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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
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                                   FORM 10-K
 
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    [X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                     THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
    [ ]       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 1-13421
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                                 DAN RIVER INC.
             (Exact name of registrant as specified in its charter)
 
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                   GEORGIA                                       58-1854637
       (State or other jurisdiction of              (I.R.S. Employer Identification No.)
        incorporation or organization)
 
   2291 MEMORIAL DRIVE, DANVILLE, VIRGINIA                         24541
   (Address of principal executive offices)                      (Zip Code)
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       Registrant's telephone number, including area code: (804) 799-7000
 
          Securities registered pursuant to Section 12(b) of the Act:
                 CLASS A COMMON STOCK PAR VALUE $0.01 PER SHARE
 
          Securities registered pursuant to Section 12(g) of the Act:
                                      NONE
 
     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.  [X]
 
     Aggregate market value of voting stock held by non-affiliates of the
registrant as of March 1, 1999: $79,964,279
 
     Number of shares of common stock outstanding as of March 1, 1999:
 
          Class A: 21,307,332 shares
        Class B: 2,062,070 shares
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
     Part III incorporates information by reference from the Proxy Statement of
the Annual Meeting of Shareholders to be held April 23, 1999.
 
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                                     PART I
 
     Unless otherwise indicated, references in this Annual Report to "Dan River"
or the "Company" include Dan River Inc. and its predecessors and subsidiaries.
References to a fiscal year refer to the fiscal year of the Company, which is
the 52- or 53-week period ending on the Saturday nearest to December 31. All
fiscal years presented consisted of 52 weeks other than fiscal 1997, which ended
on January 3, 1998 and consisted of 53 weeks.
 
     This Annual Report contains certain forward-looking statements within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"), and
the Securities Exchange Act of 1934 (the "Exchange Act"). These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those included in such statements. Many of these
statements appear under "Item 1. Business", "Item 2. Properties," "Item 3. Legal
Proceedings" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations." For further information regarding these
forward-looking statements and the associated risks and uncertainties, see the
discussion in this Annual Report under the caption "Forward-Looking Statements"
under "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
 
ITEM 1. BUSINESS.
 
GENERAL
 
     Founded in 1882, Dan River is a leading manufacturer and marketer of
textile products for the home fashions and apparel fabrics markets. The Company
designs, manufactures and markets a coordinated line of value-added home
fashions products consisting of bedroom furnishings such as comforters, sheets,
pillowcases, shams, bed skirts, decorative pillows and draperies ("Home Fashions
Products"). Dan River also manufactures and markets a broad range of high
quality woven cotton and cotton-blend apparel fabrics ("Apparel Fabrics") and
believes that it is the leading supplier of men's dress shirting fabrics in the
Western Hemisphere (based on net sales). As a result of its acquisition of The
Bibb Company ("Bibb") in October 1998, the Company now manufacturers and sells
specialty engineered textile products for use in making high-pressure hoses and
other industrial products ("Engineered Products").
 
     The Company is a Georgia corporation with principal offices located at 2291
Memorial Drive, Danville, Virginia 24541. The Company's telephone number is
(804) 799-7000.
 
ACQUISITIONS AND JOINT VENTURES
 
     In February 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of The New Cherokee Corporation ("Cherokee") for an
aggregate purchase price of approximately $65 million. Cherokee, which was a
supplier of yarn-dyed fabrics to men's and women's shirting manufacturers and of
sportswear fabrics to the converting trade, was the Company's primary competitor
for these fabrics. In connection with the Cherokee acquisition, the Company
acquired woven fabrics manufacturing facilities located in Spindale, North
Carolina and Sevierville, Tennessee, and a finishing facility located in Harris,
North Carolina. Since completing the acquisition, the Company closed its
Riverside Plant in the fourth quarter of fiscal 1997 and the Spindale Plant in
January 1999. As a result of this consolidation, the Company has reduced the
number of Apparel Fabrics weaving plants from four to two, providing better
capacity utilization and, aided by the Company's aggressive capital expenditure
program, reducing fixed manufacturing costs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
 
     In October 1998, the Company purchased all the outstanding capital stock of
Bibb (through a merger transaction) for an aggregate purchase price of
approximately $240 million, which consisted of $86 million of cash and 4,361,000
shares of Dan River Class A Common Stock. In connection with the acquisition,
the Company also assumed or repaid an aggregate of $95 million of Bibb debt.
Bibb, founded in 1876, was a leading domestic manufacturer of home fashions
textile products. The Bibb acquisition broadened the Company's Home Fashions
Products to include juvenile products and products for the hospitality and
health care markets. As a result of the Bibb acquisition, the Company believes
that it is the leading manufacturer of
 
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bedding products for the juvenile market under such licensed names and
trademarks as "Barbie," "Looney Tunes," "Major League Baseball," "National
Football League," and "Teletubbies." The Bibb acquisition also significantly
expanded the Home Fashions Products manufacturing capacity, adding spinning and
weaving operations located in Greenville, South Carolina, finishing operations
located in Brookneal, Virginia and sewing facilities located in Fort Valley and
Newnan, Georgia, and in Brookneal, Virginia. The Engineered Products
manufacturing operations are located in Porterdale, Georgia.
 
     In December 1998, the Company purchased a 300,000 square foot sewing
facility located in Morven, North Carolina, for an aggregate purchase price of
approximately $2.4 million. The Company intends this facility to reduce its
dependence on outside manufacturers for the fabrication of Home Fashions
Products, which should increase manufacturing efficiencies and reduce costs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
     In March 1999 the Company and Grupo Industrial Zaga, a Mexican textile and
apparel company, entered into a letter of intent wherein they agreed, subject to
negotiation and approval of a definitive stockholders' agreement and other
customary conditions, to form a jointly owned company to build and operate a
manufacturing plant in Mexico for the production of light weight yarn-dyed
Apparel Fabrics. The parties contemplate that the new facility will contain
opening, spinning, yarn-dyeing, weaving and finishing operations for the
production of fine and medium yarn count Apparel Fabrics that are currently in
demand by Dan River's customers but which are presently being provided from
non-Western Hemisphere sources. The location of the facility in Mexico and the
financial terms of the transaction have not been determined. Dan River will
handle the marketing and sales for the venture. The parties intend that the new
plant will be operational during the fourth quarter of fiscal 2000.
 
     Certain financial information for the Home Fashions, Apparel Fabrics and
Engineered Products segments is set forth in Note 11 to the Consolidated
Financial Statements, which is incorporated by reference herein.
 
HOME FASHIONS PRODUCTS
 
  Products
 
     The Company's Home Fashions Products include bedroom furnishings such as
comforters, sheets, pillowcases, shams, bed skirts, decorative pillows and
draperies which are marketed under the "Dan River" brand name, as well as under
various other trademarks and licenses from, among others, "Colours by Alexander
Julian" and "Jessica McClintock." The Company also markets Home Fashions
Products for the juvenile market under licenses utilizing a number of names and
trademarks, including "Barbie," Looney Tunes," "Major League Baseball," "Major
League Soccer," "National Football League" and "Teletubbies." The Company had
net sales attributable to Home Fashions Products of $321.8 million, $255.8
million and $243.1 million for fiscal 1998, fiscal 1997 and fiscal 1996,
respectively.
 
     Home Fashions Products are offered in a wide variety of styles and
patterns, including fashion designs and, to a lesser extent, solid colors.
Products range from a 120-thread count muslin sheet of blended polyester and
cotton to a top-of-the-line 250-thread count percale 100% cotton sheet.
 
     Dan River has established itself as an innovator in merchandising Home
Fashions Products. The Company was a leader in introducing the complete bed
ensemble to retailers, which it markets under the name "Bed-in-a-Bag." The
"Bed-in-a-Bag" complete bed ensemble consists of a comforter with matching
sheets, pillowcases, shams and a dust ruffle. Management further believes that
the Company's ability to manufacture wide-width, yarn-dyed fabrics in short runs
in a wide variety of innovative styles, such as woven plaids, for use in Home
Fashions Products differentiates the Company from its competitors.
 
  Customers
 
     The Company's Home Fashions Products are designed and manufactured to meet
the needs of retail, hospitality and healthcare markets. The Company distributes
Home Fashion Products through key retailers in all retail trade classes
including department stores, specialty home fashions stores, direct marketers,
national
 
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chains, mass merchants and regional discounters. The Company also sells Home
Fashions Products directly to the hospitality and healthcare markets.
 
     The Company markets its Home Fashions Products to approximately 1,100
customers. The Company has pursued and established strong relationships with
large, high volume retailers including Wal-Mart Stores, Inc. ("Wal-Mart"), Kmart
Corporation, Federated Department Stores, Inc., J.C. Penney Company, Inc. and
Linens N'Things Inc. During fiscal 1998, sales of Home Fashions Products to
Wal-Mart accounted for approximately 13% of the Company's net sales. No other
Home Fashions customer accounted for more than 6% of the Company's total net
sales in fiscal 1998. As a supplement to its primary distribution channels, a
Dan River subsidiary operates factory outlet stores which sell Home Fashions
Products directly to consumers. During fiscal 1998, less than 3% of the
Company's sales of Home Fashions Products were to customers outside the United
States.
 
  Sales and Marketing
 
     The Home Fashions Products sales and marketing staff consists of
approximately 120 persons and is headquartered in New York City, with satellite
offices in Atlanta, Boston, Chicago, Dallas, Los Angeles and San Francisco.
These marketing professionals, stylists and product development personnel work
as early as one year in advance of a retail selling season to develop new
fabrics, styles, colors, constructions and finishes. Together with the marketing
group, stylists often work directly with the Company's customers to create
fabrics and styles that respond to rapidly changing fashion trends and customer
needs. New styles are also developed internally for the April and October bed
and bath home textile trade shows, where they are shown to buyers and are placed
in production based on customer acceptance. Orders for Home Fashions Products
are filled from inventory or, if inventory is not available, products are
manufactured and generally shipped within six to 12 weeks of order placement.
 
APPAREL FABRICS
 
  Products
 
     The Company manufactures and markets a broad range of high quality woven
cotton and cotton-blend fabrics, which are marketed primarily to manufacturers
of men's, women's and children's clothing. The Company's yarn-dyed and
piece-dyed woven Apparel Fabrics include oxford cloth, pinpoint oxford cloth,
fancy broad cloth, seer-suckers, mid and light weight denim, twills and
chambrays. The Company also manufactures and distributes Apparel Fabrics to
uniform manufacturers and for use in decorating and crafts, 100% cotton and
cotton-blend fabrics to the furniture market and greige (unfinished) fabrics to
converters. Net sales attributable to Apparel Fabrics Products were $186.5
million, $220.7 million and $136.4 million during fiscal 1998, fiscal 1997 and
fiscal 1996, respectively.
 
     Management believes that the Company enjoys a reputation as a leader in
creating new fabric styles and designs within the Apparel Fabrics market. The
Company's product development professionals work independently as well as
directly with customers to develop new fabric styles and constructions. In
addition, the Company's product development personnel increasingly work directly
with retailers to develop fabrics. These retailers often specify that the
Company's fabrics be used by their suppliers in the manufacture of garments to
be sold by them. The Company believes that it is a leader in wrinkle resistant
technology for shirting fabrics and markets Dri-Don(R) blended easy care fabrics
and 100% cotton Wrinkl-Shed(R) fabrics. The Company also manufactures and
markets fabrics utilizing Tencel(R) lyocell, an innovative natural fiber.
Versatile lyocell fabrics have been used primarily in manufacturing women's
sportswear; however, the Company is actively exploring use of lyocell in new
fabrics for mens' shirting and bottom ("pant") weight fabrics.
 
  Customers
 
     The Company distributes its Apparel Fabrics primarily to domestic
manufacturers of men's, women's and children's clothing which, in turn, operate
sewing plants throughout the United States, Mexico and the Caribbean. The
Company markets its Apparel Fabrics to approximately 2,300 customers, none of
which
 
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accounted for more than 4% of the Company's total net sales in fiscal 1998.
Customers market clothing manufactured from the Company's Apparel Fabrics under
such brand names as Arrow, Brooks Brothers, Hathaway, Liz Claiborne, L.L. Bean,
Land's End, Osh Kosh B'Gosh and Van Heusen, as well as under private labels
through retailers such as J.C. Penney Company, Inc. and Sears, Roebuck & Co. The
Company markets uniform fabrics to customers such as Cintas Corporation and Red
Kap, and distributes Apparel Fabrics to home sewing retailers such as Wal-Mart,
Jo-Ann Stores, Inc., and through various wholesale distributors, for use in
decorating and crafts, as well as garment sewing. The Company's upholstery
fabrics are sold to furniture manufacturers. During fiscal 1998, less than 6% of
the Company's sales of Apparel Fabrics were to customers located outside the
United States.
 
  Sales and Marketing
 
     The Company's Apparel Fabrics sales and marketing staff consists of
approximately 52 persons and is headquartered in New York City, with satellite
offices in Atlanta, Chicago, Dallas, Danville, High Point (North Carolina), Los
Angeles and San Francisco. Apparel Fabrics are generally "made to order"
products, which are generally manufactured and shipped within nine to 12 weeks
of order placement. Orders for Apparel Fabrics are based on customer selections
from offerings of color, content, construction, design and finish, and fabrics
are made to customer specifications, which may be developed jointly with the
customer.
 
ENGINEERED PRODUCTS
 
  Products
 
     The Company's Engineered Products consist of yarns and woven fabrics which
are manufactured to customer specification for use in such products as high
pressure hoses for the automotive industry, conveyer belts and other industrial
applications. Net sales attributable to Engineered Products were $9.1 million
during fiscal 1998.
 
  Customers
 
     The Company sells its Engineered Products primarily to rubber companies,
which in turn utilize them as components in their own rubberized products. The
Company markets its Engineered Products to approximately 100 customers, none of
which accounted for more than 1% of the Company's net sales in fiscal 1998.
During fiscal 1998, substantially all of the Company's sales of Engineered
Products were to domestic customers.
 
  Sales and Marketing
 
     The Company has established close working relationships with its Engineered
Products customers in the development of products to meet their specific needs.
Sales and marketing of the Company's Engineered Products is based in the
Atlanta, Georgia area.
 
MANUFACTURING PROCESS
 
     Dan River is a vertically integrated manufacturer involved in all aspects
of the woven textile manufacturing process, from spinning and weaving to dyeing,
finishing, and sewing.
 
     In addition to the expansion of its manufacturing operations through
acquisitions, the Company has made significant investments over the past several
years in an extensive facility modernization program focused on installing
advanced manufacturing technologies in an effort to be the low cost manufacturer
in the industry. Within its Home Fashions operations, the Company has installed
modern, high-speed air-jet looms; automatic sheet cutting, hemming and folding
equipment; lower cost open-end spinning equipment; and computerized comforter
equipment. Additionally, within the past three years, the Company has built a
new Home Fashions accessory sewing plant and a finished goods warehouse and
distribution center, both in close proximity to its Danville facilities and its
Brookneal finishing and sewing operations. The Company believes that, as a
result of
 
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its acquisitions and investments, it is positioned to better and more
efficiently service its Home Fashions customers, and accommodate further growth
of its Home Fashions business.
 
     Within its Apparel Fabrics operations, the Company has modernized its yarn
preparation processes through the installation of more efficient, lower cost,
open-end spinning, carding, drawing and combing equipment. The Company's ongoing
capital improvement programs have modernized and streamlined substantially all
significant components of the manufacturing process. With the Cherokee
acquisition in 1997 the Company acquired efficient greige manufacturing capacity
as well as a modern finishing plant dedicated to the finishing of Apparel
Fabrics.
 
     In addition to modernizing operations, the Company has consolidated its
manufacturing operations to improve operating costs within its Apparel Fabrics
operations. Accordingly, the Company closed its Riverside Apparel Fabrics
weaving facility in fiscal 1997 and consolidated these operations into its
existing Schoolfield facility. In January 1999, the Company closed its Spindale,
North Carolina spinning and weaving facility and consolidated these operations
into its existing Danville and Sevierville, Tennessee Apparel Fabrics
manufacturing plants. Together, these actions have aided the Company's efforts
to fully utilize its most cost-effective equipment in the manufacture of Apparel
Fabrics.
 
     The Engineered Products facilities include modern weaving equipment and
coating ranges for finishing both yarns and fabrics, and the Company has begun a
program to modernize the twisting and winding operations. Additionally, the
Company is in the process of obtaining ISO 9000 certification.
 
     Dan River has engineered its manufacturing processes to meet the quick
response delivery requirements of its customers. Quick response techniques
reduce turnaround time (the time required to process a particular order) which
improves customer service and production efficiency. Furthermore, Dan River has
the capability to offer electronic data interchange programs to all of its
customers. These programs minimize the lead time for customer orders and permit
a more efficient, targeted manufacturing schedule, as well as improvements in
efficiency, communications, planning and processing times at each stage of
production. The Company has electronic data interchange programs in place with
most of its major Home Fashions Products customers.
 
RAW MATERIALS
 
     Dan River uses substantial quantities of cotton in its manufacturing
operations. By law, U.S. textile companies are generally prohibited from
importing cotton, subject to certain exceptions which take effect primarily when
the U.S. price of cotton exceeds the world price for a period of time. Cotton is
an agricultural product subject to weather conditions and other factors
affecting agricultural markets. Accordingly, the price of cotton is subject to
considerable fluctuation.
 
     Dan River purchases cotton primarily in the domestic market directly from
merchants or through brokers. Generally, the Company seeks to purchase
sufficient amounts of cotton to cover existing order commitments; however, the
Company may purchase cotton in advance of orders on terms that it deems
advantageous, and while the Company does not speculate on the price of cotton,
it may hedge prices from time to time through forward contracts and in the
futures and options markets. The Company also uses significant quantities of
polyester, which is available from several sources.
 
     Although the Company has always been able to obtain sufficient supplies of
both cotton and polyester, any shortage or interruption in the supply or
variations in the quality of either could have a material adverse effect on the
Company's business. Additionally, fluctuations in cotton and polyester prices
can significantly affect the Company's profitability, particularly on a short
term basis, since Dan River and other textile manufacturers cannot always mirror
such fluctuations in the pricing of their products.
 
     The Company also uses various other raw materials, such as dyes and
chemicals, in its manufacturing operations. The Company believes these materials
are readily available from a number of sources. Dan River also supplements its
internal manufacturing capabilities by purchasing yarn and unfinished fabrics
from outside sources and by contracting with third parties for various
manufacturing services, including certain printing and sewing operations. During
fiscal 1998, less than 15% of the Company's manufacturing
 
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requirements were purchased from outside sources. As a result of recent
acquisitions, the Company expects to reduce its reliance on outside
manufacturing, which generally is more costly.
 
TRADEMARKS AND LICENSES
 
     The Company holds licenses to produce and sell Home Fashions products under
"Colours by Alexander Julian," "Jessica McClintock," "Barbie," "Looney Tunes,"
"Major League Baseball," "Major League Soccer," "National Football League" and
"Teletubbies," as well as other names or marks, and to use certain designs on
its Home Fashions Products. Such licenses generally provide that the Company has
the right for a limited period, generally three years subject to renewal for
additional periods, to use the respective brand name and/or design in the sale
of certain types of products in certain geographic regions. Dan River also holds
licenses with respect to the use and advertising of certain processes or
synthetic fibers or fabrics. Management believes that the failure of the Company
to continue to hold any one of its licenses or trademarks (other than "Dan
River") would not have a material adverse effect on the Company's business.
 
COMPETITION
 
     The Company's competitive position varies by product line. Competitive
factors include price, product styling and differentiation, quality, flexibility
of production and finishing, delivery time and customer service. The Company
sells its products primarily to domestic customers and competes with both large,
integrated textile manufacturers and numerous smaller companies specializing in
limited segments of the market. Some competitors have significantly greater
financial resources than Dan River.
 
     The Company is one of several domestic manufacturers of Home Fashions
Products. Although the Bibb acquisition has increased the Company's sales of
Home Fashions Products, certain of the Company's competitors still have a
significantly greater share of the domestic market than the Company, including
WestPoint Stevens Inc. and Springs Industries, Inc, which management believes
collectively account for over 50% of the home fashions bedding products market.
 
     With the acquisition of Cherokee, the Company believes that it is a leading
producer of lightweight yarn-dyed woven cotton and cotton-blend apparel fabrics
in the Western Hemisphere. With respect to men's shirtings, management believes
the Company is the largest producer of oxford cloth and pima cotton pinpoint
oxford cloth and the leading producer of lightweight yarn-dyed dress shirting
fabrics in the Western Hemisphere (based on net sales). In the sportswear and
upholstery fabrics markets, the Company is one of a number of domestic
producers.
 
     The Company is subject to foreign competition. The Company believes that
over half of the Apparel Fabrics (much in the form of imported garments) and
approximately 20% of the Home Fashions Products sold in the U.S. are
manufactured overseas. Competitive pressures due to imports have been
exacerbated, particularly in the case of Apparel Fabrics, by the Asian economic
crisis.
 
     One of the Company's business strategies is to seek niche Apparel Fabrics
markets that are less susceptible to foreign competition. The Company believes
that its domestic manufacturing base, its design expertise, its product
development efforts, and its and emphasis on shortening production and delivery
times allow the Company to respond more quickly than foreign producers to
changing fashion trends and to its domestic customers' delivery schedules.
 
     The extent of import protection afforded by the U.S. government to domestic
textile producers has been, and is likely to remain, subject to considerable
domestic political deliberation. The Company benefits from protections afforded
to apparel manufacturers based in certain Caribbean and Central American
countries which ship finished garments into the U.S. under Item 9802.00.80 of
the Harmonized Tariff Schedule of the U.S. as authorized by the Caribbean Basin
Recovery Act. Item 9802.00.80 reduces certain tariffs which would otherwise
apply to apparel garments manufactured outside the U.S. and shipped into the
U.S., provided that the garments are manufactured from fabric produced and cut
domestically. Item 9802.00.80 is beneficial for Dan River and other domestic
producers of Apparel Fabrics, because it creates an attractive manufacturing
base for apparel in close proximity to the U.S.
 
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     In January 1995, a multilateral trade organization, the WTO, was
established to replace the GATT. This new body has set forth the mechanisms by
which world trade in textiles and clothing will be progressively liberalized
with the elimination of quotas and the reduction of duties. The implementation
began in January 1995 with the phasing-out of quotas and the reduction of duties
to take place over a 10-year period. The selection of products at each phase is
made by each importing country and must be drawn from each of the four main
textile groups: tops and yarns, fabrics, made-up textile products and apparel.
The elimination of quotas and the reduction of tariffs under the WTO may result
in increased imports of certain textile products and apparel into North America.
These factors could make the Company's products less competitive against low
cost imports from developing countries.
 
     NAFTA, which was entered into by the United States, Canada and Mexico and
became effective on January 1, 1994, has created the world's largest free-trade
zone. The agreement contains safeguards sought by the U.S. textile industry,
including a rule of origin requirement that products be processed in one of the
three countries in order to benefit from NAFTA. NAFTA will phase out all trade
restrictions and tariffs on textiles and apparel among the three countries. In
addition, NAFTA requires merchandise to be made from yarns and fabrics
originating in North America in order to avoid trade restrictions. Thus, not
only must apparel be made from North American fabric but the fabric must be
woven from North American spun yarn. Although management believes that the
Company may benefit from NAFTA, there can be no assurance that the removal of
these barriers to trade will not have a material adverse effect on the Company's
business.
 
ORDER BACKLOG
 
     The Company's order backlog was approximately $117 million at January 2,
1999, as compared to approximately $104 million at January 3, 1998. This
increase is substantially attributable to the Bibb acquisition, which was
completed in October 1998. Substantially all of the orders on hand at January 2,
1999 are expected to be filled within four months of that date.
 
GOVERNMENTAL REGULATION
 
     The Company is subject to various federal, state and local environmental
laws and regulations limiting the discharge of pollutants and the storage,
handling and disposal of a variety of substances. In particular, the Company's
dyeing and finishing operations result in the discharge of substantial
quantities of wastewater and in emissions to the atmosphere. The Company is
subject to the federal Clean Water and Clean Air Acts, and related state and
local laws and regulations. The Company's operations also are governed by laws
and regulations relating to workplace safety and worker health, principally the
Occupational Safety and Health Act and regulations thereunder, which, among
other things, establish cotton dust, formaldehyde, asbestos and noise standards,
and regulate the use of hazardous chemicals in the workplace.
 
     Dan River believes that it is currently in compliance in all material
respects with environmental or health and safety laws and regulations and does
not believe that the cost of, or any operational constraints or modifications
required to assure, future compliance with such laws or regulations, or to
remediate existing environmental contamination, will have a material adverse
effect on its results of operations or financial condition. However, there can
be no assurance that environmental requirements will not become more stringent
in the future, that the position taken by the various regulatory agencies in
respect of the matters described herein will not change in a manner materially
adverse to the Company, that claims in material amounts will not be brought by
third parties, that additional sites which are alleged to have been contaminated
by the Company or its predecessors will not be discovered, or that the Company
will not incur material costs in order to address any such matters.
 
     At the graphics facility in Macon, Georgia (which was acquired by the
Company from Bibb), the State of Georgia previously required Bibb to perform a
groundwater investigation and remediation due to the presence of volatile
organic compounds ("VOCs") in the groundwater underlying the facility.
Monitoring wells and a pump and treatment system utilizing an air stripper have
been installed to control the off-site migration of impacted groundwater. These
operations have had success in eliminating off-site migration and continue to
date. According to the State of Georgia the facility will not be listed on
Georgia's Hazardous Site Inventory.
 
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     At the Brookneal, Virginia Finishing Plant (which was also acquired by the
Company from Bibb), the Company is subject to a Consent Order in connection with
its wastewater treatment system. Specifically, in February 1996, Bibb entered
into a Special Order on Consent (the "Order") with the Virginia Water Control
Board in connection with its Brookneal wastewater discharge permit. The Order
required, among other things, substantial upgrades to the wastewater treatment
facilities. The construction activities required by the order have been
substantially completed, and the Company is currently in negotiations with the
State Water Control Board with regard to renewal of the permit and its on-going
obligations under the Order. Pursuant to the Order, the Commonwealth of Virginia
also required the closure of the existing wastewater treatment systems and
groundwater remediation relating thereto under the Virginia Voluntary
Remediation Program. In addition, Bibb entered into a Voluntary Remediation
Agreement with Virginia providing for the investigation and on-site remediation
of groundwater and soils. This activity has not been completed.
 
     At the property formerly owned by Cherokee at Spindale, North Carolina,
there is groundwater contamination consisting of diesel fuel, for which the
owner of an adjoining property has acknowledged responsibility. The neighboring
landowner is engaged in cleanup operations under the direction of the North
Carolina Department of Health, Environment and Natural Resources. Prior to
purchasing the Spindale property, the Company identified additional
contamination, consisting primarily of benzene in excess of applicable action
levels, that the Company believes, based on reports from its environmental
consultant, also originates on the adjoining property. The Company also believes
cleanup of the benzene contamination may not be required under current North
Carolina policy, and that in the event the Company is required to clean up the
contamination, it may be eligible to apply for funding from the North Carolina
underground storage tank trust fund. In addition, liabilities arising from
environmental contamination associated with pre-closing operation of Cherokee's
facilities were excluded in connection with the Company's purchase of Cherokee's
assets and therefore not assumed by the Company.
 
     During its due diligence at the Morven, North Carolina facility, which was
acquired in December 1998, the Company discovered low levels of groundwater
contamination from perchloroethylene. Prior to purchasing the facility, Company
personnel met with regulatory authorities regarding the options for dealing with
this contamination. As a result of those discussions, the Company elected to
pursue a Brownfields Agreement for the property with the State of North
Carolina. Under the North Carolina Brownfields program, contaminated industrial
sites are placed into productive use by allowing owners to perform less
intensive cleanups than would be required for residential sites or drinking
water sources. The Company is in on-going discussions with the State of North
Carolina regarding this Agreement.
 
     At the closed Abbeville, South Carolina facility, Bibb previously worked
with the South Carolina Department of Health and Environmental Control to
identify the source of low levels of freon and certain other VOCs which were
found in a water supply well located on-site. It is believed that this
contamination originates off-site. No active on-site remediation is being
required by the State at this time.
 
     In connection with the removal of former underground storage tanks at the
closed Rockingham, North Carolina plant, Bibb discovered the presence of
petroleum constituents in soils and groundwater in March 1997. The presence of
these constituents in soils and groundwater was reported to the North Carolina
Department of Environment, Health and Natural Resources ("NCDEHNR"). To date,
only a Limited Site Assessment has been required by NCDEHNR. As both underground
storage tanks were registered with NCDEHNR, Bibb anticipates that if any
remediation is required as a result of that Assessment, a portion of the
investigation and remediation expenses will be reimbursed by the North Carolina
Leaking Underground Storage Tank trust fund.
 
EMPLOYEES
 
     At January 2, 1999, the Company had approximately 7,700 employees, of which
approximately 6,600 were hourly employees. Of these hourly employees,
approximately 3,600 are located primarily in the Company's Danville, Virginia
operations and represented by a collective bargaining agreement which expires on
January 1, 2002. The Company believes that its relations with its employees are
good.
 
                                        8
<PAGE>   10
 
ITEM 2. PROPERTIES.
 
     In February 1997, in connection with the Cherokee acquisition, the Company
acquired greige manufacturing facilities in Spindale, North Carolina and
Sevierville, Tennessee, and a finishing plant in Harris, North Carolina. The
Company owns the North Carolina facilities, totaling approximately 595,000
square feet of manufacturing space, and leases the Sevierville, Tennessee
facility (consisting of approximately 419,000 feet of manufacturing space) with
an option to purchase the facility for nominal consideration in 2018. The
Company closed the Spindale facility, consisting of approximately 370,000 square
feet, in January 1999.
 
     In October 1998, the Company acquired Bibb, and in December 1998, the
Company acquired the Morven facility. As a result of these acquisitions the
Company added approximately 4.7 million square feet of additional manufacturing
and warehouse space for its Home Fashions Products, of which approximately 2.4
million square feet are currently in use, as well as approximately 600,000
square feet devoted to manufacturing and warehousing Engineered Products. The
Company owns all of these facilities except for a 31,000 square foot building in
Brookneal, Virginia which is used for sewing operations and a 119,000 square
foot warehouse in Fort Valley, Georgia, which it leases.
 
     Dan River's other Apparel Fabrics and Home Fashions Products facilities, as
well as its corporate facilities, are located in Danville, Virginia. Most of the
Danville facilities are owned by the Company. The owned facilities occupy a
total of approximately 5.7 million square feet, with approximately 3.3 million
square feet of space currently used for manufacturing and warehousing. The
Company's 116,000 square foot accessory sewing plant and 258,000 square foot
distribution center are leased, with an option to purchase at any time for
nominal consideration. The Company leases approximately 900,000 square feet of
additional warehouse and manufacturing space in Danville.
 
     The Company leases each of its marketing and sales offices and, through its
subsidiary, Dan River Factory Stores, Inc., the Company leases nine factory
outlet stores in Florida, Georgia, Illinois, North Carolina, Ohio, South
Carolina and Tennessee, which average approximately 6,000 square feet of total
space each. The Company owns three factory outlet stores in Georgia and
Virginia.
 
     The Company's manufacturing facilities generally operate on a 24 hour,
five, six or seven day schedule depending on the nature of the operations and
demand for specific products of the Company, as well as other factors.
 
     The Company believes that its existing facilities are adequate to service
existing demand for the Company's products. The Company considers its plants and
equipment to be in good condition.
 
ITEM 3. LEGAL PROCEEDINGS.
 
     From time to time, the Company is a party to litigation arising in the
ordinary course of its business. Except as described below, the Company is not
currently a party to any litigation that management believes, if determined
adversely to the Company, would have a material adverse effect on the Company.
 
     Bibb is a plaintiff in a lawsuit filed on June 5, 1998 in the General Court
of Justice, Superior Court Division, Halifax County, North Carolina, styled
WestPoint Stevens, Inc. ("WestPoint") and the Bibb Company v. Panda-Rosemary
Corporation and Panda Energy Corporation (collectively, including Panda-
Rosemary, L.P., "Panda"), in which Bibb and WestPoint seek, among other things,
a declaratory judgment as to the validity of an assignment by Bibb and WestPoint
of Bibb's rights under a cogeneration agreement between Bibb and Panda in
connection with the sale of Bibb's Roanoke Rapids towel operations to WestPoint
in 1997. Panda counterclaimed seeking, among other things, damages against
WestPoint and/or Bibb based on various theories of alleged breach of contract,
tort, conspiracy and unfair competition, all based generally on the factual
allegation that Bibb could not assign its rights under the contract without
Panda's prior consent and that Panda is, therefore, entitled to cancel the
contract and/or renegotiate the price to be paid by WestPoint for steam under
the contract. In discovery Panda has alleged damages of as much as $30 million.
On October 27, 1998, Panda-Rosemary, L.P. and Panda Energy Corporation sued
WestPoint, Bibb and Dan River (as alleged successor to Bibb), making essentially
the same allegations, in the County Court at Law No. Two, Dallas County, Texas.
                                        9
<PAGE>   11
 
     WestPoint is currently purchasing steam from the cogeneration facility and
Panda is accepting WestPoint's payments of the contract price for the steam. The
Company and WestPoint are cooperating fully in the defense of this matter. The
Company believes that Panda's position is without merit and intends, in
cooperation with WestPoint, to vigorously defend the lawsuit. There can be no
assurance, however, that the Company and WestPoint will prevail or that the
Company will not suffer a judgment against it in an amount which would have a
material adverse effect on its results of operation or financial condition. The
Company has notified its insurance carrier concerning this litigation, but its
carrier has not yet taken a position as to coverage.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     On October 14, 1998, a special meeting of shareholders was convened for the
purpose of considering a proposal to approve the Agreement and Plan of Merger
dated as of June 28, 1998, as amended, between Dan River and Bibb and the
issuance of shares of Dan River Class A Common Stock in connection therewith.
The proposal was approved with 22,535,645 votes cast in favor of the proposal,
26,900 votes cast against the proposal, and 4,483 abstentions.
 
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The following table sets forth information concerning the executive
officers of Dan River, who are elected by the Board of Directors and hold office
generally until the next annual meeting of the Board or until their successors
are elected and qualified:
 
<TABLE>
<CAPTION>
                   NAME                     AGE         POSITION WITH DAN RIVER
                   ----                     ---         -----------------------
<S>                                         <C>   <C>
Joseph L. Lanier, Jr. ....................  67    Chairman, Chief Executive Officer
                                                  and Director
Richard L. Williams.......................  65    President, Chief Operating Officer
                                                  and Director
Barry F. Shea.............................  50    Executive Vice President -- Chief
                                                  Financial Officer
Gregory R. Boozer.........................  43    Executive Vice President --
                                                  Manufacturing
Scott D. Batson...........................  42    Vice President -- Finance
Anthony J. Bender.........................  41    Vice President -- Information
                                                  Systems
Joseph C. Bouknight.......................  46    Vice President -- Human Resources
Harry L. Goodrich.........................  48    Vice President, Secretary and
                                                  General Counsel
George R. Herron..........................  58    Vice President -- Cotton
                                                  Procurement
Larry W. Van de Visser....................  62    Vice President -- Administration
Gary D. Waldman...........................  42    Controller
</TABLE>
 
     Joseph L. Lanier, Jr. has been Chairman of the Board of Directors and Chief
Executive Officer of Dan River or Braelan Corp. (the "Predecessor") since 1989.
Mr. Lanier is also a director of SunTrust Bank, Inc. (a bank holding company),
Flowers Industries, Inc. (a food company), Torchmark Corporation (an insurance
company), Dimon Incorporated (a tobacco products company) and Waddell & Reed
Financial, Inc., a mutual fund company.
 
     Richard L. Williams has been a director and President and Chief Operating
Officer of Dan River or the Predecessor since 1989.
 
                                       10
<PAGE>   12
 
     Barry F. Shea was Vice President -- Finance, Chief Financial Officer and
Assistant Secretary of Dan River or the Predecessor from 1989 until 1996 and was
Vice President -- Chief Financial Officer from 1996 until October 1998, when he
was elected Executive Vice President -- Chief Financial Officer.
 
     Gregory R. Boozer was Vice President -- Manufacturing Services of Dan River
from 1989 until October 1998, when he was elected Executive Vice
President -- Manufacturing.
 
     Scott D. Batson has been Vice President -- Finance of Dan River since 1995
and was Director of Finance from 1990 to 1995. Mr. Batson was also Treasurer of
the Predecessor from 1990 to 1995.
 
     Anthony J. Bender has been Vice President -- Information Systems of Dan
River since 1995. Mr. Bender was Director of Systems Development of Springs
Industries, Inc. (a manufacturer and distributor of textile products) from 1993
until 1995.
 
     Joseph C. Bouknight has been Vice President -- Human Resources of Dan River
since January 25, 1999. Mr. Bouknight was Staff Vice President -- Organization
Effectiveness with Sonoco Products Company from 1994 until 1999. Prior to that
he served as Director of International Human Resources from 1992 until 1994.
 
     Harry L. Goodrich has been Secretary and General Counsel of Dan River or
the Predecessor since 1989 and has been Vice President of Dan River since 1995.
 
     George R. Herron has been Vice President -- Cotton Procurement of Dan River
since 1987.
 
     Larry W. Van de Visser was Controller of Dan River from 1990 until 1995 and
Vice President -- Controller of Dan River from 1995 to 1996. He has been Vice
President -- Administration of Dan River since 1996.
 
     Gary D. Waldman has been Controller of Dan River since 1996. He was
Assistant Controller of Dan River from 1992 until 1996, and Director of Taxes
from 1990 until 1992.
 
     Other significant employees of the Company are Robert E. Major, James E.
Martin and Thomas L. Muscalino.
 
     Mr. Major has headed the Company's Engineered Products operations since
1987. He is 56 years old.
 
     Mr. Martin has headed Dan River's Apparel Fabrics operations since 1990. He
is 49 years old.
 
     Mr. Muscalino has headed the Company's Home Fashions operations since 1993.
He is 48 years old.
 
                                       11
<PAGE>   13
 
                                    PART II
 
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
 
     The Company was privately held until the completion of its initial public
offering on November 20, 1997, at which time its Class A Common Stock was listed
on the New York Stock Exchange (the "NYSE") under the symbol "DRF." There is no
established trading market for the Class B Common Stock. On March 1, 1999, there
were approximately 130 holders of record of the Company's Class A Common Stock
and eight holders of record of the Company's Class B Common Stock.
 
     The Company has paid no cash dividends during its two most recent fiscal
years and has no present intention to commence paying such dividends.
 
     The following table sets forth for the calendar quarter indicated the high
and low closing prices per share of Dan River Class A Common Stock as reported
in composite trading on the NYSE.
 
<TABLE>
<CAPTION>
                                                               HIGH     LOW
                                                               ----     ---
<S>                                                           <C>      <C>
1997:
Fourth Quarter(1)...........................................  $16.56   $15.00
1998:
First Quarter...............................................  $19.00   $14.75
Second Quarter..............................................  $21.13   $16.75
Third Quarter...............................................  $18.13   $10.63
Fourth Quarter..............................................  $11.75   $ 8.13
</TABLE>
 
---------------
 
(1) Prior to November 20, 1997, the date of completion of Dan River's initial
    public offering of its Class A Common Stock, there was no established public
    market for the Dan River Class A Common Stock.
 
                                       12
<PAGE>   14
 
ITEM 6. SELECTED FINANCIAL DATA.
 
<TABLE>
<CAPTION>
                                                                        FISCAL YEARS
                                            --------------------------------------------------------------------
                                              1998         1997(1)          1996           1995           1994
                                                      (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                         <C>            <C>            <C>            <C>            <C>
STATEMENT OF INCOME DATA:
Net sales............................       $517,443       $476,448       $379,567       $384,801       $371,534
Cost of sales........................        406,619        372,165        307,383        306,879        297,460
Gross profit.........................        110,824        104,283         72,184         77,922         74,074
Selling, general and administrative
  expenses...........................         58,410         54,231         45,673         44,860         43,908
Amortization of goodwill.............            589             --             --             --             --
Other operating costs, net(2)........          5,347          7,012           (428)         8,972          1,534
Operating income.....................         46,478         43,040         26,939         24,090         28,632
Other income (expense), net..........            334           (290)           485            241            144
Interest expense.....................         18,713         21,135         18,168         21,941         20,419
Income before extraordinary item.....         17,101         13,264          5,686            258          3,525
Extraordinary item...................           (405)          (243)            --             --             --
Net income...........................         16,696         13,021          5,686            258          3,525
Earnings per share -- basic:
    Income before extraordinary
      item...........................           0.86           0.90           0.40           0.02           0.31
    Net income per share -- basic....           0.84           0.89           0.40           0.02           0.31
Earnings per share -- diluted:
    Income before extraordinary
      item...........................           0.85           0.89           0.40           0.02           0.31
    Net income per
      share -- diluted...............           0.83           0.88           0.40           0.02           0.31
BALANCE SHEET DATA
  (AT END OF FISCAL YEAR):
Working capital......................       $221,854       $123,604       $ 93,291       $109,763       $103,973
Total assets.........................        720,210        392,295        321,050        330,944        329,902
Convertible junior subordinated
  notes..............................             --             --             --             --         25,220
Total debt, including current
  maturities.........................        354,268        143,756        169,468        179,703        196,436
Common stock subject to put rights...             --             --          9,726          7,000          7,000
Shareholders' equity.................        258,774        165,830         77,898         73,702         46,810
Common shares outstanding............         23,219         18,841         14,155         14,155         11,375
OTHER FINANCIAL DATA:
Depreciation and amortization of
    property, plant and equipment....       $ 30,220       $ 27,508       $ 20,795       $ 19,537       $ 18,187
Capital expenditures in cash.........         39,454         24,231         27,582         24,316         24,793
</TABLE>
 
---------------
(1) Fiscal year 1997 represents a 53-week period. All other fiscal years
    presented represent a 52-week period.
(2) Other Operating Costs, Net includes various non-recurring charges and
    credits, the most significant of which relate to fixed asset writedowns,
    plant closure costs and a discontinued product line. See Note 7 to the
    Consolidated Financial Statements.
 
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
       OF OPERATIONS.
 
OVERVIEW
 
     The Company's primary strategy is to expand its Home Fashions business both
internally and through acquisitions as well as to maintain its niche position as
a leading producer of light weight yarn-dyed Apparel Fabrics. The Company also
continues to implement cost reductions, which it believes are critical in order
to remain competitive in the global marketplace.
 
     Fiscal 1998 was a year of transition for the Company. As the year began,
the Company's two operating divisions, Home Fashions and Apparel Fabrics, each
generated approximately half of the Company's net sales.
 
                                       13
<PAGE>   15
 
By the end of fiscal 1998, due to the Bibb acquisition in October 1998, the
Company's Home Fashions division was generating approximately two-thirds of the
Company's net sales. The Company believes that the Bibb acquisition has made it
more attractive to its Home Fashions customers, who need large suppliers to
satisfy their requirements. The Bibb acquisition also gave the Company needed
capacity and thus reduced its dependence on outside suppliers and expanded the
Company's product categories to include juvenile products and products for the
hospitality and health care markets.
 
     During the first half of fiscal 1998, the Company experienced strong demand
for its Home Fashions products, particularly its Bed-in-a-Bag(R) bed ensembles,
as result of new program rollouts at mass merchandise retailers. In order to
meet demand for these products, it was necessary to outsource some of the
production, which led to higher costs and negatively impacted profit margins for
the Home Fashions segment in fiscal 1998. This situation persisted throughout
fiscal 1998. As a result of the Bibb acquisition and the purchase of a cut and
sew facility in Morven, North Carolina, the Company now has increased capacity
and, consequently, even if strong demand for Home Fashions products continues
during fiscal 1999, the Company expects to be less dependent on outsourcing.
 
     Historically, the Company's Apparel Fabrics operations have been more
sensitive to downturns within the textile industry generally and, as a result,
Apparel Fabrics' contribution to operating income has been significantly less
than, and has tended to fluctuate more than, Home Fashions products'
contribution to operating income. In recent years the Company has taken several
steps to improve the performance of its Apparel Fabrics operations, including
the replacement of older manufacturing equipment and the closure and
consolidation of certain facilities. Most significantly, in February 1997, the
Company acquired Cherokee, which almost doubled the size of the Company's
Apparel Fabrics operations. For the fiscal year ended September 1996, the last
full fiscal year prior to the acquisition by the Company, Cherokee had net sales
of $105 million compared to the Company's net sales of $136 million attributable
to Apparel Fabrics for fiscal 1996.
 
     At the time of the Cherokee acquisition, the Company and Cherokee each
operated two Apparel Fabrics weaving plants, offered very similar product lines
(that could be manufactured in any of the four plants) and had substantially the
same customers. As a result, the acquisition of Cherokee enabled the Company to
achieve certain synergies by eliminating duplicative selling, general and
administrative expenses and, most importantly, by increasing volumes and
capacity utilization while reducing fixed manufacturing costs through the
consolidation of Cherokee's and the Company's Apparel Fabrics weaving
operations. Accordingly, the Company closed its Riverside Apparel Fabrics
weaving plant (which was the least efficient of its Apparel Fabrics plants) at
the end of fiscal 1997.
 
     Initially, the Cherokee acquisition and the closure of the Riverside plant
led to increased volumes and capacity utilization with a concurrent reduction of
fixed manufacturing costs. This improved the operating margin of the Apparel
Fabrics segment during the first half of fiscal 1998. However, the Apparel
Fabrics segment was adversely impacted during the latter half of the year as
Asian imports of garments and fabrics started to negatively impact demand for
the Company's Apparel Fabrics. In response, the Company first reduced operating
schedules at its three remaining Apparel Fabrics plants and then closed its
Spindale, North Carolina plant in January 1999, permanently reducing its Apparel
Fabrics manufacturing capacity. In connection with the closure of its Riverside
and Spindale plants, the Company incurred pre-tax charges of $7.6 million ($4.7
million after tax; $0.32 per share) and $5.7 million ($3.5 million after tax;
$0.18 per share) in fiscal 1997 and fiscal 1998, respectively. The Company
believes that the closure of these plants will better align the Company's
Apparel Fabrics manufacturing capacity with expected future demand.
 
     In March 1999, the Company and Grupo Industrial Zaga, a Mexican textile and
apparel company, entered into a letter of intent, wherein they agreed, subject
to negotiation and approval of a definitive stockholders' agreement and other
customary conditions, to form a jointly owned company to build and operate a
manufacturing plant in Mexico for the production of light weight yarn-dyed
Apparel Fabrics. The parties intend that the new plant will be operational
during the fourth quarter of fiscal 2000.
 
     As the Company moves into fiscal 1999, its performance will be affected by
many factors, but the Company believes the most important factor will be the
level of demand for its Apparel Fabrics and its ability to integrate Bibb and
realize the costs savings that are expected as a result of the acquisition.
Other factors will
 
                                       14
<PAGE>   16
 
be continued strong demand for its Home Fashions Products and the stability of
raw material prices, which are currently at historically low levels.
 
PERFORMANCE BY SEGMENT
 
     The Company operates in three industry segments: products for the Home
Fashions markets, products for the Apparel Fabrics markets, and Engineered
Products for the industrial markets. The following table sets forth certain
information about segment results for the fiscal years ended January 2, 1999
(fiscal 1998), January 3, 1998 (fiscal 1997), and December 28, 1996 (fiscal
1996).
 
<TABLE>
<CAPTION>
                                                      FISCAL 1998   FISCAL 1997   FISCAL 1996
                                                      -----------   -----------   -----------
<S>                                                   <C>           <C>           <C>
NET SALES
  Home Fashions.....................................   $321,807      $255,766      $243,142
  Apparel Fabrics...................................    186,491       220,682       136,425
  Engineered Products...............................      9,145            --            --
                                                       --------      --------      --------
          Total.....................................   $517,443      $476,448      $379,567
                                                       ========      ========      ========
OPERATING INCOME
  Home Fashions.....................................   $ 33,848      $ 32,468      $ 28,970
  Apparel Fabrics...................................     23,656        23,446         3,688
  Engineered Products...............................        169            --            --
                                                       --------      --------      --------
          Total segment operating income............     57,673        55,914        32,658
  Corporate items not allocated to segments:
     Amortization of goodwill.......................       (589)           --            --
     Other operating costs, net.....................     (5,347)       (7,012)          428
     Other expenses not allocated to segments.......     (5,259)       (5,862)       (6,147)
                                                       --------      --------      --------
          Total operating income....................   $ 46,478      $ 43,040      $ 26,939
                                                       ========      ========      ========
</TABLE>
 
RESULTS OF OPERATIONS
 
COMPARISON OF 52 WEEKS ENDED JANUARY 2, 1999 ("FISCAL 1998") TO 53 WEEKS ENDED
JANUARY 3, 1998 ("FISCAL 1997")
 
  NET SALES
 
     Net sales for fiscal 1998 were $517.4 million, an increase of $41.0 million
or 8.6% from net sales of $476.4 million for fiscal 1997.
 
  Home Fashions
 
     Net sales of Home Fashions Products for fiscal 1998 were $321.8 million, up
$66.0 million or 25.8% from net sales of $255.8 million for fiscal 1997. The
acquisition of Bibb in October 1998 contributed $38.3 million of this increase.
The remainder of the increase was primarily attributable to higher sales of bed
ensembles, which were up $60.7 million over fiscal 1997 sales, offset by lower
sales of individually packaged sheets and sales of greige goods (unfinished
sheeting) which, were down $29.1 million from fiscal 1997 sales.
 
  Apparel Fabrics
 
     Net sales of Apparel Fabrics in fiscal 1998 were $186.5 million, down $34.2
million or 15.5% from net sales of $220.7 million for fiscal 1997. Of this
decrease, $12.2 million was attributable to the sale of a polypropylene yarn
spinning plant in December 1997 and the Company's exit from a commission dyeing
arrangement during the year. The remainder of the decrease reflected lower sales
throughout most product categories, including the segments' largest product
category, shirting products, in which sales declined $12.1 million, or
approximately 10% from fiscal 1997 sales.
 
  Engineered Products
 
     Net sales of Engineered Products for the period from October 14, 1998 (the
date the segment was acquired as a result of the Bibb acquisition) until the end
of fiscal 1998 were $9.1 million.
 
                                       15
<PAGE>   17
 
  SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
     Selling, general and administrative expenses for fiscal 1998 were $58.4
million (11.3% of net sales), an increase of $4.2 million or 7.7% from $54.2
million (11.4% of net sales) for fiscal 1997. The increase was primarily
attributable to incremental expenses resulting from the acquisition of Bibb
(approximately $3.3 million), higher spending in the information systems area
($1.0 million) and an increase in group insurance costs ($0.4 million), offset
by lower incentive compensation ($0.4 million).
 
  OPERATING INCOME
 
     Total operating income for fiscal 1998 was $46.5 million (9.0% of net
sales) compared to $43.0 million (9.0% of net sales) for fiscal 1997.
 
  Home Fashions
 
     Operating income for the Home Fashions segment was $33.8 million in fiscal
1998. This compares to operating income of $32.5 million for the segment in
fiscal 1997. The increase was due to the acquisition of Bibb in October 1998,
which added $4.0 million of operating income. Excluding Bibb, operating income
would have declined $2.6 million or 8.0% from operating income for fiscal 1997.
In spite of higher sales and lower raw material costs during fiscal 1997,
operating income for the segment (excluding Bibb) declined due to higher
production costs associated with the use of outside contractors to meet
increased demand levels, a competitive pricing environment which led to lower
prices for Home Fashions Products, and a less favorable product mix.
 
  Apparel Fabrics
 
     Operating income for the Apparel Fabrics segment was $23.7 million for
fiscal 1998 as compared to $23.4 million of operating income for fiscal 1997.
Operating income for the segment was approximately even with operating income
for fiscal 1997 despite a $34.2 million sales decline. This relatively high
level of operating income in relation to net sales was due to lower production
costs as a result of the acquisition of Cherokee in February 1997 and the
subsequent closure of the Company's Riverside Apparel Fabrics weaving plant
(which resulted in increased plant utilization and reduced unit costs), and
lower raw material costs during fiscal 1998. Segment operating income does not
reflect the amounts reported as one-time charges under "Other Operating Costs,
Net" for the closure of the Apparel Fabrics segment's Riverside and Spindale
weaving mills.
 
  Engineered Products
 
     The Engineered Products segment generated $0.2 million in operating income
in the 11 weeks since the business was acquired by the Company from Bibb in
October 1998.
 
  Corporate Items
 
     Amortization of goodwill was $0.6 million for fiscal 1998 and was entirely
attributable to goodwill resulting from the acquisition of Bibb.
 
     Other operating costs, net totaled $5.3 million in fiscal 1998 and
consisted of (i) a $5.7 million charge resulting from the Company's decision to
close its apparel fabrics weaving facility in Spindale, North Carolina, and (ii)
a $0.4 million gain realized from the early termination of a lease. The charge
for the Spindale facility closure included a $5.4 million non-cash write-down of
assets, and $0.3 million for severance and other benefits associated with the
termination of approximately 130 employees. The Company began phasing out
production at the Spindale facility in the fourth quarter of fiscal 1998. By the
end of January 1999 all production had ceased and the termination of affected
employees had been completed. Substantially all of the related severance and
benefit costs will be paid out during fiscal 1999.
 
     Other operating costs, net for fiscal 1997 totaled $7.0 million and
consisted of (i) a $7.6 charge relating to the closure of the Company's
Riverside apparel fabrics weaving facilities, and (ii) a $0.6 gain from the sale
of a yarn mill in Wetumpka, Alabama.
 
                                       16
<PAGE>   18
 
     The charge for the Riverside facilities closure included a $4.2 million
non-cash write-down of assets, and $0.3 million for severance and other benefits
associated with the termination of approximately 200 employees. The remainder of
the charge ($3.1 million) related principally to estimated expenditures required
for demolition of the buildings and environmental expense (principally asbestos
removal). By the end of fiscal 1997, operations at the facilities had ceased,
the termination of affected employees had been completed, and most salvageable
equipment had either been sold or was in the process of being moved to other
facilities. During fiscal 1998 the Company entered into a contract with a third
party for asbestos removal and demolition of the first of the two mill
buildings. Shortly after work on the project commenced, the Company agreed to
suspend work on the demolition at the request of state and local historical
organizations who are exploring alternative uses for the property and have the
support of various government agencies and officials. Proposed alternatives
include donation of the property to a nonprofit organization or trust for future
renovation and development. As of January 2, 1999, (i) $0.5 million had been
spent on, and $2.6 million remained in reserve for, asbestos removal and
demolition and (ii) $0.2 had been spent on, and $0.1 million remained in reserve
for, severance and benefits. There is considerable uncertainty as to whether the
buildings will be donated or whether they will be demolished. Regardless of
whether the property is donated, the Company is committed to pay an additional
$600,000 on the third party demolition contract. If the Company donates the
property, it will reverse any remaining reserves relating to Riverside, which
would result in a pre-tax gain of approximately $2,100,000. In addition,
donation of the property could result in federal and state income tax benefits.
Also at January 2, 1999 $0.6 million remained in a reserve established in fiscal
1995 for removal of asbestos and equipment from an idle building which is
located in the same historic district as the Riverside facilities. Work on this
project was suspended for a period of time while the Virginia Department of
Transportation considered various sites for relocating a bridge, one of which
would have resulted in the condemnation of the property. The asbestos and
equipment removal is currently on hold pending other decisions concerning the
historic district.
 
     As noted above, the Company realized a $0.6 million gain on the sale of its
Wetumpka yarn mill in fiscal 1997. Wetumpka was a plant devoted primarily to the
manufacture of polypropylene yarn for one customer pursuant to a long-term
contract. The customer decided to exit the business and since the conversion of
the plant to support other businesses was not cost effective, the Company
decided to sell the plant. During fiscal 1997 and 1996, sales attributable to
yarn manufactured at the plant ranged from $5 million to $7 million annually,
and it operated at a break-even level.
 
     Other expenses not allocated to the Company's business segments totaled
$5.3 million in fiscal 1998 compared to $5.9 million in fiscal 1997 and
consisted primarily of depreciation on the write-up of the Company's fixed
assets from when it was acquired in 1989. Most of the write-up will become fully
depreciated in the fourth quarter of fiscal 1999.
 
  INTEREST EXPENSE
 
     Interest expense for fiscal 1998 was $18.7 million, down $2.4 million or
11.4% from $21.1 million in fiscal 1997. The decline in interest expense was due
to lower debt levels during fiscal 1998 as a result of debt repayments made with
the proceeds from the Company's initial public offering in November 1997 and
lower interest rates. Debt levels increased by $211 million at the end of fiscal
1998 as a result of higher levels of working capital and the acquisition of
Bibb. In connection with that acquisition, the Company refinanced its bank debt,
and therefore it will be subject to both higher average outstanding debt and
interest rates in fiscal 1999.
 
  INCOME TAX PROVISION
 
     The income tax provision was $11.0 million (39.1% of pre-tax income) for
fiscal 1998, compared to $8.4 million (38.6% of pre-tax income) for fiscal 1997.
The slightly higher effective tax rate in fiscal 1998 was caused by
nondeductible goodwill amortization.
 
                                       17
<PAGE>   19
 
  NET INCOME AND EARNINGS PER SHARE
 
     Net Income for fiscal 1998 was $16.7 million or $0.83 per share (diluted),
in comparison with $13.0 million, or $0.88 per share (diluted) for the fiscal
1997. Fiscal 1998 included a charge of $3.5 million after tax ($0.18 per share)
for the closure of the Spindale Apparel Fabrics weaving plant and an
extraordinary loss of $0.4 million ($0.02 per share) from the refinancing of
outstanding bank debt as a result of the Bibb acquisition. Fiscal 1997 included
a net charge of $4.3 million after tax ($0.29 per share) for the closure of the
Riverside apparel fabrics weaving plant offset by the gain on the sale of
Wetumpka, and an extraordinary loss of $0.2 million ($0.01 per share) associated
with the early retirement of debt from the proceeds of the Company's initial
public offering.
 
COMPARISON OF 53 WEEKS ENDED JANUARY 3, 1998 ("FISCAL 1997") TO 52 WEEKS ENDED
DECEMBER 28, 1996 ("FISCAL 1996").
 
  NET SALES
 
     Net sales for fiscal 1997 were $476.4 million, an increase of $96.9 million
or 25.5% compared to net sales of $379.6 million for fiscal 1996.
 
  Home Fashions
 
     Net sales of Home Fashions Products for fiscal 1997 were $255.8 million, up
$12.6 million or 5.2% from fiscal 1996 during which net sales were $243.1
million. The sales increase was due to higher unit volume of bed ensembles and
higher average pricing which reflected the increased sales of ensembles.
 
  Apparel Fabrics
 
     Net sales of Apparel Fabrics in fiscal 1997 were $220.7 million, an
increase of $84.3 million or 61.8% compared to net sales of $136.4 million in
fiscal 1996. The increase in net sales of Apparel Fabrics resulted primarily
from the acquisition of Cherokee which was consummated on February 3, 1997.
Apparel Fabrics unit volumes were up significantly as a result of the
acquisition, offset somewhat by lower average pricing reflecting a sales mix
that included a higher proportion of lower priced greige (unfinished) fabrics
that were sold to the converter trade (purchasers of unfinished fabrics who
contract the finishing to third parties) and higher commission finishing sales.
 
  SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
     Selling, general and administrative expenses for fiscal 1997 were $54.2
million (11.4% of net sales) an increase of $8.6 million or 18.7% from $45.7
million (12.0% of net sales) for fiscal 1996. The increase was primarily caused
by higher incentive compensation expense (approximately $3.3 million),
incremental selling and administrative expenses resulting from the acquisition
of Cherokee (approximately $2.3 million), and increased product design and
rollout costs associated with the introduction of the "Nautica" brand of Home
Fashions Products ($1.6 million).
 
  OPERATING INCOME
 
     Operating income for fiscal 1997 was $43.0 million (9.0% of net sales), an
increase of $16.1 million or 59.8% from $26.9 million (7.1% of net sales) for
fiscal 1996.
 
  Home Fashions
 
     Operating income for the Home Fashions segment was $32.5 million in fiscal
1997 compared to $29.0 million for fiscal 1996. This increase ($3.5 million or
12.1%) was due primarily to higher unit volumes and lower raw material prices
during the year offset somewhat by increased selling expenses in connection with
the introduction of the "Nautica" brand of Home Fashions Products.
 
                                       18
<PAGE>   20
 
  Apparel Fabrics
 
     Operating income for the Apparel Fabrics segment was $23.4 million for
fiscal 1997 compared to $3.7 million for fiscal 1996. The $19.7 million increase
was due to the increased volumes as a result of the Cherokee acquisition,
increased plant utilization and reduced unit costs as a result of the
integration of Cherokee and lower raw material prices. Segment operating income
does not reflect the one-time charge included under "Other Operating Costs, Net"
in 1997 for the closure of the Apparel Fabrics segment's Riverside weaving mill.
 
  Corporate Items
 
     Other operating costs, net for fiscal 1997 (discussed in detail above)
totaled $7.0 million and consisted of a $7.6 charge relating to the closure of
the Company's Riverside Apparel Fabrics weaving facilities, and a $0.6 gain from
the sale of a yarn mill in Wetumpka, Alabama.
 
     In 1996, the Company recorded a $1.3 million gain due to a better than
anticipated recovery on idle equipment and other assets that had been written
down in 1995 in connection with the Company's decision to discontinue one of its
Apparel Fabrics product lines. In addition, the Company reversed $0.1 million of
a cash charge recorded in fiscal 1995 relating to the relocation of its
marketing headquarters, primarily due to the early buyout of the existing lease.
These gains were offset in part by a $0.9 million cash charge relating to the
satisfaction of lease obligations on idled equipment. The Company satisfied $0.4
million of the lease obligation in fiscal 1996, and the remainder was satisfied
in the first quarter of fiscal 1997.
 
     Other expenses not allocated to the Company's business segments totaled
$5.9 million in fiscal 1997 compared to $6.1 million in fiscal 1996, and consist
primarily of depreciation on the write-up of the Company's fixed assets from
when it was acquired in 1989.
 
  INTEREST EXPENSE
 
     Interest expense was $21.1 million for fiscal 1997, an increase of $3.0
million or 16.3% from $18.2 million for fiscal 1996. The increase in interest
expense was due to higher debt levels for most of fiscal 1997 arising from the
acquisition of Cherokee in February 1997, offset somewhat by lower average
interest rates. The Company completed its initial public offering of its stock
on November 20, 1997 raising $64.5 million in net proceeds for the Company, all
of which was used to reduce outstanding debt.
 
  INCOME TAX PROVISION
 
     The income tax provision was $8.4 million (38.6% of pre-tax income) for
fiscal 1997, compared to $3.6 million (38.6% of pre-tax income) for fiscal 1996.
 
  NET INCOME AND EARNINGS PER SHARE
 
     Net income for fiscal 1997 was $13.0 million or $0.88 per share (diluted)
on 14.8 million shares outstanding, compared to $5.7 million or $0.40 per share
(diluted) for fiscal 1996 on 14.2 million shares outstanding. Fiscal 1997
included a net charge of $4.3 million after tax ($0.29 per share) for the
closure of the Riverside Apparel Fabrics weaving plant offset by the gain on the
sale of Wetumpka, and an extraordinary loss of $0.2 million ($0.01 per share)
associated with the early retirement of debt from the proceeds of the Company's
initial public offering.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  GENERAL
 
     The Company relies on internally generated cash flow, supplemented by
borrowings under its Working Capital Facility (as defined herein) to meet its
working capital needs, capital improvements and debt service requirements. The
Company's total debt to total capital ratio at January 2, 1999 was 57.8%.
 
                                       19
<PAGE>   21
 
  WORKING CAPITAL
 
     The Company's operations are working capital intensive. The Company's
operating working capital (accounts receivable and inventories less accounts
payable and accrued expenses) typically increases or decreases in relation to
sales and operating activity levels.
 
     Operating working capital used $46.3 million of cash during fiscal 1998
reflecting increased sales activity and the payment of Bibb's vendors whom were
not current. Net income plus noncash expense items (net) provided $57.9 million
in cash during the year, which provided funding for $48.0 million used by
changes in operating assets and liabilities. Those changes were the $46.3
million increase in working capital mentioned above, an increase of $1.3 million
in prepaid expenses and other assets, and a $0.4 million decrease in other
liabilities. As a result, net cash of $9.9 million was provided by operating
activities in fiscal 1998.
 
     Excluding the initial impact of the Cherokee acquisition, operating working
capital increased $3.7 million (4.2%) during fiscal 1997 reflecting increased
sales activity. Net income plus noncash expense items (net) provided $49.4
million in cash during the year, which provided funding for $4.7 million used by
changes in operating assets and liabilities. Those changes were a $2.7 million
increase in prepaid expenses and other assets, a $1.6 million decrease in other
liabilities, as well as the $3.7 million increase in operating working capital
mentioned above. As a result, net cash of $44.6 million was provided by
operating activities in fiscal 1997.
 
     Operating working capital decreased $17.3 million (16.7%) during fiscal
1996 reflecting improved inventory management and to a lesser extent the 1.4%
decrease in net sales from fiscal 1995. Net income plus noncash expense items
(net) provided $28.4 million in cash during the year. Additionally, cash was
provided by a $16.7 million reduction in operating assets and liabilities,
principally from the reduction in operating working capital mentioned here.
Accordingly, net cash of $45.1 million was generated from operating activities
in fiscal 1996.
 
     In connection with purchasing cotton for anticipated manufacturing
requirements, the Company may enter into cotton futures and option contracts in
order to reduce the risk associated with future price fluctuations. The Company
generally covers open order requirements, which average approximately three
months of production, through direct purchase and hedging transactions, and it
may shorten or lengthen that period in accordance with its perception of the
direction of cotton prices. Futures and option contracts are accounted for as
hedges and, accordingly, gains or losses are deferred and reflected in cost of
sales as an element of the cost of the finished product. Gains and losses
related to hedging activity during the three year period ended January 2, 1999
were not material to the Company's results of operations. There were no material
cotton futures or options contracts outstanding at January 2, 1999 or January 3,
1998.
 
  CREDIT FACILITIES AND VENDOR FINANCING
 
     On October 14, 1998, in order to finance the Bibb acquisition, the Company
replaced its $90.0 million revolving credit facility with a new $275 million
Credit Agreement ("Agreement"). The Agreement consists of a $125 million
amortizing term loan ("Term Loan") and a $150 million non-amortizing revolving
working capital credit line ("Working Capital Facility"). The Agreement is
secured by the Company's accounts receivable and inventories.
 
     The borrowings under the Agreement bear interest at a Base Rate plus
applicable percentage, as defined (7.875% as of February 23, 1999) or LIBOR plus
applicable percentage, as defined (6.375% as of February 23, 1999) for periods
of one, two, three or six months, at the Company's option. The Term Loan was
fully borrowed at inception and has required principal amortization in the
amounts of $20 million, $23 million, $40 million, and $42 million in fiscal
years 2000, 2001, 2002, and 2003, respectively, with a final maturity of
September 30, 2003. The Working Capital Facility is non-amortizing with any
borrowings outstanding due at final maturity September 30, 2003. At January 2,
1999, the Company had aggregate borrowings of $91.5 million and $2.0 million in
letters of credit outstanding under the Working Capital Facility and had $56.5
million unused and available for borrowing.
 
                                       20
<PAGE>   22
 
     The Agreement contains certain covenants including the maintenance of a
certain interest coverage ratio and maximum debt levels and limitations on
mergers and consolidations, affiliated transactions, incurring liens, disposing
of assets and limitations on investments. An event of default under the
Agreement includes Change of Control (as defined) as well as non-compliance with
certain other provisions.
 
  ACQUISITIONS
 
     In February 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Cherokee for an aggregate purchase price of $65
million. Cherokee was a supplier of yarn-dyed fabrics to men's and women's
shirting manufacturers and of sportswear fabrics to the converting trade, and
was the Company's primary competitor for these fabrics. The Company financed the
purchase price with borrowings under its old revolving credit facility (which
was refinanced in connection with the Bibb acquisition). In connection with the
acquisition, the Company also assumed $0.6 million of Cherokee debt.
 
     In October 1998, the Company purchased all of the outstanding capital stock
of Bibb (through a merger transaction) for an aggregate purchase price of $240
million. Bibb, founded in 1876, was a leading domestic manufacturer of home
fashions products. The purchase price for the Bibb acquisition consisted of $86
million of cash and 4,361,000 shares of the Company's Class A Common Stock. The
Company funded the cash portion of the purchase price with borrowings under the
Working Capital Facility. In connection with the acquisition, the Company also
assumed or repaid an aggregate of $95 million of Bibb debt. The portion of Bibb
debt repaid was funded with borrowings under the Working Capital Facility.
 
  CAPITAL IMPROVEMENTS
 
     The Company made capital expenditures aggregating $39.5 million, $24.2
million and $27.6 million in fiscal 1998, 1997 and 1996, respectively. The
Company anticipates capital expenditures in the range of $40 million to $60
million in fiscal 1999, which will be used primarily for cutting and sewing,
greige fabric manufacturing, information systems and other facility
modernizations.
 
     Rental expense for fiscal 1998, 1997 and 1996 was approximately $7.7
million, $7.4 million and $10.3 million, respectively, net of rental income on
noncancellable leases and subleases of approximately $252,000, $34,000 and
$76,000, respectively. At January 2, 1999, the Company's future minimum lease
payments due under operating leases with noncancellable terms in excess of one
year were as follows: 1999, $7.6 million; 2000, $6.1 million; 2001, $3.7
million: 2002 and later, $19.3 million.
 
RISK MANAGEMENT
 
  INTEREST RATE RISK
 
     The Company has exposure to floating interest rates through its borrowings
under the Credit Agreement. At this time it has chosen not to hedge those
borrowings. Therefore, interest expense will fluctuate with changes in LIBOR and
Reference Rates (prime). As of January 2, 1999 a 10% increase in interest rates
in effect on borrowings under the Credit Agreement would increase interest
expense by $1.4 million on an annual basis.
 
  COMMODITY PRICE RISK
 
     The Company uses many types of fiber, both natural and man-made, in the
manufacture of its textile products. The company believes that future price
levels of all fibers will depend primarily upon supply and demand conditions,
weather conditions, general inflation and domestic and foreign governmental
regulations and agricultural programs. The Company manages its exposure to
changes in commodity prices primarily through its procurement practices.
 
     The Company enters into contracts to purchase cotton under the Southern
Mill Rules ratified and adopted by the American Textile Manufacturers Institute,
Inc. and American Cotton Shippers Association. Under these contracts and rules,
nonperformance by either the buyer or seller may result in a net cash settlement
of the difference between the current market price of cotton and the contract
price. If the Company
 
                                       21
<PAGE>   23
 
had a net cash settlement of its open firm commitment cotton contracts at
January 2, 1999, and market prices of contracted cotton decreased by 10%, the
Company would be required to pay a net settlement provision of approximately
$2.9 million.
 
  IMPACT OF YEAR 2000
 
     Much attention has been given to a serious problem that exists in many
computer programs in use today, a problem that arose from the earliest days of
computing when systems had very limited memory storage capacities. To save space
and data entry time, only the last two digits of a year were used when
performing date calculations and, consequently, these systems may not be able to
properly recognize dates beginning with the year 2000. The failure of a computer
system to accurately recognize the year 2000 could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
 
     Like most owners of computer software, the Company is replacing or
modifying a significant portion of its computer software to handle the Year 2000
problem. This includes business applications and embedded systems such as
manufacturing equipment, voice and data communications and Enterprise Resource
Planning ("ERP") systems. Through fiscal 1998, the Company had spent
approximately $7.0 million, and expects to spend approximately $10 million in
fiscal 1999, in connection with modifying its computer information systems to
ensure the proper processing of transactions relating to Year 2000 and beyond.
Most of these amounts are expenditures to implement certain new or improved
systems which not only achieve Year 2000 compliance, but significantly improve
and expand operational capabilities of certain of the Company's computer systems
and, therefore, are being capitalized. Costs associated strictly with the
Company's Year 2000 remediation program (excluding costs relating to capital
improvements to systems that are not directly related to remediating Year 2000
problems in such systems) are being expensed as incurred. All amounts are being
funded with cash from operations or borrowings under the Company's Credit
Agreement. There can be no assurance that the cost of the Company's Year 2000
program will not materially exceed expectations.
 
     Specifically, the Company has successfully implemented SAP R.3 for
corporate financial and material management systems which are Year 2000
compliant and are operational. It is installing the SAP R.3 Enterprise Resource
Planning (ERP) System for its Home Fashions operations which is expected to be
completed during the second quarter of fiscal 1999. Required modifications of
the Apparel Fabrics ERP system (Datatex) for Year 2000 compliance were completed
in December 1998 with integrated testing planned for the second quarter of
fiscal 1999. Also, Bibb's systems are being converted to the Company's systems.
The corporate systems of Bibb, i.e., financial, material management, etc. are
expected to be converted to SAP R.3 during the second quarter of fiscal 1999,
and the Home Fashions and Engineered Products businesses are expected to be
converted to SAP R.3 ERP by the end of the third quarter of fiscal 1999.
 
     The Company is dependent upon the successful efforts of its customers and
suppliers of goods, services and essential utilities to identify and remediate
their Year 2000 problems and could be affected by the failure of one or more of
these efforts. The Company has communicated with most of its major suppliers and
customers. Efforts include the collection and evaluation of voluntary
representations made or provided by those parties. Although the Company will
continue to take reasonable care to gather information about external parties,
such information is not always provided voluntarily, is not otherwise available,
or may not be reliable. While the Company obtains its goods (including raw
materials) and services from a number of suppliers and sells its products to a
large number of customers, if a sufficient number of these suppliers or
customers experience Year 2000 problems that prevent or substantially impair
their ability to continue to transact business with the Company as they
currently do, the Company would be required to find alternative suppliers and/or
customers for its products. Any delay or inability in finding such alternatives
could have a material adverse effect on the Company's results of operations,
financial condition and cash flow.
 
     Based on analyses of its own systems and discussions with and surveys of
its key vendors and customers, management currently believes that Company
information systems affected by Year 2000 issues have been or will be timely
identified and that its implementation plans will render all material systems
Year 2000 compliant on a timely basis; however, should other entities upon whose
systems the Company relies fail to
 
                                       22
<PAGE>   24
 
properly address Year 2000 compliance issues, or should key resources required
to achieve the initiatives described herein become unavailable or prove to be
unreliable, the Company's effectiveness in achieving Year 2000 compliance could
be delayed, which could have a material adverse effect on the Company's results
of operations, financial condition and cash flow. The Company has begun the
development of contingency plans and recovery procedures to deal with potential
problems ranging from systems failure to failure of a utility or a supplier. The
Company expects to finalize these contingency plans and procedures by July 1999.
To the extent the Company experiences material Year 2000 problems and any such
contingency plan is ineffective in remedying such problems, such Year 2000
problems could have a material adverse effect on the Company's results of
operations, financial condition and cash flow.
 
FORWARD-LOOKING STATEMENTS
 
     This Annual Report contains forward-looking statements within the meaning
of the Securities Act and the Exchange Act. These statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those included in such forward looking statements. The words
"believes," "expects," "intends," "estimates" or "anticipates" and similar
expressions, as well as future or conditional verbs such as "will," "should,"
"would," and "could", are intended to identify forward-looking statements.
Specific forward looking statements contained in this Annual Report include,
among others, statements regarding expected cost savings in connection with the
Bibb acquisition, estimated capital expenditures for fiscal 1999, the
anticipated impact and cost of remediating Year 2000 problems, expected
expenditures for environmental, health and safety law compliance and the
anticipated outcome of pending environmental matters and litigation.
 
     With respect to forward-looking statements contained in this Annual Report,
management has made assumptions regarding, among other things, the timing and
cost of plant consolidations, the amount and timing of related severance
expenses, the timing and level of anticipated operating efficiencies, the level
of customer demand for the Company's products, the amount and timing of expected
capital expenditures, the extent of the Company's and certain third parties'
Year 2000 problems, the costs to remedy such problems and the impact of the
failure to remedy such problems, the estimated cost of compliance with
environmental, health and safety laws and the expected resolution of various
pending environmental matters and litigation. There can be no assurance that the
assumptions made by management are correct.
 
     The forward looking statements in this Annual Report are also subject to
certain risks and uncertainties including, among others, that the Company's
performance in future periods may be adversely impacted by the cyclical nature
of the textile industry, intense competition within the textile industry,
fluctuations in the price and availability of cotton and other raw materials,
the inability of the Company to make capital improvements necessary to maintain
competitiveness, possible adverse changes in governmental regulation regarding
the import of cotton and textile products, difficulties in integrating acquired
businesses and achieving cost savings, changes in environmental regulations,
deterioration of relationships with or the loss of material customers and
adverse changes in general market and industry conditions.
 
     Management believes that the forward looking statements in this Annual
Report are reasonable; however, such statements are based on current
expectations and undue reliance should not be placed on such statements. The
Company undertakes no obligation to update publicly any forward-looking
statements.
 
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
     Not Applicable
 
                                       23
<PAGE>   25
 
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
                          CONSOLIDATED BALANCE SHEETS
 
                      JANUARY 2, 1999 AND JANUARY 3, 1998
 
<TABLE>
<CAPTION>
                                                                       1998              1997
                                                                     ---------         ---------
                                                                     (IN THOUSANDS, EXCEPT SHARE
                                                                         AND PER SHARE DATA)
<S>                                                                  <C>               <C>
                                             ASSETS
Current assets:
     Cash and cash equivalents..............................         $  3,356          $  1,759
     Accounts receivable (less allowance of $10,020 and
       $6,230)..............................................           94,374            70,676
     Inventories............................................          175,045            92,376
     Prepaid expenses and other current assets..............           11,283             5,112
     Deferred income taxes..................................           20,653             7,628
                                                                     --------          --------
          Total current assets..............................          304,711           177,551
Property, plant and equipment:
     Land...................................................            8,063             6,296
     Building and improvements..............................           71,915            59,382
     Machinery and equipment................................          347,842           250,849
     Construction in progress...............................            9,951             5,467
                                                                     --------          --------
                                                                      437,771           321,994
     Less accumulated depreciation and amortization.........          141,131           113,866
                                                                     --------          --------
          Net property, plant and equipment.................          296,640           208,128
Goodwill....................................................          110,727                --
Other assets................................................            8,132             6,616
                                                                     --------          --------
                                                                     $720,210          $392,295
                                                                     ========          ========
                              LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
     Current maturities of long-term debt...................         $  2,329          $    301
     Accounts payable.......................................           33,825            27,933
     Accrued compensation and related benefits..............           27,219            16,661
     Other accrued expenses.................................           19,484             9,052
                                                                     --------          --------
          Total current liabilities.........................           82,857            53,947
Long-term debt..............................................          351,939           143,455
Deferred income taxes.......................................           15,126            20,182
Other liabilities...........................................           11,514             8,881
Shareholders' equity:
     Preferred stock, $.01 par value; authorized 50,000,000
       shares; no shares issued.............................               --                --
     Common stock, Class A, $.01 par value; authorized
       175,000,000 shares; issued and outstanding 21,157,198
       shares (16,778,472 shares at January 3, 1998)........              212               168
     Common stock, Class B, $.01 par value; authorized
       35,000,000 shares; issued and outstanding 2,062,070
       shares...............................................               21                21
     Common stock, Class C, $.01 par value; authorized
       5,000,000 shares; no shares outstanding..............               --                --
     Additional paid-in capital.............................          215,906           139,140
     Retained earnings......................................           42,635            26,501
                                                                     --------          --------
          Total shareholders' equity........................          258,774           165,830
                                                                     --------          --------
                                                                     $720,210          $392,295
                                                                     ========          ========
</TABLE>
 
                            See accompanying notes.
 
                                       24
<PAGE>   26
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
       YEARS ENDED JANUARY 2 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
 
<TABLE>
<CAPTION>
                                                             1998             1997             1996
                                                           --------         --------         --------
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                        <C>              <C>              <C>
Net sales.........................................         $517,443         $476,448         $379,567
Costs and expenses:
     Cost of sales................................          406,619          372,165          307,383
     Selling, general and administrative
       expenses...................................           58,410           54,231           45,673
     Amortization of goodwill.....................              589               --               --
     Other operating costs, net...................            5,347            7,012             (428)
                                                           --------         --------         --------
Operating income..................................           46,478           43,040           26,939
Other income (expense), net.......................              334             (290)             485
Interest expense..................................          (18,713)         (21,135)         (18,168)
                                                           --------         --------         --------
Income before income taxes and extraordinary
  item............................................           28,099           21,615            9,256
Provision for income taxes........................           10,998            8,351            3,570
                                                           --------         --------         --------
Income before extraordinary item..................           17,101           13,264            5,686
Extraordinary item, net of income taxes:
     Loss on early extinguishment of debt.........             (405)            (243)              --
                                                           --------         --------         --------
Net income........................................         $ 16,696         $ 13,021         $  5,686
                                                           ========         ========         ========
Earnings per share -- basic:
     Income before extraordinary item.............         $   0.86         $   0.90         $   0.40
     Extraordinary item...........................            (0.02)           (0.01)              --
                                                           --------         --------         --------
     Net income per share -- basic................         $   0.84         $   0.89         $   0.40
                                                           ========         ========         ========
Earnings per share -- diluted:
     Income before extraordinary item.............         $   0.85         $   0.89         $   0.40
     Extraordinary item...........................            (0.02)           (0.01)              --
                                                           --------         --------         --------
     Net income per share -- diluted..............         $   0.83         $   0.88         $   0.40
                                                           ========         ========         ========
</TABLE>
 
                            See accompanying notes.
 
                                       25
<PAGE>   27
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                            CLASS A   CLASS B   CLASS C   ADDITIONAL               PENSION
                            COMMON    COMMON    COMMON     PAID-IN     RETAINED   LIABILITY
                             STOCK     STOCK     STOCK     CAPITAL     EARNINGS   ADJUSTMENT    TOTAL
                            -------   -------   -------   ----------   --------   ----------   --------
                                                          (IN THOUSANDS)
<S>                         <C>       <C>       <C>       <C>          <C>        <C>          <C>
Balance at December 30,
  1995....................   $127      $  --     $ 14      $ 67,394    $ 8,012     $(1,845)    $ 73,702
     Net income...........     --         --       --            --      5,686          --        5,686
     Pension liability
       adjustment.........     --         --       --            --         --       1,236        1,236
     Change in common
       stock subject to
       put rights.........     --         --       --        (2,726)        --          --       (2,726)
                             ----      -----     ----      --------    -------     -------     --------
Balance at December 28,
  1996....................    127         --       14        64,668     13,698        (609)      77,898
     Net income...........     --         --       --            --     13,021          --       13,021
     Pension liability
       adjustment.........     --         --       --            --         --         609          609
     Initial public
       offering...........     41         21      (14)       64,436         --          --       64,484
     Termination of put
       rights.............     --         --       --         9,726         --          --        9,726
     Tax effect of stock
       options
       exercised..........     --         --       --           310         --          --          310
     Retirement of common
       stock..............     --         --       --            --       (218)         --         (218)
                             ----      -----     ----      --------    -------     -------     --------
Balance at January 3,
  1998....................    168         21       --       139,140     26,501          --      165,830
     Net income...........     --         --       --            --     16,696          --       16,696
     Stock issued for
       acquisition........     44         --       --        75,394         --          --       75,438
     Exercise of stock
       options............     --         --       --           544         --          --          544
     Tax effect of stock
       options
       exercised..........     --         --       --           828         --          --          828
     Retirement of common
       stock..............     --         --       --            --       (562)         --         (562)
                             ----      -----     ----      --------    -------     -------     --------
Balance at January 2,
  1999....................   $212      $  21     $ --      $215,906    $42,635     $    --     $258,774
                             ====      =====     ====      ========    =======     =======     ========
</TABLE>
 
                            See accompanying notes.
 
                                       26
<PAGE>   28
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
       YEARS ENDED JANUARY 2, 1999, JANUARY 3 ,1998 AND DECEMBER 28, 1996
 
<TABLE>
<CAPTION>
                                                         1998              1997             1996
                                                       ---------         --------         --------
                                                                     (IN THOUSANDS)
<S>                                                    <C>               <C>              <C>
Cash flows from operating activities:
     Net income...............................         $  16,696         $ 13,021         $  5,686
          Adjustments to reconcile net income
            to net cash provided by operating
            activities:
               Noncash interest expense.......               772            1,359            1,166
               Depreciation and amortization
                 of property, plant and
                 equipment....................            30,220           27,508           20,795
               Amortization of goodwill.......               589               --               --
               Deferred income taxes..........             3,463              (59)           1,842
               Writedown/disposal of assets...             5,511            7,161           (1,129)
               Extraordinary loss on
                 extinguishment of debt.......               659              397               --
               Changes in operating assets and
                 liabilities, excluding
                 effects of business acquired:
                    Accounts receivable.......            13,704              473             (691)
                    Inventories...............           (27,391)          (8,790)          24,554
                    Prepaid expenses and other
                      assets..................            (1,291)          (2,701)            (396)
                    Accounts payable and
                      accrued expenses........           (32,653)           4,646           (6,555)
                    Other liabilities.........              (374)           1,632             (194)
                                                       ---------         --------         --------
                         Net cash provided by
                           operating
                           activities.........             9,905           44,647           45,078
                                                       ---------         --------         --------
Cash flows from investing activities:
          Capital expenditures................           (39,454)         (24,231)         (27,582)
          Proceeds from sale of assets........             2,803            4,005            2,385
          Acquisition of business.............          (164,605)         (64,583)              --
                                                       ---------         --------         --------
                         Net cash used by
                           investing
                           activities.........          (201,256)         (84,809)         (25,197)
                                                       ---------         --------         --------
Cash flows from financing activities:
          Payments of long-term debt..........           (41,054)         (89,177)         (18,566)
          Net proceeds from issuance of
            long-term debt....................           207,458           62,972           25,187
          Net borrowings (payments) -- working
            capital facility..................            26,000           (1,400)         (23,000)
          Proceeds from exercise of stock
            options...........................               544               --               --
          Net proceeds from issuance of common
            stock.............................                --           64,484               --
                                                       ---------         --------         --------
                         Net cash provided
                           (used) by financing
                           activities.........           192,948           36,879          (16,379)
                                                       ---------         --------         --------
Net increase (decrease) in cash and cash
  equivalents.................................             1,597           (3,283)           3,502
Cash and cash equivalents at beginning of
  year........................................             1,759            5,042            1,540
                                                       ---------         --------         --------
Cash and cash equivalents at end of year......         $   3,356         $  1,759         $  5,042
                                                       =========         ========         ========
</TABLE>
 
                            See accompanying notes.
 
                                       27
<PAGE>   29
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
             JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
 
NOTE 1.  SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
 
BASIS OF PRESENTATION
 
     The consolidated financial statements include the accounts of Dan River
Inc. and its wholly owned subsidiaries (collectively, the "Company"). All
significant intercompany items have been eliminated in consolidation.
 
FISCAL YEAR
 
     The Company's fiscal year ends on the Saturday nearest to December 31. All
references to 1998, 1997 and 1996 mean the 52 weeks ended January 2, 1999, 53
weeks ended January 3, 1998, and 52 weeks ended December 28, 1996, 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.
 
CASH EQUIVALENTS
 
     All highly liquid cash investments purchased with an initial maturity of
three months or less are considered to be cash equivalents.
 
INVENTORIES
 
     Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method. Inventories at January 2, 1999 and January
3, 1998, respectively, by component are as follows:
 
<TABLE>
<CAPTION>
                                                         1998           1997
                                                       --------       --------
                                                           (IN THOUSANDS)
<S>                                                    <C>            <C>
Finished goods.......................................  $ 60,914       $25,401
Work in process......................................    96,534        56,156
Raw materials........................................     4,007         2,429
Supplies.............................................    13,590         8,390
                                                       --------       -------
Total inventories....................................  $175,045       $92,376
                                                       ========       =======
</TABLE>
 
PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment are stated at cost. Depreciation is computed
on a straight-line basis over the estimated useful lives of the related assets,
ranging from 10 to 35 years for buildings and improvements, and 3 to 14 years
for machinery and equipment. Leasehold improvements are amortized on a
straight-line basis over the lease term or estimated useful life, whichever is
less. Machinery and equipment under capital leases with a book value totaling
$14,100,000, net of amortization, is included in property, plant and equipment
at January 2, 1999. There were no assets under capital lease at January 3, 1998
or December 28, 1996.
 
GOODWILL
 
     Goodwill represents the excess of the purchase price over the fair value of
net assets acquired in connection with the acquisition of The Bibb Company on
October 14, 1998 (Note 2). Goodwill is being
 
                                       28
<PAGE>   30
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 1.  SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS -- (CONTINUED)
amortized over forty years on the straight-line method. Accumulated amortization
at January 2, 1999 was $589,000.
 
DEFERRED FINANCING FEES
 
     Debt financing fees are amortized over the term of the related debt.
 
REVENUE RECOGNITION
 
     The Company generally recognizes revenues from product sales when goods are
shipped, at which time sales are final.
 
STOCK-BASED COMPENSATION
 
     The Company continues to follow the accounting method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and has presented the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
 
INCOME TAXES
 
     Deferred income taxes are accounted for under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
 
COTTON FUTURES CONTRACTS
 
     In connection with the purchasing of cotton for anticipated manufacturing
requirements, the Company may enter into cotton futures and option contracts in
order to reduce the risk associated with future price fluctuations. These
contracts are accounted for as hedges and, accordingly, gains or losses are
deferred and reflected in cost of sales as an element of the cost of the
finished product. Transactions related to cotton futures and option contracts
during the three year period ended January 2, 1999 were not material.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
     Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", became effective at the beginning of fiscal year 1998.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income includes net income and other items, such as minimum pension liability
adjustments, which previously were reported directly in shareholders' equity.
There were no differences between net income and comprehensive income for 1998,
1997 or 1996. In addition, accumulated other comprehensive income was $-0- at
January 2, 1999 and January 3, 1998.
 
     In 1998 the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which requires disclosure of financial and
descriptive information about the Company's operating segments. Under SFAS No.
131, the Company's business includes three reportable operating segments: Home
Fashions; Apparel Fabrics; and Engineered Products.
 
     Also in 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This standard revises
financial statement disclosures about pensions and other postretirement benefit
plans, but does not change the measurement or recognition of costs or
obligations under these plans.
 
                                       29
<PAGE>   31
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 1.  SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS -- (CONTINUED)
     In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which requires
capitalization of certain costs to develop or obtain software for internal use.
The Company will adopt SOP 98-1 in fiscal 1999. The adoption will likely result
in capitalization of certain costs which previously would have been expensed,
however this is not expected to have a material impact on the Company's
financial position or results of operations.
 
     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which the
Company will be required to adopt in fiscal 2000. Under the Statement, all
derivatives must be recognized on the balance sheet at fair value. Depending on
the nature of the Company's derivative instruments at the time of adoption, the
Statement could affect earnings. The Company has not yet determined the impact
SFAS No. 133 will have on its results of operations or financial position.
 
NOTE 2.  ACQUISITIONS
 
     On October 14, 1998, the Company acquired all of the capital stock of The
Bibb Company ("Bibb") for $86,497,000 in cash, including transaction costs, and
the issuance of approximately 4,257,000 shares of the Company's Class A common
stock. In connection with the acquisition, the Company also retired $78,612,000
of Bibb indebtedness, and paid $2,025,000 in cash and issued 104,000 shares of
Class A common stock in cancellation of nonqualified Bibb stock options. The
cash portion of the acquisition was funded at closing from borrowings under a
new credit agreement (Note 4). Bibb is a manufacturer and marketer of: consumer
products for the home, principally sheets, bedding and bedding accessories;
textile products for the hospitality and healthcare industries; and specialty
engineered textile products used in making high-pressure hoses and other
industrial products.
 
     The acquisition of Bibb has been accounted for as a purchase, and the
results of operations of the acquired business have been included in the
consolidated financial statements since the date of acquisition. Assets acquired
and liabilities assumed have been recorded at their estimated fair values, and
are subject to adjustment pending completion of final valuations. A summary of
the assets acquired, liabilities assumed and consideration paid follows:
 
<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
                                                              --------------
<S>                                                           <C>
Accounts receivable.........................................     $ 37,423
Inventories.................................................       55,439
Other current assets........................................       17,946
Property, plant and equipment...............................       85,157
Goodwill....................................................      111,316
Other assets................................................       10,820
Accounts payable............................................      (34,763)
Other current liabilities...................................      (26,988)
Noncurrent liabilities......................................      (16,307)
                                                                 --------
Total.......................................................      240,043
Issuance of 4,361 shares of Class A common stock............      (75,438)
                                                                 --------
Cash paid, net of $2,529 in cash acquired...................     $164,605
                                                                 ========
</TABLE>
 
     On February 3, 1997, the Company acquired substantially all the assets of
The New Cherokee Corporation ("Cherokee"), a manufacturer of yarn-dyed shirting
and sportswear fabrics, for $64,583,000 in cash, including transaction costs,
and the assumption of certain operating liabilities. The acquisition was
 
                                       30
<PAGE>   32
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 2.  ACQUISITIONS -- (CONTINUED)
funded at closing with $12,100,000 of cash on hand, and borrowings under a
working capital line of credit and term loan. The acquisition of Cherokee has
been accounted for as a purchase and the results of operations of the acquired
business have been included in the consolidated financial statements since the
date of acquisition.
 
     The purchase price was allocated to the assets acquired and liabilities
assumed based on their fair values at the date of the Cherokee acquisition as
follows:
 
<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
                                                              --------------
<S>                                                           <C>
Accounts receivable.........................................     $15,367
Inventories.................................................      11,857
Property, plant and equipment...............................      46,525
Current liabilities.........................................      (8,588)
Noncurrent liabilities......................................        (578)
                                                                 -------
Cash paid, net of $0 in cash acquired.......................     $64,583
                                                                 =======
</TABLE>
 
     The following summarized, unaudited pro forma results of operations assume
the acquisitions of Bibb and Cherokee had occurred at the beginning of each year
presented:
 
<TABLE>
<CAPTION>
                                                                1998           1997
                                                              --------       --------
                                                                  (IN THOUSANDS,
                                                              EXCEPT PER SHARE DATA)
<S>                                                           <C>            <C>
Net sales...................................................  $696,404       $734,494
Income before extraordinary item............................    11,126          6,169
Net income..................................................    10,721          5,926
Earnings per share:
     Basic..................................................      0.46           0.31
     Diluted................................................      0.46           0.31
</TABLE>
 
     The pro forma information is presented for informational purposes and is
not indicative of results which would have occurred or which may occur in the
future.
 
NOTE 3.  PUBLIC OFFERING AND CAPITALIZATION
 
     On November 20, 1997 the Company completed an initial public offering of
its Class A common stock to the public (the "Offering"), which included the sale
of 4,700,000 shares by the Company and 2,619,200 shares by certain selling
shareholders. The Company used the net proceeds from the Offering, $64,484,000,
to retire indebtedness.
 
     In connection with the Offering, the shareholders of the Company approved a
multi-step recapitalization plan which became effective on November 3, 1997 (the
"Recapitalization"). Prior to the Recapitalization, the Company's outstanding
capital stock included 1,500,000 authorized shares of voting stock, par value
$.01 per share ("Old Voting Stock") (726,454 shares of which were outstanding),
and 1,500,000 authorized shares of nonvoting common stock, par value $.01 per
share ("Old Nonvoting Stock") (82,413 shares of which were outstanding).
 
     The Company first amended and restated its Articles of Incorporation (the
"Restated Articles"). Upon filing of the Restated Articles: (i) Class A Common
Stock, par value $.01 per share, entitled to one vote per share, Class B Common
Stock, par value $.01 per share, entitled to 4.39 votes per share, and Class C
Common Stock, par value $.01 per share, nonvoting, were created; (ii) each
outstanding share of Old Voting Stock was reclassified and exchanged for 17.5
shares of Class A Common Stock of the Company ("Class A Common") and (iii) each
outstanding share of Old Nonvoting Stock was reclassified and exchanged for 17.5
shares of Class C Common Stock of the Company ("Class C Common") (the
"Reclassification"). All share and per
                                       31
<PAGE>   33
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 3.  PUBLIC OFFERING AND CAPITALIZATION -- (CONTINUED)
share amounts in the accompanying financial statements and the related notes
have been adjusted to reflect the impact of the Reclassification on the number
of shares outstanding and the per share amounts. Shares of Class C Common
automatically converted into shares of Class A Common on a share-for-share basis
upon consummation of the Offering.
 
     Upon consummation of the Offering, the Company completed an exchange offer
(the "Exchange Offer") pursuant to which certain members of senior management of
the Company (and certain of their family members) that held Old Voting Stock
prior to the Reclassification exchanged 2,062,070 shares of Class A Common for
shares of supervoting Class B Common Stock ("Class B Common") on a
share-for-share basis.
 
     The Company has the option until September 2001 to purchase the common
shares held prior to the Offering by certain shareholders at a price equal to
the fair market value at the date the option is exercised. The Company's call
option may only be exercised once during any 12-month period. Mr. Joseph L.
Lanier, Jr., Chairman and Chief Executive Officer, has a similar call option on
certain issued and outstanding common shares, which has priority to the
Company's call option. In addition, certain shareholders have the right to
require the Company to register, at its expense, their shares under the
Securities Act of 1933. Prior to the Offering, certain shareholders had the
right to require the Company to repurchase annually a portion of their shares at
the then fair market value, as defined. As a result of certain financial
covenants and other restrictions contained in the put agreement and the
Company's debt agreements, the Company was not required to repurchase any
securities. Upon consummation of the Offering the put agreement terminated.
 
NOTE 4.  LONG-TERM DEBT
 
     Long-term debt at January 2, 1999 and January 3, 1998, consists of the
following:
 
<TABLE>
<CAPTION>
                                                                1998           1997
                                                              --------       --------
                                                                  (IN THOUSANDS)
<S>                                                           <C>            <C>
Senior subordinated notes...................................  $120,000       $120,000
Working capital facility....................................    91,500         18,500
Term loan...................................................   125,000             --
Capital leases..............................................    13,178             --
Other borrowings with various rates and maturities..........     4,590          5,256
                                                              --------       --------
                                                               354,268        143,756
Less current maturities.....................................     2,329            301
                                                              --------       --------
Total long-term debt........................................  $351,939       $143,455
                                                              ========       ========
</TABLE>
 
     The senior subordinated notes (the "Notes") consist of $120,000,000 in
non-amortizing ten-year notes issued pursuant to an indenture dated December 15,
1993, bearing interest at 10 1/8%, payable semi-annually.
 
     The Company entered into a $275,000,000 Credit Agreement (the "Agreement")
on October 14, 1998, which consists of a $125,000,000 term loan facility and a
$150,000,000 working capital facility. Borrowings under the Agreement bear
interest at a Base Rate plus an Applicable Percentage, as defined, or LIBOR plus
an Applicable Percentage, as defined, at the option of the Company. The
obligations of the Company under the Agreement are secured by substantially all
accounts receivable and inventory.
 
     The working capital facility as established October 14, 1998 consists of a
long-term $150 million working capital line of credit. At January 2, 1999,
$91,500,000 was outstanding and $56,498,000 was available. All borrowings under
the working capital facility are non-amortizing and are due September 30, 2003.
The weighted average interest rate of the borrowings under the working capital
facility at January 2, 1999 was 6.53%. The Company pays a commitment fee on the
unused portion of the $150,000,000 working capital line
 
                                       32
<PAGE>   34
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 4.  LONG-TERM DEBT -- (CONTINUED)
of credit. The working capital facility also provides for the issuance of
stand-by letters of credit up to $10,000,000 outstanding, of which $2,002,000
was outstanding at January 2, 1999. This facility replaced a $90,000,000 working
capital facility which was terminated on October 14, 1998.
 
     The weighted average interest rate of the borrowings under the $125,000,000
term loan facility at January 2, 1999 was 6.57%. Scheduled principal payments by
year are: 2000, $20,000,000; 2001, $23,000,000; 2002, $40,000,000; 2003,
$42,000,000. The final payment is due September 30, 2003.
 
     The Agreement and the Notes contain certain restrictive covenants which,
among other things, require the Company to meet earnings ratios, impose
limitation on debt incurrence and restrict certain payments, including dividends
and payments for the repurchase of capital stock. At January 2, 1999,
$36,285,000 of the Company's retained earnings was so restricted.
 
     In 1998 the early retirement of debt obligations with proceeds from the
Agreement resulted in an extraordinary loss of $659,000 less related income
taxes of $254,000. The repayment of debt obligations in 1997 with the proceeds
of the Company's Offering resulted in an extraordinary loss of $396,000, less
related income taxes of $153,000.
 
     The aggregate annual scheduled principal repayments of long-term debt for
1999, 2000, 2001, 2002 and 2003 are $2,329,000; $22,358,000; $25,782,000,
$41,242,000 and $254,674,000 (which includes $91,500,000 under the working
capital facility and $120,000,000 under the Notes), respectively.
 
     Cash payments of interest on debt were $15,199,000, $19,791,000 and
$17,854,000 in 1998, 1997 and 1996, respectively.
 
NOTE 5.  INCOME TAXES
 
     The provision for income taxes is comprised of the following:
 
<TABLE>
<CAPTION>
                                                            1998          1997          1996
                                                          --------      --------      --------
                                                                     (IN THOUSANDS)
<S>                                                       <C>           <C>           <C>
Current:
     Federal............................................  $ 5,770        $7,395        $1,645
     State..............................................    1,765         1,011            83
                                                          -------        ------        ------
                                                            7,535         8,406         1,728
                                                          -------        ------        ------
Deferred:
     Federal............................................    3,568          (267)        1,278
     State..............................................     (105)          212           564
                                                          -------        ------        ------
                                                            3,463           (55)        1,842
                                                          -------        ------        ------
Provision for income taxes..............................  $10,998        $8,351        $3,570
                                                          =======        ======        ======
</TABLE>
 
                                       33
<PAGE>   35
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 5.  INCOME TAXES -- (CONTINUED)
     A reconciliation of the differences between the provision for income taxes
and income taxes computed using the statutory federal income tax rate of 35%
follows:
 
<TABLE>
<CAPTION>
                                                            1998          1997          1996
                                                          --------      --------      --------
                                                                     (IN THOUSANDS)
<S>                                                       <C>           <C>           <C>
Amount computed using the statutory rate................  $ 9,835        $7,565        $3,240
Increase (decrease) in taxes resulting from:
     State taxes........................................    1,079           795           421
     Amortization of goodwill...........................      206            --            --
     Other, net.........................................     (122)           (9)          (91)
                                                          -------        ------        ------
Provision for income taxes..............................  $10,998        $8,351        $3,570
                                                          =======        ======        ======
</TABLE>
 
     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets at January 2, 1999 and January
3, 1998 are as follows:
 
<TABLE>
<CAPTION>
                                                                1998          1997
                                                              --------      --------
                                                                  (IN THOUSANDS)
<S>                                                           <C>           <C>
Deferred tax assets:
     Net operating loss and credit carryforwards............  $16,679       $ 11,075
     Accrued compensation and benefits......................    8,950          4,197
     Inventory valuation and reserves.......................    5,353          2,367
     Accounts receivable allowances.........................    3,285          2,118
     Other nondeductible reserves and accruals..............    5,827          2,517
     Other..................................................      883            266
                                                              -------       --------
          Total deferred tax assets.........................   40,977         22,540
     Valuation allowance for deferred tax assets............       --         (2,395)
                                                              -------       --------
          Net deferred tax assets...........................   40,977         20,145
                                                              -------       --------
Deferred tax liabilities:
     Book carrying value in excess of tax basis of property,
       plant and equipment..................................   30,745         29,728
     Other..................................................    4,705          2,971
                                                              -------       --------
          Total deferred tax liabilities....................   35,450         32,699
                                                              -------       --------
          Net deferred tax asset (liability)................  $ 5,527       $(12,554)
                                                              =======       ========
</TABLE>
 
     At January 2, 1999 the Company had available federal net operating loss
carryforwards of $24,400,000 which may be used to offset future taxable income.
These carryforwards expire beginning in fiscal 2010. In addition, the Company
had available a minimum tax credit carryforward of $8,100,000 which may be used
to reduce future federal regular income taxes over an indefinite period.
 
     The net operating loss carryforwards were generated by The Bibb Company
prior to its acquisition by the Company in 1998 (Note 2), and the related tax
benefit has been credited to goodwill. Because the acquisition constituted a
"change in ownership" under Section 382 of the Internal Revenue Code, the annual
utilization of these carryforwards is subject to certain restrictions. However,
such restrictions are not expected to cause any of the carryforwards to expire.
 
     The federal income tax returns of the Company for fiscal 1994 and prior
years are closed to assessment by the Internal Revenue Service. However, the net
operating loss and credit carryforwards that existed at the end
 
                                       34
<PAGE>   36
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 5.  INCOME TAXES -- (CONTINUED)
of 1994 remain open to adjustment. The Company believes that it has adequately
provided for income taxes, and that any potential adjustments or assessments
that might be made by the Internal Revenue Service or other taxing authorities
would not have a material impact on the Company's financial position or results
of operations.
 
     The Company made income tax payments of $6,200,000, $4,815,000, and
$1,180,000 during 1998, 1997 and 1996, respectively.
 
NOTE 6.  BENEFIT PLANS
 
RETIREMENT PLANS
 
     The Company sponsors qualified noncontributory defined benefit pension
plans that cover the majority of its full-time employees. The following tables
set forth the changes in benefit obligations and plan assets of the plans for
1998 and 1997, and the funded status of the plans as of January 2, 1999 and
January 3, 1998.
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Change in benefit obligations:
     Benefit obligations at beginning of year...............  $22,109    $18,591
     Service cost...........................................    1,787      1,501
     Interest cost..........................................    1,829      1,541
     Actuarial loss.........................................      211      1,070
     Acquisition of Bibb....................................   10,791         --
     Benefits paid..........................................   (2,086)      (594)
                                                              -------    -------
     Benefit obligations at end of year.....................   34,641     22,109
                                                              -------    -------
Change in plan assets:
     Fair value of plan assets at beginning of year.........   21,941     16,219
     Actual return on plan assets...........................    4,404      2,779
     Company contributions..................................       65      3,537
     Acquisition of Bibb....................................    8,851         --
     Benefits paid..........................................   (2,086)      (594)
                                                              -------    -------
     Plan assets at end of year.............................   33,175     21,941
                                                              -------    -------
Funded status:..............................................   (1,466)      (168)
Unrecognized actuarial loss (gain)..........................     (226)     1,752
Unrecognized prior service cost.............................       (4)        (2)
                                                              -------    -------
Net amount recognized at end of year........................  $(1,696)   $ 1,582
                                                              =======    =======
Amounts recognized in the consolidated statement of
  financial position consist of:
     Prepaid pension cost...................................  $ 1,504    $ 2,084
     Accrued pension cost...................................   (3,200)      (502)
                                                              -------    -------
     Net amount recognized at end of year...................  $(1,696)   $ 1,582
                                                              =======    =======
</TABLE>
 
     The projected benefit obligations, accumulated benefit obligations, and
fair value of plan assets for the pension plans with projected or accumulated
benefit obligations in excess of plan assets were $22,592,000, $21,013,000, and
$20,220,000, respectively, as of January 2, 1999, and $11,390,000, $9,966,000,
and $10,340,000, respectively, as of January 3, 1998.
 
                                       35
<PAGE>   37
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 6.  BENEFIT PLANS -- (CONTINUED)
     Weighted average assumptions used in measuring benefit obligations as of
year-end are as follows:
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------   --------
<S>                                                           <C>        <C>
     Discount rate..........................................    7.0%       7.4%
     Expected return on plan assets.........................    9.5%       9.5%
     Rate of compensation increase..........................    4.0%       4.4%
</TABLE>
 
     Net periodic benefit cost included the following components:
 
<TABLE>
<CAPTION>
                                                    1998       1997       1996
                                                  --------   --------   --------
                                                          (IN THOUSANDS)
<S>                                               <C>        <C>        <C>
Service cost....................................  $ 1,787    $ 1,501    $  1,727
Interest cost...................................    1,829      1,541       1,401
Expected return on assets.......................   (2,214)    (1,582)     (1,282)
Actuarial loss..................................       --         18         270
                                                  -------    -------    --------
Net periodic benefit cost.......................  $ 1,402    $ 1,478    $  2,116
                                                  =======    =======    ========
</TABLE>
 
     The Company also sponsors 401(k) plans for most salary paid employees and
certain hourly paid employees not covered under defined benefit plans. Beginning
in 1998, certain participants were eligible for company matching contributions,
which amounted to $292,000 for the year.
 
SUPPLEMENTAL RETIREMENT PLAN
 
     The Company sponsors an unfunded supplemental retirement plan for certain
former employees that provides for payments upon retirement, death or disability
over the longer of the employee's life or ten years. The projected benefit
obligations of $3,052,000 and $3,076,000 at January 2, 1999 and January 3, 1998,
respectively, are accrued in the accompanying consolidated balance sheets. The
Company is a beneficiary of life insurance policies on certain participants in
this plan.
 
STOCK OPTION PLANS
 
     The Company adopted stock incentive plans in 1997 (the "1997 Plans") for
key employees and non-employee directors that allow for the grant of stock
options, restricted stock, stock appreciation rights and stock. There are
1,925,000 shares of Class A common stock reserved for issuance under the 1997
Plans, and as of January 2, 1999, nonqualified options to purchase 1,098,000
shares had been granted and were outstanding. Employee options generally vest in
one-third increments annually beginning on December 31, 1999 for 1997 grants,
and in one-fourth increments annually beginning on December 31, 1999 for 1998
grants. Non-employee director options generally vest ratably over a 3-year
period from the date of grant. All outstanding options under the 1997 Plans have
an exercise price equal to the fair market value of the stock on the grant date
and expire at the end of 10 years.
 
     The Company also maintains a nonqualified stock option plan pursuant to
which options to purchase Class A common stock were granted prior to 1997.
Effective with establishment of the 1997 Plans, options are no longer granted
under this plan. All options to purchase unissued shares granted under this plan
have an exercise price of $6.85 per share, generally vest on December 31, 1999,
and expire on December 31, 2000. Prior to December 30, 1994, the plan also
provided for the granting of options to purchase shares of the Company's Class A
common stock from a certain principal shareholder at an exercise price of $0.57
per share. All of these options were exercisable at January 2, 1999 and expire
on December 31, 1999.
 
                                       36
<PAGE>   38
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 6.  BENEFIT PLANS -- (CONTINUED)
     In connection with the acquisition of Bibb (Note 2), outstanding incentive
stock options ("ISO's") held by Bibb employees were converted into fully vested
and exercisable options to purchase Class A common stock of the Company. The
ISO's expire in 2007.
 
     The Company has applied APB 25 in accounting for stock options and,
accordingly, no compensation expense has been recorded in 1998, 1997 or 1996. If
the Company had determined compensation expense based on fair value at the grant
date for its stock options under SFAS 123, net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                   1998           1997           1996
                                                 --------       --------       --------
                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                              <C>            <C>            <C>
Net income:
     As reported..........................       $16,696        $13,021         $5,686
     Pro forma............................        16,033         12,949          5,683
Per share:
     As reported --
          Basic...........................          0.84           0.89           0.40
          Diluted.........................          0.83           0.88           0.40
     Pro forma --
          Basic...........................          0.81           0.88           0.40
          Diluted.........................          0.80           0.87           0.40
</TABLE>
 
     The pro forma results reflect amortization of the fair value of stock
options over the vesting period, and only take into consideration options
granted after 1994. The weighted average fair value of options granted in 1998,
1997 and 1996, was estimated to be $3.82, $6.63 and $1.60, respectively. The
fair value of each option grant was estimated on the date of grant using a
Black-Scholes option pricing model, assuming no expected dividends. As permitted
under SFAS No.123, the volatility factor is excluded from the valuation of
options granted in 1996, when the Company's stock was not publicly traded.
 
     The following weighted average assumptions were used in the valuation of
options:
 
<TABLE>
<CAPTION>
                                                         1998       1997       1996
                                                         -----      -----      ----
<S>                                                      <C>        <C>        <C>
Expected option life in years......................       6.0        6.0       5.0
Risk-free interest rate............................       4.73%      5.89%     5.30%
Expected stock price volatility....................      37.00%     34.00%     --
</TABLE>
 
                                       37
<PAGE>   39
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 6.  BENEFIT PLANS -- (CONTINUED)
     The following is a summary of stock option activity:
 
<TABLE>
<CAPTION>
                                                                           OPTIONS EXERCISABLE
                                             OPTIONS EXERCISABLE            AGAINST PRINCIPAL
                                           AGAINST UNISSUED SHARES             SHAREHOLDER
                                           ------------------------      ------------------------
                                                          WEIGHTED-                     WEIGHTED-
                                                           AVERAGE                       AVERAGE
                                            NUMBER        EXERCISE        NUMBER        EXERCISE
                                           OF SHARES        PRICE        OF SHARES        PRICE
                                           ---------      ---------      ---------      ---------
<S>                                        <C>            <C>            <C>            <C>
Outstanding at December 30, 1995.........    595,000       $ 6.85         513,800         $0.57
Granted..................................     13,125         6.85
Exercised................................                                 (51,800)         0.57
Forfeited................................    (13,300)        6.85          (5,250)         0.57
                                           ---------       ------        --------         -----
Outstanding at December 28, 1996.........    594,825         6.85         456,750          0.57
Granted..................................    599,000        15.00
Exercised................................                                 (57,250)         0.57
Forfeited................................    (11,375)        6.85
                                           ---------       ------        --------         -----
Outstanding at January 3, 1998...........  1,182,450        10.98         399,500          0.57
Conversion of Bibb ISO's.................    347,586         5.46
Granted..................................    502,500         8.66
Exercised................................    (63,799)        6.08        (178,450)         0.57
Forfeited................................     (3,500)       15.00
                                           ---------       ------        --------         -----
Outstanding at January 2, 1999...........  1,965,237       $ 9.56         221,050         $0.57
                                           =========       ======        ========         =====
</TABLE>
 
     A summary of stock options outstanding against unissued shares at January
2, 1999 follows:
 
<TABLE>
<CAPTION>
                                              OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                                     -------------------------------------   ----------------------
                                                     WEIGHTED     WEIGHTED                 WEIGHTED
                                                     AVERAGE      AVERAGE                  AVERAGE
             RANGE OF                  NUMBER       REMAINING     EXERCISE     NUMBER      EXERCISE
          EXERCISE PRICES            OUTSTANDING   LIFE (YEARS)    PRICE     EXERCISABLE    PRICE
          ---------------            -----------   ------------   --------   -----------   --------
<S>                                  <C>           <C>            <C>        <C>           <C>
$5.46 - $6.85......................    867,237         4.7         $ 6.35      750,652      $ 6.27
$8.31 - $9.81......................    489,500         9.9         $ 8.39           --          --
$15.00 - $20.13....................    608,500         8.9         $15.07        8,334      $15.25
</TABLE>
 
     At January 3, 1998, 3,333 options outstanding against unissued shares were
exercisable at a price of $15.00. No options were exercisable against unissued
shares at December 28, 1996. All options against shares held by the principal
shareholder have been exercisable since June 30, 1995.
 
NOTE 7.  OTHER OPERATING COSTS, NET
 
     In 1998 the Company recorded a charge of $5,747,000 as a result of its
decision to close its Apparel Fabrics weaving facility in Spindale, North
Carolina. This was partially offset by a $400,000 gain realized from the early
termination of a lease. The charge for the Spindale facility closure included a
$5,446,000 non-cash write-down of assets, and $301,000 for severance and other
benefits associated with the termination of approximately 130 employees. The
Company began phasing out production at the Spindale facility in the fourth
quarter of 1998. By the end of January, 1999 all production had ceased and the
termination of affected employees was complete. Most of the related severance
and benefit costs will be paid out within one year.
 
     During 1997 the Company recorded a charge of $7,594,000 relating to the
closure of its Riverside Apparel Fabrics weaving facilities in Danville,
Virginia. Also in 1997, the Company sold its yarn mill in Wetumpka, Alabama,
resulting in a gain of $583,000. The charge for the Riverside facilities closure
included a $4,194,000 non-cash write-down of assets, and $294,000 for severance
and other benefits associated with the
 
                                       38
<PAGE>   40
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 7.  OTHER OPERATING COSTS, NET -- (CONTINUED)
termination of approximately 200 employees. The remainder of the charge
($3,106,000) relates principally to estimated expenditures required for
demolition of the buildings and environmental expense (principally asbestos
removal). By the end of fiscal 1997, operations at the facilities had ceased,
the termination of affected employees was complete, and most salvageable
equipment had either been sold or was in the process of being moved to other
facilities. During 1998, the Company entered into a contract with a third party
for asbestos removal and demolition of the first of the two mill buildings.
Shortly after work on the project commenced, the Company agreed to suspend work
on the demolition at the request of state and local historical organizations who
are exploring alternative uses for the property and have the support of various
government agencies and officials. Proposed alternatives include donation of the
property to a nonprofit organization or trust for future renovation and
development. As of January 2, 1999: $470,000 had been spent, and $2,636,000
remained in reserve for asbestos removal and demolition; and $192,000 had been
spent, and $102,000 remained in reserve for severance and benefits. There is
considerable uncertainty as to whether the buildings will be donated or whether
they will be demolished. Regardless of whether the property is donated, the
Company is committed to pay an additional $600,000 on the third party demolition
contract. If the Company donates the property, it will reverse any remaining
reserves relating to Riverside, which would result in a pre-tax gain of
approximately $2,100,000. In addition, donation of the property could result in
federal and state income tax benefits.
 
     In 1996, the Company recorded a $1,262,000 gain due to a better than
anticipated recovery on idle equipment and other assets that had been written
down in 1995 in connection with the Company's decision to discontinue one of its
apparel fabrics product lines. In addition, the Company reversed $84,000 of a
cash charge recorded in 1995 relating to the relocation of its marketing
headquarters, primarily due to the early buyout of the existing lease. These
gains were offset in part by a $918,000 cash charge relating to the satisfaction
of lease obligations on idled equipment. $449,000 of the lease obligation was
satisfied in 1996, and the remainder was satisfied in the first quarter of 1997.
 
     At January 2, 1999 $570,000 remained in a reserve established in 1995 for
removal of asbestos and equipment from an idle building which is located in the
same historic district as the Riverside facilities discussed above. Work on this
project was suspended for a period of time while the Virginia Department of
Transportation considered various sites for relocating a bridge, one of which
would have resulted in the condemnation of the property. The asbestos and
equipment removal is currently on hold pending other decisions concerning the
historic district.
 
     Following is a summary of activity in the reserve accounts relating to
charges included in Other Operating Costs, Net.
 
<TABLE>
<CAPTION>
                                                        ENVIRONMENTAL
                                             LEASE      AND DEMOLITION    SEVERANCE
                                          COMMITMENTS       COSTS        AND BENEFITS   OTHER    TOTAL
                                          -----------   --------------   ------------   -----   -------
                                                                 (IN THOUSANDS)
<S>                                       <C>           <C>              <C>            <C>     <C>
Balance at December 30, 1995............    $ 1,381         $   --          $  --       $570    $ 1,951
Expense accrued.........................        918                                                 918
Expenditures............................     (1,671)                                             (1,671)
Change in estimate......................        (84)                                                (84)
                                            -------         ------          -----       ----    -------
Balance at December 28, 1996............        544             --             --        570      1,114
Expense accrued.........................                     3,106            294                 3,400
Expenditures............................       (469)           (38)           (74)                 (581)
                                            -------         ------          -----       ----    -------
Balance at January 3, 1998..............         75          3,068            220        570      3,933
Expense accrued.........................                                      301                   301
Expenditures............................        (75)          (432)          (118)                 (625)
                                            -------         ------          -----       ----    -------
Balance at January 2, 1999..............    $    --         $2,636          $ 403       $570    $ 3,609
                                            =======         ======          =====       ====    =======
</TABLE>
 
                                       39
<PAGE>   41
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 8.  EARNINGS PER SHARE
 
     The following table sets forth the computation of basic and diluted
earnings per share:
 
<TABLE>
<CAPTION>
                                                  1998          1997          1996
                                               -----------   -----------   -----------
                                                (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                            <C>           <C>           <C>
Numerator for basic and diluted earnings per
  share -- income before extraordinary
  item.......................................  $    17,101   $    13,264   $     5,686
                                               ===========   ===========   ===========
Denominator:
     Denominator for basic earnings per
       share -- weighted-average shares......   19,802,684    14,710,843    14,155,165
     Effect of dilutive securities:
     Employee stock options..................      232,632       127,943        24,889
                                               -----------   -----------   -----------
     Denominator for diluted earnings per
       share -- weighted average shares
       adjusted for dilutive securities......   20,035,316    14,838,786    14,180,054
                                               ===========   ===========   ===========
Basic earnings per share.....................  $      0.86   $      0.90   $      0.40
                                               ===========   ===========   ===========
Diluted earnings per share...................  $      0.85   $      0.89   $      0.40
                                               ===========   ===========   ===========
</TABLE>
 
NOTE 9.  COMMITMENTS AND CONTINGENCIES
 
     The Company leases certain manufacturing equipment, warehouses and office
facilities under operating leases that expire at various dates through 2011.
Rental expense for 1998, 1997 and 1996 amounted to approximately $7,730,000,
$7,422,000 and $10,296,000, respectively, net of rental income on noncancelable
leases and subleases of approximately $252,000, $34,000 and $76,000,
respectively.
 
     The future minimum lease payments due under leases that have initial or
remaining noncancelable lease terms in excess of one year at January 2, 1999,
are as follows:
 
<TABLE>
<CAPTION>
                                                              CAPITAL   OPERATING
                                                              LEASES     LEASES
                                                              -------   ---------
                                                                (IN THOUSANDS)
<S>                                                           <C>       <C>
1999........................................................  $ 3,164    $ 7,572
2000........................................................    2,996      6,130
2001........................................................    3,192      3,732
2002........................................................    1,467      3,334
2003........................................................    1,306      2,773
Later.......................................................    4,878     13,233
                                                              -------    -------
Total minimum lease payments................................   17,003    $36,774
                                                                         =======
Less: amount representing interest..........................    3,825
                                                              -------
Present value of minimum lease payments.....................  $13,178
                                                              =======
</TABLE>
 
     Future minimum lease payments under operating leases have not been reduced
for sublease income of approximately $1,976,000.
 
     Commitments for additions to plant and equipment amounted to approximately
$8,800,000 at January 2, 1999. Certain manufacturing and warehouse leases
contain renewal options at their fair rental values.
 
     The Company is subject to various legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. It is impossible at this time for the Company to predict
 
                                       40
<PAGE>   42
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 9.  COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
with any certainty the outcome of such litigation. However, management is of the
opinion, based upon information presently available, that it is unlikely that
any such liability, to the extent not provided for through insurance or
otherwise, would be material in relation to the Company's consolidated financial
position or results of operations.
 
NOTE 10.  FINANCIAL INSTRUMENTS
 
OFF BALANCE SHEET RISK
 
     In connection with the purchase of cotton for anticipated manufacturing
requirements, the Company enters into cotton forward purchase commitments,
futures and option contracts in order to reduce the risk associated with future
price fluctuations. The Company does not engage in speculation. There were no
material cotton futures or options contracts outstanding at January 2, 1999 or
January 3, 1998. See Note 2 for information on the Company's accounting policy
with respect to cotton futures and option contracts.
 
CONCENTRATIONS OF CREDIT RISK
 
     Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of temporary cash investments
and trade accounts receivable. The Company places its temporary cash investments
with high credit quality financial institutions. Concentration of credit risk
with respect to trade accounts receivable is managed by an in-house professional
credit staff. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral.
 
FAIR VALUES
 
     The carrying values of cash and cash equivalents, accounts receivable and
accounts payable approximate fair values due to the short-term nature of these
instruments. The fair value of the Company's senior subordinated notes, based on
quoted market prices, was $123,000,000 and $127,800,000 at January 2, 1999 and
January 3, 1998, respectively, compared to a carrying value of $120,000,000.
Based on rates available for similar types of borrowings, the carrying values of
the Company's other debt approximated fair value at January 2, 1999 and January
3, 1998.
 
NOTE 11.  SEGMENT INFORMATION
 
     The Company operates in three major segments within the textile industry;
Home Fashions, Apparel Fabrics, and Engineered Products. Each segment has a
separate management team, and although certain aspects of the manufacturing
process are similar, each segment can be differentiated by the products it sells
and the nature of its customers. Home Fashions Products consist mostly of
packaged bedroom furnishings, which are sold to domestic retailers, and bedding
products for the hospitality and healthcare industries. Apparel Fabrics products
include a broad range of woven cotton and cotton-blend fabrics, and are
distributed primarily to clothing manufacturers. The Company began operating the
Engineered Products business upon completing the acquisition of Bibb on October
14, 1998. The Engineered Products segment produces specially-treated engineered
yarns and fabrics for industrial uses, including high-pressure hoses and
conveyer belts, which are sold primarily to automobile and tire manufacturers.
 
     The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates the performance of each segment based on operating
income excluding: amortization of goodwill; plant closure charges and other
one-time items reflected on the Consolidated Statements of Income as "Other
Operating Costs, Net"; depreciation on the write-up of the Company's fixed
assets from when it was acquired in 1989; and other certain other items, such as
idle facility costs. Assets attributable to the Company's operating segments
consist primarily of: accounts receivable; inventories; and property plant and
equipment, including an allocable share of shared facilities and corporate
headquarters assets. Assets not attributable to
 
                                       41
<PAGE>   43
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 11.  SEGMENT INFORMATION -- (CONTINUED)
segments include: cash; miscellaneous receivables; certain inventories of raw
materials; prepaid expenses and other current assets; deferred income taxes;
book value attributable to the write-up of the Company's fixed assets from when
it was acquired in 1989; goodwill; and other noncurrent assets.
 
     Summarized information by reportable segment is shown in the following
table:
 
<TABLE>
<CAPTION>
                                                                1998       1997       1996
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Net sales
  Home Fashions.............................................  $321,807    255,766   $243,142
  Apparel Fabrics...........................................   186,491    220,682    136,425
  Engineered Products.......................................     9,145         --         --
                                                              --------   --------   --------
  Consolidated net sales....................................  $517,443   $476,448   $379,567
                                                              ========   ========   ========
Operating income
  Home Fashions.............................................  $ 33,848   $ 32,468   $ 28,970
  Apparel Fabrics...........................................    23,656     23,446      3,688
  Engineered Products.......................................       169         --         --
  Corporate items not allocated to segments:
     Amortization of goodwill...............................      (589)        --         --
     Other operating costs, net.............................    (5,347)    (7,012)       428
     Depreciation...........................................    (4,822)    (5,566)    (6,147)
     Other..................................................      (437)      (296)
                                                              --------   --------   --------
  Consolidated operating income.............................  $ 46,478   $ 43,040   $ 26,939
                                                              ========   ========   ========
Depreciation and amortization of property, plant and
  equipment
  Home Fashions.............................................  $ 12,150   $  9,634   $  7,752
  Apparel Fabrics...........................................    13,137     12,308      6,896
  Engineered Products.......................................       111         --         --
  Corporate depreciation not allocated to segments..........     4,822      5,566      6,147
                                                              --------   --------   --------
  Consolidated depreciation and amortization of property,
     plant and equipment....................................  $ 30,220   $ 27,508   $ 20,795
                                                              ========   ========   ========
Capital expenditures
  Home Fashions.............................................  $ 26,444   $ 16,181   $ 22,337
  Apparel Fabrics...........................................    12,910      8,050     11,196
  Engineered Products.......................................       100         --         --
  Less: plant and equipment acquired in exchange for debt...        --         --     (5,951)
                                                              --------   --------   --------
  Consolidated capital expenditures in cash.................  $ 39,454   $ 24,231   $ 27,582
                                                              ========   ========   ========
Assets at end of year
  Home Fashions.............................................  $385,040   $186,233   $165,129
  Apparel Fabrics...........................................   149,813    160,939    104,952
  Engineered Products.......................................    12,849         --         --
  Corporate assets not allocated to segments:...............   172,508     45,123     50,969
                                                              --------   --------   --------
  Consolidated assets.......................................  $720,210   $392,295   $321,050
                                                              ========   ========   ========
</TABLE>
 
     One customer accounted for approximately 15% of consolidated net sales in
1998. No single customer accounted for 10% or more of consolidated net sales in
1997 or 1996. Sales to customers outside of the United States amounted to less
than 4% of consolidated net sales in 1998, 1997 and 1996. Assets located outside
of the United States are insignificant.
 
                                       42
<PAGE>   44
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 12.  QUARTERLY FINANCIAL DATA (UNAUDITED)
 
     The Company's unaudited consolidated results of operations are presented
below (in thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED JANUARY 2, 1999:
                                             -----------------------------------------
                                              FIRST      SECOND     THIRD      FOURTH
                                             QUARTER    QUARTER    QUARTER    QUARTER
                                             --------   --------   --------   --------
<S>                                          <C>        <C>        <C>        <C>
Net sales..................................  $120,943   $118,596   $118,589   $159,315
Gross Profit...............................    26,046     27,137     27,821     29,820
Income (loss) before extraordinary item....     5,402      6,478      5,826       (605)
Net income (loss)..........................     5,402      6,478      5,826     (1,010)
Per share:
     Income (loss) before extraordinary
       item --
          Basic............................      0.29       0.34       0.31      (0.03)
          Diluted..........................      0.28       0.34       0.31      (0.03)
     Net income (loss) --
          Basic............................      0.29       0.34       0.31      (0.04)
          Diluted..........................      0.28       0.34       0.31      (0.04)
                                                    YEAR ENDED JANUARY 3, 1998:
                                             -----------------------------------------
                                              FIRST      SECOND     THIRD      FOURTH
                                             QUARTER    QUARTER    QUARTER    QUARTER
                                             --------   --------   --------   --------
Net sales..................................  $105,736   $122,199   $116,254   $132,259
Gross Profit...............................    20,149     27,066     28,235     28,833
Income before extraordinary item...........     1,993        321      5,009      5,941
Net income.................................     1,993        321      5,009      5,698
Per share:
     Income before extraordinary item --
          Basic............................      0.14       0.02       0.35       0.37
          Diluted..........................      0.14       0.02       0.35       0.36
     Net income --
          Basic............................      0.14       0.02       0.35       0.35
          Diluted..........................      0.14       0.02       0.35       0.35
</TABLE>
 
     The fourth quarter of the year ended January 3, 1998 represents a 14-week
period. All other quarters presented consist of 13 weeks.
 
     The interim earnings (loss) per share amounts were computed as if each
quarter was a discrete period. As a result, the sum of the earnings (loss) per
share by quarter will not necessarily total the annual earnings per share.
 
     Results for the second quarter of 1998 include a pre-tax gain of $400,000
($246,000 after tax, or $0.01 per share) from the early termination of a lease.
Results for the fourth quarter of 1998 include: a pre-tax charge of $5,747,000
($3,532,000 after tax benefits, or $0.16 per share) relating to the Company's
decision to close its Apparel Fabrics weaving facility in Spindale, North
Carolina; and an extraordinary loss of $405,000 after tax ($0.02 per share) from
the early retirement of debt.
 
     Results for the second quarter of 1997 include a pre-tax charge of
$7,875,0000 ($4,839,000 net of tax benefits, or $0.34 per share) relating to the
closure of the Company's Riverside Apparel Fabrics weaving facilities. The
fourth quarter results include a pre-tax gain of $583,000 from the sale of a
yarn operation, and a reversal of $281,000 of the pre-tax charge recorded in the
second quarter. Together these items increased net income for the fourth quarter
by $531,000, or $0.03 per share. Also in the fourth quarter of 1997, an
extraordinary loss associated with the early retirement of debt was recorded,
which decreased net income by $243,000, or $0.01 per share. See Notes 4 and 7.
 
                                       43
<PAGE>   45
 
                         REPORT OF INDEPENDENT AUDITORS
 
THE BOARD OF DIRECTORS AND SHAREHOLDERS
DAN RIVER INC.
 
     We have audited the accompanying consolidated balance sheets of Dan River
Inc. as of January 2, 1999 and January 3, 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
fiscal years in the period ended January 2, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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
Dan River Inc. at January 2, 1999 and January 3, 1998, and the consolidated
results of its operations and its cash flows for each of the three fiscal years
in the period ended January 2, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
 
                                          /s/ Ernst & Young LLP
Greensboro, North Carolina
February 10, 1999
 
                                       44
<PAGE>   46
 
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
       DISCLOSURES.
 
     None.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Information regarding the directors under the caption, "Election of
Directors-Information About Nominees and Directors," is incorporated herein by
reference from the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 23, 1999.
 
     For information regarding the executive officers and certain significant
employees of the Registrant, see Part I, "Executive Officers of the Registrant."
 
ITEM 11. EXECUTIVE COMPENSATION
 
     Incorporated herein by reference from sections of the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 23, 1999
under the captions entitled, "Election of Directors -- Director Compensation"
and "Executive Compensation."
 
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
     Incorporated herein by reference from the section of the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 23, 1999
entitled "Security Ownership of Certain Beneficial Owners and Management."
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
     Incorporated herein by reference from the section in the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 23, 1999
entitled "Executive Compensation," "Security Ownership of Certain Beneficial
Owners and Management" and "Certain Relationships and Related Transactions."
 
                                       45
<PAGE>   47
 
                                    PART IV
 
ITEM 14.EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
 
(a) 1. Financial Statements
 
     The following Financial Statements are filed under Item 8 of this Report:
 
        Consolidated Balance Sheets as of January 2, 1999 and January 3, 1998.
 
        Consolidated Statements of Income for the fiscal years ended January 2,
        1999, January 3, 1998 and December 28, 1996.
 
        Consolidated Statements of Shareholders' Equity for the fiscal years
        ended January 2, 1999, January 3, 1998 and December 28, 1996.
 
        Consolidated Statements of Cash Flows for the fiscal years ended January
        2, 1999, January 3, 1998 and December 28, 1996.
 
        Notes to Consolidated Financial Statements for the fiscal years ended
        January 2, 1999, January 3, 1998 and December 28, 1996.
 
        Report of Independent Auditors.
 
    2. The following Financial Statement Schedules are filed as part of this
Report:
 
        Schedule II -- Valuation and Qualifying Accounts
 
        Other schedules are omitted because, under applicable rules, the omitted
        Schedules are not required, are inapplicable, or the information
        required is included in the Financial Statements or in the Notes
        thereto.
 
    3. Exhibits.
 
        The Exhibits listed as applicable on the accompanying Exhibit Index are
        filed as part of this Annual Report.
 
(b) Reports on Form 8-K.
 
          (1) On October 27, 1998 Registrant filed a Current Report on Form 8-K,
              dated October 14, 1998, reporting on the merger of a wholly-owned
              subsidiary of Registrant with and into The Bibb Company, as a
              result of which The Bibb Company became a wholly-owned subsidiary
              of the Registrant.
 
                                       46
<PAGE>   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.
 
                                            DAN RIVER INC.
 
                                            By: /s/ JOSEPH L. LANIER, JR.
                                              ----------------------------------
                                              Joseph L. Lanier, Jr.
                                              Chairman and Chief Executive
                                                Officer
 
                                            Date: March 25, 1999
 
     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 and on the dates indicated.
 
<TABLE>
<S>                                                         <C>
 
By: /s/ DONALD J. KELLER                                    By: /s/ JOHN F. MAYPOLE
                                                            -----------------------------------------------------
-----------------------------------------------------           John F. Maypole
    Donald J. Keller                                            Director
    Director
Dated: March 25, 1999                                       Dated: March 25, 1999
 
By: /s/ JOSEPH L. LANIER, JR.                               By: /s/ BARRY F. SHEA
                                                            -----------------------------------------------------
-----------------------------------------------------           Barry F. Shea
    Joseph L. Lanier, Jr.                                       Executive Vice President -- Chief Financial
    Chairman and Chief Executive Officer and Director       Officer (Principal Financial and Accounting Officer)
    (Principal Executive Officer
Dated: March 25, 1999                                       Dated: March 25, 1999
 
By: /s/ EDWARD J. LILL                                      By: /s/ RICHARD L. WILLIAMS
                                                            -----------------------------------------------------
-----------------------------------------------------           Richard L. Williams
    Edward J. Lill                                              President and Chief Operating Officer and
    Director                                                    Director
Dated: March 25, 1999                                       Dated: March 25, 1999
</TABLE>
 
                                       47
<PAGE>   49
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT                     PAGE
-------                      ----------------------                     ----
<C>       <S>                                                           <C>
   2.1    -- Asset Purchase Agreement dated January 10, 1997 by and
             between Dan River Inc. and The New Cherokee Corporation
             (incorporated by reference to Exhibit 2.1 in Dan River's
             Current Report on Form 8-K (No. 33-70442) dated February
             3, 1997).................................................
   2.2    -- First Amendment to Asset Purchase Agreement between Dan
             River Inc. and The New Cherokee Corporation dated as of
             February 2, 1997 (incorporated by reference to Exhibit
             2.2 in Dan River's Current Report on Form 8-K (No.
             33-70442) dated February 3, 1997)........................
   2.3    -- Agreement and Plan of Merger, dated as of June 28, 1998,
             as amended August 14, 1998, by and between Dan River Inc.
             and The Bibb Company (incorporated by reference to Annex
             A to the Joint Proxy Statements/Prospectus forming a part
             of Registration Statement on Form S-4, Amendment No. 1
             (File No. 333-58855))....................................
   2.4    -- Second Amendment to Agreement and Plan of Merger, dated
             as of September 3, 1998, among Dan River Inc., DR
             Acquisition Corp. and The Bibb Company (incorporated by
             reference to Annex S-A to the Supplement to Joint Proxy
             Statement/Prospectus forming a part of Registration
             Statement on Form S-4, Post-Effective Amendment No. 1
             (File No. 333-58855))....................................
   3.1    -- Amended and Restated Articles of Incorporation of Dan
             River Inc. (incorporated by reference to Exhibit 3.1 in
             Amendment No. 1 to Registration Statement on Form S-1
             (File No. 333-36479))....................................
   3.2    -- Bylaws of Dan River Inc. (incorporated by reference to
             Exhibit 3.2 in Amendment No. 1 to Registration Statement
             on Form S-1 (File No. 333-36479))........................
   4.1    -- Form of Indenture between the Dan River Inc. and Marine
             Midland Bank, N.A., as Trustee (including Form of Note)
             (incorporated by reference to Exhibit No. 4 in Dan
             River's Report on Form 10-K (No. 33-70442) for the fiscal
             year ended January 1, 1994)..............................
  10.1    -- Credit Agreement among Dan River Inc. and certain of its
             subsidiaries, the several lenders parties thereto and
             First Union National Bank as Agent dated as of October
             14, 1998.................................................
  10.2    -- Registration Rights Agreement, dated as of September 3,
             1991, among Dan River Inc. and the parties named therein
             (incorporated by reference to Exhibit 10.4 in Dan River
             Inc. Registration Statement on Form S-1 (File No.
             33-70442) filed on October 15, 1993).....................
  10.3    -- Amendment to Registration Rights Agreement dated as of
             October 27, 1997, (incorporated by reference to Exhibit
             10.4.1 in Dan River Inc. Report on Form 10-K (File No.
             1-13421) for the fiscal year ended January 3, 1998)......
  10.4    -- Voting Agreement among Joseph L. Lanier, Jr., Richard L.
             Williams and Barry F. Shea and certain members of their
             families (incorporated by reference to Exhibit 10.5 in
             Amendment No. 2 to Dan River Inc. Registration Statement
             on Form S-1 (File No. 333-36479))........................
 *10.5    -- Employment Agreement, dated as of October 29, 1997,
             between Dan River Inc. and Joseph L. Lanier, Jr.
             (incorporated by reference to Exhibit No. 10.7 in
             Amendment No. 2 to Dan River's Registration Statement on
             Form S-1 (File No. 333-36479))...........................
 *10.6    -- Employment Agreement, dated as of October 29, 1997,
             between Dan River Inc. and Richard L. Williams
             (incorporated by reference to Exhibit No. 10.8 in
             Amendment No. 2 to Dan River's Registration Statement on
             Form S-1 (File No. 333-36479))...........................
</TABLE>
<PAGE>   50
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT                     PAGE
-------                      ----------------------                     ----
<C>       <S>                                                           <C>
 *10.7    -- Employment Agreement, dated as of October 29, 1997,
             between Dan River Inc. and Barry F. Shea (incorporated by
             reference to Exhibit No. 10.9 in Amendment No. 2 to Dan
             River's Registration Statement on Form S-1 (File No.
             333-36479))..............................................
 *10.8    -- Form of Post-employment Letter Agreement between the Dan
             River Inc. and certain of its officers, including Messrs.
             Boozer and Goodrich (incorporated by reference to Exhibit
             No. 10.10 in Dan River Inc. Registration Statement on
             Form S-1 (File No. 33-70442) filed on October 15,
             1993)....................................................
 *10.9    -- Dan River Inc. Amended and Restated Stock Option Plan and
             form of Option Agreement in effect prior to December 30,
             1994 (incorporated by reference to Exhibit No. 10.14 in
             Dan River's Registration Statement on Form S-1 (File No.
             33-70442) filed on October 15, 1993).....................
 *10.10   -- Dan River Inc. Amended and Restated Stock Option Plan and
             form of Option Agreement as amended as of December 30,
             1994 (incorporated by reference to Exhibit No. 10.14.1 in
             Dan River Inc. Report on Form 10-K (File No. 33-70442)
             for the fiscal year ended December 31, 1994).............
 *10.11   -- Dan River Management Incentive Plan (incorporated by
             reference to Exhibit No. 10.15 to Dan River Inc. Report
             on Form 10-K for the fiscal year ended January 3, 1998
             (File No. 1-13421))......................................
 *10.12   -- Form of Dan River Inc. 1997 Stock Incentive Plan
             (incorporated by reference to Exhibit No. 10.16 in Dan
             River Inc. Registration Statement on Form S-1 (File No.
             333-36479))..............................................
 *10.13   -- Form of Dan River Inc. 1997 Stock Plan for Outside
             Directors (incorporated by reference to Exhibit No. 10.19
             in Dan River Inc. Registration Statement on Form S-1
             (File No. 333-36479))....................................
  11      -- Statement regarding Computation of Earnings per share
             (incorporated by reference to Note 8 to the Consolidated
             Financial Statements included in this Annual Report on
             Form 10-K)...............................................
  21      -- List of Subsidiaries.....................................
  23      -- Consent of Ernst & Young, LLP............................
  27      -- Financial Data Schedule..................................
</TABLE>
 
---------------
* Management contract, compensatory plan or arrangement.
<PAGE>   51
 
                                                                     SCHEDULE II
 
                                 DAN RIVER INC.
                       VALUATION AND QUALIFYING ACCOUNTS
       YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
 
<TABLE>
<CAPTION>
                                                              ADDITIONS
                                                         -------------------
                                            BALANCE AT   CHARGED TO                             BALANCE
                                            BEGINNING    COSTS AND                              AT END
               DESCRIPTION                   OF YEAR      EXPENSES    OTHER     DEDUCTIONS(B)   OF YEAR
               -----------                  ----------   ----------   ------    -------------   -------
                                                                  (IN THOUSANDS)
<S>                                         <C>          <C>          <C>       <C>             <C>
Allowance for uncollectible accounts,
  discounts and claims (deducted from
  accounts receivable):
  Year ended January 2, 1999..............    $6,230      $11,980     $3,244(A)    $11,434      $10,020
                                              ======      =======     ======       =======      =======
  Year ended January 3, 1998..............    $4,631      $ 8,096     $1,200(A)    $ 7,697      $ 6,230
                                              ======      =======     ======       =======      =======
  Year ended December 28, 1996............    $5,140      $ 6,937         --       $ 7,446      $ 4,631
                                              ======      =======     ======       =======      =======
</TABLE>
 
---------------
 
Notes:
 
(A) Allowance related to receivables acquired through business combination.
 
(B) Includes writeoff of receivables (net of recoveries) and claims allowed.