<PAGE>
FIELDCREST CANNON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS

The following summary income statement from continuing operations sets forth the
percentage relationship that certain costs and expenses and other items in the
income statement bear to net sales (dollars in millions).
<TABLE>
<CAPTION>
                                                        1995                    1994                    1993

                                                   Amount    Percent       Amount    Percent       Amount    Percent
<S>                                              <C>         <C>         <C>         <C>         <C>         <C>
NET SALES                                        $1,095.2      100.0%    $1,063.7      100.0%    $1,000.1      100.0%
Cost of sales                                       966.6       88.3        898.4       84.5        834.7       83.5
Selling, general and administrative                 108.2        9.9         94.8        8.9        101.8       10.2
Restructuring charges                                20.5        1.8           --         --         10.0        1.0
OPERATING INCOME (LOSS)                               (.1)        --         70.5        6.6         53.6        5.3
Interest expense                                     27.6        2.5         23.3        2.2         27.7        2.7
Other (income) expense, net                            .1         --           .9         .1         (1.0)       (.1)
INCOME (LOSS) FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES AND ACCOUNTING CHANGES        (27.8)      (2.5)        46.3        4.3         26.9        2.7
Federal and state income taxes (benefit)            (12.1)      (1.1)        15.6        1.4         11.9        1.2
INCOME (LOSS) FROM CONTINUING OPERATIONS
  BEFORE ACCOUNTING CHANGES                      $  (15.7)      (1.4)%   $   30.7        2.9%    $   15.0        1.5%
</TABLE>
                                                                              21
 
<PAGE>
FIELDCREST CANNON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
1995 COMPARED TO 1994

Net sales for 1995 were $1,095.2 million compared to $1,063.7 million for 1994,
an increase of 3%. The $31.5 million increase includes $47.0 million of
furniture coverings from the Sure Fit business acquired in January 1995. The
1.5% decrease in sales, after adjusting for the Sure Fit acquisition, was due to
lower volumes which were only partially offset by price increases implemented in
the last half of 1994 and during 1995. The volume decline occurred in the second
half of the year and is attributed primarily to weakness in retail sales. Gross
profit margins decreased from 15.5% in 1994 to 11.7% in 1995 primarily because
of higher raw material prices and lower mill activity.

Selling, general and administrative expenses as a percent of sales increased
from 8.9% in 1994 to 9.9% in 1995. The increase was due primarily to increased
advertising and other selling expenses.

Operating income for 1995 was also reduced by $20.5 million of restructuring
charges resulting from the reorganization of the Company's New York operations,
which included severance and termination benefits for 54 employees, a related
voluntary early retirement program, which was accepted by 87 employees and
closing two yarn mills. See Note 2 of the Notes to Consolidated Financial
Statements. The reorganization of the New York office and related early
retirement program are expected to reduce pre-tax annual costs by approximately
$8 million. The Company has contracted to purchase yarn from outside vendors and
expects annual pre-tax savings of $8 to $9 million. Before the restructuring
charges, operating income in 1995 was $20.4 million, or 1.9% of sales, compared
to $70.5 million, or 6.6% of sales, in 1994.

Interest expense increased $4.3 million in 1995. The increase was due to higher
rates under the revolver and an increase in average debt outstanding. Debt
increased during 1995 because of the Sure Fit acquisition and the Company's
increased level of capital expenditures. In 1994 the Company allocated $1.6
million of interest costs to the Amoskeag assets held for sale.

An income tax benefit equal to 43.5% of the 1995 pre-tax loss was recognized in
1995, compared to an effective income tax rate of 33.6% on pre-tax income in
1994. A $1.7 million favorable settlement of prior years income taxes in 1994
reduced the 1994 effective tax rate by 3.7%. See Note 13 of the Notes to
Consolidated Financial Statements.

A loss from continuing operations of $15.7 million, or $2.28 per share, was
incurred in 1995 compared to income of $30.7 million, or $3.02 per share, in
1994. The loss before restructuring charges was $3.6 million, or $.91 per share,
in 1995 compared to income of $29.0 million, or $2.82 per share, in 1994 after
excluding the favorable settlements of prior years income taxes of $1.7 million
from 1994.

On March 4, 1996 the Company announced it would close a towel weaving plant and
a yarn manufacturing plant as part of the Company's ongoing consolidation effort
to utilize assets more effectively. The Company expects to accrue a pre-tax
charge of $4.5 to $5.0 million, or $.31 to $.35 per share, for the write-down of
equipment and employee termination benefits in the first quarter of 1996. In
addition, 1996 operating costs will be adversely affected by approximately $3
million of equipment relocation, training and other related transition costs.
The move, when completed, is expected to produce annual cost savings of $8 to $9
million.

1994 COMPARED TO 1993

Net sales from continuing operations in 1994 increased to $1,063.7 million
compared to $1,000.1 million in 1993. The 6.4% increase was due primarily to
increased volume and to a lesser extent to price increases implemented during
the third quarter of 1994. Increases in raw material and labor costs were not
fully recovered by the selling price increases and gross margins declined to
15.5% in 1994 compared to 16.5% in 1993.

Selling, general and administrative expenses as a percent of sales decreased
from 10.2% in 1993 to 8.9% in 1994. The decrease was due primarily to reduced
costs resulting from the voluntary early retirement program implemented in late
1993, lower bad debt expense and a decrease in other selling expenses.

22
 
<PAGE>
FIELDCREST CANNON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS

Operating income as a percent of sales was 6.6% in 1994 compared to 5.3% in
1993. Operating income was reduced 1.0% in 1993 due to $10 million of
restructuring charges. See Note 2 of the Notes to Consolidated Financial
Statements. Before the restructuring charges operating income as a percent of
sales was 6.3% in 1993.

Interest expense decreased $4.4 million in 1994. The reduction of interest
expense was primarily due to lower average debt resulting from the reduction of
debt with the proceeds from the sale of the carpet and rug division in July
1993. In 1994 the Company allocated $1.6 million of interest costs to the
Amoskeag assets held for sale. See Note 3 of the Notes to Consolidated Financial
Statements.

The effective income tax rate was 33.6% in 1994 compared to 44.3% in 1993. The
decrease in the effective income tax rate is due primarily to a $1.7 million
favorable settlement of prior years income taxes in 1994 and the unfavorable
$1.4 million effect of the federal tax rate increase in 1993. See Note 13 of the
Notes to Consolidated Financial Statements.

Income from continuing operations before accounting changes was $30.7 million or
$3.02 per share in 1994 compared to $15.0 million or $1.24 per share in 1993.
Income before non-recurring items was $29.0 millon, or $2.82 per share, in 1994
compared to $22.5 million, or $1.88 per share, in 1993 after excluding the
favorable settlements of prior years income taxes of $1.7 million from 1994, and
the pre-tax restructuring charge of $10 million and a $1.4 million tax
adjustment from 1993.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary capital requirements are for working capital, principally
inventory and accounts receivable, and capital expenditures. The Company
historically has financed these requirements, including its working capital
requirements which follow a seasonal pattern, with funds generated from its
operations and through borrowings under its revolving credit agreements.

The table below summarizes the Company cash provided by operating and financing
activities and cash used for additions to plant and equipment.
<TABLE>
<CAPTION>
(Dollars in thousands)                 1995        1994
<S>                                <C>         <C>
CASH PROVIDED (USED):
Net income (loss)                  $(15,725)    $30,745
Depreciation and amortization        31,746      29,828
Deferred income taxes                (2,384)      7,677
Working capital, excluding
  effects of acquisition of Sure
  Fit                                12,613     (19,719)
Other                                 1,597      (8,178)
Financing activities                 42,386      11,781
TOTAL CASH PROVIDED                  70,233      52,134
CASH USED FOR:
Additions to plant and equipment    (64,153)    (51,929)
Sale of plant and equipment           1,218       1,815
Proceeds from net assets held
  for sale                           23,241          --
Purchase of Sure Fit, net of
  cash acquired                     (27,300)         --
TOTAL CASH (USED)                   (66,994)    (50,114)
INCREASE IN CASH                   $  3,239      $2,020
</TABLE>

Working capital requirements decreased in 1995 primarily because accounts
receivables decreased $10.6 million. Working capital requirements increased in
1994 primarily because of a $17.9 million decrease in accounts payable and
accrued liabilities, a $5.6 million increase in accounts receivable and a $4.2
million increase in inventories.

Total debt as a percent of total capitalization (long-term debt, short-term debt
and shareowners' equity) was 63% at December 31, 1995, compared to 58% at the
end of 1994.

Capital expenditures totalled $64.2 million in 1995 compared to $51.9 million
spent in 1994. Capital expenditures for 1996 are expected to be approximately
$38 million. Included in the 1995 and 1994 capital expenditures are $37.2
million and $33.8 million, respectively, for a new weaving plant at the
Company's Columbus, Ga./Phenix City, Ala. towel mill. It is anticipated that
financing of future capital expenditures will be provided by cash flows from
operations, borrowings under the Company's revolving credit facility, and,
possibly, the sale of long-term debt or equity securities.
                                                                              23
 
<PAGE>
FIELDCREST CANNON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

On January 27, 1995 the Company purchased the Sure Fit furniture covering
business of UTC Holdings, Inc., for a cash purchase price of $27.3 million. Sure
Fit's 1995 sales were $47 million. With the acquisition, the Company amended its
revolving credit facility to permit the transaction and increased the line from
$160 million to $195 million. In March 1995, the Company sold the Bangor and
Aroostook Railroad for approximately $20 million of cash and $8 million of notes
receivable. Proceeds from the sale were used to reduce borrowings under the
revolving credit facility.

The Company's revolving credit facility allows the Company to borrow up to $195
million through January 3, 1998. The Company uses its revolving credit facility
for long-term debt purposes and its seasonal borrowing requirements during the
year. Short-term borrowings are required during the year to finance seasonal
increases in inventories and receivables.

As a result of the operating loss in the fourth quarter of 1995, the Company
amended its revolving term debt agreement effective December 29, 1995, to modify
certain financial covenants for 1995 and future periods to provide the Company
with necessary operating flexibility. The revolving credit facility is secured
by a first lien on substantially all of the Company's accounts receivables and
inventories and a substantial portion of its plant and equipment and bears
interest, at the Company's option, at the prime rate fixed by The First National
Bank of Boston, or at a Euromarket-based rate plus 1.25%. Under the December 29,
1995, amendment the borrowing rate increases to a Euromarket-based rate plus 2%
in February 1996 based upon the Company's 1995 interest coverage ratio.

The revolving credit facility requires, among other things, that the Company
maintain certain financial ratios with regard to working capital, interest
coverage, funded debt and net worth. It allows payment of $4.5 million of
preferred dividends annually, but does not allow dividends on Common Stock. The
agreement also places restrictions on the Company's ability to incur debt or
liens, to make certain investments and to effect certain mergers, consolidations
or sales of assets or changes in control.

At December 31, 1995, borrowings under the $195 million revolving term debt
agreement totalled $142.5 million and $42.5 million of the facility was
available and unused. A letter of credit to secure $10 million of industrial
development bonds of the Company reduces the availability under the revolving
credit facility by $10 million.

As of December 31, 1995, the Company lowered its discount rate from 8.6% to
7.25% for valuing its accumulated pension benefit obligations under FAS 87,
"Employers' Accounting for Pensions" and its accumulated postretirement health
care and life insurance benefit obligations under FAS 106, "Employers'
Accounting for Postretirement Benefits other than Pensions". The lower discount
rate of 7.25% results in a higher value for the calculated obligations and will
result in higher expenses in 1996 than would have been provided with the
previous 8.6% discount rate. The increase in expense is not expected to
materially effect the Company's future operating results or financial condition.

In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," (FAS 121) which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. FAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt FAS 121 in the first quarter of 1996 and, based on current
circumstances, does not believe the effect of adoption will be material.

24
 
<PAGE>

FIELDCREST CANNON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
MARKET AND DIVIDEND DATA

The Company's Common Stock is listed on the New York Stock Exchange (trading
symbol: FLD). At December 31, 1995, there were 2,082 shareholders of record of
Common Stock. See Note 8 of the Notes to Consolidated Financial Statements
regarding restrictions on the payment of dividends. No dividends were paid on
Common Stock during the last two years. The high and low sale prices on the New
York Stock Exchange composite tape for the last two years were as shown below:

<TABLE>
<CAPTION>
                                                        Market price
                                                        Common Stock
Quarter, 1995                                 High               Low
<S>                                    <C>               <C>
1st                                    $    25 3/8           $19 7/8
2nd                                         24 1/8            19 3/4
3rd                                         24 7/8            21 1/4
4th                                         22 1/4            15 3/4
Quarter, 1994
1st                                    $    34 3/8           $24 1/4
2nd                                             33            22 1/2
3rd                                         29 1/8            23 3/4
4th                                         27 3/4            23 3/8
</TABLE>

QUARTERLY DATA (UNAUDITED)
Data in millions, except per share information

<TABLE>
<CAPTION>
1995 quarter ended                                                      March 31    June 30    Sept. 30    Dec. 31
<S>                                                                     <C>         <C>        <C>         <C>
Net sales                                                               $  257.0    $ 273.1    $  280.5    $ 284.6
Gross profit                                                                43.0       34.4        40.1       11.1
Operating income (loss)                                                     12.4        4.2         6.7      (23.4)
Net income (loss)                                                            3.6       (1.6)         --      (17.7)
Primary earnings (loss) per share                                            .28       (.30)       (.13)     (2.11)
Fully diluted earnings (loss) per share                                      .28       (.30)       (.13)     (2.11)
<CAPTION>
1994 quarter ended                                                      March 31    June 30    Sept. 30    Dec. 31
<S>                                                                     <C>         <C>        <C>         <C>
Net sales                                                               $  232.3    $ 254.8    $  279.3    $ 297.3
Gross profit                                                                37.4       40.5        44.2       43.2
Operating income                                                            15.0       16.9        20.1       18.5
Net income                                                                   5.5        6.7         8.5       10.0
Primary earnings per share                                                   .51        .64         .84       1.03
Fully diluted earnings per share                                             .47        .56         .68        .80
</TABLE>

Annual earnings for 1995 were reduced by pre-tax restructuring charges of $20.5
million which increased the net loss by $12.1 million, or $1.37 per share.
Quarterly earnings for 1995 were reduced by restructuring charges of $3.9
million, or $.28 per share; $4.5 million, or $.32 per share; $7.1 million, or
$.53 per share; and $4.9 million or $.23 per share for the first, second, third
and fourth quarter, respectively. The restructuring charges during the first
three quarters were related to the reorganization of the Company's New York
operations and a related early retirement program. The fourth quarter charges
were the result of closing two yarn mills.

The fourth quarter of 1994 includes favorable settlements of prior years income
taxes of $1.7 million which increased net income by $1.7 million, or $.19 per
common share on a primary basis and $.12 per share on a fully diluted basis.

Quarterly earnings per share amounts presented for 1995 do not equal the annual
1995 earnings per share amount due to issuance of shares during the year.

                                                                              25
 
<PAGE>
FIELDCREST CANNON, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Year Ended December 31
Dollars in thousands, except per share data
<TABLE>
<CAPTION>
                                                                                 1995          1994          1993
<S>                                                                        <C>           <C>           <C>
Net sales                                                                  $1,095,193    $1,063,731    $1,000,107
Cost of sales (notes 2, 5)                                                    966,642       898,437       834,701
Selling, general and administrative                                           108,194        94,756       101,843
Restructuring charges (note 2)                                                 20,469            --        10,000
Total operating costs and expenses                                          1,095,305       993,193       946,544
Operating income (loss)                                                          (112)       70,538        53,563
OTHER DEDUCTIONS (INCOME):
  Interest expense                                                             27,630        23,268        27,659
  Other, net                                                                       67           987          (975)
Total other deductions                                                         27,697        24,255        26,684
Income (loss) before income taxes                                             (27,809)       46,283        26,879
Federal and state income taxes (benefits) (note 13)                           (12,084)       15,538        11,913
Income (loss) from continuing operations before accounting changes            (15,725)       30,745        14,966
Income from discontinued operations                                                --            --         3,201
Gain from disposition of discontinued operations                                   --            --         9,207
Cumulative effect of accounting changes                                            --            --       (70,305)
Net income (loss)                                                             (15,725)       30,745       (42,931)
Preferred dividends                                                            (4,500)       (4,500)         (463)
Earnings (loss) on common                                                  $  (20,225)   $   26,245    $  (43,394)
Amount added to (subtracted from) retained earnings                           (20,225)       26,245       (43,394)
Retained earnings, January 1                                                  119,280        93,035       136,429
Retained earnings, December 31                                             $   99,055    $  119,280    $   93,035
INCOME (LOSS) PER COMMON SHARE:
  Primary from continuing operations before accounting changes             $    (2.28)   $     3.02    $     1.24
  Income from discontinued operations                                              --            --           .27
  Gain from disposition of discontinued operations                                 --            --           .78
  Cumulative effect of accounting changes                                          --            --         (5.99)
  Primary earnings (loss) per common share                                 $    (2.28)   $     3.02    $    (3.70)
  Fully diluted earnings (loss) per common share (note 1)                  $       --    $     2.51    $       --
Average primary shares outstanding                                          8,875,360     8,696,015    11,732,505
Average fully diluted shares outstanding                                   14,264,504    14,085,905    11,733,276
</TABLE>

THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.

26
 
<PAGE>
FIELDCREST CANNON, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At December 31,
Dollars in thousands, except per share data
<TABLE>
<CAPTION>
                                                                                               1995         1994
<S>                                                                                       <C>          <C>
ASSETS
Cash                                                                                      $   9,124    $   5,885
Accounts receivable less allowances of $8,162 in 1995 and $9,506 in 1994, principally
  trade                                                                                     168,112      170,001
Inventories (note 5)                                                                        228,167      213,994
Net assets held for sale                                                                         --       24,000
Other prepaid expenses and current assets                                                     3,446        3,793
TOTAL CURRENT ASSETS                                                                        408,849      417,673
Plant and equipment, net (notes 6, 9)                                                       342,285      314,726
Deferred charges and other assets                                                            61,812       50,266
TOTAL ASSETS                                                                              $ 812,946    $ 782,665
LIABILITIES AND SHAREOWNERS' EQUITY
Accounts and drafts payable                                                               $  54,274    $  55,533
Federal and state income taxes                                                                   --        2,268
Deferred income taxes                                                                        17,593       21,988
Accrued liabilities (note 7)                                                                 67,725       53,958
Current portion of long-term debt                                                               780        1,465
TOTAL CURRENT LIABILITIES                                                                   140,372      135,212
Senior long-term debt (note 8)                                                              155,262      107,744
Subordinated long-term debt (note 8)                                                        210,000      210,000
Total long-term debt                                                                        365,262      317,744
Deferred income taxes                                                                        40,475       42,859
Other non-current liabilities                                                                51,406       55,648
TOTAL NON-CURRENT LIABILITIES                                                               457,143      416,251
TOTAL LIABILITIES                                                                           597,515      551,463
Commitments (notes 9, 11, 12)
Preferred Stock, $.01 par value (note 10)
  Shares authorized: 10,000,000
  Shares issued: 1,500,000
  (aggregate liquidation preference of $75,000)                                                  15           15
Common Stock, $1 par value (note 10)
  Shares authorized: 25,000,000
  Shares issued, 1995: 12,560,826                                                            12,561
  Shares issued, 1994: 12,360,252                                                                         12,360
Additional paid in capital                                                                  221,025      216,772
Retained earnings                                                                            99,055      119,280
Excess purchase price for Common Stock acquired and held in treasury -- 3,606,400
  shares                                                                                   (117,225)    (117,225)
TOTAL SHAREOWNERS' EQUITY                                                                   215,431      231,202
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY                                                 $ 812,946    $ 782,665
</TABLE>

THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
                                                                              27
 
<PAGE>

FIELDCREST CANNON, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31,
Dollars in thousands
<TABLE>
<CAPTION>
                                                                                    1995        1994         1993
<S>                                                                             <C>         <C>         <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss)                                                               $(15,725)   $ 30,745    $ (42,931)
Adjustments to reconcile net income to net cash provided by operating
  activities:
Cumulative effect of accounting changes for FAS 106 and 109                           --          --       70,305
Income and gain on sale from discontinued operations                                  --          --      (12,408)
Depreciation and amortization                                                     31,746      29,828       31,539
Deferred income taxes                                                             (2,384)      7,677        2,329
Other                                                                              1,597      (8,178)       1,726
Change in current assets and liabilities, excluding effects of acquisition of
  Sure Fit and of discontinued operations:
  Accounts receivable                                                             10,579      (5,582)     (13,132)
  Inventories                                                                      3,125      (4,160)     (10,637)
  Current deferred income taxes                                                   (4,395)      7,189       (3,971)
  Other prepaid expenses and current assets                                          582      (1,302)       1,638
  Accounts payable and accrued liabilities                                         4,990     (17,870)       8,700
  Federal and state income taxes                                                  (2,268)      2,006       (3,362)
NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES                              27,847      40,353       29,796
Cash (used in) discontinued operations                                                --          --      (17,405)
Net cash provided by operating activities                                         27,847      40,353       12,391
Cash flows from investing activities:
Additions to plant and equipment                                                 (64,153)    (51,929)     (21,594)
Proceeds from disposal of plant and equipment                                      1,218       1,815       12,621
Proceeds (acquisition) of net assets held for sale                                23,241          --      (32,536)
Purchase of Sure Fit, net of cash acquired                                       (27,300)         --           --
Proceeds from disposition of discontinued operations                                  --          --      147,627
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                              (66,994)    (50,114)     106,118
Cash flows from financing activities:
Increase (decrease) in revolving debt                                             48,298      17,798      (59,899)
Proceeds from issuance of other long-term debt                                        --      10,000           --
Payments on long-term debt                                                        (1,469)    (11,597)     (14,811)
Proceeds from issuance of common stock                                                57          80          339
Purchase of treasury stock                                                            --          --     (117,225)
Proceeds from issuance of preferred stock                                             --          --       72,375
Dividends paid on preferred stock                                                 (4,500)     (4,500)         (88)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                               42,386      11,781     (119,309)
Net increase (decrease) in cash                                                    3,239       2,020         (800)
Cash at beginning of year                                                          5,885       3,865        4,665
Cash at end of year                                                             $  9,124    $  5,885    $   3,865
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
  Interest expense                                                              $ 25,471    $ 23,871    $  30,163
  Income tax payments                                                              2,848       5,381       23,239
</TABLE>

THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.

28
 
<PAGE>

FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular Amounts in thousands except per share

(1) SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
year items have been reclassified to conform to the 1995 presentation.

The Company operates in the textile industry and is principally involved in the
manufacture and sale of home furnishings products. These sales are primarily to
domestic department stores, mass retailers, specialty stores and large chain
stores. Sales to one customer (Wal-Mart Stores and its affiliates) represented
16.6%, 18.3% and 17.4% of total sales of the Company in 1995, 1994 and 1993,
respectively.

USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

INVENTORIES -- Inventories are valued at the lower of cost, determined
principally on a last-in, first-out basis, or market.

DEPRECIATION -- Buildings, machinery and equipment are depreciated for financial
reporting purposes on the straight line method over the estimated useful lives
of these assets. Depreciation for tax purposes is provided on an accelerated
basis.

DEFERRED FINANCING FEES -- Debt financing fees are amortized over the term of
the related debt.

INCOME TAXES -- The Company adopted Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes" (FAS 109), effective January 1,
1993. Under FAS 109, deferred income taxes are recognized, at enacted tax rates,
to reflect the future income tax effect of reported differences between the book
and tax bases of the Company's assets and liabilities, assuming they will be
realized and settled, respectively, at the amount reported in the Company's
financial statements. See Note 13 for additional information.

INCOME PER COMMON SHARE -- Primary earnings per common share is based on net
income after preferred dividend requirements and the weighted average number of
shares of Common Stock and Class B Common Stock outstanding during the year and
common stock equivalents attributable to outstanding stock options. Fully
diluted earnings per common share are calculated assuming conversion, when
dilutive, of the 6% convertible subordinated sinking fund debentures and the $3
Series A Convertible Preferred Stock. Fully diluted income from continuing
operations and net income per common share for 1995 and 1993 are not presented
as effects are anti-dilutive.
                                                                              29
 
<PAGE>

FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular Amounts in thousands except per share

(2) RESTRUCTURING CHARGES

During 1995 the Company reorganized its New York operations and relocated sales,
marketing and design personnel to Kannapolis, N.C. In conjunction with the
reorganization, the Company offered a voluntary early retirement program to its
salaried employees. In December 1995 the Company announced the closing of two
yarn mills and agreed to sell a warehouse. As a result of these actions the
Company incurred restructuring charges of $20.5 million in 1995. The
restructuring charges include approximately $15.6 million primarily for
severance and termination benefits for 54 employees, the voluntary early
retirement program which was accepted by 87 employees and lease costs in
connection with the New York reorganization and $4.4 million for the write-down
of yarn equipment and $.5 million for termination benefits associated with
closing the yarn mills. These charges increased the 1995 loss by $12.1 million,
or $1.37 per share.

Concurrent with the purchase of the capital stock of Amoskeag Company the
Company implemented a number of programs to reduce overhead and cut costs in
1993. As a result of this process, restructuring charges were incurred in 1993
which reduced pre-tax operating income by $10 million. The restructuring charges
include $8 million for the cost of a voluntary early retirement program which
was accepted by 184 employees and severance for additional staff reductions, and
$2 million for direct non-recurring expenses incurred by the Company in
evaluating the purchase of the capital stock of Amoskeag Company. These expenses
did not contribute to the ultimate consummation of the tender offer to acquire
Amoskeag Company. These charges reduced 1993 net income by $6.1 million, or $.52
per share.

(3) ACQUISITION AND MERGER WITH AMOSKEAG COMPANY

On November 24, 1993 a newly formed and wholly owned subsidiary of the Company
completed a tender offer for all of the outstanding shares of Amoskeag Company
("Amoskeag") for a cash price of $40 per share, or an aggregate of approximately
$141.9 million including certain costs. The acquisition has been accounted for
as a purchase by the Company of the net assets of Amoskeag held for sale at
their net realizable values and as the purchase of treasury stock. Amoskeag
owned 3,606,400 shares of the Company's common stock which was assigned a cost
of $117.2 million after an allocation of $24.7 million to the net assets of
Amoskeag. The Company is in the process of selling all of the operating assets
of Amoskeag. These assets were primarily the Bangor and Aroostook Railroad
("BAR") and certain real estate properties. During 1994 the BAR's operating
income of $3 million was excluded from the Company's consolidated income
statement and $1.6 million of interest costs of the Company were allocated to
the assets held for sale. In March, 1995 the Company sold the BAR for
approximately $20 million of cash and $8 million of notes receivable.

(4) DISCONTINUED OPERATIONS

On July 30, 1993 the Company completed the sale of its carpet and rug operations
to Mohawk Industries, Inc. Accordingly, the carpet and rug results have been
classified as discontinued operations in the Statement of Income for 1993.
Results of operations for the carpet and rug operations include an allocation of
corporate interest based on net assets. The sale resulted in a $15.1 million
pre-tax gain which increased after-tax net income by $9.2 million, or $.78 per
share, in 1993.

30
 
<PAGE>

FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular Amounts in thousands except per share

(5) INVENTORIES

Inventories are valued at the lower of cost or market and consisted of the
following at December 31:
<TABLE>
<CAPTION>
                                       1995        1994
<S>                                <C>         <C>
Finished goods                     $117,776    $109,423
Work in progress                     72,315      65,375
Raw materials and supplies           38,076      39,196
Total                              $228,167    $213,994
</TABLE>

Approximately 73% of the inventories at year-end 1995 and 74% at year-end 1994
were valued on the last-in, first-out method (LIFO). If the first-in, first-out
method of accounting had been used, inventories would have been greater by
approximately $49 million and $40 million at December 31, 1995 and 1994,
respectively. The LIFO reserve for continuing operations increased $9.2 million
and $6.8 million in 1995 and 1994, respectively.

(6) PLANT AND EQUIPMENT

Plant and equipment is stated at cost and consisted of the following at December
31:

<TABLE>
<CAPTION>
                                      1995         1994
<S>                              <C>          <C>
Land                             $   5,376    $   5,796
Buildings                          213,205      184,902
Equipment                          404,277      378,374
Plant additions in progress         24,903       40,509
Total                              647,761      609,581
Accumulated depreciation          (305,476)    (294,855)
Net plant and equipment          $ 342,285    $ 314,726
</TABLE>

(7) ACCRUED LIABILITIES

Accrued liabilities were as follows at December 31:
<TABLE>
<CAPTION>
                                        1995       1994
<S>                                  <C>        <C>
Salaries and other compensation      $ 9,749    $11,291
Pension, medical and other
  employee benefit plans              22,937     18,359
Advertising expense                    4,301      1,436
Interest expense                       4,267      3,240
Other                                 26,471     19,632
Total                                $67,725    $53,958
</TABLE>
                                                                              31
 
<PAGE>

FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular Amounts in thousands except per share

(8) DEBT
Long-term debt at December 31 was as follows:
<TABLE>
<CAPTION>
                                       1995        1994
<S>                                <C>         <C>
SENIOR LONG-TERM DEBT:
  Revolving term debt              $142,522    $ 94,224
  Industrial development
    bonds, due 2021                  10,000      10,000
  Industrial revenue bonds, due
    in installments through
    2002........................      3,520       4,985
TOTAL SENIOR LONG-TERM DEBT         156,042     109,209
Less current portion                    780       1,465
NET SENIOR LONG-TERM DEBT           155,262     107,744
SUBORDINATED LONG-TERM DEBT:
  6% convertible subordinated
    sinking fund debentures
    due 1997 to 2012                125,000     125,000
  11.25% senior subordinated
    debentures due 2002
    to 2004                          85,000      85,000
TOTAL SUBORDINATED LONG-TERM
  DEBT                              210,000     210,000
TOTAL LONG-TERM DEBT               $365,262    $317,744
</TABLE>

The Company's revolving credit facility allows the Company to borrow up to $195
million through January 3, 1998. Accordingly, borrowings under the revolving
credit facility are classified as long-term debt. Interest rates on the
revolving term debt are, at the Company's option, at the prime rate fixed by The
First National Bank of Boston, or at a Euromarket-based rate plus 1.25%. The
borrowing rate increases to a Euromarket-based rate plus 2% in February 1996
based upon the Company's 1995 interest coverage ratio. The average interest rate
on the revolving term debt was 7.1% on December 31, 1995.

The revolving credit facility is secured by a first lien on substantially all of
the Company's accounts receivables and inventories and a substantial portion of
its plant and equipment and requires, among other things, that the Company
maintain certain financial ratios with regard to working capital, interest
coverage, funded debt and net worth. It allows payment of $4.5 million of
preferred dividends annually, but does not allow dividends on Common Stock. The
revolving term debt agreement also places restrictions on the Company's ability
to incur debt or liens, to make certain investments and to effect certain
mergers, consolidations or sales of assets or changes in control.

The Company's 6% Convertible Subordinated Sinking Fund Debentures are
convertible into shares of Common Stock of the Company at a conversion price of
$44.25 per share.

At December 31, 1995, the fair value of the Company's 6% Convertible
Subordinated Debentures was $85.6 million compared to a carrying value of $125
million and the fair value of the 11.25% Subordinated Debentures was $80 million
compared to a carrying value of $85 million. The fair value of the debentures is
based on quoted market prices. Differences between fair value and carrying value
of the Company's other debt were not significant.

The aggregate principal and sinking fund payments required to be made on
long-term debt during each of the five years subsequent to December 31, 1995
are: 1996, $.8 million; 1997, $7.0 million; 1998, $149.5 million; 1999, $6.6
million and 2000, $6.6 million.

32
 
<PAGE>

FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular Amounts in thousands except per share

(9) LEASE OBLIGATIONS

The Company leases certain real estate and equipment under various operating
leases. Listed below are the future minimum rental payments required under these
operating leases with noncancelable terms in excess of one year at December 31,
1995.

<TABLE>
<CAPTION>
                                                                                    Real
                                                                                  Estate    Equipment      Total
<S>                                                                              <C>        <C>          <C>
1996                                                                             $ 6,176    $  10,313    $16,489
1997                                                                               5,809        9,391     15,200
1998                                                                               5,396        7,415     12,811
1999                                                                               4,741        6,518     11,259
2000                                                                               4,238        3,213      7,451
Subsequent years                                                                  34,914          657     35,571
Net minimum lease payments                                                       $61,274    $  37,507    $98,781
</TABLE>

Total rental expense for all operating leases was $22.0 million, $20.2 million,
and $18.9 million for 1995, 1994 and 1993, respectively.

(10) SHAREOWNERS' EQUITY

In November 1993 the Company's shareowners authorized 10 million shares of
undesignated preferred stock and the issuance of up to 1.8 million shares of
preferred stock. On November 24, 1993, the Company sold 1.5 million shares of
$3.00 Series A Convertible Preferred Stock ("$3.00 Preferred Stock") in a
private offering and received net proceeds of $72.4 million. Each $3.00
Preferred Stock share is convertible into 1.7094 shares of Common Stock,
equivalent to a conversion price of $29.25 on the $50 offering price. Annual
dividends are $3.00 per share and are cumulative. The $3.00 Preferred Stock may
be redeemed at the Company's option on or after September 1, 2004, in whole or
in part, at $50 per share plus accrued and unpaid dividends. In the event the
Company's 11.25% Senior Subordinated Debentures are not outstanding or have been
defeased the $3.00 Preferred Stock may be redeemed, in whole or in part, at the
option of the Company, at a redemption price of $51.50 per share beginning as of
September 10, 1998 and at premiums declining to the $50 liquidation preference
by September 2004.

On November 24, 1993, the Board of Directors adopted a Stockholder Rights Plan
and declared a dividend of one preferred stock purchase right ("right") for each
outstanding share of the Company's Common Stock. Similar rights have been, and
generally will be, issued in respect of Common Stock subsequently issued. Each
right becomes exercisable, upon the occurrence of certain events, for one
one-hundredth of a share of Series B Junior Participating Preferred Stock, $.01
par value, at a purchase price of $80 or, in certain circumstances, Common Stock
or other securities, cash or other assets having a then current market price (as
defined and subject to adjustment) equal to twice such purchase price. Under the
Stockholder Rights Plan, 500,000 shares of Series B Junior Participating
Preferred Stock have been reserved. The rights currently are not exercisable and
will be exercisable only if a person or group acquires beneficial ownership of
15% or more of the Company's outstanding shares of Common Stock. The rights,
which expire on December 6, 2003, are redeemable in whole, but not in part, at
the Company's option at any time for a price of $.02 per right.

Following the acquisition of Amoskeag, the Company converted all shares of Class
B Common Stock held by Amoskeag into an equivalent number of shares of Common
Stock. Under the Company's Certificate of Incorporation, all remaining shares of
Class B Common Stock were automatically converted into an equivalent number of
shares of Common Stock, and no additional shares of Class B Common Stock may be
issued in the future without the prior approval of the holders of Common Stock.

                                                                              33
 
<PAGE>

FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular Amounts in thousands except per share

(10) SHAREOWNERS' EQUITY (CONTINUED)

The Company has an Employee Stock Option Plan which was adopted by the Board of
Directors and approved by the shareowners in 1995. Under the Plan, options
granted may be either incentive stock options or nonqualified stock options and
are granted at not less than the fair market value of the Common Stock at the
time of grant. Options generally become exercisable in four equal annual
installments commencing one year from the date of grant. Options generally
expire, if not exercised, within ten years from the date of grant. Under the
option plan, 435,000 shares of Common Stock have been reserved for awards.
During 1995 options to purchase 400,400 shares of Common Stock were awarded at
an average exercise price of $22.17. None of the outstanding options are
exercisable at December 31, 1995 and 34,600 shares are available for grant.

The Company has a Director Stock Option Plan which was adopted by the Board of
Directors and approved by the shareowners. Under the option plan, an annual
grant of an option for 2,000 shares of Common Stock is awarded to each person
who is a Director on the fifth business day after the annual meeting of
shareowners. Options to Directors who are also employees of the Company are
incentive stock options and to all others are nonqualified options. The price
per share is the fair market value on the date each option is granted.
Options may be exercised up to seven years from the date of grant, but no option
may be exercised during the six-month period following its grant except in the
case of death or disability. Under the option plan, 500,000 shares of Common
Stock have been reserved for awards. The following is an analysis of options
under the Director Stock Option Plan:

<TABLE>
<CAPTION>
                            Number of           Option
                               Shares            Price
<S>                         <C>          <C>
Outstanding, January 1,
  1993                         42,000    $17.625-13.00
Awarded                        12,000           23.625
Exercised                     (21,000)    23.625-13.00
Cancelled                      (6,000)    23.625-13.00
Outstanding, January 1,
  1994                         27,000     23.625-13.00
Awarded                         8,000           25.625
Exercised                      (5,000)    17.625-13.00
Outstanding, January 1,
  1995                         30,000     25.625-13.00
Awarded                        16,000           22.125
Exercised                      (4,000)    17.625-13.00
Cancelled                      (2,000)   25.625-23.625
Outstanding and
  exercisable at
  December 31, 1995            40,000     25.625-13.00
Available for grant at
  December 31, 1995           427,000
</TABLE>

34
 
<PAGE>

FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular Amounts in thousands except per share

(10) SHAREOWNERS' EQUITY (CONTINUED)

On September 11, 1991, the Board of Directors approved the grant of a
nonqualified stock option to purchase 20,000 shares of Common Stock to the
Company's chief executive officer. The per share price is $14.875, the fair
market value on that date. This option became exercisable on January 1, 1992,
and expires on September 10, 1998.

The Company has a Long-Term Incentive Plan (the Plan) which was adopted by the
Board of Directors and approved by the shareowners in 1988. Under the Plan,
employees who are senior executives of the Company may be awarded shares of
Common Stock without cost to the employee. The fair market value of the shares
at the date of award is accounted for as deferred compensation and is amortized
over the restricted period. At December 31, 1995, unamortized deferred
compensation of $.9 million is included in shareowners' equity as a reduction of
additional paid in capital. Awards under the Plan are vested after the employee
completes four years of continuous employment beginning with the year for which
the award is made. Vesting occurs prior to completion of four years of
employment if the employee dies while employed, reaches normal retirement or
becomes disabled.

Under the Plan, 650,000 shares of Common Stock have been reserved for awards.
The following is an analysis of shares of restricted stock under the Long-term
Incentive Plan:
<TABLE>
<CAPTION>
                             1995       1994        1993
<S>                       <C>        <C>        <C>
Number of Shares:
Outstanding at
  beginning of year       151,111    111,674     156,526
Awarded                    70,000     70,000      75,000
Cancelled                  (5,460)        --      (4,450)
Issued                    (74,505)   (30,563)   (115,402)
Outstanding at end
  of year                 141,146    151,111     111,674
Available for grant at
  end of year             190,008    254,548     324,548
Market value on date of
  grant for shares
  granted during year      $22.00    $28.625      $18.75
</TABLE>
                                                                              35
 
<PAGE>

FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular Amounts in thousands except per share

(10) SHAREOWNERS' EQUITY (CONTINUED)

Transactions with respect to common stock and additional paid in capital during
the three years ended December 31, 1995, were as follows:
<TABLE>
<CAPTION>
                                                                                                         Additional
                                                                                              Class B       Paid in
                                                                Common Stock             Common Stock       Capital
                                                           Shares     Amount        Shares     Amount        Amount
<S>                                                    <C>           <C>        <C>           <C>        <C>
Balance 12/31/92                                        8,338,941    $ 8,339     3,635,114    $3,635     $  136,075
Shares issued to employee savings plans                   120,562        120            --        --          2,883
Restricted shares award                                    75,000         75            --        --            (75)
Restricted shares cancelled                                (4,450)        (4)           --        --              4
Earned compensation, restricted stock                          --         --            --        --          1,126
Director stock options exercised                           21,000         21            --        --            426
Net proceeds from sale of preferred stock
  in excess of par value                                       --         --            --        --         72,360
Exchange or conversion of shares                        3,635,114      3,635    (3,635,114)   (3,635 )           --
Balance 12/31/93                                       12,186,167     12,186            --        --        212,799
Shares issued to employee savings plans                    99,085         99            --        --          2,571
Restricted shares awarded                                  70,000         70            --        --            (70)
Earned compensation, restricted stock                          --         --            --        --          1,431
Preferred stock issuance expense                               --         --            --        --            (73)
Director stock options exercised                            5,000          5            --        --            114
Balance 12/31/94                                       12,360,252     12,360            --        --        216,772
Shares issued to employee savings plans                   132,034        132            --        --          2,563
Restricted shares awarded                                  70,000         70            --        --            (70)
Restricted shares cancelled                                (5,460)        (5)           --        --             --
Earned compensation, restricted stock                          --         --            --        --          1,747
Director stock options exercised                            4,000          4            --        --             71
Balance 12/31/95                                       12,560,826    $12,561            --    $   --     $  221,025
</TABLE>

Total shares of Common Stock outstanding as of December 31, 1995 are reduced to
8,954,426 shares by 3,606,400 shares of treasury stock acquired with the
acquisition of Amoskeag. The $117.2 million cost of the treasury stock reduces
total shareowners' equity.

36
 
<PAGE>

FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular Amounts in thousands except per share

(11) EMPLOYEE PENSION AND SAVINGS PLANS

The Company has trusteed pension plans covering essentially all employees. The
plans provide pension benefits that are based on the employees' compensation and
service. The Company's policy is to fund amounts required by applicable
regulations.

Pension expense amounted to $8.2 million in 1995, $6.9 million in 1994 and $13.2
million in 1993. Net pension expense for 1995, 1994 and 1993 consisted of the
following components:
<TABLE>
<CAPTION>
                            1995        1994        1993
<S>                     <C>         <C>         <C>
Service cost
  (benefits earned
  during the period)    $  6,530    $  8,076    $  8,802
Interest cost on
  projected benefit
  obligation              17,572      16,668      15,124
Actual return on
  assets                 (52,465)      4,845     (20,985)
Net amortization and
  deferral                34,197     (22,703)      4,023
Curtailment and
  special termination
  benefits                 2,359          --       6,263
Net pension cost        $  8,193    $  6,886    $ 13,227
</TABLE>

The Company recognized a curtailment loss with the sale of its carpet and rug
division in 1993 and special termination benefits from voluntary early
retirement programs in 1995 and 1993.

The table below sets forth the plans' funded status at December 31:
<TABLE>
<CAPTION>
                                       1995        1994
<S>                                <C>         <C>
Projected benefit obligation:
Vested benefits                    $243,767    $199,034
Non-vested benefits                   6,265       6,058
Accumulated benefit obligation      250,032     205,092
Additional amounts related to
  projected compensation levels       8,121       6,332
Total projected benefit
  obligation                        258,153     211,424
Plan assets at fair value,
  primarily publicly traded
  stocks
  and bonds                         253,378     208,170
Plan assets over (under)
  projected benefit obligation       (4,775)     (3,254)
Unrecognized net loss                31,752      29,911
Unrecognized net
  transition assets                  (1,556)     (2,579)
Unrecognized prior service cost       2,470       2,798
Net pension asset recognized in
  the Consolidated Statement of
  Financial Position               $ 27,891    $ 26,876
</TABLE>

Assumptions used in determining the funded status of the pension plans were as
follows:
<TABLE>
<CAPTION>
                                1995     1994     1993
<S>                            <C>      <C>      <C>
Discount rate                  7.25 %    8.6 %   7.25 %
Increase in compensation
  levels                        4.5 %    4.5 %    4.5 %
Expected long-term rate of
  return on assets                9 %      9 %      9 %
</TABLE>

The Company also sponsors employee savings plans which cover substantially all
employees. The Company provides a match of 70% of employee contributions up to
two percent of compensation and a match of 20% of employee contributions for the
next two percent of compensation. The matching formula may be changed yearly at
the discretion of the Company. The match is contributed quarterly in Common
Stock of the Company. Expense of the Company match was $2.7 million in 1995,
$2.7 million in 1994 and $3.0 million in 1993.
                                                                              37
 
<PAGE>

FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular Amounts in thousands except per share

(12) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS

The Company adopted FAS 106, "Employers' Accounting for Postretirement Benefits
other than Pensions", effective January 1, 1993. The cumulative effect on prior
years of the accounting change was charged to income in 1993 which resulted in a
pre-tax charge of $35.1 million and reduced net income by $21.8 million, or
$1.86 per share.

The Company provides medical insurance premium assistance and life insurance
benefits to retired employees. The medical premium assistance payments are at a
fixed dollar amount based on the retiree's years of service. Essentially all of
the Company's employees become eligible for these benefits when they reach
retirement age while working for the Company. The Company's policy is to fund
the plans as benefits are paid.

The table below sets forth the plans' combined status at December 31:
<TABLE>
<CAPTION>
                                        1995       1994
<S>                                  <C>        <C>
Accumulated postretirement
  benefit obligation --
  Retirees                           $25,057    $23,592
  Fully eligible active
    participants                       8,892      8,020
  Other active participants            5,838      4,728
  Total                               39,787     36,340
Unrecognized net gain (loss)          (1,422)     2,114
Accrued postretirement benefit
  cost recognized in the
  Consolidated Statement of
  Financial Position at December     $38,365    $38,454
  31                                 
</TABLE>

The discount rate used in determining the accumulated postretirement benefit
obligation was 7.25% as of December 31, 1995 and 8.6% as of December 31, 1994.
Medical premium assistance payments are at a fixed dollar amount based on the
retiree's years of service and, therefore, the plan is not affected by a health
care cost trend rate assumption.

Net periodic postretirement benefit cost for 1995, 1994 and 1993 included the
following components:
<TABLE>
<CAPTION>
                               1995      1994       1993
<S>                          <C>       <C>       <C>
Service cost (benefits
  earned during the
  period)                    $  818    $  979    $   974
Interest cost on projected
  benefit obligation          2,945     2,820      3,033
Net amortization and
  deferral                     (171)      206        (93)
Curtailment gain                 --        --     (1,850)
Net periodic
  postretirement benefit
  cost                       $3,592    $4,005    $ 2,064
</TABLE>

During 1993 the Company recognized a curtailment gain with the sale of its
carpet and rug division.

38
 
<PAGE>
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular Amounts in thousands except per share

(13) INCOME TAXES

The Company adopted FAS 109, "Accounting for Income Taxes", effective January 1,
1993. The cumulative effect on prior years of the accounting change was charged
to net income in 1993 which reduced net income by $48.5 million, or $4.13 per
share.

Under FAS 109, assets and liabilities acquired in purchase business combinations
are assigned their fair values, and deferred taxes are provided for the lower or
higher tax bases. Under APB 11, values were assigned net-of-tax. In adopting FAS
109, the Company adjusted the carrying amounts of assets and liabilities
acquired in the Cannon and Bigelow acquisitions in 1986 and reduced deferred
income tax liabilities to reflect the then current federal tax rate of 34% as
opposed to the higher federal tax rates that were in effect when the deferred
taxes originated. The carrying amounts have subsequently been adjusted to
reflect the increase in the 1993 federal tax rate to 35%.

At December 31, 1995, the Company had $52.1 million of deferred tax assets and
$110.2 million of deferred income tax liabilities which have been netted for
presentation purposes. The significant components of these amounts as shown on
the balance sheet are as follows:
<TABLE>
<CAPTION>
                                                                        12/31/95                  12/31/94
                                                                  Current    Noncurrent     Current    Noncurrent
                                                                 Liability    Liability    Liability    Liability
<S>                                                              <C>         <C>           <C>         <C>
Depreciation                                                     $    636    $   52,899    $     --    $   51,176
Inventory valuation                                                35,924            --      36,472            --
Deferred compensation                                                (360)       (5,031)       (392)       (5,262)
Accruals and allowances                                           (16,401)       (4,129)    (14,686)       (6,439)
Operating loss carryforwards                                       (2,155)           --          --            --
Other                                                                 (51)       (3,264)        594         3,384
Total deferred tax liabilities                                   $ 17,593    $   40,475    $ 21,988    $   42,859
</TABLE>

The provision for income taxes for continuing operations included in the
Consolidated Statement of Income and Retained Earnings for continuing operations
consisted of the following:
<TABLE>
<CAPTION>
                              1995       1994       1993
<S>                       <C>         <C>        <C>
Current
  Federal                 $ (5,611)   $ 5,397    $ 5,483
  State                        306         56      1,130
Deferred
  Federal                   (3,977)     8,327      4,605
  State                     (2,802)     1,758        695
Total income taxes on
  income from
  continuing operations
  before accounting
  changes                 $(12,084)   $15,538    $11,913
</TABLE>
                                                                              39
 
<PAGE>

FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular Amounts in thousands except per share

(13) INCOME TAXES (CONTINUED)

The income tax effect of items which altered the Company's effective income tax
rate from the statutory federal rate were as follows:
<TABLE>
<CAPTION>
                                                         1995                   1994                  1993
                                                    Amount    Percent     Amount    Percent     Amount    Percent
<S>                                               <C>         <C>         <C>       <C>         <C>       <C>
Tax at statutory rate                             $ (9,733)      35.0%    $16,199      35.0%    $9,408       35.0%
State taxes, net                                    (1,623)       5.8      2,037        4.4      1,186        4.4
Effect of tax rate change                               --         --         --         --      1,400        5.2
Tax credits                                           (543)       2.0       (567)      (1.2)        --         --
Prior years tax settlements                             --         --     (1,714)      (3.7)        --         --
Other                                                 (185)        .7       (417)       (.9)       (81)       (.3)
Net taxes                                         $(12,084)      43.5%    $15,538      33.6%    $11,913      44.3%
</TABLE>

At December 31, 1995, the Company has net operating loss carryforwards of $49.1
million for state income tax purposes that expire in 2000 through 2010.

40
 
<PAGE>

FIELDCREST CANNON, INC.
REPORT OF MANAGEMENT

The integrity and objectivity of the information presented in this Annual Report
are the responsibility of Fieldcrest Cannon, Inc. management. The financial
statements contained in this report were audited by Ernst & Young LLP
independent auditors, whose report appears on this page.

The Company maintains a system of internal controls which is independently
assessed on an ongoing basis through a program of internal audits. These
controls include the selection and training of the Company's employees,
organizational arrangements that provide a division of responsibilities and
communication programs explaining the Company's policies and standards. We
believe this system provides reasonable assurance that transactions are executed
in accordance with management's authorization; that transactions are
appropriately recorded to permit preparation of financial statements that, in
all material respects, are presented in conformity with generally accepted
accounting principles; and that assets are properly accounted for and
safeguarded against loss from unauthorized use.

The Board of Directors pursues its responsibilities for the financial statements
through its Audit Committee, which consists solely of directors who are neither
officers nor employees of the Company. The Audit Committee meets periodically
with the independent public accountants, the internal auditors and
representatives of management to discuss internal accounting control, auditing
and financial reporting matters.

Thomas R. Staab
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER


REPORT OF INDEPENDENT AUDITORS

The Shareowners and
Board of Directors of
Fieldcrest Cannon, Inc.

We have audited the accompanying consolidated statement of financial position of
Fieldcrest Cannon, Inc. as of December 31, 1995 and 1994, and the related
consolidated statements of operations and retained earnings, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Fieldcrest Cannon, Inc. at December 31, 1995 and 1994, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.

As explained in Notes 12 and 13 to the consolidated financial statements,
effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," and Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes."

Greensboro, North Carolina
January 30, 1996
                                                                              41
 
<PAGE>

FIELDCREST CANNON, INC.
SELECTED FINANCIAL AND STATISTICAL DATA
In thousands of dollars, except per share data

<TABLE>
<S>                                           <C>            <C>            <C>            <C>          <C>
SUMMARY OF CONTINUING OPERATIONS (A)                1995           1994           1993         1992         1991
Net sales                                     $1,095,193     $1,063,731     $1,000,107     $981,773     $960,663
Depreciation                                  $   30,248     $   28,779     $   29,524     $ 29,480     $ 28,473
Operating income (loss)                             (112)(b)     70,538         53,563       60,855       39,613
Income (loss) from continuing operations      $  (15,725)(b)     30,745(c)      14,966(d)    15,690(e)     1,395
PER SHARE OF COMMON STOCK:
Primary income (loss) from continuing
  operation                                   $    (2.28)(b) $     3.02(c)  $     1.24(d)  $   1.39(e)  $   0.13
Fully diluted income (loss)                           --(b)        2.51(c)          --(d)        --(e)      0.13
Shareowners' equity                                15.68          17.84          13.79        23.76        23.33
Number of employees                               13,610         13,926         14,090       14,636       14,935
Number of shareholders                             2,082          2,191          2,401        2,735        2,980
SUMMARY OF FINANCIAL POSITION
Capital expenditures                          $   64,153     $   51,929     $   21,594     $ 20,687     $ 41,000
Working capital                                  268,477        282,461        262,326      296,580      138,227
Total assets                                     812,946        782,665        740,446      863,991      882,662
Long-term debt                                   365,262        317,744        294,611      353,419      253,493
Shareowners' equity                              215,431        232,202        193,330      284,478      243,173
FINANCIAL RATIOS
Return on net sales                                 (1.4)%          2.9%           1.5%         1.6%         0.1%
Return on average shareowners' equity               (7.0)          14.5            6.8          6.0          0.6
Return on average total assets                      (2.0)           4.0            1.9          1.8          0.2
</TABLE>
(a)   On July 30, 1993, the Company completed the sale of
      its carpet and rug operations. Accordingly, the
      summary of continuing operations excludes the
      discontinued carpet and rug operations for all
      periods presented.
(b)   Reflects pre-tax restructuring charges of $20.5
      million which increased 1995 loss by $12.1 million,
      or $1.37 per common share. Fully diluted income per
      share is not presented as effects are
      anti-dilutive.
(c)   1994 income was increased $1.7 million, or $.20 per
      common share on a primary basis and $.12 per share
      on a fully diluted basis, as a result of favorable
      settlements of prior years income taxes.
(d)   Reflects pre-tax restructuring charges of $10
      million and income tax adjustments of $1.4 million
      which reduced 1993 income from continuing
      operations before accounting changes by $7.5
      million, or $.64 per common share. The Company
      adopted FAS 106, "Employers' Accounting for
      Postretirement Benefits other than Pensions" and
      FAS 109, "Accounting for Income Taxes", effective
      January 1, 1993. The cumulative effect of these
      accounting changes reduced 1993 net income by $70.3
      million, or $5.99 per common share. Fully diluted
      income per share is not presented as effects are
      anti-dilutive. Financial ratios for 1993 are based
      on income from continuing operations before
      accounting changes.
(e)   Before extraordinary charge for early retirement of
      debt which reduced 1992 net income by $5.2 million
      ($.46 per common share). Fully diluted income per
      share is not presented as effects are
      anti-dilutive. Financial ratios for 1992 are based
      on income from continuing operations before the
      extraordinary charge.
 
42