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 and equipment that secure three of the industrial revenue bond
facilities described below, and a first priority lien on all post-petition real
and personal assets of the Company. The documentation evidencing the DIP
Financing Facility contains financial covenants requiring maintenance of an
asset coverage ratio and a minimum level of EBITDA, as well as other covenants
that limit, among other things, the incurrence of costs for relocation of
equipment and costs associated with facility closures, indebtedness, liens,
sales of assets, capital expenditures and investments, and prohibit dividend
payments. The net proceeds of certain asset sales outside the ordinary course of
business will reduce prepetition indebtedness under the senior secured credit
facilities; otherwise, the net proceeds of asset sales outside the ordinary
course of business will be applied as a reduction of the DIP Financing Facility.

No cash borrowings were outstanding on the DIP Financing Facility at
December 29, 2001. Availability under the DIP Financing Facility is based upon
the balances of eligible assets, reduced by outstanding debt and letters of
credit. Availability under the DIP Financing Facility as of December 29, 2001
was approximately $25.0 million. As of December 29, 2001, the Company had $40.4
million in cash and cash equivalents, including $3.9 million in

24

cash which was being held by the lenders under the DIP Financing Facility as
collateral for outstanding letter of credit. As of December 29, 2001, the
Company had $16.3 million in letters of credit outstanding under the DIP
Financing Facility. As prepetition letters of credit expire under the Company's
senior secured revolving credit facility described below, to the extent they are
renewed, they will be reissued under the DIP Financing Facility or, assuming
consummation of the Plan in accordance with its terms, the Exit Financing
Revolver Facility.

Assuming consummation of the Plan in accordance with its terms, holders of
claims in respect of the DIP Financing Facility other than those relating to
Designated Post-Petition Loans will be paid cash in an amount equal to such
claim and holders of claims relating to Designated Post-Petition Loans will
receive a note under the Exit Term Loan in an amount equal to the amount of such
holder's Designated Post-Petition Loans. In addition, letters of credit issued
under the DIP Financing Facility will be replaced with letters of credit issued
under the Exit Financing Revolver Facility.

Senior Debt Facilities

In December 1997, in connection with the Fieldcrest Cannon acquisition,
the Company entered into senior secured revolving credit and term loan
facilities with a group of financial and institutional investors for which Bank
of America, N.A. acts as the administrative and collateral agent. These
facilities consisted of a $350.0 million revolving credit facility and a $250.0
million term loan facility. The term loan facility consisted of a $125.0 million
Tranche A Term Loan and a $125.0 million Tranche B Term Loan. Effective July 28,
1998, the Company amended these facilities by increasing the Tranche B Term Loan
to $225.0 million. The increase occurred in conjunction with the acquisition of
Leshner, allowing the Company to fund the transaction and reduce borrowings
under the revolving credit facility.

As of December 29, 2001, (a) outstanding prepetition borrowings under the
revolving credit facility were $233.0 million, (b) outstanding prepetition
borrowings under the term loan facility were $242.0 million in the aggregate,
and (c) outstanding letters of credit under the revolving credit facility were
the $11.1 million in the aggregate. Pursuant to the DIP Financing Order, $150
million of prepetition borrowings under the senior debt facilities had become
subject to treatment as postpetition debt. As prepetition letters of credit
expire, to the extent they are renewed, they will be reissued under the DIP
Financing Facility or, assuming consummation of the Plan in accordance with its
terms, the Exit Financing Revolver Facility.

As amended, amounts outstanding under the revolving credit facility and
the Tranche A Term Loan currently bear interest at a rate based upon LIBOR plus
3.50%. The Tranche B Term Loan bears interest on a similar basis to the Tranche
A Term Loan, plus an additional margin of 0.50%. The weighted average annual
interest rate on outstanding borrowings under the various prepetition senior
credit facilities for the twelve months ended December 29, 2001 was 7.82%. The
prepetition senior debt facilities expired on January 31, 2002.

The senior debt facilities are guaranteed by each of the domestic
subsidiaries of the Company, and are secured by first priority liens on all of
the capital stock of each domestic subsidiary of the Company and by 65% of the
capital stock of the Company's foreign subsidiaries. The Company has also
granted a first priority security interest in all of its presently unencumbered
and future domestic assets and properties, and all presently unencumbered and
future domestic assets and properties of each of its subsidiaries.

Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the
Company to make scheduled interest payments on the prepetition senior debt
facilities. Even though these payments are being made, the Company remains in
default under the prepetition senior debt facilities.

Assuming consummation of the Plan in accordance with its terms, the
indebtedness under the senior debt facilities will be cancelled and, in exchange
therefor, holders of claims in respect of the senior debt facilities will become
entitled to receive New Common Stock.

Overline Facility

In May 1999, the Company entered into a $20.0 million senior unsecured
revolving credit facility (the "Overline Facility") to obtain additional working
capital availability. On July 27, 1999, the Overline Facility was amended to
increase the amount of funds available to $35.0 million and to secure it with
the same assets securing the senior debt facilities described above. As of
December 29, 2001, outstanding borrowings under the Overline Facility were $34.7
million. The Overline Facility is guaranteed on a senior basis by the Company's
domestic subsidiaries. Amounts borrowed under the Overline Facility bear
interest at a rate based upon LIBOR plus 4.5% or the base rate plus 3.0%, at the
Company's option. The Overline Facility matured on January 31, 2002.

25

Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the
Company to make scheduled interest payments on the Overline Facility. Even
though these payments are being made, the Company remains in default under the
Overline Facility.

Assuming consummation of the Plan in accordance with its term, the
indebtedness under the Overline Facility will be cancelled and, in exchange
therefor, holders of claims in respect of the Overline Facility will become
entitled to receive New Common Stock and New Warrants.

Senior Subordinated Debt

In connection with the Fieldcrest Cannon acquisition, the Company issued
$185.0 million aggregate principal amount of 9% Senior Subordinated Notes due
2005 (the "9% Notes"), with interest payable semiannually commencing June 15,
1998. The 9% Notes are general unsecured obligations of the Company, are
subordinated in right of payment to all existing and future senior indebtedness,
and rank pari passu with the 10% Notes described below. As of December 29, 2001,
all of the 9% Notes remained outstanding.

On November 12, 1996, the Company issued $125.0 million aggregate
principal amount of 10% Senior Subordinated Notes due 2006 (the "10% Notes"),
with interest payable semiannually commencing May 15, 1997. The 10% Notes are
general unsecured obligations of the Company, are subordinated in right of
payment to all existing and future senior indebtedness, and rank pari passu with
the 9% Notes. As of December 29, 2001, all of the 10% Notes remained
outstanding.

The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior
subordinated basis by each of the existing and future domestic subsidiaries of
the Company and each other subsidiary of the Company that guarantees the
Company's obligations under the senior debt facilities described above. The
guarantees are subordinated in right of payment to all existing and future
senior indebtedness of the relevant guarantor.

The Company is in default under the indentures governing both the 9% Notes
and the 10% Notes. No principal or interest payment has been or will be made on
the 9% Notes or the 10% Notes during the pendency of the Chapter 11 Cases.

Assuming consummation of the Plan in accordance with its terms, the
indebtedness under the 9% Notes and the 10% Notes will be cancelled and, in
exchange therefor, holders of claims in respect of 9% Notes or 10% Notes will
become entitled to receive New Common Stock and New Warrants.

Fieldcrest Cannon 6% Convertible Debentures

As a result of the Company's acquisition of Fieldcrest Cannon, the
outstanding 6% Convertible Debentures are convertible, at the option of the
holders, into a combination of cash and Common Stock. As of December 29, 2001,
approximately $85.2 million aggregate principal amount of the 6% Convertible
Debentures remain outstanding. If all such outstanding 6% Convertible Debentures
were converted at such date, the resulting cash component of the conversion
consideration would have been approximately $57.2 million.

Prior to the Petition Date, Fieldcrest Cannon issued certain non-interest
bearing subordinated promissory notes (the "Cash Claimant Notes") in respect of
the unpaid cash portion of the conversion consideration owing to certain holders
of the 6% Convertible Debentures who had surrendered their debentures for
conversion, but had not been paid the cash portion of the conversion
consideration. As of December 29, 2001, the aggregate amount of the outstanding
Cash Claimant Notes was $5.2 million.

The 6% Convertible Debentures and Cash Claimant Notes are general
unsecured obligations of Fieldcrest Cannon. Fieldcrest Cannon is in default
under the indenture governing the 6% Convertible Debentures and the Cash
Claimant Notes. No principal or interest payment has been or will be made on the
6% Convertible Debentures or Cash Claimant Notes during the pendency of the
Chapter 11 Cases.

Assuming consummation of the Plan in accordance with its terms, the
indebtedness under the 6% Convertible Debentures and the Cash Claimant Notes
will be cancelled and, in exchange therefor, holders of claims in respect of 6%
Convertible Debentures or Cash Claimant Notes will become entitled to receive
New Common Stock and New Warrants.

26

Industrial Revenue Bonds

The Company presently has obligations in respect of two industrial revenue
bond facilities (the "IRB Facilities"). One of the IRB Facilities is secured by
liens on specified plants and equipment and by a letter of credit. The other IRB
Facility is secured by a letter of credit. As of December 29, 2001, $13.2
million of bonds in the aggregate were outstanding under the IRB Facilities.

On February 6, 2001, the Bankruptcy Court authorized the Company to make
scheduled principal and interest payments on the IRB Facilities. Even though
these payments are being made, the Company remains in default of its obligations
under each of the IRB Facilities.

Assuming consummation of the Plan in accordance with its terms, the IRB
Facilities will be reinstated and the letters of credit issued in respect
thereof will be replaced, substituted, or otherwise satisfied with equivalent
letters of credit to be issued under the Exit Financing Revolver Facility.

Adequacy of Capital Resources

As discussed above, the Debtors are operating their businesses as
debtors-in-possession under Chapter 11 of the Bankruptcy Code. 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 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 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.

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 confirmation of the Plan or
another plan of reorganization could materially change the amounts reported in
the consolidated financial statements.

Pursuant to the Bankruptcy Code, prepetition obligations of the Debtors of
approximately $485.0 million as of December 29, 2001, 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 what the ultimate liability will be for all
contracts and leases approved by the Bankruptcy Court for rejection, but the
estimated prepetition liability for those the Bankruptcy Court has already
approved is approximately $15.8 million. The Company expects to accrue
additional liabilities as more contracts and leases are approved for rejection
by the Bankruptcy Court.

27

New Accounting Standards

In 2000, the Financial Accounting Standards Board's Emerging Issues Task
Force (EITF) issued EITF No. 00-14, "Accounting for Certain Sales Incentives",
which the Company was required to adopt at the beginning of fiscal 2001. The
Company was already in compliance with the accounting guidance prescribed in
EITF No. 00-14, and as a result, the adoption of EITF No. 00-14 had no impact on
the Company's financial position or results of operations. The EITF also issued
EITF No. 00-22, "Accounting for `Points' and Certain Other Time-Based or
Volume-Based Sales Incentive Offers, and Offers for Free Products and Services
to be Delivered in the Future", and EITF No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products"
(collectively, the "EITFs"), which address various aspects of accounting for
consideration given by a vendor to a customer or a reseller of products. The
Company is required to adopt the provisions of the EITFs as of the beginning of
fiscal 2002, which commenced December 30, 2001. The EITFs will require the
Company to classify all consideration paid to customers as a reduction to
revenue. Prior to December 30, 2001, the Company classified amounts paid to
customers for co-operative advertising and marketing in selling, general, and
administrative expenses. If the Company had adopted these EITFs in 2001,
approximately $19.0 million of selling, general, and administrative expense
would have been reclassified as a reduction of net sales.

In July 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations completed after June 30, 2001, and
specifies criteria for the recognition and reporting of intangible assets apart
from goodwill. Under SFAS No. 142, beginning in fiscal 2002, the Company will no
longer amortize goodwill and intangible assets with indefinite lives, but
instead will test those assets for impairment at least annually. Intangible
assets with definite useful lives will be amortized over such lives to their
estimated residual values. The Company is required to adopt SFAS No. 142 on
December 30, 2001. If the Company had adopted SFAS No. 142 in 2001, selling,
general, and administrative expenses would have decreased by $6.3 million,
representing the amortization expense recognized on the Company's goodwill and
intangible assets with indefinite lives.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supercedes both SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("Opinion 30"), for the disposal of a segment
of a business (as previously defined in Opinion 30). SFAS No. 144 also retains
the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how
to present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will
never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under SFAS No. 142.

The Company is required to adopt SFAS No. 144 as of December 30, 2001.
Management does not expect the adoption of SFAS No. 144 for long-lived assets
held for use to have a material impact on the Company's financial statements
because the impairment assessment under SFAS No. 144 is largely unchanged from
SFAS No. 121. The provisions of SFAS No. 144 for assets held for sale or other
disposal generally are required to be applied prospectively after the adoption
date to newly initiated disposal activities. Therefore, the Company cannot
presently determine the effects that adoption of SFAS No. 144 will have on the
Company's financial statements.

28

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------

Pillowtex is exposed to market risk from changes in interest rates on debt
and foreign currency exchange rates. Pillowtex's exposure to interest rate risk
consists of floating rate debt based on the LIBOR plus an adjustable margin. The
annual impact on the Company's results of operations of a 100 basis point
interest rate change on the December 29, 2001 outstanding balance of the
variable rate debt would be approximately $6.6 million. This same calculation
for 2000 was $6.8 million.

Pillowtex's exposure to fluctuations in foreign currency exchange rates is
due primarily to a foreign subsidiary domiciled in Canada. Pillowtex's Canadian
subsidiary uses the Canadian dollar as its functional currency. Pillowtex
generally does not use financial derivative instruments to hedge foreign
currency exchange rate risks. The Canadian subsidiary is not material to
Pillowtex's consolidated results of operations; therefore, the impact of a 10%
change in the exchange rate at December 29, 2001 would not have a significant
impact on the Company's results of operations or financial position.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------

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

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

Not applicable.

29

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
----------------------------------------------

DIRECTORS OF THE REGISTRANT

The following is a list of directors, their ages, positions and business
experience as of March 20, 2002.

Name and Position Age Experience
- ----------------- --- ----------

Ralph W. LaRovere 66 Mr. LaRovere became a director of the Company in May 1997. He has served
as Chairman of the Board of the Company since November 2000. He retired
from J.C. Penney Company, Inc. after a 36-year career having served as
Vice President and Director of Merchandising for the Home and Leisure
Division. He also served in various management positions in New York, Los
Angeles, and Dallas.

Paul G. Gillease 69 Mr. Gillease became a director of the Company in October 1993. From 1989
until retiring in late 1993, Mr. Gillease was Vice President and General
Manager of DuPont Textiles, a division of E.I. DuPont de Nemours &
Company. He also served in a variety of marketing and business management
positions with DuPont. Mr. Gillease is a member of the Board of Galey &
Lord, Inc. and Guilford Mills, Inc.

William B. Madden 63 Mr. Madden became a director of the Company in February 1993. He has been
the President of Madden Securities Corporation, a general securities and
investment banking firm, located in Dallas, Texas, since 1986. Mr. Madden
is also a member of the Board of Mercantile Bank and Trust.

A. Allen Oakley 48 A. Allen Oakley has served as Executive Vice President - Manufacturing and
a director of the Company since May 2000. Prior to that time and since
1976, Mr. Oakley served in various managerial capacities for the Company
and Fieldcrest Cannon.

Mark A. Petricoff 63 Mr. Petricoff was elected a director of the Company in November 1998 to
fill a vacancy. He was a 39-year employee and former President and Chief
Executive Officer of The Leshner Corporation, a towel manufacturer
acquired by the Company in July 1998.

Scott E. Shimizu 48 Scott E. Shimizu has served as Executive Vice President - Sales &
Marketing of the Company since 1992 and a director since February 1996.
Mr. Shimizu was Executive Vice President of the Company from 1988 to
1992. He was also a director of the Company from May 1994 to May 1995.

Mary R. Silverthorne 66 Mrs. Silverthorne has been a director of the Company since December 1992.
She has for many years been actively involved in charitable and civic
activities and is a director of the Retina Foundation of the Southwest
(Dallas), the Foundation Fighting Blindness, Reading and Radio Resources
and the Assistance League of Dallas. She has not been engaged in business
activities during the past five years.

30

Anthony T. Williams 55 Anthony T. Williams has served as President and Chief Operating Officer of
the Company since November 2000 and a director since August 2000. Mr.
Williams was Executive Vice President and Chief Financial Officer of the
Company from May 2000 to October 2000. Prior to joining the Company, from
January 1999 to April 2000, Mr. Williams was a consultant. From November
1995 until December 1998, Mr. Williams was Vice President - Finance of
LucasVarity Light Vehicle Braking Systems, the world's second largest
independent manufacturer of braking systems for the automotive industry.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following are the executive officers of the Company, their ages,
position and business experience as of March 20, 2002.

Name and Position (1) Age Experience
- ------------------ --- ----------

Ralph W. LaRovere, 66 See "Item 10. Directors and Executive Officers of the Registrant -
Chairman of the Board Directors of the Registrant" above.

Anthony T. Williams, 55 See "Item 10. Directors and Executive Officers of the Registrant -
President and Chief Operating Directors of the Registrant" above.
Officer

Scott E. Shimizu, 48 See "Item 10. Directors and Executive Officers of the Registrant -
Executive Vice President - Directors of the Registrant" above.
Sales & Marketing

Michael R. Harmon, 54 Michael R. Harmon has served as Executive Vice President and Chief
Executive Vice President and Chief Financial Officer of the Company since March 2001. Prior to joining the
Financial Officer Company, Mr. Harmon spent 13 years at Galey & Lord, Inc., a $1 billion
manufacturer of textiles, where he last served as Executive Vice President
and Chief Financial Officer. Galey & Lord, Inc. filed for bankruptcy
protection under chapter 11 of the Bankruptcy Code on February 19, 2002.

A. Allen Oakley, 48 See "Item 10. Directors and Executive Officers of the Registrant -
Executive Vice President - Directors of the Registrant" above.
Manufacturing

Richard A. Grissinger, 58 Richard A. Grissinger has served as Senior Vice President - Marketing of
Senior Vice President - the Company since March 2000. From September 1998 to February 2000, he
Marketing was Senior Vice President - Marketing - Bath of the Company and from December 1997
to September 1998, Mr. Grissinger was Vice President - Marketing for the
Department Store Specialty Business of the Company. Mr. Grissinger was Business
Manager of the Bath Division of Fieldcrest Cannon from 1995 to December 1997.

Richard L. Dennard, 53 Richard L. Dennard has served as Senior Vice President - Purchasing and
Senior Vice President - Logistics of the Company since August 1999. From December 1997 to July
Purchasing and Logistics 1999, Mr. Dennard was Vice President of the Company in charge of
purchasing. From January 1997 to December 1997, Mr. Dennard served as Vice
President for Blankets and Utility Bedding for the Company and from January 1996
to December 1996, he served as Vice President of Purchasing for Utility Bedding.

31

Deborah G. Poole, 47 Deborah G. Poole has served as Vice President and Chief Information
Vice President and Chief Officer of the Company since February 1999. Prior to joining the Company,
Information Officer from 1991 to February 1999, Ms. Poole was Corporate Vice President,
Information Services of Guilford Mills, Inc., a textile manufacturer.
Guilford Mills, Inc. filed for bankruptcy protection under chapter 11 of
the Bankruptcy Code on March 13, 2002.

Donald Mallo, 52 Donald Mallo has served as Vice President - Human Resources of the Company
Vice President - since September 2000. Prior to joining the Company, Mr. Mallo practiced
Human Resources labor and employment law in New York. From 1998 through 1999, Mr. Mallo
was Senior Vice President - Human Resources of Grove Worldwide LLC, a
leading manufacturer of construction cranes and aerial work platforms.
From 1993 to 1998, Mr. Mallo was Executive Vice President - Human
Resources and Counsel for Foamex International, Inc., a large manufacturer
of polyurethane foam products for the automotive, furniture, bedding, and
medical supply industries. From 1985 until its acquisition by Foamex in
1993, Mr. Mallo was Vice President - Employee Relations for General Felt
Industries, Inc., a manufacturer of carpet cushions and related products.

John F. Sterling, 38 John F. Sterling has served as Vice President and General Counsel of the
Vice President and Company since November 1999 and as Corporate Secretary since July 2001.
General Counsel and From May 1997 to November 1999, Mr. Sterling was Associate General Counsel
Corporate Secretary of the Company. Prior to joining the Company, Mr. Sterling was an
attorney with the law firm of Thompson & Knight, P.C.

Henry T. Pollock, 61 Henry T. Pollock has served as Vice President and Treasurer of the Company
Vice President and Treasurer since March 2001. From June 2000 to November 2000, Mr. Pollock was a
consultant to the Company in the areas of finance and treasury and joined the
Company full-time in November 2000. Prior to joining the Company, Mr. Pollock
was assistant treasurer of Varity Corporation, a $2.5 billion worldwide
manufacturer of brake systems and diesel engines.

Thomas D. D'Orazio, 43 Thomas D. D'Orazio has served as Vice President and Corporate Controller
Vice President and of the Company since October 2001. Prior to joining the Company, from
Corporate Controller December 1998 to September 2001, Mr. D'Orazio was Corporate Controller of
Glatfelter, a $0.7 billion global manufacturer of specialty paper and
engineered products. From March 1994 to December 1998, Mr. D'Orazio was
Assistant Corporate Controller of Mohawk Industries, Inc., a multi-billion
producer of woven and tufted broadloom carpet and rugs for residential and
commercial applications.

John Wahoski, 49 John Wahoski has served as Vice President - Financial and Operational
Vice President - Financial and Analysis since July 2000. Prior to joining the Company, Mr. Wahoski spent
Operational Analysis 12 years at TRW Automotive Systems, a $6 billion automotive
supplier, and its predecessors where he last served as Director - Financial
and Operational Analysis.

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

- ---------------------------

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

32

Based solely on a review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that all Section 16(a) filing requirements applicable to its
directors, officers and beneficial owners of more than 10 percent of its Common
Stock were met during the year ended December 29, 2001, except that a timely
Form 4 was not filed for Paul G. Gillease, a director of the Company, for the
sale of 700 shares of Common Stock in September 2001.

ITEM 11. EXECUTIVE COMPENSATION
----------------------

Summary Compensation Table

The following table sets forth the compensation paid or accrued by the
Company to the five most highly compensated executive officers (the "Named
Executive Officers") for their services in 2001, 2000 and 1999.

---------------------------------- ------------------------
Long Term
Annual Compensation Compensation
- -------------------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Other Annual Stock Underlying All Other
Principal Position Year Salary Bonus Compensation Awards Options Compensation
(1) ($) ($) ($)(2) ($)(3) (#) ($)(4)
- -------------------------------------------------------------------------------------------------------------------

Anthony T. Williams 2001 400,000 -- 135,998 -- -- 249,237
- -------------------------------------------------------------------------------------------------------------------
President and Chief 2000 147,917 -- 19,312 -- 40,000 6,020
- -------------------------------------------------------------------------------------------------------------------
Operating Officer 1999 -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Michael R. Harmon 2001 277,083 -- 128,825 -- -- 56,661
- -------------------------------------------------------------------------------------------------------------------
Executive Vice President 2000 -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
and CFO 1999 -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Scott E. Shimizu 2001 375,000 -- -- -- -- 220,485
- -------------------------------------------------------------------------------------------------------------------
Executive Vice President - 2000 375,000 -- -- -- -- 6,271
- -------------------------------------------------------------------------------------------------------------------
Sales & Marketing 1999 375,000 -- -- 63,426 50,000 3,041
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
A. Allen Oakley 2001 300,000 -- -- -- -- 105,721
- -------------------------------------------------------------------------------------------------------------------
Executive Vice President - 2000 300,000 -- -- -- -- 8,004
- -------------------------------------------------------------------------------------------------------------------
Manufacturing 1999 300,000 12,000 -- 52,844 62,000 844
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Richard A. Grissinger 2001 284,167 -- -- -- -- 73,902
- -------------------------------------------------------------------------------------------------------------------
Senior Vice President - 2000 275,000 -- -- -- 7,500 5,627
- -------------------------------------------------------------------------------------------------------------------
Marketing 1999 275,000 -- -- 26,422 -- 2,678
- -------------------------------------------------------------------------------------------------------------------

FOOTNOTES:

(1) The Company's former Chief Executive Officer resigned from the Company
effective October 26, 2000. Since his departure, the Company has not elected or
appointed an individual to replace him as the Company's Chief Executive Officer;
however, the Board of Directors has appointed a Management Committee consisting
of Ralph W. LaRovere, Mark A. Petricoff, Anthony T. Williams and Scott E.
Shimizu to fulfill the duties of the Chief Executive Officer. No additional
compensation is paid to the members for their participation on the Management
Committee. Mr. LaRovere acts as Chairman of the Management Committee.

(2) Certain of the Company's executive officers receive personal benefits in
addition to salary and cash bonuses. The amount paid to Mr. Williams in 2001
includes $116,705 for reimbursement of moving expenses. The amount paid to Mr.
Harmon in 2001 includes $111,790 for reimbursement of moving expenses. The
amount of personal benefits has been omitted from the table for each named
executive officer for whom the aggregate amount of any benefits did not exceed
the lesser of $50,000 or 10% of the total of the annual salary and bonus
reported for the named executive officer. Personal benefit amounts paid that do
not exceed 25% of the total personal benefits received have been omitted from
this footnote.

(3) The restricted stock was issued on February 8, 1999; accordingly, one-half
of the shares awarded vested on February 8, 2000 and one-half vested on February
8, 2001.

(4) For 2001, the amount for Mr. Williams includes $120,000 paid under the
Retention Plan (as such term is hereinafter defined), $50,000 paid as a bonus to
Mr. Williams as a result of his promotion to President, $65,000 paid as a bonus
to Mr. Williams pursuant to the terms of his Employment Agreement, $6,517 for
medical insurance and $3,870 for group term life insurance; the amount for Mr.
Harmon includes $52,500 paid under the Retention Plan and $1,150 for group term
life insurance; the amount for Mr. Shimizu includes $112,500 paid under the
Retention Plan, $100,000 paid as a special retention bonus

33

approved by the Bankruptcy Court, $2,785 for medical insurance and $1,350 for
group term life insurance; the amount for Mr. Oakley includes $90,000 paid under
the Retention Plan, $10,521 for medical insurance and $1,350 for group term life
insurance; and the amount for Mr. Grissinger includes $68,750 paid under the
Retention Plan and $1,290 for group term life insurance. The amounts for 2001
also include company contributions to the Pillowtex Corporation 401(k) Plan, a
qualified ERISA plan ($3,850 for Mr. Williams; $3,011 for Mr. Harmon; $3,850 for
Mr. Shimizu; $3,850 for Mr. Oakley; and $3,862 for Mr. Grissinger).

Option Grants in Last Fiscal Year

None.

Aggregated Option Exercises in Fiscal 2001 and Option Values at December 29,
2001

Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at December 29, 2001 December 29, 2001
(#) ($)
---------------------------------- ---------------------------------
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
(#) ($)
- --------------------------------------------------------------------------------------------------------------------------

Anthony T. Williams -- -- 10,000 30,000 -- --
Michael R. Harmon -- -- - - -- --
Scott E. Shimizu -- -- 78,500 30,500 -- --
A. Allen Oakley -- -- 48,250 36,750 -- --
Richard A. Grissinger -- -- 16,875 10,625 -- --

Assuming consummation of the Plan in accordance with its terms, all
outstanding stock options will be cancelled without consideration.

Pension Plan

The Company maintains defined benefit pension plans covering substantially
all of its employees, other than employees of the Company's Canadian subsidiary,
Pillowtex Canada Inc., and other employees subject to collective bargaining
agreements. The Company funds the pension plans through annual contributions in
an amount between the minimum required and the maximum amount that can be
deducted for federal income taxes. Prior to January 1, 2000, the Company
maintained a pension plan for qualified employees in its Pillow and Pad
Division, as well as separate pension plans for qualified employees of two of
its subsidiaries, Fieldcrest Cannon and Leshner. On January 1, 2000, the Company
merged the pension plans into two new plans covering all of the qualified
salaried and hourly employees of the Company.

Certain of the Named Executive Officers have always been subject to the
surviving plan; however, prior to January 1, 2000, Scott E. Shimizu was subject
to one of the plans that was merged out of existence (the "Prior Pillowtex
Plan"). Pursuant to the terms of the new consolidated plan, such participant's
benefits for his years of service prior to January 1, 2000 will continue to be
determined using the benefit provisions of the Prior Pillowtex Plan.
Accordingly, a separate table is presented to determine the annual benefits
available to Mr. Shimizu for his years of service prior to January 1, 2000.

34

The following tables present certain information concerning annual
benefits provided under the pension plans.

For Years of Service Under Prior Plan Formula (1)
- --------------------------------------------------------------------------------------------------------------------
Years of Service
Average
Compensation*(2) -----------------------------------------------------------------------------------------
- ------------------------- 5 10 15 20 25 30 35 40

$125,000 $5,320 $10,639 $15,959 $21,279 $26,599 $31,918 $37,238 $42,558
$150,000 $6,570 $13,139 $19,709 $26,279 $32,849 $39,418 $45,988 $52,558
$175,000 $7,570 $15,139 $22,709 $30,279 $37,849 $45,418 $52,988 $60,558
$200,000 $7,570 $15,139 $22,709 $30,279 $37,849 $45,418 $52,988 $60,558
$250,000 $7,570 $15,139 $22,709 $30,279 $37,849 $45,418 $52,988 $60,558
$275,000 $7,570 $15,139 $22,709 $30,279 $37,849 $45,418 $52,988 $60,558
$300,000 $7,570 $15,139 $22,709 $30,279 $37,849 $45,418 $52,988 $60,558

- ---------------------------
*"Average Compensation" is equal to the average of the highest five years of
compensation out of the last ten years of employment.

For Years of Service Under Current Plan Formula (1)
- --------------------------------------------------------------------------------------------------------------------
Years of Service
Career Average
Compensation**(2) -----------------------------------------------------------------------------------------
- ------------------------- 5 10 15 20 25 30 35 40

$125,000 $ 9,375 $18,750 $28,125 $37,500 $42,188 $46,875 $51,563 $56,250
$150,000 $11,250 $22,500 $33,750 $45,000 $50,625 $56,250 $61,875 $67,500
$175,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500
$200,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500
$250,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500
$275,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500
$300,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500

- ---------------------------
**"Career Average Compensation" is equal to the average of all years of
compensation, where years before 1991 are considered to equal 1991 compensation.

FOOTNOTES:

(1) Estimated years of service as of January 1, 2001 for the named executive
officers are as follows:

Years of Service
---------------------------------------------
Name Prior Formula Current Formula
- ---------------------------------

Anthony T. Williams 0 2
Michael R. Harmon 0 1
Scott E. Shimizu 18 2
A. Allen Oakley 0 26
Richard A. Grissinger 0 8

(2) An employee's compensation for purposes of determining pension benefits is
calculated on substantially the same basis as the employee's cash compensation
set forth in the Summary Compensation Table. The Internal Revenue Service
maximum compensation allowed for benefits for the 2001 plan year is $170,000.
Therefore, fiscal 2001 compensation for all employees would be limited to
$170,000.

Benefits under the pension plan are integrated with Social Security and
are computed as straight life annuities. The benefits shown are not offset by
any other Company benefits or by Social Security.

Supplemental Executive Retirement Plan

The Supplemental Executive Retirement Plan (the "SERP") provides
supplemental retirement income to executive employees of the Company who are
selected by the Compensation Committee of the Board of Directors.

35

Scott E. Shimizu and A. Allen Oakley are covered by the SERP. When
combined with the pension plan and social security benefits, the SERP is
designed to provide a targeted retirement benefit equal to 50% of an executive's
final average compensation. However, the executive's actual benefit will be
determined solely by the vested balance of the executive's account balance under
the SERP. Final average compensation is the projected total cash compensation
for the five consecutive years of service with the Company ending at age 65.

An amount is credited each year to a retirement account that will
accumulate a balance sufficient to pay the supplemental retirement benefit when
the participant reaches age 65, assuming each credited amount earns 12% per year
compounded. On the date of the contribution each year, the annual accrual amount
is divided by the market value per share of Common Stock on that date to produce
a number of hypothetical shares. Each participant's supplemental retirement
account is deemed to be invested solely in hypothetical shares of Common Stock
and the balance of a participant's account as of any date can be determined by
multiplying the number of hypothetical shares credited to the participant's
account by the market value of Common Stock on that date. In the event of a
change in control of the Company, the balance of each participant's account will
be converted from hypothetical shares to a hypothetical fixed-income investment
earning 12% per annum. In general, a "change in control" occurs when (a) the
Company is no longer an independent publicly owned corporation or sells or
disposes of all or substantially all of its assets; (b) a person becomes the
beneficial owner of 35% or more of the Company's voting stock; (c) the Company
does not survive a merger or consolidation; or (d) during any consecutive
two-year period, at least a majority of the incumbent directors are not
directors who have served continuously since the beginning of the two-year
period unless the election of directors, or nomination by the Company's
shareholders, was approved by a vote of at least two-thirds of the incumbent
directors who have been in office continuously since the beginning of the
two-year period.

Vesting under the SERP occurs at the same rate as vesting under the
Company's pension plan. Immediate vesting in both plans occurs in the event of a
participant's disability or a change in control of the Company.

Payments under the SERP will be made in a single lump-sum cash payment
unless the participant elects in advance to receive installment payments. If a
participant dies before benefits are scheduled to begin, benefits will be paid
to the beneficiary designated by the participant, or, if no beneficiary was
designated, to the surviving spouse or to the participant's estate if there is
no surviving spouse.

The SERP may be amended or discontinued at any time by the Compensation
Committee of the Board of Directors or by the full Board. Any amendment may
reduce prospectively the earnings factor to be applied to a participant's
account, or may change the hypothetical investment of account balances from
hypothetical shares of Common Stock to any other hypothetical investment but may
not decrease a participant's account balance as of the date of the amendment. In
the event of a change in control, the SERP may not be amended in a way that
would adversely affect a participant's existing or future benefit without the
participant's written consent.

The SERP is unfunded. All benefits payable to a participant under the SERP
will be paid from the general assets of the Company. As a result of the filing
of the Chapter 11 Cases, each participant has the status of a general unsecured
creditor with respect to the obligation of the Company to make payments under
the SERP relating to prepetition contributions. The Compensation Committee may
change the discount rates and actuarial assumptions that are used to calculate
credits and targeted benefits under the SERP.

Pursuant to the Plan, the Common Stock will be cancelled without
consideration. Accordingly, under the current circumstances, the SERP benefit
has no value to the participants.

36

Employment Agreements

Pillowtex has entered into employment agreements with each of the Named
Executive Officers. The employment agreement of each Named Executive Officer
states that the Named Executive Officer is an at-will employee and that the
relationship between the Named Executive Officer and Pillowtex may be terminated
by either party, subject to satisfaction of any applicable severance pay
obligations. The employment agreements provide for initial annual base salaries
for the Named Executive Officers as follows:

Initial Amount
Named Executive Officer Base Salary
- ----------------------- --------------

Anthony T. Williams................. $400,000
Michael R. Harmon................... 350,000
Scott E. Shimizu.................... 375,000
A. Allen Oakley..................... 300,000
Richard A. Grissinger............... 286,000

In each case, the Named Executive Officer's base salary is subject to
increase in accordance with company policy. Mr. Harmon's employment agreement
also provides for a $50,000 bonus which was paid on March 19, 2002. The
employment agreements for all the Named Executive Officers also provide (a) that
the Named Executive Officers will be eligible to participate in the Retention
Incentive Plan and the Severance Plan (as such terms are defined below) and in
any stock option plan made available generally to the Company's senior
executives and (b) for other customary benefits. The employment agreements
supersede the prior employment agreements that the Company had with Messrs.
Williams, Shimizu, Oakley and Grissinger.

Under Mr. William's employment agreement, if his employment is
involuntarily terminated for reasons other than death, disability, retirement at
or after the earliest retirement age under any company-sponsored pension plan in
which he participates or cause, or if following a change in control he
terminates employment for good reason no later than six months after the
occurrence of an event constituting good reason, Pillowtex will pay to Mr.
Williams in a single lump sum no later than five days after such termination of
employment a severance benefit equal to his base salary then in effect for a
period of 24 months, less the amount of any severance benefit paid to him under
the Retention Plan.

Under Mr. Harmon's employment agreement, if his employment is
involuntarily terminated for reasons other than death, disability, retirement at
or after the earliest retirement age under any company-sponsored pension plan in
which he participates or cause, or if following a change in control he
terminates employment for good reason no later than six months after the
occurrence of an event constituting good reason under the agreement, Pillowtex
will pay to Mr. Harmon in a single lump sum no later than five days after such
termination of employment a severance benefit in an amount equal to his annual
base salary then in effect, reduced by the amount of any severance benefit paid
to him under the Retention Plan. If, however, within one year after the
commencement of employment of an individual who is not an officer of Pillowtex
on the Effective Date to serve as chief executive officer, Mr. Harmon's
employment is involuntarily terminated for reasons other than death, disability,
retirement at or after the earliest retirement age under any company-sponsored
pension plan in which he participates or cause, then, notwithstanding any
provision in the Retention Plan to the contrary, the amount of such severance
benefit will be equal to two times Mr. Harmon's annual base salary then in
effect, reduced by the amount of any severance benefit paid to him under the
Retention Plan.

Under the employment agreements with each of Messrs. Shimizu, Oakley and
Grissinger, if employment of the applicable Named Executive Officer is
involuntarily terminated for reasons other than death, disability, retirement at
or after the earliest retirement age under any company-sponsored pension plan in
which he participates or cause, or if following a change in control he
terminates employment for good reason no later than six months after the
occurrence of an event constituting good reason under the employment agreement,
Pillowtex will pay to him a severance benefit equal to his base salary then in
effect for a period of 24 months, less any amount received by him under the
Retention Plan. The severance benefit shall be paid to the applicable Named
Executive Officer as follows: (a) the portion of the severance benefit equal to
his annual base salary then in effect, shall be paid in a single lump sum no
later than five days after the termination of his employment; and (b) the
remainder of the severance benefit shall be paid in equal monthly installments
beginning on the first anniversary date of the termination of his employment;
provided, however, that he will not be entitled to the remaining amount if he
obtains other full-time employment prior to such anniversary and the obligation
to pay the remaining amount shall immediately cease if he obtains other
full-time employment after such anniversary.

Pillowtex has entered into similar employment agreements with certain
other key employees.

37

Key Employee Retention Program

To stabilize employee relations, the Company developed a key employee
retention plan (the "Retention Plan"), which the Bankruptcy Court approved on
March 6, 2001. The Retention Plan is designed to, among other things, ensure
that the employees most critical to the Company's reorganization efforts are
provided with sufficient economic incentives and protections to remain with the
Company and fulfill their responsibilities through the successful conclusion of
the Chapter 11 Cases. The Retention Plan consists of three separate components:
(a) a retention incentive plan (the "Retention Incentive Plan"), (b) an
emergence performance bonus plan, (the "Emergence Performance Bonus Plan"), and
(c) an employee severance plan (the "Severance Plan").

Under the Retention Incentive Plan, each eligible employee earns a
specified retention incentive payment (the "Retention Incentive Payment"), based
upon a percentage of his or her salary as determined by the Company's
management, if the employee remains actively employed by the Company on the
specified dates. Under the Retention Incentive Plan: (a) 25% of the total
Retention Incentive Payment (approximately $1.5 million) was paid on April 9,
2001, (b) 25% of the total Retention Incentive Payment (approximately $1.5
million) was paid on November 14, 2001, (c) 25% of the total Retention Incentive
Payment is to be paid on the earlier of (i) six months after the second payment
is made or (ii) confirmation of a plan of reorganization, and (d) 25% of the
total Retention Incentive Payment is to be paid 30 days following confirmation
of a plan of reorganization. The Company currently estimates the total cost of
the Retention Incentive Plan to be approximately $6.1 million. In addition, a
discretionary retention pool of $500,000 is available for non-union employees
not included in the Retention Incentive Plan. Each of the Named Executive
Officers participates in the Retention Incentive Plan and is eligible for a
Retention Incentive Payment equal to a percentage of their base pay equal to 60%
in the case of Messrs. Williams, Harmon, Shimizu, and Oakley, and 50% in the
case of Mr. Grissinger.

The Emergence Performance Bonus Plan provided an additional incentive
payment to certain management employees considered essential to the
implementation of the Company's restructuring to encourage them to remain with
the Company through the plan of reorganization negotiation and confirmation
process. Payments under the Emergence Performance Bonus Plan were tied directly
to the amount of the distribution made under a confirmed plan of reorganization
to unsecured creditors and length of the Reorganization Cases. Each of the Named
Executive Officers participated in the Emergence Performance Bonus Plan. Under
the current circumstances, the Company does not anticipate making any payments
of emergence bonuses under the Retention Plan.

The purpose of the Severance Plan is to consolidate all severance
agreements existing prior to the Petition Date into one severance plan, which
supersedes all prior severance plans and the severance provisions of executives'
employment arrangements. The Severance Plan covers all full-time employees of
the Company, the majority of whom are not eligible to participate in any other
components of the Retention Plan. With certain exceptions, under the Severance
Plan, employees who are terminated for reasons other than death, disability,
retirement or cause, are eligible to receive severance benefits equal to one
week's salary for each completed year of service, with a minimum benefit of two
weeks' salary and a maximum of 26 weeks' salary. In addition, eligible employees
are entitled to receive medical insurance, life insurance and certain other
benefits.

Restricted Stock Awards

In February 1999, the Board of Directors, on the recommendation of the
Compensation Committee, approved the grant of restricted stock awards to certain
key employees of the Company. Upon the award of restricted stock, the Company
makes an immediate transfer to the executive of a specific number of shares, and
no payment from the executive is required. Restricted stock will be forfeited by
the executive if the executive voluntarily terminates employment during the
restriction period, or if the executive is terminated for poor performance or
other "cause." Restrictions on the awards lapse with respect to one-half of the
shares on each of the first and second anniversary dates of the awards. Stock
representing the award is issued and held in custody by the Company or an agent
until the restrictions lapse. During the restriction period, holders of the
awards are entitled to receive dividends declared on the Common Stock and have
voting rights but they may not sell or transfer the Common Stock representing
the restricted award. In the event of a change in control of the Company (as
such term is used in the Company's SERP), all restrictions lapse. The
restrictions also lapse if the executive's employment is involuntarily
terminated for a reason other than poor performance or other "cause." Messrs.
Shimizu, Oakley and Grissinger received restricted stock awards. The restricted
stock was issued on February 8, 1999; accordingly, one-half of the shares
awarded vested on February 8, 2000 and one-half vested on February 8, 2001.

38

Compensation Committee Interlocks and Insider Participation

The Compensation Committee consists entirely of non-employee directors.
Mr. Madden, Mr. Petricoff, Mrs. Silverthorne and Mr. Gillease served on the
Compensation Committee during 2001.

Compensation of Directors

Directors who are not officers of the Company or any of its subsidiaries
receive an annual fee of $35,000. For each committee meeting attended, committee
members are paid a fee of $1,000 and committee chairmen are paid a fee of
$2,500. The Company also reimburses directors for travel, lodging and related
expenses they incur in attending Board and committee meetings. The Company
provides no retirement benefits to non-employee directors. Directors who are
also employees of the Company receive no additional compensation from the
Company for services rendered in their capacity as directors.

The 1993 Pillowtex Corporation Stock Option Plan (the "Stock Option Plan")
allows for the grant of nonqualified stock options to directors who are not
employees. Under the Stock Option Plan, the exercise price of options granted
thereunder may not be less than 100% of the fair market value per share of
Common Stock on the date the option is granted. As of December 29, 2001, Messrs.
Madden and Gillease had each been granted options to purchase a total of 17,072
shares of Common Stock and Mr. Petricoff 7,500 shares, all at prices ranging
from $5.0625 to $33.50. All options granted under the Stock Option Plan,
including those granted to directors who are not employees, vest 25% on the
first through the fourth anniversary dates of the grant and terminate on the
tenth anniversary date. Mrs. Silverthorne does not participate in the Stock
Option Plan. Assuming consummation of the Plan in accordance with its terms, all
outstanding stock options will be cancelled without consideration.

Following the resignation of the Company's then Chairman in October 2000,
Mr. LaRovere was hired by the Company to perform the duties of Chairman of the
Board. Mr. LaRovere is paid a salary of $20,000 per month, as well as a monthly
car allowance of $1,000. He receives no additional compensation as a member of
the Board of Directors. As of December 29, 2001, Mr. LaRovere had been granted a
total of 13,572 shares at prices ranging from $5.0625 to $33.50.

39

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------

The following table lists certain information concerning the beneficial
ownership of the Company's Common Stock, as of March 20, 2002, by the following
persons:

. Each person known by the Company to own beneficially more than 5% of
the outstanding Common Stock;
. The executive officers whose names appear in the table set forth
under "Item 11. Executive Compensation - Summary Compensation Table"
above;
. Each director of the Company; and
. All executive officers and directors as a group.

Except as otherwise indicated, the Company believes that the owners named
below have sole voting and investment power of the shares of Common Stock
listed.

Number of Shares
Name Beneficially Owned Percent of Class
- ------------------------------------------- ----------------------- --------------------

John H. Silverthorne Marital Trust B(1) 2,268,893 15.9%
Mary R. Silverthorne (1) 634,241 4.4%
Paul G. Gillease (2) 13,947 *
Ralph W. LaRovere (2) 10,447 *
William B. Madden (2) 18,447 *
Mark A. Petricoff (2) 4,415 *
Anthony T. Williams (2) 20,000 *
Michael R. Harmon (2) 0 *
Scott E. Shimizu (2) 86,883 *
A. Allen Oakley (2) 56,201 *
Richard A. Grissinger (2) 21,875 *
Jeffrey M. Hollander (3) 3,393,375 19.2%
All executive officers and directors
as a group (17 persons) (4) 3,214,626 22.1%

- ----------
*Less than 1%.

FOOTNOTES:

(1) The address of the John H. Silverthorne Marital Trust B and Mrs.
Silverthorne is 4111 Mint Way, Dallas, Texas 75237. Under the rules and
regulations of the SEC, Mrs. Silverthorne may be deemed the beneficial
owner of the shares held by the John H. Silverthorne Marital Trust B
because she is its independent trustee. In addition, Mrs. Silverthorne, in
her capacity as trustee, may be deemed the beneficial owner of 42,857
shares held by the John H. Silverthorne Family Trust A. Mrs. Silverthorne
disclaims beneficial ownership of any shares other than 591,384 shares she
holds of record.
(2) Includes options which are currently exercisable or become exercisable
within 60 days after March 20, 2002 to purchase the number of shares of
Common Stock indicated for the following persons: Mr. Gillease (13,947);
Mr. Madden (13,947); Mr. LaRovere (10,447); Mr. Petricoff (4,375); Mr.
Williams (20,000); Mr. Shimizu (84,000); Mr. Oakley (55,000); and Mr.
Grissinger (21,875).
(3) The address of Jeffrey M. Hollander is 6560 W. Rogers Circle, Suite 19,
Boca Raton, Florida 33487. As reported in Schedule 13D filed by Mr.
Hollander with the SEC on February 23, 2001, Mr. Hollander is the holder
of 81,441 shares of the Company's Series A Redeemable Convertible
Preferred Stock (the "Series A Preferred Stock"). As of March 20, 2002,
the shares of Series A Preferred Stock held by Mr. Hollander are
convertible into a total of 3,393,375 shares of Common Stock as reported
in Schedule 13D filed by Mr. Hollander with the SEC on February 23, 2001.
The amount shown does not reflect dividends in kind that have continued to
accrue since the Petition Date but for which shares of additional
Preferred Stock have not been issued by the Company.
(4) Includes options which are currently exercisable or become exercisable
within 60 days after March 20, 2002 to purchase a total of 302,841 shares
of Common Stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------

None.

40

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------

(a) The following documents are filed as part of this Report:

1. Consolidated Financial Statements: Page
---------------------------------

Independent Auditors' Report F-2

Consolidated Balance Sheets as of December 29, 2001 and
December 30, 2000 F-3

Consolidated Statements of Operations for the years ended
December 29, 2001, December 30, 2000 and January 1, 2000 F-4

Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 29, 2001, December 30, 2000 and January 1, 2000 F-5

Consolidated Statements of Cash Flows for the years ended
December 29, 2001, December 30, 2000 and January 1, 2000 F-6

Notes to Consolidated Financial Statements F-7

2. Financial Statement Schedule. The following financial statement
----------------------------
schedule of Pillowtex for the fiscal years ended December 29, 2001,
December 30, 2000 and January 1, 2000 is filed as part of this Report
and should be read in conjunction with the Consolidated Financial
Statements of Pillowtex:

Schedule II - Valuation and Qualifying Accounts S-1

3. Index to Exhibits
-----------------

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------

2.1 Agreement and Plan of Merger, dated as of September 10, 1997, by and
among Pillowtex Corporation, Pegasus Merger Sub, Inc., and
Fieldcrest Cannon, Inc. (incorporated by reference to Appendix A to
the Joint Proxy Statement/Prospectus forming a part of Pillowtex
Corporation's Registration Statement on Form S-4 (No. 333-36663))

2.2 Amendment to Agreement and Plan of Merger, dated as of September 23,
1997, by and among Pillowtex Corporation, Pegasus Merger Sub, Inc.,
and Fieldcrest Cannon, Inc. (incorporated by reference to Appendix A
to the Joint Proxy Statement/Prospectus forming a part of Pillowtex
Corporation's Registration Statement on Form S-4 (No. 333-36663))

2.3 Asset Purchase Agreement, dated as of July 27, 2001 between Beacon
Manufacturing Co. and Beacon Acquisition Co. (incorporated by
reference to Exhibit 2.1 to Pillowtex Corporation's Current Report
on Form 8-K dated August 23, 2001)

2.4 First Amendment to Asset Purchase Agreement, dated September 6, 2001
between Beacon Manufacturing Co. and Beacon Acquisition Co.
(incorporated by reference to Exhibit 2.2 to Pillowtex Corporation's
Current Report on Form 8-K dated September 6, 2001)

3.1 Restated Articles of Incorporation of Pillowtex Corporation, as
amended (incorporated by reference to Exhibit 3.1 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the quarter ended
July 3, 1999)

41

3.2 Amended and Restated Bylaws of Pillowtex Corporation, as amended
(incorporated by reference to Exhibit 3.2 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended December 30,
2000)

3.3 Amendments to Amended and Restated Bylaws of Pillowtex Corporation

4.1 Specimen of Certificate evidencing Common Stock (incorporated by
reference to Exhibit 4.2 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended December 28, 1996)

4.2 Specimen of Certificate evidencing Series A Redeemable Convertible
Preferred Stock (incorporated by reference to Exhibit 4.2 to
Pillowtex Corporation's Annual Report on Form 10-K for the fiscal
year ended January 3, 1998)

4.3 Indenture, dated November 12, 1996, among Pillowtex Corporation, the
guarantors listed on the signature page thereto, and Bank One,
Columbus, N.A., as Trustee (incorporated by reference to Exhibit 4.1
to Pillowtex Corporation's Registration Statement on Form S-4 (No.
333-17731))

4.4 Supplemental Indenture, dated as of December 19, 1997, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and Bank One, N.A. (formerly known as Bank One, Columbus,
N.A.), as Trustee (incorporated by reference to Exhibit 4.4 to
Pillowtex Corporation's Annual Report on Form 10-K for the fiscal
year ended January 1, 2000)

4.5 Second Supplemental Indenture, dated as of July 28, 1998, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and Bank One, N.A. (formerly known as Bank One, Columbus,
N.A.), as Trustee (incorporated by reference to Exhibit 4.5 to
Pillowtex Corporation's Annual Report on Form 10-K for the fiscal
year ended January 1, 2000)

4.6 Resignation, Appointment and Acceptance Agreement, dated as of
January 19, 2000, by and among Bank One, N.A. (formerly known as
Bank One, Columbus, N.A.), as prior Trustee, U.S. Bank National
Association, as successor Trustee, and Pillowtex Corporation, as
Issuer (incorporated by reference to Exhibit 4.6 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal year ended
January 1, 2000)

4.7 Indenture, dated as of December 18, 1997, among Pillowtex
Corporation, the guarantors listed on the signature page thereto,
and Norwest Bank Minnesota, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's
Current Report on Form 8-K dated December 19, 1997, as amended by a
Form 8-K/A (Amendment No. 1))

4.8 Supplemental Indenture, dated as of December 19, 1997, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and Norwest Bank Minnesota, National Association, as
Trustee (incorporated by reference to Exhibit 4.2 to Pillowtex
Corporation's Current Report on Form 8-K dated December 19, 1997, as
amended by a Form 8-K/A (Amendment No. 1))

4.9 Second Supplemental Indenture, dated as of July 28, 1998, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and Norwest Bank Minnesota, National Association, as
Trustee (incorporated by reference to Exhibit 4.1 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the quarter ended
July 4, 1998)

4.10 Resignation, Appointment and Acceptance Agreement dated April 14,
2000 by and among Pillowtex Corporation, as Issuer, Norwest Bank
Minnesota, as Resigning Trustee, and U.S. Bank National Association,
as Successor Trustee, (incorporated by reference to Exhibit 4.1 to
Pillowtex Corporation's Quarterly Report on Form 10-Q for the
quarter ended April 1, 2000)

4.11 Resignation, Appointment and Acceptance, dated March 23, 2001, by
and among Pillowtex Corporation, as Issuer, U.S. Bank National
Association, as Resigning Trustee, and HSBC Bank USA, as Successor
Trustee (incorporated by reference to Exhibit 4.1 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the Quarterly period
ended March 31, 2001)

42

10.1 Amended and Restated Credit Agreement, dated as of December 19,
1997, among Pillowtex Corporation, certain Lenders named therein,
and NationsBank of Texas, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.1 to Pillowtex
Corporation's Current Report on Form 8-K dated December 19, 1997, as
amended by a Form 8-K/A (Amendment No. 1))

10.2 First Amendment to Amended and Restated Credit Agreement, dated as
of June 19, 1998, among Pillowtex Corporation, certain Lenders named
therein, and NationsBank of Texas, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.3 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the quarter ended
July 4, 1998)

10.3 Second Amendment to Amended and Restated Credit Agreement, dated as
of July 28, 1998, among Pillowtex Corporation, certain Lenders named
therein, and NationsBank of Texas, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.4 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the quarter ended
July 4, 1998)

10.4 Third Amendment to Amended and Restated Credit Agreement, dated as
of March 12, 1999, among Pillowtex Corporation, certain Lenders
named therein, and NationsBank of Texas, N.A., as Administrative
Agent (incorporated by reference to Exhibit 10.4 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal year ended
January 2, 1999)

10.5 Fourth Amendment to Amended and Restated Credit Agreement, dated as
of October 8, 1999, among Pillowtex Corporation, certain Lenders
named therein, and Bank of America N.A. (formerly NationsBank,
N.A.), as Administrative Agent (incorporated by reference to Exhibit
10.3 to Pillowtex Corporation's Quarterly Report on Form 10-Q for
the Quarterly period ended October 2, 1999)

10.6 Waiver and Fifth Amendment to Amended and Restated Credit Agreement,
dated as of December 9, 1999, to be effective as of December 7,
1999, among Pillowtex Corporation, certain Lenders named therein,
and Bank of America N.A. (formerly NationsBank, N.A.), as
Administrative Agent (incorporated by reference to Exhibit 10.2 to
Pillowtex Corporation's Current Report on Form 8-K dated December 7,
1999)

10.7 Sixth Amendment and Waiver to Amended and Restated Credit Agreement,
dated as of February 15, 2000, among Pillowtex Corporation, certain
Lenders named therein, and Bank of America N.A. (formerly
NationsBank, N.A.), as Administrative Agent (incorporated by
reference to Exhibit 10.7 to Pillowtex Corporation's Annual Report
on Form 10-K for the fiscal year ended January 1, 2000)

10.8 Waiver and Seventh Amendment to Amended and Restated Credit
Agreement, dated as of March 31, 2000, among Pillowtex Corporation,
certain Lenders named therein, and Bank of America N.A. (formerly
NationsBank, N.A.), as Administrative Agent (incorporated by
reference to Exhibit 10.8 to Pillowtex Corporation's Annual Report
on Form 10-K for the fiscal year ended January 1, 2000)

10.9 Term Credit Agreement, dated as of December 19, 1997, among
Pillowtex Corporation, certain Lenders named herein, and NationsBank
of Texas, N.A., as Administrative Agent (incorporated by reference
to Exhibit 10.2 to Pillowtex Corporation's Current Report on Form
8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment
No. 1))

10.10 First Amendment to Term Credit Agreement, dated as of June 19, 1998,
among Pillowtex Corporation, certain Lenders named therein, and
NationsBank of Texas, N.A., as Administrative Agent (incorporated by
reference to Exhibit 10.5 to Pillowtex Corporation's Quarterly
Report on Form 10-Q for the quarter ended July 4, 1998)

10.11 Second Amendment to Term Credit Agreement, dated as of July 28,
1998, among Pillowtex Corporation, certain Lenders named therein,
and NationsBank of Texas, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.6 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the quarter ended
July 4, 1998)

43

10.12 Third Amendment to Term Credit Agreement, dated as of May 5, 1999,
among Pillowtex Corporation, certain Lenders named therein, and Bank
of America N.A. (formerly NationsBank, N.A.), as Administrative
Agent (incorporated by reference to Exhibit 10.1 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the Quarterly period
ended October 2, 1999)

10.13 Fourth Amendment to Term Credit Agreement, dated as of October 8,
1999, among Pillowtex Corporation, certain Lenders named therein,
and Bank of America N.A. (formerly NationsBank, N.A.), as
Administrative Agent (incorporated by reference to Exhibit 10.2 to
Pillowtex Corporation's Quarterly Report on Form 10-Q for the
Quarterly period ended October 2, 1999)

10.14 Waiver and Fifth Amendment to Term Credit Agreement, dated as of
December 9, 1999, to be effective as of December 7, 1999, among
Pillowtex Corporation, certain Lenders named therein, and Bank of
America N.A. (formerly NationsBank, N.A.), as Administrative Agent
(incorporated by reference to Exhibit 10.1 to Pillowtex
Corporation's Current Report on Form 8-K dated December 7, 1999)

10.15 Sixth Amendment and Waiver to Term Credit Agreement, dated as of
February 15, 2000 among Pillowtex Corporation, certain Lenders named
therein, and Bank of America N.A. (formerly NationsBank, N.A.), as
Administrative Agent (incorporated by reference to Exhibit 10.15 to
Pillowtex Corporation's Annual Report on Form 10-K for the fiscal
year ended January 1, 2000)

10.16 Waiver and Seventh Amendment to Term Credit Agreement, dated as of
March 31, 2000 among Pillowtex Corporation, certain Lenders named
therein, and Bank of America N.A. (formerly NationsBank, N.A.), as
Administrative Agent (incorporated by reference to Exhibit 10.16 to
Pillowtex Corporation's Annual Report on Form 10-K for the fiscal
year ended January 1, 2000)

10.17 Promissory Note dated May 4, 1999 by and between NationsBank, N.A.,
as Lender, and Pillowtex Corporation, as Borrower, in the amount of
$20,000,000 (incorporated by reference to Exhibit 10.1 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the Quarterly period
ended July 3, 1999)

10.18 First Amendment, dated July 27, 1999, to the Promissory Note dated
May 4, 1999 by and between Bank of America N.A. (formerly
NationsBank, N.A.), as Lender, and Pillowtex Corporation, as
Borrower (incorporated by reference to Exhibit 10.2 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the Quarterly period
ended July 3, 1999)

10.19 Third Amendment, dated as of December 7, 1999, to the Promissory
Note dated May 4, 1999 by and between Bank of America N.A. (formerly
NationsBank, N.A.), as Lender, and Pillowtex Corporation, as
Borrower (incorporated by reference to Exhibit 10.3 to Pillowtex
Corporation's Current Report on Form 8-K dated December 7, 1999)

10.20 Fourth Amendment, dated as of February 15, 2000, to the Promissory
Note dated May 4, 1999 by and between Bank of America N.A. (formerly
NationsBank, N.A.), as Lender, and Pillowtex Corporation, as
Borrower (incorporated by reference to Exhibit 10.20 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal year ended
January 1, 2000)

10.21 Fifth amendment dated as of March 31, 2000 to the Promissory Note
dated May 4, 1999 by and between Bank of America N.A. (formerly
NationsBank, N.A.), as Lender, and Pillowtex Corporation, as
Borrower (incorporated by reference to Exhibit 10.21 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal year ended
January 1, 2000)

10.22 Consent dated as of December 7, 1999, by and between Bank of America
N.A. (formerly NationsBank, N.A.), as Lender, and Pillowtex
Corporation, as Borrower (incorporated by reference to Exhibit 10.4
to Pillowtex Corporation's Current Report on Form 8-K dated December
7, 1999)

10.23 Consent dated as of February 15, 2000, by and between Bank of
America N.A. (formerly NationsBank, N.A.), as Lender, and Pillowtex
Corporation, as Borrower (incorporated by reference to Exhibit 10.23
to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal
year ended January 1, 2000)

44

10.24 Consent dated as of March 31, 2000, by and between Bank of America
N.A. (formerly NationsBank, N.A.), as Lender, and Pillowtex
Corporation, as Borrower (incorporated by reference to Exhibit 10.24
to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal
year ended January 1, 2000)

10.25 Post-Petition Credit Agreement dated as of November 14, 2000, among
Pillowtex Corporation and certain of its Subsidiaries, certain
Lenders named therein, and Bank of America, N.A., as Administrative
Agent (incorporated by reference to Exhibit 10.25 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 30, 2000)

10.26 First Amendment to Post-Petition Credit Agreement dated as of March
6, 2001, among Pillowtex Corporation and certain of its
Subsidiaries, certain Lenders named therein, and Bank of America,
N.A., as Administrative Agent (incorporated by reference to Exhibit
10.26 to Pillowtex Corporation's Annual Report on Form 10-K for the
fiscal year ended December 30, 2000)

10.27 Second Amendment to Post-Petition Credit Agreement dated as of
January 30, 2001, among Pillowtex Corporation and certain of its
Subsidiaries, certain Lenders named therein, and Bank of America,
NA, as Administrative Agent (incorporated by reference to Exhibit
10.1 to Pillowtex Corporation's Quarterly Report on Form 10-Q for
the Quarterly period ended March 31, 2001)

10.28 Third Amendment to Post-Petition Credit Agreement dated as of August
13, 2001, among Pillowtex Corporation and certain of its
Subsidiaries, certain Lenders named therein, and Bank of America,
NA, as Administrative Agent (incorporated by reference to Exhibit
10.1 to Pillowtex Corporation's Quarterly Report on Form 10-Q for
the Quarterly period ended September 29, 2001)

10.29 Fourth Amendment to Post-Petition Credit Agreement dated as of
November 14, 2001, among Pillowtex Corporation and certain of its
Subsidiaries, certain Lenders named therein, and Bank of America,
N.A., as Administrative Agent

10.30 Fifth Amendment to Post-Petition Credit Agreement dated as of
February 8, 2002, among Pillowtex Corporation and certain of its
Subsidiaries, certain Lenders named therein, and Bank of America,
N.A., as Administrative Agent

10.31 Preferred Stock Purchase Agreement, dated as of September 10, 1997,
by and among Pillowtex Corporation, Apollo Investment Fund III,
L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners
III, L.P. (incorporated by reference to Exhibit 10.2 to Pillowtex
Corporation's Current Report on Form 8-K dated September 10, 1997,
as amended by a Form 8-K/A (Amendment No. 1))

10.32 Amendment No. 1 to the Preferred Stock Purchase Agreement, dated as
of November 21, 1997, by and among Pillowtex Corporation, Apollo
Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and
Apollo (UK) Partners III, L.P. (incorporated by reference to Exhibit
10.1 to Pillowtex Corporation's Current Report on Form 8-K dated
November 21, 1997)

10.33 Purchase Agreement, dated December 15, 1997, among Pillowtex
Corporation, the guarantors listed on the signature page thereto,
and NationsBanc Montgomery Securities, Inc. and Bear, Stearns & Co.
Inc. (incorporated by reference to Exhibit 10.5 to Pillowtex
Corporation's Current Report on Form 8-K dated December 19, 1997, as
amended by a Form 8-K/A (Amendment No. 1))

10.34 Purchase Agreement Supplement, dated December 19, 1997, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and NationsBank Montgomery Securities, Inc. and Bear,
Stearns & Co. Inc. (incorporated by reference to Exhibit 10.6 to
Pillowtex Corporation's Current Report on Form 8-K dated December
19, 1997, as amended by a Form 8-K/A (Amendment No. 1))

45

10.35 Registration Rights Agreement, dated as of December 18, 1997, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and NationsBanc Montgomery Securities, Inc. and Bear,
Stearns & Co. Inc. (incorporated by reference to Exhibit 10.7 to
Pillowtex Corporation's Current Report on Form 8-K dated December
19, 1997, as amended by a Form 8-K/A (Amendment No. 1))

10.36 Registration Rights Agreement Supplement, dated as of December 19,
1997, among Pillowtex Corporation, the guarantors listed on the
signature page thereto, and NationsBank Montgomery Securities, Inc.
and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit
10.8 to Pillowtex Corporation's Current Report on Form 8-K dated
December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1))

10.37 Registration Rights Agreement, dated as of November 12, 1996, by and
among Pillowtex Corporation, each domestic subsidiary of Pillowtex
Corporation, and NationsBanc Capital Markets, Inc. and Merrill
Lynch, Pierce, Fenner & Smith, Incorporated (incorporated by
reference to Exhibit 10.59 to Pillowtex Corporation's Registration
Statement on Form S-4 (No. 333-17731))

10.38 Sublicense Agreement, dated as of July 1, 1998, between Pillowtex
Corporation and the Ralph Lauren Home Collection (incorporated by
reference to Exhibit 10.1 to Pillowtex Corporation's Quarterly
Report on Form 10-Q for the quarter ended July 4, 1998)

10.39 Industrial Lease, dated as of November 23, 1992, between Angel and
Jean Echevarria and Pillowtex Corporation (incorporated by reference
to Exhibit 10.21 to Pillowtex Corporation's Registration Statement
on Form S-1 (No. 33-57314))

10.40 Second Amendment to Lease entered into in September 1997 between
Angel and Jean Echevarria and Pillowtex Corporation (incorporated by
reference to Exhibit 10.17 to Pillowtex Corporation's Annual Report
on Form 10-K for the fiscal year ended January 3, 1998)

10.41* Form of Confidentiality and Noncompetition Agreement (incorporated
by reference to Exhibit 10.27 to Pillowtex Corporation's
Registration Statement on Form-S-1 (No. 33-57314))

10.42* Form of Director Indemnification Agreement (incorporated by
reference to Exhibit 10.36 to Pillowtex Corporation's Registration
Statement on Form S-1 (No. 33-57314))

10.43* Pillowtex Corporation 1993 Stock Option Plan (incorporated by
reference to Appendix A to Pillowtex Corporation's Proxy Statement
for its Annual Meeting of Shareholders held on May 8, 1997)

10.44* Employment Agreement entered into between Pillowtex Corporation and
Anthony T. Williams, dated April 1, 2001

10.45* Employment Agreement entered into between Pillowtex Corporation and
Michael R. Harmon, dated as of March 19, 2001 (incorporated by
reference to Exhibit 10.2 to Pillowtex Corporation's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001)

10.46* Employment Agreement entered into between Pillowtex Corporation and
Scott E. Shimizu, dated as of April 1, 2001

10.47* Employment Agreement entered into between Pillowtex Corporation and
A. Allen Oakley, dated as of April 1, 2001

10.48* Employment Agreement entered into between Pillowtex Corporation and
Richard A. Grissinger, dated as of April 1, 2001

10.49* Pillowtex Corporation Supplemental Executive Retirement Plan,
effective as of January 1, 1997 (incorporated by reference to
Exhibit 10.1.44 to Pillowtex Corporation's Registration Statement on
Form S-4 (No. 33-36663) filed on September 29, 1997)

46

10.50* Pillowtex Corporation Management Incentive Plan (incorporated by
reference to Appendix B to Pillowtex Corporation's Proxy Statement
for its Annual Meeting of Shareholders held on May 8, 1997)

10.51* Pillowtex Corporation Deferred Compensation Plan, effective as of
February 9, 1998 (incorporated by reference to Exhibit 10.32 to
Pillowtex Corporation's Annual Report on Form 10-K for the fiscal
year ended January 3, 1998)

10.52* Pillowtex Corporation Executive Medical Expense Reimbursement Plan,
effective as of January 1, 1998 (incorporated by reference to
Exhibit 10.2 to Pillowtex Corporation's Quarterly Report on Form
10-Q for the quarter ended July 4, 1998)

10.53* Separation Agreement dated as of October 26, 2000 by and between
Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated by
reference to Exhibit 10.52 to Pillowtex Corporation's Annual Report
on Form 10-K for the fiscal year ended December 30, 2000)

10.54 Indenture, dated as of March 15, 1987, relating to the 6%
Convertible Subordinated Debentures Due 2012 (incorporated by
reference to Exhibit 4.9 to Fieldcrest Cannon, Inc.'s Registration
Statement on Form S-3 (No. 33-12436))

21.1 List of Pillowtex Corporation's Principal Operating Subsidiaries

23.1 Consent of KPMG LLP

99.1 Second Amended Joint Plan of Reorganization of Pillowtex Corporation
and Its Debtor Subsidiaries (incorporated by reference to Exhibit
99.2 to Pillowtex Corporation's Current Report on Form 8-K dated
March 11, 2002)

99.2 Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code
for the Second Amended Joint Plan of Reorganization of Pillowtex
Corporation and Its Debtor Subsidiaries (incorporated by reference
to Exhibit 99.3 to Pillowtex Corporation's Current Report on Form
8-K dated March 11, 2002)

47

b) Reports On Form 8-K.
-------------------

During the quarter ended December 29, 2001, Pillowtex filed the following
Current Report on Form 8-K:

Current Report on Form 8-K, dated December 28, 2001 and filed
December 28, 2001, reporting information under "Item 3. Bankruptcy
or Receivership" regarding the filing of the Company's plan of
reorganization.

- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit hereto.

48

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 28, 2002.

PILLOWTEX CORPORATION

By: /s/ Anthony T. Williams
---------------------------------------
Anthony T. Williams
President and Chief Operating Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 28, 2002.

Signatures Title
- ---------- -----

/s/ Ralph W. LaRovere Chairman of the Board; Director
- ------------------------------
Ralph W. LaRovere

/s/ Anthony T. Williams President and Chief Operating Officer; Director
- ------------------------------ (Principal Executive Officer)
Anthony T. Williams

/s/ Michael R. Harmon Executive Vice President and Chief Financial Officer
- ------------------------------ (Principal Financial Officer)
Michael R. Harmon

/s/ Paul G. Gillease Director
- ------------------------------
Paul G. Gillease

/s/ William B. Madden Director
- ------------------------------
William B. Madden

/s/ A. Allen Oakley Director
- ------------------------------
A. Allen Oakley

/s/ Mark A. Petricoff Director
- ------------------------------
Mark A. Petricoff

/s/ Scott E. Shimizu Director
- ------------------------------
Scott E. Shimizu

/s/ Mary R. Silverthorne Director
- ------------------------------
Mary R. Silverthorne

/s/ Thomas D. D'Orazio Vice President and Corporate Controller
- ------------------------------ (Principal Accounting Officer)
Thomas D. D'Orazio

49

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Independent Auditors' Report .................................................. F-2

Consolidated Financial Statements:
- ---------------------------------

Consolidated Balance Sheets as of December 29, 2001 and December 30, 2000 F-3

Consolidated Statements of Operations for years ended
December 29, 2001, December 30, 2000 and January 1, 2000 .............. F-4

Consolidated Statements of Shareholders' Equity (Deficit) for
years ended December 29, 2001, December 30, 2000 and January 1, 2000 .. F-5

Consolidated Statements of Cash Flows for years ended
December 29, 2001, December 30, 2000 and January 1, 2000 .............. F-6

Notes to Consolidated Financial Statements .............................. F-7

Financial Statement Schedule for years ended December 29,
2001, December 30, 2000 and January 1, 2000

Schedule II - Valuation and Qualifying Accounts ......................... S-1

F-1

Independent Auditors' Report

The Board of Directors and Shareholders
Pillowtex Corporation:

We have audited the consolidated financial statements of Pillowtex Corporation
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pillowtex
Corporation and subsidiaries as of December 29, 2001 and December 30, 2000, and
the results of their operations and their cash flows for the each of the years
in the three-year period ended December 29, 2001 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming
Pillowtex Corporation will continue as a going concern. As discussed in the Note
1 to the consolidated financial statements, on November 14, 2000, Pillowtex
Corporation, and substantially all of its subsidiaries (collectively, the
Companies) filed a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code (Chapter 11). The Companies are currently operating their
business under the jurisdiction of Chapter 11 and the United States Bankruptcy
Court in Delaware (the Bankruptcy Court), and continuation of the Company as a
going concern is contingent upon, among other things, the ability to formulate a
plan of reorganization which will gain approval of the requisite parties under
the United States Bankruptcy Code and confirmation by the Bankruptcy Court, the
ability to comply with the debtor-in-possession financing facility, and the
ability to generate sufficient cash from operations and obtain financing
arrangements to meet future obligations. In addition, the Companies have
experienced operating losses and negative operating cash flows and are currently
in default under all of their pre-petition debt agreements. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classifications of liabilities that might result from
the outcome of these uncertainties.

(signed) KPMG LLP

Charlotte, North Carolina
February 14, 2002

F-2

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Consolidated Balance Sheets
December 29, 2001 and December 30, 2000
(in thousands of dollars, except for par value)

December 29, December 30,
2001 2000
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents (including restricted cash of $3,861
as of December 29, 2001) $ 40,388 32,182
Receivables:
Trade, less allowances of $9,276 as of December 29, 2001 and $40,897
as of December 30, 2000 144,727 189,064
Other 4,478 6,192
Inventories 200,578 262,145
Assets held for sale 6,075 5,281
Prepaid expenses 3,604 5,260
Net assets of discontinued operations 1,358 46,784
----------- ----------
Total current assets 401,208 546,908

Property, plant and equipment, net 453,440 525,990
Intangible assets, at cost less accumulated amortization of $40,899
as of December 29, 2001 and $27,802 as of December 30, 2000 221,729 233,480
Other assets 11,250 29,391
----------- ----------
Total assets $ 1,087,627 1,335,769
=========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT

Liabilities not subject to compromise:
Current liabilities:
Accounts payable $ 35,119 33,083
Accrued expenses 59,837 57,182
Current portion of long-term debt 356 --
Current portion of long-term debt in default 660,893 33,229
Long-term debt in default 10,920 660,790
----------- ----------
Total current liabilities 767,125 784,284
Long-term debt, less current portion 645 --
Noncurrent liabilities 48,950 40,016
----------- ----------
Total liabilities not subject to compromise 816,720 824,300
Liabilities subject to compromise 500,840 492,093
----------- ----------
Total liabilities 1,317,560 1,316,393
Series A redeemable convertible preferred stock, $.01 par value;
81,411 shares issued and outstanding for December 29, 2001
and December 30, 2000 99,185 82,827
Shareholders' deficit:
Preferred stock, $.01 par value; authorized 20,000,000 shares;
only Series A issued -- --
Common stock, $.01 par value; authorized 55,000,000 shares; 14,250,892 as of
December 29, 2001 and 14,252,069 as of December 30, 2000 shares issued
and outstanding 143 143
Additional paid-in capital 160,120 160,120
Accumulated deficit (461,186) (222,067)
Accumulated other comprehensive loss (28,195) (1,647)
----------- ----------
Total shareholders' deficit (329,118) (63,451)
Commitments and contingencies
----------- ----------
Total liabilities and shareholders' deficit $ 1,087,627 1,335,769
=========== ==========

See accompanying notes to consolidated financial statements.

F-3

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Consolidated Statements of Operations
Years ended December 29, 2001, December 30, 2000 and January 1, 2000
(in thousands of dollars, except for per share data)

2001 2000 1999
----------- ---------- ----------

Net sales $ 1,031,055 1,259,004 1,432,434
Cost of goods sold 992,540 1,222,572 1,241,903
----------- ---------- ----------
Gross profit 38,515 36,432 190,531
Selling, general, and administrative expenses 92,275 126,353 114,020
Impairment of long-lived assets 40,961 24,400 2,000
Restructuring charges 10,759 -- --
----------- ---------- ----------
Earnings (loss) from operations (105,480) (114,321) 74,511
Interest and other expense (contractual interest of $98,929
in 2001 and $111,061 in 2000) 64,666 107,062 87,279
----------- ---------- ----------
Loss from continuing operations before
reorganization items and income taxes (170,146) (221,383) (12,768)
Reorganization items 31,401 19,368 --
----------- ---------- ----------
Loss from continuing operations before income taxes (201,547) (240,751) (12,768)
Income tax benefit -- (93,361) (2,740)
----------- ---------- ----------
Net loss from continuing operations (201,547) (147,390) (10,028)
Discontinued operations:
Loss from operations, net of income tax benefit of
$11,399 in 2000 and $5,161 in 1999 (18,258) (115,018) (9,504)
Loss on disposal (2,956) -- --
----------- ---------- ----------
Loss from discontinued operations (21,214) (115,018) (9,504)
----------- ---------- ----------
Net loss (222,761) (262,408) (19,532)
Preferred dividends and accretion 16,358 8,928 12,294
----------- ---------- ----------
Loss applicable to common shareholders $ (239,119) (271,336) (31,826)
=========== ========== ==========

Basic and diluted loss per common share -
Loss from continuing operations applicable
to common shareholders $ (15.29) (10.97) (1.58)
=========== ========== ==========
Loss applicable to common shareholders $ (16.78) (19.04) (2.25)
=========== ========== ==========
Weighted average common shares outstanding -
Basic and diluted 14,251 14,252 14,154
=========== ========== ==========

See accompanying notes to consolidated financial statements.

F-4

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Consolidated Statements of Shareholders' Equity (Deficit)
Years ended December 29, 2001, December 30, 2000 and January 1, 2000
(in thousands of dollars, except for per share data)

Common Stock Retained Accumulated Total
------------------------ Additional earnings other shareholders'
Number Par paid-in (accumulated comprehensive equity
of shares value capital deficit) loss (deficit)
----------- -------- ----------- ----------- ----------- -----------

Balance at January 2, 1999 14,126,595 $ 141 $ 155,811 $ 83,650 $ (1,669) $ 237,933

Comprehensive loss:
Net loss -- -- -- (19,532) -- (19,532)
Currency translation adjustments -- -- -- -- (62) (62)
-----------
Total comprehensive loss (19,594)
-----------
Exercise of stock options,
including tax benefits of $6 3,375 -- 49 -- -- 49
Issuance of restricted stock 46,398 -- 1,190 -- (807) 383
Issuance of common stock -
convertible debentures 85,518 2 3,465 -- -- 3,467
Accretion of Series A Preferred
Stock -- -- -- (216) -- (216)
Preferred stock dividends -- -- -- (12,078) -- (12,078)
Common stock dividends
declared ($.18 per share) -- -- -- (2,555) -- (2,555)
----------- -------- ----------- ----------- ----------- -----------
Balance at January 1, 2000 14,261,886 143 160,515 49,269 (2,538) 207,389

Comprehensive loss:
Net loss -- -- (262,408) -- (262,408)
Currency translation adjustments -- -- -- 84 84
-----------
Total comprehensive loss (262,324)
-----------
Restricted stock - amortization and
forfeitures (15,469) -- (586) -- 807 221
Issuance of common stock -
convertible debentures 5,652 -- 191 -- -- 191
Accretion of Series A Preferred
Stock -- -- -- (216) -- (216)
Preferred stock dividends -- -- -- (8,712) -- (8,712)
----------- -------- ----------- ----------- ----------- -----------
Balance at December 30, 2000 14,252,069 143 160,120 (222,067) (1,647) (63,451)

Comprehensive loss:
Net loss -- -- -- (222,761) -- (222,761)
Currency translation adjustments -- -- -- -- (143) (143)
Excess of additional pension liability
over unrecognized prior service cost -- -- -- -- (26,405) (26,405)
-----------
Total comprehensive loss (249,309)
-----------
Cancellation of restricted stock (1,177) -- -- -- -- --
Accretion of Series A Preferred
Stock -- -- -- (216) -- (216)
Preferred stock dividends -- -- -- (16,142) -- (16,142)
----------- -------- ----------- ----------- ----------- -----------
Balance at December 29, 2001 14,250,892 $ 143 $ 160,120 $ (461,186) $ (28,195) $ (329,118)
=========== ======== =========== =========== =========== ===========

See accompanying notes to consolidated financial statements.

F-5

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Consolidated Statements of Cash Flows
Years ended December 29, 2001, December 30, 2000 and January 1, 2000
(in thousands of dollars)

2001 2000 1999
--------- --------- ---------

Cash flows from operating activities:
Net loss $(222,761) $(262,408) $ (19,532)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss from discontinued operations 21,214 115,018 9,504
Depreciation and amortization 53,785 57,517 51,941
Long-lived asset impairment 40,961 24,400 2,000
Write-down of inventory -- 49,538 --
Reorganization items (118) 17,528 --
Deferred income taxes -- (93,361) (3,194)
Changes in assets and liabilities,
net of effects of divestiture of Blanket Division:
Trade receivables 44,337 47,371 (28,349)
Inventories 60,720 51,305 (256)
Accounts payable and accrued expenses 23,388 (3,126) (14,852)
Other assets and liabilities 13,325 22,132 407
--------- --------- ---------
Net cash provided by (used in) continuing operations 34,851 25,914 (2,331)
--------- --------- ---------

Net cash provided by discontinued operations 3,365 9,072 11,869

Cash flows from investing activities:
Proceeds from sale of assets held for sale and property, plant
and equipment 4,589 4,925 6,151
Proceeds from sale of Blanket Division 11,153 -- --
Purchases of property, plant and equipment (12,832) (33,197) (89,737)
--------- --------- ---------
Net cash provided by (used in) investing activities 2,910 (28,272) (83,586)
--------- --------- ---------

Cash flows from financing activities:
Decrease in checks not yet presented for payment (11,785) (8,427) (18,592)
Borrowings on revolving credit loans -- 849,413 383,028
Repayments of revolving credit loans -- (736,078) (271,028)
Retirement of long-term debt (19,882) (82,198) (16,095)
Payments of debt and equity issuance costs (1,253) (2,100) --
Dividends paid -- -- (4,011)
Proceeds from exercise of stock options -- -- 43
--------- --------- ---------
Net cash provided by (used in) financing activities (32,920) 20,610 73,345
--------- --------- ---------

Net change in cash and cash equivalents 8,206 27,324 (703)
Cash and cash equivalents at beginning of year 32,182 4,858 5,561
--------- --------- ---------
Cash and cash equivalents at end of year $ 40,388 $ 32,182 $ 4,858
========= ========= =========

See accompanying notes to consolidated financial statements.

F-6

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

(1) General

Founded in 1954, Pillowtex Corporation ("Pillowtex" or the
"Company") 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 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 below for financial information regarding segments.

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 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 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.

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 subsequent to March
1, 2002.

F-7

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

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.

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 deliver 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.

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.

F-8

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

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).

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.

The accompanying consolidated financial statements 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, its ability to obtain confirmation
of the Plan or another plan of reorganization, its ability to comply with
the DIP Financing Facility (see note 11) and its ability to generate
sufficient cash from operations and financing sources to meet future
obligations. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets amounts or the
amounts and classification of liabilities that might result from the
outcome of these uncertainties.

While under the protection of Chapter 11, 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 sheets
could materially change because of changes in business strategies and the
effects of the Plan or another plan of reorganization.

F-9

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

In the Chapter 11 Cases, substantially all unsecured 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. For financial reporting purposes,
those liabilities and obligations whose treatment and satisfaction is
dependent on the outcome of the Chapter 11 Cases have been segregated and
classified as liabilities subject to compromise in the accompanying
consolidated balance sheets. 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 ultimate
amount of and settlement terms for such liabilities 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.

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

The consolidated financial statements include the financial
statements of Pillowtex and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.

(b) Fiscal Year

The Company's fiscal year ends on the Saturday closest to December
31. Fiscal year 1999 ended January 1, 2000, fiscal year 2000 ended
December 30, 2000, and fiscal year 2001 ended December 29, 2001.
Each year includes the results of operations for 52 weeks.

(c) Statements of Cash Flows

For purposes of reporting cash flows, the Company considers all
short-term investments with original maturities of three months or
less to be cash equivalents. At December 29, 2001, approximately
$3.9 million in cash was being held by the lenders under the
Company's DIP Financing Facility (see note 11) as collateral for
outstanding letters of credit.

Supplemental disclosures of cash flow information for years 2001,
2000, and 1999 follow:

2001 2000 1999
-------- ------- ------

Interest paid $ 74,313 87,535 87,906
======== ======= ======

Income taxes paid (refunded) $ (759) (2,706) 769
======== ======= ======

During the year ended December 29, 2001, the Company entered into a
capital lease obligation of $1.1 million.

(d) Inventories

Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) and last-in,
first-out (LIFO) methods (see note 6).

(e) Derivative Financial Instruments and Hedging Activities

During June 1998, Statement of Financial Accounts Standards ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued. This statement establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The provisions of SFAS No. 133, as amended by SFAS

F-10

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

Nos. 137 and 138, are effective for fiscal years beginning after
June 15, 2000. The Company adopted the provisions of SFAS No. 133 as
of December 31, 2000. The adoption of SFAS No. 133, as amended, did
not have any impact on its financial position or results of
operations. The Company enters into fixed-price contracts for
purchases of raw material cotton and natural gas from its suppliers.
SFAS No. 133, as amended, requires the Company to evaluate its
commodity contracts to determine whether the contracts are "normal
purchases or normal sales." The Company has concluded and documented
that these contracts meet the definition of "normal purchases or
normal sales," and therefore are not considered derivative
instruments subject to the provisions of SFAS No. 133, as amended.

(f) Property, Plant and Equipment

Depreciation is provided generally using the straight-line method in
amounts sufficient to amortize the cost of the assets over their
estimated useful lives as follows:

Buildings and improvements 10-39 years
Machinery and equipment 5-15 years
Data processing equipment and software 5-10 years
Furniture and fixtures 5-8 years

Leasehold improvements are amortized over the shorter of the
estimated useful lives of the assets or the remaining term of the
lease using the straight-line method. Renewals and betterments are
capitalized and depreciated over the remaining life of the specific
property unit.

(g) Intangibles

Intangible assets consist primarily of goodwill ($193.6 million and
$199.1 million, net of accumulated amortization of $22.2 million and
$16.8 million as of December 29, 2001 and December 30, 2000,
respectively) recorded in connection with acquisitions. Goodwill
represents the excess of purchase price over the fair value of net
assets acquired. Amortization is provided using the straight-line
method principally over an estimated useful life of 40 years.

Other intangible assets consist principally of trademarks and
deferred debt issuance costs. Trademarks are amortized using the
straight-line method over their useful lives, which range from 5 to
40 years. Debt issuance costs are amortized using the effective
interest method over the terms of the related debt (see note 20).

The Company assesses the recoverability of goodwill by determining
whether the amortization of the asset balance over its remaining
life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of impairment, if any is
measured based on projected discounted future operating cash flows.
The discount rate used will be based on the Company's cost of
capital. Other than the impairment described in note 3, the Company
believes no impairment of goodwill has occurred and that no
reduction of the estimated useful lives is warranted.

(h) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of

The Company reviews long-lived assets and certain identifiable
intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell and classified as assets held for sale.

(i) Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, receivables, and
accounts payable approximate fair value. The fair value of other
financial instruments are included in note 11.

F-11

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

(j) Income Taxes

Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.

(k) Stock Option Plan

In accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, the Company applies the accounting provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations and provides
pro forma net income and earnings per share disclosures for employee
stock option grants as if the fair-value based method defined in
SFAS No. 123 had been applied. Compensation expense is recorded only
if the current market price of the underlying stock exceeds the
exercise price on the date of grant.

(l) Revenue Recognition

Revenue is recognized upon shipment of products. Reserves for sales
returns and allowances are recorded in the same accounting period as
the related revenues.

(m) Sales Incentive and Other Advertising Expense

The Company employs a number of sales incentive programs to promote
and maintain its product lines. The major programs are rebates,
discounts, co-operative advertising, and market development funds.
The Company expenses the costs of such programs as incurred.

Sales incentive expense was approximately $50.9 million, $56.1
million, and $71.0 million during 2001, 2000, and 1999,
respectively. Sales incentive expense is classified in part in net
sales and in selling, general, and administrative expenses. In 2001,
2000 and 1999, sales incentive expense included in net sales and
selling, general, and administrative expenses was $31.9 million and
$19.0 million, $31.9 million and $24.2 million, and $51.2 million
and $19.8 million, respectively.

Other advertising expense included in selling, general, and
administrative expenses during 2001, 2000, and 1999 was $1.5
million, $0.7 million, and $5.1 million, respectively. Such cost is
expensed as incurred.

(n) Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing earnings
available for common shareholders by the weighted average number of
shares outstanding during the period. Diluted earnings (loss) per
share is computed by dividing (i) earnings (loss) available for
common shareholders as adjusted to add back (if dilutive)
convertible preferred dividends and accretion and the after-tax
interest recognized in the period associated with convertible debt
by (ii) the weighted average number of shares outstanding plus the
number of dilutive additional shares that would have been
outstanding if potentially dilutive securities had been issued.

(o) Foreign Currency Translation and Transactions

The Company's foreign subsidiaries use the local currency as the
functional currency and translate their assets and liabilities into
U.S. dollars using current exchange rates. Revenues and expenses are
translated at average monthly exchange rates. The resulting
translation adjustments are recorded as a separate component of
shareholders' equity (deficit). Foreign currency transaction gains
and losses are included in the consolidated statements of operations
and were not material in any of the years presented.

(p) Use of Estimates

The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the

F-12

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. See notes 1, 3, 12, and 16 for
significant estimates, assumptions, and unresolved uncertainties as
a result of the Chapter 11 Cases.

(q) Comprehensive Income (Loss)

Comprehensive income (loss) consists of net earnings (loss), foreign
currency translation adjustments, and pension equity adjustments and
is presented in the consolidated statements of shareholders' equity
(deficit).

(r) Reclassifications

The 2000 and 1999 consolidated financial statements have been
restated to present the Blanket Division as a discontinued operation
(see note 5).

Approximately $12.8 million of information technology expenses
associated with the Company's manufacturing systems have been
reclassified in 1999 from selling, general, and administrative
expenses to cost of goods sold to conform with the presentation used
in 2000 and 2001.

(3) Restructuring Charges and Impairment of Long-Lived Assets

Restructuring Charges. During 2001, the Company announced the
closure of the following locations: a towel manufacturing facility in
Hawkinsville, Georgia; a cut-and-sew bedding facility in Rocky Mount,
North Carolina; a sheet manufacturing facility in Kannapolis, North
Carolina; a towel yarn manufacturing operation and cotton warehouse in
Columbus, Georgia, a towel warehouse and distribution center in Phenix
City, Alabama; a towel yarn manufacturing operation in Tarboro, North
Carolina and a pillow manufacturing location in Toronto, Canada. The
Company also scaled back towel production at another facility in
Kannapolis, North Carolina. Only the Toronto location and the warehouse
and distribution operations at Rocky Mount remained open at December 29,
2001, utilizing approximately 150 employees. In total, the facility
closures impacted approximately 1,300 employees. The Rocky Mount facility
manufactured decorative bedding exclusively under a license agreement,
which expired on June 30, 2001. The production and functions performed at
the other locations were relocated to existing facilities. The total
charge recognized during 2001 for severance and related benefits was $6.5
million.

In addition to the facility closures, during 2001, the Company
implemented an enhanced early retirement plan under which salaried
employees age 59 or older having at least five years of service were
eligible to participate in the plan. Of the 135 employees eligible, 76
accepted. The Company also continued to implement a reduction in force
among its salaried employees, terminating approximately 22 employees. The
total charge relating to the early retirement plan and reduction in force
recognized in 2001 was approximately $4.3 million.

Activity in the reserve established for the restructuring charges is
presented below:

Restructuring charges $ 10,759
Payments (5,552)
Reclassification of early retirement program liability
to pension liability (4,144)
--------
Ending balance $ 1,063
========

Included in the loss from discontinued operations for the year ended
December 29, 2001 is a $0.4 million restructuring charge consisting of
severance and benefits associated with employees at a blanket yarn
manufacturing plant in Newton, North Carolina. The facility was closed in
connection with sale of the Company's Blanket Division (see note 5).

Impairment of Long-Lived Assets. During 2001, the Company recognized
charges for impairment of long-lived assets of $41.0 million.
Approximately $36.5 million relates to the real property and equipment at
the facilities discussed above. The Company also evaluated the carrying
values of certain machinery and equipment classified as assets held for
sale and recorded a write-down of $4.5 million.

F-13

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

During 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 Company recorded
a charge of $24.4 million to reduce these assets to their estimated fair
values.

During 2000, the Company also determined that given the expected
future operations of the Blanket Division, the carrying value of its
long-lived assets and goodwill was also impaired. The Company recorded an
asset impairment charge of $88.3 million to reduce the carrying value of
these assets to their fair values. This impairment charge consisted of
$38.3 million for goodwill associated with the Company's Blanket Division
and $50.0 million for the impairment of property, plant, and equipment.
This charge has been included in the loss from discontinued operations in
the 2000 income statement. The Blanket Division was sold in September 2001
(see note 5).

The impairment charges 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.

Certain of the permanently idled facilities and equipment were
included in the assets held for sale in the accompanying balance sheet as
of December 29, 2001 at a carrying value of $6.1 million. Management
expects to sell these assets within the next twelve months.

During 1999, a $2.0 million impairment charge was recorded to reduce
the carrying value of the Opelika, Alabama facility, which was closed in
the first quarter of 1999, to its estimated fair value.

(4) Earnings (Loss) Per Share

There were no reconciling items between basic loss per share and
diluted loss per share in 2001, 2000, and 1999, because the effects of the
conversion of convertible preferred stock and convertible debentures would
have been anti-dilutive for all periods presented. No options were assumed
to be exercised during 2001, 2000, and 1999 as the exercise price exceeded
the average market price. The convertible preferred stock was convertible
into approximately 4.1 million shares, 3.1 million shares, and 2.7 shares
in 2001, 2000, and 1999, respectively. The convertible debentures were
convertible into 0.5 million shares, 0.5 million shares, and 0.5 million
shares in 2001, 2000 and 1999, respectively. Options to purchase
approximately 1.0 million shares, 1.1 million shares, and 1.0 million
shares were outstanding in 2001, 2000, and 1999, respectively.

(5) Sale of Blanket Division

On September 6, 2001, the Company sold the majority of the inventory
and fixed assets associated with its Blanket Division to Beacon
Acquisition Corporation for approximately $13.4 million. The purchase
price consisted of approximately $12.1 million in cash ($0.6 million of
which was placed in escrow to secure post-closing obligations) and a
three-year promissory note in a principal amount of approximately $1.3
million. The promissory note is secured by a pledge of 100% of the stock
of the purchaser, a second lien on the majority of the assets being sold
(excluding the Blanket Division's real property located in Swannanoa,
North Carolina and Westminister, South Carolina), and a third lien on the
Blanket Division's real property located in Swannanoa, North Carolina. The
net cash proceeds of $11.2 million from the sale were applied to pay down
the Company's senior debt facilities. The loss on the sale recognized
during 2001 was $3.0 million.

The results of operations and net assets of the Blanket Division
have been accounted for as a discontinued operation. As a result, the 2000
and 1999 consolidated financial statements have been restated to reflect
the Blanket Division as a discontinued operation. The net assets of the
Blanket Division remaining at December 29, 2001 primarily include accounts
receivable, accounts payable and accrued expenses. The losses from
discontinued operations during 2001, 2000, and 1999 were $18.3 million,
$115.0 million, and $9.5 million, respectively.

F-14

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

(6) Inventories

Inventories consist of the following at December 29, 2001 and
December 30, 2000:

2001 2000
-------- -------

Finished goods $104,532 116,212
Work-in-process 40,832 75,465
Raw materials and supplies 46,828 53,258
In-transit and off-site 8,386 17,210
-------- -------
$200,578 262,145
======== =======

At December 29, 2001 and December 30, 2000, 70% and 71%,
respectively, of inventories were valued at LIFO.

During 2000, the Company recorded a $49.5 million write-down of
excess, obsolete, and distressed inventory. This charge was reflected in
cost of goods sold and resulted from a slow down in the retail environment
and the impact of the filing of the Chapter 11 Cases on November 14, 2000.
The Chapter 11 Cases increased the pressure on the Company to liquidate
its excess, obsolete, and distressed inventory in a shorter timeframe than
in the past. As a result, the Company estimated it would receive lower
prices when selling such inventory. The loss from discontinued operations
for 2000 includes a $19.2 million write-down to reflect the Blanket
Division's inventory at its estimated net realizable value based upon the
Company's review of strategic alternatives with regard to the division. As
discussed in note 5, the Blanket Division was sold in 2001.

During 1999, the Company recorded a $4.9 million write-down to
reduce certain inventory at the Blanket Division to its net realizable
value. The write-down has been included in the loss from discontinued
operations for 1999.

(7) Property, Plant, and Equipment

Property, plant, and equipment are stated at cost or fair value and
consist of the following at December 29, 2001 and December 30, 2000:

2001 2000
--------- --------
Land $ 24,529 27,671
Buildings and improvements 157,655 161,249
Machinery and equipment 329,590 372,968
Data processing equipment and software 100,727 100,782
Furniture and fixtures 4,579 5,991
Leasehold improvements 2,666 2,567
Projects in progress 6,632 8,341
--------- --------
626,378 679,569
Less accumulated depreciation and amortization (172,938) (153,579)
--------- --------
$ 453,440 525,990
========= ========

Interest costs of $0.9 million and $5.6 million incurred during 2000
and 1999, respectively, for the purchase and construction of qualifying
fixed assets, were capitalized and are being amortized over the related
assets' estimated useful lives. No interest costs were capitalized during
2001.

(8) Accounts Payable and Accrued Expenses

Accounts payable includes $0.3 million and $12.1 million at December
29, 2001 and December 30, 2000, respectively, of checks not yet presented
for payment on zero balance disbursement accounts, less amounts on deposit
at the banking institutions where the zero balance disbursement accounts
are maintained.

F-15

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

Accrued expenses consist of the following at December 29, 2001 and
December 30, 2000:

2001 2000
------- ------
Employee-related compensation and benefits $10,012 10,507
Insurance and workers' compensation 9,929 11,655
Customer rebates 14,455 8,529
Interest and commitment fees 2,064 3,731
Advertising 5,763 7,699
Other accrued expenses 17,614 15,061
------- ------
$59,837 57,182
======= ======

At December 29, 2001 and December 30, 2000, certain accrued expenses
have been classified as liabilities subject to compromise (see note 12).

(9) Pension Plans

The Company has defined benefit pension plans covering substantially
all of its employees except certain union employees who are not covered
under these plans. The plans provide pension benefits based on the
employees' compensation and years of service. The Company's funding policy
provides for annual contributions of an amount between the minimum
required and maximum amount that can be deducted for federal income tax
purposes. Pension plan assets consist of investments in publicly traded
corporate common stocks and bonds, as well as U.S. government obligations.
Summarized information for the plans follows:

2001 2000
--------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 310,499 296,889
Service cost 6,143 6,667
Interest cost 23,194 22,740
Actuarial loss 17,109 4,973
Benefits paid (23,935) (20,770)
Curtailments (1,350) --
Special termination benefits 4,144 --
--------- --------
$ 335,804 310,499
========= ========

Change in plan assets:
Fair value of plan assets at beginning of year $ 365,353 370,840
Actual return on plan assets (21,436) 15,283
Benefits paid (23,935) (20,770)
--------- --------
Fair value of plan assets at end of year $ 319,982 365,353
========= ========

Funded status:
Benefit obligation $(335,804) (310,499)
Fair value of plan assets 319,982 365,353
Unrecognized transition asset (18) (26)
Unrecognized prior service cost 702 805
Unrecognized net actuarial (gain) loss 33,036 (37,285)
Intangible asset (702) --
Amount included in comprehensive income (26,405) --
--------- --------
Prepaid (accrued) benefit cost $ (9,209) 18,348
========= ========

F-16

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

At December 29, 2001, the Company recognized an additional minimum
pension liability of $27.1 million for the additional pension liability in
excess of the accumulated benefit obligation. The additional minimum
liability results from the value of the accumulated benefit obligation
being greater than the fair value of the plan assets at December 29, 2001.
The offsets to the additional minimum liability are a charge to
shareholders' deficit of $26.4 million, representing the excess of
additional pension liability over unrecognized prior service cost, and an
intangible asset of $0.7 million.

2001 2000 1999
-------- ------- -----------

Weighted average assumptions as of December 29, 2001,
December 30, 2000 and January 1, 2000:
Discount rate 7.25% 7.75% 8.00%
Expected return 9.00% 9.00-9.50% 9.00-10.50%
Compensation increase rate 3.50% 3.50% 4.00%

Components of net periodic pension cost (income):
Service cost $ 6,143 6,667 7,615
Interest cost 23,194 22,740 21,892
Expected return on plan assets (31,305) (34,272) (34,379)
Recognized net actuarial gain (471) (2,798) (2)
Amortization of transition asset (8) (8) (8)
Amortization of prior service cost 103 104 35
Special termination benefits 4,144 -- --
Curtailment gain (1,350) -- --
-------- ------- -----------
Net periodic pension cost (income) $ 450 (7,567) (4,847)
======== ======= ==========

The $4.1 million charge for special termination benefits relates to
the Company's enhanced early retirement program (see note 3) and has been
included in restructuring charges in 2001. The curtailment gain relates to
the sale of the Blanket Division (see note 5) and has been included in the
loss on the sale of the Blanket Division in 2001.

The Company also sponsors employee savings plans that cover
substantially all employees. The Company's matching provisions under these
plans vary, with some matches being discretionary. The matching formulas
of certain plans can be changed annually. In 2001, 2000, and 1999, the
Company incurred costs of $2.6 million, $2.7 million, and $3.2 million,
respectively, to provide matching contributions for those plans with
matching provisions.

(10) Postretirement Benefits Other Than Pensions

The Company provides medical insurance premium assistance and life
insurance benefits to retired employees of Fieldcrest Cannon. The medical
and life insurance benefits provided under the plan are fixed amounts
determined at the time of retirement and, thus, are unaffected by medical
trend rates. Employees become eligible for these benefits when they reach
retirement age while working for the Company. The plans are funded as
benefits are paid.

F-17

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

2001 2000
-------- -------

Change in benefit obligation:
Benefit obligation at beginning of year $ 31,647 34,418
Service cost 535 497
Interest cost 2,350 2,311
Actuarial (gain) loss 785 (3,361)
Benefits paid (2,307) (2,218)
-------- -------
Benefit obligation at end of year $ 33,010 31,647
======== =======

Change in plan assets:
Fair value of plan assets at beginning of year $ -- --
Employer contributions 2,307 2,218
Benefits paid (2,307) (2,218)
-------- -------
Fair value of plan assets at end of year $ -- --
======== =======

Funded status:
Benefit obligation $(33,010) (31,647)
Unrecognized net actuarial gain (5,925) (7,294)
-------- -------
Accrued postretirement benefit cost included in accrued
expenses and noncurrent liabilities $(38,935) (38,941)
======== =======

2001 2000 1999
-----------------------------------

Weighted average assumptions as of December 29, 2001,
December 30, 2000 and January 1, 2000:
Discount rate 7.25% 7.75% 8.00%
Compensation increase rate 3.50% 3.50% 4.00%

Components of net periodic postretirement cost:
Service cost $ 535 497 582
Interest cost 2,350 2,311 2,430
Amortization of actuarial gain (584) (342) (28)
-----------------------------------
Net periodic postretirement benefit cost $ 2,301 2,466 2,984
===================================

F-18

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

(11) Long-term Debt and Liquidity

Long-term debt consists of the following at December 29, 2001 and
December 30, 2000:

2001 2000
----------- ----------

Revolver, less portion to be treated as post-petition debt $ 233,051 255,956
Overline Credit Facility 34,738 34,738
Term loans, less portion to be treated as post-petition debt 242,004 268,090
Portion of revolver and term loans to be treated as post-petition debt 150,000 117,179
DIP Financing Facility -- --

Industrial revenue bonds with interest rates from 3.60% to
7.85% and maturities through July 1, 2021; generally collateralized
by land and buildings 13,185 14,925
9% Senior Subordinated Notes due 2007 185,000 185,000
10% Senior Subordinated Notes due 2006 125,000 125,000
6% Convertible Subordinated Sinking Fund Debentures due in 2012,
inclusive of Cash Claimant Notes in the principal amount of $5.2 million 90,417 90,417
Other debt 2,106 3,131
----------- ----------
Total debt 1,075,501 1,094,436

Less:

Current portion of long-term debt (356) --

Current portion of long-term debt in default (660,893) (33,229)

Long-term debt in default (10,920) (660,790)

Liabilities subject to compromise (see note 12) (402,687) (400,417)
----------- ----------
Total long-term debt $ 645 --
=========== ==========

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, (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 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 earnings before interest, taxes, depreciation, and amortization
("EBITDA"), and (e) elimination of a nine-month extension provision.

F-19

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

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
and equipment that secure three of the industrial revenue bond facilities
described below, and a first priority lien on all post-petition real and
personal assets of the Company. The documentation evidencing the DIP
Financing Facility contains financial covenants requiring maintenance of
an asset coverage ratio and a minimum level of EBITDA, as well as other
covenants that limit, among other things, the incurrence of costs for
relocation of equipment and costs associated with facility closures,
indebtedness, liens, sales of assets, capital expenditures and
investments, and prohibit dividend payments. The net proceeds of certain
asset sales outside the ordinary course of business will reduce
prepetition indebtedness under the senior secured credit facilities;
otherwise, the net proceeds of asset sales outside the ordinary course of
business will be applied as a reduction of the DIP Financing Facility.

No cash borrowings were outstanding on the DIP Financing Facility at
December 29, 2001. Availability under the DIP Financing Facility is based
upon the balances of eligible assets, reduced by outstanding debt and
letters of credit. Availability under the DIP Financing Facility as of
December 29, 2001 was approximately $25.0 million. As of December 29,
2001, the Company had $40.4 million in cash and cash equivalents,
including $3.9 million in cash which was being held by the lenders under
the DIP Financing Facility as collateral for outstanding letter of credit.
As of December 29, 2001, the Company had $16.3 million in letters of
credit outstanding under the DIP Financing Facility. As prepetition
letters of credit expire under the Company's senior secured revolving
credit facility described below, to the extent they are renewed, they will
be reissued under the DIP Financing Facility or, assuming consummation of
the Plan in accordance with its terms, the Exit Financing Revolver
Facility.

Assuming consummation of the Plan in accordance with its terms,
holders of claims in respect of the DIP Financing Facility other than
those relating to Designated Post-Petition Loans will be paid cash in an
amount equal to such claim and holders of claims relating to Designated
Post-Petition Loans will receive a note under the Exit Term Loan in an
amount equal to the amount of such holder's Designated Post-Petition

F-20

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

Loans. In addition, letters of credit issued under the DIP Financing
Facility will be replaced with letters of credit issued under the Exit
Financing Revolver Facility.

Senior Debt Facilities

In December 1997, in connection with the Fieldcrest Cannon
acquisition, the Company entered into senior secured revolving credit and
term loan facilities with a group of financial and institutional investors
for which Bank of America, N.A. acts as the administrative and collateral
agent. These facilities consisted of a $350.0 million revolving credit
facility and a $250.0 million term loan facility. The term loan facility
consisted of a $125.0 million Tranche A Term Loan and a $125.0 million
Tranche B Term Loan. Effective July 28, 1998, the Company amended these
facilities by increasing the Tranche B Term Loan to $225.0 million. The
increase occurred in conjunction with the acquisition of The Leshner
Corporation ("Leshner"), allowing the Company to fund the transaction and
reduce borrowings under the revolving credit facility.

As of December 29, 2001, (a) outstanding prepetition borrowings
under the revolving credit facility were $233.0 million, (b) outstanding
prepetition borrowings under the term loan facility were $242.0 million in
the aggregate, and (c) outstanding letters of credit under the revolving
credit facility were the $11.1 million in the aggregate. Pursuant to the
DIP Financing Order, $150 million of prepetition borrowings under the
senior debt facilities had become subject to treatment as postpetition
debt. As prepetition letters of credit expire, to the extent they are
renewed, they will be reissued under the DIP Financing Facility or,
assuming consummation of the Plan in accordance with its terms, the Exit
Financing Revolver Facility.

As amended, amounts outstanding under the revolving credit facility
and the Tranche A Term Loan currently bear interest at a rate based upon
LIBOR plus 3.50%. The Tranche B Term Loan bears interest on a similar
basis to the Tranche A Term Loan, plus an additional margin of 0.50%. The
weighted average annual interest rate on outstanding borrowings under the
various prepetition senior credit facilities for the year ended December
29, 2001 was 7.82%. The prepetition senior debt facilities expired on
January 31, 2002.

The senior debt facilities are guaranteed by each of the domestic
subsidiaries of the Company, and are secured by first priority liens on
all of the capital stock of each domestic subsidiary of the Company and by
65% of the capital stock of the Company's foreign subsidiaries. The
Company has also granted a first priority security interest in all of its
presently unencumbered and future domestic assets and properties, and all
presently unencumbered and future domestic assets and properties of each
of its subsidiaries.

Pursuant to the DIP Financing Order, the Bankruptcy Court authorized
the Company to make scheduled interest payments on the prepetition senior
debt facilities. Even though these payments are being made, the Company
remains in default under the prepetition senior debt facilities.

Assuming consummation of the Plan in accordance with its terms, the
indebtedness under the senior debt facilities will be cancelled and, in
exchange therefore, holders of claims in respect of the senior debt
facilities will become entitled to receive New Common Stock.

Overline Facility

In May 1999, the Company entered into a $20.0 million senior
unsecured revolving credit facility (the "Overline Facility") to obtain
additional working capital availability. On July 27, 1999, the Overline
Facility was amended to increase the amount of funds available to $35.0
million and to secure it with the same assets securing the senior debt
facilities described above. As of December 29, 2001, outstanding
borrowings under the Overline Facility were $34.7 million. The Overline
Facility is guaranteed on a senior basis by the Company's domestic
subsidiaries. Amounts borrowed under the Overline Facility bear interest
at a rate based upon LIBOR plus 4.5% or the base rate plus 3.0%, at the
Company's option. The Overline Facility matured on January 31, 2002.

Pursuant to the DIP Financing Order, the Bankruptcy Court authorized
the Company to make scheduled interest payments on the Overline Facility.
Even though these payments are being made, the Company remains in default
under the Overline Facility.

F-21

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

Assuming consummation of the Plan in accordance with its term, the
indebtedness under the Overline Facility will be cancelled and, in
exchange therefor, holders of claims in respect of the Overline Facility
will become entitled to receive New Common Stock and New Warrants.

Senior Subordinated Debt

In connection with the Fieldcrest Cannon acquisition, the Company
issued $185.0 million of 9% Senior Subordinated Notes due 2005 (the "9%
Notes"), with interest payable semiannually commencing June 15, 1998. The
9% Notes are general unsecured obligations of the Company, are
subordinated in right of payment to all existing and future senior
indebtedness, and rank pari passu with the 10% Notes described below. As
of December 29, 2001, all of the 9% Notes remained outstanding.

On November 12, 1996, the Company issued $125.0 million aggregate
principal amount of 10% Senior Subordinated Notes due 2006 (the "10%
Notes"), with interest payable semiannually commencing May 15, 1997. The
10% Notes are general unsecured obligations of the Company, are
subordinated in right of payment to all existing and future senior
indebtedness, and rank pari passu with the 9% Notes. As of December 29,
2001, all of the 10% Notes remained outstanding.

The 9% Notes and the 10% Notes are unconditionally guaranteed on a
senior subordinated basis by each of the existing and future domestic
subsidiaries of the Company and each other subsidiary of the Company that
guarantees the Company's obligations under the senior debt facilities
described above. The guarantees are subordinated in right of payment to
all existing and future senior indebtedness of the relevant guarantor.

The Company is in default under the indentures governing both the 9%
Notes and the 10% Notes. No principal or interest payment has been or will
be made on the 9% Notes or the 10% Notes during the pendency of the
Chapter 11 Cases.

Assuming consummation of the Plan in accordance with its terms, the
indebtedness under the 9% Notes and the 10% Notes will be cancelled and,
in exchange therefor, holders of claims in respect of 9% Notes or 10%
Notes will become entitled to receive New Common Stock and New Warrants.

Fieldcrest Cannon 6% Convertible Debentures

As a result of the Company's acquisition of Fieldcrest Cannon, the
outstanding Fieldcrest Cannon 6% Convertible Subordinated Debentures due
2012 (the "6% Convertible Debentures") are convertible, at the option of
the holders, into a combination of cash and Common Stock. As of December
29, 2001, approximately $85.2 million aggregate principal amount of the 6%
Convertible Debentures remain outstanding. If all such outstanding 6%
Convertible Debentures were converted at such date, the resulting cash
component of the conversion consideration would have been approximately
$57.2 million.

Prior to the Petition Date, Fieldcrest Cannon issued certain
non-interest bearing subordinated promissory notes (the "Cash Claimant
Notes") in respect of the unpaid cash portion of the conversion
consideration owing to certain holders of the 6% Convertible Debentures
who had surrendered their debentures for conversion, but had not been paid
the cash portion of the conversion consideration. As of December 29, 2001,
the aggregate amount of the outstanding Cash Claimant Notes was $5.2
million.

The 6% Convertible Debentures and Cash Claimant Notes are general
unsecured obligations of Fieldcrest Cannon. Fieldcrest Cannon is in
default under the indenture governing the 6% Convertible Debentures and
the Cash Claimant Notes. No principal or interest payment has been or will
be made on the 6% Convertible Debentures or Cash Claimant Notes during the
pendency of the Chapter 11 Cases.

Assuming consummation of the Plan in accordance with its terms, the
indebtedness under the 6% Convertible Debentures and the Cash Claimant
Notes will be cancelled and, in exchange therefor, holders of claims in
respect of the 6% Convertible Debentures and the Cash Claimant Notes will
become entitled to receive New Common Stock and New Warrants.

F-22

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

Industrial Revenue Bonds

The Company presently has obligations in respect of two industrial
revenue bond facilities (the "IRB Facilities"). One of the IRB Facilities
is secured by liens on specified plants and equipment and by a letter of
credit. The other IRB Facility is secured by a letter of credit. As of
December 29, 2001, $13.2 million of bonds in the aggregate were
outstanding under the IRB Facilities.

On February 6, 2001, the Bankruptcy Court authorized the Company to
make scheduled principal and interest payments on the IRB Facilities. Even
though these payments are being made, the Company remains in default of
its obligations under each of the IRB Facilities.

Assuming consummation of the Plan in accordance with its terms, the
IRB Facilities will be reinstated and the letters of credit issued in
respect thereof under the senior debt facilities described above will be
replaced, substituted, or otherwise satisfied with equivalent letters of
credit to be issued under the Exit Financing Revolver Facility.

Adequacy of Capital Resources

As discussed above, the Debtors are operating their businesses as
debtors-in-possession under Chapter 11 of the Bankruptcy Code. 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 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 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.

F-23

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

Fair Value

The carrying and fair values of these financial instruments as of
December 29, 2001 and December 30, 2000 are presented below. The fair
values at December 29, 2001 were determined using the estimated recovery
percentages included in the Disclosure Statement approved by the
Bankruptcy Court on February 28, 2002 (see note 1). The recovery
percentages are based on the estimated market prices of the New Common
Stock and/or New Warrants and are subject to change. The fair values at
December 30, 2000 were estimated by discounting the future cash flows
using rates available at December 30, 2000 or obtaining market prices as
of December 30, 2000.

2001 2000
----------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ------- --------- -------

Revolver, less portion to be
treated as post-petition debt $ 233,051 95,085 255,956 159,973
Overline Credit Facility 34,738 903 34,738 21,486
Term loans, less portion to be
treated as post-petition debt 242,004 99,222 268,090 167,556
Portion of revolver and term
loans to be treated as post-
petition debt 150,000 150,000 117,179 117,179
Industrial revenue bonds and
other debt 15,291 12,456 18,056 11,510
9% Senior Subordinated Notes
due 2007 185,000 4,810 185,000 9,250
10% Senior Subordinated
Notes due 2006 125,000 3,250 125,000 6,625
6% convertible
subordinated sinking
fund debentures due
2012 90,417 2,350 90,417 3,617
---------- ------- --------- -------
Total $1,075,501 368,076 1,094,436 497,196
========== ======= ========= =======

Scheduled Maturities

Aggregate maturities of long-term debt for each of the five years
following December 29, 2001 and thereafter, assuming the unpaid principal
balance at December 29, 2001 under the revolving credit facilities remains
unchanged and based on the contractual terms of the instruments prior to
the filing of the Chapter 11 Cases, are as follows:

Amount
Year --------
2002 $669,081
2003 7,781
2004 6,932
2005 6,273
2006 131,268
Thereafter 254,166

F-24

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

(12) Liabilities Subject to Compromise

The principal categories of obligations classified as liabilities
subject to compromise under the Chapter 11 Cases are identified below. The
amounts set forth below may vary significantly from the stated amounts of
proofs of claim that may be filed with the Bankruptcy Court and may be
subject to future adjustments depending on Bankruptcy Court action,
further developments with respect to potential disputed claims,
determination as to the value of any collateral securing claims, or other
events. In addition, other claims may arise from the rejection of
additional leases and executory contracts by the Debtors.

2001 2000
-------- -------
9% Senior Subordinated Notes due 2007 $185,000 185,000
10% Senior Subordinated Notes due 2006 125,000 125,000
6% Convertible Subordinated Sinking Fund
Debentures due 2012 90,417 90,417
Other unsecured debt 2,270 --
-------- -------
Total long-term debt 402,687 400,417
-------- -------
Interest accrued on above notes and debentures 14,018 14,448
Accounts payable 51,266 55,322
Nonqualified pension plan liability 11,673 11,673
Liability for rejected contracts and leases 15,841 --
Other accrued expenses 5,355 10,233
-------- -------
$500,840 492,093
======== =======

As a result of the filing of the Chapter 11 Cases, no principal or
interest payments will be made on unsecured prepetition debt without
Bankruptcy Court approval or until the Plan or another plan of
reorganization providing for the repayment terms has been confirmed by the
Bankruptcy Court and becomes effective. Therefore, interest of $38.2
million on prepetition unsecured obligations has not been accrued after
the Petition Date.

(13) Income Taxes

The components of income tax benefit are as follows:

2001 2000 1999
-------- ------- ------
U.S. federal - deferred $ -- (84,926) (2,355)
State and foreign taxes - deferred -- (8,435) (385)
-------- ------- ------
$ -- (93,361) (2,740)
======== ======= ======

F-25

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

A reconciliation of income tax benefit computed using the U.S.
federal statutory income tax rate of 35% of loss from continuing
operations before income taxes to the actual income tax benefit is as
follows:

2001 2000 1999
-------- -------- --------

Expected tax benefit at U.S. statutory rate $(70,541) (84,263) (4,468)
Amortization of goodwill 1,898 1,956 2,036
State and foreign taxes, net of federal effect (6,906) (11,598) (385)
Change in valuation allowance 75,832 -- --
Other (283) 544 77
-------- -------- --------
$ -- (93,361) (2,740)
======== ======== ========

The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets (liabilities) as of
December 29, 2001 and December 30, 2000 are presented below:

Deductible temporary differences & carryforwards: 2001 2000
--------- ---------
Package design costs $ 258 72
Accrued employee benefits 12,565 11,865
State deferred income taxes -- 18,613
Accruals and allowances 17,250 19,363
Operating losses and credit carryforwards 220,316 98,774
Other 3,936 5,236
--------- ---------
Total gross deferred tax assets 254,325 153,923

Less valuation allowance (115,925) (32,666)
--------- ---------

Net deferred tax assets 138,400 121,257
--------- ---------

Taxable temporary differences:
Inventory costs and reserves (38,696) (25,561)
Depreciable assets (80,133) (72,338)
State deferred income taxes (9,883) (13,613)
Trademarks (9,688) (9,745)
--------- ---------
Total gross deferred tax liabilities (138,400) (121,257)
--------- ---------

Net deferred tax liabilities $ -- --
========= =========

The table above includes net deferred tax assets of discontinued
operations of $7.4 million and $32.7 million at December 29, 2001 and
December 30, 2000, respectively, which have been completely offset by
valuation allowances.

At December 29, 2001, the Company has $536.0 million of federal and
state operating loss carryforwards expiring 2006 through 2021, $2.0
million general business tax credit carryforward expiring 2005 through
2021 and $6.7 million unused alternative minimum tax credit carryforward
that does not expire.

In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. The Company
expects the deferred tax assets, net of the valuation allowance, at
December 29, 2001 to be realized as a result of the reversal of existing
taxable temporary differences.

As part of the above analysis, a $32.6 million valuation allowance
was established during the year ended December 30, 2000. The net change in
the valuation allowance for the year ended December 29, 2001 was an $83.3
million increase.

F-26

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

(14) Redeemable Convertible Preferred Stock

On December 19, 1997, the Company issued 65,000 shares of Series A
Redeemable Convertible Preferred Stock ("Series A Preferred Stock") for
$65.0 million less $2.1 million of issue costs. Accretion is being
recognized to increase the recorded amount to the redemption amount over
the period to the redemption date. Dividends accrued from the issue date
through December 31, 1999 at a 3% annual rate. Beginning January 1, 2000,
the rate increased to 10% as a result of the Company's earnings per share
for 1999 falling below predetermined targets. During the third and fourth
quarters of 1999, the Company accrued and paid in kind a one-time
cumulative dividend on the Series A Preferred Stock, from the issue date
through December 31, 1999, equal to the difference between the dividends
calculated at the 3% rate and dividends calculated at the 10% rate, or
10,135 shares of Series A Preferred Stock. Under the terms of the Series A
Preferred Stock, dividends can be paid in cash or additional shares of
Series A Preferred Stock until December 2002, at which time they must be
paid in cash. Under the DIP Financing Facility, the Company is prohibited
from paying any dividends on the Series A Preferred Stock. A total of
81,411 shares of Series A Preferred Stock were outstanding as of December
29, 2001. The commencement of the Chapter 11 Cases constitutes an "Event
of Noncompliance" under the terms of the Series A Preferred Stock. The
terms of the Series A Preferred Stock provide that upon the occurrence of
an Event of Noncompliance, the dividend rate on such stock will increase
immediately to the lesser of 18% per annum and the maximum rate permitted
by law. Accordingly, as of the Petition date, dividends on the Series A
Preferred Stock began accruing at 18% per year, compounding quarterly.

The Series A Preferred Stock is convertible, at any time at the
option of the holder, into Common Stock at a rate calculated by dividing
$1,000 plus unpaid dividends per share by $24.00 per share. Each share of
Series A Preferred Stock is subject to mandatory redemption in ten and
one-half years after the issue date at a redemption price of $1,000 plus
accrued and unpaid dividends. The Company has the right after the fourth
anniversary of the issue date to call all or a portion of the Series A
Preferred Stock at $1,000 per share plus accrued and unpaid dividends
times a premium equal to the dividend rate after the fourth anniversary
date and declining ratably to the mandatory redemption date. Holders of
the Series A Preferred Stock are entitled to limited voting rights only
under certain conditions.

Assuming consummation of the Plan in accordance with its terms, the
Series A Preferred Stock will be cancelled without consideration.

(15) Stock Options

In 1993, the Company established a stock option plan under which
options may be granted to eligible employees and non-employee directors of
the Company. Under the stock option plan, the Board of Directors may grant
either nonqualified stock options or incentive stock options.

At December 29, 2001, there were 684,000 shares available for grant
under the stock option plan. No stock options were granted during 2001.
The per share weighted-average fair value of stock options granted in 2000
and 1999 was $2.52 and $6.46 respectively, on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions:

2000 1999
------- -------
Expected dividend yield 0.0% 0.0%
Stock price volatility 60.51 46.53
Risk-free interest rate 6.33 5.35
Expected option term 5 years 5 years

The Company applies APB Opinion No. 25 and related interpretations
in accounting for its stock option plan and, accordingly, no compensation
cost has been recognized for its stock options in the consolidated
financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:

F-27

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

2001 2000 1999
----------------------------------------------

Loss available for common shareholders:
As reported $ (239,119) (271,336) (31,826)
Pro forma (240,434) (272,951) (33,410)

Loss per share:
As reported - basic and diluted $ (16.78) (19.04) (2.25)
Pro forma - basic and diluted (16.87) (19.15) (2.36)

All options are granted at an exercise price not less than the fair
market value of the common stock at the date of grant. The option period
may not be more than ten years from the date the option is granted, and
options generally vest over a four-year period.

A summary of option activity during 1999, 2000, and 2001 follows
(shares in thousands):

Weighted average
Shares exercise price
------ ----------------
Outstanding at January 2, 1999
(142 shares exercisable) 899 $25.36
Granted 418 14.32
Exercised (3) 12.72
Canceled (272) 22.00
------
Outstanding at January 1, 2000
(296 shares exercisable) 1,042 20.80
Granted 506 4.38
Canceled (408) 5.44
------
Outstanding at December 30, 2000
(387 shares exercisable) 1,140 15.03
Canceled (143) 16.90
------
Outstanding at December 29, 2001
(564 shares exercisable) 997 $14.77
======

The table below provides weighted average exercise prices and
weighted average remaining contractual life of options outstanding at
December 29, 2001, segregated based upon ranges of exercise prices.
Options are presented in thousands.

Weighted
average
Weighted Weighted remaining
Number Number average average contractual
of options of options exercise price exercise price life
outstanding exercisable (outstanding) (exercisable) (outstanding)
------------------------------------------------------------------------------------

$2.56 - $4.32 340 110 $ 4.16 $ 4.20 8.34
$4.56 - $15.63 220 129 8.13 10.12 6.22
$15.88 - $31.81 265 196 21.16 20.58 6.19
$33.50 - $44.38 172 129 34.29 34.29 6.13

Assuming consummation of the Plan in accordance with its terms, all
outstanding stock options will be cancelled without consideration.

(16) Commitments and Contingent Liabilities

Manufacturing equipment and facilities at certain locations,
showrooms, sales offices, and warehouse space are leased under
non-cancelable operating lease agreements. These leases generally require
the Company to pay all executory costs such as maintenance and taxes.
Rental expense for operating leases was approximately $28.2 million,
$33.3 million, and $27.6 million during 2001, 2000, and 1999,
respectively.

F-28

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

Future minimum lease payments under non-cancelable operating leases
(with initial or remaining lease terms in excess of one year), which
expire at various dates through 2009, are as follows:

Year Amount
- ---- -------
2002 $20,046
2003 19,113
2004 18,321
2005 16,015
2006 13,122
Thereafter 6,386

At December 29, 2001, the Company had $43.1 million in outstanding
cotton purchase commitments.

From time to time, the Company is a party to various legal
proceedings arising in the ordinary course of business. While any
proceeding or litigation has an element of uncertainty, management
believes that the final outcome of all matters currently pending will not
have a materially adverse effect on the Company's consolidated financial
position, results of operations, or liquidity.

As described in note 1, as debtors-in-possession, the Debtors have
the right to assume or reject executory contracts and leases. The Debtors
are in the process of reviewing their executory contracts and leases to
determine which, if any, they will reject. The Debtors cannot presently
determine or reasonably estimate the ultimate liability that may result
from rejecting contracts or leases or from the filing of claims for any
rejected contracts or leases, and no provisions have yet been made for
these items. Such rejections could result in additional liabilities
subject to compromise.

(17) Concentration of Risk

The Company's customers are primarily retailers located throughout
the United States and Canada. Although the Company closely monitors the
creditworthiness of its customers, adjusting credit policies and limits as
needed, a customer's ability to pay is largely dependent upon the retail
industry's economic environment.

The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends, and other information. The Company has trade receivables which are
due from certain customers who are experiencing financial difficulties.
However, in the opinion of management of the Company, the allowance for
doubtful accounts is adequate, and trade receivables are presented at net
realizable value.

Sales to the Company's largest individual customer, including its
affiliated entities, accounted for approximately 31.2%, 20.1%, and 16.8%
in 2001, 2000, and 1999, respectively. No other customer accounted for 10%
or more of the Company's sales.

Pillowtex may have difficulty in maintaining existing or creating
new relationships with suppliers or vendors as a result of the Chapter 11
Cases. Pillowtex's suppliers and vendors may 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 cash flow.

(18) Segment Information

The Company manufactures textile products for the bedroom, bathroom,
and kitchen and markets them to department stores, discount stores,
specialty shops, and certain institutional customers and over the
Internet. The Company is organized into two major divisions that it
considers operating segments: (1) Bed and Bath and (2) Pillow and Pad. The
Bed and Bath Division manufactures and sells sheets and other fashion
bedding textiles, as well as towels, bath rugs, and kitchen textile
products. The Pillow and Pad Division manufactures and sells bed pillows,
down comforters, and mattress pads. On September 6, 2001, the Company sold
the majority of the inventory and fixed assets associated with its Blanket
Division, which

F-29

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

manufactured and sold blanket products (see note 5). Other includes the
Company's retail stores, corporate activities, and the remaining assets
associated with the Blanket Division.

The accounting policies of the divisions are the same as those
described in the Summary of Significant Accounting Policies. The Company
evaluates division performance based on gross profit. Interdivisional
sales are not material.

Information about the Company's divisions is presented below:

Year ended December 29, 2001
-------------------------------------------------------
Bed Pillow
and and
Bath Pad Other(1) Total
-------------------------------------------------------

Net sales $ 756,234 252,919 21,902 1,031,055
Gross profit (loss) 39,672 34,630 (35,787) 38,515
Depreciation & amortization 38,437 3,370 11,978 53,785
Total assets 820,871 133,803 132,953 (2) 1,087,627
Capital expenditures 5,967 841 6,024 12,832

Year ended December 30, 2000
-------------------------------------------------------
Bed Pillow
and and
Bath Pad Other(1) Total
-------------------------------------------------------

Net sales $ 942,604 286,666 29,734 1,259,004
Gross profit (loss) (3) 61,825 28,452 (53,845) 36,432
Depreciation & amortization 42,031 2,886 12,800 57,717
Total assets 983,983 117,371 234,415 (2) 1,335,769
Capital expenditures 22,884 899 9,414 (4) 33,197

Year ended January 1, 2000
-------------------------------------------------------
Bed Pillow
and and
Bath Pad Other(1) Total
-------------------------------------------------------

Net sales $1,095,344 303,969 33,121 1,432,434
Gross profit (loss) 165,608 59,694 (34,771) 190,531
Depreciation & amortization 40,801 3,093 8,047 51,941
Total assets 1,147,531 139,250 384,995 (2) 1,671,776
Capital expenditures 46,815 1,544 41,378 (4) 89,737

(1) Includes retail stores and miscellaneous Corporate activities, including
the Company's central information technology, manufacturing, human
resource, and purchasing departments.
(2) Corporate amounts include primarily data processing equipment and software
and other enterprise wide assets not allocated to the segments. Also
includes net assets of discontinued operations of $1.4 million, $46.8
million, and $182.6 million in 2001, 2000, and 1999, respectively.
(3) Includes inventory write-downs of $39.8 million in the Bed and Bath
Division, $8.2 million in the Pillow and Pad Division, and $1.5 million in
Other.
(4) Includes capital expenditures for discontinued operations of $0.7 million
and $6.2 million in 2000 and 1999, respectively.

F-30

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

The Company's principal geographic market is North America,
primarily the United States. Pillowtex's current international business is
concentrated in Canada, but the Company 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.

(19) Selected Quarterly Financial Data (Unaudited)

The following tables present unaudited financial data of the Company
for each quarter of 2001 and 2000.

2001 quarter ended
--------------------------------------------------------
March 31 June 30 September 29 December 29
--------- ------- ------------ -----------

Net sales $ 278,925 237,135 271,395 243,600
Gross profit (loss) 7,492 (1,503) 12,433 20,093
Net loss (48,227) (80,676) (43,689) (50,169)

Loss per common share - basic
and diluted (3.64) (9.56) (3.39) (3.83)

2000 quarter ended
--------------------------------------------------------
April 1 July 1 September 30 December 30
--------- ------- ------------ -----------

Net sales $ 324,419 323,868 330,391 280,326
Gross profit (loss) 41,430 40,815 30,382 (76,195)
Net loss (9,727) (6,118) (16,268) (230,295)

Loss per common share - basic
and diluted (0.82) (0.57) (1.29) (16.36)

(20) Reorganization Items

The Company recognized the following items as reorganization items
in the statement of operations:

2001 2000
-------- ------
Professional fees and other costs
associated with the
Chapter 11 Cases $ 17,169 1,840
Retention incentive plan 5,393 --
Rejected contracts and lease
agreements 10,360 --
Deferred financing fees associated with
unsecured debt -- 17,528
Gain on renegotiated lease (118) --
Interest income on investments (1,403) --
-------- ------
$ 31,401 19,368
======== ======

Professional Fees. During 2001, the Company paid approximately $14.4
million in professional fees associated with the Chapter 11 Cases.

Key Employee Retention Program. To stabilize employee relations, the
Company developed a key employee retention plan (the "Retention Plan"),
which the Bankruptcy Court approved on March 6, 2001. The

F-31

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

Retention Plan is designed to, among other things, ensure that the
employees most critical to the Company's reorganization efforts are
provided with sufficient economic incentives and protections to remain
with the Company and fulfill their responsibilities through the successful
conclusion of the Chapter 11 Cases. The Retention Plan consists of three
separate components: (a) a retention incentive plan (the "Retention
Incentive Plan"), (b) an emergence performance bonus plan, (the "Emergence
Performance Bonus Plan"), and (c) an employee severance plan (the
"Severance Plan").

Under the Retention Incentive Plan, each eligible employee earns a
specified retention incentive payment (the "Retention Incentive Payment"),
based upon a percentage of his or her salary as determined by the
Company's management, if the employee remains actively employed by the
Company on the specified dates. Under the Retention Incentive Plan: (a)
25% of the total Retention Incentive Payment (approximately $1.5 million)
was paid on April 9, 2001, (b) 25% of the total Retention Incentive
Payment (approximately $1.5 million) was paid on November 14, 2001, (c)
25% of the total Retention Incentive Payment is to be paid on the earlier
of (i) six months after the second payment is made or (ii) confirmation of
a plan of reorganization, and (d) 25% of the total Retention Incentive
Payment is to be paid 30 days following confirmation of a plan of
reorganization. The Company currently estimates the total cost of the
Retention Incentive Plan to be approximately $6.1 million. In addition, a
discretionary retention pool of $500,000 is available for non-union
employees not included in the Retention Incentive Plan.

The Emergence Performance Bonus Plan provided an additional incentive
payment to certain management employees considered essential to the
implementation of the Company's restructuring to encourage them to remain
with the Company through the plan of reorganization negotiation and
confirmation process. Payments under the Emergence Performance Bonus Plan
were tied directly to the amount of the distribution made under a
confirmed plan of reorganization to unsecured creditors and length of the
Reorganization Cases. Under the current circumstances, the Company does
not anticipate making any payments of emergence bonuses under the
Retention Plan.

The purpose of the Severance Plan is to consolidate all severance
agreements existing prior to the Petition Date into one severance plan,
which supersedes all prior severance plans and the severance provisions of
executives' employment arrangements. The Severance Plan covers all
full-time employees of the Company, the majority of whom are not eligible
to participate in any other components of the Retention Plan. With certain
exceptions, under the Severance Plan, employees who are terminated for
reasons other than death, disability, retirement or cause, are eligible to
receive severance benefits equal to one week's salary for each completed
year of service, with a minimum benefit of two weeks' salary and a maximum
of 26 weeks' salary. In addition, eligible employees are entitled to
receive medical insurance, life insurance and certain other benefits.

Rejected Contracts and Leases. 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 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.

(21) Recently Issued Accounting Standards

In 2000, the Financial Accounting Standards Board's Emerging Issues
Task Force (EITF) issued EITF No. 00-14, "Accounting for Certain Sales
Incentives", which the Company was required to adopt at the beginning of
fiscal 2001. The Company was already in compliance with the accounting
guidance prescribed in EITF No. 00-14, and as a result, the adoption of
EITF No. 00-14 had no impact on the Company's financial position or
results of operations. The EITF also issued EITF No. 00-22, "Accounting
for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentive
Offers, and Offers for Free Products and Services to be Delivered in the
Future", and EITF No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products" (collectively,
the "EITFs"), which address various aspects of accounting for
consideration given by a vendor to a customer or a reseller of products.
The

F-32

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

Company is required to adopt the provisions of the EITFs as of the
beginning of fiscal 2002, which commenced December 30, 2001. The EITFs
will require the Company to classify all consideration paid to customers
as a reduction to revenue. Prior to December 30, 2001, the Company
classified amounts paid to customers for co-operative advertising and
marketing in selling, general, and administrative expenses. If the Company
had adopted these EITFs in 2001, approximately $19.0 million of selling,
general, and administrative expense would have been reclassified as a
reduction of net sales.

In July 2001, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations completed after
June 30, 2001, and specifies criteria for the recognition and reporting of
intangible assets apart from goodwill. Under SFAS No. 142, beginning in
fiscal 2002, which commences December 30, 2001, the Company will no longer
amortize goodwill and intangible assets with indefinite lives, but instead
will test those assets for impairment at least annually. Intangible assets
with definite useful lives will be amortized over such lives to their
estimated residual values. The Company is required to adopt SFAS No. 142
as of December 30, 2001. If the Company had adopted SFAS No. 142 in 2001,
selling, general, and administrative expenses would have decreased by $6.3
million, representing the amortization expense recognized on the Company's
goodwill and trademarks.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supercedes both SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("Opinion 30"), for the disposal of a segment of a business
(as previously defined in Opinion 30). SFAS No. 144 also retains the
fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets
to be disposed by sale. SFAS No. 144 retains the basic provisions of
Opinion 30 on how to present discontinued operations in the income
statement but broadens that presentation to include a component of an
entity (rather than a segment of a business). Unlike SFAS No. 121, an
impairment assessment under SFAS No. 144 will never result in a write-down
of goodwill. Rather, goodwill is evaluated for impairment under SFAS No.
142.

The Company is required to adopt SFAS No. 144 as of December 30,
2001. Management does not expect the adoption of SFAS No. 144 for
long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under SFAS No. 144
is largely unchanged from SFAS No. 121. The provisions of SFAS No. 144 for
assets held for sale or other disposal generally are required to be
applied prospectively after the adoption date to newly initiated disposal
activities. Therefore, the Company cannot presently determine the effects
that adoption of SFAS No. 144 will have on the Company's financial
statements.

(22) Subsequent Events (Unaudited)

On February 28, 2002, the Company announced the closure of the towel
finishing operations in Phenix City, Alabama and Columbus, Georgia. The
facilities are estimated be closed by June 1, 2002 and will impact
approximately 980 employees. The majority of the goods produced at the
plants will be produced at an existing facility in Kannapolis, North
Carolina and the remaining items will be purchased from other suppliers.
The Company currently expects to recognize a restructuring charge between
$3.0 million and $3.5 million in the first quarter of 2002 for severance
and related benefits associated with the terminated employees. In
addition, the Company believes it will incur a charge for impairment of
long-lived assets for the real property and machinery and equipment
associated with the facilities. Appraisals of the assets are currently in
process, and the resulting write-downs of these long-lived assets are not
presently known.

F-33

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

(23) Supplemental Condensed Consolidating Financial Information (Unaudited)

The following is summarized condensed consolidating financial information
for Pillowtex, segregating Pillowtex (the "Parent") and guarantor
subsidiaries from non-guarantor subsidiaries. The guarantor subsidiaries
are wholly-owned subsidiaries of Pillowtex and guarantees are full,
unconditional and joint and several. Separate financial statements of the
guarantor subsidiaries are not presented because management believes that
these financial statements would not provide relevant material additional
information to users of the financial statements. The combined parent and
guarantor subsidiaries information shown below approximates the financial
information of the debtors.

December 29, 2001
-----------------------------------------------------------------------------
Guarantor Non-Guarantor
Financial Position Parent Subsidiaries Subsidiaries Elimination Consolidated
-------------------------- -----------------------------------------------------------------------------

Assets:
Trade receivables $ -- 140,489 4,238 -- 144,727
Receivables from affiliates 773,297 -- -- (773,297) --
Inventories -- 197,167 3,411 -- 200,578
Other current assets -- 55,427 476 -- 55,903
--------- --------- ------ -------- ----------
Total current assets 773,297 393,083 8,125 (773,297) 401,208

Property, plant and equipment, net 38 452,714 688 -- 453,440
Intangibles 1,131 218,460 2,138 -- 221,729
Other assets 29,691 4,305 -- (22,746) 11,250
--------- --------- ------ -------- ----------
Total assets 804,157 1,068,562 10,951 (796,043) 1,087,627
========= ========= ====== ======== ==========

Liabilities and shareholders' deficit:
Liabilities not subject to compromise:
Accounts payable and accrued liabilities 41,859 52,775 322 -- 94,956
Payables to affiliates -- 765,228 8,069 (773,297) --
Other current liabilities -- 356 -- -- 356
Long-term debt in default 659,793 12,020 -- -- 671,813
--------- --------- ------ -------- ----------
Total current liabilities 701,652 830,379 8,391 (773,297) 767,125

Noncurrent liabilities -- 49,595 -- -- 49,595
--------- --------- ------ -------- ----------
Total liabilities not subject
to compromise 701,652 879,974 8,391 (773,297) 816,720

Liabilities subject to compromise 332,438 168,402 -- -- 500,840

Redeemable convertible preferred stock 99,185 -- -- -- 99,185

Shareholders' equity (deficit) (329,118) 20,186 2,560 (22,746) (329,118)
--------- --------- ------ -------- ----------

Total liabilities and shareholders'
equity (deficit) $ 804,157 1,068,562 10,951 (796,043) 1,087,627
========= ========= ====== ======== ==========

December 30, 2000
----------------------------------------------------------------------------------
Guarantor Non-Guarantor
Financial Position Parent Subsidiaries Subsidiaries Elimination Consolidated
-------------------------- ----------------------------------------------------------------------------------

Assets:
Trade receivables -- 181,173 7,891 -- 189,064
Receivables from affiliates 787,590 -- -- (787,590) --
Inventories -- 255,257 6,888 -- 262,145
Other current assets -- 94,890 809 -- 95,699
---------- --------- ------- ---------- ----------
Total current assets 787,590 531,320 15,588 (787,590) 546,908

Property, plant and equipment, net 320 524,686 984 -- 525,990
Intangibles 6,622 224,652 2,206 -- 233,480
Other assets 214,090 53,914 -- (238,613) 29,391
---------- --------- ------- ---------- ----------
Total assets 1,008,622 1,334,572 18,778 (1,026,203) 1,335,769
========== ========= ======= ========== ==========

Liabilities and shareholders' deficit:
Liabilities not subject to compromise:
Accounts payable and accrued liabilities 4,151 83,233 2,881 -- 90,265
Payables to affiliates -- 779,207 8,383 (787,590) --
Other current liabilities 984 32,369 (124) -- 33,229
Long-term debt in default 660,790 -- -- -- 660,790
---------- --------- ------- ---------- ----------
Total current liabilities 665,925 894,809 11,140 (787,590) 784,284

Noncurrent liabilities -- 39,910 106 -- 40,016
---------- --------- ------- ---------- ----------
Total liabilities not subject
to compromise 665,925 934,719 11,246 (787,590) 824,300

Liabilities subject to compromise 323,321 168,772 -- -- 492,093

Redeemable convertible preferred stock 82,827 -- -- -- 82,827

Shareholders' equity (deficit) (63,451) 231,081 7,532 (238,613) (63,451)
---------- --------- ------- ---------- ----------

Total liabilities and shareholders'
equity (deficit) 1,008,622 1,334,572 18,778 (1,026,203) 1,335,769
========== ========= ======= ========== ==========

F-34

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

Years ended
---------------------------------------------------------------------------------
December 29, 2001
---------------------------------------------------------------------------------
Guarantor Non-Guarantor
Results of Operations Parent Subsidiaries Subsidiariez Eliminations Consolidated
- ------------------------------------- ---------------------------------------------------------------------------------

Net sales $ -- 1,040,305 15,872 (25,122) 1,031,055

Cost of goods sold -- 998,427 19,235 (25,122) 992,540
---------------------------------------------------------------------------------
Gross profit (loss) -- 41,878 (3,363) -- 38,515
Selling, general, and administrative
expenses (6,804) 97,970 1,109 -- 92,275
Impairment of long-lived assets -- 40,961 -- -- 40,961

Restructuring charges -- 10,594 165 -- 10,759
---------------------------------------------------------------------------------
Earnings (loss) from operations 6,804 (107,647) (4,637) -- (105,480)
Equity in earnings (loss) of
subsidiaries (215,867) -- -- 215,867 --

Interest expense (income) (17,238) 80,229 335 -- 63,326
---------------------------------------------------------------------------------
Earnings (loss) from continuing
operations before reorganization
items and income taxes (191,825) (187,876) (4,972) 215,867 (168,806)

Reorganization items 30,936 465 -- -- 31,401
---------------------------------------------------------------------------------
Earnings (loss) from continuing
operations before income tax (222,761) (188,341) (4,972) 215,867 (200,207)
Income taxes -- -- -- -- --
---------------------------------------------------------------------------------
Net earnings (loss) from
continuing operations (222,761) (188,341) (4,972) 215,867 (200,207)
Loss from discontinued operations -- (22,554) -- -- (22,554)
---------------------------------------------------------------------------------
Net loss (222,761) (210,895) (4,972) 215,867 (222,761)
Preferred dividends and accretion 16,358 -- -- -- 16,358
---------------------------------------------------------------------------------
Earnings (loss) available for
common shareholders $(239,119) (210,895) (4,972) 215,867 (239,119)
=================================================================================

Years ended
---------------------------------------------------------------------------------
December 30, 2000
---------------------------------------------------------------------------------
Guarantor Non-Guarantor
Results of Operations Parent Subsidiaries Subsidiariez Eliminations Consolidated
- ------------------------------------- ---------------------------------------------------------------------------------

Net sales -- 1,271,160 26,236 (38,392) 1,259,004

Cost of goods sold -- 1,231,600 29,364 (38,392) 1,222,572
---------------------------------------------------------------------------------
Gross profit (loss) -- 39,560 (3,128) -- 36,432
Selling, general, and administrative
expenses (2,306) 127,727 932 -- 126,353
Impairment of long-lived assets -- 24,400 -- -- 24,400

Restructuring charges -- -- -- -- --
---------------------------------------------------------------------------------
Earnings (loss) from operations 2,306 (112,567) (4,060) -- (114,321)
Equity in earnings (loss) of
subsidiaries (245,609) -- -- 245,609 --

Interest expense (income) 15,259 90,751 1,052 -- 107,062
---------------------------------------------------------------------------------
Earnings (loss) from continuing
operations before reorganization
items and income taxes (258,562) (203,318) (5,112) 245,609 (221,383)

Reorganization items 8,380 10,988 -- -- 19,368
---------------------------------------------------------------------------------
Earnings (loss) from continuing
operations before income tax (266,942) (214,306) (5,112) 245,609 (240,751)
Income taxes (4,534) (88,827) -- -- (93,361)
---------------------------------------------------------------------------------
Net earnings (loss) from
continuing operations (262,408) (125,479) (5,112) 245,609 (147,390)
Loss from discontinued operations -- (115,018) -- -- (115,018)
---------------------------------------------------------------------------------
Net loss (262,408) (240,497) (5,112) 245,609 (262,408)
Preferred dividends and accretion 8,928 -- -- -- 8,928
---------------------------------------------------------------------------------
Earnings (loss) available for
common shareholders (271,336) (240,497) (5,112) 245,609 (271,336)
=================================================================================

Year Ended January 1, 2000
---------------------------------------------------------------------------------
Guarantor Non-Guarantor
Results of Operations Parent Subsidiaries Subsidiariez Eliminations Consolidated
- ------------------------------------- ---------------------------------------------------------------------------------

Net sales -- 1,414,638 25,902 (8,106) 1,432,434

Cost of goods sold -- 1,225,100 24,909 (8,106) 1,241,903
--------------------------------------------------------------------------------
Gross profit -- 189,538 993 -- 190,531
Selling, general, and administrative
expenses (5,477) 118,641 856 -- 114,020
Impairment of long-lived assets -- 2,000 -- -- 2,000

Restructuring charges -- -- -- -- --
--------------------------------------------------------------------------------
Earnings (loss) from operations 5,477 68,897 137 -- 74,511
Equity in earnings (loss) of
subsidiaries (21,793) -- -- 21,793 --

Interest expense (income) 1,998 85,301 (20) -- 87,279
--------------------------------------------------------------------------------
Earnings (loss) from continuing
operations before reorganization
items and income taxes (18,314) (16,404) 157 21,793 (12,768)

Reorganization items -- -- -- -- --
--------------------------------------------------------------------------------
Earnings (loss) from continuing
operations before income tax (18,314) (16,404) 157 21,793 (12,768)
Income taxes 1,218 (3,881) (77) -- (2,740)
--------------------------------------------------------------------------------
Net earnings (loss) from
continuing operations (19,532) (12,523) 234 21,793 (10,028)
Loss from discontinued operations -- (9,504) -- -- (9,504)
--------------------------------------------------------------------------------
Net loss (19,532) (22,027) 234 21,793 (19,532)
Preferred dividends and accretion 12,294 -- -- -- 12,294
--------------------------------------------------------------------------------
Earnings (loss) available for
common shareholders (31,826) (22,027) 234 21,793 (31,826)
===============================================================================

F-35

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements
December 29, 2001 and December 30, 2000
(Tables in thousands of dollars, except for per share data)

Years Ended
------------------------------------------------------------------------
December 29, 2001
------------------------------------------------------------------------
Guarantor Non-Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------

Net cash provided by
(used in) operating
activities $ 4,117 30,010 724 -- 34,851

Net cash provided by
discontinued
operations -- 3,365 -- -- 3,365

Net cash provided by
(used in) investing
activities (4,117) 7,185 (158) -- 2,910

Net cash provided by
(used in) financing
activities -- (32,354) (566) -- (32,920)
---------------------------------------------------------------------
Net change in cash
and cash equivalents -- 8,206 -- -- 8,206
Cash and
cash equivalents
at beginning of year -- 32,182 -- -- 32,182
---------------------------------------------------------------------

Cash and cash
equivalents
end of year $ -- 40,388 -- -- 40,388
=====================================================================

Years Ended
----------------------------------------------------------------------
December 30, 2000
----------------------------------------------------------------------
Guarantor Non-Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------------------------------------------------------------------

Net cash provided by
(used in) operating
activities (15,259) 40,942 231 -- 25,914

Net cash provided by
discontinued
operations -- 9,072 -- -- 9,072

Net cash provided by
(used in) investing
activities -- (28,045) (227) -- (28,272)

Net cash provided by
(used in) financing
activities 15,259 5,355 (4) -- 20,610
------------------------------------------------------------------
Net change in cash
and cash equivalents -- 27,324 -- -- 27,324
Cash and
cash equivalents
at beginning of year -- 4,858 -- -- 4,858
------------------------------------------------------------------

Cash and cash
equivalents
end of year -- 32,182 -- -- 32,182
==================================================================

Years ended
-------------------------------------------------------------------------
January 1, 2000
-------------------------------------------------------------------------
Guarantor Non-Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------

Net cash provided by
(used in) operating
activities (32,752) 38,307 (7,886) -- (2,331)

Net cash provided by
discontinued
operations -- 11,869 -- -- 11,869

Net cash provided by
(used in) investing
activities 98 (83,569) (115) -- (83,586)

Net cash provided by
(used in) financing
activities 32,654 32,697 7,994 -- 73,345
----------------------------------------------------------------------
Net change in cash
and cash equivalents -- (696) (7) -- (703)
Cash and
cash equivalents
at beginning of year -- 5,554 7 -- 5,561
----------------------------------------------------------------------

Cash and cash
equivalents
end of year -- 4,858 -- -- 4,858
======================================================================

F-36

PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Schedule II - Valuation and Qualifying Accounts

Years ended December 29, 2001, December 30, 2000 and January 1, 2000
(dollars in thousands)

Additions Deductions
------------------------------ ------------
Balance at Balance at
beginning of Charged to Charged to Write-offs/ end
period Expense Other Accounts Recoveries of period
------------ ------------ ------------ ------------ ------------

Allowance for:
Returns & Allowances
and Doubtful Accounts

Year ended 2001 $ 40,897 $ 19,404 -- $ 51,025 (1) $ 9,276
============ ============ ============ ============ ============
Year ended 2000 $ 31,897 $ 51,138 -- $ 42,138 (1) $ 40,897
============ ============ ============ ============ ============
Year ended 1999 $ 19,891 $ 44,169 -- $ 32,163 (1) $ 31,897
============ ============ ============ ============ ============

Inventory reserves:

Year ended 2001 $ 46,699 $ 33,826 -- $ 69,008 $ 11,517
============ ============ ============ ============ ============
Year ended 2000 $ 12,641 $ 53,947 -- $ 19,889 $ 46,699
============ ============ ============ ============ ============
Year ended 1999 $ 13,478 $ 9,562 -- $ 10,399 $ 12,641
============ ============ ============ ============ ============

(1) Accounts written off, less recoveries

S-1