PILLOWTEX CORP - 10-K Annual Report

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

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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 29, 2001

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 1-11756

PILLOWTEX CORPORATION
(Exact name of registrant as specified in its charter)

Texas 75-2147728
(State of Incorporation) (I.R.S. Employer
Identification No.)

One Lake Circle Drive, Kannapolis, North Carolina 28081
(Address of Principal Executive Offices) (Zip Code)

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

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Securities Registered Pursuant to Section 12(b) of the Act:

Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $0.01 par value None

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

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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 []

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. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 20, 2002 was $226,782.

As of March 20, 2002, Registrant had 14,250,892 shares of Common Stock
outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE
None.
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Unless the context otherwise requires, references to "Pillowtex" or the
"Company" include Pillowtex Corporation and its subsidiaries.

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 which 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:

. If the Company is unable to obtain confirmation of a plan of
reorganization and emerge from bankruptcy protection prior to the
scheduled termination of its current debtor-in-possession financing
facility on June 30, 2002, no assurance can be given that the
Company will have access to sufficient cash to fund its operations
following such a date.

. Actions may be taken by creditors or other parties in interest that
may have the effect of preventing or unduly delaying confirmation of
a plan of reorganization in connection with the Company's bankruptcy
proceedings.

. The Bankruptcy Court may not confirm the Company's plan of
reorganization, as proposed.

. The plan of reorganization proposed by the Company, even if
confirmed by the Bankruptcy Court, may not be viable.

. The Company's senior management may be required to expend a
substantial amount of time and effort in connection with the
reorganization process, which could have a disruptive impact on
management's ability to focus on the operation of the Company's
business.

. The Company may not be able to obtain sufficient financing to meet
future obligations.

. The Company's access to capital markets will likely be limited for
the foreseeable future.

. Although the Company has not experienced such problems to date, the
Company could have difficulty in attracting and retaining customers,
top management, and other key personnel and labor as a result of its
bankruptcy proceedings or other factors.

. The Company may have difficulty in maintaining existing or creating
new relationships with suppliers or vendors as a result of its
pending bankruptcy proceedings; suppliers to the Company may stop
providing supplies or services to the Company or provide such
supplies or services 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.

1

PART I

ITEM 1. BUSINESS
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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 18 of the notes to the
Company's consolidated financial statements included elsewhere in this Annual
Report for financial information regarding segments.

Proceedings Under Chapter 11 of the Bankruptcy Code

On November 14, 2000 (the "Petition Date"), Pillowtex and substantially
all of its domestic subsidiaries (collectively, the "Debtors"), including
Fieldcrest Cannon, Inc. ("Fieldcrest Cannon"), filed voluntary petitions for
reorganization 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 pending for the Debtors
(the "Chapter 11 Cases") are being jointly administered for procedural purposes.

The Debtors are currently operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code. Pursuant to the
Bankruptcy Code, prepetition obligations of the Debtors, including obligations
under debt instruments, generally may not be enforced against the Debtors, and
any actions to collect prepetition indebtedness are automatically stayed, unless
the stay is lifted by the Bankruptcy Court. In addition, as
debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court
approval and certain other limitations, to assume or reject executory contracts
and unexpired leases. In this context, "assumption" means that the Debtors agree
to perform their obligations and cure all existing defaults under the contract
or lease, and "rejection" means that the Debtors are relieved from their
obligations to perform further under the contract or lease, but are subject to a
claim for damages for the breach thereof. Any damages resulting from rejection
of executory contracts and unexpired leases will be treated as general unsecured
claims in the Chapter 11 Cases unless such claims had been secured on a
prepetition basis prior to the Petition Date. The Debtors are in the process of
reviewing their executory contracts and unexpired leases and have received
approval from the Bankruptcy Court to reject certain contracts and leases. The
Debtors cannot presently determine the ultimate liability for all contracts and
leases that will be approved the Bankruptcy Court for rejection. During 2001,
the Company accrued $15.8 million for the estimated prepetition liability for
those contracts and leases the Bankruptcy Court has already approved for
rejection. Approximately $10.3 million of the prepetition liability relating to
the rejected contracts and leases have been reflected as reorganization items,
and the remaining $5.5 million has been included in the loss from discontinued
operations in the accompanying consolidated statement of operations for 2001.
The Company expects to accrue additional liabilities as more contracts and
leases are approved for rejection by the Bankruptcy Court.

The United States trustee for the District of Delaware has appointed an
Official Committee of Unsecured Creditors in accordance with the provisions of
the Bankruptcy Code.

2

On December 28, 2001, the Debtors filed with the Bankruptcy Court a Joint
Plan of Reorganization and related Disclosure Statement. On February 26, 2002,
the Debtors filed with the Bankruptcy Court a First Amended Joint Plan of
Reorganization and related Disclosure Statement. On March 1, 2002, the Debtors
filed with the Bankruptcy Court a Second Amended Joint Plan of Reorganization
and related Disclosure Statement. On March 11, 2002, the Debtors filed with the
Bankruptcy Court a revised version of the Second Amended Joint Plan of
Reorganization (as so revised, the "Plan") and related Disclosure Statement (as
so revised, the "Disclosure Statement") incorporating certain nonmaterial
clarifications and modifications to reflect, among other things, events
occurring subsequent to March 1, 2002.

The primary objectives of the Plan are to: (a) alter the Debtors' debt and
equity structures to permit the Debtors to emerge from the Chapter 11 Cases with
viable capital structures; (b) maximize the value of the ultimate recoveries to
all creditor groups on a fair and equitable basis; and (c) settle, compromise,
or otherwise dispose of certain claims and interests on terms that the Debtors
believe to be fair and reasonable and in the best interests of their respective
estates, creditors, and equity holders. The Plan provides for, among other
things:

. the cancellation of certain indebtedness in exchange for cash,
common stock in reorganized Pillowtex (the "New Common Stock"),
and/or warrants to purchase shares of New Common Stock ("New
Warrants");

. the cancellation of "Designated Post-Petition Loans" (as such term
is defined in the Plan) having an aggregate principal amount of $150
million in exchange for the issuance by reorganized Pillowtex of
$150 million aggregate principal amount of notes under a new secured
term loan (the "Exit Term Loan");

. the cancellation without consideration of Pillowtex's common stock
and preferred stock that was issued and outstanding immediately
prior to the Petition Date;

. the assumption, assumption and assignment, or rejection of executory
contracts or unexpired leases to which any Debtor is a party;

. the reinstatement of approximately $11.4 million principal amount of
industrial revenue bonds;

. the selection of boards of directors of the reorganized Debtors;

. the merger of Pillowtex with and into a new Delaware corporation,
with the new Delaware corporation as the surviving corporation; and

. the corporate restructuring of certain of Pillowtex's subsidiaries
to simplify the Company's corporate structure.

For a more detailed discussion of the Plan, reference is hereby made to the
Disclosure Statement and the Plan itself, copies of which are filed as exhibits
to the Company's Current Report on Form 8-K dated March 11, 2002 and are also
available on the Company's website at www.pillowtex.com.
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Under the terms of the Plan, there are significant conditions precedent to
both the confirmation of the Plan by the Bankruptcy Court and the subsequent
effectiveness of the Plan. Conditions to the confirmation of the Plan include,
among others, the receipt by the Debtors of a commitment for a revolving credit
facility (the "Exit Financing Revolver Facility") on terms and conditions
satisfactory to the Debtors and the unanimous consent of the holders of
Designated Post-Petition Loans to the treatment thereof under the Plan as
described in the immediately preceding paragraph. Conditions to the
effectiveness of the Plan include, among others, the execution and delivery of
the documentation effectuating the Exit Financing Revolver Facility and the
execution and delivery of the documentation effectuating the Exit Term Loan.
There can be no assurance that these conditions will be satisfied.

It is presently anticipated that (a) the Exit Financing Revolver Facility
will be a senior asset-based revolving credit facility in the amount of $200
million, including a $60 million letter of credit sub-facility, secured by a
first priority lien on the accounts receivable, inventory, and trademarks of the
reorganized Debtors and a second priority lien on the primary collateral that
secures the Exit Term Loan and (b) the Exit Term Loan will be 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 that Exit Financing Revolver Facility. The principal
amount of the Exit Term Loan may be immediately reduced utilizing borrowings
under the Exit Financing Revolver Facility depending on borrowing base
availability thereunder.

3

The Bankruptcy Court has entered an order approving the Disclosure
Statement as containing "adequate information" for creditors of the Debtors in
accordance with section 1125 of the Bankruptcy Code. The Boards of Directors of
Pillowtex and each of the other Debtors, as well as the Official Committee of
Unsecured Creditors, believe that the Plan is in the best interests of the
Company's creditors.

On or about March 11, 2002, the Debtors commenced delivery of copies of
the Plan and Disclosure Statement to parties in interest as required pursuant to
the Bankruptcy Code. The Debtors have until 4:00 p.m., Eastern Time, on April
19, 2002 (the "Voting Deadline") to solicit acceptance of the Plan. Following
the solicitation period, the Bankruptcy Court will consider whether to confirm
the Plan. The Bankruptcy Court has scheduled a confirmation hearing for the Plan
on May 1, 2002 at 4:30 p.m., Eastern Time. There can be no assurance that the
Plan will receive the requisite acceptance by creditors or that the Bankruptcy
Court will confirm the Plan. To confirm a plan of reorganization, the Bankruptcy
Court, among other things, is required to find that (a) with respect to each
impaired class of creditors and equity holders, each holder in such class has
accepted the plan or will, pursuant to the plan, receive at least as much as
such holder would receive in a liquidation, (b) each impaired class of creditors
and equity holders has accepted the plan by the requisite vote (except as
described in the following sentence), and (c) confirmation of the plan is not
likely to be followed by a liquidation or a need for further financial
reorganization of the Debtors or any successors to the Debtors unless the plan
proposes such liquidation or reorganization. If any impaired class of creditors
or equity holders does not accept the plan and, assuming that all of the other
requirements of the Bankruptcy Code are met, the proponent of the plan may
invoke the "cram down" provisions of the Bankruptcy Code. Under these
provisions, the Bankruptcy Court may confirm a plan notwithstanding the
non-acceptance of the plan by an impaired class of creditors or equity holders
if certain requirements of the Bankruptcy Code are met. These requirements may,
among other things, necessitate payment in full for senior classes of creditors
before payment to a junior class can be made.

As a result of the amount of prepetition indebtedness and the availability
of the "cram down" provisions, the holders of the Company's capital stock will
receive no value for their interests under the Plan.

The Bankruptcy Code provides that the Debtors have exclusive periods
during which only they may file and solicit acceptances of a plan of
reorganization. These "exclusive periods" may be extended for "cause." As a
result of several extensions, the Debtors have the exclusive right until May 15,
2002 to solicit acceptance of the Plan. Unless such period is again extended by
the Bankruptcy Court, if the Debtors fail to obtain acceptance of the Plan from
the requisite impaired classes of creditors by May 15, 2002, any party in
interest, including a creditor, an equity holder, a committee of creditors or
equity holders, or an indenture trustee, may file their own plan of
reorganization for the Debtors.

Since the Petition Date, the Debtors have conducted business in the
ordinary course. During the pendency of the Chapter 11 Cases, the Debtors may,
with Bankruptcy Court approval, sell assets and settle liabilities, including
for amounts other than those reflected in the financial statements. The Debtors
are continuing to review their operations and to identify assets for
disposition. On September 6, 2001, the Company sold the majority of the
inventory and fixed assets associated with its Blanket Division (see note 5 of
the notes to the Company's consolidated financial statements included elsewhere
in this Annual Report).

The administrative and reorganization expenses resulting from the Chapter
11 Cases will unfavorably affect the Debtors' results of operations. Future
results of operations may also be adversely affected by other factors related to
the Chapter 11 Cases.

See "- Risk Factors - Pillowtex Faces Significant Challenges in Connection
With Its Bankruptcy Reorganization," "- 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.

Business Plan and Strategy

The Company has developed a business plan and strategy with a view toward
maintaining and improving the Company's position in the highly competitive home
textile marketplace. The Company's business plan centers around four broad
initiatives: branding and marketing; capacity rationalization; strategic
sourcing; and total quality management.

4

Branding and Marketing

The Company intends to develop and creatively market its strong portfolio
of brands, including Cannon(R), Fieldcrest(R), Royal Velvet(R), and Charisma(R).
The Company has already begun to change the focus of its business from that of a
manufacturer of home textiles to a marketer of its own brands. Historically,
brand development has been weak within the home textile industry leaving the
domestic producers with a lack of influence in the retail market. As retailers
continue to look for more product value and an increasing level of services,
brands are expected to play a more important role in building and retaining
loyalty and in providing the consumer with a level of assurance of reliability
and quality. As a consequence, the Company will focus on developing more
intimate relationships with both retailers and consumers with respect to
marketing, product development, and customer service. Management believes that
in so doing it can improve the profitability and economic returns on the
Company's established brand names and its business as a whole.

Capacity Rationalization

The Company continuously reviews its manufacturing capacities to determine
whether individual plants, processes, or facilities can be maintained on a
profitable basis given prevailing market dynamics. In addition to the steps
already taken by the Company during fiscal years 2000 and 2001, the Company's
business strategy will incorporate further rationalization of manufacturing
capacity to (a) concentrate production on higher margin products, (b) eliminate
uneconomic facilities, and (c) continue to provide quality service to its entire
domestic customer base. In connection with this strategy, the Company continues
to examine the economics behind its historic involvement in all aspects of the
manufacturing supply chain and has already begun to outsource certain components
of its operations. Through outsourcing of cost disadvantaged processes, the
Company will focus its manufacturing operations on its core competencies, which
are (i) weaving and finishing of higher margin sheeting and towel product lines
and (ii) the pillow and pad businesses.

Strategic Sourcing

The Company's business strategy is based on establishing long-term
partnerships with a select number of overseas textile suppliers, initially to
support the domestic markets and subsequently to extend the relationships to
international markets under the umbrella of the Company's portfolio of brands.
By combining its manufacturing expertise, market reach, and reputation with low
cost overseas manufacturing capabilities, management believes it will be able to
supply the domestic market while further improving the Company's overall
profitability. These potential partners, some of whom have already been
identified, will serve as an extension of the Company's United States-based
facilities, employing production and technical expertise transferred from the
Company and utilizing the capabilities of the Company's information technology
to maintain the highest quality customer service standards. See "Risk Factors --
Relationships with Suppliers and Vendors" for a description of the risks that
may affect the implementation of this initiative.

Total Quality Management

The Company is introducing the concept of "total quality management" to
each and every business process. This concept requires a commitment to
excellence by all personnel within the organization, with customers, both
internal and external, becoming the core focus of all employees. Customers
define quality, which the Company believes to be a key ingredient to success. As
a consequence, every aspect of the Company's business will be viewed from the
customers' perspective. This initiative supports the Company's drive for
operational excellence but is also designed to enable it to operate as a single
entity with all employees focused on exceeding each customer's expectations and
on becoming the undisputed leader in customer service.

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 all 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. As indicated above, Pillowtex sold its blanket business in September
2001.

5

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 360-thread count 100% pima cotton
sheets. Its principal brand names for this product line include Cannon(R),
Fieldcrest(R), Royal Velvet(R), and Charisma(R). 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(R), Fieldcrest(R),
Cannon(R), Charisma(R), Royal Velvet Big & Soft(R), and St. Mary's(R) 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(R) franchise. In the
marketplace, Pillowtex differentiates its towels by using fine ring spun cotton
yarns to produce Royal Velvet(R) towels and pima cotton yarns for Charisma(R)
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(R), Cannon(R), Fieldcrest(R), Royal
Family(R), and Charisma(R) 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.

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(R), a multidirectional stretch material manufactured by
E.I. DuPont de Nemours & Co.).

6

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 72% of its total
net sales in 2001. Wal-Mart Stores, Inc. and its affiliated entity, Sam's Club
stores, accounted for approximately 25% and 6%, respectively, of Pillowtex's
total net sales in 2001. No other customer accounted for 10% or more of
Pillowtex's total net sales in 2001. 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(R), Charisma(R), Fieldcrest(R), and Royal Family(R) brand name bed and
bath products are distributed primarily through leading department stores,
specialty home furnishing stores, and catalog merchants. Cannon(R) brand name
bed and bath products are distributed across a wide variety of distribution
channels, while St. Mary's(R) brand name bed and bath products are distributed
primarily through mass merchants. Pillowtex's Royal Velvet(R), Charisma(R), and
Cannon(R) brand names receive national consumer advertising. Pillowtex sells
private brands primarily through large chain stores. It also sells a smaller
amount of unbranded products to institutional and government 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 2% of total sales in 2001, 5% in 2000 and 6%
in 1999. During each of the last three years, less than 5% of the Pillowtex's
assets have been located outside the United States.

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 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(R) brand name over the
Internet at www.charismahome.com and under its Royal Velvet(R) brand name over
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the Internet at www.royalvelvet.com. In addition, Pillowtex operates an online
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outlet store at www.cannonoutlet.com.
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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.

7

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. In
September 2001, in connection with the sale of assets associated with its
Blanket Division, Pillowtex entered into a license agreement with the purchaser
of those assets under which Pillowtex granted the purchaser an exclusive license
to manufacture, sell, and distribute blankets under some of Pillowtex's
trademark 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, Georgia, 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.

In addition, Pillowtex operates 28 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, and Concord, 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,
Georgia, 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 Columbus, Georgia and Phenix City, Alabama facilities
generally support Pillowtex's mass merchant business. The Kannapolis, North
Carolina facility produces both types of products and, as a result, supports
both distribution channels. On March 1, 2002, Pillowtex announced the closing of
the towel finishing operations at its Phenix City, Alabama and Columbus, Georgia
facilities. The towel warping departments in Columbus, Georgia will be moved to
an existing weaving facility in Phenix City, Alabama, which will continue to
operate. The closings, which are anticipated to be completed by June 1, 2002,
will eliminate the jobs of approximately 980 employees. The majority of the lost
production at the Phenix City finishing plant will be replaced by increased
production at Pillowtex's towel finishing operation in Kannapolis, North
Carolina, where approximately 200 employees are expected to be hired.

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.

8

Kitchen Products. Pillowtex manufactures its kitchen textile products at
its facilities in Phenix City, Alabama and Kannapolis, North Carolina.

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. State-of-the-art
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.

Pillowtex will be closing its automated sewing facility in Dallas, Texas
and consolidating the facility's operations into its other pillow and pad
facilities. The closing is anticipated to be completed by May 31, 2002 and will
eliminate the jobs of approximately 97 employees.

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, Pennsylvania, and Toronto, Canada 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.

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 its
relationships with its suppliers are generally good, notwithstanding the Chapter
11 Cases. See "- Risk Factors - Dependence on Specific Raw Materials" below.

9

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 29, 2001, the
Company had $43.1 million in outstanding commitments for the future purchases of
cotton, pursuant, in part, to contracts that have been accepted in connection
with the Chapter 11 Cases. The contracts governing the commitments meet the
normal purchases or normal sales exclusion provided for in derivative accounting
and as such, the contracts 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 contact 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(R) skirting.
Because of DuPont's patent on Lycra(R), it is the exclusive supplier of this
material. Management believes that the risk that DuPont will cease to
manufacture and sell Lycra(R) is minimal.

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

10

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 1, 2002, Pillowtex had approximately 9,200 employees.

As of March 1, 2002, Pillowtex Corporation and/or certain of its
subsidiaries had entered into the following collective bargaining agreements:

Approximate
Number of
Bargaining
Unit
Union Location Covered Expiration Employees
----- ---------------- ---------- ---------

Workers Union of Needletrades, Industrial and Textile Phenix City, Alabama; 02/01/03 6,244
Workers Columbus, Georgia;
Concord, North Carolina;
Eden, North Carolina;
Kannapolis, North
Carolina;
China Grove, North
Carolina;
Salisbury, North
Carolina;
and Fieldale, Virginia
Union of Needletrades, Industrial and Textile Workers Macon, Georgia 02/01/03 333
Union of Needletrades, Industrial and Textile Workers Toronto, Ontario, Canada 08/31/03 68
Union of Needletrades, Industrial and Textile Workers Scottsboro, Alabama 01/22/04 230
United Auto Workers Tunica, Mississippi 07/31/03 316
Warehouse, Mail Order, Office, Technical Chicago, Illinois 01/31/03 161
and Professional Employees (Teamsters)

As of March 1, 2002, approximately 54% of Pillowtex's employees had chosen
to have union dues deducted from their paychecks.

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

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 Significant Challenges In Connection With Its Bankruptcy
Reorganization

On November 14, 2000, Pillowtex Corporation and substantially all of its
domestic subsidiaries, including Fieldcrest Cannon, filed voluntary petitions
for reorganization under chapter 11 of the Bankruptcy Code in the Bankruptcy
Court. The Chapter 11 Cases are being jointly administered for procedural
purposes. Since the Petition Date, the Debtors have been operating their
business as debtors-in-possession pursuant to the Bankruptcy Code.

As described above, the Debtors have filed the Plan with the Bankruptcy
Court, and the Disclosure Statement has been sent to creditors to solicit
acceptance of the Plan. Following such solicitation, the Bankruptcy Court will
consider whether to confirm the plan. There can be no assurance that the Plan
will receive the requisite acceptance by creditors, that the conditions to
confirmation set forth in the Plan will be satisfied, that the Bankruptcy Court
will confirm the Plan, or that the conditions to effectiveness set forth in the
Plan will be satisfied. Moreover, even if the Plan receives the requisite
acceptance by creditors, is confirmed by the Bankruptcy Court, and does become
effective, there can be no assurance that reorganized Pillowtex will be able to
successfully implement the business plan and strategy on which the Plan is
based.

In addition, due to the terms of the Plan and the nature of the
reorganization process, actions may be taken by creditors or other parties in
interest that may have the effect of preventing or unduly delaying confirmation
of the Plan or another plan of reorganization in connection with the Chapter 11
Cases. Accordingly, Pillowtex can provide no assurance as to whether or when the
Plan or another plan of reorganization may be confirmed in the Chapter 11 Cases.

11

Pillowtex's Financial Statements Assume 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." Because of the Chapter 11 Cases and the circumstances leading to the
filing thereof, 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 obtain confirmation
of the Plan or another plan of reorganization, Pillowtex's ability to comply
with the terms of its debtor-in-possession financing facility (the "DIP
Financing Facility"), 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 would be necessary in the carrying
value of assets and liabilities, the revenues and expenses reported, and the
balance sheet classifications used.

In addition, the amounts reported in the consolidated financial statements
included elsewhere in this Annual Report do not reflect adjustments to the
carrying value of assets or the amount and classification of liabilities that
ultimately may be necessary as the result of the Plan or another plan of
reorganization. Adjustments necessitated by the Plan or another plan of
reorganization could materially change the amounts reported in the consolidated
financial statements included elsewhere in this Annual Report. For information
regarding potential adjustments that would be necessitated by the Plan,
reference is made to the Disclosure Statement, a copy of which is filed as an
exhibit to the Company's Current Report on Form 8-K dated March 11, 2002.

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

In addition to the cash requirements necessary to fund ongoing operations,
Pillowtex has incurred, and will continue to incur, significant professional
fees and other restructuring costs in connection with the Chapter 11 Cases and
the restructuring of its business operations. However, based on current and
anticipated levels of operations and continued efforts to reduce inventories,
and assuming consummation of the Plan on or prior to June 30, 2002, Pillowtex's
management believes that Pillowtex's cash flow from operations, together with
amounts available under the DIP Financing Facility, will be adequate to meet its
anticipated cash requirements during the pendency of the Chapter 11 Cases. The
DIP Financing Facility is currently scheduled to terminate on June 30, 2002, and
accordingly, if the Plan is not consummated in accordance with its terms on or
prior to such date, Pillowtex would be required to obtain a further extension of
the DIP Financing Facility or alternative financing. Pillowtex can provide no
assurance that such an extension would be granted or that alternative financing
would be available on acceptable terms. As a result of the Chapter 11 Cases and
the circumstances leading to the filing thereof, Pillowtex's access to
alternative financing in such a scenario would be very limited. Furthermore, in
the event that cash flows, together with available borrowings under the DIP
Financing Facility or alternative financing arrangements, are not sufficient to
meet the Company's cash requirements, Pillowtex may be required to reduce
planned capital expenditures; however, Pillowtex can provide no assurance that
such reductions would be sufficient to cover any cash shortfalls. Management of
the Debtors believes that, assuming consummation of the Plan in accordance with
its terms and achievement of the Debtors' business plan and strategy,
reorganized Pillowtex will have sufficient liquidity for the reasonably
foreseeable future to service post-reorganization indebtedness and conduct its
business as contemplated by the Debtors' business plan and strategy.

Pillowtex Is Subject To Restrictions On The Conduct Of Its Business

The Debtors are operating their businesses as debtors-in-possession
pursuant to the Bankruptcy Code. Under applicable bankruptcy law, during the
pendency of the Chapter 11 Cases, the Debtors will be required to obtain the
approval of the Bankruptcy Court prior to engaging in any transaction outside
the ordinary course of business. In connection with any such approval, creditors
and other parties in interest may raise objections to such approval and may
appear and be heard at any hearing with respect to any such approval.
Accordingly, although the Debtors may sell assets and settle liabilities
(including for amounts other than those reflected on the Debtors' financial
statements), with the approval of the Bankruptcy Court, there can be no
assurance that the Bankruptcy Court will approve any sales or settlements
proposed by the Debtors. The Bankruptcy Court also has the authority to oversee
and exert control over the Debtors' ordinary course operations.

In addition, the DIP Financing Facility contains financial covenants
requiring maintenance of an asset coverage ratio and a minimum earnings before
interest, taxes, depreciation and amortization ("EBITDA"), as well as other
covenants that limit, among other things, indebtedness, liens, sales of assets,
capital expenditures, and investments and prohibit, among other things, dividend
payments. The DIP Financing Facility provides that the net proceeds of

12

certain asset sales outside the ordinary course of business will be applied to
reduce prepetition indebtedness under Pillowtex's senior secured credit
facilities and that the net proceeds of other asset sales outside the ordinary
course of business will be applied as a reduction of the DIP Financing Facility.

Moreover, assuming consummation of the Plan in accordance with its terms,
the Exit Financing Revolver Facility and the Exit Term Loan will contain
covenants imposing operating and financial restrictions on the reorganized
Debtors, requiring asset sale proceeds and excess cash flow to be utilized to
prepay such indebtedness and restricting the ability of reorganized Pillowtex to
pay dividends.

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

Holders Of Pillowtex's Capital Stock To Receive No Value Under Plan

As a result of the amount of prepetition indebtedness and the availability
of the "cram down" provisions of the Bankruptcy Code described above, the Plan
provides that Pillowtex's presently outstanding capital stock will be cancelled
without consideration. Accordingly, the holders of Pillowtex's capital stock
will receive no value for their interests under the Plan. Potential investors in
Pillowtex's presently outstanding capital stock should consider the proposed
treatment of Pillowtex's capital stock under the Plan prior to making any
investment decision with respect to such capital stock.

Dependence On Specific Raw Materials

Cotton is the primary raw material used in Pillowtex's business. Cotton is
an agricultural product and, as a result, its availability 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 Pillowtex is dependent include
the raw feathers and down that it uses to produce natural fill pillows and down
comforters. China is currently Pillowtex's primary source of raw feather and
down. See "-- Dependence on Supply Sources in China."

The raw materials used by Pillowtex are generally available from a number
of sources. No significant shortage of these materials is currently anticipated.
However, Pillowtex uses significant quantities of these raw materials, which are
subject to price fluctuations. Pillowtex 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, Pillowtex 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 the Chapter 11 Cases. In
the event that the DIP Financing Facility was to terminate and, at the time of
such termination, 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. In
addition, Pillowtex's business plan and strategy centers around, among other
initiatives, strategic sourcing. There can be no assurance that Pillowtex or
reorganized Pillowtex will be able to successfully implement the strategic
sourcing initiative included in the business plan and strategy.

Dependence on Supply Sources in China

In fiscal year 2001, 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 equally satisfactory terms.

13

Adverse Retail Industry Conditions

Pillowtex sells its products to a number of 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 Pillowtex'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, Pillowtex may be unable
to collect some or all amounts owed 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 Pillowtex's products to the
customer may be curtailed or terminated as a result of bankruptcy or insolvency
proceedings. There can be no assurance that Pillowtex or reorganized Pillowtex
will not be adversely affected by retail industry conditions.

Dependence On Specific Brand Names

In fiscal year 2001, sales of products bearing Pillowtex's principal
proprietary brand names of Royal Velvet(R), Cannon(R), Charisma(R), Royal
Velvet Big & Soft(R), Fieldcrest(R), Royal Family(R), Caldwell(R), and St.
Mary's(R) made up a substantial portion of its net sales. Accordingly, the
future success of Pillowtex and reorganized Pillowtex 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 do the laws of the United States.

Risk Of Loss Of Material Customers

In fiscal year 2001, Pillowtex's top ten customers accounted for
approximately 72% of its total net sales. Net sales to Wal-Mart Stores, Inc.
("Wal-Mart") and its affiliated entity, Sam's Club stores, accounted for
approximately 25% and 6%, respectively, of its total net sales. 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 business, financial condition, results of
operations, or prospects of Pillowtex and reorganized Pillowtex.

Labor Relations

As of March 1, 2002, Pillowtex had approximately 9,200 employees. As of
that date, approximately 75% of Pillowtex's employees were in areas covered by
collective bargaining agreements, and approximately 54% of those employees had
chosen to have union dues deducted from their pay checks.

Since 1991, the Union of Needletrades, Industrial and Textile Workers
(UNITE) campaigned to organize hourly workers of Pillowtex plants in Concord,
North Carolina, Kannapolis, North Carolina, and Salisbury, North Carolina. In
June 1999, UNITE was elected as a bargaining representative for hourly workers
at those plants. In February 2000, Pillowtex and UNITE entered into a contract
covering employees at those plants, as well as the employees represented by
UNITE at Pillowtex's plants in Eden, North Carolina; Phenix City, Alabama;
Columbus, Georgia; and Fieldale, Virginia. Pillowtex cannot be certain that it
or reorganized Pillowtex will not face similar campaigns at other plants in the
future or as to the effect that any such campaign would have on the productivity
of its workforce or labor costs.

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 and reorganized Pillowtex.

14

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. While it
has not experienced problems to date, no assurance can be given that Pillowtex
and reorganized Pillowtex will not have difficulty attracting and retaining such
personnel in the future as a result of the Chapter 11 Cases or other factors.

Pillowtex's Reorganization Will Require Substantial Effort By Management

Pillowtex's senior management has been and may continue to be required to
expend a substantial amount of time and effort in connection with the
reorganization process, which could have a disruptive impact on management's
ability to focus on the operation of the Company's business.

15

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:

Approx.
Square Owned/
Location Principal Use Feet Leased
-------- ------------- ------ ------

Dallas, Texas Feather and down processing for Pillow and Pad Division 104,000 Owned
and administrative offices
Dallas, Texas Manufacturing and distribution for Pillow and Pad Division 150,000 Owned
Phenix City, Alabama Manufacturing and warehouse for Bed and Bath Division 777,681 Owned
Phenix City, Alabama Manufacturing for Bed and Bath Division 220,000 Owned
Scottsboro, Alabama Manufacturing and warehouse for Bed and Bath Division 272,800 Owned
Scottsboro, Alabama Warehouse for Bed and Bath Division 135,000 Leased
Los Angeles, California Manufacturing and distribution for Pillow and Pad Division 320,000 Leased
Columbus, Georgia Manufacturing and warehouse for Bed and Bath Division 727,246 Owned
Macon, Georgia Warehouse for Bed and Bath Division 220,000 Owned
Chicago, Illinois Manufacturing and distribution for Pillow and Pad Division 121,000 Owned
Tunica, Mississippi Manufacturing and distribution for Pillow and Pad Division 288,000 Owned
New York, New York Sales office and showroom for all divisions 64,490 Leased
Concord, North Carolina Manufacturing for Bed and Bath Division 696,963 Owned
Eden, North Carolina Manufacturing and warehouse for Bed and Bath Division 529,273 Owned
Eden, North Carolina Warehouse for Bed and Bath Division 411,531 Owned
Kannapolis, North Carolina Manufacturing for Bed and Bath Division 682,407 Owned
Kannapolis, North Carolina Headquarters and manufacturing and warehouse for Bed and Bath 5,863,041 Owned
Division
Rockwell, North Carolina Manufacturing for Bed and Bath Division 98,240 Owned
China Grove, North Carolina Manufacturing and warehouse for Bed and Bath Division 567,000 Owned
Hanover, Pennsylvania Manufacturing and distribution for Pillow and Pad Division 291,000 Owned
Mauldin, South Carolina Warehouse and distribution for Bed and Bath Division 746,600 Owned
Union, South Carolina Manufacturing for Bed and Bath Division 95,700 Owned
Fieldale, Virginia Manufacturing and warehouse for Bed and Bath Division 973,253 Owned
Martinsville, Virginia Warehouse for Bed and Bath Division 100,000 Leased
Toronto, Ontario, Canada Manufacturing and distribution for Pillow and Pad Division 60,000 Leased

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 28 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.

On March 1, 2002, Pillowtex announced the closing of the towel finishing
operations at its Phenix City, Alabama and Columbus, Georgia facilities. The
towel warping departments in Columbus, Georgia will be moved to an existing
weaving facility in Phenix City, Alabama, which will continue to operate. The
closings, which are anticipated to be completed by June 1, 2002, will eliminate
the jobs of approximately 980 employees. The majority of the lost production at
the Phenix City finishing plant will be replaced by increased production at
Pillowtex's towel finishing operation in Kannapolis, North Carolina, where
approximately 200 employees are expected to be hired.

In addition, Pillowtex will be closing its automated sewing facility in
Dallas, Texas and consolidating the facility's operations into its other pillow
and pad facilities. The closing is anticipated to be completed by May 31, 2002
and will eliminate the jobs of approximately 97 employees.

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 financial position or results of
operations of Pillowtex or reorganized Pillowtex.

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

None.

16

PART II

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

The Company's common stock, par value $0.01 per share ("Common Stock"), was
traded on the New York Stock Exchange (the "NYSE") under the symbol "PTX" until
the NYSE suspended trading of the Common Stock on November 14, 2000 and then
subsequently de-listed the Common Stock from trading on the NYSE on January 23,
2001. After the NYSE suspended trading in the Common Stock, the Common Stock
began trading on the over-the-counter electronic bulletin board (the "OTCBB")
under the symbol "PTEXQ.OB." The following table sets forth for the periods
indicated the high and low reported bid prices on the OTCBB of the Common Stock:

Fiscal Year: High Low
---- ---
2001

Fourth Quarter ............................. $ 3/16 $ 1/16
Third Quarter .............................. 3/16 1/8
Second Quarter ............................. 3/16 1/16
First Quarter .............................. 11/16 1/8

2000
Fourth Quarter (from 11/14/00) ............. $ 1/2 $ 1/4

The following table sets forth for the periods indicated the high and low sales
prices on the NYSE of the Common Stock:

Fiscal Year: High Low
---- ---
2000

Fourth Quarter (through 11/13/00) .......... $2 15/16 $ 1/2
Third Quarter .............................. 5 1 1/4
Second Quarter ............................. 6 7/16 3 1/2
First Quarter .............................. 6 2/16 3 14/16

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

As of March 20, 2002, Pillowtex had approximately 1,036 holders of record
of Common Stock.

Pillowtex paid no dividends on the Common Stock during fiscal years 2000
or 2001. Under the terms of the DIP Financing Facility, 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."
Pillowtex does not expect to pay any further dividends on the Common Stock.

Assuming consummation of the Plan in accordance with its terms,
Pillowtex's outstanding capital stock, including the Common Stock, will be
cancelled without consideration. See "Item 1. Business -- Risk Factors --
Holders Of Pillowtex's Capital Stock To Receive No Value Under Plan."

17

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 five fiscal years ended 2001. The data
should be read in conjunction with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements and related notes included elsewhere in this Annual Report. The
selected financial data presented for 1997 through 2000 have been restated to
reflect the Blanket Division as a discontinued operation.

Year Ended

Statement of Operations Data: 2001 2000 1999 1998(1) 1997(2)

Net sales $ 1,031,055 $ 1,259,004 $ 1,432,434 $ 1,368,825 $ 378,851
Cost of goods sold 992,540 1,222,572 1,241,903(3) 1,112,148(3) 302,700
----------- ----------- ----------- ----------- -----------
Gross profit 38,515 36,432 190,531 256,677 76,151
Selling, general, and administrative expenses 92,275 126,353 114,020 111,807 50,436
Impairment of long-lived assets
and restructuring charges 51,720 24,400 2,000 -- --
----------- ----------- ----------- ----------- -----------
Earnings (loss) from operations (105,480) (114,321) 74,511 144,870 25,715
Interest and other expenses 64,666 107,062 87,279 72,283 22,461
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing operations
before reorganization items, income taxes and
extraordinary items (170,146) (221,383) (12,768) 72,587 3,254
Reorganization items 31,401 19,368 -- -- --
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing operations
before income taxes and extraordinary items (201,547) (240,751) (12,768) 72,587 3,254

Income tax expense (benefit) -- (93,361) (2,740) 28,230 1,695
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing operations
before extraordinary items (201,547) (147,390) (10,028) 44,357 1,559
Earnings (loss) from discontinued
operations, net (21,214) (115,018) (9,504) (1,502) 6,677
----------- ----------- ----------- ----------- -----------
Earnings (loss) before extraordinary items (222,761) (262,408) (19,532) 42,855 8,236

Extraordinary items, net -- -- -- -- (919)
----------- ----------- ----------- ----------- -----------
Net earnings (loss) (222,761) (262,408) (19,532) 42,855 7,317

Preferred dividends and accretion 16,358 8,928 12,294 2,097 85
----------- ----------- ----------- ----------- -----------
Earnings (loss) available for common
shareholders $ (239,119) $ (271,336) $ (31,826) $ 40,758 $ 7,232
=========== =========== =========== =========== ===========
Basic earnings (loss) per common share:
Continuing operations $ (15.29) $ (10.97) $ (1.58) $ 3.00 $ 0.13
Discontinued operations (1.49) (8.07) (0.67) (0.11) 0.62
Extraordinary items -- -- -- -- (0.08)
----------- ----------- ----------- ----------- -----------
Basic earnings (loss) per common share $ (16.78) $ (19.04) $ (2.25) $ 2.89 $ 0.67
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding - basic 14,251 14,252 14,154 14,082 10,837
=========== =========== =========== =========== ===========
Diluted earnings (loss) per common share:
Continuing operations $ (15.29) $ (10.97) $ (1.58) $ 2.39 $ 0.13
Discontinued operations (1.49) (8.07) (0.67) (0.09) 0.61
Extraordinary items -- -- -- -- (0.08)
----------- ----------- ----------- ----------- -----------
Diluted earnings (loss) per common share $ (16.78) $ (19.04) $ (2.25) $ 2.30 $ 0.66
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding - diluted 14,251 14,252 14,154 17,653 11,086
=========== =========== =========== =========== ===========
Operating Data:
Depreciation and amortization $ 53,785 $ 57,517 $ 51,941 $ 45,888 $ 7,397
Capital expenditures 12,832 33,197 89,737 133,620 20,567
Preferred stock cash dividends -- -- 1,456 2,019 --
Common stock cash dividends -- -- 2,555 3,383 2,569
Balance Sheet Data:
Working capital $ (365,917)(4) $ (237,376)(4) $ 511,139 $ 557,968 $ 503,127
Property, plant and equipment, net 453,440 525,990 577,947 559,851 421,998
Total assets 1,087,627 1,335,769 1,671,776 1,644,736 1,393,866

Long-term debt, net of current portion 645 -- 965,323 944,493 785,359

Redeemable convertible preferred stock 99,185 82,827 73,898 63,057 62,882

Shareholders' equity (deficit) (329,118) (63,451) 207,389 237,933 196,707

(1) Amounts set forth in 1998 reflect the inclusion of Leshner from July 28,
1998.
(2) Amounts set forth in 1997 reflect the results of operations for a 53-week
period, and the inclusion of Fieldcrest Cannon from December 19, 1997
(3) Information technology costs associated with the Company's manufacturing
systems of $12.8 million and $9.4 million have been reclassified from
selling, general and administrative expense to cost of goods sold in the
1999 and 1998 consolidated statements of operations to conform with the
2001 and 2000 presentation.
(4) Includes long-term debt in default of $671.8 million in 2001 and $694.0
million in 2000.

18

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 U.S.
and Canada with approximately 9,200 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.

Proceedings Under Chapter 11 of the Bankruptcy Code

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. For further discussion of the Chapter
11 Cases, see "Item 1. Business -- Proceedings Under Chapter 11 of the
Bankruptcy Code" above and the notes to the Company's consolidated financial
statements included elsewhere in this Annual Report.

Since the Petition Date, the Debtors have conducted business in the
ordinary course. On or about March 11, 2002, the Debtors commenced delivery of
copies of the Plan and Disclosure Statement to parties in interest as required
pursuant to the Bankruptcy Code. The Debtors have until the Voting Deadline to
solicit acceptance of the Plan. Following the solicitation period, the
Bankruptcy Court will consider whether to confirm the Plan. There can be no
assurance that the Plan will be confirmed or become effective. For a brief
overview of the Plan and the conditions to the confirmation and effectiveness
thereof, see "Item 1. Business -- Proceedings Under Chapter 11 of the Bankruptcy
Code." See also "Item 1. Business -- Risk Factors -- Pillowtex Faces Significant
Challenges In Connection With Its Bankruptcy Reorganization."

During the pendency of the Chapter 11 Cases, the Debtors may, with
Bankruptcy Court approval, sell assets and settle liabilities, including for
amounts other than those reflected in the financial statements. On September 6,
2001, the Company sold the majority of the inventory and fixed assets associated
with its Blanket Division.

The Debtors are in the process of reviewing their executory contracts and
unexpired leases and have received approval from the Bankruptcy Court to reject
certain contracts and leases. The Debtors cannot presently determine the
ultimate liability for all contracts and leases that will be approved by the
Bankruptcy Court for rejection. During 2001, the Company accrued $15.8 million
for the estimated prepetition liability for those contracts and leases the
Bankruptcy Court has already approved for rejection. Approximately $10.3 million
of the prepetition liability relating to the rejected contracts and leases have
been reflected as reorganization items, and the remaining $5.5 million has been
included in the loss from discontinued operations in the accompanying
consolidated statement of operations for 2001. The Company expects to accrue
additional liabilities as more contracts and leases are approved for rejection
by the Bankruptcy Court.

The administrative and reorganization expenses resulting from the Chapter
11 Cases will unfavorably affect the Debtors' results of operations. Future
results of operations may also be adversely affected by other factors related to
the Chapter 11 Cases.

Basis of Presentation

The consolidated financial statements included elsewhere in this Annual
Report are presented in accordance with American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" (SOP 90-7), assuming that the Company
will continue as a going concern. The Company is currently operating under the
jurisdiction of Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and
continuation of the Company as a going concern is contingent upon, among other
things, the Company's ability to (a) obtain confirmation of the Plan or another
plan of reorganization, (b) comply with the terms of the DIP Financing Facility,
and (c) generate sufficient cash from operations and financing sources

19

to meet its future obligations. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might result from the resolution of these uncertainties.

While under the protection of Chapter 11 of the Bankruptcy Code, the
Company may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the financial statements.
Additionally, the amounts reported on the consolidated balance sheet could
materially change because of changes in business strategies and the effects of
the Plan or another plan of reorganization.

In the Chapter 11 Cases, substantially all unsecured and under-secured
liabilities as of the Petition Date are subject to compromise or other treatment
under the Plan or another plan of reorganization, which must be confirmed by the
Bankruptcy Court as described above. Generally, all actions to enforce or
otherwise effect repayment of pre-petition liabilities, as well as all pending
litigation against the Debtors, are stayed while the Debtors continue their
business operations as debtors-in-possession. The last date by which claims
against the Company had to be filed in the Bankruptcy Court if the claimants
wished to receive any distribution in the Chapter 11 Cases, i.e., the bar date,
was July 23, 2001. Differences between amounts shown by the Debtors and claims
filed by creditors will be investigated and amicably resolved, adjudicated
before the Bankruptcy Court, or resolved through another dispute resolution
process. The ultimate amount of and settlement terms for liabilities subject to
compromise are subject to the terms of the Plan or another plan of
reorganization, as confirmed by the Bankruptcy Court, and accordingly are not
presently determinable.

Pursuant to SOP 90-7, professional fees associated with the Chapter 11
Cases are expensed as incurred and reported as reorganization items. Interest
expense is reported only to the extent that it will be paid during the Chapter
11 Cases or that it is probable that it will be an allowed claim.

Critical Accounting Policies

Management considers certain accounting policies related to sales returns
and allowances, inventory, and impairment of long-lived assets 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. See note 1 in the notes to the
consolidated financial statements included elsewhere in this Annual Report for a
detailed discussion of the application of all accounting policies adopted by the
Company.

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. At
December 29, 2001, a reserve of $7.1 million was recorded and included as an
allowance against trade accounts receivable. This allowance includes $2.1
million for returns and allowances not yet claimed by customers, but which
management believes is necessary based on historical deductions 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.

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. Given the Company's 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 reserves are required.

If the assumptions made by management in estimating sales returns and
allowances and inventory reserves do not reflect the actual expenses to be
incurred, net sales and gross profit could be reduced significantly.

When management determines that a long-lived asset has been impaired, an
estimate of the fair value 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. The impairment charges recorded by the Company in fiscal 2001
primarily relate to assets that will be sold. Assets held for sale are recorded
at their estimated fair values. Management bases its estimate of the fair value
on available information from the sale of similar assets in similar locations
and appraisals. Given the

20

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 29, 2001, the Company has $6.1 million
in assets held for sale, of which $4.1 million relates to real property and $2.0
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 in 2001 and the
adjustments recorded by the Company during fiscal 2001, management believes the
likelihood is reasonably possible that the Company will not fully recover these
balances and that additional impairment charges may be required in subsequent
periods.

Results of Operations

The following table presents certain historical statements of operations
data as a percentage of net sales for the periods indicated. The consolidated
statements of operations for the years ended December 30, 2000 and January 1,
2000 have been restated to present the Blanket Division as a discontinued
operation.

Year Ended
---------------------------------------------
December 29, December 30, January 1,
2001 2000 2000
---- ---- ----

Net sales....................... 100.0% 100.0% 100.0%
Cost of goods sold.............. 96.3 93.2 86.7
Inventory write-downs........... -- 3.9 --
----- ----- ----
Gross profit.................... 3.7 2.9 13.3
Selling, general, and
administrative expenses..... 9.0 10.0 8.0
Impairment of long-lived assets.
and restructuring charges... 5.0 2.0 0.1
----- ----- ----
Earnings (loss) from continuing
operations.................. (10.3) (9.1) 5.2
Interest and other expenses..... 6.3 8.5 6.1
Reorganization items............ 3.0 1.5 --
----- ----- ----
Loss from continuing
operations before income taxes (19.6)% (19.1)% (0.9)%
===== ===== ====

The operating results of the Company's segments are disclosed in note 18
to the consolidated financial statements included elsewhere in this Annual
Report.

Fiscal Year 2001 Compared to Fiscal Year 2000

Net Sales. Net sales were down from $1,259.0 million in 2000 to $1,031.1
---------
million in 2001, a decrease of $227.9 million or 18.1%. Approximately $86.0
million of the decrease in net sales in 2001 is 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 9.4% in 2001 as compared to 2000. This decrease is due to the
continued slow down in the US economy and increased competition from imports.

Gross Profit. Gross profit increased $2.1 million from $36.4 million in
------------
2000 to $38.5 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 slow down 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 3.7% in 2001, compared to 6.8% in 2000,
excluding the inventory write-downs in 2000. The decrease is 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.
The Company's gross margin continues to experience downward pressure from the
slowing U.S. economy and increased competition from abroad.

21

Selling, General, and Administrative ("SG&A") Expense. SG&A expense in
-----------------------------------------------------
2001 decreased $34.1 million from $126.4 million in 2000 to $92.3 million in
2000. The decrease is 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 included $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 included $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 reflects 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. As
the reorganization process continues, it is possible that additional asset
impairments may be required and that these impairments may be material to the
Company's financial position and results of operations.

Restructuring Charges. During 2001, the Company incurred $10.8 million in
---------------------
restructuring charges. Approximately $6.5 million of such charges relate 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. The annual savings expected to be
realized by the facility closures, early retirement plan and reduction in force
are approximately $20.0 to $30.0 million.

Interest and Other Expenses. Interest and other expenses 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 interest and other expenses 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
prepetition 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 have
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.

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 was $18.3 million in 2001, compared to $115.0 million in 2000. The 2000
loss included 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 incurred in 2001 was $3.0 million.

Fiscal Year 2000 Compared to Fiscal Year 1999

Net Sales. Net sales were down from $1,432.4 million in 1999 to $1,259.0
---------
million in 2000, a decrease of $173.4 million or 12.1%. The general slow down in
the U.S. economy in the last quarter of 2000, and Pillowtex's filing of the
Chapter 11 Cases were the primary contributors to the sharp decline in sales
volume for the fourth

22

quarter of 2000 across all segments. Other factors that adversely affected sales
in earlier quarters of 2000 were increased competition from imports, higher
inventory levels held by many of the Company's customers and an unexpected
softening in demand in the Company's institutional and regional discount
markets. In addition, approximately $50 million of the sales decrease was
attributable to the loss of a specific customer during 2000, affecting both the
Bed and Bath and Pillow and Pad Divisions.

Gross Profit. Gross profit decreased $154.1 million from $190.5 million in
------------
1999 to $36.4 million in 2000. 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 slow down 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.

Excluding the impairment charges, gross margin decreased to 6.8% in 2000,
compared to 13.3% in 1999. In response to declines in sales volume, the Company
reduced production levels, including idling several plants in the Bed and Bath
divisions in the fourth quarter. This resulted in higher unabsorbed overhead
expenses of approximately $43.0 million in 2000. In addition, the Company
experienced higher raw material costs, principally chemicals, packaging,
feathers and cotton.

Selling, General, and Administrative ("SG&A") Expenses. SG&A expenses for
------------------------------------------------------
fiscal year 2000 increased $12.4 million to $126.4 million from $114.0 million
in 1999. This increase was due to higher bad debt expense in 2000 resulting from
the deteriorating creditworthiness of certain of the Company's customers,
severance payments made to the Company's former chief executive officer and
higher professional fees related to the Company's financial difficulties prior
to the Petition Date, partially offset by strict cost controls.

Impairment of Long-Lived Assets. During the fourth quarter of 2000, the
-------------------------------
Company decided to permanently idle and sell certain manufacturing facilities
and equipment and as a result determined that the carrying value of such assets
was impaired. The impairment charge of $24.4 million included $4.6 million
related to real property and $19.8 million related to equipment and
miscellaneous corporate assets.

Interest and Other Expenses. Interest and other expenses increased $19.8
---------------------------
million to $107.1 million in 2000, compared to $87.3 million in 1999. This
increase in interest and other expenses was the result of an approximately $69
million increase in average outstanding debt, additional fees, expenses and
higher interest rates from restructuring the Company's debt and approximately
$2.9 million in interest cost related to purchase commitments on certain cotton
contracts. The Company's average interest rate increased from 8.2% in 1999 to
10.1% for 2000. Interest expense excluded approximately $4.0 million related to
the Company's debt that is subject to compromise for the period from the
Petition Date through December 30, 2000.

Reorganization Items. During the fourth quarter of 2000, Pillowtex
--------------------
recognized a $19.4 million charge associated with filing of the Chapter 11
Cases. Approximately $17.6 million of this charge related to the non-cash
write-off of the unamortized discount on 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 Blanket Division generated a loss
---------------------------------
of $115.0 million in 2000 compared to a loss of $9.5 million in 1999. The 2000
loss included 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 1999 loss included an inventory write-down charge of $4.9
million.

Liquidity and Capital Resources

DIP Financing Facility

On December 12, 2000, the Bankruptcy Court entered an order (the "DIP
Financing Order") authorizing the Debtors to enter into a $150.0 million
debtor-in-possession financing facility, including a $60.0 million letter of
credit sub-facility, (i.e., the "DIP Financing Facility") with Bank of America,
N.A. as agent for a syndicate of financing institutions comprised of certain of
the Company's prepetition senior secured lenders, and to grant first priority
priming liens and mortgages, security interests, liens (including priming
liens), and superiority claims on substantially all of the assets of the Debtors
to secure the DIP Financing Facility. Under the DIP Financing Order, the Debtors
were required to remit (or were deemed to have remitted) to the prepetition
lenders as payment in respect of the prepetition senior debt facilities
described below all cash collateral constituting proceeds of the

23

prepetition collateral up to $150 million. All such cash collateral so remitted
(or deemed remitted) was required to be re-advanced (or was deemed re-advanced)
to the Debtors on a postpetition basis as the Designated Post-Petition Loans.

On March 6, 2001, the DIP Financing Facility was amended to, among other
things, reduce the size of the facility to $125.0 million, including the $60.0
million letter of credit sub-facility. The Company obtained the reduction in the
size of the DIP Financing Facility based upon its determination that, as a
result of its improved liquidity position, it did not need as much availability
as originally provided by the facility and its desire to reduce the amount of
its monthly unused commitment fee.

On August 13, 2001, the Debtors and the lenders under the DIP Financing
Facility entered into an amendment to the facility providing for, among other
things, the (a) modification and addition of certain reporting requirements, (b)
modification of the financial covenant requiring maintenance of an asset
coverage ratio, (c) elimination of the financial covenant requiring maintenance
of a minimum operating cash flow, (d) addition of a financial covenant requiring
maintenance of a minimum level of EBITDA, and (e) elimination of a nine-month
extension provision.

On November 21, 2001, the Bankruptcy Court entered an order authorizing
the Debtors to enter into another amendment to the facility, dated as of
November 14, 2001, pursuant to which, (a) the scheduled termination date of the
DIP Financing Facility was extended to June 30, 2002, (b) certain covenants were
modified based on the Debtors' three-year strategic plan, (c) a new covenant was
added limiting the incurrence of costs for relocation of equipment and costs
associated with facility closures, (d) the commitment under the DIP Financing
Facility was reduced from $125 million to $100 million, and (e) certain events
of default were added relating to the Debtors' progress toward emergence from
bankruptcy, which required the Debtors to file on or prior to December 31, 2001
a feasible plan of reorganization and disclosure statement and to obtain the
Bankruptcy Court's approval of a disclosure statement on or prior to March 1,
2002, and further requires the Debtors to (i) obtain confirmation of a plan of
reorganization on or prior to May 15, 2002 and (ii) cause a plan of
reorganization to become effective on or prior to June 30, 2002.

The Debtors and the lenders under the DIP Financing Facility entered into
another amendment to the facility, dated as of February 8, 2002, providing for,
among other things, the (a) further modification of the financial covenant
relating to the asset coverage ratio, (b) modification of the covenant limiting
the incurrence of costs for relocation of equipment and costs associated with
facility closures, and (c) modification of the covenant relating to the level of
capital expenditures. This amendment was obtained to allow the Company to
proceed with certain aspects of the Company's business plan.

The DIP Financing Facility will expire on the earliest to occur of (a)
June 30, 2002, (b) the date on which the Plan or another plan of reorganization
becomes effective, (c) any material non-compliance with any of the terms of the
DIP Financing Order, (d) any event of default that shall have occurred under the
DIP Financing Facility, or (e) consummation of a sale of substantially all of
the assets of the Company pursuant to an order of the Bankruptcy Court.

Amounts borrowed under the DIP Financing Facility bear interest at the
option of the Company at the rate of London Interbank Offered Rate ("LIBOR")
plus 4.00% or Bank of America's Base Rate (which is the higher of the Federal
Funds Rate or Prime Rate plus, in either case, 0.50%) plus 1.50%. In addition to
a facility fee and an underwriting fee of 0.50% each, there is an unused
commitment fee of 0.75%, a letter of credit fee of 4.00%, and a letter of credit
fronting fee of 0.20%. The DIP Financing Facility is secured by a first priority
priming lien on the real and personal assets of the Company that also secure the
prepetition senior secured credit facilities described below, a junior lien on
certain plant an