 shares of Common Stock were issued for distribution in respect of claims against the Debtors, (b) 3,529,412 shares of Common Stock were reserved for issuance upon the exercise of Warrants, and (c) 1,400,000 shares of Common Stock were reserved for issuance in satisfaction of awards under the Pillowtex Corporation 2002 Equity Incentive Plan (the “Equity Incentive Plan”), which was implemented in accordance with the Plan. In addition, on the Effective Date, Pillowtex entered into a three-year $200 million senior secured asset-based non-amortizing revolving credit facility, including a $60 million letter of credit sub-facility (the “Exit Revolver Facility”) with Congress Financial Corporation as agent for a syndicate of lenders. See note 11 to the Company’s consolidated financial statements included elsewhere in this Annual Report for a more detailed description of the Exit Revolver Facility.

See “- Risk Factors – Pillowtex Faces Uncertainty Regarding The Adequacy Of Its Capital Resources And Has Limited Access to Additional Financing,” and “- Risk Factors – Pillowtex Is Subject To Restrictions On The Conduct Of Its Business” below.

Products

General

Pillowtex has expanded beyond its traditional pillow operations largely through strategic acquisitions, including the 1997 acquisition of Fieldcrest Cannon and the 1998 acquisition of The Leshner Corporation (“Leshner”). As a result of these acquisitions, Pillowtex’s extensive product offerings now include a full line of utility and fashion bedding and complementary bedroom textile products, as well as a full line of bathroom and kitchen textile products.

Bed and Bath and Other Textile Products

Sheets and Other Fashion Bedding. Pillowtex produces a wide variety of sheets, ranging from muslin to the finest 420-thread count 100% Supima® cotton sheets. Its principal brand names for this product line include Cannon®, Fieldcrest®, Royal Velvet®, and Charisma®. Pillowtex’s sheeting strengths include solid color sheets with coordinating decorative bedding accessories. In addition to sheets, Pillowtex’s fashion bedding products consist of matching synthetic fill comforters, comforter covers, and pillow shams along with coordinated ruffled or pleated bed skirts. Retail prices of Pillowtex’s sheets vary widely based on size, thread count, and fabric type.

Towels. Pillowtex’s bathroom textile products include bath, hand, and fingertip towels, washcloths, and bath mats. Royal Velvet®, Fieldcrest®, Cannon®, Charisma®, Royal Velvet Big & Soft®, and St. Mary’s® are well-known, high quality towel brand names. These brand names provide Pillowtex with a strong market position in substantially all key sectors of the North American market. Pillowtex is also recognized as the color leader in the towel industry as it markets 40 colors in its Royal Velvet® franchise. In the marketplace, Pillowtex differentiates its towels by using fine ring spun cotton yarns to produce Royal Velvet® towels and pima and Supima® cotton yarns for Charisma® towels. The towel line includes solid colors, woven stripes, and fancy jacquards, as well as printed towels. Retail prices of Pillowtex’s towels range widely based on, among other things, size, weight, and yarn type.

Bath Rugs. Pillowtex also markets a variety of bath and accent rugs in conjunction with its towel offerings. These products come in a variety of sizes and are marketed under the Royal Velvet®, Cannon®, Fieldcrest®, Royal Family®, and Charisma® brands, as well as under private labels.

Kitchen Products. Pillowtex is a leading manufacturer and marketer of kitchen textile products in North America. Pillowtex’s kitchen products include terry towels, terry dish cloths, waffle weave and flat woven dish cloths, bar mops, utility cloths, pot holders, and oven mitts. A variety of constructions include yarn-dye checks, stripes, and plaids coordinating with piece-dye solids, as well as printed fashion motifs. Fabricated pot holders, oven mitts, and other coordinating accessories accompany most of Pillowtex’s kitchen ensembles.

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Other Bedroom Textiles. Pillowtex also offers a variety of other complementary bedroom textile products, including featherbeds, pillow protectors, decorative pillows, and window treatments.

Pillows and Pads

Bed Pillows. Pillowtex is a leading manufacturer and marketer of bed pillows in North America. Pillowtex produces and markets a broad line of traditional bed pillows, as well as specially designed products such as body pillows. Pillowtex offers products at various levels of quality and price. Pillowtex’s products range from synthetic pillows sold at relatively low retail prices to fine white goose down pillows sold at much higher price points.

Pillowtex is a leading feather and down pillow manufacturer in North America. These products contain quality goose and duck down, or blends of feather and down, in a range of grades. These materials, known as “natural fill,” have gained popularity for their loft and resiliency.

Pillowtex also manufactures and markets a full line of bed pillows featuring staple (cut and crimped), tow (continuous filament), and cluster (individual ball) synthetic fiber fills. Pillowtex is a leading supplier of premium synthetic bed pillows in North America.

Down Comforters. Pillowtex was a pioneer in marketing down comforters in the United States, and is now a leading manufacturer and marketer of down comforters in North America. Down comforters have become increasingly popular for both their insulation and fashion qualities, selling well in both warm and cool climates. They are sold at department stores, specialty stores, and mass merchants at a variety of prices. Increasingly popular higher-end comforters typically offer more down fill, have higher thread count shells, and feature more appealing “surface interest,” such as damask, dots, stripes, and checks.

Mattress Pads. Pillowtex is a leading manufacturer and marketer of mattress pads in North America. It produces and markets a complete line of mattress pads, including sizes for adults and children, natural and synthetic filled, flat, fitted, and stretch-to-fit mattress pads (adjustable fit mattress pads made with Lycra®, a multidirectional stretch material manufactured by E.I. DuPont de Nemours & Co.).

Marketing and Sales

Pillowtex markets its products to mass merchants, department stores, and specialty retail stores, as well as to wholesale clubs, catalog merchants, institutional distributors, and international customers and on the Internet.

Pillowtex’s top ten customers accounted for approximately 71% of its total net sales in 2002. Wal-Mart Stores, Inc. (“Wal-Mart”) and its affiliated entity, Sam’s Club stores, accounted for approximately 23% and 5%, respectively, of Pillowtex’s total net sales in 2002. No other customer accounted for 10% or more of Pillowtex’s total net sales in 2002. Consistent with industry practice, Pillowtex does not operate under long-term written supply contracts with its customers. See “- Risk Factors – Risk of Loss of Material Customers” below.

Pillowtex segments its portfolio of brand names by distribution channel to solidify the perceived value of such brands and maintain their integrity. Royal Velvet®, Charisma®, Fieldcrest®, and Royal Family® brand name bed and bath products are distributed primarily through leading department stores, specialty home furnishing stores, and catalog merchants. Cannon® brand name bed and bath products are distributed across a wide variety of distribution channels, while St. Mary’s® brand name bed and bath products are distributed primarily through mass merchants. Pillowtex’s Royal Velvet®, Charisma®, and Cannon® brand names receive national consumer advertising. Pillowtex sells private brands primarily through large chain stores. It also sells a smaller amount of branded products to institutional customers.

Pillowtex’s current international business is concentrated in Canada. However, Pillowtex also sells its products in other foreign markets, including Asia, Australia, Europe, Mexico, and South America. Sales outside the United States accounted for approximately 3% of total sales in 2002, 2% in 2001, and 5% in 2000. During each of the last three years, less than 5% of the Pillowtex’s assets have been located outside the United States. In addition, from time to time, Pillowtex enters into license agreements with third parties to produce and sell products using certain of the Company’s trademarks in foreign markets, including Asia, Australia, Europe, Mexico, South America, and the Middle East. These license agreements require third parties to pay royalties to Pillowtex based upon product sales and generally require payments of minimum annual royalties.

To maximize product exposure and increase sales, Pillowtex works closely with its major customers to assist them in merchandising and promoting Pillowtex’s products to the consumer. In addition to frequent personal consultation with the employees of such customers, Pillowtex meets periodically with the senior management of these customers. Pillowtex assists them in developing joint merchandising programs, new products, product mix strategies, point-of-sale

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concepts, and advertising campaigns specifically tailored to that customer’s needs. Pillowtex also provides its customers merchandising assistance with store layouts, fixture designs, point-of-sale displays, and advertising materials.

Pillowtex’s electronic data interchange system (“EDI”) allows customers to place, and Pillowtex to fill, track, and bill, orders by computer. This system enables Pillowtex to ship products on a “quick response” basis.

Pillowtex sells products under its Charisma® brand name over the Internet at www.charismahome.com and under its Royal Velvet® brand name over the Internet at www.royalvelvet.com. In addition, Pillowtex operates an online outlet store at www.cannonoutlet.com.

Trademarks And License Agreements

Pillowtex manufactures and markets products:

•          under its proprietary Pillowtex-owned trademarks and trade names;

•          under some licensed trademarks and trade names; and

•          under customer-owned private labels.

Pillowtex regards its trademarks and trade names as valuable assets and vigorously protects them against infringement. See “- Risk Factors – Dependence on Specific Brand Names” below. Pillowtex uses trademarks, trade 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.

From time to time, Pillowtex enters into license agreements with third parties for the use of third party trademarks and trade names on products manufactured by Pillowtex. These licenses generally require the payment of royalties based on net sales. Pillowtex currently holds a sublicense from Revman Industries Inc. to manufacture and sell certain Pillowtex products under the Tommy Hilfiger trademark in the United States, Canada, and Mexico. Pillowtex’s sublicense with Revman Industries Inc. expires on December 31, 2003, subject to extension of up to four additional years as provided in the sublicense.

Pillowtex manufactures products for some customers under the customer’s private labels. Products manufactured under customer-owned private labels are marketed by the customer.

Pillowtex occasionally identifies product lines for which it is more advantageous for Pillowtex to license third parties to use its brand names for use in the manufacture and sale of these products. These license agreements require third parties to pay royalties to Pillowtex based upon product sales and generally require payments of minimum annual royalties. In January 1998, Pillowtex entered into a license agreement with Ex-Cell Home Fashions, Inc. whereby Pillowtex granted Ex-Cell an exclusive license to manufacture, sell, and distribute shower curtains and bath accessories under some of Pillowtex’s trademarks and trade names. In January 1999, Pillowtex entered into a license agreement with Bardwil Industries, Inc. under which Pillowtex granted Bardwil an exclusive license to manufacture, sell, and distribute tablecloths and other table-top accessories under some of Pillowtex’s trademarks and trade names.

Product Development

Pillowtex’s product development staff creates and develops products with new or superior performance characteristics in cooperation with various outside sources, including its suppliers and customers. Pillowtex’s ability to develop products responsive to individual customers’ needs is an important competitive advantage. As a result, Pillowtex commits time and resources to identifying new materials, designs, and products from a variety of domestic and international vendors.

Manufacturing And Distribution

General

Pillowtex operates an extensive network of facilities in Texas, Alabama, California, Illinois, Mississippi, New York, North Carolina, Pennsylvania, South Carolina, Virginia, and Toronto, Canada in connection with the manufacture and distribution of Pillowtex’s product lines. This nationwide manufacturing and distribution network enables Pillowtex to ship its products cost effectively to all major cities in North America.

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In addition, Pillowtex operates 18 retail outlet stores that sell certain of Pillowtex’s products directly to customers. These stores sell both first quality merchandise and seconds or “off-goods” at competitive retail prices.

Bed, Bath, and Other Textile Products

Sheets and Other Fashion Bedding. Pillowtex produces bed sheet products at its facilities in Kannapolis, China Grove, Concord and Rockwell, North Carolina, and Union, South Carolina. These facilities provide a full range of Pillowtex’s sheet products for substantially all channels of distribution. Pillowtex spins cotton and synthetic fibers into yarn and weaves the yarn into greige cloth for finishing, dyeing, cutting, and sewing. Pillowtex produces synthetic fill comforters and other decorative bedding products, such as pillow shams and decorative pillows, at its Eden, North Carolina facility. The product is later packaged for shipment to retail customers.

Towels. Pillowtex produces bath towels at its facilities in Alabama, North Carolina, and Virginia. Cotton and synthetic fibers are spun into yarns, and then woven into fabric or greige cloth. The fabric is then finished, dyed, cut, and sewn into finished towel products. Pillowtex’s Fieldale, Virginia facility generally produces the higher quality products for department and specialty stores. The Phenix City, Alabama facility weaves fabric that is then finished in the Kannapolis, North Carolina facility. The Kannapolis, North Carolina facility produces a variety of products for multiple distribution channels.

Bath Rugs. Pillowtex produces bath rugs at its Scottsboro, Alabama facility. Pillowtex punches tufted yarn into fabric and cuts it to a uniform height. Pillowtex then applies a latex coating to the underside of the fabric to hold the fibers. Finally, the product is dyed, cut, and finished.

Kitchen Products. Pillowtex imports kitchen textile products for distribution to various customers.

Other Bedroom Textiles. Pillowtex manufactures other complementary bedroom textile products, such as featherbeds, pillow protectors, decorative pillows, and window treatments, at one or more of the facilities described above.

Pillows and Pads

Bed Pillows. Pillowtex’s facility in Dallas, Texas is one of the largest feather and down processing facilities in North America. Computerized washing and sorting equipment process feather and down. Pillowtex later sorts these products into a variety of mixtures and grades used in manufacturing natural fill pillows and comforters. Pillowtex ships raw materials, along with imported products, to its regional facilities for final assembly and distribution to customers.

Many of Pillowtex’s regional manufacturing facilities produce natural fill and synthetic fill pillows. Pillowtex assembles natural fill pillows by blowing processed feather and down into the pillow shell and sewing the open seam closed. Pillowtex produces synthetic fill pillows on machines known as garnets. Garnets pull, comb, and expand compressed polyester fibers. Once expanded, Pillowtex inserts the fibers into a pillow shell and sews the open seam shut.

Down Comforters. Pillowtex manufactures its line of natural fill comforters at its California, Illinois, Mississippi, Pennsylvania, and Toronto, Canada locations using processed down from the Dallas facility.

Mattress Pads. Pillowtex manufactures mattress pads at the California, Mississippi, and Pennsylvania facilities by two automated methods. The traditional quilt sewing method uses high-speed equipment that sews the top, bottom, and fill material together. The sonic method fuses the top, bottom, and fill material together.

Quality Control Programs

Pillowtex has quality control programs in place to ensure that its products meet quality standards established both internally and by its customers. Pillowtex devotes significant resources to support its quality improvement efforts. Each manufacturing facility has a quality control team that identifies and resolves quality issues. Pillowtex attempts to maintain close contact with customer quality control or other appropriate personnel to ensure that Pillowtex understands the customers’ requirements. Pillowtex also has programs with its major suppliers to ensure the consistency of purchased raw materials by imposing strict standards and materials inspection, and by requiring rapid response to Pillowtex’s complaints.

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Raw Materials And Imports

General

The principal raw materials that Pillowtex uses in manufacturing its various product lines are:

•          cotton;

•          feather and down;

•          synthetic (polyester and acrylic) fibers;

•          yarn; and

•          cotton and polyester-cotton blend fabrics.

A wide variety of sources offer these materials, and Pillowtex currently expects no significant shortage of these materials. Management believes that the Company’s relationships with its suppliers are generally good. See “- Risk Factors – Dependence on Specific Raw Materials” below.

Cotton

Domestic cotton merchants are Pillowtex’s primary source of cotton. Pillowtex uses significant quantities of cotton. To reduce the effect of potential price fluctuations in cotton prices, Pillowtex makes commitments for a portion of its anticipated future purchases of cotton. At December 28, 2002, the Company had $27.0 million in outstanding commitments for future purchases of cotton, pursuant to, in part, contracts that have been assumed in connection with the Chapter 11 Cases. The contracts governing these commitments meet the normal purchases or normal sales exclusion provided for in derivative accounting and, as such, are not accounted for as derivative instruments.

Feathers and Down

Pillowtex imports feather and down from several sources outside the United States. Pillowtex purchases a majority of these products from China, where feather and down are by-products of ducks and geese raised for food. Pillowtex generally purchases feather and down from its suppliers in China on open credit terms without letters of credit. Pillowtex also purchases some feather and down from suppliers in Europe.

Synthetic Fibers

Domestic fiber producers are Pillowtex’s primary source of synthetic fibers. To reduce the effect of potential price fluctuations, Pillowtex makes commitments for a portion of its anticipated future purchases of synthetic fibers.

Yarn

Pillowtex uses significant quantities of yarn in its operations, some of which is produced internally and some of which is purchased from third party suppliers. To reduce the effect of potential fluctuations in price and to ensure a timely supply of quality product, Pillowtex makes commitments for a portion of its anticipated future purchases of yarn. In this regard, Pillowtex has entered into a long-term supply contract with Parkdale America, LLC, one of the nation’s largest yarn suppliers.

Fabric

Pillowtex uses fabric purchased from third parties in the production of pillow shells, comforter covers, and various other products. In addition, Pillowtex imports the majority of its down comforter shells from China and India.

Other

Some of Pillowtex’s stretch-to-fit mattress pads use Lycra® skirting. Because of DuPont’s patent on Lycra®, it is the exclusive supplier of this material. Management believes that the risk that DuPont will cease to manufacture and sell Lycra® is minimal.

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Competition

Pillowtex participates in a highly competitive industry. It competes with a number of established manufacturers, importers, and distributors of home textile furnishings, some of which have greater financial resources than does the Company. Pillowtex competes on the basis of quality, brand names, service, and price.

Government Regulation

Pillowtex must comply with various federal, state, and local environmental laws and regulations governing the discharge, storage, handling, and disposal of various substances. The Company must also comply with federal and state laws and regulations that require certain of its products to bear product content labels containing specified information, including their place of origin and fiber content. In addition, a variety of federal, state, local, and foreign laws and regulations relating to worker safety and health, advertising, importing and exporting, and other general business matters, govern Pillowtex’s operations. Laws and regulations may change, and Pillowtex cannot predict what effect, if any, changes in various laws and regulations might have on its business.

Backlog

A number of factors affect the amount of Pillowtex’s backlog orders at any particular time. These factors include seasonality and scheduling of the manufacturing and shipment of products. In general, Pillowtex’s EDI and “quick response” capabilities have resulted in shortened lead times between submission of purchase orders and delivery and have lowered the level of backlog orders. Consequently, Pillowtex believes that the amount of its backlog is not an appropriate indicator of levels of future sales.

Employees

As of March 14, 2003, Pillowtex had approximately 7,850 employees.

As of March 14, 2003, Pillowtex Corporation and/or certain of its subsidiaries had entered into the following collective bargaining agreements:

As of March 1, 2003, approximately 53% of Pillowtex’s employees covered by collective bargaining agreements had chosen to have union dues deducted from their paychecks.

Pillowtex believes that it generally has good relationships with both its union and non-union employees.

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Risk Factors

Pillowtex and its businesses are subject to a number of risks including those enumerated below. Any or all of such risks could have a material adverse effect on the business, financial condition, results of operations, or prospects of Pillowtex. See also “Cautionary Statement Regarding Forward-Looking Statements” above.

Pillowtex Faces Uncertainty Regarding The Adequacy Of Its Capital Resources And Has Limited Access To Additional Financing

After taking into consideration the range of projections of cash flows from operations, anticipated capital expenditures, debt principal repayment requirements, and anticipated pension plan cash funding payments, the Company believes that the excess availability under the Exit Revolver Facility may drop below $35 million at certain times during the second half of 2003. The Company does not believe that it would be able to comply with the minimum earnings threshold contained in its Exit Revolver Facility, which would become effective in this event. As a result of these factors, coupled with the uncertainties as to the results of future negotiations with the Company’s term loan lenders as to revised financial covenants, the Company can provide no assurances that it will have adequate financial resources to meet its anticipated cash requirements for the second half of 2003 and future periods. If the Company is unable to comply with the minimum earnings threshold contained in the Exit Revolver Facility, the Company would anticipate seeking to obtain appropriate waivers or amendments, but there can be no assurance that the Company would obtain any such waiver or amendment. If an event of default occurs and the Company is unable to obtain appropriate waivers or amendments, the Company’s lenders would be entitled to exercise their remedies under the Company’s respective debt instruments, and the Company would no longer have access to borrowings under the Exit Revolver Facility, its principal source of liquidity. In such event, the Company can provide no assurance that alternative financing would be available on terms acceptable to the Company. If these developments were to occur, the Company would have to consider pursuing appropriate restructuring options, which could include a bankruptcy proceeding.

In the event that the Company’s borrowing base, comprised of a percentage of eligible accounts receivable and eligible inventory after reserves, falls below $200 million and becomes insufficient to support additional borrowing under the Exit Revolver Facility, the borrowers thereunder have the option of borrowing up to a maximum principal amount of $10 million (as part of the overall $200 million commitment) based on the value of certain real property and equipment held as collateral that would be added to the borrowing base. However, since the amount of any such loan is dependent on the appraised value of such real property and equipment at the time the option is exercised by the borrowers, no assurance can be given as to the amount of additional borrowing that would actually be available to the borrowers in such circumstances. In the event that cash flows, together with available borrowings under the Exit Revolver Facility, were not sufficient to meet the Company’s cash requirements, the Company would be required to obtain alternative financing or reduce planned capital expenditures. The Company can provide no assurance that alternative financing would be available on acceptable terms, especially in light of the fact that substantially all of the Company’s existing assets are pledged as collateral for the Exit Term Loan, Exit Revolver Facility, IRB Facilities, and capital lease obligations, or that reductions in planned capital expenditures would be sufficient to cover any cash shortfalls. Accordingly, the Company’s ability to respond to changing business and economic conditions and to secure additional financing, if needed, would be significantly restricted.

The Company is reviewing its strategic alternatives, which may include a sale of the business, sales of assets or restructuring options, which could include a bankruptcy proceeding. The Company has retained Credit Suisse First Boston as its financial advisor to assist it in this review.

Pillowtex Cannot Be Certain That It Will Be Able To Amend The Exit Term Loan

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As further described in note 11 to the Company’s consolidated financial statements included elsewhere in this Annual Report, the Company entered into amendments to the Exit Term Loan, which included a waiver of compliance by the Company with the maximum leverage ratio and minimum interest coverage ratio covenants for the first quarter of fiscal year 2003. The Company anticipates that it will be unable to comply with the covenants, as currently written, at the end of the second quarter of 2003. The Company intends to continue to negotiate with the term loan lenders to amend the financial covenants contained in the Exit Term Loan effective as of the end of the second quarter of 2003 and for future periods; however, the Company can provide no assurances that it will be able to amend the covenants in the Exit Term Loan upon terms that are acceptable to the Company.

A failure to comply with any of the covenants contained in the Exit Term Loan would result in an event of default under the Exit Term Loan. Upon the occurrence of an event of default, the term loan lenders would be entitled to declare all amounts outstanding under the Exit Term Loan, including accrued interest and other obligations, to be immediately due and payable, and the term loan lenders would be entitled to proceed against the collateral granted to them to secure the Exit Term Loan. In these circumstances, cross-defaults could occur under the documents governing the Company’s other outstanding debt. Pursuant to the terms of the Exit Revolver Facility, a default by the Company of the financial covenants set forth in the Exit Term Loan will be deemed an event of default under the Exit Revolver Facility if such default continues for more than sixty (60) days and is not waived in writing by or on behalf of the term loan lenders. If the Company fails to comply with any of the covenants in the Exit Term Loan, the Company would anticipate seeking to obtain appropriate waivers or amendments, but there can be no assurance that Company would be able to obtain any such waiver or amendment. If an event of default occurs and the Company is unable to obtain appropriate waivers or amendments, the Company’s lenders would be entitled to exercise their remedies under the Company’s respective debt instruments, and the Company would no longer have access to borrowings under the Exit Revolver Facility, its principal source of liquidity. In such event, the Company can provide no assurance that alternative financing would be available on terms acceptable to the Company. If these developments were to occur, the Company would have to consider pursuing appropriate restructuring options, which could include a bankruptcy proceeding.

Pillowtex’s Financial Statements Assume That It Will Continue As A “Going Concern” Even Though There Is Substantial Doubt In This Regard

Pillowtex’s consolidated financial statements included elsewhere in this Annual Report have been prepared assuming Pillowtex will continue as a “going concern.” Continuing adverse conditions in the general economic environment, the effect of those conditions on the retail industry through which the Company sells a substantial portion of its products, and intense domestic and foreign competition have had a negative impact on the Company’s cash flows and results from operations and therefore on its ability to comply with certain financial covenants previously established by its revolver and term loan lenders. Because of the uncertainties as to the results of future negotiations with the Company’s revolver and term loan lenders as to revised financial covenants and therefore as to the adequacy of the Company’s financial resources to meet its anticipated cash requirements for the second half of 2003 and future periods (such uncertainties being more fully discussed under “ – Pillowtex Faces Uncertainty Regarding The Adequacy Of Its Capital Resources And Has Limited Access To Additional Financing” above), there is substantial doubt about Pillowtex’s ability to continue as a “going concern.” The continuation of the Company as a “going concern” is dependent upon, among other things, Pillowtex’s ability to comply with the terms of the Exit Revolver Facility and the Exit Term Loan and Pillowtex’s ability to generate sufficient cash from operations and financing arrangements to meet its obligations. If the “going concern” basis was not appropriate for Pillowtex’s consolidated financial statements, then significant adjustments might be necessary in the carrying value of assets and liabilities, the revenues and expenses reported, and the balance sheet classifications used.

Pillowtex Is Subject To Restrictions On The Conduct Of Its Business

Both the Exit Term Loan and the Exit Revolver Facility contain a number of negative covenants, which restrict, among other things, Pillowtex’s ability to incur additional debt, pay dividends or make other restricted payments, sell stock of Pillowtex or any of its subsidiaries, grant liens, make loans, advances, and investments, engage in transactions with affiliates, dispose of assets, effect mergers, consolidations, and dissolutions, prepay and refinance debt, and make certain changes in its business. In addition, the Exit Revolver Facility also establishes a minimum earnings threshold that applies at any time excess availability is less than $35 million and the Exit Term Loan contains certain financial covenants (see note 11 to the Company’s consolidated financial statements included elsewhere in this Annual Report).

As a result of the restrictions described above, the ability of the Company to respond to changing business and economic conditions may be significantly restricted, and the Company may be prevented from engaging in transactions that might otherwise be considered beneficial.

Pillowtex Is Prohibited From Paying Dividends On Its Common Stock For The Foreseeable Future

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The Exit Revolver Facility and the Exit Term Loan currently prohibit Pillowtex from paying dividends to or making other distributions to holders of its Common Stock. Accordingly, Pillowtex does not anticipate paying dividends on its Common Stock for the foreseeable future.

Dependence On Specific Raw Materials

Cotton is the primary raw material used in the Company’s businesses. The availability of cotton is subject to weather conditions and other factors affecting agricultural markets. Historically, there have been periods of rapid and significant movement in the price of cotton both upward and downward. Other raw materials on which the Company is dependent include the raw feathers and down that it uses to produce natural fill pillows and down comforters. China is currently the Company’s primary source of raw feathers and down. See “— Dependence on Supply Sources in China.”

The raw materials used by the Company are generally available from a number of sources. No significant shortage of these materials is currently anticipated. However, the Company uses significant quantities of these raw materials, which are subject to price fluctuations. The Company cannot be certain that shortages of these materials will not occur in the future, which could increase the cost or delay the shipment of its products. Moreover, the Company cannot be certain that it will be able to pass on any increase in the price of raw materials to its customers.

Relationships with Suppliers and Vendors

Pillowtex may have difficulty in maintaining existing or creating new relationships with suppliers or vendors as a result of its financial condition. In the event that the Company was to default under the Exit Revolver Facility or the Exit Term Loan and, at the time of such default, alternative financing was not available, Pillowtex’s suppliers and vendors might stop providing supplies or services to Pillowtex or provide such supplies or services only on “cash on delivery,” “cash on order,” or other terms that could have an adverse impact on Pillowtex’s short-term cash flow.

Dependence on Supply Sources in China

In fiscal year 2002, based on cost, approximately 85% of the raw feathers and down that Pillowtex used to produce natural fill pillows and down comforters was imported from China. Pillowtex’s relationships with its suppliers in China could be disrupted or adversely affected due to a number of factors, including governmental regulation, fluctuation in exchange rates, and changes in economic and political conditions in China. If Pillowtex’s supply sources in China were disrupted for any reason, Pillowtex believes, based on existing market conditions, that it could establish alternative supply relationships. However, because establishing these relationships involves numerous uncertainties relating to delivery requirements, price, payment terms, quality control, and other matters, Pillowtex is unable to predict whether such relationships would be on satisfactory terms.

Industry Competition

The Company participates in a highly competitive industry. It competes with a number of established manufacturers, importers, and distributors of home textile furnishings, some of which have greater financial, distribution and marketing resources than the Company. It is important that the Company remains competitive in the areas of quality, price, selection and convenience, as failure to do so could result in the reduction of the price at which the Company sells its products. If the Company is unable to compete effectively, it may lose market share.

Imports of foreign-made textile products are a significant source of competition for most sectors of the domestic textile industry. The United States has attempted to regulate the growth of certain textile imports through tariffs and bilateral agreements, which establish quotas on imports from lesser-developed countries that historically account for significant shares of United States imports. The General Agreement on Tariffs and Trade (“GATT”) may have a negative effect on the domestic textile industry and the Company. The World Trade Organization is coordinating the phase-out of textile quotas over a 10-year period through 2004. The 10-year phase-out of quotas will replace the existing system of bilateral import restrictions and revert to GATT rules that prohibit quotas to gradually allow more imports to enter the United States. In addition, under GATT, the United States is obligated to lower its tariffs on imports of textiles. These reductions are being phased in gradually over the 10-year period through 2004. If there is a significant influx of imports, there may be intense price competition, which could adversely affect the Company’s business. The United States has agreed to a new round of multilateral trade negotiations. Those negotiations, which are scheduled to conclude within three years, could result in additional tariff reductions on imports of textile products. Any such further reductions in tariffs could have an adverse affect on the Company’s results of operations.

Adverse Retail Industry Conditions

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The Company sells its products to a number of department stores and other major retailers that have experienced financial difficulties during past years. Some of these retailers have previously sought protection under the Bankruptcy Code. In addition, some of the Company’s current retail customers may seek protection under the Bankruptcy Code or state insolvency laws in the future. As a result of these financial difficulties and bankruptcy and insolvency proceedings, the Company may be unable to collect some or all amounts owed to it by these retail customers. In addition, all or part of the operations of a retail customer that seeks bankruptcy or other debtor protection may be discontinued, or sales of the Company’s products to the customer may be curtailed or terminated as a result of bankruptcy or insolvency proceedings. There can be no assurance that the Company will not be adversely affected by retail industry conditions.

Dependence On Specific Brand Names

In fiscal year 2002, sales of products bearing Pillowtex’s principal proprietary brand names of Royal Velvet®, Cannon®, Charisma®, Royal Velvet Big & Soft®, Fieldcrest®, Royal Family®, and St. Mary’s® made up a substantial portion of its net sales. Accordingly, the Company’s future success may depend in part upon the goodwill associated with these brand names.

Pillowtex’s principal brand names are registered in the United States and certain foreign countries. However, Pillowtex cannot be certain that the steps taken by it to protect its proprietary rights in such brand names will be adequate to prevent their misappropriation in the United States or abroad. In addition, the laws of some foreign countries do not protect proprietary rights in brand names to the same extent as the laws of the United States.

Risk Of Loss Of Material Customers

In fiscal year 2002, the Company’s top ten customers accounted for approximately 71% of its total net sales. Net sales to Wal-Mart and its affiliated entity, Sam’s Club stores, accounted for approximately 23% and 5%, respectively, of the Company’s total net sales in 2002. Other than Wal-Mart, no customer accounted for 10% or more of the Company’s total net sales during this period. Consistent with industry practice, Pillowtex does not operate under a long-term written supply contract with Wal-Mart or any of its other customers. The loss of Wal-Mart or another large customer could have a materially adverse effect on the Company’s business, financial condition, results of operations, or prospects.

Labor Relations

As of March 14, 2003, Pillowtex had approximately 7,850 employees. As of that date, approximately 76% of Pillowtex’s employees were in areas covered by collective bargaining agreements, and approximately 53% of those employees had chosen to have union dues deducted from their pay checks. Pillowtex believes that it generally has good relationships with both its union and non-union employees; however, a work stoppage could occur as a result of disputes under the Company’s existing collective bargaining agreements with labor unions or in connection with negotiations of new collective bargaining agreements which, if protracted, could substantially adversely affect the Company’s business and results of operations.

Seasonality of Business

Pillowtex’s business is subject to a pattern of seasonal fluctuation. Sales and earnings from operations generated during the second half of a given fiscal year generally are expected to be higher than sales and earnings from operations generated during the first half of the year. Accordingly, the need for working capital generally is expected to increase in the second half of the year. As a result, total debt levels generally tend to peak in the third and fourth quarters, falling off again in the first quarter of the following year. The amount of sales generated during the second half of the year generally will depend upon a number of factors, including the level of retail sales for home textile furnishings during the fall and winter, weather conditions affecting the sales of down comforters, general economic conditions, and other factors beyond Pillowtex’s control. The seasonality of the business may impact the results of operations achieved by Pillowtex.

Pillowtex May Have Difficulty Attracting And Retaining Personnel

Pillowtex believes that its future success will be highly dependent upon its ability to attract and retain skilled managers and other personnel. No assurance can be given that Pillowtex will not have difficulty attracting and retaining such personnel in the future.

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ITEM 2.         PROPERTIES

The following table summarizes certain information concerning certain of the facilities used by Pillowtex in connection with the manufacture and distribution of its product lines:

In addition to the locations listed above, Pillowtex maintains warehousing and distribution centers in the states where its manufacturing facilities are located. It also maintains approximately 23 retail outlets and small sales and marketing offices in other states. Pillowtex also owns various other properties, both developed and undeveloped, which are unrelated to its manufacturing operations. Fieldcrest Cannon acquired these properties throughout the years for investment or as part of specific acquisitions. Pillowtex has listed some of these properties for sale and has leased others to third parties. Substantially all of Pillowtex’s assets are pledged as collateral for borrowings under its credit facilities and capital lease obligations.

Pillowtex believes that its facilities are generally well maintained, in good operating condition, and adequate for its current needs.

ITEM 3.         LEGAL PROCEEDINGS

The discussion of the Chapter 11 Cases set forth in “Item 1. Business – Proceedings Under Chapter 11 of the Bankruptcy Code” is incorporated herein by this reference.

In addition, Pillowtex is involved in various claims and lawsuits incidental to its business; however, the outcome of such suits is not expected to have a material adverse effect on the Company’s financial position or its results of operations.

ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5.         MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Since the Effective Date, the Company’s common stock, par value $0.01 per share (“Common Stock”), has been trading on the over-the-counter electronic bulletin board (the “OTCBB”) under the symbol “PWTX.OB.” The following table sets forth for the periods indicated the high and low reported bid prices on the OTCBB of the Common Stock:

The quotations reflect inter-dealer prices without retail mark-up, markdown, or commission and may not represent actual transactions.

As of March 20, 2003, Pillowtex had approximately 865 holders of record of Common Stock.

Pillowtex paid no dividends on the Common Stock during fiscal year 2002. Under the terms of the Exit Revolver Facility and the Exit Term Loan, Pillowtex is prohibited from paying dividends on the Common Stock. See “Item 1. Business - Risk Factors - Pillowtex Is Subject To Restrictions On The Conduct Of Its Business.” Accordingly, Pillowtex does not expect to pay any further dividends on the Common Stock.

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ITEM 6.         SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA
(In thousands of dollars, except per share data)

The selected financial data presented below are derived from Pillowtex’s consolidated financial statements for the seven months ended December 28, 2002, the five months ended June 1, 2002, and the fiscal years ended 2001, 2000, 1999 and 1998. The data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and related notes included elsewhere in this Annual Report.

The Debtors emerged from their chapter 11 bankruptcy proceedings on May 24, 2002. However, for financial reporting purposes, the Company deemed the Effective Date of the Plan to have occurred on June 1, 2002. Fresh start reporting has been implemented as of June 1, 2002, and accordingly, at such date all assets and liabilities were restated to reflect their respective fair values. See note 1 to the Company’s consolidated financial statements included elsewhere in this Annual Report for a discussion of the fresh start adjustments. For financial reporting purposes, references to “Predecessor” refer to Old Pillowtex and its subsidiaries on and prior to May 24, 2002 and Pillowtex and its subsidiaries from May 24, 2002 through June 1, 2002, and references to “Successor” refer to Pillowtex and its subsidiaries on and after June 1, 2002, after giving effect to the implementation of fresh start reporting. Successor consolidated financial statements are not comparable to Predecessor consolidated financial statements.

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   (1)    Amounts set forth in 1998 reflect the inclusion of Leshner from July 28, 1998.

   (2)    Amounts paid to customers for co-operative advertising and marketing were classified as a reduction to net sales beginning on December 30, 2001. Prior to fiscal 2002, these amounts were classified in selling, general, and administrative expenses. Approximately $19.2 million, $24.2 million, $19.8 million and $18.9 million have been reclassified from selling, general, and administrative expenses as a reduction in net sales in the fiscal years ended 2001, 2000, 1999 and 1998, respectively, to conform to the 2002 presentation.

   (3)    Includes long-term debt of $213.2 million at December 28, 2002 classified as current pursuant to EITF No. 86-30 (see Note 11 to the Company’s consolidated financial statements included elsewhere in this Annual Report), and long-term debt in default of $671.8 million in 2001 and $694.0 million in 2000.

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ITEM 7.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Pillowtex is one of the largest North American designers, manufacturers, and marketers of home textile products. Pillowtex manufactures and markets home textile furnishings for the bedroom, bathroom, and kitchen. Pillowtex operates a network of manufacturing, purchasing, and distribution facilities in the United States and Canada with approximately 7,850 employees. Pillowtex markets its products to mass merchants, department stores, and specialty retailers, as well as wholesale clubs, catalog merchants, institutional distributors, and international customers, and over the Internet.

The Company is organized into two major manufacturing divisions that it considers operating segments: Bed and Bath Division and Pillow and Pad Division. The Bed and Bath Division manufactures and sells sheets and other fashion bedding, towels, bath rugs, and kitchen products. The Pillow and Pad Division manufactures and sells bed pillows, down comforters, and mattress pads.

Pillowtex’s consolidated financial statements included elsewhere in this Annual Report have been prepared assuming Pillowtex will continue as a “going concern.” Continuing adverse conditions in the general economic environment, the effect of those conditions on the retail industry through which the Company sells a substantial portion of its products, and intense domestic and foreign competition have had a negative impact on the Company’s cash flows and results from operations and therefore on its ability to comply with certain financial covenants previously established by its revolver and term loan lenders. Because of the uncertainties as to the results of future negotiations with the Company’s revolver and term loan lenders as to revised financial covenants and therefore as to the adequacy of the Company’s financial resources to meet its anticipated cash requirements for the second half of 2003 and future periods (such uncertainties being more fully discussed under “- Adequacy of Capital Resources” below), there is substantial doubt about Pillowtex’s ability to continue as a “going concern.” The continuation of the Company as a “going concern” is dependent upon, among other things, Pillowtex’s ability to comply with the terms of the Exit Revolver Facility and the Exit Term Loan and Pillowtex’s ability to generate sufficient cash from operations and financing arrangements to meet its obligations. If the “going concern” basis was not appropriate for Pillowtex’s consolidated financial statements, then significant adjustments might be necessary in the carrying value of assets and liabilities, the revenues and expenses reported, and the balance sheet classifications used.

The Company is reviewing its strategic alternatives, which may include a sale of the business, sales of assets or restructuring options, which could include a bankruptcy proceeding. The Company has retained Credit Suisse First Boston as its financial advisor to assist it in this review.

Chapter 11 Proceedings and Reorganization

On November 14, 2000, Pillowtex Corporation and substantially all of its domestic subsidiaries filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code. The Chapter 11 Cases were jointly administered for procedural purposes. From the Petition Date until May 24, 2002, the Debtors operated their business as debtors-in-possession pursuant to the Bankruptcy Code. On May 24, 2002, the Plan became effective and the Debtors successfully emerged from their chapter 11 bankruptcy proceedings. For further discussion of the Chapter 11 Cases, see “Item 1. Business – Chapter 11 Proceedings and Reorganization” above and the notes to the Company’s consolidated financial statements included elsewhere in this Annual Report.

Critical Accounting Policies

Management considers certain accounting policies related to sales returns and allowances, allowance for doubtful accounts, inventory, sales incentive programs, self-insured employee medical and workers’ compensation claims costs, pension and postretirement benefit obligations, impairment of long-lived assets, and deferred income taxes to be “critical” because they have a significant impact in portraying the Company’s financial condition and results of operations and require management’s most difficult, subjective, and complex judgments due to the need to make estimates about the effects of matters that are inherently uncertain.

Sales returns and allowances require management to estimate the eventual expense of all returns and other sales allowances for products shipped and recorded in net sales each period. Management bases its estimate of the expense to be recorded each period on historical returns and allowance levels. Management does not believe the likelihood is significant that materially higher deduction levels will result given its experience with the sales and returns deduction activities of its customers in the past few years.

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The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. The Company has trade receivables which are due from certain customers that are experiencing financial difficulties. At December 28, 2002, a reserve of $1.9 million was recorded and included as an allowance against trade accounts receivable. Management believes that the allowance is adequate to cover potential losses resulting from uncollectible accounts and deductions resulting from sales returns and allowances.

Inventory requires management to estimate the net realizable value of the Company’s obsolete and slow moving inventory at the end of each period. Management bases its net realizable value estimate on the actual proceeds received for similar inventory items in the most recent three-month period in the Company’s Bed and Bath Division and a review of the age of inventory on hand in its Pillow and Pad Division. The Company’s determination of the net realizable value of inventory assumes that approximately 35% of the cost of obsolete and slow moving inventory is recovered. Based on experiences in the past few years with selling obsolete and slow moving inventory to various promotional and alternative markets, management does not believe the likelihood is significant that materially higher inventory write-downs due to obsolescence are required.

The Company’s sales incentive programs require management to estimate the eventual expense to be incurred for the various discount, rebate and other incentive allowances employed by the Company to promote and maintain its product lines. Management bases its estimate of the expense to be recorded each period on the agreements established from time to time with customers, commitments made by sales personnel and industry practice. As the cost of certain types of sales incentive programs is dependent upon a detailed analysis of a customers’ sales activity, the exact amount required to be expensed in a period has to be estimated by management initially based on historical levels. Management does not believe the likelihood is significant that materially higher sales incentive expense levels will result given its experience with such costs.

The Company self-insures for the majority of its employee medical costs and is insured for its workers’compensation costs with a $250,000 per occurrence deductible. As a result management, with assistance from its actuarial advisors, must estimate the required accrual for these costs at each period end. The Company is responsible for the cost of all employee medical claims up to $300,000 per occurrence. An insurance policy has been acquired to reimburse the Company for the cost of all employee medical claims in excess of $300,000 per occurrence. The year-end accrual for the cost of workers' compensation and employee medical costs is based on historical claims experience. The Company’s actuarial advisors review historical claims levels and development factors, along with industry cost trends to provide management with an estimate of costs yet to be paid for claims incurred prior to the period end. Management determines the most likely year-end accrual required by selecting a value that is consistent with the methods used in prior periods. Management does not believe the likelihood is significant that materially higher insurance expense levels will result given its experience with such costs.

The Company’s calculations of pension and postretirement benefit obligations are dependent on assumptions, including discount rates, expected return on plan assets, interest costs, benefits earned, mortality rates, and other factors. Actual results that differ from assumptions are accumulated and amortized over future periods and therefore generally affect recognized expense and the recorded obligation in future periods. While management believes that the assumptions used are reasonable, differences in actual experience or changes in assumptions may materially affect the Company’s pension and postretirement benefit obligations and future expense. See “- Liquidity and Capital Resources – Pension Plans” below and notes 9 and 10 to the Company’s consolidated financial statements included elsewhere in this Annual Report for more information.

If the assumptions made by management in estimating sales returns and allowances, inventory obsolescence, sales incentive programs, self-insured employee medical costs and workers’ compensation costs, and pension and postretirement benefit obligations do not reflect the actual expenses to be incurred, net sales and loss from operations could be significantly impacted.

When management determines that a long-lived asset has been impaired, an estimate of the fair value of the asset is required. The methodology used to determine fair value depends on whether the asset will continue to be used in the business or will be sold. Assets held for sale are recorded at their estimated fair values. Management bases its estimate of fair value on available information from the sale of similar assets in similar locations and appraisals as well as economic conditions. Given the significant number of recent plant closures in the textile industry in the geographic areas where the Company operates, the likelihood is remote that historical sales levels will be achieved, and management attempts to take this into consideration when determining fair values. Management continually reviews its fair value estimates and records further impairment charges for assets held for sale when management determines, based on new and reliable information, that such charges are appropriate. At December 28, 2002, the Company had $17.4 million in assets held for sale, of which $12.0 million relates to real property and $5.4 million relates to machinery and equipment. While management has exercised its good faith business judgment in determining such amounts, based on the fluctuations in fair values for transactions completed

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in 2002 and 2001 and the adjustments recorded during fiscal 2002 and 2001, management believes that it is reasonably possible that the Company will not fully recover these balances and that additional impairment charges may be required in subsequent periods.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company expects the deferred tax assets, net of the valuation allowance, at December 28, 2002 to be realized as a result of the reversal of existing taxable temporary differences.

Fresh Start Reporting and Factors Affecting Comparability of Financial Information

The Debtors emerged from their chapter 11 bankruptcy proceedings on May 24, 2002. However, for financial reporting purposes, the Company deemed the Effective Date of the Plan to have occurred on June 1, 2002. Fresh start reporting has been implemented as of June 1, 2002, and accordingly, at such date all assets and liabilities were restated to reflect their respective fair values. The fresh start adjustments were based upon the work of outside appraisers, actuaries, and financial consultants, as well as internal valuation estimates using discounted cash flow analyses, to determine the relative fair values of the assets and liabilities of the Company. See note 1 to the Company’s consolidated financial statements included elsewhere in this Annual Report for a discussion of the fresh start adjustments. For financial reporting purposes, references to “Predecessor” refer to Old Pillowtex and its subsidiaries on and prior to May 24, 2002 and Pillowtex and its subsidiaries from May 24, 2002 through June 1, 2002, and references to “Successor” refer to Pillowtex and its subsidiaries on and after June 1, 2002, after giving effect to the implementation of fresh start reporting. Successor consolidated financial statements are not comparable to Predecessor consolidated financial statements. However, for purposes of discussion of the results of operations, the seven months ended December 28, 2002 (Successor) have been combined with the five months ended June 1, 2002 (Predecessor) and compared with the fiscal year ended December 29, 2001 (Predecessor).

Results of Operations

Amounts paid to customers for co-operative advertising and marketing were classified as a reduction to net sales beginning on December 30, 2001. Prior to fiscal 2002, these amounts were classified in selling, general, and administrative expenses. Approximately $19.2 million and $24.2 million have been reclassified from selling, general, and administrative expenses as a reduction to net sales in the years ended December 29, 2001 and December 30, 2000, respectively, to conform to the 2002 presentation.

The following table shows the combined 2002 periods in comparison to the corresponding 2001 and 2000 periods (dollars in thousands):

The operating results of the Company’s segments are disclosed in note 19 to the Company’s consolidated financial statements included elsewhere in this Annual Report.

Twelve Months Ended December 28, 2002 Compared to Fiscal Year 2001

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Net Sales. Net sales were down from $1,011.9 million in 2001 to $934.9 million in 2002, a decrease of $77.0 million or 7.6%. Approximately $31 million of the decrease is attributable to the expiration of a Ralph Lauren licensing agreement on June 30, 2001. Fiscal year 2001 also included approximately $29 million in sales relating to a one-time inventory liquidation. A charge had been taken in December 2000 to reduce certain inventories to net realizable value. The remaining decrease is due to lower selling prices and lower sales volume caused by increased competitive pressures from both domestic and international competitors and a weaker than expected retail environment. The Company anticipates that the difficult competitive environment and slowdown in retail sales will continue to adversely affect net sales for the foreseeable future.

Gross Profit. Gross profit increased $23.3 million from $19.3 million in 2001 to $42.6 million in 2002. Gross margin increased to 4.6% in 2002, compared to 1.9% in 2001. The increase is due in part to lower depreciation expense resulting from a revaluation of fixed assets performed in conjunction with fresh start reporting and reduced operating lease costs due to the Company’s emergence from its chapter 11 bankruptcy proceedings in May 2002. The gross profit increase experienced in 2002 is also attributable to lower overhead costs resulting from a manufacturing rationalization plan and reduced material costs and natural gas prices. These savings have been partially offset by operating inefficiencies experienced due to the relocation of certain manufacturing operations required by facility closures. During 2002, the towel finishing operations in Columbus, Georgia and Phenix City, Alabama and the Pillow and Pad automated sewing line facility in Dallas, Texas were closed. The operations at these facilities were either transferred to existing facilities or sourced from other vendors. While the Company has experienced improvements in gross profit in comparison to the prior year periods, the Company anticipates that it will continue to experience selling price pressure, which will adversely impact operating results for the foreseeable future.

Selling, General, and Administrative (“SG&A”) Expenses. SG&A expenses increased $0.2 million from $73.1 million in 2001 to $73.3 million in 2002. The increase in SG&A expenses is primarily due to costs associated with a national advertising campaign and approximately $6 million of non-recurring costs related to executive management changes that took place during 2002. These increases have been partially offset by lower depreciation expense due to the revaluation of fixed assets in conjunction with fresh start reporting and lower amortization expense due to the adoption of SFAS No. 142. SFAS No. 142 was adopted on December 30, 2001 and requires that goodwill and intangible assets with indefinite lives no longer be amortized. As a result, no amortization on its goodwill and trademarks has been recorded during 2002, which reduced SG&A expenses by $6.3 million. SG&A expenses in 2002 were also partially offset by a $2.2 million gain recognized on the termination of an excess benefit plan provided for certain employees and former employees.

Impairment of Long-lived Assets. A charge for impairment of long-lived assets of $32.3 million was incurred during 2002 primarily related to assets located at the Columbus, Georgia and Phenix City, Alabama facilities. The charge consists of $9.8 million for real property and $22.5 million for machinery and equipment. During 2001, charges for impairment of long-lived assets of $41.0 million were incurred primarily for facilities closed in 2001. The 2001 charge includes $36.5 million related to real property and equipment at facilities closed during 2001 and $4.5 million related to assets held for sale. During 2001, the Company announced the closure of facilities in Hawkinsville, Georgia; Rocky Mount, North Carolina; Kannapolis, North Carolina; Columbus, Georgia; Phenix City, Alabama; Tarboro, North Carolina; and Toronto, Canada.

Restructuring Charges. During 2002, facilities at Columbus, Georgia; Phenix City, Alabama; Dallas, Texas; and Macon, Georgia were closed, affecting approximately 1,225 employees. In addition, approximately 60 administrative positions were eliminated during 2002. The total restructuring charges for severance and related benefits associated with these actions were $5.4 million. During 2001, the Company incurred $10.8 million in restructuring charges, of which $6.5 million relates to severance and related benefits associated with employees terminated at the closed facilities discussed above. In addition to the facility closures, the Company implemented an enhanced early retirement plan for certain salaried employees in 2001. The Company also undertook a reduction in force among its salaried employees. The charge associated with the 2001 early retirement plan and reduction in force was $4.3 million.

Interest and Other Expense. Interest and other expense decreased $36.3 million from $64.7 million in 2001 to $28.4 million in 2002. The decrease is primarily due to a decrease in the amount of debt outstanding due to the Company’s emergence from its chapter 11 bankruptcy proceedings in May 2002. The outstanding debt balance decreased $435.6 million from $672.8 million (excluding liabilities subject to compromise for which no interest expense was recorded) as of December 29, 2001 to $237.2 million as of December 28, 2002. In addition, the average interest rate decreased from 7.8% for 2001 to 6.0% for 2002.

Reorganization Items. A gain of $398.7 million was recognized in 2002. The gain was due to the gain

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recognized on the cancellation of pre-petition liabilities upon emergence, offset by fresh start adjustments and costs associated with the Chapter 11 Cases.

Fiscal Year 2001 Compared to Fiscal Year 2000

Net Sales. Net sales were down from $1,234.8 million in 2000 to $1,011.9 million in 2001, a decrease of $222.9 million or 18.1%. Approximately $86 million of the decrease was attributable to the loss of a specific customer in August 2000, which affected the Company’s two major divisions. In addition, the Company’s license agreement with Ralph Lauren, which expired on June 30, 2001, contributed approximately $23 million to the sales decrease experienced in 2001. Excluding the impact of these decreases, net sales decreased 9.2% in 2001 as compared to 2000. This decrease was due to the continued slowdown in the United States economy and increased competition from imports.

Gross Profit. Gross profit increased $7.1 million from $12.2 million in 2000 to $19.3 million in 2001. During the fourth quarter of 2000, the Company recorded a charge for inventory write-downs of $49.5 million to reduce certain inventories to net realizable value. This charge resulted from a number of factors, including a slowdown in the retail environment and increased pressure due to the filing of the Chapter 11 Cases to liquidate excess, obsolete, and distressed inventory in a shorter time frame than in the past.

Gross margin decreased to 1.9% in 2001, compared to 5.0% in 2000, excluding the inventory write-downs in 2000. The decrease was due to the decline in sales volume, increased unabsorbed overhead costs due to inventory reduction initiatives, increased levels of customer deductions, and lower selling prices.

Selling, General, and Administrative (“SG&A”) Expense. SG&A expense in 2001 decreased $29.1 million from $102.2 million in 2000 to $73.1 million in 2000. The decrease was primarily the result of management’s continued focus on cost controls, particularly in travel, salaries, and general fees and services. In addition, SG&A expense in 2000 included severance payments to the Company’s former chief executive officer and higher bad debt expense resulting from the deteriorating creditworthiness of certain of the Company’s customers.

Impairment of Long-Lived Assets. The Company incurred charges for impairment of long-lived assets of $41.0 million in 2001, compared to $24.4 million in 2000. The 2001 charge includes $36.5 million related to real property and equipment at facilities closed during 2001 and $4.5 million related to assets held for sale. During 2001, the Company announced the closure of facilities in Hawkinsville, Georgia; Rocky Mount, North Carolina; Kannapolis, North Carolina; Columbus, Georgia; Phenix City, Alabama; Tarboro, North Carolina; and Toronto, Canada. The 2000 charge includes $4.6 million related to real property and $19.8 million related to equipment and miscellaneous corporate assets.

The impairment of the manufacturing facilities and equipment resulted from management’s rationalization of production capacity in connection with filing of the Chapter 11 Cases. The impairment reflected management’s estimate of the fair value of the assets as determined by the present value of expected future cash flows to be generated by the assets, including their ultimate disposition.

Restructuring Charges. During 2001, the Company incurred $10.8 million in restructuring charges, of which $6.5 million relates to severance and related benefits associated with employees terminated at the closed facilities discussed above. In addition to the facility closures, the Company implemented an enhanced early retirement plan for certain salaried employees. The Company also undertook a reduction in force among its salaried employees. The charge associated with the early retirement plan and reduction in force was $4.3 million. These actions were undertaken in an effort to reduce manufacturing capacity and lower costs.

Interest and Other Expense. Interest and other expense decreased $42.4 million to $64.7 million in 2001, compared to $107.1 million in 2000. The primary reason for the overall decrease in 2001 resulted from the Company’s filing of the Chapter 11 Cases, which enabled the Company to cease the payment and accrual of interest on all unsecured debt, partially offset by other financing costs. The interest on such unsecured pre-petition debt was approximately $34.3 million in 2001 and $4.0 million in 2000. In addition, the average interest rates on the Company’s debt decreased in comparison to 2000. The average interest rate in 2001 was 7.8%, compared to 10.1% in 2000.

Reorganization Items. During 2001, the Company incurred $31.4 million of reorganization items associated with the Chapter 11 Cases. The charge consists of $17.1 million of fees payable to professionals retained to assist with the Chapter 11 Cases, $10.3 million for rejected contracts and leases, and $5.4 million for a key employee retention program for the Company’s management team and other key employees, offset by net interest income of $1.4 million.

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During 2000, Pillowtex incurred $19.4 million of reorganization items. The charge consists of $17.6 million related to the non-cash write-off of the unamortized discount on the Fieldcrest Cannon, Inc. 6% Convertible Subordinated Debentures due 2012 (the “6% Convertible Debentures”) and the non-cash write-off of deferred financing costs associated with other unsecured debt classified as subject to compromise. In addition, the Company incurred $1.8 million in fees payable to professionals retained to assist with the Chapter 11 Cases.

Loss from Discontinued Operations. The loss from operations of the Blanket Division (which the Company sold in September 2001) was $18.3 million in 2001, compared to $115.0 million in 2000. The 2000 loss includes a charge of $88.3 million for impairment of long-lived assets, consisting of $50.0 million related to real property and equipment and $38.3 million related to goodwill, and a charge for inventory write-downs of $19.7 million. These charges were incurred to reflect the Blanket Division at its net realizable value. The loss on disposal of the Blanket Division incurred in 2001 was $3.0 million.

Liquidity and Capital Resources

Exit Revolver Facility

The Company entered into the Exit Revolver Facility on the Effective Date. The Exit Revolver Facility is a three-year $200 million senior secured asset-based non-amortizing revolving credit facility, including a $60 million letter of credit sub-facility. Pillowtex Corporation and certain of its domestic subsidiaries are borrowers under the Exit Revolver Facility, and Pillowtex Corporation’s other domestic and Canadian subsidiaries are guarantors thereunder. The availability of borrowings under the Exit Revolver Facility generally is based on a percentage of eligible accounts receivable and eligible inventory, subject to certain reserves that can be established by the lender. In addition, the borrowers may, at their option, borrow up to a maximum principal amount of $10 million as part of the $200 million facility based on the value of certain real property and equipment held as collateral that would be added to the borrowing base. Any such loan would be partially amortized over the remaining term of the Exit Revolver Facility. The Exit Revolver Facility is secured by a pledge of the stock of the subsidiaries, a first priority lien on the accounts receivable, inventory, and trademarks, as well as certain real property and equipment, of the borrowers and guarantors, and a second priority lien on the primary collateral that secures the Exit Term Loan.

All borrowings under the Exit Revolver Facility bear interest at an annual rate equal to, at Pillowtex’s option, the lender’s prime rate or the prevailing adjusted Eurodollar rate, in either case plus a specified margin determined based on the amount of excess availability and the Company’s leverage ratio. The average interest rate on the Exit Revolver Facility was 4.6% for the seven months ended December 28, 2002. The Exit Revolver Facility includes an unused commitment fee of either 3/8% or 1/2% per annum (depending on excess availability and the leverage ratio), a servicing fee of $5,000 per month, a letter of credit fee of 2 1/2% per annum on the daily outstanding balance of letters of credit issued under the Exit Revolver Facility, an early termination fee in an amount equal to 1/2% of the amount of the maximum credit if the Exit Revolver Facility is terminated in whole prior to its maturity, and a reduction fee in an amount equal to 1/2% of the reduction of the maximum credit if the Company reduces the maximum credit in part at the time of any such reduction.

The Exit Revolver Facility contains a number of negative covenants, which restrict, among other things, Pillowtex’s ability to incur additional debt, pay dividends or make other restricted payments, sell stock of Pillowtex or any of its subsidiaries, grant liens, make loans, advances, and investments, engage in transactions with affiliates, dispose of assets, effect mergers, consolidations, and dissolutions, prepay and refinance debt, and make certain changes in its business. The Exit Revolver Facility also establishes a minimum earnings threshold that applies at any time excess availability is less than $35 million. See “- Adequacy of Capital Resources” below.

As of December 28, 2002, $96.6 million was outstanding under the Exit Revolver Facility and outstanding letters of credit under the Exit Revolver Facility aggregated $27.0 million. Availability as of March 15, 2003 was $62.7 million.

Exit Term Loan

On the Effective Date, Pillowtex also entered into the Exit Term Loan, a $150 million senior five-year term loan secured by a first priority lien on certain real estate, plant, and equipment and a second priority lien on the primary collateral that secures the Exit Revolver Facility. The Exit Term Loan was entered into by Pillowtex in exchange for cancellation of designated post-petition loans having an aggregate principal amount of $150 million

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which were made to Old Pillowtex, and accordingly, Pillowtex obtained no new funds from the Exit Term Loan. Pillowtex Corporation is the borrower under the Exit Term Loan and substantially all of its subsidiaries are guarantors thereunder.

The Exit Term Loan bears interest at a fixed rate of 10% per annum, payable on the last day of March, June, September, and December, which commenced on September 30, 2002. In addition to scheduled payments of principal on the last day of June and December, commencing December 31, 2002, Pillowtex is required to prepay the Exit Term Loan (i) with the net cash proceeds from the sale of certain assets, and (ii) commencing March 31, 2004 and on each March 31 thereafter (subject to the minimum excess availability requirements contained in the Exit Revolver Facility), with 50% of the excess cash flow, if any, for the preceding fiscal year.

The Exit Term Loan also contains a number of negative covenants, which restrict, among other things, Pillowtex’s ability to incur additional debt, pay dividends or make other restricted payments, sell stock of subsidiaries, grant liens, make loans, advances and investments, engage in transactions with affiliates, dispose of assets, enter into sale-leaseback arrangements, effect mergers, consolidations, and dissolutions, prepay debt, and make certain changes in its business, to adopt newly-issued generally accepted accounting standards as appropriate and new tax requirements as they are enacted. The Exit Term Loan requires compliance with a maximum leverage ratio and a minimum interest coverage ratio. Effective September 27, 2002, the Exit Term Loan was amended to add an asset coverage ratio test and a minimum availability requirement under the Exit Revolver Facility (the “Amended Financial Covenants”), which were measured at the end of each fiscal month for the remainder of fiscal year 2002. The amendment also included a waiver of compliance by the Company with the maximum leverage ratio and minimum interest coverage ratio covenants for the third quarter of the 2002 fiscal year. Effective December 20, 2002, the Exit Term Loan was further amended to include a waiver of compliance with the maximum leverage ratio and minimum interest coverage ratio for the fourth quarter of 2002. The amendment also extends through the end of the first fiscal quarter of 2003 the effectiveness of the Amended Financial Covenants. Effective March 27, 2003, the Exit Term Loan was further amended to include a waiver of compliance with certain provisions, including, among others, the maximum leverage ratio and minimum interest coverage ratio for the first quarter of 2003. The amendment also extends through the end of the second fiscal quarter of 2003 the effectiveness of the Amended Financial Covenants.

A failure to comply with any of the covenants contained in the Exit Term Loan would result in an event of default under the Exit Term Loan. Upon the occurrence of an event of default, the term loan lenders would be entitled to declare all amounts outstanding under the Exit Term Loan, including accrued interest and other obligations, to be immediately due and payable, and the term loan lenders would be entitled to proceed against the collateral granted to them to secure the Exit Term Loan. In these circumstances, cross-defaults could occur under the documents governing the Company’s other outstanding debt. Pursuant to the terms of the Exit Revolver Facility, a default by the Company of the financial covenants set forth in the Exit Term Loan will be deemed an event of default under the Exit Revolver Facility if such default continues for more than sixty (60) days and is not waived in writing by or on behalf of the term loan lenders. If the Company fails to comply with any of the covenants in the Exit Term Loan, the Company would anticipate seeking to obtain appropriate waivers or amendments, but there can be no assurance that the Company would be able to obtain any such waiver or amendment. If an event of default occurs and the Company is unable to obtain appropriate waivers or amendments, the Company’s lenders would be entitled to exercise their remedies under the Company’s respective debt instruments, and the Company would no longer have access to borrowings under the Exit Revolver Facility, its principal source of liquidity. In such event, the Company can provide no assurance that alternative financing would be available on terms acceptable to the Company. If these developments were to occur, the Company would have to consider pursuing appropriate restructuring options, which could include a bankruptcy proceeding.

Upon emergence from bankruptcy, the principal amount of the Exit Term Loan was immediately reduced on the Effective Date by $38.6 million utilizing borrowings under the Exit Revolver Facility. Under the Exit Term Loan, Pillowtex has paid or will pay an annual administrative fee of $150,000 on the Effective Date and each anniversary thereof. As of December 28, 2002, $108.5 million was outstanding under the Exit Term Loan.

Industrial Revenue Bonds

The Company presently has obligations in respect of two industrial revenue bond facilities that were reinstated on the Effective Date (the “IRB Facilities”). One of the IRB Facilities is secured by liens on specified plants and equipment and by a letter of credit. The other IRB Facility is secured by a letter of credit. As of December 28, 2002, $11.4 million of bonds in the aggregate were outstanding under the IRB Facilities.

On February 6, 2001, the Bankruptcy Court authorized the Debtors to make scheduled principal and interest payments on the IRB Facilities. Even though these payments were being made, the Debtors remained in

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default of their obligations under each of the IRB Facilities. On the Effective Date, pursuant to the Plan, the IRB Facilities were reinstated.

During the pendency of the Chapter 11 Cases, two industrial revenue bond facilities matured pursuant to their terms and were paid off by the Debtors pursuant to an order of the Bankruptcy Court. The plant facility associated with another industrial revenue bond financing was closed, and the Debtors agreed to have the Bankruptcy Court lift the automatic stay to enable the lender to foreclose on the equipment collateral to satisfy partially the obligations of the Debtors thereunder.

Capital Lease Obligations

Certain existing operating leases for machinery and equipment were renegotiated as part of the reorganization process. The renegotiated leases have been classified as capital lease obligations. These leases have interest rates between 7.5% and 9%, and have terms from 48 to 60 months. The total amount of operating leases converted into capital lease obligations during the five months ended June 1, 2002 was $24.4 million. As of December 28, 2002, $20.7 million was outstanding under capital lease obligations.

Pension Plans

The assets of the Company’s defined benefit pension plans, like numerous other companies’ similar plans, are, to a substantial degree, invested in the capital markets and managed by third party investment advisors. Given the weak performance of the capital markets, the asset values of the Company’s pension plans have declined, requiring the Company to make cash contributions to its pension plans.

Beginning in the 2003 plan year, the Company, with the consent of the Pension Benefit Guarantee Corporation, adopted an asset valuation smoothing technique for determining cash funding obligations (the “smoothing technique”), which allows for the required cash funding contributions to be spread over five years, thus resulting in a reduction in the cash obligation for plan year 2003 from that which would have otherwise been required under the Company’s prior valuation method. Increases in post-2003 pension cash funding requirements will occur, however, if the performance of the capital markets in future periods does not more closely approximate the long-term rate of return assumed by the Company, and the amount of any such increases could be material. Based on the January 1, 2003 preliminary actuarial valuation of the Company’s pension plans, the Company will be required to make cash contributions to its pension plans of $18.6 million during fiscal year 2003 (which includes $10.6 million for plan year 2002 and $8.0 million for plan year 2003) and $17.5 million in fiscal year 2004 (which includes $6.6 million, the balance of the funding obligation for plan year 2003, and $10.9 million, the minimum amount of quarterly contributions required for plan year 2004). In addition, unless there is a significant recovery in 2003 in the stock market and more specifically a recovery in the equity asset investments of the plans, the Company anticipates that it would be required to make significant additional cash contributions to its pension plans during fiscal year 2005 relating to contribution requirements for plan year 2004, which are measured as of January 1, 2004. The Company will continue to review other potential changes that could reduce the future cash funding obligations of the Company.

Upon each determination of the amount of the contributions required to be made for any fiscal year by the Company in respect of the pension plans, the Company must notify the agent bank (the “Revolver Agent”) under the Exit Revolver Facility of such determination. If the amount required to be contributed is more than $5 million greater than the amount that was required to be contributed for the immediately preceding fiscal year, the Revolver Agent may establish a reserve against availability under the Exit Revolver Facility in an amount equal to such excess. The Company anticipates that such determination will be finalized with respect to the 2003 fiscal year during May 2003. The amount required to be contributed to the pension plans for the 2002 fiscal year is $10.6 million. Consequently, to the extent that on such determination date the amount required to be contributed to the pension plans for the 2003 fiscal year exceeds $15.6 million, the Revolver Agent will be entitled to establish a reserve in the amount equal to such excess. Based on the estimates of the contributions required for fiscal year 2003 above, the Company does not anticipate such a reserve being established during 2003. The creation of such a reserve results in a corresponding reduction in the availability under the Exit Revolver Facility.

The Company anticipates that based on the overall decline in the value of the pension plans’ assets and the current assumptions described in “ – Critical Accounting Policies” above, pension costs reflected in its 2003 operating results will increase by approximately $9 million.

Adequacy of Capital Resources

The Company’s principal sources of liquidity are cash flows from operations and borrowings under the Exit

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The Company’s principal sources of liquidity are cash flows from operations and borrowings under the Exit Revolver Facility. After taking into consideration the range of projections of cash flows from operations, anticipated capital expenditures (which the Company estimates will be approximately $9 million during fiscal year 2003, primarily related to updating and maintaining existing facilities and equipment), debt principal repayment requirements, and anticipated pension plan cash funding payments, the Company believes that the excess availability under the Exit Revolver Facility may drop below $35 million at certain times during the second half of 2003. The Company does not believe that it would be able to comply with the minimum earnings threshold contained in its Exit Revolver Facility, which would become effective in such event. As a result of these factors, coupled with the uncertainties as to the results of future negotiations with the Company’s term loan lenders as to revised financial covenants, the Company can provide no assurances that it will have adequate financial resources to meet its anticipated cash requirements for the second half of 2003 and future periods. If the Company is unable to comply with the minimum earnings threshold contained in the Exit Revolver Facility, the Company would anticipate seeking to obtain appropriate waivers or amendments, but there can be no assurance that the Company would obtain any such waiver or amendment. If an event of default occurs and the Company is unable to obtain appropriate waivers or amendments, the Company’s lenders would be entitled to exercise their remedies under the Company’s respective debt instruments, and the Company would no longer have access to borrowings under the Exit Revolver Facility, its principal source of liquidity. In such event, the Company can provide no assurance that alternative financing would be available on terms acceptable to the Company. If these developments were to occur, the Company would have to consider pursuing appropriate restructuring options, which could include a bankruptcy proceeding.

In the event that the Company’s borrowing base, comprised of a percentage of eligible accounts receivable and eligible inventory after reserves, becomes insufficient to support additional borrowing under the Exit Revolver Facility, the borrowers thereunder have the option of borrowing up to a maximum principal amount of $10 million (as part of the overall $200 million commitment) based on the value of certain real property and equipment held as collateral that would be added to the borrowing base. However, since the amount of any such loan is dependent on the appraised value of such real property and equipment at the time the option is exercised by the borrowers, no assurance can be given as to the amount of additional borrowing that would actually be available to the borrowers in such circumstances. In the event that cash flows, together with available borrowings under the Exit Revolver Facility, were not sufficient to meet the Company’s cash requirements, the Company would be required to obtain alternative financing or reduce planned capital expenditures. The Company can provide no assurance that alternative financing would be available on acceptable terms, especially in light of the fact that, except for miscellaneous real property and equipment, substantially all of the Company’s existing assets are pledged as collateral for the Exit Term Loan, Exit Revolver Facility, IRB Facilities, and capital lease obligations, or that reductions in planned capital expenditures would be sufficient to cover any cash shortfalls. Accordingly, the Company’s ability to respond to changing business and economic conditions and to secure additional financing, if needed, would be significantly restricted.

Contractual Obligations and Commercial Commitments

The following table contains the contractual cash obligations outstanding under long-term debt (for which this table comprises the Exit Term Loan and IRB Facilities), capital lease obligations, and operating leases as of December 28, 2002 (dollars in thousands):

Other commercial commitments outstanding as of December 28, 2002 are as follows (dollars in thousands):

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   (1)    These amounts are scheduled based upon contractual payment terms and do not reflect the reclassification to current liabilities pursuant to EITF No. 86-30 (see Note 11 to the Company’s consolidated financial statements included elsewhere in this Annual Report).

New Accounting Standards

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that results from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 at the beginning of fiscal year 2003, which commences on December 29, 2002. The adoption of SFAS No. 143 is not expected to have a material effect on the Company’s consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145, among other things, prohibits the classification of gains and losses from extinguishment of debt as extraordinary unless they meet the criteria defined in APB Opinion No. 30. The provisions of SFAS No. 145 were adopted upon the Statement’s issuance, and as such, the gain recognized by Old Pillowtex on the extinguishment of debt resulting from the emergence from the chapter 11 bankruptcy proceedings has been classified as a reorganization item.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 applies to costs associated with an exit activity (including a restructuring) or with a disposal of long-lived assets. Under SFAS No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. A liability is incurred when an event obligates the entity to transfer or use assets. Under current accounting guidance, a liability can be recorded when management has committed to an exit plan. The requirements under SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Restatement of previously issued financial statements is not permitted. The adoption of SFAS No. 146 is not expected to have a material effect on the Company’s consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, and interpretation of FASB Statements of No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s consolidated financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to the Company’s consolidated financial statements included elsewhere in this Annual Report.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This interpretation addresses the consolidation of business enterprises (variable interest entities) to which the usual condition of consolidation does not apply. This interpretation focuses on financial interests that indicate control. It concludes that in the absence of clear control through voting interests, a company’s exposure (variable interest) to the economic risks and potential rewards from the variable interest entity’s assets and activities are the best evidence of control. Variable interests are rights and obligations that convey economic gains or losses from changes in the values of the variable interest entity’s assets and liabilities. Variable interests may arise from financial instruments, service contracts, nonvoting membership interests and other arrangements. If an enterprise holds a majority of the variable interests of an entity, it would be considered the primary beneficiary. The primary beneficiary would be required to include assets, liabilities and the results of operations of the variable interest entity in its financial statements. This interpretation applies to variable interest entities that are created after or for which control is obtained after January 31, 2003. For variable interest entities created prior to February 1, 2003, the provisions would be applied effective July 1, 2003. This interpretation is not expected to have a material effect on the Company’s consolidated financial statements included elsewhere in this Annual Report.

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pillowtex is exposed to market risk from changes in interest rates on debt and foreign currency exchange rates. Pillowtex’s exposure to interest rate risk consists of floating rate debt based on the prime rate or Eurodollar rate, plus an adjustable margin. The annual impact on the Company’s results of operations of a 100 basis point interest

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rate change on the December 28, 2002 outstanding balance of the variable rate debt would be $1.1 million. This same calculation for 2001 was $6.6 million.

Pillowtex’s exposure to fluctuations in foreign currency exchange rates is due primarily to a foreign subsidiary domiciled in Canada. Pillowtex’s Canadian subsidiary uses the Canadian dollar as its functional currency. Pillowtex generally does not use financial derivative instruments to hedge foreign currency exchange rate risks. The Canadian subsidiary is not material to Pillowtex’s consolidated results of operations.

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are set forth herein commencing on page F-1. Schedule II to the financial statements is set forth herein on page S-1.

ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

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PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

DIRECTORS OF THE REGISTRANT

The following is a list of directors, their ages, positions and business experience as of March 28, 2003.

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CORPORATE OFFICERS OF THE REGISTRANT

The following are the corporate officers of the Company, their ages, position and business experience as of March 28, 2003.

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   (1)    All executive officers serve at the pleasure of the Board of Directors.

   (2)    Officers subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934.

____________________________

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires directors and officers of the Company, and persons who own more than 10 percent of the Common Stock, to file with the Securities and Exchange Commission (the “SEC”) initial reports of ownership and reports of changes in ownership of such stock. Directors, officers and beneficial owners of more than 10 percent of the Common Stock are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

Based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that all Section 16(a) filing requirements applicable to its directors, officers and beneficial owners of more than 10 percent of its Common Stock were met during the year ended December 28, 2002.

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ITEM 11.       EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth the compensation paid or accrued by the Company to the Chief Executive Officer and each of the six other most highly compensated executive officers (the “Named Executive Officers”) for their services in 2002, 2001 and 2000.