DELTA WOODSIDE INDUSTRIES INC /SC/, ARS, 1998-10-05

DELTA WOODSIDE INDUSTRIES INC /SC/
ARS, 1998-10-05
BROADWOVEN FABRIC MILLS, COTTON

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1998 Annual Report
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<PAGE>

[Delta Woodside Logo]

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Contents

Common Stock Market Prices and
Dividends....Inside Front Cover
Selected Financial Data........2
Letter to Shareholders.........3
Management's Discussion and
Analysis....................4-8
Operations by Industry
Segment.......................9
Report of KPMG Peat
Marwick LLP..................10
Consolidated Financial
Statements................11-20
Corporate
Directory.....Inside Back Cover

Common Stock Market Prices and Dividends
The Common Stock of the Company is listed on the New York Stock Exchange
under the symbol DLW. The stock transfer agent for Delta Woodside Industries,
Inc. is First Union National Bank of North Carolina, Shareholder Services
Group, Two First Union Center, Charlotte, North Carolina 28288-1154.

The following table presents a two-year history of the high and low stock
sales prices for the Common Stock, as reported by the New York Stock Exchange
composite tape.

<TABLE>
<CAPTION>
FISCAL QUARTERS:
1998 1997
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High Low High Low
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<S> <C> <C> <C> <C>
First Quarter $6 3/4 $5 5/16 $5 1/2 $4 5/8
- ----------------- ------- ------- ------ ------
Second Quarter 6 5/16 4 3/4 6 5/8 4 3/4
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Third Quarter 5 9/16 4 5/16 8 5 1/2
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Fourth Quarter 6 3/8 4 7/8 7 5 1/4
- ----------------- ------- ------- ------ ------
</TABLE>

[Dividends]
Fiscal Year: The Company's operations are based on a fifty-two or
fifty-three week fiscal year ending on the Saturday closest to June 30.
As of September 18, 1998 there were approximately 1,857 holders of record
of the Company's Common Stock.
During fiscal 1998, the Company paid quarterly dividends of $.025 per
share. The Company declared and paid dividends of $.10 per share in each of the
first three quarters of fiscal 1996, and then stopped paying dividends until
fiscal 1998. Dividend payments depend upon the Company's earnings, financial
condition, capital requirements and other relevant factors.

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In Memoriam

[Photo of Mr. Mickel appears here]

Buck Mickel

1925-1998

Director of Delta Woodside Industries
and a Friend of the Textile Industry

During 41 years of active management in the construction industry as
Chairman of Daniel International and later as President and Vice
Chairman of Fluor Corporation, Buck Mickel was responsible for the
construction of many of the textile plants located in the United States
and throughout the world.

In addition, Buck was instrumental in the growth of the U.S. textile
industry by serving on the Boards of Graniteville Corporation; Monsanto
Company; RSI Corporation; J.P. Stevens & Co., Inc.; and Delta Woodside
Industries, Inc. He also served on the Boards of CSX, NationsBank, Duke
Energy, Insignia Financial Group, Liberty Corporation and numerous
others, which were also instrumental in helping out with the growth of
the Textile Industry.

Buck was a loving, caring, kind individual and a wonderful role model.
We at Delta Woodside will truly miss his humor, his inspiration and his
guidance.

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Selected Financial Data
In Thousands, Except Ratios, Percentages, Number of Shareholders and Per Share
Data
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<TABLE>
<S> <C> <C>
Operations 1998 1997
- ------------------------------------------------------------------------------- ---- ----
Net Sales $ 535,460 $530,278
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Cost of Goods Sold 439,300 432,567
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Gross Profit 96,160 97,711
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Operating Profit (Loss) excluding Litigation and Restructuring Charges 35,233 46,644
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Litigation (Credit) Charge
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Restructuring Charges (Credit) 8,895
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Operating Profit (Loss) 26,338 46,644
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Earnings (Loss) Before Interest and Taxes 26,338 46,644
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Interest Expense 23,395 23,354
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Income (Loss) from Continuing Operations Before Income Tax 3,500 24,042
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Income Taxes 884 9,256
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Income (Loss) from Continuing Operations 2,616 14,786
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Discontinued Operations (46,367) (7,395)
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Net Income (Loss) (43,751) 7,391
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Financial Data
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Cash Flow (Income (Loss) from Continuing Operations plus Depreciation and
Amortization) 33,173 37,404
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Capital Expenditures 16,789 17,059
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Depreciation and Amortization 30,557 22,618
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Working Capital 170,761 229,568
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Long-Term Debt 183,535 227,516
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Funded Debt 195,253 233,597
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Shareholders' Equity 179,567 225,367
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Capital Employed 374,820 458,964
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Total Assets 474,042 557,940
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Financial Ratios
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Net Sales divided by Inventory 4.7 4.0
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Net Sales divided by Accounts Receivable 4.5 4.7
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Net Sales divided by Capital Employed 1.4 1.2
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Operating Income (Loss) as % of Capital Employed 7.2 10.3
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Current Ratio 2.8 3.8
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Interest Coverage Ratio 1.1 2.0
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Gross Profit as % of Sales 18.0 18.4
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Income (Loss) from Continuing Operations Before Income Taxes as % of Sales 0.7 4.5
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Income (Loss) from Continuing Operations as % of Sales 0.5 2.8
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Income (Loss) from Continuing Operations as % of Beginning Equity 1.2 6.8
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Common Stock Data (Per Share)
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Income (Loss) From Continuing Operations 0.11 0.60
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Net Income (Loss) (1.78) 0.30
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Dividends 0.10
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Book Value 7.29 9.19
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Price Range -- High 6 3/4 8
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-- Low 4 5/16 4 5/8
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Weighted Average Shares Outstanding 24,575 24,513
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Approximate Number of Shareholders 1,857 1,939
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<S> <C> <C> <C>
Operations 1996 1995 1994
- ------------------------------------------------------------------------------- ---- ---- ----
Net Sales $ 487,450 $467,202 $ 484,735
- ------------------------------------------------------------------------------- --------- -------- ---------
Cost of Goods Sold 451,216 387,215 397,288
- ------------------------------------------------------------------------------- --------- -------- ---------
Gross Profit 36,234 79,987 87,447
- ------------------------------------------------------------------------------- --------- -------- ---------
Operating Profit (Loss) excluding Litigation and Restructuring Charges (20,018) 25,272 28,936
- ------------------------------------------------------------------------------- --------- -------- ---------
Litigation (Credit) Charge (9,000) (7,000) 27,096
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Restructuring Charges (Credit) 8,259 (263) 7,463
- ------------------------------------------------------------------------------- --------- -------- ---------
Operating Profit (Loss) (19,277) 32,535 (5,623)
- ------------------------------------------------------------------------------- --------- -------- ---------
Earnings (Loss) Before Interest and Taxes (19,277) 34,739 (5,623)
- ------------------------------------------------------------------------------- --------- -------- ---------
Interest Expense 18,993 13,646 8,639
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Income (Loss) from Continuing Operations Before Income Tax (37,822) 21,142 (13,540)
- ------------------------------------------------------------------------------- --------- -------- ---------
Income Taxes (14,561) 12,791 (5,281)
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Income (Loss) from Continuing Operations (23,261) 8,351 (8,259)
- ------------------------------------------------------------------------------- --------- -------- ---------
Discontinued Operations (39,378) 1,747 (9,038)
- ------------------------------------------------------------------------------- --------- -------- ---------
Net Income (Loss) (62,639) 10,098 (17,297)
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Financial Data
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Cash Flow (Income (Loss) from Continuing Operations plus Depreciation and
Amortization) 1,337 25,484 8,998
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Capital Expenditures 59,512 40,559 11,113
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Depreciation and Amortization 24,598 17,133 17,257
- ------------------------------------------------------------------------------- --------- -------- ---------
Working Capital (32,648) 286,887 241,950
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Long-Term Debt 283 219,119 161,948
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Funded Debt 242,644 219,395 162,812
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Shareholders' Equity 217,335 286,499 284,877
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Capital Employed 459,979 505,894 447,689
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Total Assets 537,716 610,296 567,003
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Financial Ratios
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Net Sales divided by Inventory 4.0 2.4 2.7
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Net Sales divided by Accounts Receivable 5.1 4.9 5.6
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Net Sales divided by Capital Employed 1.1 0.9 1.1
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Operating Income (Loss) as % of Capital Employed (4.1) 6.4 (1.1)
- ------------------------------------------------------------------------------- --------- -------- ---------
Current Ratio 0.9 4.8 3.5
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Interest Coverage Ratio (1.0) 2.5 (0.7)
- ------------------------------------------------------------------------------- --------- -------- ---------
Gross Profit as % of Sales 7.4 17.1 18.0
- ------------------------------------------------------------------------------- --------- -------- ---------
Income (Loss) from Continuing Operations Before Income Taxes as % of Sales (7.8) 4.5 (2.8)
- ------------------------------------------------------------------------------- --------- -------- ---------
Income (Loss) from Continuing Operations as % of Sales (4.8) 1.8 (1.7)
- ------------------------------------------------------------------------------- --------- -------- ---------
Income (Loss) from Continuing Operations as % of Beginning Equity (8.1) 2.9 (2.5)
- ------------------------------------------------------------------------------- --------- -------- ---------
Common Stock Data (Per Share)
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Income (Loss) From Continuing Operations (0.95) 0.34 (0.34)
- ------------------------------------------------------------------------------- --------- --------- ---------
Net Income (Loss) (2.56) 0.42 (0.70)
- ------------------------------------------------------------------------------- --------- --------- ---------
Dividends 0.30 0.40 0.40
- ------------------------------------------------------------------------------- --------- --------- ---------
Book Value 8.89 11.76 11.75
- ------------------------------------------------------------------------------- --------- --------- ---------
Price Range -- High 9 3/4 12 12 1/2
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-- Low 4 3/8 7 5/8 9 3/4
- ------------------------------------------------------------------------------- --------- --------- ---------
Weighted Average Shares Outstanding 24,443 24,317 24,550
- ------------------------------------------------------------------------------- --------- --------- ---------
Approximate Number of Shareholders 2,081 2,154 2,221
- ------------------------------------------------------------------------------- --------- --------- ---------
</TABLE>

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(1) The amounts presented above for prior years have been restated to conform
to the fiscal 1998 presentation of discontinued operations. The Stevcoknit
knitted fabrics business and the Nautilus International fitness equipment
business are presented as part of discontinued operations.
(2) Capital Employed includes shareholders' equity and funded debt.
(3) Depreciation and amortization include certain write-downs of property and
equipment and reductions of excess of cost over assigned value of net
assets acquired of $7 million, $15 million and $2 million in fiscal years
1998, 1996 and 1994, respectively.

<PAGE>

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To Our Fellow Shareholders

To Our Shareholders:

During the third quarter of fiscal 1998, we made the decision to exit the
knit fabrics and fitness equipment businesses. This decision resulted in the
closure of our Stevcoknit Fabrics Division and the announcement that we would
sell our fitness equipment subsidiary, Nautilus International. These businesses
are now accounted for as discontinued operations.
We had participated in the knit fabrics business for the last twelve years
with our Stevcoknit Fabrics Division. For the last several years the operating
results in Stevcoknit had been unsatisfactory, despite our investment in modern
equipment and expansion of our marketing efforts. We became convinced that this
market was oversupplied, and demand for knit fabric made in the United States
was weakening. Despite other competitors exiting this market, we saw demand and
prices declining with little reasonable expectation for improvement. This
decision resulted in the elimination of approximately 1,000 jobs in the
division, and the closure of our knit, dye and finish plants in Wallace NC. The
Mickel yarn plant has been sold, and the production from the Rainsford yarn
plant has been directed to our Delta Apparel division. While we are saddened by
the negative impact this decision had on many of our employees and the Wallace
community, we are convinced that we made the best decision for the long term
health of Delta Woodside and our shareholders.
We purchased Nautilus International five years ago, with the hope that
this strong consumer brand could be used to add value to our Delta Apparel
division. While the Nautilus brand remains strong, we found that without a
consumer product, it did not enhance the value of apparel. The fitness industry
is going through a period of consolidation, and we felt the Nautilus brand
would better fit a company whose core business is in the fitness industry.
We now have three businesses that make up our continuing operations. Delta
Mills Marketing Company which participates in the woven bottomweight apparel
fabrics markets, Duck Head Apparel Company which provides moderately priced
apparel for distribution through department stores, and Delta Apparel which
produces knit apparel for the activewear market.
Delta Mills Marketing Company had another excellent year in fiscal 1998.
Sales were up two percent over fiscal 1997 to $343 million, which set a new
record for the division. Operating profits, while down slightly from the prior
year, were very good. This business has operated most facilities at capacity
for the last two years. The capital expenditures made in recent years to
modernize and expand capacity at this division continue to generate superior
returns for Delta Woodside. We will be evaluating ways to further expand output
in areas where demand for our products continue to exceed our capacity.

Duck Head Apparel Company had a second consecutive year of growth in sales
to $86 million during fiscal 1998. This represents a six percent increase over
fiscal 1997 and occurred while the company reduced inventory by $8.6 million
and improved customer service. Duck Head now has over 500 men's and 200 boys'
in-store shops to help retailers display and merchandise the Duck Head
products. This dedicated floor space allows us to provide a consistent message
about Duck Head to the consumer and ensures us of having the proper space to
display our merchandise. As we begin fiscal 1999, Duck Head will expand a
consumer advertising program targeted to the 13 Southeastern states that make
up their core business. We believe the program will fuel continued sales
growth, and allow us to maintain the margins required to drive improved
operating results.
Delta Apparel, our knit apparel division, had a difficult year during
fiscal 1998. Sales declined four percent due to price erosion in this market
and a decline in units sold. This resulted in the division operating at a
substantial loss for the year. Prices have stabilized in this market over the
past six months, and demand for basic T-shirts has improved, but current market
prices do not yet allow us to make an adequate return on our investment in this
business. We believe we have competitive assets employed in the T-shirt
business, but realize we must improve the return we are generating from this
business.
Inventories and debt were reduced by $18 million and $33 respectively
during the 1998 fiscal year. This, combined with the $150 million of senior
notes issued during the year, and the $130 million of revolving bank loan
facilities the company has in place, has resulted in a much improved liquidity
situation for Delta Woodside.
Demand for our products seems to remain good as we enter our new fiscal
year, although we are keeping a cautious eye on currency exchange rates that
could suddenly change our competitive position with the rest of the world. We
expect another good year out of our woven fabrics business, and improved
results in our apparel operations.

/s/ E. Erwin Maddrey, II
- -----------------------------
E. Erwin Maddrey, II
President and
Chief Executive Officer

/s/ Bettis C. Rainsford
- -----------------------------
Bettis C. Rainsford
Executive Vice President, Treasurer
and Chief Financial Officer

<PAGE>

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Management's Discussion and Analysis
of Results of Operations and Financial Condition

The foregoing letter to shareholders and the following discussion contain
certain "forward-looking statements". All statements, other than statements of
historical fact, that address activities, events or developments that the
Company expects or anticipates will or may occur in the future, including such
matters as future revenues, future cost savings, future capital expenditures,
business strategy, competitive strengths, goals, plans, references to future
success and other such information are forward-looking statements. The words
"estimate", "project", "anticipate", "expect", "intend", "believe" and similar
expressions are intended to identify forward-looking statements.
The forward-looking statements in this Annual Report are based on the
Company's expectations and are subject to a number of business risks and
uncertainties, any of which could cause actual results to differ materially
from those set forth in or implied by the forward-looking statements. These
risks and uncertainties include, among others, changes in the retail demand for
apparel products, the cost of raw materials, competitive conditions in the
apparel and textile industries and the relative strength of the United States
dollar as against other currencies and the discovery of unknown conditions
(such as with respect to environmental matters, Year 2000 readiness and similar
items). The Company does not undertake publicly to update or revise the
forward-looking statements even if it becomes clear that any projected results
will not be realized.

Consolidated Company Results

Fiscal 1998 Versus Fiscal 1997
As a result of the history of operating losses at Stevcoknit Fabrics'
knitting and knit finishing plants, and at the Nautilus fitness equipment
business, the Company made the decision on March 3, 1998 to close its
Stevcoknit Fabrics division and to sell its Nautilus International division
(fitness equipment). Accordingly, operating results for those segments have
been reclassified and reported as discontinued operations. The Company is
selling the assets of the Stevcoknit division, and has retained a firm to sell
the Nautilus International fitness equipment business. The Company expects to
complete disposition of these businesses during the first six months of fiscal
year 1999.
Consolidated net sales for fiscal year 1998 were $535 million compared to
$530 million for fiscal year 1997. Net sales increases in Delta Mills Marketing
and in Duck Head Apparel were offset somewhat by a sales decrease at Delta
Apparel.
Consolidated gross margin for fiscal 1998 was down slightly, from the
prior fiscal year. All of the Company's businesses experienced a decline in
gross margin.
For fiscal year 1998, the Company reported operating earnings of $26
million or 4.9% of net sales compared to $47 million or 8.8% of sales for the
prior fiscal year. During fiscal 1998, operating profits decreased in all of
the Company's segments due to lower margins, increased selling, general and
administrative expenses, and as a result of certain restructuring charges at
Delta Apparel and Duck Head Apparel.
Interest expense was down slightly in fiscal year 1998 compared to fiscal
1997; net borrowings decreased, while interest rates increased. The interest
rate on the senior notes issued on August 25, 1997 is higher than the interest
rate on the prior revolving credit facility.
The effective tax rate on income from continuing operations for fiscal
1998 was 25% as compared to 32% for fiscal 1997. The lower tax rate is a result
of a reduction in valuation allowances recognized in the prior fiscal year. The
Company also expects next year's income tax expense rate to be less than the
statutory rate as anticipated improved earnings permit further reductions in
estimated valuation allowances.
Income from continuing operations declined in fiscal year 1998 from fiscal
year 1997, primarily due to the restructuring and impairment and higher selling
general and administrative expenses.
In connection with the Company's decision to discontinue the business
referred to above, the Company recognized a loss on disposal of discontinued
operations of $37 million including a provision of $8.0 million for losses
during the phase-out period and an income tax benefit of $1.2 million. The
Company believes that it will recover the net book value of the assets of the
discontinued businesses. However, the amount ultimately realized upon
disposition could differ materially from the carrying value of these assets. In
addition to these charges to income during fiscal 1998, the Company recognized
an impairment charge of $12 million during fiscal year 1996 related to the
property and equipment at the Stevcoknit division.
Inventories were $114 million at June 27, 1998 compared to $134 million at
June 27, 1997. The decrease in inventory occurred primarily at Duck Head
Apparel and Delta Apparel.
The Company's order backlog at June 27, 1998 was $158 million as compared
to $161 million at June 28, 1997. Order backlogs were down at Delta Mills
Marketing Company, and up at Duck Head Apparel and Delta Apparel.

Consolidated Company Results

Fiscal 1997 Versus Fiscal 1996
Consolidated net sales for fiscal year 1997 were $530 million as compared
to $487 million in the prior fiscal year. Net sales in fiscal 1997 increased at
Delta Mills Marketing and Duck Head Apparel, but decreased at Delta Apparel.
Consolidated gross profit margin for fiscal 1997 was 18%, as compared to
the gross profit margin of 7.4% in the prior fiscal year. Gross margins
increased at both Delta Mills Marketing and Duck Head Apparel, but decreased at
Delta Apparel. The lower margins in fiscal 1996 were primarily due to
restructuring and impairment charges, and charges to increase the reserve for
excess inventories at Duck Head Apparel.

<PAGE>

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Consolidated selling, general, and administrative expenses for fiscal 1997
totaled $53 million, or 9.9% of net sales, compared to $55 million, or 11% of
net sales in fiscal 1996. These expenses increased at Delta Mills Marketing,
but decreased at Duck Head Apparel and Delta Apparel.
Consolidated operating profit for fiscal 1997 was $47 million as compared
to a loss of $19 million in fiscal 1996. Losses in fiscal 1996 are attributed
to the high cost of cotton in that year, a $25 million charge to increase
market reserves associated with excess inventories at Duck Head Apparel, and $8
million of restructuring charges at Duck Head Apparel and Delta Apparel
primarily for plant closings.
Net interest expense totaled $23 million in fiscal 1997 as compared to $19
million in fiscal 1996, primarily due to higher average interest rates and
higher loan fees.
The effective income tax rates for the 1997 and 1996 fiscal years were 32%
and 38%, respectively. The lower tax rate for fiscal 1997 was primarily due to
a decrease in the valuation allowance for deferred tax assets.
Income from continuing operations for fiscal 1997 was $16 million as
compared to a loss of $38 million for fiscal 1996. Fiscal 1996 net income
includes pretax credits to income of $9 million related to recovery of certain
litigation charges recognized in fiscal 1994, and settled during fiscal 1995.
The improvement in results of operations for fiscal 1997 is primarily
attributable to more normal cotton price levels.
Consolidated Inventories totaled $132 million at June 28, 1997 as compared
to $120 million at June 29, 1996, an increase of 10%. The increase in inventory
occurred primarily at Delta Apparel.

Segment Results
Delta Mills Marketing Company

Fiscal 1998 Versus Fiscal 1997
Delta Mills Marketing manufactures and sells finished woven fabrics
principally to manufacturers of apparel products. The segment also sells
unfinished fabrics to converters for various end uses. Delta Mills Marketing is
operating, and expects to continue during fiscal 1999 to operate, virtually at
full capacity. Generally, profitability of this segment is enhanced by
increases in the use of its manufacturing capacity and is affected by the
relative mix of more or less profitable goods being produced and the cost and
availability of raw materials.
Net sales for fiscal year 1998 totaled $342 million, as compared to $336
million for fiscal year 1997, an increase of 2%. Sales of finished woven
fabrics to commercial accounts and government accounts increased due to
increased demand. These increases were largely offset by a sharp, 32% decline
in sales of unfinished woven fabrics due to decreased demand.
Gross profit in fiscal year 1998 was $63 million, as compared to $65
million in fiscal year 1997. The gross profit decline was due principally to
the decline in the unfinished woven fabrics business in both volume and price.
Operating earnings for fiscal year 1998 were $46 million, as compared to
$51 million in fiscal year 1997. The decline in operating earnings is primarily
a result of the decline in gross margins and due to increased selling, general
and administrative expenses attributable in part to information technology
project expenditures which are not expected to reoccur.

Delta Mills Marketing Company

Fiscal 1997 Versus Fiscal 1996
Net sales of Delta Mills Marketing were $336 million in fiscal year 1997
as compared to $294 million in fiscal year 1996, an increase of 14%, resulting
from an increase in unit sales and unit prices. Sales of woven fabrics to
commercial accounts increased due both to increased demand and to additional
finishing capacity resulting from recent capital expenditures. This increase
more than offset a decrease in sales of woven government fabrics due to a
slowdown in procurement activity.
During fiscal year 1997, Delta Mills Marketing's gross profit totaled $65
million, as compared to $34 million in fiscal year 1996, an increase of 93%.
This gross profit improvement was due principally to higher sales, lower raw
material costs and improved efficiencies resulting from the modernization
project at the Beattie spinning and weaving plant.
During fiscal 1997, selling, general and administrative expenses were $16
million as compared to $13 million during fiscal year 1996, an increase of 18%.
The increase is primarily attributable to increased sales.
Operating profit at Delta Mills Marketing was $51 million in fiscal year
1997, an improvement of $33 million as compared to fiscal year 1996. The
improvement is a result of more normal cotton prices and factors described
above.

Delta Apparel Company

Fiscal 1998 Versus Fiscal 1997
Delta Apparel manufactures and sells T-shirts, fleece goods and sportswear
to distributors, screen printers and private label accounts. Operating results
are dependent in large part on orders from retailers, distributors, and screen
printers who supply finished garments to retailers. Generally, when retail
sales of apparel are strong, Delta Apparel benefits. Its operating results are
also dependent on the utilization of manufacturing facilities. The Company
believes that Delta Apparel will operate its facilities at or near full
capacity during fiscal 1999.
Net sales for fiscal year 1998 were $106 million, a decline of 5.4% from
sales of $112 million in fiscal year 1997. The decline in sales was due both to
lower unit prices and to fewer units being shipped as compared to fiscal year
1997. Demand for basic T-shirts has improved, but pricing remains volatile and
current

5
<PAGE>

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market prices do not allow us to make an adequate return on our investment.
Gross profit declined from $4.3 million in fiscal year 1997 to $3.9
million in fiscal year 1998, as a result of increased competition.
During the third quarter of fiscal 1998, Delta Apparel determined that the
excess of cost over assigned value of net assets acquired in a prior
acquisition, was impaired. Accordingly, a charge of $7.3 million was taken to
write-off the excess of cost over assigned value of net assets acquired at
Delta Apparel.
The fiscal year 1998 operating loss, including the impairment of the
excess of cost over assigned value of net assets acquired, was $18 million,
compared to an operating loss of approximately $5.4 million in fiscal 1997. The
increased loss was primarily a result of the impairment charge, but was also
due to an increase in selling general and administrative expenses.
Inventories at Delta Apparel at June 27, 1998 totaled $30 million,
compared to $41 million at June 28, 1997.

Delta Apparel Company

Fiscal 1997 Versus Fiscal 1996
Net sales at Delta Apparel decreased 8.9% in fiscal 1997 compared to
fiscal 1996. The decrease in sales was due primarily to a reduction in average
unit prices, while unit sales rose slightly.
During fiscal 1996, Delta Apparel established a new sewing operation in
Honduras. The plant began producing garments in September 1995. In June 1996
the plant reached 55% of capacity, and full capacity in January 1997.
Gross profit margins at Delta Apparel decreased to 3.9% in fiscal 1997
from 13% in fiscal 1996. The decrease was primarily attributable to higher cost
inventory being shipped during the first six months of the fiscal 1997, coupled
with lower unit billing prices.
Fiscal 1997 operating losses at Delta Apparel were $5.4 million as
compared to an operating profit of $2.8 million in fiscal 1996. Fiscal 1996
included restructuring charges of $2.6 million. The operating losses are
attributable to a reduction in sales and a related dramatic reduction in gross
profit during fiscal 1997.
Inventories at Delta Apparel were $41 million at June 28, 1997, compared
to $30 million at June 29, 1996. The increase in inventories resulted from a
decline in sales and from higher operating costs per unit of inventory as fixed
costs were spread over fewer units produced.
Capital expenditures at Delta Apparel of $8.2 million during fiscal 1996,
were primarily related to the new sewing facility in Honduras. In fiscal year
1997, capital expenditures were $2.4 million.

Duck Head Apparel Company

Fiscal 1998 Versus Fiscal 1997
The Company's Duck Head Apparel segment manufactures and sells woven and
knitted apparel under the Duck Head label primarily to retailers and through
the company's own outlet stores. Duck Head's operating results are dependent in
large part on orders from retailers. Generally, Duck Head benefits when retail
sales of apparel are strong. Operating results are also dependent on the
utilization of owned and leased manufacturing facilities. The Company does not
believe that Duck Head Apparel's facilities will be fully utilized during
fiscal 1999. Duck Head Apparel has closed three manufacturing facilities during
fiscal year 1998, and expects to sell these facilities during fiscal 1999.
Net sales in the Duck Head Apparel segment increased by $5.0 million to
$86 million in fiscal 1998. Sales to retail accounts increased while sales from
the company's own stores decreased. The increase in sales to retailers was due
primarily to increases in sales to the same accounts, as compared to fiscal
year 1997.
Gross profit margins at Duck Head Apparel decreased slightly in fiscal
1998, due principally to inventory reduction programs.
Fiscal 1998 operating losses at Duck Head Apparel totaled $.9 million as
compared to a $1.4 million operating profit in fiscal 1997. Included in the
fiscal 1998 operating losses are $1.4 million of restructuring charges related
to the closing of two sewing plants in Costa Rica and the closing of certain
retail outlet stores. Selling, general and administrative expenses increased 9%
from fiscal 1997, primarily due to increased merchandising and marketing
expenses.
Inventories at Duck Head Apparel decreased $8.6 million during fiscal 1998
resulting from a reduction in older obsolete inventory and lower levels of core
and recent season close-outs.
Higher capital expenditures of $7.4 million during fiscal 1998 were
primarily for in-store shops and focal areas placed in major retailers.

Duck Head Apparel Company

Fiscal 1997 Versus Fiscal 1996
Net sales at Duck Head Apparel increased approximately $12 million from
fiscal year 1996 to fiscal year 1997. The increase resulted from increased
marketing efforts through Duck Head's use of in-store Duck Head shops.
Gross profit margins at Duck Head returned to a more normal level of 35%
in fiscal year 1997. Duck Head had negative gross margins in fiscal 1996
because of a $25 million write-down of excess inventories.
Operating profit in fiscal year 1997 was $1.4 million compared to a loss
of $38 million in fiscal year 1996. Fiscal 1996 includes restructuring charges
of $4.1 million and credits to litigation expense of $9 million. Selling,
general, and administrative expenses at Duck Head Apparel were $27 million in
fiscal 1997, a decrease from $29 million in fiscal year 1996, primarily due to
lower distribution costs at the new distribution center in Winder, Georgia,
completed during fiscal year 1996.

<PAGE>

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

In connection with the increased sales at Duck Head Apparel, inventories
also increased during fiscal 1997.
Capital expenditures at Duck Head Apparel were $13 million during fiscal
1996, primarily to complete the new distribution center in Winder, Georgia.

LIQUIDITY AND SOURCES OF CAPITAL
During fiscal 1998, the Company financed its capital expenditures
primarily through cash generated from operations. During the fourth quarter of
fiscal 1998, proceeds from the sale of plant and equipment and reductions in
current assets of discontinued operations were used to reduce debt.
The Company generated operating cash flows of $52 million, $29 million and
$51 million for the 1998, 1997 and 1996 fiscal years, respectively. Cash
generated from operations and borrowings has been used primarily to finance
capital expenditures, including equipment purchases. Proceeds from sales of
assets of discontinued operations at Stevcoknit Fabrics were used to reduce
debt.
At June 28, 1997, approximately $220 million of the Revolving Credit
Facility due in September 1997 was classified as non-current because it was
subsequently refinanced with the long-term debt described in the following
paragraph.
On August 25, 1997, a subsidiary of the Company, Delta Mills, Inc. "DMI"
issued $150 million of unsecured ten-year senior notes, and obtained a secured
five-year $100 million revolving line of credit subject to borrowing base
limitations. At the same time, the company obtained a separate, $20 million
line of credit due October 31, 1998. The $100 million revolving line of credit
is backed by certain accounts receivable and inventory of DMI with a carrying
value of $154 million at June 27, 1998. At June 27, 1998 interest on the senior
notes and the $100 million revolving line of credit was 9.625% and 7.4%,
respectively.
In May 1998, the Company replaced the above referenced $20 million line of
credit with a short-term $30 million revolving credit facility (subject to
borrowing base limitations) which is due in May of 1999. This new facility is
backed by certain accounts receivable and inventory of Delta Apparel, Duck Head
Apparel and Nautilus International with a carrying value of $105 million at
June 27, 1998. This credit facility has a term of one year and carries an
interest rate that is two percentage points above the London Interbank
Borrowing Rate.
Loan covenants in the senior notes and the DMI revolving credit facility,
among other matters limit the Company's ability to use cash generated by DMI to
fund operations in the rest of the Company. At June 27, 1998 approximately $63
million was available under the DMI revolving credit agreement, and
approximately $16 million was available under the separate short-term $30
million line of credit. The new credit facility and the senior notes also
contain other restrictive covenants which include minimum tangible net worth
and certain other minimum financial ratios. The agreement also restricts
additional indebtedness, dividends and capital expenditures.
During fiscal 1999, the Company plans to spend approximately $20 million
for capital improvements and new equipment. The Company believes that its
equipment and facilities are generally adequate to allow it to remain
competitive with its principal competitors.
The Company has considered the impact of Year 2000 issues on its computer
systems and applications and developed a remediation plan. The Company expects
conversion and testing to be completed during fiscal 1999. Expenditures in
fiscal 1998 for the Year 2000 project amounted to $150,000 and the Company
expects that completion of the various projects will result in additional
expenditures of approximately $350,000.
The Company received a refund of $2.2 million during fiscal 1998, from
carry-back of an alternative minimum tax loss for fiscal 1997.
The Company believes that cash flow generated from its operations and
sales of assets of discontinued operations, along with funds available under
its new credit lines, should be sufficient to service its bank debt, to satisfy
its day-to-day working capital needs, fund its planned capital expenditures and
to pay dividends.

ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local environmental
laws and regulations concerning, among other things, wastewater discharges,
storm water flows, air emissions, ozone depletion and solid waste disposal. The
Company's plants generate very small quantities of hazardous waste which are
either recycled or disposed of off-site. Most of its plants are required to
possess one or more discharge permits.
The Company is subject to a consent order that it entered into with the
South Carolina Department of Health and Environmental Control on September 26,
1985 (the "Consent Order"), prior to Delta Woodside's acquisition of the
business. The Consent Order arose from a determination that several private
drinking wells in the area of two of the Company's plants had been
contaminated. Pursuant to the Consent Order, the Company has discontinued the
operation of a large spray field near these plants into which waste water
sludge had been disposed and has placed into operation for such purpose a new
larger adjacent spray field. The Company expects that any continuing
expenditures to comply with the Consent Order will be immaterial.
Two of the Company's South Carolina plants, the textile segment's Delta 2
and 3 finishing plants, have been unable to comply with certain toxicity and
other permit-related limits contained in a National Pollutant Discharge
Elimination System ("NPDES") permit held by the Company. The Company is working
with the appropriate state agency to address these issues. To attempt to
achieve compliance, the Company has completed required upgrades at a cost of
approximately

<PAGE>

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

$2.3 million and believes that the required effluent limits will be achieved by
November 1, 1998. Although there is no assurance that the Company will be
successful, and it could face administrative penalties if it is not, the
Company does not currently believe that these matters will have a material
adverse impact on the Company.
The Company is currently assessing certain wastewater treatment system
basins of a North Carolina plant that is no longer in operation but was a
likely source of groundwater contamination. The Company currently has no plans
to remediate any groundwater contamination. Although no assurance can be
provided, the Company does not currently believe that this matter will have a
material adverse impact on the Company.
The Company's Nautilus business has been named as a "potentially
responsible party" ("PRP") under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") with respect to three sites in North
Carolina, South Carolina, and Mississippi. To the Company's knowledge, all of
the transactions with these sites were conducted by a corporation (the "Selling
Corporation") whose assets were sold in 1990 pursuant to the terms of an order
of the United States Bankruptcy Court to another corporation, the stock of
which was subsequently acquired by the Company in January 1993.
At the North Carolina site, the Selling Corporation is listed as a "de
Minimis" party, and at the South Carolina site, the Selling Corporation has
been listed as an "insolvent" party and would appear to qualify as a "de
Minimis" party. The Company believes that the Selling Corporation's share of
liabilities at either of these sites will be immaterial.
At the Mississippi site, the PRP group has completed the surface removal
action and is investigating soil and groundwater contamination, both at the
site and in the surrounding area. The Company's latest information is that the
Selling Corporation is ranked eleventh out of a total of over 300 PRPs in
contributions of material to the site, and, based on volume, the Selling
Corporation contributed approximately 3% of the site's material. To the
Company's knowledge, latest estimates of costs to clean up the site range up to
$4 million. Trichlomethane, one of the substances delivered by the Selling
Corporation to the site, has been found in site's groundwater and at nearby
residential drinking water wells.
Although no assurance can be provided, the Company believes that it is
shielded from liability at these three sites by the order of the United States
Bankruptcy Court pursuant to which the Selling Corporation sold its assets to
the corporation subsequently acquired by the Company. The Company has denied
any responsibility at these three sites, has declined to participate as a
member of the respective PRP groups, and has not provided for any reserves for
costs or liabilities attributable to the Selling Corporation.
The Company believes that it is in compliance in all material respects
with federal, state, and local environmental statutes and requirements.

<PAGE>

- --------------------------------------------------------------------------------
Operations by Industry Segment

In the third quarter of fiscal year 1998, the Company adopted the segment
reporting provisions of Financial Accounting Standard 131. This standard
requires the Company to report segment information for divisions which engage
in business activity, whose operating results are regularly reviewed by the
chief operating officer. The Company has three segments in continuing
operations: Delta Mills Marketing Company, Delta Apparel and Duck Head Apparel.
Delta Mills Marketing Company manufactures and sells woven fabrics for apparel
and home furnishing manufacturers. Delta Apparel manufactures and sells
T-shirts, fleece goods, and sportswear. Duck Head Apparel manufactures and
sells casual apparel under the brand name "Duck Head" to department stores and
specialty retailers. Operating profit does not include interest expense or
interest income. The Company had two segments which are presented as
discontinued operations: Stevcoknit Fabrics Company and Nautilus International.
Stevcoknit Fabrics Company manufactured and sold knitted fabrics, and Nautilus
International manufactures and sells fitness equipment.

Net Sales:
Delta Mills Marketing Company ........... $342,439,000 $336,181,000 $294,083,000
Delta Apparel Company ................... 106,298,000 112,311,000 123,297,000
Duck Head Apparel Company ............... 86,332,000 81,313,000 69,569,000
Other ................................... 391,000 473,000 501,000
------------- ------------- ------------
Total .................................. $535,460,000 $530,278,000 $487,450,000
============= ============= ============
Gross Profit:
Delta Mills Marketing Company ........... $ 63,433,000 $ 65,058,000 $ 33,670,000
Delta Apparel Company ................... 3,890,000 4,343,000 16,006,000
Duck Head Apparel Company ............... 28,775,000 28,174,000 (13,373,000)
Other ................................... 62,000 136,000 (69,000)
------------- ------------- ------------
Total .................................. $ 96,160,000 $ 97,711,000 $ 36,234,000
============= ============= ============
Operating Profit (Loss):
Delta Mills Marketing Company ........... $ 46,377,000 $ 50,580,000 $ 17,697,000
Delta Apparel Company ................... (17,739,000) (5,391,000) 2,777,000
Duck Head Apparel Company ............... (935,000) 1,431,000 (38,302,000)
Other ................................... (1,365,000) 24,000 (1,449,000)
------------- ------------- ------------
Total Operating Profit (Loss) .......... 26,338,000 46,644,000 (19,277,000)
Interest expense ........................ (23,395,000) (23,354,000) (18,993,000)
Interest income ......................... 557,000 752,000 448,000
------------- ------------- ------------
Income (Loss) From Continuing
Operations Before Income Taxes ......... $ 3,500,000 $ 24,042,000 $(37,822,000)
============= ============= ============
Identifiable Assets:
Delta Mills Marketing Company ........... $239,974,000 $247,915,000 $233,226,000
Delta Apparel Company ................... 98,257,000 120,366,000 120,628,000
Duck Head Apparel Company ............... 75,383,000 83,980,000 74,227,000
Other ................................... 12,308,000 8,099,000 11,936,000
------------- ------------- ------------
425,922,000 460,360,000 440,017,000
Discontinued operations ................. 48,120,000 97,580,000 97,699,000
------------- ------------- ------------
Total .................................. $474,042,000 $557,940,000 $537,716,000
============= ============= ============
Depreciation and Amortization:
Delta Mills Marketing Company ........... $ 9,921,000 $ 10,101,000 $ 9,602,000
Delta Apparel Company ................... 15,252,000 7,788,000 10,331,000
Duck Head Apparel Company ............... 4,039,000 3,668,000 4,003,000
Other ................................... 1,345,000 1,061,000 662,000
------------- ------------- ------------
Total .................................. $ 30,557,000 $ 22,618,000 $ 24,598,000
============= ============= ============
Capital Expenditures:
Delta Mills Marketing Company ........... $ 5,181,000 $ 12,042,000 $ 38,659,000
Delta Apparel Company ................... 4,141,000 2,396,000 8,206,000
Duck Head Apparel Company ............... 7,427,000 2,510,000 12,581,000
Other ................................... 40,000 111,000 66,000
------------- ------------- ------------
Total .................................. $ 16,789,000 $ 17,059,000 $ 59,512,000
============= ============= ============
</TABLE>

Intersegment sales and profit are not significant and are not included in
the accompanying segment information. Delta Mills Marketing Company had
intersegment sales of $417,000 and $5,000 for fiscal years 1998 and 1997,
respectively. Delta Apparel had intersegment sales of $2,192,000, $403,000 and
$1,899,000 for fiscal years 1998, 1997 and 1996, respectively.
Operating profit is total revenue less operating expenses, excluding
interest expense and interest income. During the third quarter of fiscal 1998,
Delta Apparel took a $7.3 million impairment charge to write off the excess of
cost over assigned value of net assets acquired, and Duck Head Apparel
recognized a charge of $1.4 million primarily associated with the closing of
certain retail stores. Depreciation and amortization include certain
write-downs of property, equipment and excess of cost over assigned value of
net assets acquired. Identifiable assets are those assets that are used in the
operations of each segment. At June 27, 1998, other identifiable assets include
cash and insurance policies of $5.2 million and deferred loan costs of $5.2
million.

During the fourth quarter of fiscal 1996, The Company took restructuring
charges of $8.3 million primarily related to plant closings at Delta Apparel
and Duck Head Apparel. At the same time Duck Head Apparel increased inventory
reserves by $25 million for excess inventory.
During the first quarter of fiscal 1996, Duck Head Apparel reduced related
litigation reserves by $9 million related to certain litigation that was
settled in the prior fiscal year.
Capital expenditures include related accounts payable of $3,235,000,
$1,431,000 and $5,518,000 as of the end of fiscal years 1998, 1997 and 1996
fiscal years, respectively.

<PAGE>

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

-----------------------------------------------------
Independent Auditors' Report

The Board of Directors and Shareholders
Delta Woodside Industries, Inc.

We have audited the accompanying consolidated balance sheets of
Delta Woodside Industries, Inc. as of June 27, 1998 and June 28,
1997 and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the
three-year period ended June 27, 1998. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Delta Woodside Industries, Inc. at June 27, 1998 and
June 28, 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended June
27, 1998, in conformity with generally accepted accounting
principles.

KPMG PEAT MARWICK LLP

Greenville, South Carolina
August 14, 1998

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

<PAGE>

- --------------------------------------------------------------------------------
Consolidated Balance Sheets
Delta Woodside Industries, Inc.

<TABLE>
<CAPTION>
June 27, 1998 June 28, 1997
--------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .......................................................... $ 2,753,000 $ 2,696,000
Accounts receivable:
Factor ............................................................................ 81,256,000 83,676,000
Customers ......................................................................... 41,253,000 31,707,000
------------ ------------
122,509,000 115,383,000
Less allowances for doubtful accounts and returns ................................. 3,309,000 2,852,000
------------ ------------
119,200,000 112,531,000
Inventories
Finished goods .................................................................... 52,219,000 63,783,000
Work in process ................................................................... 48,814,000 56,879,000
Raw materials and supplies ........................................................ 12,925,000 13,139,000
------------ ------------
113,958,000 133,801,000
Current assets of discontinued operations .......................................... 25,797,000 51,174,000
Deferred income taxes .............................................................. 861,000 9,627,000
Prepaid expenses and other current assets .......................................... 2,962,000 2,112,000
------------ ------------
TOTAL CURRENT ASSETS ......................................................... 265,531,000 311,941,000
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and land improvements ........................................................ 5,062,000 5,096,000
Buildings ......................................................................... 66,995,000 66,491,000
Machinery and equipment ........................................................... 192,295,000 190,243,000
Furniture and fixtures ............................................................ 11,749,000 7,655,000
Leasehold improvements ............................................................ 3,068,000 2,903,000
Construction in progress .......................................................... 9,131,000 1,005,000
------------ ------------
288,300,000 273,393,000
Less accumulated depreciation ..................................................... 123,537,000 97,912,000
------------ ------------
164,763,000 175,481,000

NONCURRENT ASSETS OF DISCONTINUED OPERATIONS ........................................ 22,323,000 46,406,000
INTANGIBLE ASSETS, less accumulated amortization of $5,515,000 (1998)
and $7,384,000 (1997)............................................................... 18,290,000 21,264,000
OTHER ASSETS ........................................................................ 3,135,000 2,848,000
------------ ------------
$474,042,000 $557,940,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank debt ............................................................... $ 11,108,000
Trade accounts payable ............................................................. 41,592,000 $ 46,834,000
Accrued employee compensation ...................................................... 8,278,000 8,309,000
Accrued and sundry liabilities ..................................................... 23,059,000 19,504,000
Accrued restructuring charges ...................................................... 10,123,000 1,645,000
Current portion of long-term debt .................................................. 610,000 6,081,000
------------ ------------
TOTAL CURRENT LIABILITIES .................................................... 94,770,000 82,373,000
LONG-TERM DEBT ...................................................................... 183,535,000 227,516,000
DEFERRED INCOME TAXES ............................................................... 3,716,000 14,324,000
OTHER LIABILITIES AND DEFERRED CREDITS .............................................. 12,454,000 8,360,000
SHAREHOLDERS' EQUITY
Common Stock -- par value $.01 a share--authorized 50,000,000 shares, issued and
outstanding 24,644,000 shares (1998) and 24,518,000 shares (1997) ................. 246,000 245,000
Additional paid-in capital ......................................................... 165,221,000 164,811,000
Retained earnings .................................................................. 14,100,000 60,311,000
------------ ------------
179,567,000 225,367,000
COMMITMENTS AND CONTINGENCIES
$474,042,000 $557,940,000
============ ============
</TABLE>

See notes to consolidated financial statements.

<PAGE>

- --------------------------------------------------------------------------------
Consolidated Statements of Operation
Delta Woodside Industries, Inc.

<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------
June 27, 1998 June 28, 1997 June 29, 1996
----------------- --------------- ----------------
<S> <C> <C> <C>
Net sales ............................................................... $ 535,460,000 $ 530,278,000 $ 487,450,000
Cost of goods sold ...................................................... 439,300,000 432,567,000 451,216,000
------------- ------------- -------------
Gross profit ............................................................ 96,160,000 97,711,000 36,234,000
Selling, general and administrative expenses ............................ 60,738,000 52,697,000 55,433,000
Litigation (credit) ..................................................... (9,000,000)
Restructuring and impairment charge ..................................... 8,895,000 8,259,000
Other income (expense) .................................................. (189,000) 1,630,000 (819,000)
------------- ------------- -------------
OPERATING PROFIT (LOSS) ............................................. 26,338,000 46,644,000 (19,277,000)
Interest (expense) income:
Interest expense ....................................................... (23,395,000) (23,354,000) (18,993,000)
Interest income ........................................................ 557,000 752,000 448,000
------------- ------------- -------------
(22,838,000) (22,602,000) (18,545,000)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ........................................................... 3,500,000 24,042,000 (37,822,000)
Income tax expense (benefit) ............................................ 884,000 9,256,000 (14,561,000)
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS ................................ 2,616,000 14,786,000 (23,261,000)
Discontinued Operations:
(Loss) on disposal of discontinued operations less applicable income
taxes ................................................................ $ (37,042,000)

(Loss) from operations of discontinued operations less applicable
income taxes ......................................................... (9,325,000) (7,395,000) (39,378,000)
------------- ------------- -------------
(46,367,000) (7,395,000) (39,378,000)

NET INCOME (LOSS) ....................................................... $ (43,751,000) $ 7,391,000 $ (62,639,000)
============= ============= =============
Basic and diluted earnings (loss) per share:
Continuing operations .................................................. $ 0.11 $ 0.60 $ (0.95)
Discontinued operations ................................................ (1.89) (0.30) (1.61)
------------- ------------- -------------
Net earnings (loss) .................................................... $ (1.78) $ 0.30 $ (2.56)
============= ============= =============

Weighted average number of shares outstanding ........................... 24,575,000 24,513,000 24,443,000
============= ============= =============
</TABLE>

See notes to consolidated financial statements.

<PAGE>

- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
Delta Woodside Industries, Inc.

<TABLE>
<CAPTION>
Common Stock Additional Total
-------------------------- Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
-------------- ----------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1995 ........................ 24,357,078 $244,000 $163,364,000 $ 122,891,000 $ 286,499,000
Incentive stock award plan, shares issued ..... 53,448 1,000 594,000 595,000
Stock Option Plan, shares issued .............. 49,125 375,000 375,000
Tax benefits of stock plans ................... (163,000) (163,000)
Net (loss) .................................... (62,639,000) (62,639,000)
Cash dividends paid -- $.30 a share............ (7,332,000) (7,332,000)
---------- --------- ------------- ------------- -------------
Balance at June 29, 1996 ....................... 24,459,651 245,000 164,170,000 52,920,000 217,335,000
Incentive stock award plan, shares issued ..... 54,348 608,000 608,000
Stock Option Plan, shares issued .............. 4,669 35,000 35,000
Net income .................................... 7,391,000 7,391,000
Other ......................................... (263) (2,000) (2,000)
---------- --------- ------------ ------------ -------------
Balance at June 28, 1997 ....................... 24,518,405 245,000 164,811,000 60,311,000 225,367,000
Incentive stock award plan, shares issued ..... 112,403 1,000 575,000 576,000
Stock Option Plan, shares issued .............. 11,255 75,000 75,000
Tax benefits of stock plans ................... (253,000) (253,000)
Net (loss) .................................... (43,751,000) (43,751,000)
Cash dividends paid -- $.10 a share............ (2,460,000) (2,460,000)
Other ......................................... 2,026 13,000 13,000
---------- -------- ------------ ------------- -------------
BALANCE AT JUNE 27, 1998 ....................... 24,644,089 $246,000 $165,221,000 $ 14,100,000 $ 179,567,000
========== ======== ============ ============= =============
</TABLE>

See notes to consolidated financial statements.

<PAGE>

- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Delta Woodside Industries, Inc.

<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------
June 27, 1998 June 28, 1997 June 29, 1996
----------------- --------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ................................................. $ (43,751,000) $ 7,391,000 $ (62,639,000)
Adjustments to reconcile net income to net cash provided by
operating activities:
Discontinued operations ......................................... 43,684,000 2,148,000 33,023,000
Depreciation .................................................... 22,033,000 20,715,000 19,269,000
Amortization .................................................... 1,789,000 1,903,000 1,510,000
Write-down of property and equipment ............................ 3,819,000
Reduction in excess of cost over assigned value of net assets
acquired ....................................................... 6,735,000
Provision for losses on accounts receivable ..................... 1,220,000 240,000 2,277,000
Provision for deferred income taxes ............................. (1,842,000) 4,697,000 (12,522,000)
Losses (gains) on disposition of property and equipment ......... (46,000) (1,420,000) 1,300,000
Compensation under stock plans .................................. 664,000 643,000 807,000
Deferred compensation ........................................... 244,000 730,000 808,000
Other ........................................................... 30,000 (327,000) (70,000)
Changes in operating assets and liabilities:
Accounts receivable ............................................ (7,889,000) (16,945,000) (1,742,000)
Inventories .................................................... 19,843,000 (11,597,000) 72,648,000
Other current assets ........................................... (850,000) 7,610,000 (4,817,000)
Accounts payable and accrued expenses .......................... 9,123,000 10,339,000 (2,261,000)
-------------- ------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..................... 50,987,000 26,127,000 51,410,000

INVESTING ACTIVITIES
Property, plant and equipment:
Purchases ....................................................... (14,612,000) (20,510,000) (61,942,000)
Proceeds of dispositions ........................................ 528,000 3,653,000 5,608,000
Investing activities of discontinued operations ................... 10,574,000 (2,613,000) (4,996,000)
Other ............................................................. (296,000) (510,000) (90,000)
-------------- ------------- --------------
NET CASH (USED) BY INVESTING ACTIVITIES ....................... (3,806,000) (19,980,000) (61,420,000)

FINANCING ACTIVITIES
Proceeds from revolving lines of credit ........................... $ 293,262,000 $ 68,904,000 $ 268,826,000
Repayments on revolving lines of credit ........................... (481,019,000) (85,134,000) (245,660,000)
Scheduled principal payments of long-term debt .................... (682,000) (405,000) (272,000)
Proceeds from issuance of long-term debt .......................... 145,688,000 6,915,000
Dividends paid .................................................... (2,460,000) (7,332,000)
Other ............................................................. (1,913,000) (2,000)
-------------- ------------- --------------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES ................................................... (47,124,000) (9,722,000) 15,562,000
-------------- ------------- --------------

INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................... 57,000 (3,575,000) 5,552,000

Cash and cash equivalents at beginning of year ..................... 2,696,000 6,271,000 719,000
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ...................... $ 2,753,000 $ 2,696,000 $ 6,271,000
============== ============= ==============
</TABLE>

See notes to consolidated financial statements.

<PAGE>

- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Delta Woodside Industries, Inc.

NOTE A -- SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the
accounts of Delta Woodside Industries, Inc. (the "Company") and its
subsidiaries, (all of which are wholly-owned, except for International Apparel
Marketing Corporation which was 70% owned as of the three years ended June 27,
1998). All significant intercompany balances and transactions have been
eliminated. Certain amounts for the 1997 and 1996 fiscal years have been
reclassified to conform to the 1998 presentation of discontinued operations.

Cash Equivalents: The Company considers all highly liquid investments of three
months or less when purchased to be cash equivalents.

Inventories: Inventories are stated at the lower of cost or market determined
using both first-in, first-out (FIFO) and last-in, first-out (LIFO) methods.

Property, Plant and Equipment: Property, plant and equipment is stated on the
basis of cost. Depreciation is computed by the straight-line method for
financial reporting based on estimated useful lives of three to thirty-two
years, but predominantly over seven to ten years, and by accelerated methods
for income tax reporting.

Intangible Assets: Amortization is computed using the straight-line method. The
excess of cost over assigned value of net assets acquired relating to certain
business combinations is being amortized to expense over 40 years. Other
intangible assets are being amortized over periods of 4 to 40 years, but
averaging approximately 9 years.

Impairment of Long-Lived Assets: When required by circumstances, the Company
evaluates the recoverability of its long-lived assets by comparing estimated
future undiscounted cash flows with the asset's carrying amount to determine if
a write-down to market value is required. This policy was formally adopted by
the Company in fiscal 1996.

Revenue Recognition: Sales are recorded upon shipment or designation of
specific goods for later shipment at customers' request with related risk of
ownership passing to such customers.

Income Taxes: Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.

Earnings per Common Share: Per share data are computed based on the weighted
average number of shares of Common Stock and Common Stock Equivalents
outstanding during each period. The Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, during fiscal 1998. The statement
requires companies to present basic and diluted earnings per share. Common
stock equivalents are approximately .2% of weighted average shares outstanding
for the periods presented, and do not affect the calculation of earnings per
share. These common stock equivalents are attributable to the stock option plan
where the options have vested, but have not yet been exercised.

Environmental Costs: Environmental compliance costs including ongoing
maintenance, monitoring and similar costs, are expensed as incurred.
Environmental remediation costs are accrued, except to the extent costs can be
capitalized, when remedial efforts are probable, and the cost can be reasonably
estimated.

Cotton Procurement: The Company contracts to buy cotton with future delivery
dates at fixed prices in order to reduce the effects of fluctuations in the
prices of cotton used in the manufacture of its products. These contracts
permit settlement by delivery and are not used for trading purposes. The
Company commits to fixed prices on a percentage of its cotton requirements up
to eighteen months in the future. If market prices for cotton fall below the
Company's committed fixed costs and are not recoverable, the differential is
charged to income at that time.

Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Fiscal Year: The Company's operations are based on a fifty-two, fifty-three
week fiscal year ending on the Saturday closest to June 30. Fiscal years 1998,
1997 and 1996 each consist of 52 weeks.

- --------------------------------------------------------------------------------
NOTE B -- ACCOUNTS RECEIVABLE

The Delta Mills Marketing Company segment assigns a substantial portion of its
trade accounts receivable to a bank under a factor agreement. The assignment of
these receivables is without recourse, provided that customer orders are
approved by the bank prior to shipment of goods, up to a maximum for each
individual account.

The Company's accounts receivable are due from many companies that market and
produce apparel, home furnishings and other products, and from department
stores and specialty apparel retailers located throughout the United States.
The many companies represented in the Company's accounts receivable limits to a
certain extent the concentration of credit risk. The Company generally does not
require collateral for its accounts receivable. One customer accounted for 12%,
15% and 11% of sales for fiscal years 1998, 1997 and 1996, respectively.

<PAGE>

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

- --------------------------------------------------------------------------------
NOTE C -- INVENTORIES

As of June 27, 1998 and June 28, 1997, cost for certain inventories at Delta
Apparel and Duck Head Apparel is determined under the LIFO method representing
44% and 56%, respectively, of the cost of consolidated inventories. The balance
of the cost of consolidated inventories is determined under the FIFO method. If
these inventories had been determined by the FIFO method, they would have been
approximately the same as the reported amounts. During fiscal 1996 the Company
wrote down the value of certain excess inventories at Duck Head Apparel by
approximately $25 million.

- --------------------------------------------------------------------------------
NOTE D -- LONG-TERM DEBT, CREDIT ARRANGEMENTS AND NOTES PAYABLE

Long-term debt consists of:

<TABLE>
<CAPTION>
June 27, 1998 June 28, 1997
--------------- --------------
<S> <C> <C>
Senior notes (9.625%), with
interest payable
semiannually .................... $150,000,000
Revolving Credit Facility
(7.4% at June 27, 1998),
with interest payable
monthly or semiannually ......... 26,635,000
Revolving Credit Facility .......... $225,500,000
Industrial Revenue Bond
payable monthly, through
2001 at 80% of a bank's
base rate ....................... 578,000 818,000
Note to a bank payable
monthly with interest at
prime plus 1% ................... 6,712,000 6,953,000
Other .............................. 220,000 326,000
------------ ------------
184,145,000 233,597,000
Less current portion ............... 610,000 6,081,000
------------ ------------
$183,535,000 $227,516,000
============ ============
</TABLE>

On August 25, 1997 a subsidiary of the Company, Delta Mills, Inc., "DMI" issued
$150 million of unsecured ten-year senior notes, and obtained a secured
five-year $100 million revolving line of credit subject to borrowing base
limitations. At the same time, the Company obtained a separate, $20 million
line of credit due October 31, 1998. The net proceeds of the senior notes and
initial borrowings under the revolving lines of credit were used to repay
long-term debt. The $100 million revolving line of credit is backed by certain
accounts receivable and inventory of DMI with a carrying value of $138 million
at June 27, 1998. At June 28, 1997, approximately $220 million of the Revolving
Credit Facility which was due in September 1997 was classified as noncurrent
because it was subsequently refinanced as just described.

In May 1998, the Company replaced the above referenced $20 million line of
credit with a $30 million revolving credit facility (subject to borrowing base
limitations) which is due in May of 1999 and is presented as short-term bank
debt.This new facility is backed by certain accounts receivable and inventory of
Delta Apparel, Duck Head Apparel and Nautilus International with a carrying
value of $105 million at June 27, 1998. This credit facility has a term of one
year and carries an interest rate that is two percentage points above the
London Interbank Borrowing Rate.

Loan covenants in the senior notes and the DMI revolving credit facility limit
the Company's ability to use cash generated by DMI to fund operations in the
rest of the Company. On June 27, 1998 approximately $63 million was available
under the DMI revolving credit agreement, and approximately $16 million was
available under the separate short-term $30 million line of credit. The new
credit facility and the DMI credit facility and the senior notes also contain
other restrictive covenants which include minimum tangible net worth and
certain other minimum financial ratios. The agreements also restrict additional
indebtedness, dividends and capital expenditures. At June 27, 1998, the net
assets of the Company include net assets of the wholly owned subsidiary DMI of
approximately $40 million which are subject to the restrictions described
above.

The carrying value of the Company's revolving credit agreements approximate
fair value since the rates are tied to floating rates. At June 27, 1998 the
carrying value of the senior notes was $150,000,000 and the fair value, based
on quoted market prices was $150,375,000.

Total interest expense incurred by the Company was $23,395,000, $23,656,000 and
$19,703,000 in fiscal years 1998, 1997 and 1996, respectively, of which
$302,000 and $710,000 was capitalized in fiscal years 1997 and 1996,
respectively. Total interest paid during fiscal years 1998, 1997 and 1996 was
$ 21,568,000, $17,546,000 and $19,357,000, respectively.

During fiscal year 1997, the Company acquired certain machinery and equipment
under noncancelable operating leases in connection with the modernization
project in the woven fabrics division. The terms provide for total lease
payments of $14 million over a period of five years.

Rent expense relating to all operating leases of the company was approximately
$7,471,000, $7,179,000 and $6,276,000 for fiscal 1998, 1997 and 1996,
respectively.

Aggregate principal maturities of all long-term debt, and minimum payments
under operating leases are as follows:

<TABLE>
<CAPTION>
Long-term Operating
Fiscal Year Debt Leases
- --------------------- --------------- -------------
<S> <C> <C>
1999 ................ $ 610,000 $ 6,446,000
2000 ................ 6,723,000 6,517,000
2001 ................ 135,000 4,259,000
2002 ................ 42,000 2,624,000
2003 ................ 26,635,000 831,000
Later years ......... 150,000,000 794,000
------------ -----------
$184,145,000 $21,471,000
============ ===========
</TABLE>

<PAGE>

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

- --------------------------------------------------------------------------------
NOTE E -- SHAREHOLDERS' EQUITY

The Stock Option Plan was approved by the shareholders in fiscal 1991, and
amended in fiscal 1996. The Plan gives the Company the right to grant awards or
options for up to 600,000 shares of Common Stock to employees. Prior to the
amendment, the Company could grant awards or options for up to 300,000 shares.
Transactions under the Stock Option Plan are as follows:

<TABLE>
<CAPTION>
Prices Outstanding Exercisable
---------------- ------------- ------------
<S> <C> <C> <C>
July 1, 1995 .................. $ 4.00-$9.94 129,250 63,125
Granted ..................... 3.06- 4.38 254,675
Became exercisable .......... 3.38- 9.94 27,875
Exercised ................... 4.00- 5.13 (49,125) (49,125)
Canceled .................... 5.88- 5.88 (7,500)
-------
June 29, 1996 ................. 3.06- 9.94 327,300 41,875
Granted ..................... 2.50- 3.56 49,000
Became exercisable .......... 3.38- 7.68 25,750
Exercised ................... 3.38- 5.88 (4,669) (4,669)
Canceled .................... 3.38- 9.94 (30,125) (12,000)
------- -------
June 28, 1997 ................. 2.50- 7.68 341,506 50,956
Granted ..................... 2.22- 3.38 148,000
Became exercisable .......... 2.50- 5.88 128,340
Exercised ................... 2.50- 3.38 (11,375) (11,375)
Canceled .................... 3.06- 7.68 (20,750) (16,625)
------- -------
June 27, 1998 ................. 2.22- 5.88 457,381 151,296
======= =======
</TABLE>

The weighted average exercise price for all options outstanding was $3.53 per
share at June 27, 1998. These options expire on various dates beginning August
1999 and ending in July 2003 The options generally become exercisable in equal
amounts on the first through fourth anniversaries of the date of grant and
remain exercisable until the fifth anniversary of the date of grant. The excess
of the fair market value of the stock over the exercise price at the date of
grant is recognized as compensation expense over the period during which the
options become exercisable. Related compensation expense was $223,000, $223,000
and $152,000 during fiscal 1998, 1997 and 1996, respectively. Options available
for grant at June 27, 1998, June 28, 1997 and June 29, 1996 were 221,700,
72,450 and 91,325, respectively.

The Incentive Stock Award Plan was approved by the shareholders in fiscal 1991,
and amended in fiscal 1996. The Plan gives the Company the right to grant
awards for up to 800,000 shares of Common Stock to employees. Prior to the
amendment, the Company could grant awards or options for up to 300,000 shares.

Under the Incentive Stock Award Plan awards are granted for the right to
purchase shares for $.01. Awards were granted to purchase up to 36,791 and
282,481 during fiscal 1998 and 1997, respectively. During fiscal 1996, rights
to purchase 22,206 shares were canceled. Generally, each award vests based in
part on service and in part on achievement of certain performance goals over a
three-year period. Compensation expense for the service portion is based on the
market price of the stock on the date of award. Compensation expense for the
performance portion is based on the prevailing market price of the stock. Tax
benefits arising from the difference in market value between the date of grant
and the date of issuance of Common Stock are recorded as an adjustment to
additional paid-in capital. Compensation expense for the Company's incentive
stock award plan including related tax assistance was $775,000, $612,000 and
$615,000 for the fiscal years 1998, 1997 and 1996, respectively. Shares
available for grant at June 27, 1998 were 158,119.

The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." If compensation cost for the Company's two stock plans,
described above, had been determined based on the provisions of SFAS No. 123,
net income would have been approximately the same as that reported by the
Company.

The shareholders have authorized the Board of Directors to issue up to 10
million shares of preferred stock with a maximum aggregate par value of $250
million, and to establish the particular terms including dividend rates,
conversion prices, voting rights, redemption prices and similar matters. No
shares of preferred stock have been issued.

- --------------------------------------------------------------------------------
NOTE F -- INCOME TAXES

For fiscal 1998, the Company had a regular tax loss of $27 million and an
alternative minimum tax (AMT) tax loss of $38 million. At June 27, 1998, the
Company had regular tax loss carryforwards of $52 million for federal purposes
and $125 million for state purposes. $9.2 million of the federal loss
carryforward resulted from the 1988 acquisition of Stanwood Corporation and
will expire in years 2002 and 2003.

The Company's gross deferred tax assets are reduced by a valuation allowance to
net deferred tax assets considered by management to be more likely than not
realizable. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. The valuation allowance increased
$11,983,000 during fiscal 1998.

<PAGE>

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

Significant components of the Company's deferred tax assets and liabilities are
as follows:

<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Assets
Net operating loss
carryforward ........................... $26,478,000 $14,567,000
Inventory ................................. 3,907,000 11,070,000
Restructuring reserves .................... 5,491,000 598,000
Tax credit carryforward ................... 3,738,000 3,375,000
Deferred compensation ..................... 3,009,000 2,912,000
Health claims ............................. 2,388,000 2,218,000
Allowance for doubtful
accounts ............................... 1,873,000
Accrued vacation .......................... 535,000 671,000
Stock compensation accruals ............... 743,000 491,000
Workers' compensation ..................... 293,000 293,000
Other ..................................... 1,338,000 1,130,000
----------- -----------
Deferred tax assets ....................... 47,920,000 39,198,000
Valuation allowance ....................... (25,896,000) (13,913,000)
----------- -----------
Net deferred tax assets ................... 22,024,000 25,285,000
Liabilities
Depreciation .............................. 20,041,000 24,354,000
Inventory -- LIFO basis
difference ............................. 2,855,000 3,410,000
Intangibles ............................... 857,000 1,819,000
Accounts receivable
write-down ............................. 1,017,000
Other ..................................... 109,000 399,000
----------- -----------
Deferred tax liabilities .................. 24,879,000 29,982,000
----------- -----------
Net deferred tax liabilities ......... $ 2,855,000 $ 4,697,000
=========== ===========
</TABLE>

Significant components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
1998 1997 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal income
taxes ............... $ 619,000 $(3,068,000) $ (8,962,000)
State income
taxes ............... 550,000 341,000 526,000
---------- ----------- ------------
Total current ....... 1,169,000 (2,727,000) (8,436,000)
Deferred:
Federal income
taxes (benefits)..... (1,583,000) 4,030,000 (10,506,000)
State income
taxes (benefits)..... (259,000) 667,000 (2,016,000)
---------- ----------- ------------
Total deferred ...... (1,842,000) 4,697,000 (12,522,000)
---------- ----------- ------------
Total provision .......... $ (673,000) $ 1,970,000 $(20,958,000)
========== =========== ============
</TABLE>

The reconciliation of income tax expense (benefit) computed at the Federal
statutory tax rate:

<TABLE>
<CAPTION>
1998 1997 1996
----------------- --------------- -----------------
<S> <C> <C> <C>
Income tax expense
(benefit) at
statutory rates ......... $(15,574,000) $3,276,000 $(29,259,000)
State taxes
(benefits), net of
federal benefit ......... 189,000 655,000 (969,000)
Amortization of
excess of cost
over assigned
value of net assets
acquired ................ 2,799,000 291,000 293,000
Foreign subsidiary
loss (income) ........... 175,000 341,000 285,000
Valuation allowance
adjustments ............. 11,983,000 (1,268,000) 9,550,000
Other ...................... (245,000) (1,325,000) (858,000)
------------ ---------- ------------
$ (673,000) $1,970,000 $(20,958,000)
============ ========== ============
</TABLE>

The Company made no income tax payments for fiscal 1998 and 1997, but made
income tax payments of approximately $1,628,000 during fiscal year 1996. The
carryback of net operating losses for fiscal 1997 resulted in a tax refund of
$2.2 million in fiscal 1998.

- --------------------------------------------------------------------------------
NOTE G -- OPERATIONS BY INDUSTRY SEGMENT

Industry segment information for the Company presented on pages and of
this Annual Report is an integral part of these financial statements.

- --------------------------------------------------------------------------------
NOTE H -- DISCONTINUED OPERATIONS AND RESTRUCTURING CHARGES

As a result of the history of operating losses at Stevcoknit Fabrics' knitting
and knit finishing plants, and at the Nautilus fitness equipment business, the
Company made the decision on March 3, 1998 to close its Stevcoknit Fabrics
division and to sell its Nautilus International division (fitness equipment).
Accordingly, operating results for those segments have been reclassified and
reported as discontinued operations. The Company is selling the assets of the
Stevcoknit division, and has retained a firm to sell the Nautilus International
fitness equipment business. The Company expects to complete disposition of
these businesses during the first six months of fiscal year 1999.

In connection with the decision to discontinue these businesses, the Company
has recognized a loss on disposal of discontinued operations of $37 million
including a provision of $8.0 million for losses during the phase-out period
and an income tax benefit of $1.2 million. The Company believes that it will
recover the net book value of the assets of the discontinued businesses.
However, the amount ultimately realized upon disposition could differ
materially from the carrying value of these assets. At June 27, 1998 the
Company had outstanding approximately $14 million in accrued restructuring
charges and reserves relating to discontinued operations. These amounts consist
of $10 million and

<PAGE>

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

$4 million which are presented as current and noncurrent liabilities,
respectively. In addition to these charges to income, during fiscal 1996, the
Company recognized an impairment charge of $12 million related to the property
and equipment at the Stevcoknit division.

The assets of discontinued businesses at June 27, 1998 and June 28, 1997, are
as follows:

<TABLE>
<CAPTION>
June 27, 1998 June 28, 1997
--------------- --------------
<S> <C> <C>
Accounts Receivable ................. $19,450,000 $24,504,000
Inventory ........................... 6,104,000 26,396,000
Other current assets ................ 243,000 274,000
----------- -----------
Total current assets ............. 25,797,000 51,174,000
=========== ===========
Property, plant and
equipment net of
accumulated depreciation ......... 11,535,000 34,930,000
Intangibles ......................... 10,788,000 11,476,000
----------- -----------
Total Assets ..................... $48,120,000 $97,580,000
=========== ===========
</TABLE>

Summarized results of operations for discontinued businesses are as follows:

<TABLE>
<CAPTION>
June 27, 1998 June 28, 1997 June 29, 1996
--------------- --------------- ----------------
<S> <C> <C> <C>
Net Sales .............. $109,452,000 $ 121,540,000 $ 112,722,000
Costs and
expenses ............ 119,090,000 136,221,000 158,497,000
------------ ------------- -------------
(Loss) before
income taxes ........ (9,638,000) (14,681,000) (45,775,000)
Income tax
expense
(benefit) ........... (313,000) (7,286,000) (6,397,000)
------------ ------------- -------------
(Loss) from
operation of
discontinued
operations .......... $ (9,325,000) $ (7,395,000) $ (39,378,000)
============ ============= =============
</TABLE>

During fiscal 1998, the Company recognized the impairment of the excess of cost
over assigned value of net assets acquired in the Delta Apparel division by
charging pretax income for $7.3 million. The Company also took a restructuring
charge related to the closure of certain retail outlet stores in its Duck Head
Apparel division.

- --------------------------------------------------------------------------------
NOTE I -- EMPLOYEE BENEFIT PLANS

On September 27, 1997 the Delta Woodside Industries Employee Retirement Plan
("Retirement Plan") merged into the Delta Woodside Employee Savings and
Investment Plan ("401(k) Plan"). Future contributions to the 401(k) Plan in
lieu of a contribution to the Retirement Plan will be made in cash and not in
stock. In the 401(k) Plan employees may elect to convert DWI stock to other
funds, but may not increase the amount of stock in their account. Each
participant has the right to direct the trustee as to the manner in which
shares held are to be voted. The Retirement Plan qualified as an Employee Stock
Ownership Plan ("ESOP") under the Internal Revenue Code as a defined
contribution plan. Contributions of $328,000 and $400,000 were allocated to
participants for fiscal 1997 and 1996, respectively. During fiscal 1998, 1997
and 1996, the Company contributed $615,000, $648,000 and $543,000,
respectively, to the 401(k) Plan.

The Company also maintains a 501(c)(9) trust, the Delta Woodside Employee
Benefit Plan and Trust ("Trust"). The Trust collects both employer and employee
contributions from the Company and makes disbursements for health claims and
other qualified benefits.

The Company has a Deferred Compensation Plan which permits certain management
employees to defer a portion of their compensation. Deferred compensation
accounts are credited with interest and are distributable after retirement,
disability or employment termination. As of June 27, 1998 and June 28, 1997,
the total liability amounted to $7,204,000 and $6,966,000, respectively. The
Company insured the lives of certain management employees to assist in funding
of the deferred compensation liability. The Company is the owner and
beneficiary of the insurance policies.

- --------------------------------------------------------------------------------
NOTE J -- AFFILIATED PARTY TRANSACTIONS

The Company leases its corporate and other office space from a corporation
whose stock is owned one-half each by the president and a vice president of the
Company. Additional office space and retail store space is leased from the
executive vice president. Under the leases, the Company made payments of
approximately $248,000, $254,000 and $216,000 for the 1998, 1997 and 1996
fiscal years, respectively.

- --------------------------------------------------------------------------------
NOTE K -- COMMITMENTS AND CONTINGENCIES

The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At June 27, 1998 minimum
payments under these contracts with noncancelable contract terms were $48
million in fiscal 1999 and $7.3 million in fiscal 2000. These commitments were
at prices which approximate current market value.

During fiscal 1999, the Company plans to spend approximately $20 million for
capital improvements to maintain its existing facilities

<PAGE>

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

Two of the Company's South Carolina plants, Delta Mills Marketing
Company's Delta 2 and 3 finishing plants, have been unable to comply with
certain toxicity and other permit-related limits contained in a National
Pollutant Discharge Elimination System ("NPDES") permit held by the
Company. The Company is working with the appropriate state agency to
address these issues. To attempt to achieve compliance, the Company has
completed required upgrades at a cost of approximately $2.3 million and
believes that the required effluent limits will be achieved by November
1, 1998. Although there is no assurance that the Company will be
successful, and it could face administrative penalties if it is not, the
Company does not currently believe that these matters will have a
material adverse impact on the Company.

The Company is currently assessing certain wastewater treatment system basins
of a North Carolina plant that is no longer in operation but was a likely
source of groundwater contamination. The Company currently has no plans to
remediate any groundwater contamination. Although no assurance can be provided,
the Company does not currently believe that this matter will have a material
adverse impact on the Company.

The Company's Nautilus business has been named as a "potentially responsible
party" under the Comprehensive Environmental Response, Compensation, and
Liability Act with respect to three hazardous waste sites. To the Company's
knowledge, all of the transactions with these sites were conducted by a
corporation whose assets were sold in 1990 pursuant to the terms of an order of
the United States Bankruptcy Court to another corporation, the stock of which
was subsequently acquired by the Company in January 1993. The Company,
therefore, has denied any responsibility at the sites and has declined to
participate in any settlements. Accordingly, the Company has not provided for
any reserves for costs or liabilities attributable to the previous corporation.
At two sites the previous company is listed as a "de minimis" party. At the
third site, the previous company is ranked eleventh out of a total of over 300
potentially responsible parties based on the company's volume of contribution
of about 3%. Latest estimates of certain costs to clean up the site range up to
$4 million. Although there is uncertainty as to several legal issues, the
Company believes that it has certain defenses to liability at these sites.
Based on the information currently known to it, the Company does not believe
that the potential liabilities arising from these three sites will have a
materially adverse impact on the Company.

From time to time the Company and its subsidiaries are defendants in legal
actions involving claims arising in the normal course of business, including
product liability claims. The Company believes that, as a result of legal
defenses, insurance arrangements and indemnification provisions with parties
believed to be financially capable, none of these actions should have a
material effect on its operations or financial condition.

- --------------------------------------------------------------------------------
NOTE L -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of quarterly results of operations for the years
ended June 27, 1998 and June 28, 1997.

<TABLE>
<CAPTION>
1998 Quarter Ended
---------------------------------------------------
Sept. 27 Dec. 27 Mar. 28 June 27
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Net sales .................................$139,142 $124,927 $121,516 $149,875
Gross profit .............................. 25,217 21,667 23,915 25,361
Income from continuing operations ......... 3,418 1,701 (4,273) 1,770
Net income (loss) ......................... 666 (570) (45,617) 1,770
Basic and diluted earnings (loss) from
continuing operations per share of
Common Stock ............................. 0.14 0.07 (0.17) 0.07
Basic and diluted earnings (loss) per share
of Common Stock .......................... 0.03 (0.02) (1.86) 0.07

<CAPTION>
1997 Quarter Ended
-------------------------------------------------------
Sept. 28 Dec. 28 Mar. 29 June 28
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Net sales ................................. $116,760 $131,768 $133,731 $148,019
Gross profit .............................. 23,529 23,571 25,563 25,048
Income from continuing operations ......... 3,419 3,339 4,522 3,506
Net income (loss) ......................... 2,003 2,158 2,608 622
Basic and diluted earnings (loss) from
continuing operations per share of
Common Stock ............................. 0.14 0.14 0.18 0.14
Basic and diluted earnings (loss) per share
of Common Stock .......................... 0.08 0.09 0.11 0.03
</TABLE>

During the fourth quarter of fiscal 1998, the Company made certain adjustments
resulting from changes in estimates of inventory losses that were material to
the results of operations. These changes resulted in a reduction in net income
of $1.7 million or $.07 per share for the fourth quarter of fiscal 1998.

During the third quarter of fiscal year 1998, the Company recognized
restructuring and impairment charges of $37 million in connection with
discontinued operations described in note H. In addition, the Company also
recognized impairment of the excess of cost over assigned value of net assets
acquired in the Delta Apparel division by charging pretax income for $7.3
million. In the same quarter, the Company also recognized other restructuring
charges of $1.6 million primarily related to closure of certain facilities at
Duck Head Apparel.

<PAGE>

- --------------------------------------------------------------------------------
Corporate Directory

Operating Companies of
Delta Woodside Industries, Inc.

Delta Mills Marketing Company
P.O. Box 6126, Station B
100 Augusta Street
Greenville, SC 29606

Duck Head Apparel Company

P.O. Box 688
1020 Barrow Industrial Parkway
Winder, GA 30680-0688

Delta Apparel Company

3355 Breckinridge Boulevard
Suite 100
Duluth, GA 30136

Nautilus International

709 Powerhouse Road
Independence, Virginia 24348-0708

Corporate Officers

E. Erwin Maddrey, II
President and Chief Executive Officer

Bettis C. Rainsford
Executive Vice President, Treasurer
and Chief Financial Officer

Jane H. Greer
Vice President and Secretary

Robert W. Humphreys
Vice President Finance and Assistant Secretary

Douglas J. Stevens
Vice President International

Brenda L. Jones
Assistant Secretary

Board of Directors

* C. C. Guy**
RSI Holdings, Inc. -- Director

* Dr. James F. Kane**
Dean Emeritus, College of Business
University of South Carolina

* Dr. Max Lennon**
President
Mars Hill College

E. Erwin Maddrey, II
President and
Chief Executive Officer
Delta Woodside Industries, Inc.

Buck A. Mickel**
President, CEO and Director -- RSI Holdings, Inc.
Vice President -- Micco Corporation
(Real estate and business investments)

Bettis C. Rainsford
Executive Vice President, Treasurer
and Chief Financial Officer
Delta Woodside Industries, Inc.

* Member Audit Committee
** Member Compensation Committee

Note, The board of directors lost a member as a result of the death of
Buck Mickel. Mr. Mickel had served as a director of Delta Woodside
since 1986.

Form 10-K

Upon written request, the Company will furnish without charge to any Delta
Woodside Shareholder a copy of the Company's Annual Report on Form 10-K for the
fiscal year ended June 27, 1998 including financial statements and schedules,
but excluding exhibits. Requests should be directed to:

Jane H. Greer, Vice President and Secretary, Delta Woodside Industries, Inc.,
233 North Main Street, Suite 200, Greenville, South Carolina 29601.

Annual Meeting

The Annual Meeting of Shareholders of Delta Woodside Industries, Inc. will be
held on Tuesday, November 24, 1998, at 10:00 a.m., at the Hyatt Regency Hotel,
220 North Main Street, Greenville, South Carolina.

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Delta Woodside Industries, Inc.
233 N. Main Street
Suite 200
Greenville, SC 29601
(864) 232-8301