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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2002

OR

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

For the transition period from                      to                     

Commission File Number 0-21496

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

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

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

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

Common shares outstanding at November 1, 2002: 49,650,657 shares of Common Stock, $.01 par value.

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INDEX

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PART I.     FINANCIAL INFORMATION
Item 1.       Financial Statements

WESTPOINT STEVENS INC.
Condensed Consolidated Balance Sheets
(In thousands)

See accompanying notes

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WESTPOINT STEVENS INC.

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

See accompanying notes

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WESTPOINT STEVENS INC.

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

See accompanying notes

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WESTPOINT STEVENS INC.

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

See accompanying notes

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WESTPOINT STEVENS INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.   Basis of Presentation

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

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

2. Inventories

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

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

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

3.   Indebtedness and Financial Arrangements

Indebtedness is as follows (in thousands of dollars):

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

In the third quarter of 2002, the Company’s Senior Credit Facility and Second-Lien Facility were amended primarily to permit certain restructuring, impairment and other charges, and to modify certain financial ratios and the minimum EBITDA covenant. The Senior Credit Facility amendment also modified the scheduled $25 million reduction in the revolver commitment date from November 1, 2002 to September 20, 2002 with no change to the remaining scheduled commitment reduction dates. At the option of the Company, interest under the Senior Credit Facility will be payable monthly, either at the prime rate plus 2.75% or at LIBOR plus 4.5%.

At September 30, 2002 and December 31, 2001, $160.0 million and $152.6 million, respectively, of accounts receivable had been sold pursuant to a trade receivables program (the “Trade Receivables Program”) and the sale is reflected as a reduction of accounts receivable in the accompanying Condensed Consolidated Balance Sheets. In January 2002, the Company amended and extended the maturity date of its existing Trade Receivables Program with an independent issuer of receivables backed commercial paper until January 2003.

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WESTPOINT STEVENS INC.

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

4.   Restructuring, Impairment and Other Charges

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

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

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

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

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

4.   Restructuring, Impairment and Other Charges—Continued

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

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

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

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WESTPOINT STEVENS INC.

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

4.   Restructuring, Impairment and Other Charges—Continued

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

On September 20, 2002, the Company announced that its Board of Directors had approved additional restructuring initiatives to increase asset utilization, lower manufacturing costs and increase cash flow and profitability through reallocation of production assets from bath products to basic bedding products and through rationalization of its retail stores division. The Company expects the restructuring initiatives to result in a $36.5 million pretax charge for restructuring, impairment and other charges. Approximately $20 million of the pretax charge is expected to be non-cash items. The charges for the restructuring initiatives began in the third quarter of 2002 and will continue throughout 2003.

As a result of the restructuring initiatives in the third quarter of 2002, the Company announced the closure of its Rosemary (NC) towel finishing facility and the conversion of its Rosemary (NC) towel fabrication and distribution facilities to basic bedding facilities. The Company also announced the closure of two retail stores. Closure of other retail stores and other facilities will be announced in future periods.

The cost of the manufacturing and retail store rationalization and certain overhead reduction costs were reflected in a restructuring and impairment charge of $5.9 million, before taxes, in the third quarter of 2002. The components of the restructuring and impairment charge included $4.3 million for the impairment of fixed assets and $1.6 million in reserves to cover cash expenses related to severance benefits.

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WESTPOINT STEVENS INC.

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

4.   Restructuring, Impairment and Other Charges—Continued

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

During the third quarter of 2002, other costs of the restructuring initiatives of $10.2 million, before taxes, were recognized consisting of inventory writedowns primarily related to the rationalization of its retail store division, all reflected in cost of goods sold.

5.   Comprehensive Income (Loss)

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

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WESTPOINT STEVENS INC.

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

6.   Deferred Financing Fees

Included in “Other expense-net” in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2002 is the amortization of deferred financing fees of $2.3 million and $6.9 million, respectively, compared with $2.2 million and $4.4 million, respectively, for the three and nine months ended September 30, 2001.

7.   Recently Adopted Accounting Standards

Effective January 1, 2002, the Company adopted the requirements of Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. During the third quarter and first nine months of 2001, amortization of goodwill was $0.2 million and $0.6 million after taxes, respectively. Excluding the impact of goodwill amortization, the net income (loss) for the third quarter and first nine months of 2001 would have been $3.8 million, or $0.08 per share diluted, and $(24.1) million, or $(0.49) per share diluted, respectively.

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

In September 2002, the Company adopted the requirements of Statements of Financial Accounting Standards No. 146, Costs Associated with Disposal Activities. Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. An entity’s commitment to a plan does not, by itself, create an obligation that meets the definition of a liability.

The adoption of Statement 146 did not have a material impact on the Company’s financial statements.

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WESTPOINT STEVENS INC.

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

8.   Income Taxes

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

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

9.   Litigation and Contingent Liabilities

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

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

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WESTPOINT STEVENS INC.

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

9.   Litigation and Contingent Liabilities—Continued

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

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

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

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

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

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

9.   Litigation and Contingent Liabilities—Continued

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

The purported class includes all descendants of African American slaves. The relief sought includes an accounting, the appointment of an independent historical commission, imposition of a constructive trust, restitution of the value of slave labor and defendants’ unjust enrichment, disgorgement of illicit profits and compensatory and punitive damages.

The Company has not yet been served in either action but believes that the Complaints are without merit and intends to contest the actions vigorously.

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

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

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

9.   Litigation and Contingent Liabilities—Continued

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

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

Senior Credit Facility and Second-Lien Facility

In the third quarter of 2002, the Company’s Senior Credit Facility and Second-Lien Facility were amended primarily to permit certain restructuring, impairment and other charges, and to modify certain financial ratios and the minimum EBITDA covenant. The Senior Credit Facility amendment also modified the scheduled $25 million reduction in the revolver commitment date from November 1, 2002 to September 20, 2002 with no change to the remaining scheduled commitment reduction dates. At the option of the Company, interest under the Senior Credit Facility will be payable monthly, either at the prime rate plus 2.75% or at LIBOR plus 4.5%.

Impairment, Restructuring and Other Charges

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

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

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

On October 2, 2000, the Rosemary greige plant, a towel plant located in Roanoke Rapids, North Carolina, and the Liebhardt basic bedding plant in Union, South Carolina, were scheduled for closing. On January 29, 2001, the Seneca plant, a sheeting plant in Seneca, South Carolina, was scheduled for closing. On March 1, 2001, the Whitmire yarn plant in Whitmire, South Carolina, was scheduled for closing. In addition to these closings, a reduction in the workforce of the remaining

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

Impairment, Restructuring and Other Charges—Continued

finishing and fabricating facilities at the Rosemary complex was announced on February 5, 2001. These plant closings will enable the Company to consolidate its manufacturing in locations that allow the most efficient work flow.

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

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

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