DAN RIVER INC /GA/, S-1/A, 1997-11-19

DAN RIVER INC /GA/
S-1/A, 1997-11-19
TEXTILE MILL PRODUCTS

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<PAGE>

As filed with the Securities and Exchange Commission on November 19, 1997
REGISTRATION NO. 333-36479
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 3 TO
FORM S-1

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

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

DAN RIVER INC.
(Exact name of registrant as specified in charter)

GEORGIA 2211 58-185637
(State or other (Primary Standard Industrial (I.R.S.
jurisdiction of Classification Code Number) Employer
incorporation or Identification
organization) No.)

----------------
2291 MEMORIAL DRIVE
DANVILLE, VIRGINIA 24541
(804) 799-7000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

----------------
HARRY L. GOODRICH, ESQ.
DAN RIVER INC.
2291 MEMORIAL DRIVE
DANVILLE, VIRGINIA 24541
(804) 799-7000
(Name, address, including zip code, and telephone
number, including area code, of agent for service)

----------------
Copies to:
MARY A. BERNARD WILLIAM P. ROGERS, JR.
KING & SPALDING CRAVATH, SWAINE & MOORE
1185 AVENUE OF THE AMERICAS WORLDWIDE PLAZA
NEW YORK, NEW YORK 10036 825 EIGHTH AVENUE
(212) 556-2100 NEW YORK, NEW YORK 10019-7475
(212) 474-1000

----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following effectiveness of this Registration Statement.

----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)

Issued November 19, 1997

6,700,000 Shares
Dan River Inc.
CLASS A COMMON STOCK

----------

OF THE 6,700,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED, 4,700,000
SHARES ARE BEING SOLD BY THE COMPANY AND 2,000,000 SHARES ARE BEING SOLD BY
THE SELLING SHAREHOLDERS (THE "OFFERING"). SEE "PRINCIPAL AND SELLING
SHAREHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE
SALE OF THE SHARES OF CLASS A COMMON STOCK BY THE SELLING SHAREHOLDERS.
PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE CLASS A
COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE
INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN $14.00 AND
$16.00. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.

----------

THE CLASS A COMMON STOCK HAS BEEN APPROVED FOR
LISTING, SUBJECT TO OFFICIAL NOTICE OF
ISSUANCE, ON THE NEW YORK STOCK EXCHANGE UNDER
THE SYMBOL "DRF."

----------

UPON COMPLETION OF THE OFFERING, THE COMPANY'S OUTSTANDING CAPITAL STOCK WILL
INCLUDE CLASS A COMMON STOCK AND CLASS B COMMON STOCK. THE CLASS A COMMON
STOCK IS SUBSTANTIALLY IDENTICAL TO THE CLASS B COMMON STOCK EXCEPT WITH
RESPECT TO VOTING POWER AND, EXCEPT AS OTHERWISE REQUIRED BY THE
COMPANY'S AMENDED AND RESTATED ARTICLES OF INCORPORATION AND GEORGIA
LAW, WILL VOTE TOGETHER WITH THE CLASS B COMMON STOCK AS ONE CLASS
ON ALL MATTERS SUBMITTED TO A VOTE OF SHAREHOLDERS, INCLUDING THE
ELECTION OF DIRECTORS. THE CLASS A COMMON STOCK IS ENTITLED TO
ONE VOTE PER SHARE AND THE CLASS B COMMON STOCK IS ENTITLED TO
4.39 VOTES PER SHARE.

----------

SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.

----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

----------

PRICE $ A SHARE

----------

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
------------ -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
Total(3).............. $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
(2) Before deducting expenses estimated at $565,000, which will be paid by the
Company.
(3) The Selling Shareholders have granted the Underwriters an option,
exercisable within 30 days of the date hereof, to purchase up to an
aggregate of 1,005,000 additional Shares of Class A Common Stock at the
Price to Public less Underwriting Discounts and Commissions for the purpose
of covering over-allotments, if any. If the Underwriters exercise such
option in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Selling Shareholders will be $ , $ and
$ , respectively. See "Underwriters."

----------

The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Cravath, Swaine & Moore, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about November , 1997, at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in immediately available funds.

----------

MORGAN STANLEY DEAN WITTER

J.P. MORGAN & CO.

SBC WARBURG DILLON READ INC.

, 1997
<PAGE>

[FOUR COLOR GRAPHICS APPEAR HERE]

1. Dan River's newly introduced Nautica(R) home fashions' bedding offering
includes sheets, pillowcases, comforters, pillow shams, window treatments, and
accessories.

2. Dan River's shirting fabrics are a top choice among producers of leading
brand name dress shirts.

3. Dan River's quality and style reputation is reflected in the labels of its
top sportswear and uniform fabric customers.
<PAGE>

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
SHAREHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
CLASS A COMMON STOCK OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 10
Use of Proceeds..................... 16
Dividend Policy..................... 16
Capitalization...................... 17
Selected Historical and Pro Forma
Consolidated Financial Data........ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................ 30
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management.......................... 40
Certain Transactions................ 47
Principal and Selling Shareholders.. 48
Description of Capital Stock........ 49
Shares Eligible for Future Sale..... 54
Underwriters........................ 55
Legal Matters....................... 57
Experts............................. 57
Available Information............... 58
Index to Consolidated Financial
Statements......................... F-1
</TABLE>

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS
OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE CLASS A COMMON STOCK IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."

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

Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" including, without limitation, those
concerning the Company's strategy, contain certain forward-looking statements
concerning the Company's operations, economic performance and financial
condition. Because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause such differences include, but are
not limited to, those discussed under "Risk Factors."

3
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise indicated, references in this Prospectus to "Dan
River" or the "Company" include Dan River Inc. and its predecessors and
subsidiaries. In addition, unless otherwise indicated, all information in this
Prospectus gives retroactive effect to the completion of the Recapitalization
(as hereinafter defined), as well as to certain other changes with respect to
the Company's charter and bylaws that will be completed prior to completion of
the Offering. See "Certain Transactions." References to a fiscal year refer to
the fiscal year of the Company, which is the 52- or 53-week period ending on
the Saturday nearest to December 31. All fiscal years presented consisted of 52
weeks other than fiscal 1992, which ended on January 2, 1993 and consisted of
53 weeks. Unless otherwise indicated, the information in this Prospectus does
not give effect to the exercise of the Underwriters' over-allotment option. See
"Underwriters."

THE COMPANY

Founded in 1882, Dan River Inc. (the "Company" or "Dan River") is a leading
manufacturer and marketer of textile products for the home fashions and apparel
fabrics markets. The Company designs, manufactures and markets a coordinated
line of value-added home fashions products consisting of packaged bedroom
furnishings such as comforters, sheets, pillowcases, shams, bed skirts,
decorative pillows and draperies. Dan River also manufactures and markets a
broad range of high quality woven cotton and cotton-blend fabrics and believes
that it is the leading supplier of men's dress shirting fabrics in North
America (based on net sales). On a pro forma basis, after giving effect to the
Cherokee Acquisition (described below), the Company's home fashions products
and apparel fabrics accounted for 50.6% and 49.4%, respectively, of the
Company's net sales of $480.6 million in fiscal 1996.

Home Fashions Products. Dan River's home fashions products are marketed to
key retailers under the "Dan River" brand name, as well as under licenses from,
among others, "Colours by Alexander Julian," "D. Porthault," "John Wilman,"
"Liberty" and "Nautica." The Company's top five retail home fashions customers
in fiscal 1996 were Wal-Mart Stores, Inc., Kmart Corporation, Federated
Department Stores, Inc., J.C. Penney Company, Inc. and The May Department
Stores Company. The Company focuses on value-added, higher thread count and
yarn-dyed products and accessory items, as opposed to solid-colored commodity
products. Management believes these products yield higher margins and
differentiate the Company's product line from those of its competitors.
Additionally, the Company is a leader in offering complete bed ensembles which
it markets under the "Bed-in-a-Bag" name and which package a comforter together
with matching sheets, pillowcases, shams and a dust ruffle. These packaged sets
provide attractive profit margins for both the Company and its retail
customers, while offering consumers value and convenience.

The Company works directly with its customers from the earliest stage of the
design process to develop styles that satisfy their specific needs. The
Company's technologically advanced manufacturing operations also provide the
flexibility to produce a wide variety of styles and to respond quickly to
changes in market conditions. As a result of its innovative merchandising and
styling techniques, its superior customer service, its license of certain well-
known brand names and its flexible manufacturing operations, Dan River has
increased its net sales of home fashions products 34.8% from $180.4 million in
fiscal 1992 to $243.2 million in fiscal 1996.

Apparel Fabrics. The Company's apparel fabrics are marketed to a diverse
customer base including manufacturers of men's, women's and children's
clothing, uniforms and home furnishings, and retailers of sewing and craft
fabrics. The Company's apparel fabrics are used in garments marketed under such
well-known brand names as Arrow, Brooks Brothers, Hathaway, Levi Strauss, Liz
Claiborne, L.L. Bean, Manhattan, Osh Kosh B'Gosh and Van Heusen, as well as
numerous private labels marketed through retailers such as J.C. Penney

4
<PAGE>

Company, Inc. and Sears, Roebuck & Co. The Company believes that it is the
leading manufacturer of men's dress shirting fabrics in North America (based on
net sales). Management believes that the Company enjoys a reputation as a
leader in developing innovative fabric styles and designs and that its
customers look to the Company's design and styling professionals to anticipate
fashion trends and develop new products.

On February 3, 1997, the Company acquired substantially all of the assets and
certain of the liabilities of The New Cherokee Corporation ("Cherokee"), a
major competitor of the Company (the "Cherokee Acquisition"). The Cherokee
Acquisition almost doubled the size of the Company's apparel fabrics business,
added complementary product lines and introduced new distribution channels.
Since completing the Cherokee Acquisition, the Company has achieved significant
cost savings by eliminating redundant manufacturing capacity and overhead and
increasing the production volume at the former Cherokee facilities. On a pro
forma basis, after giving effect to the Cherokee Acquisition, the Company had
net sales of apparel fabrics of $237.4 million in 1996.

BUSINESS STRATEGY

The Company's principal business objective is to continue to expand the sales
of its home fashions products and apparel fabrics, while improving the overall
profitability of its operations. The primary components of the Company's
business strategy include the following:

. Capitalize on Profit Opportunities in Home Fashions Market. The Company
focuses on the sale of higher thread count percale products (180 threads
per square inch and above), printed products and accessory items
(products other than individually packaged sheets and pillowcases) which
enhance the Company's competitiveness, sales growth and profitability.
The Company's customer-specific marketing strategy is designed to (i)
create specialized products that provide differentiation from competitors
and enable both the Company and its customers to increase sales and
margins, and (ii) attract value conscious consumers by offering high
quality products at reasonable prices. Accordingly, the Company works
directly with retailers to develop value-added, fashion-oriented products
(as opposed to solid color commodity products) that are periodically
updated to respond to changing consumer preferences, thereby improving
retailers' inventory turn rates and associated profitability.

. Expand Distribution of Home Fashions Products Through Strategic
Relationships with Major Retailers. The Company aggressively markets its
home fashions products to, and has developed significant business
relationships with, key retailers in all retail trade classes, including
department stores, mass merchandisers, discount stores, national chain
stores, specialty stores and warehouse clubs. Establishing and expanding
these key distribution channels has strengthened consumer recognition of
the "Dan River" brand name and increased sales. The Company has
established strategic relationships with large, high volume retailers
such as Wal-Mart Stores, Inc., Kmart Corporation, Federated Department
Stores, Inc., J.C. Penney Company, Inc. and The May Department Stores
Company, by providing high quality products together with superior
customer service.

. Enhance Strong Apparel Fabrics Market Position. Dan River seeks to
enhance its position as a leading producer of apparel fabrics by focusing
on customer relationships, anticipating fashion trends, developing new
innovative products and reducing manufacturing lead times. Management
believes that (i) the significant reduction in manufacturing costs
achieved through its aggressive facility modernization program, (ii) the
increase in the size of its apparel fabrics operations and attendant
reduction in fixed costs on a per unit basis as a result of the Cherokee
Acquisition and (iii) its diverse customer base will make Dan River's
apparel fabrics business less sensitive to the cyclicality experienced by
the textile industry in general and will further increase the Company's
profitability. Management also believes that demand for apparel fabrics
manufactured in North America and the Caribbean will continue to increase
as a result of the North American Free Trade Agreement ("NAFTA"), the
Caribbean Basin Recovery Act and the increasing importance of geographic
proximity in enabling shortened delivery times.

5
<PAGE>

. Attain Textile Industry Leadership in Information Technology. The Company
has invested significantly in information technology to provide improved
and differentiated services. The Company has implemented an advanced
supply chain management system which reduces manufacturing lead-time and
enhances the Company's ability to respond to customer requirements. The
Company's electronic data interchange ("EDI") systems, quick response
customer delivery programs and point-of-sale decision support systems
enable customers to maintain lower inventory levels and react faster to
changes in product demand, thereby improving their operating results. In
addition, the Company employs continuous inventory replenishment and
dedicated manufacturing programs with certain customers to enhance
service. Planned investments in information technology include the
implementation of a new enterprise resource planning ("ERP") system along
with additional continuous inventory replenishment programs.

. Enhance Financial Flexibility. The Company seeks to maintain a capital
structure that will position it for growth through expansion of existing
operations and potential acquisitions as well as provide stability during
cyclical downturns. The textile industry generally, and in particular
marketers of home fashions products, have undergone significant
consolidation in recent years and the Company anticipates that this trend
will continue. The Company believes that, following completion of the
Offering, its strong balance sheet will enable it to capitalize on
attractive acquisition opportunities.

Dan River is a Georgia corporation and its principal executive offices are
located at 2291 Memorial Drive, Danville, Virginia 24541. Its telephone number
is (804) 799-7000.

RISK FACTORS

Prospective purchasers of Class A Common Stock should carefully consider the
matters discussed under "Risk Factors" in evaluating an investment in the
shares of Class A Common Stock offered hereby, which include, among other
things, (i) the cyclicality of the textile industry generally, (ii) competitive
conditions within the textile industry, (iii) potential fluctuations in the
price and availability of cotton and (iv) the effect of government policy and
import regulations on the price and availability of cotton. See "Risk Factors."

6
<PAGE>

THE OFFERING

<TABLE>
<S> <C> <C>
Class A Common Stock offered(1):
Class A Common Stock offered by the
Company............................... 4,700,000 shares
Class A Common Stock offered by the
Selling Shareholders.................. 2,000,000 shares
----------
Total Class A Common Stock offered... 6,700,000 shares
==========
Class A Common Stock to be outstanding
after the Offering...................... 16,793,095 shares(1)
Class B Common Stock to be outstanding
after the Offering...................... 2,062,070 shares(2)(3)
----------
Total Common Stock to be outstanding
after the Offering...................... 18,855,165 shares(1)(2)(3)
==========
Use of proceeds by the Company........... To repay outstanding indebtedness and
for general corporate purposes. The
Company will not receive any proceeds
from the sale of the Shares by the
Selling Shareholders.
Proposed NYSE symbol..................... "DRF"
</TABLE>
- --------
(1) Does not include (i) 1,184,950 shares of Class A Common Stock issuable upon
exercise of options outstanding as of the date of the Offering or (ii)
1,323,500 shares of Class A Common Stock available for the future grant of
stock options under the Company's stock option plans.
(2) Except with respect to voting power and, except as otherwise required by
the Company's Amended and Restated Articles of Incorporation (the "Restated
Charter") and Georgia law, the Class A Common Stock and Class B Common
Stock (together, the "Common Stock") will vote as one class on all matters
submitted to a vote of shareholders, including the election of directors.
The Class A Common Stock is entitled to one vote per share and the Class B
Common Stock is entitled to 4.39 votes per share. Upon the completion of
the Offering, the Class B Common Stock will represent approximately 11% of
the outstanding shares of Common Stock and approximately 35% of the voting
power of the Common Stock. The Class B Common Stock will be held by Joseph
L. Lanier, Jr., the Company's Chairman and Chief Executive Officer, Richard
L. Williams, the Company's President and Chief Operating Officer, and Barry
F. Shea, the Company's Vice President--Chief Financial Officer (and certain
members of their immediate families) (collectively, the "Senior Management
Group"). Pursuant to the Voting Agreement (as defined herein), Mr. Lanier
will be entitled to vote all of the shares of Class B Common Stock held by
the Senior Management Group. Subject to certain limitations, each share of
Class B Common Stock will be convertible at any time at the option of its
holder into one share of Class A Common Stock and will automatically
convert into Class A Common Stock upon the transfer of Class B Common Stock
to any person who is not a Permitted Transferee (as defined herein) or if
the aggregate outstanding shares of Class B Common Stock represent less
than 7% of the aggregate outstanding Common Stock at the end of any month.
See "Description of Capital Stock."
(3) Upon completion of the Offering, under its Restated Charter, the Company
will only be authorized to issue additional shares of Class B Common Stock
in connection with a dividend or other distribution with respect to, or a
subdivision of, all outstanding shares of Common Stock. See "Description of
Capital Stock--Common Stock."

7
<PAGE>

SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA

The information set forth below should be read in conjunction with "Selected
Historical and Pro Forma Consolidated Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements and Notes thereto of the Company, the
Financial Statements and Notes thereto of Cherokee, the Unaudited Condensed
Consolidated Financial Statements of the Company and the Unaudited Pro Forma
Condensed Consolidated Statements of Income of the Company included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
FISCAL YEAR NINE MONTHS ENDED NINE MONTHS
--------------------------------------------------------------- PRO FORMA ------------------------ ENDED
FISCAL YEAR SEPT. 28, SEPT. 27, SEPT. 27,
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
INCOME DATA:
Net sales........ $333,033 $317,566 $371,534 $384,801 $379,567 $480,639 $272,031 $344,189 $353,399
Cost of sales.... 268,605 259,148 297,460 306,879 307,383 399,602 220,975 268,739 275,895
Selling, general
and
administrative
expenses........ 39,083 38,550 43,908 44,860 45,673 51,863 33,866 39,212 39,961
Other operating
costs, net(2)... -- 3,039 1,534 8,972 (428) 392 -- 7,875 7,875
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income. $25,345 $16,829 $28,632 $24,090 $26,939 $28,782 $17,190 $28,363 $29,668
=========== =========== =========== =========== =========== =========== =========== =========== ===========
Income before
income taxes and
extraordinary
item............ $13,103 $4,643 $8,357 $2,390 $9,256 $10,818 $3,660 $11,917 $16,831
Extraordinary
item(3)......... -- 348 -- -- -- -- -- -- --
Net income....... 8,166 2,519 3,525 258 5,686 6,642 2,213 7,323 10,338
Redeemable
preferred
stock dividends. 2,782 2,091 -- -- -- -- -- -- --
Net income
applicable to
common stock.... $5,384 $428 $3,525 $258 $5,686 $6,642 $2,213 $7,323 $10,338
Earnings per
share:
Primary......... $0.47 $0.04 $0.31 $0.02 $0.40 $0.35 $0.16 $0.52 $0.55
Fully diluted... $0.47 $0.04 $0.31 $0.23 $0.40 $0.35 $0.16 $0.52 $0.55
Weighted average
number of shares
outstanding:
Primary......... 11,375,000 11,375,000 11,375,000 12,276,268 14,155,165 18,855,165 14,155,165 14,155,165 18,855,165
Fully diluted... 11,375,000 11,375,000 11,375,000 13,940,133 14,155,165 18,855,165 14,155,165 14,155,165 18,855,165
OTHER FINANCIAL
DATA:
EBITDA(4)........ $40,413 $36,314 $48,353 $52,599 $47,306 $56,569 $32,848 $57,077 $58,899
Cash flow from
operating
activities...... 25,360 21,518 11,887 22,538 45,078 27,830 27,306
Cash flow from
investing
activities...... (9,747) (10,687) (23,873) (23,994) (25,197) (17,124) (76,906)
Cash flow from
financing
activities...... (12,561) (17,567) 5,389 1,247 (16,379) (10,305) 45,974
Depreciation
and
amortization(5). 15,068 16,446 18,187 19,537 20,795 15,658 20,839
Capital
expenditures,
gross........... 9,914 27,690 44,112 28,004 34,515 24,419 13,711
Capital
expenditures,
net(6).......... 9,821 12,839 26,885 20,801 28,564 20,183 12,598
</TABLE>

8
<PAGE>

<TABLE>
<CAPTION>
AS OF
SEPTEMBER 27, 1997
-----------------------
ACTUAL AS ADJUSTED(7)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $116,611 $123,193
Total assets............................................ 393,634 393,634
Total debt.............................................. 218,465 153,465
Common Stock subject to put rights...................... 13,389 --
Shareholders' equity.................................... 81,558 159,947
</TABLE>
- --------
(1) The pro forma statement of income data and pro forma other financial data
give effect to the Cherokee Acquisition and the Offering and the
application of the estimated net proceeds therefrom to the Company as if
they had been consummated at the beginning of the periods presented. See
"Use of Proceeds" and Unaudited Pro Forma Condensed Consolidated Financial
Statements included herein.
(2) Other operating costs, net include various non-recurring charges and
credits from year to year, the most significant of which relate to
writedowns of fixed assets rendered obsolete by the Company's ongoing
facility modernization program, plant closure costs and the decision to
discontinue manufacturing and marketing a line of apparel fabrics. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Note 8 to the Consolidated Financial Statements of the Company
and Note 5 to the Unaudited Condensed Consolidated Financial Statements of
the Company.
(3) The extraordinary item in fiscal 1993 represented the gain, net of related
income taxes, from the early retirement of certain of the Company's credit
facilities and term loans out of the proceeds from the issuance and sale of
$120 million original principal amount of the Company's 10 1/8% Senior
Subordinated Notes due 2003 (the "Senior Subordinated Notes").
(4) EBITDA represents operating income before depreciation and amortization.
For purposes of computing EBITDA, operating income has been adjusted to
exclude other operating costs, net. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations" and Note 8 to the Consolidated Financial Statements of the
Company. EBITDA is presented not as an alternative measure of operating
results or cash flow (as determined in accordance with generally accepted
accounting principles), but rather to provide additional information
related to the Company's ability to service debt.
(5) Includes depreciation and amortization of tangible assets, but excludes
amortization of debt issuance costs, which is included in interest expense.
(6) Represents capital expenditures, net of amounts acquired in exchange for
debt.
(7) As adjusted to give effect to (i) the Offering and the application of the
net proceeds therefrom to the Company and (ii) the reclassification of the
Common Stock subject to put rights as part of shareholders' equity. See
"Use of Proceeds," "Capitalization" and Note 8 to the Unaudited Condensed
Consolidated Financial Statements of the Company.

9
<PAGE>

RISK FACTORS

An investment in the shares of Class A Common Stock offered hereby involves
a high degree of risk. Prospective purchasers of the Class A Common Stock
should carefully consider the following risk factors in addition to the other
information contained in this Prospectus in evaluating an investment in the
shares of Class A Common Stock offered hereby.

CYCLICAL NATURE OF TEXTILE INDUSTRY; SEASONALITY

Domestic demand for textile products tends to vary with the business cycle
of the U.S. economy. In addition, the popularity, supply and demand for
particular textile products may change significantly from year to year based
upon prevailing fashion trends and other factors. These factors historically
have contributed to fluctuations in the sales and profitability of certain
textile products and in Dan River's results of operations. A decline in the
demand for textile products, an increase in the supply of textile products due
to expansion of capacity within the textile industry, changes in fashion
trends or deteriorating economic conditions could have a material adverse
effect on the Company's results of operations and financial condition.

Demand for the Company's products and the level of the Company's sales
fluctuate moderately during the year, based upon historical buying trends.
Generally, there is increased retail demand for home fashions products during
the fall (back to school) and Christmas holiday seasons and for apparel
fabrics during the same seasons as well as for Father's Day. As a result, the
Company sells more of its home fashions products during its third and fourth
fiscal quarters when demand for home fashions products is generally higher,
and the Company sells more apparel fabrics during the first and second
quarters when demand for apparel fabrics is greatest.

INTENSE COMPETITION

The textile industry is highly competitive. Dan River sells its products
primarily to domestic customers and competes with large, vertically integrated
textile manufacturers as well as numerous smaller companies specializing in
limited segments of the market. Competitors are both domestic and foreign, and
include a number of companies that are larger in size and have greater
financial resources than the Company. Increases in domestic capacity and
imports of foreign-made textile and apparel products are a significant source
of competition for many domestic textile manufacturers, including Dan River.
Competition in the form of imported textile and apparel products, pricing
strategies of domestic competitors and the proliferation of newly styled
fabrics competing for fashion acceptance have been factors affecting the
Company's business environment. The primary competitive factors in the textile
industry are price, product styling and differentiation, quality,
manufacturing flexibility, delivery time and customer service. The importance
of these factors is determined by the needs of particular customers and the
characteristics of particular products. To the extent that one or more of the
Company's competitors gains an advantage with respect to any key competitive
factor, Dan River's business could be materially adversely affected. See
"Business--Competition." In addition, import protections afforded to foreign
textile manufacturers could make the Company's products less competitive and
have a material adverse effect on the Company's results of operations and
financial condition. See "--Possible Adverse Effect of Government Policy and
Import Regulations."

POSSIBLE ADVERSE EFFECT OF FLUCTUATIONS IN PRICE AND AVAILABILITY OF COTTON

The primary raw material used by the Company is cotton. Prior to 1991, from
time to time, domestic cotton prices exceeded world prices, which created a
competitive disadvantage for the Company and other domestic textile
manufacturers, which are required by law to purchase substantially all of
their cotton from domestic sources. The U.S. government has taken legislative
action to improve the price imbalance, but there can be no assurance that this
will continue to be the case. To the extent that U.S. cotton prices exceed
world cotton prices, the Company's competitiveness may be materially adversely
affected. U.S. Cotton prices are also affected by general economic conditions
as well as the demand for U.S. cotton in world markets and may increase or
decrease depending on other market variables at the time. Prevailing cotton
prices significantly impact the Company's results of operations, and price
increases could have a material adverse effect on the Company's

10
<PAGE>

results of operations and financial condition. In connection with its purchase
of cotton, Dan River generally covers open order requirements, which average
approximately three months of production, through direct purchases and hedging
transactions, and the Company may shorten or lengthen that period in
accordance with its perception of the direction of cotton prices. There can be
no assurance that such transactions will not result in higher costs to the
Company or will protect the Company from fluctuations in cotton prices.
Further, since cotton is an agricultural product, its supply and quality are
subject to forces of nature. Any material shortage or interruption in the
supply, variations in the quality of cotton by reason of weather, infestations
or any other factor that would result in an increase in the cost of cotton
could have a material adverse effect on the Company's results of operations
and financial condition. See "Business--Raw Materials."

SUBSTANTIAL CAPITAL REQUIREMENTS

The textile manufacturing industry is capital intensive. In order to
maintain their competitive position, textile manufacturers, including Dan
River, must continually modernize their manufacturing processes, plants and
equipment, which can involve substantial capital investments. Over the last
five fiscal years, the Company has made capital improvements of approximately
$150 million. The Company expects to invest approximately $26 million during
fiscal 1997 and from $30 million to $35 million during fiscal 1998 in capital
improvements designed to reduce manufacturing costs, enhance manufacturing
flexibility and improve product quality and responsiveness to customers. Dan
River generally finances its capital improvements with cash from operations,
vendor financing and borrowings under its credit facilities. To the extent
these sources of funds are insufficient to meet the Company's ongoing capital
improvements requirements, the Company may be required to seek alternative
sources of financing or curtail or delay capital spending plans. There can be
no assurance that such financing will be available when needed or, if
available, that it will be on terms acceptable to the Company. Failure to make
capital improvements necessary to continue modernizing the Company's
manufacturing operations and reduce costs could adversely affect the Company's
competitive position and have a material adverse effect on the Company's
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Business--Business Strategy."

POTENTIAL LIABILITY IN CONNECTION WITH MISLABELED PRODUCTS

During fiscal 1996, to improve manufacturing performance, the Company
implemented a change in the construction of a substantial portion of the
fabrics used in its home fashions accessory products. However, this change
caused the polyester content with respect to a significant portion of the
fabrics to increase, and the Company failed to change the labeling of the
products produced from such fabric. Consequently, such products have been
inaccurately labeled as containing 65% polyester when in fact such products
contain 80% polyester. One of the Company's largest home fashions products
customers recently contacted the Company concerning this mislabeling. The
Company is currently in the process of correcting the labeling on all such
products held in its inventory and contacting customers with mislabeled
products in their inventory for the purpose of implementing a program to
correct the labeling error. To date the Company has contacted home fashions
products customers (including its top five), which accounted for over 50% of
the Company's net sales attributable to home fashions products during the
first nine months of fiscal 1997. These customers have indicated an intention
to cooperate with the Company's relabeling program, which the Company
estimates will cost between $250,000-$500,000. Accordingly, the Company does
not believe customers will return a substantial portion of such mislabeled
inventory or that any material customer will terminate its relationship with
the Company. To the extent mislabeled merchandise is returned, the Company
intends to properly label such inventory and resell it. Nevertheless, the
return of a substantial amount of mislabeled inventory and any delay or
inability to resell it or the termination of a material customer relationship
would have a material adverse effect on the Company's results of operations
during the period in which such returns or termination occurs. In addition,
the Company may be subject to fines relating to such mislabeling but believes,
based on currently available information, that such fines, if imposed, will
not be material in amount.

POSSIBLE ADVERSE EFFECT OF GOVERNMENT POLICY AND IMPORT REGULATIONS

The domestic textile market is subject to various U.S. governmental policies
affecting raw material costs and product supply. In addition, the policies of
foreign governments may, directly or indirectly, affect the

11
<PAGE>

domestic market. Because U.S. textile companies are generally prohibited from
importing cotton, Dan River must purchase substantially all of its cotton in
the domestic market. Prior to 1991, from time to time, price imbalances between
world and domestic cotton prices existed. A series of U.S. legislative
initiatives has resulted in the reduction of the Company's effective cotton
costs to near world levels. Because the availability and cost of cotton are
affected by U.S. agricultural policies, Dan River may experience increased
cotton costs that cannot be entirely passed on to its customers.

The extent of import protection afforded by the U.S. government to domestic
textile producers has been, and is likely to remain, subject to considerable
domestic political deliberation. In view of the labor cost advantages and the
number of foreign producers of textile products that compete with certain of
the Company's products, substantial elimination of import protection for
domestic textile manufacturers could have a material adverse effect on the
Company's business. In January 1995, a multilateral trade organization, the
World Trade Organization ("WTO"), was established to replace the General
Agreement on Tariffs and Trade ("GATT"). This new body has set forth the
mechanisms by which world trade in textiles and clothing will be progressively
liberalized with the elimination of quotas and the reduction of duties. The
implementation began in January 1995 with the phasing-out of quotas and the
reduction of duties to take place over a 10-year period. The selection of
products at each phase is made by each importing country and must be drawn from
each of the four main textile groups: tops and yarns, fabrics, made-up textile
products and apparel. The elimination of quotas and the reduction of tariffs
under the WTO may result in increased imports of certain textile products and
apparel into North America. These factors could make the Company's products
less competitive against low cost imports from developing countries. See
"Business--Competition."

NAFTA, which was entered into by Canada, Mexico and the United States and
became effective on January 1, 1994, has created the world's largest free-trade
zone. The agreement contains safeguards that were sought by the U.S. textile
industry, including a rule of origin requirement that products be processed in
one of the three countries in order to benefit from NAFTA. NAFTA will phase out
all trade restrictions and tariffs on textiles and apparel among the three
countries. There can be no assurance that the removal of these barriers to
trade will not have a material adverse effect on the Company's results of
operations and financial condition. See "Business--Competition."

ACQUISITION RISKS

The Company completed the Cherokee Acquisition in February 1997, and it may
seek additional acquisition opportunities that enhance its business. There can
be no assurance that the Company will be able successfully to identify suitable
acquisition candidates, complete acquisitions, integrate acquired operations
into its existing operations or expand into new markets. There can also be no
assurance that future acquisitions will not have an adverse effect upon the
Company's operating results, particularly in the fiscal quarters immediately
following the completion of such acquisitions while the operations of the
acquired business are being integrated into the Company's operations. Once
integrated, acquired operations may not achieve levels of revenues,
profitability or productivity comparable with those achieved by the Company's
existing operations, or otherwise perform as expected. In addition, the Company
competes for acquisition and expansion opportunities with companies that have
substantially greater resources. Although the Company has preliminary
discussions from time to time regarding possible acquisition opportunities, the
Company does not presently have any agreements, arrangements or understandings
regarding any particular acquisition.

UNCERTAINTY REGARDING USE AND AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS

On September 3, 1991, the Company completed a financial restructuring (the
"1991 Restructuring") which involved issuing common and preferred stock to
various parties. Management believes that the 1991 Restructuring did not result
in a "change in ownership" as such term is used in Section 382 of the Internal
Revenue Code. However, Section 382 and related regulations promulgated by the
Internal Revenue Service ("IRS") are extremely complex, and management's
assessment of whether or not a "change in ownership"

12
<PAGE>

occurred involves judgments as to certain factual issues and interpretations as
to certain legal issues for which there is little guidance. There can be no
assurance that the IRS will not challenge the Company's conclusion that no
"change in ownership" has occurred under Section 382. The utilization of the
Company's pre-1991 Restructuring net operating loss and credit carryforwards
could be significantly restricted or eliminated if the 1991 Restructuring is
deemed to have constituted a "change in ownership." From the date of the 1991
Restructuring through December 28, 1996, the Company utilized an aggregate of
$16.9 million in net operating loss carryforwards and $1.7 million in general
business credit carryforwards for federal income tax purposes that are subject
to review by the IRS. At December 28, 1996, the Company had unused net
operating loss carryforwards of $0.9 million (expiring in 2005), a minimum tax
credit carryforward of $8.1 million, and investment credit and other general
business credit carryforwards of $5.3 million (the majority of which expire in
1997 through 2000).

IMPACT OF RESTRICTIVE COVENANTS ON ABILITY TO OBTAIN ADDITIONAL FINANCING

The Company's Credit Agreement (as defined herein) and the indenture
governing the Company's Senior Subordinated Notes contain restrictions on the
ability of the Company to, among other things (i) incur additional
indebtedness, (ii) place liens on assets, (iii) sell assets, (iv) engage in
mergers or consolidations, (v) pay dividends, (vi) engage in certain
transactions with affiliates and (vii) enter into sale and leaseback
transactions. The Credit Agreement also requires the Company to maintain
compliance with certain financial ratios. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." These limitations and requirements may restrict the ability
of Dan River to obtain additional financing for working capital, capital
improvements, acquisitions or general corporate purposes.

POTENTIAL UNFORESEEN ENVIRONMENTAL LIABILITIES OR COSTS

Dan River is subject to various federal, state and local environmental laws
and regulations limiting the discharge of pollutants and the storage, handling
and disposal of a variety of substances, including some substances which
contain constituents considered hazardous under environmental laws. The
Company's dyeing and finishing operations result in the discharge of
substantial quantities of wastewater and emissions to the atmosphere. The
Company's operations also are governed by laws and regulations relating to
workplace safety and worker health which, among other things, establish cotton
dust, formaldehyde, asbestos and noise standards, and regulate the use of
hazardous chemicals in the workplace. Treatment costs of air emissions and
wastewater discharges, as well as other costs of environmental compliance, have
increased moderately over the past several years. There can be no assurance
that compliance with environmental or health and safety laws and regulations
will not materially adversely affect the Company's operations in the future. In
addition, Dan River cannot predict what environmental or health and safety
legislation or regulations will be enacted in the future or how existing or
future laws or regulations will be enforced, administered or interpreted, nor
can it predict the amount of future expenditures which may be required in order
to comply with any such environmental or health and safety laws or regulations.
See "Business--Governmental Regulation."

CUSTOMER CONCENTRATION

The Company markets its home fashions products and apparel fabrics to over
3,000 customers. In fiscal 1996, the top five home fashions products customers
and apparel fabrics customers accounted for 44.5% and 24.4%, respectively, of
the Company's net sales attributable to home fashions products and apparel
fabrics. During the nine months ended September 27, 1997, the top five home
fashions products customers and apparel fabrics customers accounted for 43.0%
and 40.2%, respectively, of the Company's net sales attributable to home
fashions products and apparel fabrics. The Company's largest home fashions
products customer and apparel fabrics customer accounted for 8.7%, and 3.9%,
respectively, of the Company's net sales in fiscal 1996, and 7.4% and 4.8%,
respectively, of the Company's net sales in the nine months ended September 27,
1997. The loss of any of the top five home fashions products customers or
apparel fabrics customers could have a material adverse effect on the Company's
net sales attributable to such product lines.

13
<PAGE>

RELIANCE ON KEY MANAGEMENT

The success of the Company is dependent upon the talents and efforts of a
small number of key management personnel, including Joseph L. Lanier, Jr., the
Company's Chairman and Chief Executive Officer, Richard L. Williams, the
Company's President and Chief Operating Officer, and Barry F. Shea, the
Company's Vice President--Chief Financial Officer. The loss of such management
personnel could have an adverse effect on the business of the Company. See
"Management."

SUBSTANTIAL INFLUENCE OF PRINCIPAL SHAREHOLDERS

Upon the completion of the Offering, the Senior Management Group will control
approximately 37% of the combined outstanding voting power of all classes of
the Company's Common Stock. As a result, such persons will be able to exert
substantial influence with respect to all matters submitted to a vote of
holders of Common Stock (except with respect to matters as to which holders of
the Class A Common Stock are entitled to vote as a separate voting group under
the Restated Charter or Georgia law), including election of the Company's
directors. Moreover, pursuant to the Voting Agreement, Mr. Joseph L. Lanier,
Jr. will be entitled to vote all shares of Class B Common Stock, which will
comprise approximately 35% of the combined outstanding voting power of all
classes of the Company's Common Stock. See "Description of Capital Stock--
Common Stock."

ABSENCE OF PRIOR PUBLIC MARKET

Prior to the Offering, there has been no public market for the Class A Common
Stock of the Company. The initial public offering price for the Class A Common
Stock will be determined by negotiations among the Company, the Selling
Shareholders and the representatives of the Underwriters. There can be no
assurance that an active trading market for the Class A Common Stock will
develop or continue after the completion of the Offering or that the market
price of the Class A Common Stock will not decline below the initial public
offering price. See "Underwriters."

SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE IMPACT ON PREVAILING MARKET
PRICE

Upon completion of the Offering, the Company will have outstanding 16,793,095
shares of Class A Common Stock, of which the 4,700,000 shares sold by the
Company and the 2,000,000 shares sold by the Selling Shareholders pursuant to
the Offering will be fully tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), except for any of such shares held by "affiliates" (as defined under
Rule 405 of the Securities Act) of the Company. The holders of the remaining
10,093,095 shares of Class A Common Stock (the "Restricted Shares") will be
entitled to sell their shares in the public securities market without
registration under the Securities Act to the extent permitted by Rule 144
promulgated thereunder or otherwise in accordance with the Securities Act. All
of the Restricted Shares have been owned by the holders thereof for more than
one year. Of such Restricted Shares, 2,927,622 are owned by non-affiliates of
the Company and, as a result, will be fully tradeable upon completion of the
Offering without compliance with the restrictions under Rule 144, and 7,165,473
are owned by affiliates of the Company and, as a result, will be eligible for
sale pursuant to Rule 144, subject to certain restrictions, upon completion of
the Offering. Certain holders of Common Stock have agreed to certain
restrictions on their ability to sell Common Stock for 180 days and, in some
instances, 120 days following the Offering. See "Underwriters."

After the Offering, certain shares of Common Stock will be covered by the
Registration Rights Agreement (as defined herein). The Registration Rights
Agreement provides for, among other things: (i) a call right, exercisable by
Joseph L. Lanier, Jr., for the purchase of shares of Common Stock held by
certain lenders related to the 1991 Restructuring; (ii) a call right,
exercisable by the Company, for the shares of Common Stock set forth in clause
(i) above; and (iii) certain demand and piggyback registration rights. See
"Description of Capital Stock--Registration Rights Agreement."

14
<PAGE>

"Description of Capital Stock--Common Stock") into shares of Class A Common
Stock (on a share-for-share basis).

Sales of substantial amounts of Class A Common Stock in the public market, or
the perception that such sales may occur, could adversely affect the prevailing
market price of the Class A Common Stock or the ability of the Company to raise
capital through a public offering of its equity securities. See "Shares
Eligible for Future Sale."

ANTI-TAKEOVER PROVISIONS

The Company's Restated Charter and Bylaws contain several provisions which
may discourage or make more difficult any attempt by a person or group to
obtain control of the Company, including provisions authorizing the issuance of
preferred stock without shareholder approval, requiring a supermajority vote of
shareholders under certain circumstances, restricting the persons who may call
a special meeting of shareholders, establishing a classified board of
directors, providing that directors may be removed only for cause and requiring
notice of shareholder nominations and proposals. The Company has also elected
to be covered by the Georgia business combination and fair price statutes,
which restrict certain business combinations with "interested shareholders" and
prohibit such combinations with "interested shareholders" unless certain fair
price criteria and other requirements are satisfied. See "Description of
Capital Stock--Charter and Bylaw Provisions" and "Georgia Anti-Takeover
Statutes." Further, upon completion of the Offering, the Senior Management
Group will control approximately 37% of the combined outstanding voting power
of all classes of the Company's Common Stock, approximately 35% of which will
be controlled by Mr. Lanier pursuant to the Voting Agreement. As a result, Mr.
Lanier will be able to exert substantial influence with respect to all matters
submitted to a vote of shareholders. See "--Substantial Influence of Principal
Shareholders."

15
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company (after deducting estimated underwriting
discounts and commissions and estimated offering expenses) from the sale of
4,700,000 shares of Class A Common Stock offered hereby by the Company (at an
assumed initial public offering price of $15.00 per share) are estimated to be
$65.0 million. The Company will not receive any of the proceeds from the sale
of 2,000,000 shares of Class A Common Stock offered hereby by the Selling
Shareholders.

The Company intends to use the net proceeds to repay indebtedness
outstanding under the Company's term loan facility (the "Term Loan Facility")
pursuant to the Loan and Security Agreement dated as of February 3, 1997 (the
"Credit Agreement"), certain notes payable to equipment vendors ("Vendor
Financing"), certain other notes ("Other Notes"), and a partial repayment of
indebtedness pursuant to a secured term note due 2001 (the "Term Loan due
2001"). As of October 27, 1997, the Company had approximately $34.1 million
outstanding under the Term Loan Facility, $7.1 million outstanding under the
Vendor Financing, $12.7 million outstanding under the Other Notes, and $11.1
million to be repaid under the Term Loan due 2001. Such borrowings bore
interest as of such date at a weighted average interest rate of 8.20%, 7.91%,
8.48% and 7.47%, respectively. All such borrowings were incurred to finance
the Cherokee Acquisition or the modernization of the Company's manufacturing
and distribution capabilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Company will not incur any penalty or be required to pay a
premium in connection with its prepayment of the Term Loan Facility, Vendor
Financing, Other Notes or the Term Loan due 2001. The Company will use the
balance, if any, of the net proceeds of the Offering for general corporate
purposes, including capital improvements and possible future acquisitions. See
"Risk Factors--Substantial Capital Requirements" and "--Acquisition Risks."

Pending application of the net proceeds as described above, the Company
intends to invest its net proceeds in short-term interest-bearing, investment-
grade debt securities, certificates of deposit or direct or guaranteed
obligations of the U.S. government.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its Common
Stock. Pursuant to the Company's Restated Charter, no dividend may be declared
or paid in cash or property on any share of either class of Common Stock
unless simultaneously the same dividend is declared or paid on each share of
the other class of Common Stock. The Company currently intends to retain its
future earnings for general corporate purposes including working capital,
capital improvements and possible acquisitions. Any payment of cash dividends
in the future will be at the discretion of the Company's Board of Directors
and will depend upon the Company's results of operations, earnings, capital
requirements, contractual restrictions and other factors deemed relevant by
the Company's Board. The Credit Agreement and the Indenture relating to the
Senior Subordinated Notes limit the Company's ability to pay dividends on the
Common Stock, based primarily upon the Company's compliance with certain
financial ratios and other financial requirements.

16
<PAGE>

CAPITALIZATION

The following table sets forth the short-term debt and total capitalization
of Dan River at September 27, 1997 and as adjusted to give effect to (i) the
Offering (at an assumed initial public offering price of $15.00 per share) and
(ii) the application of the net proceeds therefrom to the Company to repay
outstanding indebtedness as described under "Use of Proceeds." In addition, as
a result of the Offering, certain put rights will terminate and the Common
Stock subject to such put rights will be classified as part of shareholders'
equity. This table should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto of the Company included elsewhere
in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt(1)................. $ 11,943 $ 5,361
======== ========
Long-term debt(1):
10.125% Senior Subordinated Notes due 2003............ $120,000 $120,000
Working Capital Facility(2)........................... 14,000 14,000
Term Loan Facility.................................... 30,250 --
Term Loan due 2001.................................... 17,475 6,467
Notes payable to equipment vendors.................... 7,456 2,213
Other borrowings with various rates and maturities.... 17,341 5,424
-------- --------
Total long-term debt................................ 206,522 148,104
-------- --------
Common stock subject to put rights...................... 13,389 -- (3)
Shareholders' equity:
Preferred Stock, $.01 par value; 50,000,000 shares
authorized; no shares outstanding; no shares
outstanding as adjusted.............................. -- --
Class A Common Stock, $.01 par value; 175,000,000
shares authorized; 12,712,945 shares outstanding;
16,793,095 shares outstanding as adjusted(4)(5)...... 127 168
Class B Common Stock, $.01 par value; 35,000,000
shares authorized; no shares outstanding; 2,062,070
shares outstanding as adjusted(5).................... -- 21
Class C Common Stock, $.01 par value; 5,000,000 shares
authorized; 1,442,220 shares outstanding; no shares
outstanding as adjusted(5)........................... 14 --
Additional paid-in capital............................ 61,005 139,346(3)
Retained earnings..................................... 21,021 21,021
Pension liability adjustment.......................... (609) (609)
-------- --------
Total shareholders' equity.......................... 81,558 159,947
-------- --------
Total capitalization................................ $301,469 $308,051
======== ========
</TABLE>
- --------
(1) For information concerning the Company's outstanding debt, see Note 4 to
the Consolidated Financial Statements of the Company.
(2) As of September 27, 1997, the Company had $69.0 million of borrowing
availability under the working capital facility established pursuant to
the Credit Agreement (the "Working Capital Facility"). As of September 27,
1997, after giving effect to the Offering and the application of the net
proceeds therefrom to the Company, the Company would have had $69.0
million of borrowing availability under the Working Capital Facility. For
a discussion of the Company's Working Capital Facility and Term Loan
Facility, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
(3) Reflects the reclassification of the Common Stock subject to put rights as
part of shareholders' equity. See Note 8 to the Unaudited Condensed
Consolidated Financial Statements of the Company.
(4) Does not include (i) 1,184,950 shares of Class A Common Stock issuable
upon exercise of stock options outstanding as of the date of the Offering
or (ii) 1,323,500 shares of Class A Common Stock available for the future
grant of stock options under the Company's stock option plans. See
"Management--New Benefit Plans" and Note 7 to the Consolidated Financial
Statements of the Company.
(5) Upon completion of the Offering, (i) an aggregate of 2,062,070 shares of
Class A Common Stock held by the Senior Management Group will be exchanged
on a share-for-share basis for an aggregate of 2,062,070 shares of Class B
Common Stock pursuant to the Exchange Offer (as defined herein) and (ii)
all outstanding shares of Class C Common Stock, par value $.01 per share,
of the Company (the "Class C Common Stock") will automatically convert
into shares of Class A Common Stock on a share-for-share basis. See
"Certain Transactions."

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<PAGE>

SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA

The selected historical statement of income data and historical balance
sheet data for each of the five fiscal years in the period ended December 28,
1996 are derived from the consolidated financial statements of the Company,
which have been audited by Ernst & Young LLP, independent auditors. The
selected historical consolidated financial data set forth below should be read
in conjunction with the Consolidated Financial Statements and Notes thereto of
the Company included elsewhere in this Prospectus, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and other
financial data included herein. The selected historical consolidated financial
data and historical balance sheet data for the nine months ended September 28,
1996 and September 27, 1997 are derived from the Unaudited Condensed
Consolidated Financial Statements of the Company. In the opinion of the
Company, such unaudited condensed consolidated financial statements include
all adjustments (consisting of only normal recurring adjustments) necessary
for a fair presentation of the information set forth therein. The results of
operations for the nine months ended September 27, 1997 are not necessarily
indicative of results that may be expected for the full year. The pro forma
consolidated financial data are derived from the Unaudited Pro Forma Condensed
Consolidated Income Statements of the Company included elsewhere in this
Prospectus. The selected pro forma consolidated financial data give effect to
the Cherokee Acquisition and the Offering and the application of the net
proceeds therefrom to the Company as if they had been consummated at the
beginning of the respective periods presented. The selected pro forma
consolidated financial data may not be indicative of results that would have
actually occurred if the Cherokee Acquisition, the Offering and the
application of the net proceeds therefrom to the Company had been effected on
the dates indicated or the results that may be obtained in the future. The
selected pro forma consolidated financial data should be read in conjunction
with the Consolidated Financial Statements and Notes thereto of the Company,
the Financial Statements and Notes thereto of Cherokee, and the Unaudited Pro
Forma Condensed Consolidated Statements of Income of the Company included
elsewhere in this Prospectus. The consolidated financial data set forth below
reflect the Recapitalization. See "Certain Transactions--Recapitalization" and
Note 3 to the Consolidated Financial Statements of the Company.

Dan River and its previous parent and sole shareholder, Braelan Corp.
("Braelan"), were organized in 1989 to acquire and operate Dan River Holding
Company and subsidiaries. On December 29, 1995, Braelan was merged with and
into Dan River. Selected historical financial data for periods prior to the
merger have been restated to reflect the combination. See Notes 1 and 2 to the
Consolidated Financial Statements of the Company.

18
<PAGE>

<TABLE>
<CAPTION>
PRO
FORMA
PRO NINE
FISCAL YEAR FORMA NINE MONTHS ENDED MONTHS
--------------------------------------------------------------- FISCAL ------------------------ ENDED
YEAR SEPT. 28, SEPT. 27, SEPT. 27,
1992 1993 1994 1995 1996 1996 1996 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
INCOME DATA:
Net sales....... $333,033 $317,566 $371,534 $384,801 $379,567 $480,639 $272,031 $344,189 $353,399
Cost of sales... 268,605 259,148 297,460 306,879 307,383 399,602 220,975 268,739 275,895
Selling, general
and
administrative
expenses....... 39,083 38,550 43,908 44,860 45,673 51,863 33,866 39,212 39,961
Other operating
costs, net(1).. -- 3,039 1,534 8,972 (428) 392 -- 7,875 7,875
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating
income......... $25,345 $16,829 $28,632 $24,090 $26,939 $28,782 $17,190 $28,363 $29,668
=========== =========== =========== =========== =========== =========== =========== =========== ===========
Income before
income taxes
and
extraordinary
item........... $13,103 $4,643 $8,357 $2,390 $9,256 $10,818 $3,660 $11,917 $16,831
Extraordinary
item(2)........ -- 348 -- -- -- -- -- -- --
Net income...... 8,166 2,519 3,525 258 5,686 6,642 2,213 7,323 10,338
Redeemable
preferred stock
dividends...... 2,782 2,091 -- -- -- -- -- -- --
Net income
applicable to
common stock... $5,384 $428 $3,525 $258 $5,686 $6,642 $2,213 $7,323 $10,338
Earnings per
share:
Primary......... $0.47 $0.04 $0.31 $0.02 $0.40 $0.35 $0.16 $0.52 $0.55
Fully diluted... $0.47 $0.04 $0.31 $0.23 $0.40 $0.35 $0.16 $0.52 $0.55
Weighted average
number of
shares
outstanding:
Primary......... 11,375,000 11,375,000 11,375,000 12,276,268 14,155,165 18,855,165 14,155,165 14,155,165 18,855,165
Fully diluted... 11,375,000 11,375,000 11,375,000 13,940,133 14,155,165 18,855,165 14,155,165 14,155,165 18,855,165
OTHER FINANCIAL
DATA:
EBITDA(3)....... $40,413 $36,314 $48,353 $52,599 $47,306 $56,569 $32,848 $57,077 $58,899
Cash flow from
operating
activities..... 25,360 21,518 11,887 22,538 45,078 27,830 27,306
Cash flow from
investing
activities. (9,747) (10,687) (23,873) (23,994) (25,197) (17,124) (76,906)
Cash flow from
financing
activities. (12,561) (17,567) 5,389 1,247 (16,379) (10,305) 45,974
Depreciation and
amortization(4) 15,068 16,446 18,187 19,537 20,795 15,658 20,839
Capital
expenditures,
gross.......... 9,914 27,690 44,112 28,004 34,515 24,419 13,711
Capital
expenditures,
net(5)......... 9,821 12,839 26,885 20,801 28,564 20,183 12,598
BALANCE SHEET
DATA (END OF
PERIOD):
Working capital. $98,954 $94,040 $103,973 $109,763 $93,291 $98,011 $116,611
Total assets.... 282,668 289,384 329,902 330,944 321,050 327,028 393,634
Total debt...... 145,182 170,066 196,436 179,703 169,468 173,703 218,465
Redeemable
preferred
stock.......... 18,577 -- -- -- -- -- --
Common stock
subject to put
rights......... 7,000 7,000 7,000 7,000 9,726 7,338 13,389
Shareholders'
equity......... 42,065 42,493 46,810 73,702 77,898 75,577 81,558
</TABLE>

19
<PAGE>

- --------
(1) Other operating costs, net include various non-recurring charges and
credits from year to year, the most significant of which relate to
writedowns of fixed assets rendered obsolete by the Company's ongoing
facility modernization program, plant closure costs and the decision to
discontinue manufacturing and marketing a line of apparel fabrics. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," Note 8 to the Consolidated Financial Statements of the
Company and Note 5 to the Unaudited Condensed Consolidated Financial
Statements of the Company.
(2) The extraordinary item in fiscal 1993 represented the gain, net of related
income taxes, from the early retirement of certain of the Company's credit
facilities and term loans out of the proceeds from the issuance of the
Senior Subordinated Notes.
(3) EBITDA represents operating income before depreciation and amortization.
For purposes of computing EBITDA, operating income has been adjusted to
exclude other operating costs, net. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 8 to
the Consolidated Financial Statements of the Company. EBITDA is presented
not as an alternative measure of operating results or cash flow (as
determined in accordance with generally accepted accounting principles),
but rather to provide additional information related to the Company's
ability to service debt.
(4) Includes depreciation and amortization of tangible assets, but excludes
amortization of debt issuance costs, which is included in interest
expense.
(5) Represents capital expenditures, net of amounts acquired in exchange for
debt.

20
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company is a leading designer, manufacturer and marketer of textile
products for the home fashions products and apparel fabrics markets. The
Company's net sales are derived principally from sales of home fashions
products, consisting of packaged bedroom furnishings such as comforters,
sheets, pillowcases, shams, bed skirts, decorative pillows and draperies, and
apparel fabrics, including a broad range of cotton and cotton-blend fabrics.
Sales of home fashions products are mainly to major retailers, including Wal-
Mart Stores, Inc., Kmart Corporation, Federated Department Stores, Inc., J.C.
Penney Company, Inc. and The May Department Stores Company. Sales of apparel
fabrics are mainly to domestic manufacturers of men's, women's and children's
clothing, which in turn market clothing under a variety of widely recognized
brand names such as Arrow, Brooks Brothers, Hathaway, Levi Strauss, Liz
Claiborne, L.L. Bean, Manhattan, Osh Kosh B'Gosh and Van Heusen, as well as
numerous private labels through retailers such as J.C. Penney Company, Inc.
and Sears, Roebuck & Co. The Company's sales are affected by the general
business cycles of the textile industry and the U.S. economy which, in turn,
affect the retail environment for the Company's products. The Company has
taken steps to reduce the sensitivity of its business to industry downturns.
Within its home fashions operations, the Company focuses on value-added,
fashion-directed products that have higher margins than solid color commodity
products. The Cherokee Acquisition has substantially increased the size of the
Company's apparel fabrics operations and reduced its fixed costs on a per unit
basis, which management believes will make such operations less sensitive to
cyclical downturns.

The Company's cost of sales include raw materials costs, primarily cotton
and polyester, as well as manufacturing costs. Fluctuations in the price of
cotton can have a significant effect on the Company's cost of sales.
Generally, the Company seeks to purchase sufficient amounts of cotton to cover
existing order commitments. However, the Company may also purchase cotton in
advance of orders on terms that it deems advantageous, and while the Company
does not speculate on the price of cotton, it may hedge prices from time to
time through forward contracts and the futures and options markets. To reduce
manufacturing costs and improve productivity, the Company has invested
approximately $150 million since 1992 in an extensive ongoing facility
modernization program which began in 1989.

On February 3, 1997, the Company consummated the acquisition of
substantially all of the assets and certain of the liabilities of Cherokee for
an aggregate purchase price of $65 million, subject to a working capital
adjustment. The Company also assumed approximately $6.7 million in
liabilities. The Company funded the purchase price (and approximately $2.0
million in fees and expenses relating to the Cherokee Acquisition) with $12.1
million of cash, $19.9 million of borrowings under the Working Capital
Facility and $35.0 million of borrowings under the Term Loan Facility. In July
1997, as a result of the finalization of the working capital adjustment, the
Company received a $1.7 million payment from Cherokee. The Cherokee
Acquisition was accounted for using the purchase method of accounting. In
connection with the Cherokee Acquisition, the Company acquired two greige
fabrics manufacturing facilities, one located in Sevierville, Tennessee and
one located in Spindale, North Carolina, and a finishing plant located in
Harris, North Carolina.

Historically, the Company's apparel fabrics operations have been more
sensitive to downturns within the textile industry generally and, as a result,
apparel fabrics' contribution to operating income has been significantly less
than, and has tended to fluctuate more than, home fashions products'
contribution to operating income. In recent years, the Company has taken
several steps to improve the performance of its apparel fabrics operations,
including the replacement of older manufacturing equipment and the
consolidation of certain facilities. These steps resulted in non-recurring
charges in fiscal 1995 and the nine months ended September 27, 1997 (which
charges are included in other operating costs, net), causing a marginally
positive contribution to operating income in fiscal 1995 and a substantially
reduced contribution to operating income in the nine months ended September
27, 1997. In addition, as a result of poor manufacturing performance
associated with abbreviated running schedules due to weak orders for apparel
fabrics, the contribution of apparel fabrics to gross profit was significantly
reduced in fiscal 1996, resulting in a negative contribution to operating
income in fiscal 1996.

21
<PAGE>

As a result of the Cherokee Acquisition, the Company almost doubled the size
of the Company's apparel fabrics operations, added new product lines and
reduced fixed costs on a per unit basis. Consequently, the Company believes
that its apparel fabrics operations will be less sensitive to cyclical
downturns within the textile industry in the future.

The following table sets forth selected results of operations, expressed in
millions of dollars and as a percentage of net sales, for each of fiscal 1994,
1995 and 1996 and for the nine months ended September 28, 1996 and September
27, 1997:

<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS ENDED
------------------------------------------- -----------------------------------------
1994 1995 1996 SEPT. 28, 1996 SEPT. 27, 1997
------------- ------------- ------------- ---------------- ----------------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Home fashions
products............. $213.3 57.4% $231.8 60.2% $243.2 64.1% $ 173.1 63.6% $ 183.0 53.2%
Apparel fabrics....... 158.2 42.6 153.0 39.8 136.4 35.9 98.9 36.4 161.2 46.8
------ ----- ------ ----- ------ ----- ------- ------ ------- ------
Total net sales..... 371.5 100.0 384.8 100.0 379.6 100.0 272.0 100.0 344.2 100.0
Cost of sales........... 297.5 80.1 306.9 79.8 307.4 81.0 221.0 81.2 268.7 78.1
------ ----- ------ ----- ------ ----- ------- ------ ------- ------
Gross profit............ 74.1 19.9 77.9 20.2 72.2 19.0 51.1 18.8 75.5 21.9
Selling, general and
administrative
expenses............... 43.9 11.8 44.9 11.7 45.7 12.0 33.9 12.4 39.2 11.4
Other operating costs,
net.................... 1.5 0.4 9.0 2.3 (0.4) (0.1) -- -- 7.9 2.3
------ ----- ------ ----- ------ ----- ------- ------ ------- ------
Operating income........ 28.6 7.7 24.1 6.3 26.9 7.1 17.2 6.3 28.4 8.2
Other income (expense),
net.................... 0.1 -- 0.2 0.1 0.5 0.1 0.4 0.2 (0.3) (0.1)
Interest expense........ (20.4) (5.5) (21.9) (5.7) (18.2) (4.8) (14.0) (5.1) (16.2) (4.7)
------ ----- ------ ----- ------ ----- ------- ------ ------- ------
Income before income
taxes.................. 8.4 2.3 2.4 0.6 9.3 2.4 3.7 1.3 11.9 3.5
Provision for income
taxes.................. 4.8 1.3 2.1 0.5 3.6 0.9 1.4 0.5 4.6 1.3
------ ----- ------ ----- ------ ----- ------- ------ ------- ------
Net income.............. $ 3.5 0.9% $ 0.3 0.1% $ 5.7 1.5% $ 2.2 0.8% $ 7.3 2.1%
====== ===== ====== ===== ====== ===== ======= ====== ======= ======
</TABLE>

RESULTS OF OPERATIONS

Nine Months Ended September 27, 1997 Compared to Nine Months Ended September
28, 1996

Net sales for the first nine months of fiscal 1997 were $344.2 million, an
increase of $72.2 million or 26.5% compared to $272.0 million for the first
nine months of fiscal 1996. Net sales of home fashions products during the
first nine months of fiscal 1997 were $183.0 million, an increase of $9.9
million or 5.7% compared to $173.1 million for the first nine months of fiscal
1996. Net sales of apparel fabrics during the first nine months of fiscal 1997
were $161.2 million, an increase of $62.3 million or 63.0% compared to $98.9
million for the first nine months of fiscal 1996. The increase in net sales of
home fashions products was due to higher unit volume aided somewhat by higher
average pricing reflecting an improved product mix. The increase in net sales
of apparel fabrics resulted primarily from the Cherokee Acquisition, which was
consummated on February 3, 1997. Apparel

22
<PAGE>

fabrics unit volumes were almost double the levels of the corresponding period
in fiscal 1996. This was offset somewhat by lower average pricing reflecting a
sales mix that included a higher proportion of lower priced greige fabrics that
were sold to the converter trade (purchasers of unfinished fabric who contract
out the finishing to third parties) and higher commission finishing sales.

Gross profit for the first nine months of fiscal 1997 was $75.5 million
(21.9% of net sales), an increase of $24.4 million or 47.8% from gross profit
of $51.1 million (18.8% of net sales) for the first nine months of fiscal 1996.
The increase in gross profit was due to higher unit volumes, lower raw material
prices, and better manufacturing performance in apparel fabrics where there was
increased activity levels and reduced costs as a result of the acquisition of
Cherokee.

Selling, general and administrative expenses for the first nine months of
fiscal 1997 were $39.2 million (11.4% of net sales), an increase of $5.3
million or 15.8% from $33.9 million (12.4% of net sales) for the first nine
months of fiscal 1996. The increase was caused by higher incentive compensation
expense, increased selling and administrative expense as a result of the
Cherokee Acquisition, and increased product design and roll-out costs
associated with the introduction of the "Nautica" brand of home fashions
products.

The Company incurred a one-time charge in the second quarter of fiscal 1997
as a result of the decision to close its Riverside apparel fabrics weaving
operation in Danville, Virginia. The production from this facility will be
moved to other Company facilities. Accordingly, its closure will reduce fixed
costs without any decrease in production. The $7.9 million pre-tax charge ($4.8
million after tax; $0.34 per share), reflected under "Other operating costs,
net", includes $0.4 million for severance and other employee benefit costs. The
remainder of the charge relates principally to writedowns and other costs
associated with the divestiture of real estate and equipment.

For the reasons described above, operating income during the first nine
months of fiscal 1997 was $28.4 million (8.2% of net sales), an increase of
$11.2 million or 65.0% from $17.2 million (6.3% of net sales) for the first
nine months of fiscal 1996. Excluding the one-time charge related to the
closure of the Riverside facility, operating income would have been $36.2
million, an increase of $19.0 million or 110.8% compared to the first nine
months of 1996.

Other income (expense), net for the first nine months of fiscal 1997 includes
$0.6 million of costs related to fees and expenses incurred in connection with
a proposed business combination that did not materialize, offset in part by
miscellaneous items of income.

Interest expense was $16.2 million for the first nine months of fiscal 1997,
an increase of $2.2 million or 15.9% from $14.0 million for the first nine
months of fiscal 1996. The increase in interest expense was due to higher debt
levels arising from the Cherokee Acquisition offset somewhat by lower average
interest rates. The lower average interest rates reflect the debt incurred to
finance the Cherokee Acquisition, most of which was financed at floating rates
which are lower than the Company's fixed rate public debt, thereby reducing the
average interest rate.

The income tax provision was $4.6 million (38.5% of pre-tax income) for the
first nine months of fiscal 1997, an increase of $3.2 million compared to an
income tax provision of $1.4 million (39.5% of the pre-tax income) recorded for
the first nine months of fiscal 1996. Accordingly, the Company recorded net
income of $7.3 million (2.1% of net sales) or $0.52 per share for the first
nine months of fiscal 1997 compared to a net income of $2.2 million (0.8% of
net sales) or $0.16 per share for the first nine months of fiscal 1996.

Fiscal 1996 Compared to Fiscal 1995

Net sales in fiscal 1996 were $379.6 million, a decrease of $5.2 million or
1.4% compared to $384.8 million in fiscal 1995. Net sales of home fashions
products were $243.2 million in fiscal 1996, an increase of $11.3 million or
4.9% compared to $231.8 million in fiscal 1995. Net sales of apparel fabrics
were $136.4 million, a

23
<PAGE>

decrease of $16.6 million or 10.8% compared to $153.0 million in fiscal 1995.
The increase in net sales of home fashions products in fiscal 1996 was due to
higher unit volume, which was partially offset by lower average pricing
reflecting a competitive pricing environment. The decrease in net sales of
apparel fabrics in fiscal 1996 was due to lower unit volume of shirting
fabrics, particularly commodity white and blue oxfords, due to a sluggish
retail environment for these products during the first half of 1996.

Gross profit in fiscal 1996 was $72.2 million (19.0% of net sales), a
decrease of $5.7 million or 7.4% compared to gross profit of $77.9 million
(20.2% of net sales) in fiscal 1995. The decrease in gross profit was due to
lower sales of apparel fabrics, higher cotton costs and poor manufacturing
performance associated with abbreviated running schedules during the first half
of 1996 because of the weak order position for apparel fabrics during that
period.

Selling, general and administrative expenses in fiscal 1996 were $45.7
million (12.0% of net sales), an increase of $0.8 million or 1.8% from $44.9
million (11.7% of net sales) in fiscal 1995. The increase in these expenses
relates primarily to higher rent expense for the Company's New York City office
and showrooms and higher incentive compensation, offset by lower costs from the
operation of fewer factory stores and lower general and administrative expenses
for the year.

The Company incurred one-time charges in both fiscal 1996 and fiscal 1995.
Other operating costs, net reflect a net credit of $0.4 million in fiscal 1996
compared to $9.0 million of net charges in fiscal 1995. Fiscal 1996 reflected
the reversal of a portion of the fiscal 1995 charges principally due to better
than anticipated recovery value of assets previously written down relating to
the discontinued line of apparel fabrics ($0.9 million), which was partially
offset by $0.5 million of net charges for equipment writedowns associated with
the Company's modernization program. Fiscal 1995 charges included $4.4 million
in writedowns of fixed assets relating to the Company's ongoing modernization
program, $3.0 million of costs associated with the Company's decision to
discontinue manufacturing and marketing a line of apparel fabrics, and $1.6
million of costs associated with relocation of the Company's design,
merchandising and marketing staff from office space at 111 West 40th Street to
new offices at 1325 Avenue of the Americas in New York City. As of December 28,
1996, the Company had accrued liabilities of $1.1 million relating to remaining
lease buyout and equipment removal costs expected to be completed within two
years.

Operating income for fiscal 1996 was $26.9 million (7.1% of net sales), an
increase of $2.8 million or 11.8% from $24.1 million (6.3% of net sales) in
fiscal 1995. The increase resulted from the one-time charges that were taken in
fiscal 1995 and which are described above. Excluding these charges, operating
income for fiscal 1996 would have decreased $6.6 million or 19.8% from fiscal
1995 due to the lower sales of apparel fabrics, higher cotton costs, and poor
manufacturing performance associated with abbreviated running schedules during
the first half of fiscal 1996 because of the weak order position for apparel
fabrics during that period.

Interest expense was $18.2 million in fiscal 1996, a decrease of $3.8 million
or 17.2% from $21.9 million in fiscal 1995. The reduction in interest expense
was due primarily to the conversion of the Company's 16.35% Convertible
Subordinated Junior Notes (the "Junior Notes") into 2,780,173 shares of the
Company's Class A Common Stock as of September 3, 1995 and to a lesser extent
because of lower average interest rates and outstanding indebtedness during
fiscal 1996. The decrease in debt levels was due to lower levels of working
capital during fiscal 1996.

The income tax provision was $3.6 million (38.6% of pre-tax income) for
fiscal 1996, an increase of $1.4 million or 67.4% from the $2.1 million (89.2%
of pre-tax income) income tax provision recorded for fiscal 1995. The high
effective tax rate for fiscal 1995 reflected the nondeductibility of interest
on the Junior Notes that were outstanding during the first eight months of
fiscal 1995.

For the reasons described above, net income in fiscal 1996 was $5.7 million
(1.5% of net sales) or $0.40 per share, an increase of $5.4 million from $0.3
million (0.1% of net sales) or $0.02 per share in fiscal 1995.

24
<PAGE>

Fiscal 1995 Compared to Fiscal 1994

Net sales in fiscal 1995 were $384.8 million, an increase of $13.3 million or
3.6% compared to $371.5 million in fiscal 1994. Net sales of home fashions
products were $231.8 million in fiscal 1995, an increase of $18.5 million or
8.7% compared to $213.3 million in fiscal 1994. Net sales of apparel fabrics
were $153.0 million in fiscal 1995, a decrease of $5.3 million or 3.3% compared
to $158.2 million in fiscal 1994. The increase in net sales of home fashions
products was due to higher unit volume, the sale of a better mix of products
and higher average selling prices. The improved product mix consisted of more
accessory items, ensembles and high thread count sheeting in fiscal 1995 as
compared to fiscal 1994. The decrease in sales of apparel fabrics in fiscal
1995 was entirely due to lower unit volume, primarily in shirting fabrics.

Gross profit in fiscal 1995 was $77.9 million (20.2% of net sales), an
increase of $3.8 million or 5.2% compared to gross profit of $74.1 million
(19.9% of net sales) in fiscal 1994. The increase in gross profit in fiscal
1995 reflected lower costs resulting from the Company's capital improvement
program, which were offset somewhat by higher costs for raw materials and
manufacturing materials.

Selling, general and administrative expenses in fiscal 1995 were $44.9
million (11.7% of net sales), an increase of $1.0 million or 2.2% from $43.9
million (11.8% of net sales) in fiscal 1994. The increase in selling, general
and administrative expenses in fiscal 1995 related primarily to higher expenses
associated with operating the Company's factory stores and an increase in bad
debt expense.

The Company incurred one-time charges in both fiscal 1995 and fiscal 1994.
Other operating costs, net reflect $9.0 million of charges in fiscal 1995
compared to $1.5 million of net charges in fiscal 1994. The charges in fiscal
1995 related to $4.4 million in writedowns of certain fixed assets that became
obsolete as a result of the Company's ongoing modernization program, $3.0
million of costs associated with the Company's decision to discontinue
manufacturing and marketing a line of apparel fabrics, and $1.6 million of
costs associated with relocation of the Company's design, merchandising and
marketing staff from office space at 111 West 40th Street to new offices at
1325 Avenue of the Americas in New York City. The one-time charges in fiscal
1994 included $0.7 million for writedowns of equipment which became obsolete as
a result of the Company's modernization program and $0.8 million related to the
noncash portion of certain compensation expense associated with the transfer of
stock and the granting of stock options by a principal shareholder to certain
management employees.

Operating income for fiscal 1995 was $24.1 million (6.3% of net sales), a
decrease of $4.5 million or 15.9% from $28.6 million (7.7% of net sales) in
fiscal 1994. All of the decrease was caused by the one-time charges described
above. Absent those charges, operating income would have been $33.1 million
(8.6% of net sales) in fiscal 1995, an increase of $2.9 million or 9.6% from
$30.2 million (8.1% of net sales) in fiscal 1994. The better operating
performance in fiscal 1995 was due to lower manufacturing costs associated with
the Company's modernization program, which were offset somewhat by cost
increases for raw materials and manufacturing materials.

Interest expense was $21.9 million in fiscal 1995, an increase of $1.5
million or 7.5% from $20.4 million in fiscal 1994. Included in interest expense
during fiscal 1995 and fiscal 1994 was $2.9 million and $3.8 million,
respectively, of noncash interest associated with the Junior Notes which were
converted into 2,780,173 shares of the Company's Class A Common Stock as of
September 3, 1995. Excluding the interest on the Junior Notes, interest expense
would have been $19.0 million and $16.6 million in fiscal 1995 and 1994,
respectively. The increase was due to higher debt levels during fiscal 1995,
which was offset to a certain extent by slightly lower average interest rates.
The increase in debt levels was caused by the Company's capital spending with
respect to its ongoing modernization program and increased levels of working
capital during the year.

The income tax provision for fiscal 1995 was $2.1 million (89.2% of pre-tax
income), a decrease of $2.7 million or 55.9% compared to $4.8 million (57.8% of
pre-tax income) in fiscal 1994. The high effective tax rates in both fiscal
years reflected the nondeductibility of interest on the Junior Notes.

For the reasons described above, net income in fiscal 1995 was $0.3 million
(0.1% of net sales) or $0.02 per share, a decrease of $3.3 million or 92.7%
from $3.5 million (0.9% of net sales) or $0.31 per share in fiscal 1994.

25
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

General

The Company relies on internally generated cash flow, supplemented by
borrowings under its Credit Facilities and Vendor Financing, to meet its
working capital needs, capital improvements and debt service requirements. In
the past, the Company has maintained substantial levels of leverage. However,
the Offering will result in a substantial reduction in that leverage. On a pro
forma basis, after giving effect to the Offering and the application of the net
proceeds therefrom by the Company to reduce outstanding indebtedness, the
Company's total debt to total capital ratio at September 27, 1997 would be
reduced from 69.7% to 48.9% and its ratio of EBITDA to interest expense for the
nine months ended September 27, 1997 would be increased from 3.5 times to 4.7
times. There can be no assurance that the Company will not incur substantial
leverage in the future in connection with its capital improvements program or
in connection with possible future acquisitions.

Working Capital

The Company's operations are working capital intensive. The Company's
operating working capital (accounts receivable and inventories less accounts
payable and accrued expenses) typically increases or decreases in relation to
sales and operating activity levels.

Net cash generated from operating activities was $27.3 million in the nine
months ended September 27, 1997. Included in that amount was a use of cash for
operating assets and liabilities of $8.2 million, primarily comprised of a
$10.1 million use for operating working capital (accounts receivable--$1.6
million source, inventories--$16.3 million use, and accounts payable and
accrued expenses--$4.7 million source).

During the comparable nine month period ended September 28, 1996, net cash
generated from operating activities was $27.8 million. Included in that amount
was a source of cash from operating assets and liabilities of $8.5 million,
primarily comprised of an $8.5 million source from operating working capital
(accounts receivable--$2.8 source, inventories--$7.3 million source, and
accounts payable and accrued expenses--$1.5 million use).

Operating working capital decreased $17.3 million (16.7%) during fiscal 1996
reflecting improved inventory management and to a lesser extent the 1.4%
decrease in net sales from fiscal 1995. Net income plus noncash expense items
(net) provided $28.4 million in cash during the year. Additionally, cash was
provided by a $16.7 million reduction in operating assets and liabilities. This
reduction was made up of a $24.6 million reduction in inventories offset by
items totaling $7.8 million, principally a reduction in accounts payable and
accrued expenses of $6.6 million. Accordingly, net cash of $45.1 million was
generated from operating activities.

Operating working capital increased $5.7 million (5.8%) in fiscal 1995
reflecting the 3.6% increase in net sales. Net income plus noncash expense
items (net) provided $29.6 million in cash during the year, which provided
funding for $7.0 million used by changes in operating assets and liabilities.
Those changes were a $1.8 million reduction in other liabilities, a $0.5
million reduction in prepaid expenses and other assets, as well as the $5.7
million increase in operating working capital mentioned above. As a result,
$22.5 million in net cash was provided by operating activities in fiscal 1995.

During fiscal 1994, operating working capital increased $17.1 million (20.3%)
reflecting the 17.0% increase in net sales from fiscal 1993. Net income plus
noncash expense items provided $30.0 million in cash during the year. This was
used to fund the $18.1 million change in operating assets and liabilities. That
change was made up of $17.1 million of cash used for operating working capital
described above and a $1.0 million use of cash resulting from a decrease in
other liabilities, offset by a decrease in prepaid expenses and other assets.
Accordingly, operating activities generated $11.9 million of net cash in fiscal
1994.

In connection with the purchasing of cotton for anticipated manufacturing
requirements, the Company may enter into cotton futures and option contracts in
order to reduce the risk associated with future price fluctuations. The Company
generally covers open order requirements, which average approximately three
months of

26
<PAGE>

production, through direct purchase and hedging transactions, and it may
shorten or lengthen that period in accordance with its perception of the
direction of cotton prices. Futures and option contracts are accounted for as
hedges and, accordingly, gains or losses are deferred and reflected in cost of
sales as an element of the cost of the finished product. Gains and losses
related to hedging activity during the three year period ended December 28,
1996 were not material to the Company's results of operations. There were no
material cotton futures or options contracts outstanding at December 30, 1995,
December 28, 1996 or September 27, 1997.

Credit Facilities and Vendor Financing

On February 3, 1997, in order to finance the Cherokee Acquisition, the
Company replaced its $60.0 million revolving credit facility with the Working
Capital Facility, under which the Company has $90.0 million aggregate borrowing
availability, subject to a borrowing base limitation, and the Term Loan
Facility, under which the Company has $35.0 million of aggregate borrowing
availability. The Working Capital Facility and Term Loan Facility (together,
the "Credit Facilities") are secured by the Company's accounts receivable and
inventories, the personal property located at the three former Cherokee
manufacturing facilities, and the real property of the Cherokee North Carolina
manufacturing facilities.

The Working Capital Facility bears interest at the Base Rate, as defined
(8.50% as of October 27, 1997) or LIBOR plus 2% (7.78% as of October 27, 1997)
for periods of one, two, three or six months, at the Company's option. The
Working Capital Facility is non-amortizing and any amounts outstanding are due
at the final maturity of February 3, 2001. At October 27, 1997, the Company had
an aggregate of $11.5 million of borrowings and $0.2 million in letters of
credit outstanding under the Working Capital Facility and had $71.5 million in
unused and available borrowings under the Working Capital Facility.

The Term Loan Facility bears interest at the Base Rate or LIBOR plus 2.50%
(8.28% as of October 27, 1997) for periods of one, two, three or six months, at
the Company's option. Principal payments are required in the following amounts
for each fiscal year: 1997, $1.75 million; 1998, $4.25 million; 1999, $5.0
million, and 2000, $24.0 million, of which $20.25 million is due November 2000.
At October 27, 1997, the Company had an aggregate of $34.1 million of
borrowings outstanding under the Term Loan Facility.

The Credit Agreement relating to the Credit Facilities contains certain
covenants including requirements for the maintenance of a certain cash interest
coverage ratio and a minimum net worth and limitations on mergers and
consolidations, affiliated transactions, incurring liens, making restricted
payments, entering into sale and leaseback transactions, disposing of assets
and owning, purchasing or acquiring margin securities. An event of default
under the Credit Agreement includes a Change in Control (as defined) as well as
the Company's default on certain of its other indebtedness. Borrowings under
the Working Capital Facility are tied to a borrowing base formula which is
dependent on the level of eligible accounts receivable and inventories, less
$10 million.

In addition, the Company finances certain capital improvements through
vendors of the capital assets, and will continue to utilize this method of
financing where it deems appropriate.

Senior Subordinated Notes

The Company currently has outstanding an aggregate principal amount of $120.0
million of Senior Subordinated Notes. The Senior Subordinated Notes were issued
pursuant to the Indenture, dated December 15, 1993 (the "Indenture"), between
the Company and Marine Midland Bank, N.A. The Senior Subordinated Notes are
non-amortizing and mature on December 15, 2003. Interest on the Senior
Subordinated Notes accrues at the rate of 10.125% per annum. The Senior
Subordinated Notes are redeemable at the option of the Company, in whole or in
part, on or after December 15, 1998, at a redemption price beginning at 105.1%
of the principal amount thereof (plus accrued interest) and declining ratably
to par on December 15, 2001. The Indenture contains certain covenants which
restrict the Company's ability to, among other things, incur additional
indebtedness and enter into sale and leaseback transactions unless a specified
fixed charge coverage ratio is satisfied, make certain dividend payments and
other restricted payments, create liens or make asset sales. The Indenture also
requires the Company to make an offer to purchase the Senior Subordinated Notes
upon a Change of Control (as defined) and contains, among other things, a cross
acceleration to certain other outstanding indebtedness.

27
<PAGE>

Capital Improvements

Between fiscal 1992 and fiscal 1996, the Company purchased or leased
approximately $150 million of equipment and other manufacturing improvements to
modernize its manufacturing processes and enhance its information systems.
These capital improvements have been financed through a variety of sources,
including (i) internally generated funds and borrowings under existing credit
facilities, (ii) vendor financing and (iii) operating leases.

The table below sets forth the amount of capital improvements made through
specified financing sources during the past three fiscal years and for the
first nine months of fiscal 1997:

<TABLE>
<CAPTION>
FISCAL YEAR
----------------- NINE MONTHS ENDED
1994 1995 1996 SEPT. 27, 1997
----- ----- ----- -----------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Source of Financing
Internally generated funds and borrowings... $26.9 $20.8 $28.5 $12.6
Vendor financing(1)......................... 17.2 7.2 6.0 1.1
Operating leases(2)......................... 1.4 1.3 0.9 --
----- ----- ----- -----
Total capital improvements................ $45.5 $29.3 $35.4 $13.7
===== ===== ===== =====
</TABLE>
- --------
(1) The financings provided by vendors for machinery and equipment typically
have maturities ranging from three to seven years and carry floating rates
of interest similar to the Company's Credit Facilities. The 1994, 1995 and
1996 amounts also include $2.8 million, $1.0 million and $3.6 million,
respectively, of financing from an Industrial Development Authority for a
home fashions accessory sewing plant and a warehouse and distribution
center.
(2) Amounts reflect the fair market value of machinery and equipment which was
leased during the applicable period.

During the first nine months of fiscal 1997, the Company made capital
improvements aggregating $13.7 million for equipment and manufacturing
improvements. The Company anticipates that capital improvements will aggregate
approximately $12 million during the balance of fiscal 1997. Such capital
improvements will be primarily for new home fashions and apparel looms and
spinning equipment. The Company anticipates capital improvements in the range
of $30 million to $35 million in fiscal 1998, which will be used primarily for
new looms, air conditioning and other facility modernizations. Capital
improvements in fiscal 1994, 1995 and 1996 aggregated $45.5 million, $29.3
million and $35.4 million, respectively. Capital improvements in fiscal 1994,
1995 and 1996 were for (i) the installation of open-end spinning and associated
opening and carding equipment, (ii) the purchase of various manufacturing
equipment subject to certain leases, (iii) the installation of dyeing, printing
and finishing equipment, (iv) the construction of a home fashions bedding
accessory sewing plant, (v) the construction of a home fashions warehouse and
distribution center, and (vi) the normal upgrading, replacement and maintenance
of the Company's equipment and facilities.

Rental expense for fiscal 1994, 1995 and 1996 was approximately $14.2
million, $13.0 million and $10.3 million, respectively, net of rental income on
noncancellable leases and subleases of approximately $1.7 million, $1.5 million
and $0.1 million, respectively. At December 28, 1996, the Company's future
minimum lease payments due under operating leases with noncancellable terms in
excess of one year were as follows: 1997, $5.3 million; 1998, $4.2 million;
1999, $2.8 million; 2000, $2.0 million; and 2001 and later, $18.3 million.
Approximately 9% of future rental payments relate to operating leases for
machinery and equipment used to produce the Company's products.

NET OPERATING LOSS AND CREDIT CARRYFORWARDS

On September 3, 1991, the Company completed the 1991 Restructuring which
involved issuing common and preferred stock to various parties. Management
believes that the 1991 Restructuring did not result in a

28
<PAGE>

"change in ownership" as such term is used in Section 382 of the Internal
Revenue Code. However, Section 382 and related regulations promulgated by the
IRS are extremely complex, and management's assessment of whether or not a
"change in ownership" occurred involves judgments as to certain factual issues
and interpretations as to certain legal issues for which there is little
guidance. There can be no assurance that the IRS will not challenge the
Company's conclusion that no "change in ownership" has occurred under Section
382. The utilization of the Company's pre-1991 Restructuring net operating
loss and credit carryforwards could be significantly restricted or eliminated
if the 1991 Restructuring is deemed to constitute a "change in ownership."
From the date of the 1991 Restructuring through December 28, 1996, the Company
utilized an aggregate of $16.9 million in net operating loss carryforwards and
$1.7 million in general business credit carryforwards for federal income tax
purposes that are subject to review by the IRS. At December 28, 1996, the
Company has unused net operating loss carryforwards of $0.9 million (expiring
in 2005), a minimum tax credit carryforward of $8.1 million, and investment
credit and other general business credit carryforwards of $5.3 million (the
majority of which expire in 1997 through 2000).

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 9 of Notes to Unaudited Condensed Consolidated Financial Statements
of the Company.

29
<PAGE>

BUSINESS

GENERAL

Founded in 1882, the Company is a leading manufacturer and marketer of
textile products for the home fashions and apparel fabrics markets. The
Company designs, manufactures and markets a coordinated line of value-added
home fashions products consisting of packaged bedroom furnishings such as
comforters, sheets, pillowcases, shams, bed skirts, decorative pillows and
draperies. These products are marketed under the "Dan River" brand name as
well under licenses from, among others, "Colours by Alexander Julian," "D.
Porthault," "John Wilman," "Liberty" and "Nautica." Dan River also
manufactures and markets a broad range of high quality woven cotton and
cotton-blend apparel fabrics and believes that it is the leading supplier of
men's dress shirting fabrics in North America (based on net sales).

On February 3, 1997, the Company acquired substantially all of the assets
and certain liabilities of Cherokee, which was a competitor of the Company and
a supplier of yarn-dyed fabrics to men's and women's shirting manufacturers
and of sportswear fabrics to the converting trade. The assets purchased
consisted primarily of two woven fabrics manufacturing facilities located in
Spindale, North Carolina and Sevierville, Tennessee and a finishing facility
located in Harris, North Carolina, together with associated real property,
machinery and equipment, inventories and receivables. The Company presently
intends to continue the current operations of all three facilities.

The following table sets forth for the periods indicated the dollar amount
and percentage of total net sales of the Company attributable to home fashions
products and apparel fabrics:

<TABLE>
<CAPTION>
PRO FORMA
FISCAL YEAR PRO NINE MONTHS ENDED NINE MONTHS
-------------------------------------- FORMA ------------------- ENDED
FISCAL SEPT. 28, SEPT. 27, SEPT. 27,
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
------ ------ ------ ------ ------ ------- --------- --------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dollar amount:
Home fashions products. $180.4 $179.4 $213.3 $231.8 $243.2 $243.2 $173.1 $183.0 $183.0
Apparel fabrics........ 152.6 138.2 158.2 153.0 136.4 237.4 98.9 161.2 170.4
------ ------ ------ ------ ------ ------ ------ ------ ------
Total................ $333.0 $317.6 $371.5 $384.8 $379.6 $480.6 $272.0 $344.2 $353.4
====== ====== ====== ====== ====== ====== ====== ====== ======
Percentage:
Home fashions products. 54.2% 56.5% 57.4% 60.2% 64.1% 50.6% 63.6% 53.2% 51.8%
Apparel fabrics........ 45.8 43.5 42.6 39.8 35.9 49.4 36.4 46.8 48.2
------ ------ ------ ------ ------ ------ ------ ------ ------
Total................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- --------
(1) Gives effect to the Cherokee Acquisition as if it had been consummated at
the beginning of each of the periods presented.

BUSINESS STRATEGY

The Company's principal business objective is to continue to expand the
sales of its home fashions products and apparel fabrics, while improving the
overall profitability of its operations. The primary components of the
Company's business strategy include the following:

30
<PAGE>

to increase sales and margins, and (ii) attract value conscious
consumers by offering high quality products at reasonable prices.
Accordingly, the Company works directly with retailers to develop value-
added, fashion-oriented products (as opposed to solid color commodity
products) that are periodically updated to respond to changing consumer
preferences, thereby improving retailers' inventory turn rates and
associated profitability.

. Enhance Strong Apparel Fabrics Market Position. Dan River seeks to
enhance its position as a leading producer of apparel fabrics by
focusing on customer relationships, anticipating fashion trends,
developing new innovative products and reducing manufacturing lead
times. Management believes that (i) the significant reduction in
manufacturing costs achieved through its aggressive facility
modernization program, (ii) the increase in the size of its apparel
fabrics operations and attendant reduction in fixed costs on a per unit
basis as a result of the Cherokee Acquisition and (iii) its diverse
customer base will make Dan River's apparel fabrics business less
sensitive to the cyclicality experienced by the textile industry in
general and will further increase the Company's profitability.
Management also believes that demand for apparel fabrics manufactured in
North America and the Caribbean will continue to increase as a result of
NAFTA, and the Caribbean Basin Recovery Act and the increasing
importance of geographic proximity in enabling shortened delivery times.
The Company believes the Cherokee Acquisition will enhance its ability
to benefit from this opportunity.

. Reduce Production Costs and Improve Productivity. The Company is a low
cost producer. During the past five fiscal years, the Company has
invested approximately $150 million in an extensive facility
modernization program focused on installing the most advanced
manufacturing technologies making the Company more competitive and cost-
efficient. As a result of this program as well as other improvements
made by the current management team since the Company was acquired in
1989, the Company has significantly increased productivity, reduced
costs and improved product quality. From fiscal 1990 through September
1997, the Company substantially improved productivity by (i) increasing
weaving efficiencies within its home fashions and apparel fabrics
operations by 12% and 11%, respectively, (ii) increasing square yards of
greige (unfinished) fabrics produced per man hour within its home
fashions and apparel fabrics operations by 151% and 48%, respectively,
and (iii) increasing square yards of finished fabrics produced per man
hour by 11%. During the same period, the Company achieved significant
cost reductions by (i) reducing off-quality production of home fashions
products and apparel fabrics by 46% and 45%, respectively, (ii) reducing
pounds of waste generated by its manufacturing operations and (iii)
reducing its manufacturing work force by 30% excluding the effect of the
Cherokee Acquisition. The Company intends to continue to modernize its
operations and improve its low cost position.

31
<PAGE>

changes in product demand, thereby improving their operating results. In
addition, the Company employs continuous inventory replenishment and
dedicated manufacturing programs with certain customers to enhance
service. Planned investments in information technology include the
implementation of a new enterprise resource planning (ERP) system along
with additional continuous inventory replenishment programs.

. Enhance Financial Flexibility. The Company seeks to maintain a capital
structure that will position it for growth through expansion of existing
operations and potential acquisitions as well as provide stability
during cyclical downturns. The textile industry generally, and in
particular marketers of home fashions products, have undergone
significant consolidation in recent years and the Company anticipates
that this trend will continue. The Company believes that, following
completion of the Offering, its strong balance sheet will enable it to
capitalize on attractive acquisition opportunities.

HOME FASHIONS OPERATIONS

Products

The Company designs, manufactures and markets a coordinated line of value-
added home fashions products, consisting of packaged bedroom furnishings such
as comforters, sheets, pillowcases, shams, bed skirts, decorative pillows and
draperies which are marketed under the "Dan River" brand name, as well as
under various other trademarks and licenses from, among others, "Colours by
Alexander Julian," "D. Porthault," "John Wilman," "Liberty" and "Nautica."
Home fashions products are offered in a wide variety of styles and patterns,
including fashion designs and, to a lesser extent, solid colors. Products
range from a 120-thread count muslin sheet of blended polyester and cotton to
a top-of-the-line 250-thread count percale 100% cotton sheet. The Company
focuses on value-added, higher margin products, such as percales and printed
products and accessory items (products other than sheets and pillowcases),
which the Company believes enhance its competitiveness and will enable it to
increase sales. The Company believes that its percentage of net sales of home
fashions products attributable to these higher margin products is among the
highest in the industry.

Dan River has established itself as an innovator in merchandising home
fashions products. The Company was a leader in introducing the complete bed
ensemble, which it markets under the name "Bed-in-a-Bag." The "Bed-in-a-Bag"
complete bed ensemble consists of a comforter with matching sheets,
pillowcases, shams and a dust ruffle. This merchandising concept capitalizes
on the Company's design capabilities and manufacturing flexibility, enabling
the Company to develop and manufacture customer-specific "Bed-in-a-Bag"
products. These packaged sets, which accounted for 40.3% of the Company's net
sales of home fashions products for the first nine months of fiscal 1997,
provide attractive profit margins for the Company and its customers, while
offering consumers value and convenience. In addition, "Bed-in-a-Bag" complete
bed ensembles increase retailers' inventory turns and help them avoid
markdowns on unsold products. Dan River also manufactures and sells home
fashions products manufactured from yarn-dyed fabrics (as opposed to printed
or solid-colored fabrics), which have expanded the styling available in this
product line. Management believes that the Company's ability to manufacture
wide-width, yarn-dyed fabrics in short runs in a wide variety of innovative
styles, such as woven plaids, for use in home fashions products differentiates
the Company from its competitors.

Customers

The Company distributes home fashions products through key retailers in all
retail trade classes including department stores, specialty home fashions
stores, direct marketers, national chains, mass merchants and regional
discounters. The Company markets its home fashions products to over 600
customers, none of which accounted for more than 10% of the Company's total
net sales in fiscal 1996. The Company has pursued and established strong
relationships with large, high volume retailers including Wal-Mart Stores,
Inc., Kmart Corporation, Federated Department Stores, Inc., J.C. Penney
Company, Inc. and The May Department Stores Company. As a supplement to its
primary distribution channels, a Dan River subsidiary operates factory outlet
stores which sell home fashions products directly to consumers. The factory
outlet stores sell first-quality and close-out

32
<PAGE>

merchandise, as well as seconds, and are located off highway exits and in
tourist areas, avoiding the creation of a perceived threat to the traditional
Dan River home fashions retailer. Sales through the Company's factory outlet
stores accounted for approximately 2% of total home fashions products sales in
fiscal 1996 and are not expected to grow significantly as a percentage of
total home fashions products sales.

Sales and Marketing

The home fashions products sales and marketing staff consists of
approximately 60 persons and is headquartered in New York City, with satellite
offices in Atlanta, Boston, Chicago, Dallas, Los Angeles, Minneapolis,
Philadelphia and San Francisco. These marketing professionals, stylists and
product development personnel work as early as one year in advance of a retail
selling season to develop new fabrics, styles, colors, constructions and
finishes. The Company's stylists monitor trends by periodically traveling
throughout the world to attend trade shows, meet with home fashions retailers
and conduct market research. Together with the marketing group, stylists often
work directly with the Company's customers to create fabrics that respond to
rapidly changing fashion trends and customer needs. New styles are also
developed internally for the April and October bed and bath home textile trade
shows, where they are shown to buyers and are placed in production based on
customer acceptance. Orders for home fashions products are filled from
inventory or, if inventory is not available, products are manufactured and
generally shipped within six to 12 weeks of order placement.

APPAREL FABRICS OPERATIONS

Products

The Company manufactures and markets a broad range of high quality woven
cotton and cotton-blend fabrics, which are marketed primarily to manufacturers
of men's, women's and children's clothing. The Company's yarn-dyed and piece-
dyed woven apparel fabrics include oxford cloth, pinpoint oxford cloth, fancy
broad cloth, seer-suckers, mid and light weight denim, twills and chambrays.
As a result of the Cherokee Acquisition, the Company believes that it is the
leading manufacturer of men's dress shirting fabrics in North America (based
on net sales). In fiscal 1996, the Company manufactured and sold approximately
27 million yards of shirting fabric, approximately 71% of which was oxford
cloth. The Company also manufactures and distributes apparel fabrics to
uniform manufacturers and for use in decorating and crafts, 100% cotton
fabrics to the furniture market and greige (unfinished) fabrics to converters.

Management believes that the Company enjoys a reputation as a leader in
creating new fabric styles and designs within the apparel fabrics market.
Management also believes that the Company's customers look to its design and
styling professionals to help identify new product ideas and anticipate
fashion trends in the domestic apparel market. The Company has a library with
over one million yarn-dyed fabric samples to help develop new product ideas.
The Company's product development professionals work independently as well as
directly with customers to develop new fabric styles and constructions. In
addition, the Company's product development personnel increasingly work
directly with retailers to develop fabrics. These retailers often specify that
the Company's fabrics be used by their suppliers in the manufacture of
garments to be sold by them. The Company believes that it is a leader in
wrinkle resistant technology for shirting fabrics and markets Dri-Don(R)
blended easy care fabrics and 100% cotton Wrinkl-Shed(R) fabrics. As a result
of the Cherokee Acquisition, the Company now manufactures and markets fabrics
utilizing Tencel lyocell, an innovative new fiber. These versatile, innovative
fabrics are used primarily in manufacturing women's sportswear.

Customers

The Company distributes its apparel fabrics primarily to domestic
manufacturers of men's, women's and children's clothing which, in turn,
operate sewing plants throughout the United States and the Caribbean. The
Company's customers market clothing manufactured from its apparel fabrics
under such brand names as Arrow, Brooks Brothers, Hathaway, Levi Strauss, Liz
Claiborne, L.L. Bean, Manhattan, Osh Kosh B'Gosh and Van Heusen, as well as
under private labels through retailers such as J.C. Penney Company, Inc. and
Sears, Roebuck

33
<PAGE>

& Co. The Company markets uniform fabrics to customers such as Cintas
Corporation and Red Kap, and distributes apparel fabrics to home sewing
retailers such as Wal-Mart Stores, Inc., Fabric-Centers of America, and
through various wholesale distributors, for use in decorating and crafts, as
well as garment sewing.

Sales and Marketing

The Company's apparel fabrics, sales and marketing staff consists of
approximately 55 persons and is headquartered in New York City, with satellite
offices in Chicago, Dallas, Danville, High Point (North Carolina), Los Angeles
and San Francisco. Apparel fabrics are generally "made to order" products.
Fabrics are manufactured and generally shipped within nine to 12 weeks of
order placement. Orders for apparel fabrics are based on customer selections
from offerings of color, content, construction, design and finish, and fabrics
are made to customer specifications, which may be developed jointly with the
customer. Fabric stylists and computerized fabric design capability aid in the
process of fabric development and samples are created for customer approval.
Once customer approval and delivery requirements are received, orders are
committed to production.

MANUFACTURING PROCESS

Production

Dan River is a vertically integrated manufacturer involved in all aspects of
the woven textile manufacturing process, from spinning and weaving to dyeing,
finishing, and sewing. Substantially all of the Company's facilities for the
manufacture of home fashions products are located in Danville, Virginia. As a
result of the acquisition of Cherokee, with spinning and weaving facilities
located in Spindale, North Carolina and Sevierville, Tennessee and finishing
facilities located in Harris, North Carolina, the Company added almost a
million square feet of manufacturing and warehousing floor space dedicated to
the manufacture of apparel fabrics in addition to its existing apparel fabrics
manufacturing facilities in Danville.

During the past five fiscal years, the Company has invested approximately
$150 million in an extensive facility modernization program focused on
installing the most advanced manufacturing technologies in an effort to be the
low cost manufacturer in the industry. See "Risk Factors--Substantial Capital
Requirements." Within its home fashions operations, the Company has installed
modern, high-speed air-jet looms; automatic sheet cutting, hemming and folding
equipment; lower cost open-end spinning equipment; and computerized comforter
equipment. Within its apparel fabrics operations, the Company has modernized
its yarn preparation processes through the installation of more efficient,
lower cost, open-end spinning, carding, drawing and combing equipment. The
Company's ongoing capital improvement programs have modernized and streamlined
substantially all significant components of the manufacturing process for both
home fashions products and apparel fabrics, helping the Company reduce lead
times, minimize inventory levels and maximize flexibility to respond to
changing market conditions, while at the same time increasing the quality of
its products.

At Dan River's manufacturing facilities, raw cotton and synthetic fibers are
spun into cotton and polyester-blend yarns. Much of the yarn used in the
manufacture of apparel fabrics is dyed before being woven into fabric, as
opposed to yarn used in the manufacture of home fashions products, which
typically is not dyed. Yarn is then woven into fabric on looms to produce
unfinished fabric. After weaving, fabric may be marketed as greige
(unfinished) goods that are finished in accordance with customer
specifications. Fabric utilized in the manufacture of home fashions products
is finished by bleaching, dyeing and/or printing. The Company also supplements
its printing through the use of third party manufacturers in order to meet
customer demand for its products. The Company cuts and sews fabric in home
fashions products, such as prepackaged sheets, pillowcases and accessory
products at its sewing and cutting facilities and supplements production from
these facilities through the use of third party contractors. Once packaged,
final products are sold to the Company's customers. Apparel fabrics are
finished through combinations of bleaching, dyeing, napping and applying
various finishes.

The Company's finishing facilities are capable of finishing over 190 million
yards of fabric per year. Dan River believes its finishing capabilities enable
it to originate new fabrics rapidly and vary production to meet

34
<PAGE>

market trends and demands. The Company's finishing facilities also finish
fabric on a commission basis for outside customers. During fiscal 1997, the
Company completed construction of a new 258,000 square foot home fashions
finished goods warehouse and distribution center which is located adjacent to
its new home fashions accessory sewing plant in Danville, Virginia. The
Company believes the new warehouse will enable it to better and more
efficiently service its home fashions customers and accommodate further growth
of its home fashions business.

Dan River has engineered its manufacturing processes to meet the quick
response delivery requirements of its customers. Quick response techniques
reduce turnaround time (the time required to process a particular order) which
improves customer service and production efficiency. Furthermore, Dan River
has the capability to offer electronic data interchange programs to all of its
customers. These programs minimize the lead time for customer orders and
permit a more efficient, targeted manufacturing schedule, as well as
improvements in efficiency, communications, planning and processing times at
each stage of production. The Company has electronic data interchange programs
in place with most of its major home fashions products customers.

Quality Improvement Program

Dan River has a program of quality improvement designed to establish common
standards of quality and performance at each stage of the manufacturing
process. These standards are used to set goals and measure performance.
Statistical process control techniques have been introduced throughout the
Company's manufacturing facilities. Modern systems have been installed to
assist in controlling the dyeing and finishing of yarn and fabric.
Computerized monitoring of key manufacturing processes is being installed and
real-time information is being integrated into the overall quality system. Dan
River's capital improvement program and the related modernization of
manufacturing processes and information systems are also important components
in its quality improvement program.

Product testing is done in the Company's laboratories in its facilities,
which are certified by both federal government agencies, private sector
customers and certification bodies. All products are subjected to statistical
sampling plans designed to assure compliance to specifications.

PRODUCT DEVELOPMENT

As part of its customer-specific marketing strategy, the Company works
directly with its customers to develop new fabric constructions, patterns,
textures and colors. The Company has equipment in its facilities dedicated to
sample manufacturing where it tests new fabric concepts in actual end-use
products. Extensive evaluation of a product is conducted prior to committing
fabrics to mill production. Fabrics are sometimes introduced in cooperation
with a retailer, in which case a test run of the fabric is produced,
manufactured (by a third party garment manufacturer) and delivered to a
retailer for test sales. Based upon the results of internal evaluations and
these retail tests, new fabrics are introduced into the marketplace.

RAW MATERIALS

Dan River uses substantial quantities of cotton in its manufacturing
operations. By law, U.S. textile companies are generally prohibited from
importing cotton, subject to certain exceptions which take effect primarily
when the U.S. price of cotton exceeds the world price. Cotton is an
agricultural product subject to weather conditions and other factors affecting
agricultural markets. Accordingly, the price of cotton is subject to
considerable fluctuation. See "Risk Factors--Possible Adverse Effect of
Fluctuations in Price and Availability of Cotton."

Dan River purchases cotton primarily in the domestic market directly from
merchants or through brokers. Generally, the Company seeks to purchase
sufficient amounts of cotton to cover existing order commitments
(approximately three months); however, the Company may purchase cotton in
advance of orders on terms that it deems advantageous, and while the Company
does not speculate on the price of cotton, it may hedge prices from time to
time through forward contracts and the futures and options markets. The
Company also uses significant quantities of polyester, which is available from
several sources.

35
<PAGE>

Although the Company has always been able to obtain sufficient supplies of
both cotton and polyester, any shortage or interruption in the supply or
variations in the quality of either could have a material adverse effect on
the Company's business. Additionally, fluctuations in cotton and polyester
prices can significantly affect the Company's profitability, particularly on a
short term basis, since Dan River and other textile manufacturers cannot
always mirror such fluctuations in the pricing of their products. See "Risk
Factors--Cyclical Nature of Textile Industry."

The Company also uses various other raw materials, such as dyes and
chemicals, in its manufacturing operations. The Company believes these
materials are readily available from a number of sources. Dan River also
supplements its internal manufacturing capabilities by purchasing yarn and
unfinished fabrics from outside sources and by contracting with third parties
for various manufacturing services, including certain printing and sewing
operations. During fiscal 1996, approximately 14% of the yarn and 5% of
unfinished fabrics used in the Company's manufacturing operations were
purchased from outside sources and approximately 5% of printing and finishing
services and 8% of sewing operations were performed by third parties. During
the first nine months of fiscal 1997, approximately 14% of the yarn and 12% of
unfinished fabrics used in the Company's manufacturing operations were
purchased from outside sources, and 9% of finishing services and 8% of sewing
operations were performed by third parties.

TRADEMARKS AND LICENSES

The Company holds licenses to produce and sell home fashions products under
"Colours by Alexander Julian," "D. Porthault," "John Wilman," "Liberty" and
"Nautica" and certain other names or marks, and to use certain designs on its
home fashions textile products. Such licenses generally provide that the
Company has the exclusive right for a limited period, generally three years
subject to renewal for additional periods, to use the respective brand name in
the sale of certain types of products in certain geographic regions. Dan River
also holds non-exclusive licenses with respect to the use and advertising of
certain processes or synthetic fibers or fabrics. Management believes that the
failure of the Company to continue to hold any one of its licenses or
trademarks (other than "Dan River") would not have a material adverse effect
on the Company's business.

Dan River has registered the "Bed-in-a-Bag" name as a trademark. In February
1997, a competitor filed a Petition for Cancellation of the trademark in the
United States Patent and Trademark Office (the "U.S. Patent Office"). Dan
River filed its answer to the Petition for Cancellation and intends to
vigorously defend the action. The Petition challenges only the exclusivity of
the trademark and not the Company's right to continue to use the phrase in
connection with its products. Therefore, while the Company cannot predict the
outcome of this matter, the Company believes that the loss of such exclusivity
would not have a material adverse effect on the Company's business or
prospects.

COMPETITION

The Company's competitive position varies by product line. Competitive
factors include price, product styling and differentiation, quality,
flexibility of production and finishing, delivery time and customer service.
The Company sells its products primarily to domestic customers and competes
with both large, integrated textile manufacturers and numerous smaller
companies specializing in limited segments of the market. Some competitors
have significantly greater financial resources than Dan River. See "Risk
Factors--Intense Competition."

The Company is one of several domestic manufacturers of home fashions
products. Certain of the Company's competitors have a significantly greater
share of the domestic market than the Company, including WestPoint Stevens
Inc., Springs Industries, Inc. and Fieldcrest Cannon, Inc., which management
believes collectively account for over 50% of the home fashions bedding
products market.

With the acquisition of Cherokee, the Company believes that it is a leading
producer of lightweight yarn-dyed woven cotton and cotton-blend apparel
fabrics in North America. With respect to men's shirtings,

36
<PAGE>

management believes the Company is the largest producer of oxford cloth and
pima cotton pinpoint oxford cloth and the leading producer of lightweight
yarn-dyed dress shirting fabrics in North America (based on net sales). In the
sportswear fabrics market, the Company is one of a number of domestic
producers.

The Company is subject to foreign competition. The Company believes that
over half of the apparel fabrics (much in the form of imported garments) and
approximately 15% of the home fashions products sold in the U.S. are
manufactured overseas. One of the Company's business strategies is to seek
niche apparel fabrics markets that are less susceptible to foreign
competition. The Company believes that its domestic manufacturing base and
emphasis on shortening production and delivery times allow the Company to
respond more quickly than foreign producers to changing fashion trends and to
its domestic customers' delivery schedules.

The extent of import protection afforded by the U.S. government to domestic
textile producers has been, and is likely to remain, subject to considerable
domestic political deliberation. The Company benefits from protections
afforded to apparel manufacturers based in certain Caribbean and Central
American countries which ship finished garments into the U.S. under Item
9802.00.80 of the Harmonized Tariff Schedule of the U.S. as authorized by the
Caribbean Basin Recovery Act. Item 9802.00.80 reduces certain tariffs which
would otherwise apply to apparel garments manufactured outside the U.S. and
shipped into the U.S., provided that the garments are manufactured from fabric
produced and cut domestically. Item 9802.00.80 is beneficial for Dan River and
other domestic producers of apparel fabrics, because it creates an attractive
manufacturing base for apparel in close proximity to the U.S.

In January 1995, a multilateral trade organization, the WTO, was established
to replace the GATT. This new body has set forth the mechanisms by which world
trade in textiles and clothing will be progressively liberalized with the
elimination of quotas and the reduction of duties. The implementation began in
January 1995 with the phasing-out of quotas and the reduction of duties to
take place over a 10-year period. The selection of products at each phase is
made by each importing country and must be drawn from each of the four main
textile groups: tops and yarns, fabrics, made-up textile products and apparel.
The elimination of quotas and the reduction of tariffs under the WTO may
result in increased imports of certain textile products and apparel into North
America. These factors could make the Company's products less competitive
against low cost imports from developing countries. See "Risk Factors--
Possible Adverse Effect of Government Policy and Import Regulations."

NAFTA, which was entered into by the United States, Canada and Mexico and
became effective on January 1, 1994, has created the world's largest free-
trade zone. The agreement contains safeguards sought by the U.S. textile
industry, including a rule of origin requirement that products be processed in
one of the three countries in order to benefit from NAFTA. NAFTA will phase
out all trade restrictions and tariffs on textiles and apparel among the three
countries. In addition, NAFTA requires merchandise to be made from yarns and
fabrics originating in North America in order to avoid trade restrictions.
Thus, not only must apparel be made from North American fabric but the fabric
must be woven from North American spun yarn. Although management believes that
the Company may benefit from NAFTA, there can be no assurance that the removal
of these barriers to trade will not have a material adverse effect on the
Company's business. See "Risk Factors--Possible Adverse Effect of Government
Policy and Import Regulations."

ORDER BACKLOG

The Company's order backlog was approximately $134.4 million at September
27, 1997, as compared to approximately $97.0 million at September 28, 1996,
which was prior to the Cherokee Acquisition. Substantially all of the orders
on hand at September 27, 1997 are expected to be filled within four months of
that date.

PROPERTIES

On February 3, 1997, the Company acquired substantially all of the assets of
Cherokee, including greige manufacturing facilities in Spindale, North
Carolina and Sevierville, Tennessee, and a finishing plant in Harris,

37
<PAGE>

North Carolina. The Company owns the North Carolina facilities, totaling
approximately 588,000 square feet of manufacturing space. The Company leases
the Sevierville, Tennessee facility (consisting of approximately 384,000 feet
of manufacturing space) with an option to purchase the facility for nominal
consideration in 2018. The North Carolina real estate and the machinery and
equipment at all of these facilities are subject to liens securing borrowings
by the Company under the Credit Facilities funded in connection with the
acquisition of Cherokee.

Substantially all of Dan River's other apparel fabrics facilities, and
substantially all of its home fashions and corporate facilities, are located
in Danville, Virginia. Most of the Danville facilities are owned by the
Company. The owned facilities occupy a total of approximately 5,680,000 square
feet, with approximately 2,600,000 square feet of space currently used for
manufacturing. The Company's 116,000 square foot accessory sewing plant and
new 258,000 square foot distribution center are leased, with an option to
purchase for nominal consideration upon repayment of debt incurred in the
construction of these facilities. The Company leases approximately 873,000
square feet of additional warehouse and manufacturing space in Danville.

Dan River also owns a yarn mill in Alabama. The Company has entered into a
definitive agreement to sell such yarn mill, which sale is subject to
customary closing conditions. The Company leases each of its marketing and
sales offices and, through its subsidiary, Dan River Factory Stores, Inc., the
Company leases seven factory outlet stores in Georgia, Illinois, Maryland,
Ohio, South Carolina and Tennessee, each of which averages approximately 6,000
square feet of total space. The Company owns its factory outlet store in
Danville, Virginia.

The Company's manufacturing facilities generally operate on a five, six or
seven day 24-hour per day schedule depending on the nature of the operations
and demand for specific products of the Company, as well as other factors.

The Company believes that its existing facilities are adequate to service
existing demand for the Company's products. The Company considers its plants
and equipment to be in good condition.

GOVERNMENTAL REGULATION

Dan River is subject to various federal, state and local environmental laws
and regulations limiting the discharge of pollutants and the storage, handling
and disposal of a variety of substances. In particular, the Company's dyeing
and finishing operations result in the discharge of substantial quantities of
wastewater and in emissions to the atmosphere.

The Company is subject to the federal Clean Water and Clean Air Acts, and
related state and local laws and regulations. The Company's operations also
are governed by laws and regulations relating to workplace safety and worker
health, principally the Occupational Safety and Health Act and regulations
thereunder, which, among other things, establish cotton dust, formaldehyde,
asbestos and noise standards, and regulate the use of hazardous chemicals in
the workplace. The Company believes that it is currently in compliance in all
material respects with the environmental or health and safety laws and
regulations and does not believe that the cost of, or any operational
constraints or modifications required to assure, future compliance with such
laws or regulations will have a material adverse effect on its results of
operations or financial condition. However, there can be no assurance that
environmental requirements will not become more stringent in the future or
that the Company will not incur significant costs to comply with such
requirements.

At the property formerly owned by Cherokee at Spindale, North Carolina,
there is groundwater contamination consisting of diesel fuel, for which the
owner of an adjoining property has acknowledged responsibility. The
neighboring landowner is engaged in cleanup operations under the direction of
the North Carolina Department of Health, Environment and Natural Resources.
Prior to purchasing the Spindale property, the Company identified additional
contamination, consisting primarily of benzene in excess of applicable action
levels, that the Company believes, based on reports from its environmental
consultant, also originates on the adjoining property. The Company also
believes cleanup of the benzene contamination may not be required under
current North Carolina policy, and that in the event the Company is required
to clean up the contamination, it may be eligible to apply for funding from
the North Carolina underground storage tank trust fund. In addition,

38
<PAGE>

liabilities arising from environmental contamination associated with pre-
closing operation of Cherokee's facilities were excluded in connection with
the Company's purchase of Cherokee's assets and therefore not assumed by the
Company. Furthermore, the Company believes that any contamination on the
Spindale property prior to the closing is subject to an indemnity from
Cherokee, for which an amount adequate to cover the likely cost of cleanup has
been placed in an escrow fund until May 1998. In any event, the Company
believes that if it were required to clean up the currently known
contamination because it is the owner of the affected property, the cost of
such cleanup would not have a material adverse effect on its results of
operations or financial condition.

EMPLOYEES

At September 27, 1997, the Company had approximately 5,500 employees, of
which approximately 4,700 were hourly employees. Of these hourly employees,
approximately 3,600 are located primarily in the Company's Danville, Virginia
operations and represented by a collective bargaining agreement which expires
on January 1, 2002. The Company believes that its relations with its employees
are good.

LEGAL PROCEEDINGS

From time to time, the Company is a party to litigation arising in the
ordinary course of its business. The Company is not currently a party to any
litigation that management believes, if determined adversely to the Company,
would have a material adverse effect on the Company. A competitor has filed a
Petition for Cancellation with the U.S. Patent Office challenging the
Company's "Bed-in-a-Bag" trademark. See "--Trademarks and Licenses."

39
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
YEARS IN
TEXTILE
NAME AGE INDUSTRY POSITIONS HELD
---- --- --------- --------------
<S> <C> <C> <C>
Joseph L. Lanier, Jr....... 65 40 Chairman, Chief Executive Officer and
Director
Richard L. Williams........ 63 29 President, Chief Operating Officer and
Director
Edward J. Lill............. 65 -- Director
John F. Maypole............ 58 -- Director
Barry F. Shea.............. 48 21 Vice President-Chief Financial Officer
Scott D. Batson............ 41 15 Vice President-Finance
Anthony J. Bender.......... 39 4 Vice President-Information Systems
Gregory R. Boozer.......... 42 20 Vice President-Manufacturing Services
Edward E. Carroll.......... 58 30 Vice President-Industrial Relations
Harry L. Goodrich.......... 47 17 Vice President, Secretary and General
Counsel
George R. Herron........... 57 26 Vice President-Cotton Procurement
Larry W. Van de Visser..... 61 36 Vice President-Administration
Gary D. Waldman............ 41 7 Controller
</TABLE>

Joseph L. Lanier, Jr. has been Chairman of the Board of Directors and Chief
Executive Officer of Dan River or its predecessor since 1989. Mr. Lanier is
also a director of SunTrust Bank, Inc. (a bank holding company), Flowers
Industries, Inc. (a food company), Torchmark Corporation (an insurance
company) and Dimon Incorporated (a tobacco products company and distributor of
cut flowers).

Richard L. Williams has been a director and President and Chief Operating
Officer of Dan River or its predecessor since 1989.

Edward J. Lill has served as a director of the Company since October 1997.
Mr. Lill was a senior partner and Vice Chairman of Deloitte & Touche from 1988
until his retirement in 1995. From 1986 to 1988, Mr. Lill was the Executive
Vice President and Chief Financial Officer of E.F. Hutton Group Inc., the
parent company of E.F. Hutton & Company. Mr. Lill is also presently a
consultant to MetLife with respect to accounting and other related matters.

John F. Maypole has served as a director of the Company or its predecessor
since 1992. Mr. Maypole is presently a consultant to MetLife and has over the
past five years served as a consultant to and/or director of various other
corporations and providers of financial services. Mr. Maypole also serves as a
director of Bell Atlantic Corporation (a telecommunications company) and
Massachusetts Mutual Life Insurance Company.

Barry F. Shea was a director of the Company's predecessor from 1989 to 1991.
He was Vice President- Finance, Chief Financial Officer and Assistant
Secretary of Dan River or its predecessor from 1989 until 1996 and has been
Vice President-Chief Financial Officer from 1996 to the present.

Scott D. Batson has been Vice President-Finance of Dan River since 1995 and
was Director of Finance from 1990 to 1995. Mr. Batson was also Treasurer of
the Company's predecessor from 1990 to 1995.

40
<PAGE>

Anthony J. Bender has been Vice President-Information Systems of Dan River
since 1995. Mr. Bender was Director of Systems Development of Springs
Industries, Inc. (a manufacturer and distributor of textile products) from
1993 until 1995, and held a number of management consulting positions with
Price Waterhouse, LLP from 1985 to 1993.

Gregory R. Boozer has been Vice President-Manufacturing Services of Dan
River since 1989.

Edward E. Carroll has been Vice President-Industrial Relations of Dan River
since 1995. He was Director of Employee Relations of Dan River from 1984 until
1995.

Harry L. Goodrich has been Secretary and General Counsel of Dan River or its
predecessor since 1989 and has been Vice President of Dan River since 1995.

George R. Herron has been Vice President-Cotton Procurement of Dan River
since 1987.

Larry W. Van de Visser was Controller of Dan River from 1990 until 1995 and
Vice President-Controller of Dan River from 1995 to 1996. He has been Vice
President-Administration of Dan River since 1996.

Gary D. Waldman has been Controller of Dan River since 1996. He was
Assistant Controller of Dan River from 1992 until 1996, and Director of Taxes
from 1990 until 1992.

Other significant employees of the Company are James E. Martin and Thomas L.
Muscalino.

Mr. Martin has headed Dan River's apparel fabrics operations since 1990. He
is 48 years old and has 26 years of experience in the textile industry.

Mr. Muscalino has headed Dan River's home fashions operations since 1993.
From 1975 until 1992, he held a number of marketing positions with WestPoint
Stevens Inc. (a textile company), including President of its Consumer Products
Division in 1992. He is 46 years old and has 25 years of experience in the
textile industry.

Directors are elected by the Company's shareholders and serve until their
successors are elected and qualified. Directors are divided into three classes
and serve staggered terms that expire at the 1998, 1999 or 2000 annual meeting
of shareholders. The terms of the directors expire as follows: Mr. Lanier in
1998, Mr. Williams in 1999 and Messrs. Lill and Maypole in 2000. Directors for
each class will be elected at the annual meeting of shareholders held in the
year in which the term for such class expires and will serve thereafter for
three years, or until their earlier resignation or removal, or until their
successors are elected and qualified.

The Company intends to add two additional non-employee directors within 60
days following completion of the Offering. The term of one such director will
expire at the 1998 annual meeting of shareholders and the term of the other
director will expire at the 1999 annual meeting of shareholders.

The Board of Directors has established a Compensation Committee and an Audit
Committee. The Compensation Committee is composed of Messrs. Lill and Maypole
and is responsible for establishing salaries, bonuses and other compensation
for the Company's executive officers and for administering the Company's
option plans. The Audit Committee is also composed of Messrs. Lill and Maypole
and is responsible for recommending independent auditors, reviewing with the
independent auditors the scope and results of the audit engagement, monitoring
the Company's financial policies and control procedures, and reviewing and
monitoring the provision of non-audit services by the Company's auditors.

All executive officers of the Company are elected annually by and serve at
the discretion of the Board of Directors.

41
<PAGE>

EXECUTIVE COMPENSATION

Summary Compensation Table. The table below sets forth the annual
compensation paid by Dan River to or for the account of the chief executive
officer of Dan River and each of the other four most highly compensated
executive officers of Dan River in the fiscal years indicated (collectively,
the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION(1) UNDERLYING
---------------------- OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) COMPENSATION(3) SARS (#) COMPENSATION(4)
--------------------------- ---- -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Joseph L. Lanier, Jr... 1996 $422,424 $169,650 -- -- $1,500
Chairman and Chief 1995 404,193 128,050 -- -- 1,500
Executive Officer 1994 388,435 213,330 -- 87,500 1,500
Richard L. Williams.... 1996 352,118 141,410 -- -- 1,500
President and Chief 1995 338,558 107,260 -- -- 1,500
Operating Officer 1994 325,500 178,760 $543,000 70,000 1,500
Barry F. Shea ......... 1996 201,815 81,050 -- -- 1,500
Vice President--Chief 1995 193,389 61,270 -- -- 1,500
Financial Officer 1994 185,866 102,080 259,000 26,250 1,500
Gregory R. Boozer...... 1996 145,385 58,390 -- -- 1,454
Vice President-- 1995 133,077 42,160 -- -- 1,331
Manufacturing 1994 113,462 62,310 -- 21,875 1,135
Services
Harry L. Goodrich...... 1996 120,723 48,480 -- -- 1,207
Vice President-- 1995 116,037 36,760 -- -- 1,160
Secretary and General 1994 111,516 61,240 -- 13,125 1,115
Counsel
</TABLE>
- --------
(1) The aggregate amount of perquisites and other personal benefits, if any,
did not exceed the lesser of $50,000 or 10% of the total annual salary and
bonus reported for each Named Executive Officer and has therefore been
omitted.
(2) For information relating to the determination of bonus amounts, see
"Compensation Committee Interlocks and Insider Participation."
(3) During 1994, Mr. Lanier transferred 121,450 and 58,975 shares of his Old
Class A Stock (as defined herein) of the Company to Messrs. Williams and
Shea, respectively, for no consideration. Under applicable IRS
regulations, the transfer is deemed to be compensation paid by the Company
to Messrs. Williams and Shea equal to the fair market value of the
securities transferred, which amount is deductible by the Company and
taxable to the recipients. The amounts set forth in the table above
reflect the noncash compensation deemed to have been paid to Messrs.
Williams and Shea, plus $196,000 and $90,500 in cash paid by the Company
to each of them, respectively, in partial reimbursement to Messrs.
Williams and Shea of taxes payable by them as a result of the stock
transfer. The Old Class A Common Stock transferred was valued at that time
at $2.85 per share.
(4) Represents amounts accrued during applicable fiscal years to each Named
Executive Officer pursuant to the Dan River Salary Retirement Plan.

42
<PAGE>

Aggregated Options Table. The table below sets forth certain information
with respect to stock options exercised (or repurchased by the Company) during
and held at the end of fiscal 1996 by each Named Executive Officer.

AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
SHARES FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME(1) EXERCISE(#) REALIZED ($) UNEXERCISABLE(#) UNEXERCISABLE($)
- ------- ----------- ------------ ---------------- --------------------
<S> <C> <C> <C> <C>
Joseph L. Lanier, Jr.... -- -- 0/87,500 $0/$ 90,000
Richard L. Williams..... -- -- 0/70,000 0/72,000
Barry F. Shea........... -- -- 0/26,250 0/27,000
Gregory R. Boozer....... -- -- 26,250/21,875 192,000/22,500
Harry L. Goodrich....... -- -- 26,250/13,125 192,000/13,500
</TABLE>
- --------
(1) Each of the Named Executive Officers holds options granted in 1994 which
vest in increments of 20% of the grant on December 31 of each year from
1995 through 1999; provided, however, if cumulative Consolidated EBITDA
(as defined in the Indenture and based on internal growth of the Company)
commencing January 1, 1995 and continuing through the end of fiscal 1997
equals or exceeds $188 million, or $274 million through the end of fiscal
1998, the options will become fully vested as of December 31, 1997 or
1998, as the case may be. The options also vest early in the event there
is a Change of Control as defined in the Indenture. The options are
exercisable, at an exercise price of $6.85 per share, only at the time at
which such options are 100% vested, as provided above, and are
automatically revoked if the optionee voluntarily leaves the Company or is
terminated for cause prior to exercise of the options. To the extent
vested at the time of an optionee's death, disability, retirement or
involuntary termination without cause, the optionee or his estate will be
entitled to exercise the options within nine months after the later of the
date of the event resulting in termination of employment or the earliest
permissible exercise date as described above. Messrs. Boozer and Goodrich
hold options, granted September 3, 1991, to purchase 26,250 shares each of
the Company's Class A Common Stock at an exercise price of $.57 per share.
These options are fully vested and exercisable. For purposes of
determining the value of unexercised options at the end of fiscal 1996
(and solely for such purpose), the Class A Common Stock had been valued at
$7.89 per share, based upon last 12 months EBITDA times a market multiple
based upon market multiples of comparable publicly traded companies, less
debt net of cash equivalents and a discount relating to the fact that the
Class A Common Stock was not publicly traded at that time.

NEW BENEFIT PLANS

1997 Stock Incentive Plan

In October 1997, the Company adopted a new stock incentive plan (the "1997
Plan") that allows for the grant of non-qualified and incentive stock options,
restricted stock and stock appreciation rights ("SARs"). Under the 1997 Plan,
there are 1,750,000 shares of Class A Common Stock reserved for issuance. The
1997 Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee"), which selects the individuals to receive options,
restricted stock and SARs. Awards under the 1997 Plan may be granted only to
key employees of the Company or an affiliate of the Company. The Committee
selects individuals to receive awards under the 1997 Plan and determines the
terms and conditions of the options, restricted stock and SARS to be granted.
Options and SARs granted to key employees under the 1997 Plan will expire no
later than 10 years after the date of grant and the exercise prices of options
and grant values for SARs will be no less than 100% of the fair market value
of the Class A Common Stock on the date of grant.

The Committee may grant SARs in tandem with the grant of options or as an
independent grant and the Committee determines the terms and conditions for
the exercise of the SARs as it deems appropriate. Upon exercise of a SAR, the
key employee receives payment in cash or stock (as determined by the
Committee) based on no more than the excess of the fair market value of the
Class A Common Stock on the date of exercise over the fair market value of the
Class A Common Stock on the date of grant. However, SARs may be exercised only
when the fair market value of the Class A Common Stock exceeds the fair market
value of the Class A Common Stock on the date the SAR was granted.

43
<PAGE>

Options, restricted stock and SARs are not transferable by the key employee
other than by will or applicable laws of descent or distribution. As of the
date of this prospectus, no options, restricted stock or SARs have been
granted under the 1997 Plan; provided, however, that contingent upon
completion of the Offering, the Board of Directors granted to Messrs. Lanier,
Williams, Shea, Boozer and Goodrich non-qualified options to purchase 100,000,
70,000, 30,000, 25,000 and 10,000 shares of Class A Common Stock,
respectively, which options will vest and become exercisable in three equal
increments on December 31, 1999, 2000 and 2001 (or 100% upon a change in
control), will have an exercise price equal to the initial public offering
price and will have a term of ten years from completion of the Offering.

1997 Stock Plan for Outside Directors

In October, 1997, the Company adopted a new outside directors' stock plan
(the "Directors' Plan") that allows for the grant of stock options, restricted
stock and stock in lieu of cash as part of a director's compensation package.
Under the Directors' Plan, there are 175,000 shares of Class A Common Stock
reserved for issuance. The Directors' Plan is administered by the Board of
Directors (the "Board"), which selects the individuals to receive stock
options and restricted stock. The Board determines the terms and conditions of
the options to be granted, including the vesting schedule and the exercise
price. However, all options granted to an outside director under the
Directors' Plan will expire no later than 10 years after the date of grant and
the option price will be no less than 100% of the fair market value of the
Class A Common Stock on the date of grant.

The Board determines the terms and conditions of the restricted stock to be
granted under the Directors' Plan, including the conditions, if any, under
which the restricted stock will be granted and the conditions, if any, under
which an outside director's interest in his or her restricted stock will
become nonforfeitable. In addition, the restricted stock may be subject to any
restrictions the Company deems necessary or appropriate to make sure the
outside director satisfies the applicable holding period requirement, if any,
set forth in Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
The Board determines the rights, if any, an outside director has with respect
to voting and dividend rights relative to restricted stock grants, pending the
forfeiture of the restricted stock or the transfer of the stock to the
director. No option or restricted stock grant may be transferred by an outside
director other than by will or by the laws of descent or distribution.

Each outside director generally has the right to receive shares of Class A
Common Stock in lieu of cash as part of his or her compensation package with
respect to all or a portion of (i) his or her annual cash retainer fee as an
outside director, (ii) any fee payable in cash to him or to her for attending
a meeting of the Board or a committee of the Board and (iii) any fee payable
in cash to him or to her for serving as the chairperson of a committee of the
Board. The fair market value of the shares which an outside director elects to
receive in lieu of cash is intended to equal the cash compensation which the
outside director gives up to receive the shares. The stock issued under the
Directors' Plan may be subject to any restrictions the Company deems necessary
or appropriate to make sure the outside director satisfies the applicable
holding period requirement, if any, set forth in Rule 16b-3. As of the date of
this prospectus, no option or restricted stock grants have been made under the
Directors' Plan, and no outside directors have elected to receive stock in
lieu of cash compensation; provided, however, that contingent upon completion
of the Offering, the Board of Directors granted to each of Messrs. Lill and
Maypole non-qualified options to purchase 5,000 shares of Class A Common
Stock, which options will vest and become exercisable in three equal
increments on December 31, 1997, 1998 and 1999 (or 100% upon a change in
control), will have an exercise price equal to the initial public offering
price and will have a term of ten years from completion of the Offering.

DIRECTOR COMPENSATION

Each of Messrs. Maypole and Lill receives a retainer of $20,000 per year for
their services as directors. In 1994, Mr. Maypole was granted an option to
purchase 11,375 shares of Class A Common Stock pursuant to the Company's
Option Plan. The terms of Mr. Maypole's option are identical to the terms of
other options granted

44
<PAGE>

in 1994 to executive officers and key employees of the Company. See Note 1 to
"Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values." Directors who are officers of Dan River are not compensated for their
services as directors. It is expected that the two additional directors
appointed after completion of the Offering will receive compensation similar
to that described above.

EMPLOYMENT AGREEMENTS

Executive Employment Agreements

The Company is party to employment agreements with Joseph L. Lanier, Jr.,
Richard L. Williams and Barry F. Shea, each of which will become effective
upon completion of the Offering and will terminate five years thereafter,
unless earlier terminated as described below (the "Employment Agreements").
Each Employment Agreement provides for the employee to be retained in certain
specified capacities by the Company and to devote his full business time and
attention to the business of the Company. Each of the employment agreements
provides that the Company shall pay the employee a bonus under the Dan River
Management Incentive Plan and reimburse certain business related expenses. The
Dan River Inc. Management Incentive Plan provides for the payment of an annual
cash bonus to executive officers and key employees of the Company based upon
achievement of operating income and cash flow goals established at the
beginning of each fiscal year. Participation in the Plan, as well as award
levels and performance criteria, are recommended by the Chief Executive
Officer and approved by the Board of Directors.

Mr. Lanier's employment agreement (the "Lanier Agreement") provides that he
will serve as the Chief Executive Officer and Chairman of the Board of
Directors of the Company. The Lanier Agreement provides for a base salary of
$460,000 per year which may be increased at the discretion of the Board of
Directors, subject to certain cost of living adjustments.

The Employment Agreements with Messrs. Williams and Shea provide for their
employment as President and Chief Operating Officer and Chief Financial
Officer of the Company, respectively. Each agreement provides that the
employee shall receive a base salary determined by the Chief Executive Officer
of the Company, subject to approval by the Board of Directors.

The Employment Agreements are terminable upon the death or disability of the
employee, by the Company for good cause (as defined in the Employment
Agreements), by the Company without cause, by the employee for good reason (as
defined in the Employment Agreements), by the employee without good reason or
on the occurrence of a change in control (as defined in the Employment
Agreements). Each Employment Agreement provides that, in the event the
employee's employment is terminated for no cause, a change in control or for
good reason (all as defined in the Employment Agreements), such employee is to
be paid an amount equal to two times his annual base salary in effect at the
time of termination, plus any incentive bonus prorated to the date on which
employment is terminated. The employee would also be entitled to participate
for a period of up to twenty-four months after termination of his employment
in various welfare, pension and savings plans and programs offered by the
Company.

Post Employment Agreements

The Company has entered into agreements with Messrs. Batson, Bender, Boozer,
Carroll, Goodrich, Herron, Martin, Muscalino and Van de Visser, as well as
other key employees. These agreements currently provide certain assurances to
the employee in the event Mr. Lanier ceases for any reason to be Chief
Executive Officer of the Company (an "Employment Event"), including an
agreement not to arbitrarily reduce the salary of or relocate the employee and
to allow the employee to participate in certain incentive and other benefit
plans at a level commensurate with his level of participation at the time the
Employment Event occurred. In the event employment of the employee is
terminated by the Company without good cause (as defined) or by the employee
upon breach of the agreement by the Company, the employee is entitled to a
severance payment of up to two years salary, plus any bonus otherwise earned
for the year in which the termination occurs, and to continue to

45
<PAGE>

participate for a period of up to two years in certain welfare, retirement and
savings plans and policies afforded by the Company.

RETIREMENT PLAN

The Dan River Salary Retirement Plan (the "Retirement Plan") provides
noncontributory defined benefits based on both years of service and the
employee's career average monthly earnings ("Average Compensation"). Average
Compensation includes salary and commissions but excludes bonuses. Estimated
annual benefits payable upon retirement at age 65 for each of the Named
Executive Officers are as follows, based upon a single life annuity: Joseph L.
Lanier, Jr.--$11,835; Richard L. Williams--$14,824; Barry F. Shea--$36,712;
Gregory R. Boozer--$40,429; and Harry L. Goodrich--$29,286.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal 1996, Messrs. Paul M. Crotty and John F. Maypole served on the
Compensation Committee of the Board of Directors. During fiscal 1997, Messrs.
Edward J. Lill and John F. Maypole will serve on the Compensation Committee of
the Company's Board of Directors. The Compensation Committee has been
delegated responsibility for determining Mr. Lanier's base salary. Within
merit budget guidelines approved by the Board of Directors for each fiscal
year, and in consultation with a Management Compensation Committee consisting
of Messrs. Williams, Shea and Carroll, Mr. Lanier determines the compensation
of all other executive officers, subject to approval by the Compensation
Committee. Targets and participation levels in Dan River's bonus programs are
based on certain financial objectives and are recommended by the Management
Compensation Committee, subject to the approval of the Compensation Committee
of the Board of Directors.

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<PAGE>

CERTAIN TRANSACTIONS

RECAPITALIZATION

The Company completed a recapitalization as described below (the
Reclassification, the Conversion and the Exchange Offer are referred to herein
as the "Recapitalization") on November 3, 1997. Prior to the Recapitalization,
the Company's outstanding capital stock included shares of Class A Common
Stock, par value $.01 per share ("Old Class A Stock"), and Class B Common
Stock, par value $.01 per share ("Old Class B Stock"). The Old Class A Stock
was voting stock while the Old Class B Stock had no voting rights. The
Recapitalization involved two steps. First, the Company amended and restated
its Amended and Restated Articles of Incorporation to (i) reclassify each
outstanding share of Old Class A Stock into 17.5 shares of Class A Common
Stock, (ii) reclassify each outstanding share of Old Class B Stock into 17.5
shares of Class C Common Stock, (iii) create the supervoting Class B Common
Stock (the matters referred to in clauses (i), (ii) and (iii) are referred to
herein as the "Reclassification") and (iv) provide that the Class C Common
Stock will automatically convert into shares of Class A Common Stock on a
share-for-share basis upon completion of the Offering (the "Conversion").
Following the Reclassification, the Company entered into an exchange agreement
with the Senior Management Group pursuant to which, upon completion of the
Offering, the Senior Management Group will exchange certain shares of Class A
Common Stock beneficially owned by them for Class B Common Stock on a share-
for-share basis (the "Exchange Offer" and together with the Reclassification
and the Conversion, the "Recapitalization"). In connection with the Exchange
Offer, the Company will issue, concurrently with completion of the Offering,
an aggregate of 2,062,070 shares of Class B Common Stock in exchange for an
aggregate of 2,062,070 shares of Class A Common Stock. Pursuant to the terms
of the Voting Agreement, Mr. Lanier will be entitled to vote all of the
outstanding shares of Class B Common Stock. See "Principal and Selling
Shareholders" and "Description of Capital Stock."

The table below sets forth for each of the members of the Senior Management
Group the number of shares of Class B Common Stock issued to such person in
connection with the Exchange Offer.

<TABLE>
<CAPTION>
NUMBER OF SHARES
OF CLASS B COMMON
NAME STOCK RECEIVED
---- -----------------
<S> <C>
Joseph L. Lanier, Jr......................................... 848,380
Richard L. Williams.......................................... 369,731
Barry F. Shea................................................ 165,058
J.C. Bradford
f/b/o Barry F. Shea......................................... 9,854
Ann L. Jackson............................................... 253,622
Joseph L. Lanier, III........................................ 253,622
Ann M. Lanier................................................ 65,553
Suzanne S. Williams.......................................... 96,250
---------
Total.................................................... 2,062,070
=========
</TABLE>

Prior to the Recapitalization, the Senior Management Group controlled
approximately 20% of the combined outstanding voting power of all classes of
the Company's Common Stock. Upon completion of the Offering, the Senior
Management Group will control approximately 37% of the combined outstanding
voting power of all classes of the Company's Common Stock.

47
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The table below sets forth certain information regarding the beneficial
ownership of the Company's classes of Common Stock (other than the Class C
Common Stock, which will automatically convert into shares of Class A Common
Stock on a share-for-share basis upon completion of the Offering), as of the
date hereof, by (i) each person who is known to Dan River to be the beneficial
owner of more than 5% of the outstanding Common Stock, (ii) each of the
directors of Dan River, (iii) each of the Named Executive Officers, and (iv)
all directors and executive officers of Dan River as a group. Except as set
forth below, the shareholders named below have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned
by them.

<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL BENEFICIAL
OWNERSHIP OWNERSHIP OWNERSHIP
OF CLASS A OF CLASS A OF CLASS B PERCENTAGE OF
COMMON STOCK COMMON STOCK COMMON STOCK COMBINED
PRIOR TO OFFERING AFTER OFFERING AFTER OFFERING VOTING POWER
NAMED EXECUTIVE ----------------------- CLASS A -------------------- -------------------- ------------------
OFFICERS, DIRECTORS, EXECUTIVE NUMBER PERCENT COMMON NUMBER PERCENT NUMBER PERCENT
OFFICERS AND DIRECTORS AS A OF OF STOCK OF OF OF OF BEFORE AFTER
GROUP AND 5% SHAREHOLDERS SHARES CLASS OFFERED SHARES CLASS SHARES CLASS OFFERING OFFERING
- ----------------------------- --------- ------- ------- --------- ------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph L. Lanier,
Jr.(1)(2)............. 2,063,376(3)(4) 16.2% -- 456,750(3) 2.7% 2,062,070(5) 100.0% 16.2% 36.8%
Richard L.
Williams(1)(2)(6)..... 465,981 3.7 -- -- -- 465,981 22.6 3.7 7.9
Barry F. Shea(1)(6).... 174,912 1.4 -- -- -- 174,912 8.5 1.4 3.0
Mezzanine Investment
Limited
Partnership-BDR(7).... 6,708,723 52.8 -- 6,708,723 39.9 -- -- 52.8 26.0
Bank of America
National Trust and
Savings Association
Investment
Administration
#15027(8)............. 1,339,494 10.5 618,894 720,600 4.3 -- -- 10.5 2.8
All executive officers
and directors
as a group
(12 persons).......... 2,063,376 16.2 -- 456,750 2.7 2,062,070 100.0 16.2 36.8
OTHER SELLING
SHAREHOLDERS
- -----------------------
Crestar Bank........... 223,363 1.8% 103,202 120,161 0.7% -- -- 1.8% 0.5%
First Chicago
Investment
Corporation........... 1,225,315(9) 8.7 425,000 800,315 4.8 -- -- -- (9) 3.1
Susan C. Lecraw........ 14,644 0.1 10,149 4,495 0.0 -- -- 0.1 0.0
Susan W. Mathis........ 285,366 2.2 197,774 87,592 0.5 -- -- 2.2 0.3
Camille T. McDuffie.... 14,644 0.1 10,149 4,495 0.0 -- -- 0.1 0.0
NationsBank, N.A....... 446,726 3.5 206,403 192,115 1.4 -- -- 3.5 0.9
Harry M. Philpott...... 26,342 0.2 6,342 20,000 0.1 -- -- 0.2 0.1
Pilgrim America Prime
Rate Trust............ 223,363 1.8 96,057 127,306 0.7 -- -- 1.8 0.5
Societe Generale....... 277,588 2.2 128,256 149,332 0.9 -- -- 2.2 0.6
Charles McKenzie
Taylor................ 285,366 2.2 197,774 87,592 0.5 -- -- 2.2 0.3
</TABLE>
- -------
(1) The business address of Messrs. Lanier, Williams and Shea is 2291 Memorial
Drive, Danville, Virginia 24541.
(2) Messrs. Lanier and Williams disclaim beneficial ownership of the Common
Stock held by their wives, Mrs. Ann M. Lanier and Mrs. Suzanne S.
Williams, respectively.
(3) Includes 456,750 shares of Class A Common Stock which Mr. Lanier is
contractually obligated to surrender to the Company from time to time upon
exercise of any stock options issued pursuant to the Company's option
plan. Upon surrender of shares of stock, the Company is required to pay to
Mr. Lanier an amount equal to the exercise price of the option in respect
of which the shares were surrendered.
(4) Includes 65,553, 96,250, 369,731 and 174,912 shares of Class A Common
Stock beneficially owned by Mrs. Ann M. Lanier, Mrs. Suzanne S. Williams,
Mr. Richard L. Williams and Mr. Barry F. Shea and 51,800 shares of Class A
Common Stock issued pursuant to the Company's option plan with respect to
which Mr. Lanier has sole voting power pursuant to a voting agreement that
will terminate upon completion of the Offering.
(5) Includes 65,553, 253,622, 253,622, 96,250, 369,731, and 174,912 shares of
Class B Common Stock beneficially owned by Mrs. Ann M. Lanier, Mr. Joseph
Lanier, III, Mrs. Ann L. Jackson, Mrs. Suzanne S. Williams, Mr. Richard L.
Williams and Mr. Barry F. Shea, respectively, with respect to which Mr.
Joseph L. Lanier, Jr. has sole voting power pursuant to the terms of the
Voting Agreement. See "Description of Capital Stock--Voting Agreement."
(6) Joseph L. Lanier, Jr. has sole voting power with respect to these shares
pursuant to the terms of the Voting Agreement.
(7) Reflects shares of stock beneficially owned by Mezzanine Investment
Limited Partnership-BDR's ("MILP") whose address is One Madison Avenue,
New York, New York 10010. The general partner of MILP is 23rd Street
Investments, Inc. ("23rd Street Investments"), a wholly-owned subsidiary
of Metropolitan Life Insurance Company. 23rd Street Investments has sole
voting and investment power with respect to the Class A Common Stock
beneficially owned by MILP. As a result, 23rd Street Investments is deemed
to beneficially own the shares of Class A Common Stock beneficially owned
by MILP.
(8) Bank of America's address is 315 Montgomery, 13/F, San Francisco,
California 94104.
(9) Reflects 1,225,315 shares of Class C Common Stock beneficially owned by
First Chicago Investment Corporation, which shares will automatically
convert into shares of Class A Common Stock on a share-for-share basis
upon completion of the Offering.

48
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The Company is authorized to issue 175,000,000 shares of Class A Common
Stock, par value $.01 per share, 35,000,000 shares of Class B Common Stock,
par value $.01 per share, 5,000,000 shares of Class C Common Stock, par value
$.01 per share and 50,000,000 shares of Preferred Stock, par value $.01 per
share. As of November 4, 1997, the Company had issued and outstanding
12,712,945 shares of Class A Common Stock, no shares of Class B Common Stock,
1,442,220 shares of Class C Common Stock and no shares of Preferred Stock. As
of November 4, 1997 the Company had 25 holders of record of Class A Common
Stock and six holders of Class C Common Stock. Upon completion of the
Offering, all outstanding shares of Class C Common Stock will automatically
convert into shares of Class A Common Stock on a share-for-share basis.

COMMON STOCK

The rights of holders of Class A Common Stock and Class B Common Stock are
identical except for voting, conversion and transfer rights.

Dividends. Holders of shares of Common Stock are entitled to receive such
dividends as may be declared by the Company's Board of Directors out of funds
legally available for such purpose. No dividend may be declared or paid in
cash or property on any share of either class of Common Stock unless
simultaneously the same dividend is declared or paid on each share of the
other class of Common Stock. Dividends payable in Common Stock of the Company
shall be payable in shares of Class A Common Stock to the holders thereof and
in shares of Class B Common Stock to the holders thereof. See "Dividend
Policy."

Voting Rights. Except as otherwise provided by the Restated Charter or
Georgia law, holders of shares of Common Stock will vote as a single voting
group with respect to all matters submitted to a vote of the shareholders.
Each share of Class A Common Stock will be entitled to one vote and each share
of Class B Common Stock will be entitled to 4.39 votes with respect to all
such matters. Under the Restated Charter, holders of shares of Class A Common
Stock will be entitled to vote as a single voting group with respect to
certain proposed amendments to the powers, preferences, rights or limitations
of the Class B Common Stock and other limited matters; provided that with
respect to any such vote, each holder of Class B Common Stock shall be
entitled to vote with the holders of Class A Common Stock and shall be
entitled to one vote for each share of Class A Common Stock that would be
issuable to such holder upon conversion of such share of Class B Common Stock.
Holders of Common Stock are not entitled to cumulate votes in the election of
directors.

Conversion Rights. Subject to compliance with the First Offer Rights (as
hereinafter defined), each share of Class B Common Stock will be convertible
at any time, at the option of its holder, into one share of Class A Common
Stock. The Class B Common Stock will convert automatically into Class A Common
Stock, and thereby lose its special voting rights, generally (i) as to any
outstanding share of Class B Common Stock if such share is sold or otherwise
transferred to, or otherwise held by, any person or entity other than a
Permitted Transferee or an Offeree (both as defined under "Restrictions on
Transfer; First Offer Rights" below) or (ii) on the last day of any month on
which the aggregate outstanding shares of Class B Common Stock constitute less
than 7% of the aggregate outstanding shares of Common Stock (treating for the
purposes of such calculation each outstanding share of Class B Common Stock as
one outstanding share of Class A Common Stock). The shares of Class A Common
Stock do not have any conversion rights.

Restrictions on Transfer; First Offer Rights. No shares of Class B Common
Stock may be sold, assigned, pledged, transferred, given or otherwise disposed
of (a "Transfer"), or converted into shares of Class A Common Stock, except
(i) for any Transfer by a holder of Class B Common Stock or Permitted
Transferee of such holder to a Permitted Transferee of such holder, or (ii)
otherwise as expressly permitted by the Company's Restated Charter after
complying with the First Offer Rights (as described below). For purposes of
the Restated Charter, Permitted Transferees of a holder of Class B Common
Stock include (i) another holder of Class B

49
<PAGE>

Common Stock, (ii) the spouse or surviving spouse and natural and adopted
children of such holder provided that such holder was a member of the Senior
Management Group immediately prior to the effectiveness of the Restated
Charter, (iii) any trust existing solely for the benefit of any person who
would be a Permitted Transferee of such holder under clause (ii) (a trust will
cease to be a Permitted Transferee as of the time any other person (other than
a person specified in clause (ii)) has the current right to receive income
from the principal of such trust), (iv) upon the death of such holder that was
a member of the Senior Management Group immediately prior to the effectiveness
of the Restated Charter, such holder's estate or any executor, administrator,
conservator or other legal representative of such holder, (v) any corporation,
partnership, business trust or similar entity all of the outstanding equity
interests of which are owned and all of the outstanding voting power of which
is controlled, directly or indirectly by such holder that was a member of the
Senior Management Group immediately prior to the effectiveness of the Restated
Charter or certain Permitted Transferees of such holder. Upon a transfer of
any shares of Class B Common Stock to any person or entity that is not a
Permitted Transferee or an Offeree pursuant to the First Offer Rights (as
described below), such shares automatically convert into shares of Class A
Common Stock. The Restated Charter does not contain any restrictions on the
transfer of shares of Class A Common Stock.

Except for a proposed Transfer or other disposition to a Permitted
Transferee, prior to any proposed Transfer or conversion of Class B Common
Stock, the holder thereof is required to give notice to the Company, which
constitutes an offer to sell to the Senior Management Group (the "Offerees"),
or to the extent that the Offerees do not elect to purchase all such shares,
to sell to the Company, up to all of the shares proposed to be transferred or
as to which conversion has been requested at a purchase price per share equal
to the Current Market Price (the "First Offer Rights"). As defined in the
Restated Charter, the Current Market Price will be an amount equal to (i) if
the Class A Common Stock is not publicly traded, the fair market value per
share of the Class B Common Stock, or (ii) if the Class A Common Stock is
publicly traded, the average of the "average sales price." The "average sales
price" will mean generally the weighted average of the sales prices of a share
of Class A Common Stock (or if no such sales occur, the weighted average of
the last bid and asked prices) as reported by the New York Stock Exchange or,
if the Class A Common Stock is not listed on the New York Stock Exchange, by
any other national securities exchange or quotation system on which the shares
of Class A Common Stock are listed or admitted to trading on the day the
Company receives a notice of a proposed Transfer or conversion request. Under
the Restated Charter, shares of Class A Common Stock are not subject to the
First Offer Rights.

Liquidation Rights. Upon the liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, after payment in full of creditors
and any liquidation preference payable to the holders of any Preferred Stock,
the remaining assets of the Company will be distributed ratably to the holders
of Class A Common Stock and Class B Common Stock, as a single class, in
proportion to the number of shares held by them.

Reorganization, Consolidation, Share Exchange or Merger. In the event of a
reorganization, consolidation, share exchange or merger of the Company, each
holder of a share of Common Stock shall be entitled to receive the same kind
and amount of consideration (whether consisting of cash, property or
securities), if any, to be received by each other holder of a share of Common
Stock, regardless of whether such share of Common Stock is a share of Class A
Common Stock or Class B Common Stock.

Other. The holders of Common Stock are not entitled to preemptive or similar
rights. The shares of Common Stock are not subject to redemption or a sinking
fund. No class of Common Stock may be subdivided, consolidated, reclassified
or otherwise changed unless concurrently the other class of Common Stock is
subdivided, consolidated, reclassified or otherwise changed in the same
proportion and in the same manner. Under the Restated Charter, upon completion
of the Offering, the Company is only authorized to issue shares of Class B
Common Stock in connection with a dividend or other distribution with respect
to, or a subdivision of, all outstanding shares of Class B Common Stock.

50
<PAGE>

The transfer agent for the Company's Common Stock is Wachovia Bank, N.A.,
301 North Church Street, Winston-Salem, North Carolina 27101.

PREFERRED STOCK

The Board of Directors is empowered by the Company's Restated Charter to
designate and issue from time to time one or more series of Preferred Stock
without shareholder approval. The Board of Directors may fix and determine the
preferences, limitations and relative rights of each series of Preferred Stock
so issued. Because the Board of Directors has the power to establish the
preferences and rights of each series of Preferred Stock, it may afford the
holders of any series of Preferred Stock preferences and rights, voting or
otherwise, senior to the rights of holders of Common Stock. The issuance of
Preferred Stock could have the effect of delaying or preventing a change in
control of the Company. The Board of Directors has no present plans to issue
any shares of Preferred Stock. For so long as Mezzannine Investment Limited
Partnership-BDR ("MILP") and/or its affiliates own in the aggregate more than
10% of the outstanding Common Stock, the Board of Directors may issue
Preferred Stock only with the approval of 75% of the directors then in office.

CHARTER AND BYLAW PROVISIONS

Shareholders' rights and related matters are governed by the Georgia
Business Corporation Code ("GBCC"), the Company's Restated Charter and its
Bylaws. Certain provisions of the Restated Charter and Bylaws of the Company,
which are summarized below, may discourage or make more difficult any attempt
by a person or group to obtain control of the Company. See "Risk Factors--
Anti-Takeover Provisions."

Special Meetings. Under the Company's Bylaws, special meetings of the
shareholders may be called only by the Chief Executive Officer of the Company,
the Chairman of the Board or a majority of the Board of Directors. This
provision eliminates the right of shareholders to call a special meeting of
shareholders to consider any proposed corporate action, including any sale of
the Company, which may be favored by the shareholders.

Shareholder Proposals and Nominations. The Company's Bylaws require written
notice to the Secretary of the Company, in advance of any shareholders'
meeting, of any shareholder proposals or nominations by any shareholders of
candidates for election as directors. In addition, shareholders that wish to
make shareholder proposals or director nominations must provide the Company
with certain specified information. These requirements may have the effect of
precluding shareholder proposals and director nominations if the proper
procedures are not followed, and may discourage or deter a third party from
conducting a solicitation of proxies to consider matters, including issues
relating to the control of the Company.

Supermajority Voting Requirements. Under the Company's Restated Charter, a
merger, consolidation, sale of all or substantially all of the assets or
dissolution of the Company must be approved by the affirmative vote of at
least 66% of the outstanding voting power of the Company. This requirement,
combined with the 35% vote of the Senior Management Group conferred by its
ownership of all the outstanding shares of Class B Common Stock could inhibit
or prevent an acquisition of the Company that is not supported by such group.
See "Risk Factors--Substantial Influence of Principal Shareholders" and "--
Anti-Takeover Provisions."

In addition, under the Restated Charter, certain provisions of the Company's
Restated Charter and Bylaws, including all of the provisions discussed above,
may not be amended and no contrary provision may be adopted by the
shareholders without the affirmative vote of at least 66 2/3% of the
outstanding voting power of the Common Stock. This restriction renders it more
difficult for the shareholders of the Company to amend these provisions and
thus enhances the power of the Board of Directors with regard to matters of
corporate governance governed by these provisions.

LIMITATION OF DIRECTORS' LIABILITY

The Company's Restated Charter eliminates, to the fullest extent permitted
by applicable law, the personal liability of directors to the Company or its
shareholders for monetary damages for breaches of such directors' duty of care
or other duties as a director. This provision of the Restated Charter will
limit the remedies available

51
<PAGE>

to a shareholder in the event of breaches of any director's duties to such
shareholder or the Company. Under current Georgia law, the Restated Charter
does not provide for the elimination of or any limitation on the personal
liability of a director for (i) any appropriation, in violation of the
director's duties, of any business opportunity of the Company, (ii) acts or
omissions which involve intentional misconduct or a knowing violation of law,
(iii) unlawful corporate distributions or (iv) any transactions from which the
director received an improper personal benefit.

GEORGIA ANTI-TAKEOVER STATUTES

The Company has elected to be covered by the Georgia business combination
and fair price statutes.

The Georgia business combination statute regulates business combinations,
such as mergers, consolidations, share exchanges and asset purchases, where
the acquired business has at least 100 shareholders residing in Georgia and,
among other things, (i) at least 10% of its outstanding voting shares are
beneficially owned by Georgia residents or (ii) at least 10% of the holders of
its outstanding shares are Georgia residents, and where the acquiror became an
"interested shareholder" of the corporation, unless either (x) the transaction
resulting in such acquiror becoming an "interested shareholder" or the
business combination received the approval of the corporation's board of
directors prior to the date on which the acquiror became an interested
shareholder, (y) the acquiror became the owner of at least 90% of the
outstanding voting stock of the corporation (excluding shares held by
directors, officers and affiliates of the corporation and shares held by
certain other persons) in the same transaction in which the acquiror became an
interested shareholder or (z) subsequent to becoming an interested
shareholder, the acquiror became the owner of additional shares of at least
90% of the outstanding voting stock of the corporation. For purposes of this
statute, an "interested shareholder" generally is any person who directly or
indirectly, alone or in concert with others, beneficially owns or controls 10%
or more of the voting power of the outstanding voting shares of the
corporation. The law prohibits business combinations with an approved
interested shareholder for a period of five years after the date on which such
person became an interested shareholder. The law restricting business
combinations is broad in its scope and is designed to inhibit unfriendly
acquisitions.

The Georgia fair price statute prohibits certain business combinations
between a Georgia business corporation and an interested shareholder unless
(i) certain "fair price" criteria are satisfied, (ii) the business combination
is unanimously approved by the continuing directors, (iii) the business
combination is recommended by at least two-thirds of the continuing directors
and approved by a majority of the votes entitled to be cast by holders of
voting shares, other than voting shares beneficially owned by such interested
shareholder, or (iv) the interested shareholder has continuously been such for
at least three years and has not increased his ownership position in such
three-year period by more than one percent in any twelve month period. The
fair price statute is designed to inhibit unfriendly acquisitions that do not
satisfy the specified "fair price" requirements.

VOTING AGREEMENT

The Company, Joseph L. Lanier, Jr. and the other members of the Senior
Management Group have entered into a Voting Agreement (the "Voting Agreement")
pursuant to which Mr. Lanier will be entitled to vote all shares of Class B
Common Stock beneficially owned by such holders.

REGISTRATION RIGHTS AGREEMENT

The Company, certain members of senior management (the "Management
Shareholders"), MILP and all other holders of the Company's Common Stock prior
to the Offering are parties to a Registration Rights Agreement, dated
September 3, 1991 (the "Registration Rights Agreement"). All provisions of the
Registration Rights Agreement described below terminate on the earlier of (i)
September 3, 2006 or (ii) the date when shares of Class A Common Stock which
are held by holders other than Management Shareholders constitute less than
10% of the outstanding Common Stock, subject to limited exceptions. The
Registration Rights Agreement is applicable only with respect to shares of
Common Stock held prior to the Offering. It contains, among others, the
following provisions:

52
<PAGE>

The Company's and Mr. Lanier's Call Rights. Joseph L. Lanier, Jr. has the
right to purchase the Class A Common Stock beneficially owned by certain
specified shareholders (the "Lanier Call"). The Company has a similar call
right (the "Company Call"). The Company Call applies to Class A Common Stock
held by the lenders under a credit agreement to which the Company and Bank of
America and certain other lenders were party immediately following the 1991
Restructuring. The Lanier Call is limited to such institutions' Class A Common
Stock originally issued in the 1991 Restructuring. In the case of a Company
Call, the call price is the fair market value (as defined) of the Common
Stock. In the case of a Lanier Call, the call price is 105% of the fair market
value of the Common Stock. The Company may not exercise the Company Call
during any period in which Mr. Lanier has previously delivered a call notice.
In addition, Mr. Lanier may request that the Company exercise the Company
Call, and if the Company does not do so within 90 days of such request, the
Company Call must be assigned to Mr. Lanier. Mr. Lanier may also preempt any
Company Call by delivering a Lanier Call notice within 30 days after delivery
of a Company Call notice. In addition, Mr. Lanier has a first offer right to
purchase any Class A Common Stock offered for sale by certain of the Company's
shareholders. The rights of each of the Company and Mr. Lanier under the call
provisions of the Registration Rights Agreement terminate on September 3, 2001
or, in the case of a Lanier Call, if earlier, Mr. Lanier's death or total
disability or termination of employment for good cause (as defined in the
Lanier Agreement).

Demand and Piggyback Registration Rights. The holders (not including the
Management Shareholders) of at least 20% of the Class A Common Stock held by
such holders immediately prior to the Offering may, on seven occasions, demand
that the Company prepare and file a registration statement under the
Securities Act with respect to such number of shares of Class A Common Stock
held by them prior to the Offering as are designated by the holders of a
majority of such shares of Class A Common Stock of the Company after
consultation with the book running lead underwriter of any such offering and
the demanding holders. Once every 12 months, the Company may delay the filing
of any such registration statement for up to 60 days if the Company would be
required in the opinion of counsel to disclose information in the registration
statement that it would not otherwise be required to publicly disclose and the
Board determines that such disclosure is not in the Company's best interests.
In addition, such holders of Class A Common Stock are entitled to offer and
sell their Class A Common Stock in any underwritten public offering involving
the offering of any security by the Company or any subsidiary of the Company,
subject to certain limitations. The Company may also offer and sell its Class
A Common Stock in any underwritten public offering effected at the request of
such holders of Class A Common Stock, subject to certain limitations.

OTHER MATTERS

The Class A Common Stock has been approved for listing, subject to official
notice of issuance, on the New York Stock Exchange under the symbol "DRF."

53
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
16,793,095 shares of Class A Common Stock, of which the 6,700,000 shares sold
pursuant to the Offering will be fully tradeable without restriction or
further registration under the Securities Act, except for any of such shares
held by "affiliates" (as defined under Rule 405 of the Securities Act) of the
Company. The holders of the remaining 10,093,095 shares will be entitled to
sell their shares in the public securities market without registration under
the Securities Act to the extent permitted by Rule 144 promulgated thereunder
or otherwise in accordance with the Securities Act. Generally, Rule 144
provides that a person who has owned Restricted Shares for at least one year,
or who may be deemed an "affiliate" of the Company, is entitled to sell,
within any three-month period, up to the number of Restricted Shares that does
not exceed the greater of (i) one percent of the then outstanding shares of
Class A Common Stock, or (ii) the average weekly trading volume during the
four calendar weeks preceding the date on which notice of sale is filed with
the Securities and Exchange Commission (the "Commission"). Sales under Rule
144 are subject to certain restrictions relating to manner of sale, volume of
sales and the availability of current public information about the Company.
All of the Restricted Shares have been owned by the holders thereof for more
than one year. Of such Restricted Shares, 2,927,622 are owned by non-
affiliates of the Company and, as a result, will be fully tradeable upon
completion of the Offering without regard to the restrictions under Rule 144,
and 7,165,473 are owned by affiliates of the Company and, as a result, will be
eligible for sale pursuant to Rule 144, subject to certain restrictions, upon
completion of the Offering. As described below, certain holders of Common
Stock have agreed to certain restrictions on their ability to sell Common
Stock for 180 or 120 days following the Offering. See "Underwriters."

After the Offering, certain shares of Common Stock will be covered by,
subject to the Registration Rights Agreement which provides for, among other
things: (i) a call right, exercisable by Joseph L. Lanier, Jr., for the
purchase of shares of Common Stock held by certain lenders related to the 1991
Restructuring; (ii) a call right, exercisable by the Company, for the shares
of Common Stock set forth in clause (i) above; and (iii) certain demand and
piggyback registration rights. See "Description of Capital Stock--Registration
Rights Agreement."

Immediately following the Offering, there will be 2,062,070 shares of Class
B Common Stock outstanding, which will be convertible (subject to certain
restrictions on transfer and first offer rights) into shares of Class A Common
Stock (on a share-for-share basis). See "Description of Capital Stock--Common
Stock."

The Selling Shareholders, certain other shareholders of the Company, the
Company and the members of the Senior Management Group holding an aggregate of
9,527,684 shares of Class A Common Stock have agreed to certain restrictions
on the transfer of such shares for a period of 180 days after the date of this
Prospectus without the prior written consent of Morgan Stanley & Co.
Incorporated. See "Underwriters" and "Risk Factors--Shares Eligible for Future
Sale; Potential Adverse Impact on Prevailing Market Price." Certain of the
shareholders of the Company are restricted from securing or transferring their
shares for a period of 120 days after the date of this Prospectus pursuant to
the Registration Rights Agreement.

Prior to the Offering, there has been no market for the Class A Common
Stock, and no predictions can be made with respect to the effect, if any, that
public sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Sales of substantial amounts of
Class A Common Stock in the public market following the Offering, or the
perception that such sales may occur, could adversely affect the prevailing
market price of the Class A Common Stock. See "Risk Factors--Absence of Prior
Public Market."

54
<PAGE>

UNDERWRITERS

Under the terms and subject to the conditions set forth in an Underwriting
Agreement, dated , 1997 (the "Underwriting Agreement"), the Underwriters
named below, for whom Morgan Stanley & Co. Incorporated, J.P. Morgan
Securities Inc. and SBC Warburg Dillon Read Inc. are acting as representatives
(the "Representatives"), have severally agreed to purchase, and the Company
and the Selling Shareholders have severally agreed to sell to them, the
respective numbers of shares of Class A Common Stock set forth opposite the
names of such Underwriters below:

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Morgan Stanley & Co. Incorporated.............................
J.P. Morgan Securities Inc....................................
SBC Warburg Dillon Read Inc...................................
------
Total.......................................................
======
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated
to take and pay for all of the shares of Class A Common Stock offered hereby
(other than those covered by the over-allotment option described below) if any
such shares are taken.

At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to shares of Class A Common Stock
offered hereby for directors, officers, employees, business associates, and
related persons of the Company. The number of shares of Class A Common Stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the Underwriters to the general public on the
same basis as the other shares offered hereby.

The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ per share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of $ per share to other Underwriters or to certain other dealers.
After the initial offering of the shares of Class A Common Stock, the offering
price and other selling terms may from time to time be varied by the
Representatives.

Pursuant to the Underwriting Agreement, the Selling Shareholders have
granted to the Underwriters an option, exercisable for thirty days from the
date of this Prospectus, to purchase up to an aggregate of 1,005,000
additional shares of Class A Common Stock at the public offering price set
forth on the cover page hereof, less underwriting discounts and commissions.
The Underwriters may exercise such option to purchase solely for the purpose
of covering over-allotments, if any, made in connection with the Offering. To
the extent such option is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage
of such additional shares of Class A Common Stock as the number set forth next
to such Underwriter's name in the preceding table bears to the total number of
shares of Class A Common Stock set forth next to the names of all Underwriters
in the preceding table.

The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
the Class A Common Stock offered by them.

The Class A Common Stock has been approved for listing, subject to official
notice of issuance, on the New York Stock Exchange under the symbol "DRF." In
order to meet the requirements for listing the Class A Common Stock on the New
York Stock Exchange, the Underwriters have undertaken to meet the New York
Stock Exchange's minimum distribution, issuance and aggregate market value
requirements.

55
<PAGE>

Each of the members of the Senior Management Group and certain other
shareholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will
not, during the period ending 180 days after the date of this Prospectus, (i)
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of Class A Common Stock or any securities convertible
into or exercisable or exchangeable for Class A Common Stock or (ii) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the Class A Common
Stock, whether any such transaction described in clause (i) or (ii) above is
to be settled by delivery of Class A Common Stock or such other securities, in
cash or otherwise. The restrictions described in this paragraph do not apply
to (w) the sale of Shares to the Underwriters, (x) the issuance by the Company
of shares of Class A Common Stock upon the exercise of an option or a warrant
or the conversion of a security outstanding on the date of this Prospectus of
which the Underwriters have been advised in writing, (y) bona fide gifts to
donees who agree in writing to be bound by the foregoing restrictions or (z)
transactions by any person other than the Company relating to shares of Class
A Common Stock or other securities acquired in open market transactions after
the completion of the Offering.

In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Class A Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offering, creating a short position in the Class A Common
Stock for their own account. In addition, to cover over-allotments or to
stabilize the price of the Class A Common Stock, the Underwriters may bid for,
and purchase, shares of Class A Common Stock in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an
Underwriter or a dealer for distributing the Class A Common Stock in the
Offering, if the syndicate repurchases previously distributed Class A Common
Stock in transactions to cover syndicate short positions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain
the market price of the Class A Common Stock above independent market levels.
The Underwriters are not required to engage in these activities, and may end
any of these activities at any time.

From time to time, the Representatives have provided, and continue to
provide, investment banking services to the Company.

The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.

PRICING OF THE OFFERING

Prior to the Offering, there has been no public market for the Class A
Common Stock. Consequently, the initial public offering price was determined
by negotiations among the Company, the Selling Shareholders and the
Representatives. Among the factors considered in determining the initial
public offering price were the Company's record of operations, the Company's
current financial condition and future prospects, the experience of its
management, the economics of the industry in general, the general condition of
the equity securities markets, and the market prices of similar securities of
companies considered comparable to the Company. There can be no assurance that
a regular trading market for the shares of Class A Common Stock will develop
after the Offering or, if developed, that a public trading market can be
sustained. There can be no assurance that the prices at which the Class A
Common Stock will sell in the public market after the Offering will not be
lower than the price at which it is offered by the Underwriters in the
Offering.

56
<PAGE>

LEGAL MATTERS

Certain legal matters with respect to the validity of the shares of Class A
Common Stock offered hereby will be passed upon for the Company by King &
Spalding, New York, New York. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Cravath, Swaine & Moore,
New York, New York.

EXPERTS

The Consolidated Financial Statements and related financial statement
schedules of the Company at December 30, 1995 and December 28, 1996 and for
each of the three fiscal years in the period ended December 28, 1996 appearing
in this Prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, and the historical Statement of Income Data
and historical Balance Sheet Data under the caption "Selected Historical and
Pro Forma Consolidated Financial Data" for each of the five fiscal years in
the period ended December 28, 1996, appearing in this Prospectus and
Registration Statement have been derived from the Consolidated Financial
Statements audited by Ernst & Young LLP as set forth in their reports thereon
appearing elsewhere herein. Such Consolidated Financial Statements, financial
statement schedules and historical Statement of Income Data and historical
Balance Sheet Data are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.

The Financial Statements of Cherokee at September 30, 1995 and September 28,
1996 and for each of the three fiscal years in the period ended September 28,
1996 appearing in this Prospectus and Registration Statement have been audited
by Pugh & Company, P.C., independent auditors, as set forth in their report
thereon appearing elsewhere herein. Such financial statements are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

57
<PAGE>

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. The reports, proxy statements and other information filed with the
Commission, as well as the Registration Statement (as defined below), may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's Regional Offices at Seven World Trade Center, 13th Floor,
New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60601-2511. Copies of such material also
can be obtained by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy statements and other
information regarding registrants that file electronically with the
Commission.

The Company has filed a Registration Statement on Form S-1 (together with
all amendments thereto, the "Registration Statement") under the Securities Act
with the Commission, Washington, D.C. 20549, with respect to the shares of
Class A Common Stock offered hereby. This Prospectus, which is a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain
portions of which have been omitted pursuant to the rules and regulations of
the Commission. For further information with respect to the Company and the
Class A Common Stock, reference is hereby made to the Registration Statement,
and exhibits and schedules contained therein, which may be inspected without
charge at the principal office of the Commission in Washington, D.C., and
copies of all or any part of which may be obtained from the Commission upon
payment of the prescribed fees. The summaries contained in this Prospectus
concerning information included in the Registration Statement, or in any
exhibit or schedule thereto, are qualified in their entirety by reference to
such information, exhibit or schedule.

The Company intends to furnish its shareholders with an annual report
containing consolidated financial statements certified by its independent
auditors and with quarterly reports for each of the first three quarters of
each fiscal year containing unaudited consolidated financial information.

58
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Dan River Inc.
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of December 30, 1995 and December 28,
1996................................................................... F-3
Consolidated Statements of Income for the years ended December 31, 1994,
December 30, 1995 and December 28, 1996................................ F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994, December 30, 1995 and December 28, 1996............. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1994, December 30, 1995 and December 28, 1996.......................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Unaudited Condensed Consolidated Balance Sheets as of September 27,
1997................................................................... F-19
Unaudited Condensed Consolidated Statements of Income for the nine
months ended September 28, 1996 and September 27, 1997................. F-20
Unaudited Condensed Consolidated Statements of Cash Flows for the nine
months ended September 28, 1996 and September 27, 1997................. F-21
Notes to Unaudited Condensed Consolidated Financial Statements for the
nine months ended September 28, 1996 and September 27, 1997............ F-22
Pro Forma Financial Information
Unaudited Pro Forma Condensed Consolidated Statements of Income for the
year ended December 28, 1996 and the nine months ended September 27,
1997................................................................... F-26
The New Cherokee Corporation
Report of Independent Auditors.......................................... F-29
Balance Sheets as of September 30, 1995 and September 28, 1996.......... F-30
Statements of Operations for the fiscal years ended October 1, 1994,
September 30, 1995 and September 28, 1996.............................. F-31
Statements of Changes in Shareholders' Equity for the fiscal years ended
October 1, 1994, September 30, 1995 and September 28, 1996............. F-32
Statements of Cash Flows for the fiscal years ended October 1, 1994,
September 30, 1995 and September 28, 1996.............................. F-34
Notes to Financial Statements........................................... F-36
Unaudited Condensed Balance Sheets as of December 28, 1996.............. F-47
Unaudited Condensed Statements of Operations for the three months ended
December 30, 1995 and December 28, 1996................................ F-48
Unaudited Condensed Statements of Cash Flows for the three months ended
September 30, 1995 and December 28, 1996............................... F-49
Notes to Unaudited Condensed Financial Statements....................... F-50
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Dan River Inc.

We have audited the accompanying consolidated balance sheets of Dan River
Inc. as of December 30, 1995 and December 28, 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for
the each of the three fiscal years in the period ended December 28, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Dan River
Inc. at December 30, 1995 and December 28, 1996, and the consolidated results
of its operations and its cash flows for each of the three fiscal years in the
period ended December 28, 1996 in conformity with generally accepted
accounting principles.

We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets as of January 2, 1993, January 1,
1994 and December 31, 1994 and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the two fiscal years in the
period ended January 1, 1994 (none of which are presented separately herein);
and we expressed unqualified opinions on those consolidated financial
statements. The information set forth as historical Statement of Income Data
and historical Balance Sheet Data in the Selected Historical and Pro Forma
Consolidated Financial Data for each of the five years in the period ended
December 28, 1996, appearing on page 19, was derived from the consolidated
financial statements which we audited. In our opinion, the aforementioned
information derived from the consolidated financial statements is fairly
stated in all material respects in relation to those consolidated financial
statements.

Ernst & Young LLP

Charlotte, North Carolina
February 7, 1997,
except as to Note 3 and the last paragraph of Note 7, as to which the date is
November 3, 1997

F-2
<PAGE>

DAN RIVER INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 30, 1995 AND DECEMBER 28, 1996

<TABLE>
<CAPTION>
UNAUDITED
PRO
FORMA
SHAREHOLDERS'
EQUITY
1995 1996 (NOTE 13)
-------- -------- --------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 10)........ $ 1,540 $ 5,042
Accounts receivable--trade (less allowance
of $5,140,000 at December 30, 1995 and
$4,631,000 at December 28, 1996) (Notes 4
and 10)................................... 54,848 55,782
Inventories (Notes 2 and 4)................ 96,204 72,493
Prepaid expenses and other current assets.. 2,481 1,275
Deferred income taxes (Note 6)............. 7,231 5,643
-------- --------
Total current assets....................... 162,304 140,235
Property, plant and equipment (Note 4):
Land....................................... 6,529 6,526
Buildings and improvements................. 41,288 43,363
Machinery and equipment.................... 186,019 209,568
Construction in progress................... 7,455 15,241
-------- --------
241,291 274,698
Less accumulated depreciation and
amortization.............................. 79,311 99,348
-------- --------
Net property, plant and equipment.......... 161,980 175,350
Other assets................................ 6,660 5,465
-------- --------
$330,944 $321,050
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note
4)........................................ $ 5,138 $ 6,990
Accounts payable........................... 23,776 21,531
Accrued compensation and related benefits.. 14,857 13,652
Other accrued expenses..................... 8,770 4,771
-------- --------
Total current liabilities.................. 52,541 46,944
Long-term debt (Note 4)..................... 174,565 162,478
Deferred income taxes (Note 6).............. 16,795 17,857
Other liabilities........................... 6,341 6,147
Commitments and contingencies (Notes 5, 6
and 9)
Common stock subject to put rights (Note 5). 7,000 9,726 $ --
Shareholders' equity (Notes 3, 4, 5 and 7):
Preferred stock, $.01 par value; authorized
50,000,000 shares; no shares issued........ -- -- --
Common stock, Class A, $.01 par value;
authorized 175,000,000 shares; issued and
outstanding 12,712,945 shares.............. 127 127 127
Common stock, Class B, $.01 par value;
authorized 35,000,000 shares; no shares
issued..................................... -- -- --
Common stock, Class C, $.01 par value;
authorized 5,000,000 shares; issued and
outstanding 1,442,220 shares............... 14 14 14
Additional paid-in capital.................. 67,394 64,668 74,394
Retained earnings........................... 8,012 13,698 13,698
Pension liability adjustment................ (1,845) (609) (609)
-------- -------- --------
Total shareholders' equity................. 73,702 77,898 87,624
-------- -------- --------
$330,944 $321,050 $321,050
======== ======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE>

DAN RIVER INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

<TABLE>
<CAPTION>
1994 1995 1996
--------------- --------------- ---------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Net sales................... $ 371,534 $ 384,801 $ 379,567
Costs and expenses:
Cost of sales............. 297,460 306,879 307,383
Selling, general and ad-
ministrative expenses.... 43,908 44,860 45,673
Other operating costs, net
(Note 8)................. 1,534 8,972 (428)
--------------- --------------- ---------------
Operating income............ 28,632 24,090 26,939
Other income................ 144 241 485
Interest expense............ (20,419) (21,941) (18,168)
--------------- --------------- ---------------
Income before income taxes.. 8,357 2,390 9,256
Provision for income taxes
(Note 6)................... 4,832 2,132 3,570
--------------- --------------- ---------------
Net income.................. $ 3,525 $ 258 $ 5,686
=============== =============== ===============
Earnings per share:
Primary................... $ 0.31 $ 0.02 $ 0.40
=============== =============== ===============
Fully diluted............. $ 0.31 $ 0.23 $ 0.40
=============== =============== ===============
Weighted average shares
outstanding:
Primary................... 11,375,000 12,276,268 14,155,165
=============== =============== ===============
Fully diluted............. 11,375,000 13,940,133 14,155,165
=============== =============== ===============
</TABLE>

See accompanying notes.

F-4
<PAGE>

DAN RIVER INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

<TABLE>
<CAPTION>
CLASS A CLASS C ADDITIONAL PENSION
COMMON COMMON PAID-IN RETAINED LIABILITY
STOCK STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
-------- -------- ----------- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994................... $ 99 $14 $38,151 $ 4,229 $ -- $42,493
Net income.............. -- -- -- 3,525 -- 3,525
Capital contribution.... -- -- 792 -- -- 792
---- --- ------- ------- ------- -------
Balance at December 31,
1994................... 99 14 38,943 7,754 -- 46,810
Net income.............. -- -- -- 258 -- 258
Pension liability
adjustment............. -- -- -- -- (1,845) (1,845)
Conversion of junior
subordinated notes..... 28 -- 28,451 -- -- 28,479
---- --- ------- ------- ------- -------
Balance at December 30,
1995................... 127 14 67,394 8,012 (1,845) 73,702
Net income.............. -- -- -- 5,686 -- 5,686
Change in common stock
subject to put rights.. -- -- (2,726) -- -- (2,726)
Pension liability
adjustment............. -- -- -- -- 1,236 1,236
---- --- ------- ------- ------- -------
Balance at December 28,
1996................... $127 $14 $64,668 $13,698 $ (609) $77,898
==== === ======= ======= ======= =======
</TABLE>

See accompanying notes.

F-5
<PAGE>

DAN RIVER INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 3,525 $ 258 $ 5,686
Adjustments to reconcile net income to net cash
provided by operating activities:
Noncash interest expense....................... 4,857 4,110 1,166
Noncash compensation expense................... 792 -- --
Depreciation and amortization.................. 18,187 19,537 20,795
Deferred income taxes.......................... 1,847 (1,379) 1,842
Writedown/disposal of equipment................ 742 4,040 (280)
Writedown--discontinued product line........... -- 3,005 (849)
Changes in operating assets and liabilities:
Accounts receivable........................... (16,209) 6,578 (691)
Inventories................................... (6,690) (8,423) 24,554
Prepaid expenses and other assets............. 942 512 (396)
Accounts payable and accrued expenses......... 5,791 (3,904) (6,555)
Other liabilities............................. (1,897) (1,796) (194)
-------- -------- --------
Net cash provided by operating activities.... 11,887 22,538 45,078
Cash flows from investing activities:
Total capital expenditures...................... (44,112) (28,004) (34,515)
Plant and equipment acquired in exchange for
debt.......................................... 17,227 7,203 5,951
Accrued equipment purchases.................... 2,092 (3,515) 982
-------- -------- --------
Capital expenditures in cash.................. (24,793) (24,316) (27,582)
Proceeds from sale of assets.................... 380 322 2,385
Proceeds from insurance claim................... 540 -- --
-------- -------- --------
Net cash used by investing activities........ (23,873) (23,994) (25,197)
Cash flows from financing activities:
Payments of long-term debt...................... (8,611) (8,453) (18,566)
Net proceeds from issuance of long-term debt.... -- 700 25,313
Net borrowings (payments)--working capital fa-
cility......................................... 14,000 9,000 (23,000)
Other........................................... -- -- (126)
-------- -------- --------
Net cash provided (used) by financing activi-
ties........................................ 5,389 1,247 (16,379)
-------- -------- --------
Net increase (decrease) in cash and cash equiva-
lents........................................... (6,597) (209) 3,502
Cash and cash equivalents at beginning of year... 8,346 1,749 1,540
-------- -------- --------
Cash and cash equivalents at end of year......... $ 1,749 $ 1,540 $ 5,042
======== ======== ========
</TABLE>

See accompanying notes.

F-6
<PAGE>

DAN RIVER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996

1. DESCRIPTION OF BUSINESS

Dan River Inc. and its former parent and sole shareholder, Braelan Corp.
("Braelan"), were organized in 1989 to acquire and operate Dan River
Holding Company and its subsidiaries (the "Predecessor"). Dan River Inc. is
a manufacturer and marketer of a variety of textile products, primarily
home fashions and apparel fabrics. Home fashions products, which accounted
for approximately 64 percent of sales for the year ended December 28, 1996,
consist mostly of packaged bedroom furnishings which are sold to domestic
retailers. Apparel products, which include a broad range of woven cotton
and cotton-blend fabrics, are distributed primarily to domestic clothing
manufacturers.

2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS

Basis of presentation

On December 29, 1995, Braelan was merged with and into Dan River Inc. The
consolidated balance sheets as of December 30, 1995 and December 28, 1996,
and the consolidated statements of income, shareholders' equity and cash
flows for the fiscal year ended December 28, 1996, represent the
consolidated financial position, results of operations and cash flows of
Dan River Inc. and its wholly-owned subsidiary, Dan River Factory Stores,
Inc. The consolidated statements of income, shareholders' equity and cash
flows for each of the two fiscal years in the period ended December 30,
1995, represent the consolidated results of operations and cash flows of
Braelan and its subsidiaries. All significant intercompany balances have
been eliminated. Braelan and its subsidiaries, and Dan River Inc. and its
subsidiary are collectively referred to as the Company.

Fiscal year

The Company's fiscal year ends on the Saturday nearest to December 31.
All references to 1994, 1995 and 1996 mean the 52-week fiscal years ended
December 31, 1994, December 30, 1995 and December 28, 1996, respectively.

Use of estimates

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

Cash equivalents

All highly liquid cash investments purchased with an initial maturity of
three months or less are considered to be cash equivalents.

F-7
<PAGE>

DAN RIVER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS--(CONTINUED)

Inventories

Inventories are stated at the lower of cost or market, with cost
determined under the first-in, first-out method. Inventories at December
30, 1995 and December 28, 1996, respectively, by component are as follows:

<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods............................................. $34,463 $24,558
Work in process............................................ 51,452 38,274
Raw materials.............................................. 3,483 2,679
Supplies................................................... 6,806 6,982
------- -------
Total inventories........................................ $96,204 $72,493
======= =======
</TABLE>

Property, plant and equipment

Property, plant and equipment are stated at cost. Depreciation is
computed on a straight-line basis over the estimated useful lives of the
related assets, ranging from 10 to 35 years for buildings and improvements,
and 3 to 14 years for machinery and equipment. Leasehold improvements are
amortized on a straight-line basis over the lease term or estimated useful
life, whichever is less.

In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." The adoption did not have a
material effect on the Company's financial statements because the Company
was generally in conformance with this standard prior to adoption.

Deferred financing fees

Debt financing fees are amortized over the term of the related debt.

Revenue recognition

The Company generally recognizes revenues from product sales when goods
are shipped.

Income taxes

Deferred income taxes are accounted for under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.

Cotton futures contracts

In connection with the purchasing of cotton for anticipated manufacturing
requirements, the Company may enter into cotton futures and option
contracts in order to reduce the risk associated with future price
fluctuations. These contracts are accounted for as hedges and, accordingly,
gains or losses are deferred and reflected in cost of sales as an element
of the cost of the finished product. Transactions related to cotton futures
and option contracts during the three year period ended December 28, 1996
were not material.

F-8
<PAGE>

DAN RIVER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS--(CONTINUED)

Earnings per share

Primary earnings per share are computed on the basis of the weighted
average number of common shares and common equivalent shares (stock
options), if dilutive, outstanding during the period. The Company's
convertible junior subordinated notes, which were converted into shares of
Class A common stock on September 3, 1995 (Note 3), were antidilutive on an
if-converted basis for both 1994 and 1995. For purposes of calculating
fully diluted earnings per share for 1995, the convertible subordinated
junior notes were deemed to be converted on the first day of the period.

3. PUBLIC OFFERING AND CAPITALIZATION

On September 26, 1997 the Company filed a registration statement for the
sale of shares of common stock to the public (the "Offering").

In connection with the Offering, the shareholders of the Company approved
a multi-step recapitalization plan which became effective on November 3,
1997 (the "Recapitalization"). Prior to the Recapitalization, the Company's
outstanding capital stock included 1,500,000 authorized shares of voting
stock, par value $.01 per share ("Old Voting Stock") (726,454 shares of
which were outstanding as of December 28, 1996), and 1,500,000 authorized
shares of nonvoting common stock, par value $.01 per share ("Old Nonvoting
Stock") (82,413 shares of which were outstanding as of December 28, 1996).

The Company first amended and restated its Articles of Incorporation (the
"Restated Articles"). Upon filing of the Restated Articles: (i) Class A
Common Stock, par value $.01 per share, entitled to one vote per share,
Class B Common Stock, par value $.01 per share, entitled to 4.39 votes per
share, and Class C Common Stock, par value $.01 per share, nonvoting, were
created; (ii) each outstanding share of Old Voting Stock was reclassified
and exchanged for 17.5 shares of Class A Common Stock of the Company
("Class A Common") and (iii) each outstanding share of Old Nonvoting Stock
was reclassified and exchanged for 17.5 shares of Class C Common Stock of
the Company ("Class C Common") (the "Reclassification"). Shares of Class C
Common will automatically convert into shares of Class A Common on a share-
for-share basis upon consummation of the Offering.

Upon consummation of the Offering, the Company will complete an exchange
offer (the "Exchange Offer") pursuant to which certain members of senior
management of the Company (and certain of their family members) that held
Old Voting Stock prior to the Reclassification will exchange 2,062,070
shares of Class A Common for shares of supervoting Class B Common Stock
("Class B Common") on a share-for-share basis.

All share and per share amounts in the accompanying financial statements
and the related notes have been adjusted to reflect the impact of the
Reclassification on the number of shares outstanding and the per share
amounts. No adjustment has been made in the accompanying financial
statements and the related notes for the Exchange Offer or the automatic
conversion of Class C Common into Class A Common upon the consummation of
the Offering.

Through September 2001, the Company has the option to purchase the common
shares held by certain shareholders at a price equal to the then fair
market value. The Company's call option is generally subject to the same
financial covenants and other restrictions as the put rights described in
Note 5. A certain

F-9
<PAGE>

DAN RIVER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

3. PUBLIC OFFERING AND CAPITALIZATION--(CONTINUED)

shareholder has a similar call option on certain issued and outstanding
common shares, which has priority to the Company's call option. In
addition, certain shareholders have the right to require the Company to
register, at its expense, their shares under the Securities Act of 1933.

On September 3, 1995 the Company's convertible junior subordinated notes
(the "Junior Notes") with an outstanding balance of $28,479,000 were
converted into 2,780,173 shares of Class A Common stock. The Junior Notes
were non-amortizing, and bore interest at 16.35%, which accrued quarterly
and was automatically capitalized and added to principal.

4. LONG-TERM DEBT

Long-term debt at December 30, 1995 and December 28, 1996, consists of
the following:

<TABLE>
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior subordinated notes................................. $120,000 $120,000
Working capital facility.................................. 23,000 --
Term loan................................................. -- 23,545
Notes payable to equipment vendors........................ 27,010 13,081
Other borrowings with various rates and maturities........ 9,693 12,842
-------- --------
179,703 169,468
Less current maturities................................... 5,138 6,990
-------- --------
Total long-term debt.................................. $174,565 $162,478
======== ========
</TABLE>

The senior subordinated notes (the "Notes") consist of $120,000,000 in
non-amortizing ten-year notes issued pursuant to an indenture dated
December 15, 1993, bearing interest at 10 1/8%, payable semi-annually.

The working capital facility at December 28, 1996 consists of a long-term
$60 million working capital line of credit, the availability of which is
tied to a defined borrowing base formula. The working capital facility also
provides for the issuance of letters of credit up to $8,500,000
outstanding, of which $2,563,000 was outstanding at December 28, 1996. This
facility was terminated on February 3, 1997 in connection with the
Company's establishment of a new $90 million working capital facility (see
below).

The working capital facility and the Notes contain certain restrictive
covenants which, among other things, require the Company to meet minimum
net worth and earnings ratios, impose limitations on debt incurrence and
restrict certain payments, including dividends and payments for the
repurchase of capital stock (see Note 5).

The term loan consists of a $25 million amortizing note due in 2001,
bearing interest at LIBOR plus 1.75% (7.34% at December 28, 1996). The
Company has a fixed rate option until June 30, 1998, whereby the rate may
be fixed based on the yield of the June 1999, 6.75% U.S. Treasury Notes
plus 1.85%. Payments on the term loan are made quarterly with a 30% balloon
payment at maturity. The term loan is secured by various machinery and
equipment of the Company.

Notes payable to vendors for machinery and equipment purchases are
secured by the related assets. The notes payable to vendors mature on
various dates between 1997 and 2002 and bear interest at various fixed and
variable interest rates averaging 7.96% at December 28, 1996.

F-10
<PAGE>

DAN RIVER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

4. LONG-TERM DEBT--(CONTINUED)

Other borrowings consist primarily of various industrial development,
revenue and pollution control obligations.

On February 3, 1997, in connection with the acquisition of the assets of
The New Cherokee Corporation (the "Acquisition," See Note 12), the Company
established a new $90 million working capital facility and a new $35
million term loan. Initial borrowings on that date were $19.9 million on
the working capital facility and $35 million on the term loan, which
proceeds together with $12 million cash on hand were used to consummate the
Acquisition, including associated fees and expenses.

The $90 million working capital facility (the "New Working Capital
Facility") consists of a long-term working capital line of credit, the
availability of which is tied to a defined borrowing base formula. As of
February 3, 1997, $54,781,000 was unused and available. Borrowings under
the New Working Capital Facility are non-amortizing and are due February 3,
2001. The borrowings bear interest at a Base Rate, as defined, or LIBOR
plus 2%, as defined, at the option of the Company. The Company pays a
commitment fee of .25% per annum on the unused portion of the $90 million
working capital line of credit. The New Working Capital Facility also
provides for the issuance of letters of credit up to $7,500,000
outstanding, of which $2,563,000 was outstanding at February 3, 1997. The
obligations of the Company under the New Working Capital Facility are
secured by a lien on substantially all accounts receivable and inventory.

The $35 million term loan facility (the "New Term Loan") bears interest
at a Base Rate, as defined, or LIBOR plus 2.5%, as defined, at the
Company's option. Scheduled principal payments are: 1997, $1,750,000; 1998,
$4,250,000; 1999, $5,000,000 and 2000, $24,000,000. The New Term Loan is
secured by the assets of certain manufacturing facilities purchased by the
Company in connection with the Acquisition.

The New Working Capital Facility and New Term Loan contain certain
restrictive covenants not materially different from the prior working
capital facility and the Notes described above.

The aggregate annual scheduled principal repayments of long-term debt
outstanding as of December 28, 1996 are: 1997, $6,990,000; 1998,
$6,838,000; 1999, $6,982,000; 2000, $7,310,000 and 2001, $11,442,000.

Cash payments of interest on debt were $15,319,000, $17,742,000 and
$17,854,000 for 1994, 1995 and 1996, respectively.

5. COMMON STOCK SUBJECT TO PUT RIGHTS

Until the earlier of September 2001 or a public offering of the Company's
common stock, certain shareholders may require the Company to repurchase
annually a portion of their shares at the then fair market value, as
defined. These put rights, which apply to approximately 7,956,638 of the
common shares outstanding as of December 28, 1996, may only be exercised
once during any 12-month period and only if the Company is able to obtain
financing on commercially reasonable terms for such repurchase.
Furthermore, the Company's obligation to repurchase shares is limited by
certain financial and other covenants contained in the put agreement and
the Company's debt agreements. The Company will not be required to
repurchase shares in 1997 because of an indebtedness limitation set forth
in the put agreement. Such limitation provides that the Company does not
have to accept a put to the extent that the ratio of its debt as of the
prior year-end plus debt incurred to finance the put exceeds 3.0 times the
Company's

F-11
<PAGE>

DAN RIVER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

5. COMMON STOCK SUBJECT TO PUT RIGHTS--(CONTINUED)

"earnings before interest, taxes, depreciation and amortization," as
defined, for the previous fiscal year. In addition, the exercise of puts
will be further limited by a restricted payment provision contained in the
indenture under the Notes, which prevents certain payments, including
dividends and payments to shareholders for the repurchase of capital stock,
from reducing the Company's shareholders' equity below certain levels.
Under this provision, cumulative restricted payments over the term of the
put rights generally cannot exceed the greater of $7,000,000 or the sum of
$1,000,000 plus 50% of the Company's cumulative post-1993 net income (or
minus 100% of net losses), as defined, as of the year ending prior to the
restricted payment. Cumulative post-1993 net income for this purpose was
$17,453,000 as of December 28, 1996. Based on the minimum levels of
shareholders' equity required by the restricted payment provision, the
accompanying consolidated balance sheets reflect the reclassification of
$7,000,000 and $9,726,000 from shareholders' equity to "common stock
subject to put rights" as of December 30, 1995 and December 28, 1996,
respectively.

6. INCOME TAXES

The provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $2,420 $3,123 $1,645
State............................................... 565 388 83
------ ------ ------
2,985 3,511 1,728
Deferred:
Federal............................................. 1,563 (1,365) 1,278
State............................................... 284 (14) 564
------ ------ ------
1,847 (1,379) 1,842
------ ------ ------
Provision for income taxes............................ $4,832 $2,132 $3,570
====== ====== ======
</TABLE>

A reconciliation of the differences between the provision for income
taxes and income taxes computed using the statutory federal income tax rate
of 35% follows:

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Amount computed using the statutory rate............... $2,925 $ 837 $3,240
Increase (decrease) in taxes resulting from:
State taxes.......................................... 552 243 421
Nondeductible interest............................... 1,321 1,018 80
Other, net........................................... 34 34 (171)
------ ------ ------
Provision for income taxes............................. $4,832 $2,132 $3,570
====== ====== ======
</TABLE>

F-12
<PAGE>

DAN RIVER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

6. INCOME TAXES--(CONTINUED)

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
at December 30, 1995 and December 28, 1996 are as follows:

<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Book carrying value in excess of tax basis of
property, plant and equipment........................ $27,930 $29,389
Other................................................. 1,417 1,376
------- -------
Total deferred tax liabilities...................... 29,347 30,765
Deferred tax assets:
Net operating loss and credit carryforwards........... 12,507 13,712
Nondeductible reserves and accruals................... 10,108 8,437
Minimum pension liability adjustment.................. 1,207 399
Other................................................. 1,231 770
------- -------
Total deferred tax assets........................... 25,053 23,318
Valuation allowance for deferred tax assets........... (5,270) (4,767)
------- -------
Net deferred tax assets............................. 19,783 18,551
------- -------
Net deferred tax liabilities........................ $ 9,564 $12,214
======= =======
</TABLE>

At December 28, 1996, the Company had net operating loss carryforwards of
$900,000, which expire in 2005. In addition, the Company had available a
minimum tax credit carryforward of $8,100,000, and investment credit and
other general business credit carryforwards of $5,300,000. If not used,
$4,300,000 of the investment credit and other general business credit
carryforwards will expire in the years 1997 through 2000, and the remainder
will expire in various years through 2010.

Because the acquisition of the Predecessor in 1989 constituted a "change
in ownership" under Section 382 of the Internal Revenue Code, the
utilization of net operating loss and credit carryforwards existing as of
the acquisition date are subject to certain restrictions. These
restrictions have not impacted the utilization of pre-acquisition net
operating losses, none of which remain as of December 28, 1996, and are not
expected to materially impact the future utilization of credit
carryforwards.

On September 3, 1991, the Company completed a financial restructuring
(the "Restructuring") which involved issuing common and preferred stock to
various parties. The Company believes that the Restructuring did not result
in a "change in ownership" and thus did not cause further restrictions in
the utilization of carryforwards. However, Section 382 and related
regulations promulgated by the Internal Revenue Service ("IRS") are
extremely complex, and the Company's assessment of whether or not a "change
in ownership" occurred involves judgments as to certain factual issues and
interpretations as to certain legal issues for which there is little
guidance. There can be no assurance that the IRS will not challenge the
Company's conclusion that no "change in ownership" has occurred under
Section 382. The utilization of the Company's pre-Restructuring
carryforwards could be significantly restricted or eliminated if the
Restructuring is deemed to constitute a "change in ownership." From the
date of the Restructuring

F-13
<PAGE>

DAN RIVER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

6. INCOME TAXES--(CONTINUED)

through December 28, 1996, the Company utilized an aggregate of $16,876,000
in net operating loss carryforwards and $1,723,000 in general business
credit carryforwards for federal income tax purposes that are subject to
review by the IRS.

For financial reporting purposes, valuation allowances of $5,270,000 and
$4,767,000 are reflected at December 30, 1995 and December 28, 1996,
respectively, to offset a portion of the deferred tax assets.

The Company made income tax payments of $1,482,000, $3,625,000, and
$1,180,000 during 1994, 1995 and 1996, respectively.

7. BENEFIT PLANS

Hourly and salary retirement plans

The Company sponsors the Dan River Inc. Hourly Retirement Plan (the
"Hourly Plan") and the Dan River Inc. Salary Retirement Plan (the "Salary
Plan"). These plans are noncontributory and cover substantially all of the
Company's full-time employees. Funding for the Hourly and Salary Plans is
through employer cash contributions.

Participants are generally eligible for full benefits at age 65 or upon
completion of five years of vesting service, if later. Vesting service is
defined generally as years of service from hire. Benefits of the Hourly
Plan are determined based upon years of service while benefits of the
Salary Plan are determined based upon years of service and career average
earnings.

The following sets forth the funded status of the plans at December 30,
1995 and December 28, 1996:

<TABLE>
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $15,174,000 at December 30, 1995 and
$16,079,000 at December 28, 1996..................... $(16,267) $(17,069)
======== ========
Projected benefit obligation for service rendered to
date................................................. $(17,558) $(18,591)
Plan assets at fair value............................. 13,043 16,218
-------- --------
Projected benefit obligation in excess of plan assets. (4,515) (2,373)
Unrecognized net loss................................. 4,343 1,896
Minimum liability adjustment.......................... (3,052) (1,008)
-------- --------
Accrued pension cost included in the consolidated
balance sheets....................................... $ (3,224) $ (1,485)
======== ========
</TABLE>

The Company's practice is to fund amounts which are required by statute
and applicable regulations and which are tax deductible. The minimum
liability adjustment at December 30, 1995 and December 28, 1996, represents
the excess of unfunded accumulated benefit obligations over previously
recorded liabilities. A corresponding reduction is reflected in
shareholders' equity, net of the related income tax effect of $1,207,000
and $399,000 at December 30, 1995 and December 28, 1996, respectively.

F-14
<PAGE>

DAN RIVER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

7. BENEFIT PLANS--(CONTINUED)

Net pension cost for the plans included the following components:

<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost...................................... $ 1,639 $ 1,452 $ 1,728
Interest cost..................................... 999 1,181 1,401
Actual return on assets........................... 317 (2,193) (1,919)
Other, net........................................ (1,159) 1,204 951
------- ------- -------
Net periodic pension cost......................... $ 1,796 $ 1,644 $ 2,161
======= ======= =======
</TABLE>

The projected benefit obligations were determined using an assumed
discount rate of 7.25% at December 30, 1995 and 7.90% at December 28, 1996.
An assumed long-term rate of increase in compensation of 4.25% was used at
December 30, 1995 and 4.90% at December 28, 1996. The assumed long-term
rate of return on plan assets was 9.5% at December 31, 1994, December 30,
1995 and December 28, 1996. Assets of the plans consist of various
institutional investment funds and money market accounts.

Supplemental retirement plan

The Company sponsors an unfunded supplemental retirement plan for certain
former employees that provides for payments upon retirement, death or
disability over the longer of the employee's life or ten years. The
projected benefit obligations of $3,182,000 and $2,960,000 at December 30,
1995 and December 28, 1996, respectively, are accrued in the accompanying
consolidated balance sheets. The Company is a beneficiary of life insurance
policies on certain participants in this plan.

Stock option plan

The Company sponsors a nonqualified stock option plan under which
directors, officers and key management employees of the Company may be
granted options to purchase shares of the Company's Class A common stock.
The Company has reserved 647,500 shares of its authorized but unissued
common stock for this plan. All options to purchase unissued shares granted
through December 28, 1996 have an exercise price of $6.85 per share,
generally vest on December 31, 1999, and expire on December 31, 2001. None
of these options were exercisable at December 28, 1996.

Prior to December 30, 1994, the plan also provided for the granting of
options to purchase shares of the Company's Class A common stock from a
certain principal shareholder at an exercise price of $0.57 per share. All
of these options were exercisable at December 28, 1996 and expire on
December 31, 1999.

The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation," but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting
for its plan. No compensation expense was recorded in 1995 or 1996. If the
Company had elected to recognize compensation expense for the stock option
plan based on the fair value at the grant dates for awards under the plan,
consistent with the method prescribed by SFAS No. 123, the pro forma effect
on net income would be immaterial for both years.

F-15
<PAGE>

DAN RIVER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

7. BENEFIT PLANS--(CONTINUED)

The following table summarizes activity under the stock option plan:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AGAINST
---------------------------
AUTHORIZED SHARES HELD BY
BUT UNISSUED PRINCIPAL
SHARES SHAREHOLDER
------------ --------------
<S> <C> <C>
Outstanding at 12/31/94....................... 603,750 524,300
Granted....................................... 20,125 --
Forfeited..................................... (28,875) (10,500)
------- -------
Outstanding at 12/30/95....................... 595,000 513,800
Granted....................................... 13,125 --
Exercised..................................... -- (51,800)
Forfeited..................................... (13,300) (5,250)
------- -------
Outstanding at 12/28/96....................... 594,825 456,750
======= =======
</TABLE>

The weighted average fair value of options granted during the year ended
December 28, 1996 is $1.60. For this purpose, fair value was determined
under the minimum value method, assuming a dividend yield of 0.0%, a risk
free interest rate of 5.3% and an expected holding period of five years.

In October 1997, the Company adopted new stock incentive plans (the "1997
Plans") for key executives and directors that allow for the grant of stock
options, restricted stock, stock appreciation rights ("SARs") and stock.
Under the 1997 Plans, there are 1,925,000 shares of Class A Common Stock
reserved for issuance. Options and SARs granted under the 1997 Plans will
expire no later than 10 years after the date of grant and the exercise
prices of options and grant values for SARs will be no less than 100% of
the fair market value of the Class A Common Stock on the date of grant. In
October 1997, the Board of Directors approved the grant of options to
purchase 601,500 shares of the Company's Class A Common Stock contingent
upon completion of the Offering (see Note 3) at an exercise price equal to
the offering price. These options will expire ten years from the date of
the Offering.

8. OTHER OPERATING COSTS, NET

During 1994 charges totaling $742,000 were recognized for writedowns and
disposals of equipment rendered obsolete by the Company's ongoing
modernization program. The Company also recorded a $792,000 charge in 1994
for stock based compensation associated with shares of the Company's common
stock deemed contributed to capital by a principal shareholder. Charges in
1995 relating to the modernization program totaled $4,391,000. Also in
1995, the Company recorded a $1,576,000 loss for the writedown of a
leasehold and other costs related to the relocation of the Company's
marketing headquarters in New York, and a $3,005,000 charge for the
writedown of assets associated with the Company's decision to discontinue
one of its apparel fabrics product lines. In 1996 the Company reversed
$849,000 of the prior year charge relating to the discontinued product line
due to better than anticipated recovery value of assets previously written
down. In addition, the Company reversed $84,000 of the reserve for the
marketing headquarters relocation primarily due to the early buyout of the
existing lease. These reversals were offset in part by net charges of
$505,000 for equipment rendered obsolete by the modernization program. At
December 28, 1996, other accrued liabilities includes approximately
$469,000 for a lease buyout to be settled in early 1997 and $570,000 for
costs related to idle equipment expected to be incurred within two years.

F-16
<PAGE>

DAN RIVER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

9. COMMITMENTS AND CONTINGENCIES

The Company leases certain manufacturing equipment, warehouses and office
facilities under operating leases that expire at various dates through
2011. Rental expense for 1994, 1995 and 1996 amounted to approximately
$14,247,000, $13,032,000 and $10,296,000, respectively, net of rental
income on noncancelable leases and subleases of approximately $1,697,000,
$1,544,000 and $76,000, respectively.

The future minimum lease payments at December 28, 1996 due under
operating leases with noncancelable terms in excess of one year are as
follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997....................................................... $ 5,310
1998....................................................... 4,243
1999....................................................... 2,817
2000....................................................... 2,044
2001....................................................... 2,001
Later...................................................... 16,283
-------
$32,698
=======
</TABLE>

Commitments for additions to plant and equipment amounted to
approximately $6,673,000 at December 28, 1996. Certain manufacturing and
warehouse leases contain renewal options at their fair rental values.

The Company is subject to various legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. It is impossible at this time for the Company to predict with
any certainty the outcome of such litigation. However, management is of the
opinion, based upon information presently available, that it is unlikely
that any such liability, to the extent not provided for through insurance
or otherwise, would be material in relation to the Company's consolidated
financial position.

10. FINANCIAL INSTRUMENTS

Off balance sheet risk

In connection with the purchase of cotton for anticipated manufacturing
requirements, the Company enters into cotton forward purchase commitments,
futures and option contracts in order to reduce the risk associated with
future price fluctuations. The Company does not engage in speculation.
There were no material cotton futures or options contracts outstanding at
December 30, 1995 or December 28, 1996. See Note 2 for information on the
Company's accounting policy with respect to cotton futures and option
contracts.

Concentrations of credit risk

Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of temporary cash
investments and trade accounts receivable. The Company places its temporary
cash investments with high credit quality financial institutions.
Concentration of credit risk with respect to trade accounts receivable is
managed by an in-house professional credit staff. The Company performs
periodic credit evaluations of its customers' financial condition and
generally does not require collateral.

F-17
<PAGE>

DAN RIVER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996

10. FINANCIAL INSTRUMENTS--(CONTINUED)

Fair values

The carrying values of cash and cash equivalents, accounts receivable and
accounts payable approximate fair values due to the short-term nature of
these instruments. The fair value of the Company's senior subordinated
notes, based on quoted market prices, was $109,200,000 and $120,600,000 at
December 30, 1995 and December 28, 1996, respectively, compared to a
carrying value of $120,000,000. Based on rates available for similar types
of borrowings, the carrying values of the Company's other debt approximated
fair value at December 30, 1995 and December 28, 1996.

11. QUARTERLY FINANCIAL DATA (UNAUDITED)

The Company's unaudited consolidated results of operations are presented
below (in thousands, except per share data):

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
<S> <C> <C> <C> <C>
Year ended December 30, 1995:
Net sales................................ $98,111 $96,972 $88,155 $101,563
Cost of sales............................ 78,877 75,872 70,068 82,062
Net income (loss)........................ 958 2,086 444 (3,230)
Earnings (loss) per share--
Primary................................ 0.08 0.18 0.04 (0.23)
Fully diluted.......................... 0.08 0.18 0.09 (0.23)
</TABLE>

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
<S> <C> <C> <C> <C>
Year ended December 28, 1996:
Net sales............................... $83,738 $93,203 $95,090 $107,536
Cost of sales........................... 70,134 74,940 75,901 86,408
Net income (loss)....................... (1,428) 1,336 2,305 3,473
Earnings (loss) per share--
Primary............................... (0.10) 0.09 0.16 0.25
Fully diluted......................... (0.10) 0.09 0.16 0.25
</TABLE>

The interim earnings (loss) per share amounts were computed as if each
quarter was a discrete period. As a result, the sum of the earnings (loss)
per share by quarter will not necessarily total the annual earnings per
share.

The fourth quarter of 1995 includes certain pre-tax charges amounting to
$8,972,000, relating to the Company's ongoing modernization program and
other items. These charges decreased net income by $5,424,000 ($0.38 per
share). See Note 8.

12. SUBSEQUENT EVENT

On February 3, 1997 the Company acquired substantially all of the assets
of The New Cherokee Corporation, a manufacturer of yarn-dyed shirting and
sportswear fabrics, for approximately $65 million in cash, subject to a
working capital adjustment, and the assumption of certain operating
liabilities. See Note 4 concerning the financing of the acquisition.

13. UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY

If the offering mentioned in Note 3 is consummated under the terms
presently anticipated, the put rights currently available to certain
shareholders (Note 5) will terminate. Unaudited pro forma shareholders'
equity reflects the assumed termination of these put rights.

F-18
<PAGE>

DAN RIVER INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 27, SHAREHOLDERS' EQUITY
1997 (NOTE 8)
------------- --------------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 1,416
Accounts receivable, net.................. 69,421
Inventories............................... 100,722
Prepaid expenses and other current assets. 3,530
Deferred income taxes..................... 5,893
--------
Total current assets.................... 180,982
Property, plant and equipment............... 314,476
Less accumulated depreciation and
amortization............................. (108,630)
--------
Net property, plant and equipment....... 205,846
Other assets................................ 6,806
--------
$393,634
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...... $ 11,943
Accounts payable.......................... 27,699
Accrued compensation and related benefits. 14,134
Other accrued expenses.................... 10,595
--------
Total current liabilities............... 64,371
Other liabilities:
Long-term debt............................ 206,522
Deferred income taxes..................... 16,451
Other deferred items...................... 11,343
--------
Total other liabilities................. 234,316
Common stock subject to put rights.......... 13,389 $ --
Shareholders' equity:
Preferred stock, $.01 par value;
authorized 50,000,000 shares; no shares
issued................................... -- --
Common stock, Class A, $.01 par value;
authorized 175,000,000 shares; issued and
outstanding 12,712,945 shares............ 127 127
Common stock, Class B, $.01 par value;
authorized 35,000,000 shares; no shares
issued................................... -- --
Common stock, Class C, $.01 par value;
authorized 5,000,000 shares; issued and
outstanding 1,442,220 shares............. 14 14
Additional paid-in capital................ 61,005 74,394
Retained earnings......................... 21,021 21,021
Pension liability adjustment.............. (609) (609)
-------- --------
Total shareholders' equity.............. 81,558 94,947
-------- --------
$393,634 $393,634
======== ========
</TABLE>

See accompanying notes.

F-19
<PAGE>

DAN RIVER INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
------------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
Net sales........................................ $ 272,031 $ 344,189
Costs and expenses:
Cost of sales.................................. 220,975 268,739
Selling, general and administrative expenses... 33,866 39,212
Other operating costs, net..................... -- 7,875
----------- -----------
Operating income................................. 17,190 28,363
Other income (expense), net...................... 429 (269)
Interest expense................................. (13,959) (16,177)
----------- -----------
Income before income taxes....................... 3,660 11,917
Provision for income taxes....................... 1,447 4,594
----------- -----------
Net income....................................... $ 2,213 $ 7,323
=========== ===========
Earnings per share............................... $ 0.16 $ 0.52
=========== ===========
Weighted average shares outstanding.............. 14,155,165 14,155,165
=========== ===========
</TABLE>

See accompanying notes.

F-20
<PAGE>

DAN RIVER INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 2,213 $ 7,323
Adjustments to reconcile net income to net cash
provided by operating activities:
Noncash interest expense....................... 890 1,031
Depreciation and amortization.................. 15,658 20,839
Deferred income taxes.......................... 411 (1,656)
Loss on writedown/disposal of equipment........ 139 78
Writedown-plant closure........................ -- 7,875
Changes in operating assets and liabilities,
net of business acquired:
Accounts receivable............................ 2,788 1,633
Inventories.................................... 7,259 (16,432)
Prepaid expenses and other assets.............. (279) (313)
Accounts payable and accrued expenses.......... (1,512) 4,732
Other liabilities.............................. 263 2,196
-------- --------
Net cash provided by operating activities.... 27,830 27,306
Cash flows from investing activities:
Total capital expenditures....................... (24,419) (13,711)
Plant and equipment acquired in exchange for
debt.......................................... 4,236 1,113
Accrued equipment purchases.................... (1,089) (1,424)
-------- --------
Capital expenditures in cash................... (21,272) (14,022)
Acquisition of business.......................... -- (64,661)
Proceeds from sale of discontinued product line.. 2,801 --
Proceeds from sale of assets..................... 1,347 1,777
-------- --------
Net cash used by investing activities........ (17,124) (76,906)
Cash flows from financing activities:
Payments of long-term debt....................... (16,818) (7,585)
Net payments--working capital facility........... (18,800) (5,900)
Proceeds from issuance of long-term debt......... 25,313 60,783
Payments of debt issuance costs.................. -- (1,324)
-------- --------
Net cash provided (used) by financing activities... (10,305) 45,974
-------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 401 (3,626)
Cash and cash equivalents at beginning of period... 1,540 5,042
-------- --------
Cash and cash equivalents at end of period......... $ 1,941 $ 1,416
======== ========
</TABLE>

See accompanying notes.

F-21
<PAGE>

DAN RIVER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
include the accounts of Dan River Inc. and its wholly-owned subsidiary, Dan
River Factory Stores, Inc. (together, the "Company"). In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of results for the interim
periods presented have been included. Interim results are not necessarily
indicative of results for a full year. For further information, refer to
the consolidated financial statements and notes thereto included elsewhere
in this Prospectus.

2. EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which is required to be adopted in the fourth quarter of fiscal
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options will be excluded. The Company
does not expect SFAS 128 to have a significant effect on the calculation of
basic and diluted earnings per share, except the antidilutive effect of the
convertible subordinated junior notes will not be included in the
calculation of diluted earnings per share for the year ended December 30,
1995.

3. INVENTORIES

The components of inventory at September 27, 1997 are as follows (in
thousands):

<TABLE>
<S> <C>
Finished goods.................................................. $ 30,512
Work in process................................................. 57,631
Raw materials................................................... 3,588
Supplies........................................................ 8,991
--------
Total Inventories........................................... $100,722
========
</TABLE>

4. SHAREHOLDERS' EQUITY

Activity in shareholders' equity is as follows:

On September 26, 1997, the Company filed a registration statement for the
sale of Class A Common Stock to the public (the "Offering").

F-22
<PAGE>

DAN RIVER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)

4. SHAREHOLDERS' EQUITY--(CONTINUED)

September 27, 1997), and 1,500,000 authorized shares of nonvoting common
stock, par value $.01 per share ("Old Nonvoting Stock") (82,413 shares of
which were outstanding as of September 27, 1997).

5. OTHER OPERATING COSTS, NET

During the quarter ended June 28, 1997, the Company recorded a pre-tax
charge of $7,875,000 as a result of its decision to close its Riverside
apparel fabrics weaving operation in Danville, Virginia. The charge
includes $373,000 for severance and other benefits related to approximately
200 employees. The remainder of the charge relates principally to
writedowns and other costs associated with the divestitures of real estate
and equipment. The Company will close the facility during the fourth
quarter of 1997 and anticipates that substantially all of the facility's
assets will be relocated or disposed of within a 2-year period.

6. INCOME TAXES

At December 28, 1996, the Company had net operating loss carryforwards of
$900,000, which expire in 2005. In addition, the Company had available a
minimum tax credit carryforward of $8,100,000, and investment credit and
other general business credit carryforwards of $5,300,000. If not used,
substantially all of the investment credit and other general business
credit carryforwards will expire in the years 1997 through 2000.

F-23
<PAGE>

DAN RIVER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)

6. INCOME TAXES--(CONTINUED)

From the date of the Restructuring through December 28, 1996, the Company
utilized an aggregate of $16,876,000 in net operating loss carryforwards
and $1,723,000 in general business credit carryforwards for federal income
tax purposes that are subject to review by the IRS. The utilization of
these carryforwards and related tax benefits could be significantly
restricted or eliminated if the Restructuring is ultimately deemed to
constitute a "change in ownership."

7. ACQUISITION

On February 3, 1997, the Company acquired substantially all the assets of
The New Cherokee Corporation ("Cherokee") for $65 million in cash, subject
to a working capital adjustment, and the assumption of certain operating
liabilities. The purchase price and associated fees and expenses of
approximately $2 million were funded at closing with $12.1 million of cash
on hand, and borrowings under a new working capital line of credit and term
loan of $19.9 million and $35 million, respectively. In July 1997, as a
result of the working capital adjustment, the Company received $1.7 million
from an escrow deposit. The acquisition has been accounted for using the
purchase method of accounting and the preliminary allocation of the
purchase price did not result in the recording of goodwill.

The following summarized, unaudited pro forma results of operations
assume the acquisition of Cherokee had occurred at the beginning of each
period presented. The pro forma information is presented for informational
purposes and is not indicative of results which would have occurred or
which may occur in the future.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
------------- -------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales........................................ $350,294 $353,399
Net income (loss)................................ $ (101) $ 7,794
Earnings (loss) per share........................ $ (0.01) $ 0.55
</TABLE>

8. PRO FORMA SHAREHOLDERS' EQUITY

If the offering mentioned in Note 4 is consummated under the terms
presently anticipated, the put rights currently available to certain
shareholders will terminate. Unaudited pro forma shareholders' equity
reflects the assumed termination of these put rights.

9. RECENT ACCOUNTING PRONOUNCEMENT

In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information",
effective for years beginning after December 15, 1997. SFAS 131 requires
that a public company report financial and descriptive information about
its reportable operating segments pursuant to criteria that differ from
those of SFAS 14, "Financial Reporting for Segments of a Business
Enterprise". Operating segments, as defined, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. The financial
information to be reported includes segment profit or loss, certain revenue
and expense items and segment assets and reconciliations to corresponding
amounts in the general purpose financial statements. SFAS 131 also requires
information about products and services, geographic areas of operation, and
major customers. The Company is required to adopt SFAS 131 at the end of
its 1998 fiscal year. The Company has not completed its analysis of the
effect of adoption on its financial statement disclosure, however, the
adoption of SFAS 131 will not affect results of operations or financial
position.

F-24
<PAGE>

DAN RIVER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)

10. SUBSEQUENT EVENT

During fiscal 1996, to improve manufacturing performance, the Company
implemented a change in the construction of a substantial portion of the
fabrics used in its home fashions accessory products. However, this change
caused the polyester content with respect to a significant portion of the
fabrics to increase, and the Company failed to change the labeling of the
products produced from such fabric. Consequently, such products have been
inaccurately labeled as containing 65% polyester when in fact such products
contain 80% polyester. One of the Company's largest home fashions products
customers recently contacted the Company concerning this mislabeling. The
Company is currently in the process of correcting the labeling on all such
products held in its inventory and contacting customers with mislabeled
products in their inventory for the purpose of implementing a program to
correct the labeling error. To date the Company has contacted home fashions
products customers (including its top five), which accounted for over 50%
of the Company's net sales attributable to home fashions products during
the first nine months of fiscal 1997. These customers have indicated an
intention to cooperate with the Company's relabeling program, which the
Company estimates will cost between $250,000-$500,000. Accordingly, the
Company does not believe customers will return a substantial portion of
such mislabeled inventory or that any material customer will terminate its
relationship with the Company. To the extent mislabeled merchandise is
returned, the Company intends to properly label such inventory and resell
it. Nevertheless, the return of a substantial amount of mislabeled
inventory and any delay or inability to resell it or the termination of a
material customer relationship would have a material adverse effect on the
Company's results of operations during the period in which such returns or
termination occurs. In addition, the Company may be subject to fines
relating to such mislabeling but believes, based on currently available
information, that such fines, if imposed, will not be material in amount.

F-25
<PAGE>

DAN RIVER INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

On February 3, 1997 Dan River Inc. (the "Company") acquired substantially
all of the assets of The New Cherokee Corporation ("Cherokee") for $65 million
in cash, subject to a working capital adjustment, and the assumption of
certain operating liabilities.

The Unaudited Pro Forma Condensed Consolidated Statements of Income for the
fiscal year ended December 28, 1996 and nine months ended September 27, 1997
give effect to the acquisition of Cherokee (the "Acquisition") and the
Company's initial public offering of common stock (the "Offering") as if the
Acquisition and Offering had occurred on the first day of the periods
presented. For purposes of presenting the pro forma financial information of
Cherokee for the year ended December 28, 1996, the results of Cherokee's
operations for its fiscal year ended September 28, 1996 were adjusted by
adding the results of operations for the quarter ended December 28, 1996 and
omitting the results for the comparative quarter ended December 30, 1995. The
revenues and net loss of Cherokee omitted for the quarter ended December 30,
1995 were $27,521,000 and $1,655,000, respectively.

The pro forma information does not purport to reflect the results of
operations that actually would have resulted had the Acquisition and the
Offering occurred as of the dates indicated or to the project the results of
operations for any future period.

The Unaudited Pro Forma Condensed Consolidated Statements of Income should
be read in conjunction with the accompanying notes and the audited financial
statements, including the notes thereto, of the Company and Cherokee,
respectively, included elsewhere in this Prospectus.

F-26
<PAGE>

DAN RIVER INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED DECEMBER 28, 1996

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------
DAN RIVER INC. CHEROKEE CHEROKEE ACQUISITION OFFERING PRO FORMA
-------------- -------- -------------------- -------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net Sales............... $ 379,567 $101,072 $ 480,639
Cost and expenses:
Cost of sales......... 307,383 93,667 (1,000)(1) 399,602
372 (2)
(820)(3)
Selling, general and
administrative
expenses............. 45,673 10,221 101 (2) 51,863
(4,132)(4)
Other operating costs,
net.................. (428) 3,350 (3,350)(5) 392
820 (3)
---------- -------- ------- ------ ----------
Operating income (loss). 26,939 (6,166) 8,009 28,782
Other income (expense),
net.................... 485 (47) 438
Interest expense........ (18,168) (3,358) (2,310)(6) 5,434(7) (18,402)
---------- -------- ------- ------ ----------
Income (loss) before
income taxes........... 9,256 (9,571) 5,699 5,434 10,818
Provision for income
taxes.................. 3,570 9,324 (10,816)(8) 2,098(8) 4,176
---------- -------- ------- ------ ----------
Net income (loss)....... $ 5,686 $(18,895) $16,515 $3,336 $ 6,642
========== ======== ======= ====== ==========
Earnings per share...... $ 0.40 $ 0.35
========== ==========
Weighted average shares
outstanding............ 14,155,165 18,855,165
========== ==========
</TABLE>
- --------
(1) Decrease in depreciation expense based on adjusted fixed asset values and
related estimated remaining useful lives.
(2) Additional costs associated with providing a pension benefit to Cherokee
employees hired by the Company.
(3) Reclassification of equipment writedowns from Cost of sales to Other
operating costs, net.
(4) Elimination of certain selling, general and administrative expenses,
including: salaries and benefits of certain officers and other employees
of Cherokee who were not employed by Dan River Inc. after the Acquisition;
and costs associated with Cherokee's marketing offices, which Dan River
vacated shortly after the Acquisition.
(5) Elimination of expenses associated with Cherokee's Employee Stock
Ownership Plan, the obligations which were not assumed in connection with
the Acquisition.
(6) Net increase in interest expense resulting from the Acquisition, as
follows:

<TABLE>
<S> <C>
Interest and amortization of related deferred finance costs on
approximately $67 million in borrowings incurred to finance
the Acquisition, with assumed average annual interest rates
of approximately 7.8%........................................ $ 5,593,000
Interest on debt assumed in the Acquisition................... 75,000
Elimination of Cherokee historical interest expense........... (3,358,000)
-----------
Net increase in interest expense.............................. $ 2,310,000
===========
</TABLE>
(7) Decrease in interest expense attributable to the assumed repayment of $65
million in borrowings related to the Acquisition out of the net proceeds
from the Offering.
(8) Adjustment of income tax expense to reflect an assumed effective tax rate
of 38.6% of pre-tax income.

F-27
<PAGE>

DAN RIVER INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME

NINE MONTHS ENDED SEPTEMBER 27, 1997

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------
CHEROKEE
DAN RIVER INC. CHEROKEE(1) ACQUISITION OFFERING PRO FORMA
-------------- ----------- ------------ ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net Sales............... $ 344,189 $9,210 $ 353,399
Cost and expenses:
Cost of sales......... 268,739 7,208 (83)(2) 275,895
31 (3)
Selling, general and
administrative
expenses............. 39,212 1,085 8 (3) 39,961
(344)(4)
Other operating costs,
net.................... 7,875 302 (302)(5) 7,875
----------- ------ --------- ----------- -----------
Operating income........ 28,363 615 690 29,668
Other income (expense),
net.................... (269) 7 (262)
Interest expense........ (16,177) (318) (224)(6) 4,144(7) (12,575)
----------- ------ --------- ----------- -----------
Income before income
taxes.................. 11,917 304 466 4,144 16,831
Provision for income
taxes.................. 4,594 0 299 (8) 1,600(8) 6,493
----------- ------ --------- ----------- -----------
Net income.............. $ 7,323 $ 304 $ 167 $ 2,544 $ 10,338
=========== ====== ========= =========== ===========
Earnings per share...... $ 0.52 $ 0.55
=========== ===========
Weighted average shares
outstanding............ 14,155,165 18,855,165
=========== ===========
</TABLE>
- --------
(1) Reflects the operating results of Cherokee for the portion of 1997 prior
to the Acquisition.
(2) Decrease in depreciation expense based on adjusted fixed asset values and
related estimated remaining useful lives.
(3) Additional costs associated with providing a pension benefit to Cherokee
employees hired by the Company.
(4) Elimination of certain selling, general and administrative expenses,
including: salaries and benefits of certain officers and other employees
of Cherokee who were not employed by Dan River Inc. after the Acquisition,
and; costs associated with Cherokee's marketing offices, which Dan River
vacated shortly after the Acquisition.
(5) Elimination of expenses associated with Cherokee's Employee Stock
Ownership Plan, the obligations which were not assumed in connection with
the Acquisition.
(6) Net increase in interest expense resulting from the Acquisition
(representing the five week period prior to the consummation of the
Acquisition on February 3, 1997) as follows:
<TABLE>
<S> <C>
Interest and amortization of certain deferred finance costs on
approximately $67 million in borrowings incurred to finance
the Acquisition, with assumed average annual interest rates of
approximately 7.8%............................................ $ 535,000
Interest on debt assumed in the Acquisition.................... 7,000
Elimination of Cherokee historical interest expense............ (318,000)
---------
Net increase in interest expense.............................. $ 224,000
=========
</TABLE>
(7) Decrease in interest expense attributable to the assumed repayment of $65
million in borrowings related to the Acquisition out of the net proceeds
from the Offering.
(8) Adjustment of income tax expense to reflect an assumed effective tax rate
of 38.6% of pre-tax income.

F-28
<PAGE>

INDEPENDENT AUDITOR'S REPORT

Board of DirectorsThe New Cherokee CorporationHarris, North Carolina

We have audited the accompanying balance sheets of The New Cherokee
Corporation as of September 30, 1995 and September 28, 1996 and the related
statements of operations, changes in shareholders' equity, and cash flows for
the years ended October 1, 1994, September 30, 1995 and September 28, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The New Cherokee
Corporation as of September 30, 1995 and September 28, 1996, and the results
of its operations and its cash flows for the years ended October 1, 1994,
September 30, 1995 and September 28, 1996 in conformity with generally
accepted accounting principles.

As discussed in Note 15 to the financial statements, the Company changed its
method of accounting for certain inventories from the last-in, first-out
(LIFO) basis to the first-in, first-out (FIFO) basis in 1995.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, as of September 28, 1996, the Company was in default
under certain covenants of its revolving and term credit agreements which
causes the balances to become due on demand. In addition, as discussed in Note
19, negotiations are presently under way with a third party to sell
substantially all the assets of the Company. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcomes of these uncertainties.

Pugh & Company, P.C.

Certified Public
AccountantsKnoxville,
TennesseeOctober 18, 1996(Except for
Notes 8 and 19, as to whichthe dates
are October 31, 1996 andNovember 20,
1996, respectively)

F-29
<PAGE>

THE NEW CHEROKEE CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 28,
1995 1996
ASSETS ------------- -------------
<S> <C> <C>
Current Assets
Cash............................................. $ 315,614 $ 497,726
Trade Accounts Receivable........................ 24,488,362 22,458,355
Inventories...................................... 20,024,645 12,389,823
Prepaid Items and Other.......................... 59,745 180,619
------------ ------------
Total Current Assets........................... 44,888,366 35,526,523
------------ ------------
Property, Plant and Equipment, Net................. 53,867,962 51,961,090
------------ ------------
Other Assets
Cash Value of Life Insurance, Net of Policy Loans
of $137,172..................................... 2,451,501 2,047,658
Intangible Assets, Net of Accumulated
Amortization of $303,184 and $335,161,
respectively.................................... 127,877 115,900
Net Deferred Tax Asset........................... 8,466,647 -0-
Other............................................ 841,290 1,255,592
------------ ------------
Total Other Assets............................. 11,887,315 3,419,150
------------ ------------
Total Assets....................................... $110,643,643 $ 90,906,763
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Checks Written in Excess of Cash on Deposit...... $ 1,398,694 $ 2,320,832
Trade Accounts Payable........................... 5,504,068 4,228,776
Accrued Expenses
Litigation Settlement.......................... 1,715,000 -0-
ESOP Benefits.................................. 1,500,000 646,630
Other.......................................... 2,021,401 2,018,585
Notes Payable.................................... 4,000,000 7,000,000
Current Maturities of Long-Term Debt............. 2,576,179 35,896,284
------------ ------------
Total Current Liabilities...................... 18,715,342 52,111,107
------------ ------------
Long-Term Liabilities
Long-Term Debt................................... 35,897,296 261,512
Accrued Rent..................................... 325,000 346,739
Deferred Compensation Plans...................... 6,277,955 5,203,294
------------ ------------
Total Long-Term Liabilities.................... 42,500,251 5,811,545
------------ ------------
Shareholders' Equity
Preferred Stock.................................. 12,000,000 12,000,000
Common Stock..................................... 17,979,310 17,979,310
Capital in Excess of Par Value................... 20,384,496 20,384,496
Retained Earnings (Deficit)...................... 4,834,200 (14,172,239)
Treasury Stock, 4,886 Shares at Par.............. (48,860) (48,860)
Deferred Compensation--Restricted Stock 47,709
Shares at Cost.................................. (1,236,721) (1,236,721)
Notes Receivable from ESOP....................... (4,484,375) (1,921,875)
------------ ------------
Total Shareholders' Equity..................... 49,428,050 32,984,111
------------ ------------
Total Liabilities and Shareholders' Equity......... $110,643,643 $ 90,906,763
============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-30
<PAGE>

THE NEW CHEROKEE CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------
OCTOBER 1,
1994 SEPTEMBER 30, SEPTEMBER 28,
(RESTATED) 1995 1996
------------ -------------- --------------
<S> <C> <C> <C>
Sales.............................. $110,202,321 $125,757,564 $105,783,472
Cost of Goods Manufactured and
Sold.............................. 95,238,678 110,767,026 99,073,099
------------ ------------ ------------
Gross Margin....................... 14,963,643 14,990,538 6,710,373
Selling, General and Administrative
Expenses.......................... 15,382,094 14,958,285 10,592,241
ESOP Contribution.................. 6,995,259 7,085,499 3,697,774
------------ ------------ ------------
Net Operating Loss................. (7,413,710) (7,053,246) (7,579,642)
------------ ------------ ------------
Other Income (Expense)
Interest Income.................. 25,382 13,088 8,988
Miscellaneous Income............. 22,072 354,662 408,008
Interest Expense (Net of
Capitalized Interest of $489,854,
$-0- and $-0-, Respectively)...... (603,293) (2,935,312) (3,186,263)
Miscellaneous Expense (Including
Litigation Settlements of
$597,000, $1,715,000 and $-0-,
Respectively)..................... (670,582) (1,831,187) (190,883)
------------ ------------ ------------
Net Other Expense................ (1,226,421) (4,398,749) (2,960,150)
------------ ------------ ------------
Loss Before Income Taxes (Benefit). (8,640,131) (11,451,995) (10,539,792)
Income Taxes (Benefit)............. (2,784,210) (3,794,515) 8,466,647
------------ ------------ ------------
Net Loss........................... $ (5,855,921) $ (7,657,480) $(19,006,439)
============ ============ ============
Loss per Share:
Primary Loss Per Share Amounts... $ (3.26) $ (4.27) $ (10.60)
============ ============ ============
Fully Diluted Loss Per Share
Amounts......................... $ (2.55) $ (3.20) $ (7.94)
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-31
<PAGE>

THE NEW CHEROKEE CORPORATION

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE YEARS ENDED SEPTEMBER 28, 1996

<TABLE>
<CAPTION>
CAPITAL IN RETAINED
PREFERRED COMMON EXCESS OF EARNINGS
STOCK STOCK PAR VALUE (DEFICIT)
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balances, October 2, 1993,
as Originally Stated....... $12,000,000 $17,979,310 $20,459,421 $ 14,891,613
Restatement for Change in
Accounting Principle;
Change in Method of
Accounting for Certain
Inventories From LIFO to
FIFO..................... -0- -0- -0- 3,455,988
----------- ----------- ----------- ------------
Balances, October 2, 1993,
as Restated................ 12,000,000 17,979,310 20,459,421 18,347,601
Repayment of Loans to
ESOP..................... -0- -0- -0- -0-
Net Loss.................. -0- -0- -0- (5,855,921)
----------- ----------- ----------- ------------
Balances, October 1, 1994... 12,000,000 17,979,310 20,459,421 12,491,680
Repayment of Loans to
ESOP..................... -0- -0- -0- -0-
Receipt of 4,682 Shares of
Common Stock from
Executive Deferred Stock
Bonus Trust.............. -0- -0- (74,925) -0-
Net Loss.................. -0- -0- -0- (7,657,480)
----------- ----------- ----------- ------------
Balances, September 30,
1995....................... 12,000,000 17,979,310 20,384,496 4,834,200
Repayment of Loans to
ESOP..................... -0- -0- -0- -0-
Net Loss.................. -0- -0- -0- (19,006,439)
----------- ----------- ----------- ------------
Balances, September 28,
1996....................... $12,000,000 $17,979,310 $20,384,496 $(14,172,239)
=========== =========== =========== ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-32
<PAGE>

THE NEW CHEROKEE CORPORATION

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)

FOR THE THREE YEARS ENDED SEPTEMBER 28, 1996

<TABLE>
<CAPTION>
DEFERRED
COMPENSATION- NOTES TOTAL
TREASURY RESTRICTED RECEIVABLE SHAREHOLDERS'
STOCK STOCK FROM ESOP EQUITY
--------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Balances, October 2, 1993,
as Originally Stated..... $ (2,040) $(1,358,466) $(15,491,318) $48,478,520
Restatement for Change
in Accounting
Principle; Change in
Method of Accounting
for Certain Inventories
From LIFO to FIFO...... -0- -0- -0- 3,455,988
-------- ----------- ------------ -----------
Balances, October 2, 1993,
as Restated.............. (2,040) (1,358,466) (15,491,318) 51,934,508
Repayment of Loans to
ESOP................... -0- -0- 5,923,608 5,923,608
Net Loss................ -0- -0- -0- (5,855,921)
-------- ----------- ------------ -----------
Balances, October 1, 1994. (2,040) (1,358,466) (9,567,710) 52,002,195
Repayment of Loans to
ESOP................... -0- -0- 5,083,335 5,083,335
Receipt of 4,682 Shares
of Common Stock from
Executive Deferred
Stock Bonus Trust...... (46,820) 121,745 -0- -0-
Net Loss................ -0- -0- -0- (7,657,480)
-------- ----------- ------------ -----------
Balances, September 30,
1995..................... (48,860) (1,236,721) (4,484,375) 49,428,050
Repayment of Loans to
ESOP................... -0- -0- 2,562,500 2,562,500
Net Loss................ -0- -0- -0- (19,006,439)
-------- ----------- ------------ -----------
Balances, September 28,
1996..................... $(48,860) $(1,236,721) $ (1,921,875) $32,984,111
======== =========== ============ ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-33
<PAGE>

THE NEW CHEROKEE CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------
OCTOBER 1,
1994 SEPTEMBER 30, SEPTEMBER 28,
(RESTATED) 1995 1996
------------ -------------- --------------
<S> <C> <C> <C>
Cash Flows from Operating
Activities:
Cash Received from Customers..... $106,144,681 $126,116,453 $107,813,479
Cash Paid to Suppliers, Employees
and for Selling, General and
Administrative Expenses......... (97,408,911) (119,973,720) (99,478,559)
ESOP Contributions............... (6,995,259) (7,085,499) (3,697,774)
Interest Received................ 25,382 13,088 8,988
Interest Paid.................... (1,093,147) (2,854,811) (3,321,526)
Miscellaneous Receipts........... 22,072 1,489,626 1,018,014
------------ ------------ ------------
Net Cash Provided by (Used in)
Operating Activities.......... 694,818 (2,294,863) 2,342,622
------------ ------------ ------------
Cash Flows from Investing
Activities:
Proceeds From Sales of Equipment. -0- 2,117,327 77,076
Purchases of Property, Plant and
Equipment....................... (30,981,220) (5,658,132) (6,347,636)
(Increase) in Other Assets....... -0- (20,000) 20,000
(Increase) in Cash Value of Life
Insurance, Net.................. (325,410) (459,537) (80,363)
Repayment on Loans to ESOP....... 5,923,608 5,083,335 2,562,500
Receipt on Note Receivable....... 824 1,613 1,454
Increase in Note Receivable...... (125,000) -0- -0-
------------ ------------ ------------
Net Cash Provided by (Used in)
Investing Activities.......... (25,507,198) 1,064,606 (3,766,969)
------------ ------------ ------------
Cash Flows from Financing
Activities:
Increase (Decrease) in Checks
Written in Excess of Cash on
Deposit......................... (403,103) 263,610 922,138
Net Proceeds From Notes Payable.. -0- 4,000,000 3,000,000
Proceeds from Long-Term Debt
Borrowing....................... 31,200,000 3,700,000 800,000
Repayment on Long-Term Debt
Borrowing....................... (5,979,559) (6,432,970) (3,115,679)
------------ ------------ ------------
Net Cash Activities by
Financing Activities.......... 24,817,338 1,530,640 1,606,459
------------ ------------ ------------
Net Increase in Cash............... 4,958 300,383 182,112
Cash at Beginning of Year.......... 10,273 15,231 315,614
------------ ------------ ------------
Cash at End of Year................ $ 15,231 $ 315,614 $ 497,726
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-34
<PAGE>

THE NEW CHEROKEE CORPORATION

STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------
OCTOBER 1,
1994 SEPTEMBER 30, SEPTEMBER 28,
(RESTATED) 1995 1996
----------- ------------- -------------
<S> <C> <C> <C>
Reconciliation of Net Loss to Net Cash
Provided by (Used in) Operating
Activities:
Net Loss............................. $(5,855,921) $(7,657,480) $(19,006,439)
----------- ----------- ------------
Adjustments to Reconcile Net Loss to
Net Cash Provided by (Used in)
Operating Activities:
Depreciation......................... 7,540,814 8,688,294 7,567,426
Amortization......................... 92,433 40,923 31,977
Loss on Sales of Equipment........... -0- 924,964 610,006
Deferred Compensation Plans, Net..... 190,215 (327,914) (1,026,211)
Deferred Income Taxes (Benefit)...... (2,552,490) (3,794,515) 8,466,647
(Increase) Decrease in Assets:
Trade Accounts Receivable............ (4,057,640) 358,889 2,030,007
Inventories.......................... 2,637,793 (3,466,709) 7,634,822
Prepaid Items and Other.............. (47,064) 387,071 (140,874)
Increase (Decrease) in Liabilities:
Accounts Payable..................... 2,737,113 (566,489) (1,275,292)
Accrued Expenses and Other........... 9,565 3,118,103 (2,549,447)
----------- ----------- ------------
Total Adjustments................... 6,550,739 5,362,617 21,349,061
----------- ----------- ------------
Net Cash Provided by (Used in)
Operating Activities.............. $ 694,818 $(2,294,863) $ 2,342,622
=========== =========== ============
Supplementary Disclosure of Noncash
Financing Activities:
Transfer of Restricted Stock to
Treasury Stock....................... $ -0- $ 121,745 $ -0-
=========== =========== ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-35
<PAGE>

THE NEW CHEROKEE CORPORATION

NOTES TO FINANCIAL STATEMENTS

OCTOBER 1, 1994, SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The New Cherokee Corporation (the "Company") is a manufacturer of yarn
and woven fabrics for textile industry customers principally located in the
eastern United States. The Company utilizes the fifty-two/fifty-three week
method for its year-end, which is always the Saturday closest to September
30. This summary of significant accounting policies of the Company is
presented to assist in understanding the Company's financial statements.
The financial statements and notes are representations of the Company's
management who is responsible for their integrity and objectivity. These
accounting policies conform to generally accepted accounting principles and
have been consistently applied in the preparation of the financial
statements. The summary of significant accounting policies is:

Use of Estimates

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

Inventories

Inventories, consisting of finished goods, stock in process, raw
materials in bales, purchased yarn and other manufacturing supplies are
stated at the lower of cost or market, using the first-in, first-out (FIFO)
method (see Notes 3 and 15).

Futures Contracts

The Company enters into futures contracts to hedge certain raw material
purchases, principally cotton, with the objective of minimizing cost risk
due to market fluctuations. Any gains or losses from hedging transactions
are included as part of the inventory cost.

Intangible Assets

Intangible assets consist of organization costs, which represent past
merger expenses and are being amortized using the straight-line method over
a five year period; and loan costs, which represent expenses incurred in
regards to long-term debt borrowing or refinancing and are being amortized
using the straight-line method over the lives of the loans, which range
from two to eight years.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is
computed using both straight-line and accelerated methods based on
estimated useful lives of 5 to 50 years. The Company uses accelerated
methods for income tax reporting purposes, except for the asset under
capital lease which is treated as an operating lease for income tax
reporting purposes.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis of certain notes
receivable from the Company's employee stock ownership plan, inventories,
accrued expenses, deferred compensation plans liabilities; and calculation
of depreciation expense for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Deferred taxes also are recognized for operating losses which are available
to offset future taxable income and tax credits which are available to
offset future federal income taxes.

F-36
<PAGE>

THE NEW CHEROKEE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

OCTOBER 1, 1994, SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
(CONTINUED)

Checks Written in Excess of Cash on Deposit

Checks written in excess of cash on deposit represents checks which have
not yet been presented for payment. The Company's policy is to fund certain
zero-balance accounts as checks are presented for payment.

2. TRADE ACCOUNTS RECEIVABLE

Factoring Agreement

The Company factors principally all of its receivables from yarn and
fabric sales with the factor assuming all credit risk. The Company receives
payment from the factor based on the average due date of the invoices plus
seven days for delays. Receivables consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 28,
1995 1996
------------- -------------
<S> <C> <C>
Factored......................................... $23,409,234 $21,277,099
Other............................................ 1,079,128 1,181,256
----------- -----------
$24,488,362 $22,458,355
=========== ===========
</TABLE>

Included in accounts receivable--other as of September 30, 1995 and
September 28, 1996 are receivables totalling $802,170 for the sales of
cotton and equipment relating to the closure of the Spindale plant's yarn
mill and $140,695 for the sales of cotton related to the closure of the
Spindale plant's yarn mill (see Note 16), respectively.

3. INVENTORIES

Inventories, priced on the basis described in Note 1, consist of the
following:

<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 28,
1995 1996
------------- -------------
<S> <C> <C>
Finished goods................................. $12,124,461 $ 6,177,616
Stock in process............................... 5,103,017 4,422,010
Cotton in bales................................ 702,154 556,181
Polyester in bales............................. 81,553 57,904
Rayon in bales................................. 126,603 429,861
Purchased yarn................................. 1,442,934 337,627
Dyes and chemicals............................. 392,736 348,093
Supplies....................................... 41,603 41,603
Waste.......................................... 9,584 18,928
----------- -----------
$20,024,645 $12,389,823
=========== ===========
</TABLE>

In 1995, the Company changed its method of accounting for certain
inventories from the last-in, first-out (LIFO) method to the first-in,
first-out (FIFO) method of inventory valuation (see Note 15).

F-37
<PAGE>

THE NEW CHEROKEE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

OCTOBER 1, 1994, SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996

4. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

The Company has a defined contribution employee stock ownership plan
(ESOP) covering substantially all employees. The ESOP was originally funded
primarily by loans from the Company, which obtained the funds through loans
from banks. The Company's bank loans and loans to the ESOP have similar
terms and each is repayable within one year with interest at 4.898% for
both 1995 and 1996 (4.386% to 4.898% in 1994). The ESOP obtains the funds
to repay its loans primarily through tax deductible contributions made by
the Company to the ESOP. The maximum contributions to all defined
contribution plans cannot exceed twenty-five percent of the compensation of
eligible employees plus contributions to pay interest on the ESOP loans. A
summary of total ESOP contributions for 1994, 1995, and 1996 is:

<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Contributions to ESOP for:
Debt Service:
Principal Payments..................... $5,923,608 $5,083,335 $2,562,500
Interest Payments...................... 486,374 338,132 164,646
Administrative Expenses................. 89,594 54,247 17,797
Benefits Accrued or Paid to
Participants........................... 495,683 1,609,785 952,831
---------- ---------- ----------
$6,995,259 $7,085,499 $3,697,774
========== ========== ==========
</TABLE>

In 1995, benefits accrued to participants include approximately
$1,125,000 related to employees terminated due to the closure of the
Spindale plant's yarn mill (see Note 16).

Certain notes, which were expensed as contributions in a prior year for
financial accounting purposes, will be deducted for income tax purposes as
contributions are made to retire the debt. For financial accounting
purposes, the bank loans are reflected as liabilities and the Company loans
to the ESOP are reflected as a reduction of stockholders' equity. The notes
receivable from the ESOP are secured by a stock pledge agreement which
pledges all shares of stock owned by the ESOP, including any stock rights,
to the Company (see Note 8). The bank, and subsequently the Company,
release a calculated number of pledged shares annually as specified by the
agreements. Subsequently, the ESOP allocates to plan participants' accounts
the shares released. Since the Company's common stock is not readily
tradeable on an established market, the ESOP requires that participants'
distributions be made in the form of cash payments in the amount of each
participant's account value, unless the participant specifically requests
to receive shares of the Company's common stock. As of September 30, 1995
and September 28, 1996, the shares released and allocated and their market
value per share, which is based on the 1994 and 1995 ESOP stock valuations
as performed by a third party appraiser, Management Planning, Inc., were
1,374,539 and 1,496,660, respectively, and $14.74 and $10.60, respectively,
which represents a contingent repurchase obligation of $20,260,705 and
$15,864,596, respectively.

5. PROFIT SHARING PLAN

The Company has a profit sharing plan to enable employees to share in its
profits. All employees with one year of service are eligible to contribute
two percent of their total compensation, while the Company may contribute a
discretionary amount as determined annually by the board of directors. The
Company's board of directors elected not to make a discretionary
contribution for the years 1994, 1995 and 1996.

F-38
<PAGE>

THE NEW CHEROKEE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

OCTOBER 1, 1994, SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996

6. DEFERRED COMPENSATION PLANS

To provide compensation for the Company's chairman (effective May 1,
1990) and the president (effective March 1, 1992), the Company contracted
to defer certain payments of bonuses and salaries due them until they
retire. The terms of the contracts permit the Company to invest the funds
at the officers' risk, with the income or loss from such investments, net
of applicable income taxes, being credited or charged to the deferred
compensation plans. The Company deducts this compensation for income tax
purposes in the year it is actually paid. The net deferred compensation
expense under the contracts for the years ended October 1, 1994, September
30, 1995 and September 28, 1996 was ($10,231), $10,488 and ($96,464),
respectively. As of September 28, 1996, the total accumulated deferred
compensation liability under the contracts was $458,654 ($437,244 in 1995).

Effective October 2, 1988, the Company entered into deferred compensation
agreements with certain key employees. At the discretion of the executive
committee of the board of directors, the Company may accrue compensation
based on the key employees' years of service and position with the Company.
For the year ended October 1, 1994, the Company accrued $573,641 in
deferred compensation expense. The Company did not accrue any compensation
in 1995 and 1996. Deferred compensation generally only becomes payable on
retirement of a participant. Participants that are terminated will receive
only the vested portion of their deferred compensation based on the
agreement's vesting schedule, which is pro-rata over a period of ten years.
As of September 30, 1995 and September 28, 1996, the total accumulated
deferred compensation liability under the preceding agreements was
$3,150,155.

Effective June 1, 1989, the Company entered into a trust agreement for
the benefit of the Company's chairman. The Company agreed to contribute to
the trust shares of its common stock sufficient to equal the difference
between each actual allocation of stock to the Company's chairman by The
New Cherokee Corporation Employee Stock Ownership Plan (ESOP) and the
allocation of stock he would have received, but for the Internal Revenue
Code Section 1042 election by the chairman's family. As of September 30,
1995 and September 28, 1996, 1,800 shares with a fair value of $26,532 and
$19,080, respectively, were either held in trust or accrued for the benefit
of the Company's chairman. The assets of the trust are to be distributed to
the Company's chairman upon termination of employment or to his estate at
death. The Company adjusted the deferred liability to the fair value of the
shares held in the trust, which resulted in a decrease of $7,452 ($3,528 in
1995). In 1994 the Company recorded deferred compensation expense related
to the plan of $11,010.

Effective June 1, 1989, the Company also entered into an executive
deferred stock bonus trust agreement with certain key employees as
beneficiaries. At the discretion of the executive committee of the board of
directors, the Company may contribute shares of common stock to the trust.
The shares of stock will be allocated to each participant's trust account
based on the participant's years of service and position with the Company.
Upon a participant's retirement, disability or death the Company is to pay
to the participant or his estate, within a period not to exceed five years,
an amount equal to the fair market value of the stock held in the
participant's trust account in exchange for the shares. Participants that
are terminated will receive their trust account's value at termination date
within a period not to exceed five years. As of September 27, 1994, the
Company, at the request of the chairman of the board of directors of the
Company, retroactively amended the trust agreement effective October 1,
1989, so that any amounts resulting from forfeiture by a terminated
participant which were reallocated to the chairman's account shall be
either returned to the Company or used to reduce future contributions to
the trust by the Company. As a result of the preceding amendment, the
Company's deferred liability under the trust agreement was reduced by
$121,745. Under terms of the agreement, the Company will not pay any
deferred compensation to participants or their estates until the earlier of
October 1, 1995, or the payment in full of the Company's

F-39
<PAGE>

THE NEW CHEROKEE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

OCTOBER 1, 1994, SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996

6. DEFERRED COMPENSATION PLANS--(CONTINUED)

term debt obligations which were obtained to fund the Company's loans to
its ESOP (see Note 9). As of September 30, 1995 and September 28, 1996,
49,103 shares and 42,029 shares with a fair value of $790,638 and $499,289,
respectively, were held in trust or accrued by the Company. Of the shares
held in trust as of September 30, 1995 and September 28, 1996, 7,589 shares
and 4,153 shares related to terminated participants and were frozen at a
value of $178,721 and $97,803, respectively. During 1996, the Company did
not accrue an imputed dividend and also reversed the imputed dividends of
$45,355 and $53,114 accrued during 1994 and 1995, respectively. The Company
also adjusted the deferred liability to the fair value of the shares held
in trust, which resulted in a net decrease in the Company's deferred
liability under the plan of $345,768 in 1994, $28,251 in 1995, and $177,930
in 1996).

Effective September 29, 1991, the Company adopted an executive
performance share plan. At the discretion of the executive committee of the
board of directors, the Company may award certain key employees a specified
number of "performance" shares. Each "performance" share is equivalent in
value to the fair value as of the award date of one share of the Company's
common stock. Effective each December 31, the value of an outstanding
"performance" share will be adjusted to reflect any increase or decrease in
the fair value of the Company's common stock. Participants in the plan are
fifty percent vested as to the number of their "performance" shares upon
receipt of an award. Participants become fully vested in their
"performance" shares after ten years of continuous service. As of September
30, 1995 and September 28, 1996, the Company had outstanding 123,492
"performance" shares under the plan with a vested value of $1,820,272 and
$1,172,580, respectively. While the executive committee did not award any
"performance" shares for the years ended October 1, 1994, September 30,
1995 and September 28, 1996, the Company did adjust its deferred liability
based on changes in the fair value of the "performance" shares outstanding
under the plan which resulted in an increase of $83,208 and decreases in
its deferred liability of $306,623 and $647,692, respectively.

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
Land........................................... $ 782,277 $ 782,277
Buildings and Improvements..................... 24,309,693 28,035,703
Machinery and Equipment........................ 76,243,240 58,846,585
Furniture and Fixtures......................... 3,685,998 3,645,575
Transportation Equipment....................... 222,157 124,968
Asset Under Capital Lease...................... 2,769,738 2,769,738
------------ ------------
108,013,103 94,204,846
Less Accumulated Depreciation.................. 54,145,141 42,243,756
------------ ------------
Net Property, Plant and Equipment............ $ 53,867,962 $ 51,961,090
============ ============
</TABLE>

8. NOTE PAYABLE

Effective October 31, 1996, the Company has available a line of credit
with their factor of up to $19,000,000 or 90% of factored accounts
receivable. Interest is payable monthly at 1.5% over the highest publicly
announced prime rate of certain financial institutions. The line is
scheduled to mature on October 31, 1998. Total advances on the existing
line as of September 30, 1995 and September 28, 1996 were $4,000,000 and
$7,000,000, with interest at prime plus 1.0% (9.75% as of September 30,
1995 and September 28, 1996, respectively.

F-40
<PAGE>

THE NEW CHEROKEE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

OCTOBER 1, 1994, SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996

9. LONG-TERM DEBT

The following term notes are secured by deeds of trust on all real
property and improvements and a security interest in all receivables,
finished goods inventories, certain insurance policies, equipment and
furniture and fixtures. The Company has also assigned the stock pledge
agreements with the ESOP, which are discussed in Note 4, as collateral for
the term notes.

<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 28,
1995 1996
------------- -------------
<S> <C> <C>
Spindale, North Carolina Operations:
Equipment obligation, due in monthly
installments based on usage, non-interest
bearing, due in 1997........................ $ -0- $ 760,500
Sevierville, Tennessee Operations:
Term note, due in quarterly principal
installments of $320,313 on the last day of
February, May, August and November, plus
interest at 4.898% payable monthly, and a
final payment due May 31, 1997. (Loan is
under technical default, therefore due on
demand.).................................... 2,242,188 960,938
Term note, due in quarterly principal
installments of $320,312 on the last day of
February, May, August and November, plus
interest at 4.898% payable monthly, and a
final payment due May 31, 1997. (Loan is
under technical default, therefore due on
demand.).................................... 2,242,188 960,938
Term line of credit agreement with maximum
borrowings of $8,000,000, due January 1997,
with interest payable monthly at the bank's
prime rate, currently 8.87% (8.75% in 1995).
(Loan is under technical default, therefore
due on demand.)............................. 6,700,000 6,200,000
Term loan, due in quarterly principal
installments of $1,350,000 beginning in
January 1997, with interest currently
ranging from 7.68% to 8.08%, through 2001.
(Loan is under technical default, therefore
due on demand.)............................. 27,000,000 27,000,000
Capital lease obligation, due in annual
installments of $18,544 through January
1999, reducing to $15,000 through January
2019, including interest at 2%.............. 289,099 275,420
----------- -----------
38,473,475 36,157,796
Less current maturities...................... 2,576,179 35,896,284
----------- -----------
$35,897,296 $ 261,512
=========== ===========
</TABLE>

Maturities of long-term debt as of September 28, 1996 are as follows:

<TABLE>
<S> <C>
1997......................................................... $35,896,284
1998......................................................... 3,938
1999......................................................... 10,781
2000......................................................... 10,963
2001......................................................... 11,147
Thereafter................................................... 224,683
-----------
$36,157,796
===========
</TABLE>

F-41
<PAGE>

THE NEW CHEROKEE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

OCTOBER 1, 1994, SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996

9. LONG-TERM DEBT--(CONTINUED)

The term note and line of credit agreements in effect as of September 28,
1996 contain restrictive covenants. Under certain of these covenants, the
Company is restricted as to the amounts which may be expended for property
and equipment, the amount of property and equipment which may be sold, and
the use of the proceeds. The covenants also prohibit or restrict changes in
senior management, dividends, loans or advances, investments in other
entities, incurrence of any new mortgages or liens and require the
maintenance of certain working capital, debt and net worth ratios. As of
September 28, 1996, the Company was not in compliance with certain of the
loan covenants described above. The Company has not received waivers of the
covenant violations and is in technical default under the terms of the note
agreements, which causes the balances to become due on demand. As a result,
the callable balances have been classified as current maturities as of
September 28, 1996. The Company is currently negotiating a sale of
substantially all of the assets of the Company which would facilitate
repayment of the above debts (see Note 19).

The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for debt of the same remaining
maturities. As of September 30, 1995 and September 28, 1996, the fair value
of the long-term debt approximates the amounts recorded in the financial
statements.

10. INCOME TAXES (BENEFIT)

Income taxes (benefit) are as follows:

<TABLE>
<CAPTION>
1994 1995 1996
----------- ---------- ----------
<S> <C> <C> <C>
Current.................................. $ (231,720) $ -0- $ -0-
Deferred................................. (2,552,490) (3,794,515) 8,466,647
----------- ---------- ----------
$(2,784,210) $3,794,515 $8,466,647
=========== ========== ==========
</TABLE>

Income taxes (benefit) as shown in the statements of operations varied
from the statutory federal income tax rate for the following reasons:

<TABLE>
<CAPTION>
1994 1995 1996
------------------------ ------------------------ ------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT PRETAX LOSS AMOUNT PRETAX LOSS AMOUNT PRETAX LOSS
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
At "expected" tax rate.. $(2,937,645) (34.0)% $(3,893,678) (34.0)% $(3,616,327) (34.0)%
Change in valuation
allowance.............. -0- -0- -0- -0- 12,082,974 113.6
Other, net.............. 153,435 1.8 99,163 .9 -0- 0.0
----------- ----- ----------- ----- ----------- -----
$(2,784,210) (32.2)% $(3,794,515) (33.1)% $ 8,466,647 79.6%
=========== ===== =========== ===== =========== =====
</TABLE>

F-42
<PAGE>

THE NEW CHEROKEE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

OCTOBER 1, 1994, SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1996

10. INCOME TAXES (BENEFIT)--(CONTINUED)

As of September 28, 1996, the Company had available for federal income
tax purposes net operating loss and tax credit carryovers which expire on
the following dates in the approximate amounts shown below:

<TABLE>
<CAPTION>
NET OPERATING LOSSES TAX CREDITS
-------------------- -----------
<S> <C> <C>
1999.................................... $ -0- $183,716
2000.................................... -0- 52,880
2001.................................... -0- 34,485
2003.................................... -0- -0-
2004.................................... 6,298,000 -0-
2005.................................... 7,270,000 -0-
2009.................................... 6,905,000 -0-
2010.................................... 8,867,000 -0-
2011.................................... 13,920,000 -0-
----------- --------
$43,260,000 $271,081
=========== ========
</TABLE>

The net deferred tax asset in the 1995 and 1996 balance sheets include
the following components:

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Current:
Deferred Tax Assets............................... $ 853,238 $ 870,340
Deferred Tax...................................... (261,441) (284,953)
----------- -----------
Net Deferred Tax Assets........................... 591,797 585,387
Less Valuation Allowance.......................... (591,797) (585,387)
----------- -----------
Net Current Deferred Tax Asset................. $ -0- $ -0-
=========== ===========
Long-Term:
Deferred Tax Assets............................... $16,445,233 $20,293,880
Deferred Tax Liabilities.......................... (6,611,639) (6,837,549)
----------- -----------
Net Deferred Tax Assets........................... 9,833,594 13,456,331
Less Valuation Allowance.......................... (1,366,947) (13,456,331)
----------- -----------
Net Long-Term Deferred Tax Asset............... $ 8,466,647 $ -0-
=========== ===========
</TABLE>

11. LEASE COMMITMENTS

The Company leases its Sevierville, Tennessee operating facility, a sales
office and storage space in New York City, certain equipment, and warehouse
space on an as needed basis for its Sevierville, Tennessee and its Spindale
and Harris, North Carolina locations. The operating facility lease is
classified as a capital lease and is included in property and equipment.
The Company is required to pay real and personal city property taxes on the
operating facility over the remaining lease term. The Company can purchase
the facility at the end of the lease for $1. All other leases are
classified as operating leases. Rental expense under all operating leases
amounted to $293,685 in 1994, $685,560 in 1995 and $614,987 in 1996. Future
minimum rental payments under all noncancellable operating leases with
remaining terms in excess of one year as of September 28, 1996 are:
$478,344 in 1997; $423,447 in 1998; $366,975 in 1999; $361,830 in 2000;
$357,841 in 2001; and $1,555,797 thereafter.

F-43
<PAGE>

THE NEW CHEROKEE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

OCTOBER 1, 1994, SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996

12. LITIGATION

The nature and scope of the Company's business brings it into regular
contact with the general public and a variety of businesses and
governmental entities in the ordinary course of business. Such activities
inherently subject the Company to the hazards of litigation.

In April 1991, a former customer of the Company filed suit seeking
damages contending that the Company breached an alleged "Confinement
Agreement", that is, an arrangement pursuant to which the Company
purportedly agreed to sell certain fabrics exclusively to the customer for
an indefinite period of time. In addition, the customer was seeking
additional damages related to the continued sales of these fabrics by the
Company in the open market. On December 27, 1995, the Company entered into
a settlement agreement which required the Company to pay $1,715,000 on
January 17, 1996 to release them from the above suit. The settlement amount
was recorded in miscellaneous expense in the Company's 1995 statement of
operations.

During the year ended October 1, 1994, the Company incurred aggregate
settlement costs of approximately $597,000 related to litigation with
certain former employees. In regard to the preceding, the Company also
amended its executive deferred stock bonus trust agreement which resulted
in a reduction of the Company's deferred compensation plans liability of
$121,745 (see Note 6). The preceding items are recorded net in
miscellaneous expense in the Company's 1994 statement of operations.

The Company is currently involved in certain employment/labor relations
proceedings. On August 5, 1996, a textile converter filed an arbitration
demand and commenced an action against the Company in the Supreme Court of
the State of New York. The Company has filed for a permanent stay and a
dismissal, respectively, of these matters. It is the opinion of management
that the Company will prevail in these matters. At present, the Company's
management is not aware of any other pending or threatened litigation.
Although the final outcome of these matters cannot be determined based on
the facts presently known, it is Management's opinion that the final
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.

13. CAPITAL STOCK

Capital stock consists of the following:

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Preferred Stock--Voting--Par Value $20, Authorized
Issued and Outstanding 600,000 Shares in 1995 and
1996.............................................. $12,000,000 $12,000,000
Common Stock--Par Value $10, Authorized 3,000,000
Shares; Issued 1,797,931 Shares in 1995 and 1996.. 17,979,310 17,979,310
----------- -----------
$29,979,310 $29,979,310
=========== ===========
</TABLE>

On October 29, 1992, the Company entered into a stock purchase agreement
with a third party to sell 600,000 shares of the Company's voting preferred
stock at a price of $20.50 per share. Subsequently, the Company amended its
charter to authorize an additional 1,200,000 shares of common stock and
600,000 shares of voting preferred stock, and on December 3, 1992, issued
the 600,000 shares of voting preferred stock in exchange for cash and notes
totalling $12,300,000. The preferred stock is non-cumulative and is
convertible into common stock through December 31, 1998 at which time the
conversion rights expire. The stock purchase agreement requires that the
Company repurchase from the third party at fair market value all or any
portion of the 600,000 shares of voting preferred stock bought, if certain
conditions of the agreement are not fulfilled (see Note 19).

F-44
<PAGE>

THE NEW CHEROKEE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

OCTOBER 1, 1994, SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996

14. LOSS PER SHARE

Primary loss per share of common stock is computed based on the weighted
average number of common stock shares outstanding during the year. Fully
diluted loss per share of common stock is computed based on the weighted
average number of common stock and convertible preferred stock shares
outstanding during the year.

<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Number of Shares Used in Per Share
Computations:
Primary................................... 1,797,727 1,793,045 1,793,045
========= ========= =========
Fully Diluted............................. 2,298,162 2,393,045 2,393,045
========= ========= =========
</TABLE>

15. CHANGE IN METHOD OF ACCOUNTING FOR INVENTORY

The Company recorded its inventories at the lower of cost or market using
the first-in, first out (FIFO) method in 1995, whereas in prior years
certain inventories were recorded at the lower of cost or market using the
last-in, first-out (LIFO) method. The new method of accounting for
inventory was adopted to more closely recognize current cost of inventory.
The effect of the accounting change on the loss as previously reported for
1994 and on the loss in 1995 is as follows:

<TABLE>
<CAPTION>
1994 1995
--------- --------
<S> <C> <C>
Effect on:
(Increase) decrease in net loss (net of income taxes
of $211,711 and $419,506)............................ $(410,968) $814,335
========= ========
(Increase) decrease in loss per common share assuming
no dilution.......................................... $ (.23) $ .45
========= ========
(Increase) decrease in loss per common share assuming
full dilution........................................ $ (.18) $ .34
========= ========
</TABLE>

16. SPINDALE PLANT YARN MILL CLOSURE

In July 1995, the Spindale plant stopped processing yarn. The Company
incurred various expenses in the closure of the yarn mill facilities which
included retention pay of approximately $320,000 for employees who worked
until the yarn mill stopped production and also a loss on the sale of
certain yarn mill production equipment of approximately $903,000. Both
amounts are included in operating expenses in the Company's 1995 statement
of operations.

17. MAJOR CUSTOMERS

During 1994, 1995 and 1996 the Company had sales (as a percentage of
total sales) to one customer of 17%, 15% and 11%, respectively, and sales
to another customer of 11%, 14% and 11%, respectively, and in 1994, sales
to a third customer of 10%.

18. SELF INSURANCE OF HEALTH BENEFITS

The Company has recorded liabilities for health benefits of $414,684 and
$451,924 at September 30, 1995 and September 28, 1996, respectively, based
upon analysis of historical actual results. The Company self-insures health
benefits. Stop-loss insurance is maintained for claims paid in excess of
$150,000 for each insured individual. Claims were $588,053, $1,167,111, and
$756,288 for the years ended October 1, 1994, September 30, 1995 and
September 28, 1996, respectively.

F-45
<PAGE>

THE NEW CHEROKEE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

OCTOBER 1, 1994, SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996

19. SUBSEQUENT EVENTS

On November 20, 1996, the Company's Chairman signed a letter of intent to
negotiate the sale, subject to the shareholders approval, of substantially
all of the Company's assets to a third party for approximately $65,000,000
and the assumption by the buyer of certain operating liabilities
(liabilities considered ordinary in the course of business) of the Company.
The Company would be responsible for liquidation of all liabilities other
than those considered ordinary in the course of business, such as notes
payable and current maturities of long-term debt, using the proceeds from
the sale. Also, on November 20, 1996, the Company's Chairman and the
preferred shareholders entered into a letter agreement whereby the Company
would redeem its outstanding preferred shares for an aggregate minimum cost
of approximately $6,600,000, subject to consummation of the third party
asset sale by no later than May 31, 1997. The agreement provides that if
the Company's common shareholders either through liquidation or redemption
were to have available for distribution aggregate funds representing an
amount greater than $10.50 per share of common stock the preferred
shareholders would receive a pro-rata portion of such excess amount, if
any. Should the Company consummate the third party asset sale, any monies
remaining after secured debt repayment and the preferred stock redemption
would be available for distribution to general creditors and common
shareholders, in that respective order. The Company's common shareholders
could receive an amount significantly less than the book value per common
share.

F-46
<PAGE>

THE NEW CHEROKEE CORPORATION

UNAUDITED CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 28, 1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 882
Accounts receivable, net.............................. 15,101
Inventories........................................... 10,172
Prepaid expenses and other............................ 340
--------
Total current assets................................ 26,495
Property, plant and equipment......................... 93,895
Less accumulated depreciation and amortization........ (43,649)
--------
Net property, plant and equipment................... 50,246
Other Assets............................................ 3,497
--------
$ 80,238
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and notes
payable.............................................. $ 37,877
Accounts payable...................................... 1,881
Accrued expenses...................................... 2,516
--------
Total current liabilities........................... 42,274
Long-term debt.......................................... 262
Deferred compensation plans............................. 5,278
Other liabilities....................................... 343
Shareholders' equity:
Preferred stock, $20 par value, 600,000 shares
authorized, issued and outstanding................... 12,000
Common stock, $10 par value, 3,000,000 shares
authorized, 1,797,931 shares issued and outstanding.. 17,979
Capital in excess of par value........................ 20,385
Retained deficit...................................... (15,716)
Treasury stock........................................ (49)
Deferred compensation--restricted stock............... (1,237)
Notes receivable from ESOP............................ (1,281)
--------
Total shareholders' equity.......................... 32,081
--------
$ 80,238
========
</TABLE>

See accompanying notes.

F-47
<PAGE>

THE NEW CHEROKEE CORPORATION

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------
DECEMBER 30, DECEMBER 28,
1995 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net Sales.................................... $ 27,521 $ 22,810
Costs and expenses:
Cost of sales.............................. 25,302 19,897
Selling, general and administrative ex-
penses.................................... 2,929 2,558
------------- -------------
Operating income (loss) before ESOP contribu-
tions....................................... (710) 355
ESOP contributions........................... 1,199 851
------------- -------------
Net operating loss........................... (1,909) (496)
Other income (expense), net.................. 127 (145)
Interest expense........................... (731) (903)
------------- -------------
Loss before income taxes..................... (2,513) (1,544)
Income tax benefit........................... 858 --
------------- -------------
Net loss..................................... $ (1,655) $ (1,544)
============= =============
</TABLE>

See accompanying notes.

F-48
<PAGE>

THE NEW CHEROKEE CORPORATION

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------
DECEMBER 30, DECEMBER 28,
1995 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................... $ (1,655) $ (1,544)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization............ 2,014 1,824
Deferred income tax benefit.............. (874) --
Deferred compensation plans, net......... (76) 75
Loss on sale of fixed assets............. -- 41
Changes in operating assets and
liabilities:
Accounts receivable..................... 4,944 7,357
Inventories............................. 5,529 2,218
Prepaid expenses and other assets....... (161) (237)
Accounts payable and accrued expenses... (2,334) (4,818)
Other liabilities....................... 43 (4)
------------- -------------
Net cash provided by operating
activities............................ 7,430 4,912
Cash flows from investing activities:
Capital expenditures........................ (1,527) (326)
Proceeds from sale of equipment............. -- 176
Repayment on loans to ESOP.................. 640 641
------------- -------------
Net cash provided (used) by investing
activities............................ (887) 491
Cash flows from financing activities:
Payments of long-term debt and notes
payable.................................... (6,540) (5,019)
------------- -------------
Net cash used by financing activities.. (6,540) (5,019)
------------- -------------
Net increase in cash and cash equivalents.... 3 384
Cash and cash equivalents at beginning of
period...................................... 316 498
------------- -------------
Cash and cash equivalents at end of period... $ 319 $ 882
============= =============
</TABLE>

See accompanying notes.

F-49
<PAGE>

THE NEW CHEROKEE CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1. UNAUDITED CONDENSED FINANCIAL STATEMENTS

In the opinion of management, the accompanying unaudited condensed
financial statements of the New Cherokee Corporation ("TNCC") reflect all
adjustments considered necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented. Such adjustments consist of normal recurring accruals. Interim
results are not necessarily indicative of results for a full year. For
further information, refer to the financial statements and notes thereto
for the year ended September 28, 1996.

On February 3, 1997, TNCC sold substantially all of its assets to Dan
River Inc. for $65 million in cash, subject to a working capital
adjustment, and the assumption of certain operating liabilities. The
unaudited condensed financial statements do not include any adjustments
attributable to the sale.

Also on February 3, 1997, TNCC redeemed its outstanding preferred shares
for $6.6 million in cash. The redemption agreement provides for additional
payments to the preferred shareholders in the event funds available to
common shareholders either through liquidation or redemption represent
greater than $10.50 per share of common stock.

2. INVENTORIES

The components of inventory are as follows:

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Finished goods................................... $ 6,178 $ 6,062
Work in process.................................. 4,422 2,651
Raw materials.................................... 1,381 816
Supplies......................................... 409 643
------- -------
Total inventories.............................. $12,390 $10,172
======= =======
</TABLE>

3. SHAREHOLDERS' EQUITY

Activity in Shareholders' Equity is as follows:

<TABLE>
<CAPTION>
PREFERRED CAPITAL IN RETAINED
STOCK COMMON STOCK EXCESS OF PAR DEFICIT
--------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at September 28,
1996................... $12,000 $17,979 $20,385 $(14,172)
Net loss................ -- -- -- (1,544)
Repayment on loans to
ESOP................... -- -- -- --
------- ------- ------- --------
Balance at December 28,
1996................... $12,000 $17,979 $20,385 $(15,716)
======= ======= ======= ========
<CAPTION>
NOTES TOTAL
TREASURY DEFERRED RECEIVABLE SHAREHOLDERS'
STOCK COMPENSATION FROM ESOP EQUITY
--------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at September 28,
1996................... $ (49) $(1,237) $(1,922) $ 32,984
Net loss................ -- -- -- (1,544)
Repayment on loans to
ESOP................... -- -- 641 641
------- ------- ------- --------
Balance at December 28,
1996................... $ (49) $(1,237) $(1,281) $ 32,081
======= ======= ======= ========
</TABLE>

F-50
<PAGE>

[FOUR COLOR GRAPHICS APPEAR HERE]

Automated raw material bale opening is a critical first step in a quality cost
effective textile operation.

Efficient open-end spinning produces excellent low cost yarn.

Flexible warpers are key to reducing lead times and enhancing quick response for
yard-dyed products.

State of the art airjet weaving makes the home fashions' greige mill a low cost
manufacturing operation.

Major investments in home fashions' bed accessory sewing and distribution
facilities are part of achieving seamless growth.
<PAGE>

[LOGO OF DAN RIVER INC.]
<PAGE>

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses and costs (other than
underwriting discounts) expected to be incurred in connection with the sale
and distribution of the shares of Class A Common Stock being registered.
All of such expenses and costs will be paid by the Company. All of the
amounts shown are estimated except for the filing fees of the Securities
and Exchange Commission and the National Association of Securities Dealers,
Inc.:

<TABLE>
<S> <C>
Securities and Exchange Commission Filing Fee...................... $ 34,849
NASD Filing Fee.................................................... 12,000
New York Stock Exchange Listing Fee................................ 125,600
Printing and Engraving Expenses.................................... 65,000
Legal Fees and Expenses............................................ 200,000
Accounting Fees and Expenses....................................... 115,000
Blue Sky Fees and Expenses......................................... 3,000
Transfer Agent Fees and Expenses................................... 5,000
Miscellaneous...................................................... 4,551
--------
Total.......................................................... $565,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 9 of the Underwriting Agreement filed as Exhibit 1.1 hereto
contains certain provisions pursuant to which certain officers, directors
and controlling persons of Dan River may be entitled to be indemnified by
the underwriters named therein.

The Company's Restated Charter eliminates, to the fullest extent
permitted by applicable law, the personal liability of directors to the
Company or its shareholders for monetary damages for breach of duty of care
or any other duty owed to the Company as a director. The GBCC currently
provides that such provision shall not eliminate or limit the liability of
a director (i) for any appropriation, in violation of his duties, of any
business opportunity of the Company, (ii) for acts or omissions that
involve intentional misconduct or a knowing violation of law, (iii) for
unlawful corporate distributions or (iv) for any transaction from which the
director received an improper personal benefit.

Article VI of Dan River's Bylaws, as well as Article 8, Part 5 of the
GBCC, provide for the indemnification by Dan River of, and advancement of
expenses to, its directors, officers, employees and agents under certain
circumstances.

Statutory Authority

14-2-850. PART DEFINITIONS.

As used in this part, the term:

(1) "Corporation" includes any domestic or foreign predecessor entity of
a corporation in a merger or other transaction in which the predecessor's
existence ceased upon consummation of the transaction.

(2) "Director" or "officer" means an individual who is or was a director
or officer, respectively, of a corporation or who, while a director or
officer of the corporation, is or was serving at the corporation's request
as a director, officer, partner, trustee, employee, or agent of another
domestic or foreign corporation,

II-1
<PAGE>

partnership, joint venture, trust, employee benefit plan, or other entity.
A director or officer is considered to be serving an employee benefit plan
at the corporation's request if his or her duties to the corporation also
impose duties on, or otherwise involve services by, the director or officer
to the plan or to participants in or beneficiaries of the plan. Director or
officer includes, unless the context otherwise requires, the estate or
personal representative of a director or officer.

(3) "Disinterested director" means a director who at the time of a vote
referred to in subsection (c) of Code Section 14-2-853 or a vote or
selection referred to in subsection (b) or (c) of Code Section 14-2-855 or
subsection (a) of Code Section 14-2-856 is not:

(A) A party to the proceeding; or

(B) An individual who is a party to a proceeding having a familial,
financial, professional, or employment relationship with the director
whose indemnification or advance for expenses is the subject of the
decision being made with respect to the proceeding, which relationship
would, in the circumstances, reasonably be expected to exert an
influence on the director's judgment when voting on the decision being
made.

(4) "Expenses" includes counsel fees.

(5) "Liability" means the obligation to pay a judgment, settlement,
penalty, fine (including an excise tax assessed with respect to an employee
benefit plan), or reasonable expenses incurred with respect to a
proceeding.

(6) "Official capacity" means:

(A) When used with respect to a director, the office of director in a
corporation; and

(B) When used with respect to an officer, as contemplated in Code
Section 14-2-857, the office in a corporation held by the officer.

Official capacity does not include service for any other domestic or foreign
corporation or any partnership, joint venture, trust, employee benefit plan,
or other entity.

(7) "Party" means an individual who was, is, or is threatened to be made
a named defendant or respondent in a proceeding.

(8) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, arbitrative
or investigative and whether formal or informal.

14-2-851. AUTHORITY TO INDEMNIFY.

(a) Except as provided in this Code section, a corporation may indemnify an
individual who is a party to a proceeding because he or she is or was a
director against liability incurred in the proceeding if:

(1) Such individual conducted himself or herself in good faith; and

(2) Such individual reasonably believed:

(A) In the case of conduct in his or her official capacity, that such
conduct was in the best interests of the corporation;

(B) In all other cases, that such conduct was at least not opposed to
the best interests of the corporation; and

(C) In the case of any criminal proceeding, that the individual had
no reasonable cause to believe such conduct was unlawful.

(b) A director's conduct with respect to an employee benefit plan for a
purpose he or she believed in good faith to be in the interests of the
participants in and beneficiaries of the plan is conduct that satisfies the
requirement of subsection (a)(2)(B) of this Code section.

(c) The termination of a proceeding by judgment, order, settlement, or
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the director did not meet the standard of conduct
described in this Code section.

II-2
<PAGE>

(d) A corporation may not indemnify a director under this Code
section:

(1) In connection with a proceeding by or in the right of the
corporation, except for reasonable expenses incurred in
connection with the proceeding if it is determined that the
director has met the relevant Standard of Conduct under this
Code section; or

(2) In connection with any proceeding with respect to conduct
for which he or she was adjudged liable on the basis that
personal benefit was improperly received by him or her, whether
or not involving action in his or her official capacity.

14-2-852. MANDATORY INDEMNIFICATION.

A corporation shall indemnify a director who was wholly successful, on the
merits or otherwise, in the defense of any proceeding to which he or she was a
party because he is or was a director of the corporation against reasonable
expenses incurred by the director in connection with the proceeding.

14-2-853. ADVANCE FOR EXPENSES.

(a) A corporation may, before final disposition of the proceeding, advance
funds to pay for or reimburse the reasonable expenses incurred by a director
who is a party to a proceeding because he or she is a director if he or she
delivers to the corporation:

(1) A written affirmation of his or her good faith belief that he or she
has met the relevant standard of conduct described in Code Section 14-2-851
or that the proceeding involves conduct for which liability has been
eliminated under a provision of the articles of incorporation as authorized
by paragraph (4) of subsection (b) of Code Section 14-2-202; and

(2) His or her written undertaking to repay any funds advanced if it is
ultimately determined that the director is not entitled to indemnification
under this part.

(b) The undertaking required by paragraph (2) of subsection (a) of this Code
section must be an unlimited general obligation of the director but need not
be secured and may be accepted without reference to financial ability to make
repayment.

(1) By the board of directors:

(A) When there are two or more disinterested directors, by a majority
vote of all the disinterested directors (a majority of whom shall for
such purpose constitute a quorum) or by a majority of the members of a
committee of two or more disinterested directors appointed by such a
vote; or

(B) When there are fewer than two disinterested directors, by the
vote necessary for action by the board in accordance with subsection
(c) of Code Section 14-2-824, in which authorization directors who do
not qualify as disinterested directors may participate; or

(2) By the shareholders, but shares owned or voted under the control of a
director who at the time does not qualify as a disinterested director with
respect to the proceeding may not be voted on the authorization.

14-2-854. COURT-ORDERED INDEMNIFICATION.

(a) A director who is a party to a proceeding because he or she is a
director may apply for indemnification or advance for expenses to the court
conducting the proceeding or to another court of competent jurisdiction. After
receipt of an application and after giving any notice it considers necessary,
the court shall:

(1) Order indemnification or advance for expenses if it determines that
the director is entitled to indemnification under this part; or

(2) Order indemnification or advance for expenses if it determines, in
view of all the relevant circumstances, that it is fair and reasonable to
indemnify the director or to advance expenses to the director,

II-3
<PAGE>

even if the director has not met the relevant standard of conduct set fort
in subsections (a) and (b) of Code Section 14-2-851, failed to comply with
Code Section 14-2-853, or was adjudged liable in a proceeding referred to
in paragraph (1) or (2) of subsection (d) of Code Section 14-2-851, but if
the director was adjudged so liable, the indemnification shall be limited
to reasonable expenses incurred in connection with the proceeding.

(b) If the court determines that the director is entitled to indemnification
or advance for expenses under this part, it may also order the corporation to
pay the director's reasonable expenses to obtain court-ordered indemnification
or advance for expenses.

14-2-855. DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION.

(a) A corporation may not indemnify a director under Code Section 14-2-851
unless authorized thereunder and a determination has been made for a specific
proceeding that indemnification of the director is permissible in the
circumstances because he or she has met the relevant standard of conduct set
forth in Code Section 14-2-851.

(b) The determination shall be made:

(1) If there are two or more disinterested directors, by the board of
directors by a majority vote of all the disinterested directors (a majority
of whom shall for such purpose constitute a quorum) or by a majority of the
members of a committee of two or more disinterested directors appointed by
such a vote;

(2) By special legal counsel:

(A) Selected in the manner prescribed in paragraph (1) of this
subsection; or

(B) If there are fewer than two disinterested directors, selected by
the board of directors (in which selection directors who do not qualify
as disinterested directors may participate); or

(3) By the shareholders, but shares owned by or voted under the control
of a director who at the time does not qualify as a disinterested director
may not be voted on the determination.

(c) Authorization of indemnification or an obligation to indemnify and
evaluation as to reasonableness of expenses shall be made in the same manner
as the determination that indemnification is permissible, except that if there
are fewer than two disinterested directors or if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subparagraph
(b)(2)(B) of this Code section to select special legal counsel.

14-2-856. INDEMNIFICATION OF DIRECTORS.

(a) If authorized by the articles of incorporation or a bylaw, contract, or
resolution approved or ratified by the shareholders by a majority of the votes
entitled to be cast, a corporation may indemnify or obligate itself to
indemnify a director made a party to a proceeding including a proceeding
brought by or in the right of the corporation, without regard to the
limitations in other Code sections of this part, but shares owned or voted
under the control of a director who at the time does not qualify as a
disinterested director with respect to any existing or threatened proceeding
that would be covered by the authorization may not be voted on the
authorization.

(b) The corporation shall not indemnify a director under this Code section
for any liability incurred in a proceeding in which the director is adjudged
liable to the corporation or is subjected to injunctive relief in favor of the
corporation:

(1) For any appropriation, in violation of the directors duties, of any
business opportunity of the corporation;

(2) For acts or omissions which involve intentional misconduct or a
knowing violation of law;

(3) For the types of liability set forth in Code Section 14-2-832; or

(4) For any transaction from which he or she received an improper
personal benefit.

II-4
<PAGE>

(c) Where approved or authorized in the manner described in subsection (a)
of this Code section, a corporation may advance or reimburse expenses incurred
in advance of final disposition of the proceeding only if:

(1) The director furnishes the corporation a written affirmation of his
good faith belief that his conduct does not constitute behavior of the kind
described in subsection (b) of this Code section; and

(2) The director furnishes the corporation a written undertaking,
executed personally or on his behalf, to repay any advances if it is
ultimately determined that he is not entitled to indemnification under this
Code section.

14-2-857. INDEMNIFICATION OF OFFICERS, EMPLOYEES, AND AGENTS.

(a) A corporation may indemnify and advance expenses under this part to an
officer of the corporation who is a party to a proceeding because he or she is
an officer of the corporation:

(1) To the same extent as a director; and

(2) If he or she is not a director, to such further extent as may be
provided by the articles of incorporation, the bylaws, a resolution of the
board of directors, or contract except for liability arising out of conduct
that constitutes:

(A) Appropriation, in violation of his or her duties, of any business
opportunity of the corporation;

(B) Acts or omissions which involve intentional misconduct or a
knowing violation of law;

(D) Receipt of an improper personal benefit.

(b) The provisions of paragraph (2) of subsection (a) of this Code section
shall apply to an officer who is also a director if the sole basis on which he
or she is made a party to the proceeding is an act or omission solely as an
officer.

(c) An officer of a corporation who is not a director is entitled to
mandatory indemnification under Code Section 14-2-852, and may apply to a
court under Code Section 14-2-854 for indemnification or advances for
expenses, in each case to the same extent to which a director may be entitled
to indemnification or advances for expenses under those provisions.

(d) A corporation may also indemnify and advance expenses to an employee or
agent who is not a director to the extent, consistent with public policy, that
may be provided by its articles of incorporation, bylaws, general or specific
action of its board of directors, or contract.

14-2-858. INSURANCE.

A corporation may purchase and maintain insurance on behalf of an individual
who is a director, officer, employee, or agent of the corporation or who,
while a director, officer, employee, or agent of the corporation, serves at
the corporation's request as a director, officer, partner, trustee, employee,
or agent of another domestic or foreign corporation, partnership, joint
venture, trust, employee benefit plan, or other entity against liability
asserted against or incurred by him or her in that capacity or arising from
his or her status as a director, officer, employee, or agent, whether or not
the corporation would have power to indemnify or advance expenses to him or
her against the same liability under this part.

14-2-859. APPLICATION OF PART.

(a) A corporation may, by a provision in its articles of incorporation or
bylaws or in a resolution adopted or a contract approved by its board of
directors or shareholders, obligate itself in advance of the act or omission
giving rise to a proceeding to provide indemnification or advance funds to pay
for or reimburse expenses

II-5
<PAGE>

consistent with this part. Any such obligatory provision shall be deemed to
satisfy the requirements for authorization referred to in subsection (c) of
Code Section 14-2-853 or subsection (c) of Code Section 14-2-855. Any such
provision that obligates the corporation to provide indemnification to the
fullest extent permitted by law shall be deemed to obligate the corporation to
advance funds to pay for or reimburse expenses in accordance with Code Section
14-2-853 to the fullest extent permitted by law, unless the provision
specifically provides otherwise.

(b) Any provision pursuant to subsection (a) of this Code section shall not
obligate the corporation to indemnify or advance expenses to a director of a
predecessor of the corporation, pertaining to conduct with respect to the
predecessor, unless otherwise specifically provided. Any provision for
indemnification or advance for expenses in the articles of incorporation,
bylaws, or a resolution of the board of directors or shareholders, partners,
or, in the case of limited liability companies, members or managers of a
predecessor of the corporation or other entity in a merger or in a contract to
which the predecessor is a party, existing at the time the merger takes
effect, shall be governed by paragraph (3) of subsection (a) of Code Section
14-2-1106.

(c) A corporation may, by a provision in its articles of incorporation,
limit any of the rights to indemnification or advance for expenses created by
or pursuant to this part.

(d) This part does not limit a corporation's power to pay or reimburse
expenses incurred by a director or an officer in connection with his or her
appearance as a witness in a proceeding at a time when he or she is not a
party.

(e) Except as expressly provided in Code Section 14-2-857, this part does
not limit a corporation's power to indemnify, advance expenses to, or provide
or maintain insurance on behalf of an employee or agent.

Bylaw Authority

ARTICLE VI OF DAN RIVER'S BYLAWS PROVIDES:

INDEMNITY.

Section 1. Mandatory Indemnification. The Corporation shall indemnify to the
fullest extent permitted under the Georgia Business Corporation Code as it
presently exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than said law permitted the Corporation
to provide prior to such amendment), any individual made a party to a
proceeding (as defined in the Georgia Business Corporation Code) because he or
she is or was a director or officer against liability (as director, officer
and liability are defined in the Georgia Business Corporation Code), incurred
in the proceeding, if he or she acted in a manner he or she believed in good
faith to be in or not opposed to the best interests of the Corporation and, in
the case of any criminal proceeding, if he or she had no reasonable cause to
believe his or her conduct was unlawful.

Section 2. Permissive Indemnification. The Corporation shall have the power
to indemnify to the fullest extent permitted by the Georgia Business
Corporation Code, any individual made a party to a proceeding (as defined in
the Georgia Business Corporation Code) because he or she is or was an employee
or agent of the Corporation against liability (as defined in the Georgia
Business Corporation Code), incurred in the proceeding, if he or she acted in
a manner he or she believed in good faith to be in or not opposed to the best
interests of the Corporation and, in the case of any criminal proceeding, if
he or she had no reasonable cause to believe his or her conduct was unlawful.

Section 3. Advances for Expenses. The Corporation shall pay for or reimburse
the reasonable expenses incurred by a director or officer who is a party to a
proceeding, and shall have the authority to pay for or reimburse the
reasonable expenses of an employee or agent of the Company who is a party to a
proceeding, in each case in advance of the final disposition of a proceeding
if:

II-6
<PAGE>

(i) Such person furnishes the Corporation a written affirmation of his or
her good faith belief that he or she has met the standard of conduct set
forth in Section 1 or Section 2 above, as applicable; and

(ii) Such person furnishes the Corporation a written undertaking,
executed personally on his or her behalf to repay any advances if it is
ultimately determined that he or she is not entitled to indemnification.

The written undertaking required by paragraph (ii) above must be an
unlimited general obligation of such person but need not be secured and may be
accepted without reference to financial ability to make repayment.

Section 4. Indemnification Not Exclusive. The right to indemnification and
the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article VI shall not be exclusive of any
other right that any person may have or hereafter acquire under any statute,
provision of the Restated and Amended Articles of Incorporation, provision of
these Bylaws, agreement, vote of shareholders or disinterested directors or
otherwise.

Section 5. Amendment or Repeal. Any repeal or modification of the foregoing
provisions of this Article VI shall not adversely affect any right or
protection hereunder of any person in respect of any act or omission occurring
prior to the time of such repeal or modification.

For the undertaking with respect to indemnification, see Item 17 herein.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

None.

II-7
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement relating to the Class A Common
Stock.
2.1 Plan and Agreement of Merger of Braelan Corp. with and into Dan
River Inc.(1)
2.2 Asset Purchase Agreement dated January 10, 1997 by and between
Dan River Inc. and The New Cherokee Corporation.(2)
2.3 First Amendment to Asset Purchase Agreement between Dan River
Inc. and The New Cherokee Corporation dated as of February 2,
1997.(2)
3.1** Amended and Restated Articles of Incorporation of Dan River
Inc.
3.2** Bylaws of Dan River Inc.
4.1 Form of Indenture between Dan River and Marine Midland Bank,
N.A., as Trustee (including Form of Note).(3)
4.2** Specimen Stock Certificate.
5.1** Opinion and Consent of King & Spalding.
10.1 Loan and Security Agreement, dated February 3, 1997 among Dan
River Inc. and Fleet Capital Corporation.(4)
10.4 Registration Rights Agreement, dated as of September 3, 1991,
among Dan River Inc. and the Investors.(5)
10.5** Voting Agreement among Joseph L. Lanier, Jr., Richard L.
Williams and Barry F. Shea
and certain members of their families.
10.7** Employment Agreement, dated as of October 29, 1997, between Dan
River Inc. and Joseph L. Lanier, Jr.
10.8** Employment Agreement, dated as of October 29, 1997, between Dan
River Inc. and Richard L. Williams.
10.9** Employment Agreement, dated as October 29, 1997, between Dan
River Inc. and Barry F. Shea.
10.10 Form of Post-employment Letter Agreement between Dan River Inc.
and certain of its officers.(5)
10.12 Post-employment Letter Agreement between Dan River Inc. and
Gregory R. Boozer.(6)
10.13 Post-employment Letter Agreement between Dan River Inc. and
Harry L. Goodrich.(7)
10.14 Dan River Inc. Amended and Restated Stock Option Plan and form
of Option Agreement in effect prior to December 30, 1994.(5)
10.14.1 Dan River Inc. Amended and Restated Stock Option Plan and form
of Option Agreement, as amended as of December 30, 1994.(6)
10.15 Dan River Management Incentive Plan.(5)
10.16** Form of Dan River Inc. 1997 Stock Incentive Plan.
10.19** Form of Dan River Inc. 1997 Stock Plan for Outside Directors.
10.21 Equipment Lease Agreement No. 2891-0, dated as of December 29,
1989, as amended, between MDFC Equipment Leasing Corporation
and Dan River Inc.(5)
21.1 List of Subsidiaries.(5)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Pugh & Company, P.C.
23.3** Consent of King & Spalding (included in Exhibit 5.1).
99.1** Directed Share Program materials (excluding Prospectus).
</TABLE>
- --------
** Previously filed.
(1) Exhibit 2.1 incorporated by reference to corresponding exhibit number in
Dan River's Report on Form 10-K (No. 33-70442) for the fiscal year ended
December 30, 1995.
(2) Exhibit Nos. 2.2 and 2.3 incorporated by reference to Exhibit Nos. 2.1 and
2.2 in Dan River's Current Report on form 8-K (No. 33-70442) dated February
3, 1997.
(3) Exhibit 4.1 incorporated by reference to exhibit 4 in Dan River's Report on
Form 10-K (No. 33-70442) for the fiscal year ended January 1, 1994.
(4) Exhibit 10.1 incorporated by reference to corresponding exhibit number in
Dan River's Report on Form 10-K (No. 33-70442) for the fiscal year ended
December 28, 1996.

II-8
<PAGE>

(5) Incorporated by reference to corresponding exhibit number in Dan River's
Registration Statement on Form S-1 (No. 33-70442) filed on October 15,
1993.
(6) Exhibit Nos. 10.12 and 10.14.1 incorporated by reference to corresponding
exhibit numbers in Dan River's Report on Form 10-K (No. 33-70442) for the
fiscal year ended December 31, 1994.
(7) Exhibit No. 10.13 incorporated by reference to exhibit number 10.12 in the
Registration Statement on Form S-1 (No. 33-70442) filed on October 15,
1993.

(B) FINANCIAL STATEMENT SCHEDULES:

Schedule II--Valuation and Qualifying Accounts

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-9
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Danville, State of Virginia on November 19, 1997.

DAN RIVER INC.

/s/ Joseph L. Lanier, Jr.
By: _________________________________
Joseph L. Lanier, Jr.
Chairman and Chief Executive
Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED:

SIGNATURE TITLE DATE

/s/ Joseph L. Lanier, Jr. Chairman of the
- ------------------------------------- Board, Chief November 19,
JOSEPH L. LANIER, JR. Executive Officer 1997
and Director

* Vice President-Chief
- ------------------------------------- Financial Officer
BARRY F. SHEA (Principal
Financial and
Accounting Officer)

* President, Chief
- ------------------------------------- Operating Officer
RICHARD L. WILLIAMS and Director

* Director
- -------------------------------------
EDWARD J. LILL

* Director
- -------------------------------------
JOHN F. MAYPOLE

/s/ Joseph L. Lanier, Jr.

*By: ________________________________ November 19,
JOSEPH L. LANIER, JR. 1997
ATTORNEY-IN-FACT

II-10
<PAGE>

SCHEDULE II

DAN RIVER INC.
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996

<TABLE>
<CAPTION>
ADDITIONS
----------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF YEAR EXPENSES OTHER DEDUCTIONS OF YEAR
---------- ---------- ----- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1994
Allowance for uncol-
lectible accounts, $6,340 7,557 21(A) 8,026(B) 5,892
discounts and claims. ------ ----- ----- ----- -----
Totals.............. $6,340 7,557 21 8,026 5,892
====== ===== ===== ===== =====
Year ended December 30,
1995
Allowance for uncol-
lectible accounts, $5,892 7,060 19(A) 7,831(B) 5,140
discounts and claims. ------ ----- ----- ----- -----
Total............... $5,892 7,060 19 7,831 5,140
====== ===== ===== ===== =====
Year ended December 28,
1996
Allowance for uncol-
lectible accounts, $5,140 6,937 145 7,591(B) 4,631
discounts and claims. ------ ----- ----- ----- -----
Totals.............. $5,140 6,937 145 7,591 4,631
====== ===== ===== ===== =====
</TABLE>

Notes:

(A) Recoveries of amounts previously written off.
(B) Includes writeoff of receivables and claims allowed.

S-1

<PAGE>
EXHIBIT 1.1

6,700,000 SHARES

DAN RIVER INC.
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE

UNDERWRITING AGREEMENT

November , 1997

<PAGE>

[CS&M Draft--11/18/97]

November , 1997

Morgan Stanley & Co. Incorporated
J.P. Morgan Securities Inc.
SBC Warburg Dillon Read Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036

Dear Sirs and Mesdames:

Dan River Inc., a Georgia corporation (the "COMPANY"), proposes to
issue and sell to the several Underwriters named in Schedule II hereto (the
"UNDERWRITERS"), and certain shareholders of the Company (the "SELLING
SHAREHOLDERS") named in Schedule I hereto severally propose to sell to the
several Underwriters, an aggregate of 6,700,000 shares (the "FIRM SHARES") of
the Class A Common Stock , par value $.01 per share, of the Company (the "COMMON
STOCK"), of which 4,700,000 shares are to be issued and sold by the Company and
2,000,000 shares are to be sold by the Selling Shareholders, each Selling
Shareholder selling the amount set forth opposite such Selling Shareholder's
name in Schedule I hereto.

The Selling Shareholders also propose to sell to the several
Underwriters not more than an additional 1,005,000 shares of Class A Common
Stock (the "ADDITIONAL SHARES"), if and to the extent that you, as Managers of
the offering, shall have determined to exercise, on behalf of the Underwriters,
the right to purchase such Additional Shares. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "SHARES". The
Company and the Selling Shareholders are hereinafter sometimes collectively
referred to as the "SELLERS".

The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS".
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the
term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462
Registration Statement.

As part of the offering contemplated by this Agreement, Morgan Stanley
& Co. Incorporated ("MORGAN STANLEY") has agreed to reserve out of the Shares
set forth opposite its
<PAGE>

name on Schedule II to this Agreement, up to 335,000 shares, for sale to the
Company's directors, officers, employees, business associates and related
persons (collectively, "PARTICIPANTS"), as set forth in the Prospectus under the
heading "Underwriters" (the "DIRECTED SHARE PROGRAM"). The Shares to be sold by
Morgan Stanley pursuant to the Directed Share Program (the "DIRECTED SHARES")
will be sold by Morgan Stanley pursuant to this Agreement at the public offering
price. Any Directed Shares not orally confirmed for purchase by any
Participants by the end of the first business day after the date on which this
Agreement is executed will be offered to the public by Morgan Stanley as set
forth in the Prospectus.

1. Representations and Warranties of the Company. The Company
represents and warrants to and agrees with each of the Underwriters that:

(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or, to the knowledge
of the Company, threatened by the Commission.

(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, (ii) the Registration Statement and the Prospectus comply and,
as amended or supplemented, if applicable, will comply in all material
respects with the Securities Act and the applicable rules and regulations
of the Commission thereunder and (iii) the Prospectus does not contain and,
as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations
and warranties set forth in this paragraph 1(b) do not apply to statements
or omissions in the Registration Statement or any amendment thereto or the
Prospectus or any amendment or supplement thereto based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.

(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of Georgia, has the corporate
power and authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing
<PAGE>

would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole.

(d) (i) Dan River Factory Stores, Inc., a Georgia corporation
("Factory Stores") and DanPren LLC, a Mississippi limited liability company
("DanPren"), are the only subsidiaries of the Company, (ii) Factory Stores
has been duly incorporated, is validly existing as a corporation in good
standing under the laws of Georgia, and DanPren has been duly organized, is
validly existing as a limited liability company in good standing under the
laws of Mississippi, and each has the corporate power and authority to own
its property and to conduct its businesses as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole, (iii) all of the issued shares of capital stock of Factory Stores
have been duly and validly authorized and issued, are fully paid and non-
assessable and are owned directly by the Company, free and clear of all
liens, encumbrances, equities or claims and (iv) the Company owns a 50%
membership interest in DanPren, free and clear of all liens, encumbrances,
equities or claims.

(e) This Agreement has been duly authorized, executed and delivered
by the Company.

(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus under the
caption "Description of Capital Stock".

(g) The shares of Common Stock (including the Shares to be sold by
the Selling Shareholders) outstanding prior to the issuance of the Shares
to be sold by the Company have been duly authorized and are validly issued,
fully paid and non-assessable.

(h) The Shares to be sold by the Company have been duly authorized
and, when issued and delivered in accordance with the terms of this
Agreement against payment therefor as provided herein, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights.

(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not violate
any statute, rule or regulation applicable to the Company or any of its
subsidiaries or the Amended and Restated Articles of Incorporation or By-
laws of the Company or any agreement or other instrument binding upon the
Company or any of its
<PAGE>

subsidiaries that is material to the Company and its subsidiaries, taken as
a whole, or any judgment, order or decree of any governmental body, agency
or court having jurisdiction over the Company or any of its subsidiaries,
and no consent, approval, authorization or order of, or qualification with,
any governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as have been
obtained under the Securities Act and such as may be required by the
securities or Blue Sky laws of the various states in connection with the
offer and sale of the Shares.

(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement).

(k) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or any contracts
or other documents required to be filed as exhibits to the Registration
Statement that are not described or filed as required.

(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, when so filed complied in
all material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.

(m) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.

(n) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance in all material
respects with all terms and conditions of any such permit,
<PAGE>

license or approval, except, in the case of all matters set forth in
clauses (i), (ii) and (iii), or as described in the Prospectus or where
such noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the terms
and conditions of such permits, licenses or approvals would not, singly or
in the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.

(o) In the ordinary course of its business, the Company conducts a
periodic review of the effect of the Environmental Laws on the business,
operations and properties of the Company and its subsidiaries. On the
basis of such review, the Company has reasonably concluded that with
respect to only those Environmental Laws in effect as of the date of this
Agreement, the cost of complying in all material respects with such
Environmental Laws will not, singly or in the aggregate, have a material
adverse effect on the Company and its subsidiaries, taken as a whole.

(p) Except as set forth in the Prospectus, there are no contracts or
agreements between the Company and any person granting such person the
right to require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company or to require
the Company to include such securities with the Shares registered pursuant
to the Registration Statement.

(q) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set forth
or described in the Prospectus, (1) the Company and its subsidiaries have
not incurred any material liability or obligation, direct or contingent,
nor entered into any material transaction not in the ordinary course of
business; (2) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of
any kind on its capital stock other than ordinary and customary dividends;
and (3) there has not been any material change in the capital stock, short-
term debt or long-term debt of the Company and its consolidated
subsidiaries.

(r) The Company and its subsidiaries have marketable title in fee
simple to all real property and marketable title to all personal property
owned by them which is material to the business of the Company and its
subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such
<PAGE>

exceptions as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company and its
subsidiaries, in each case except as set forth or described in the
Prospectus and except for matters which would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole.

(s) Except as set forth or described in the Prospectus, the Company
and its subsidiaries own or possess, or can acquire on reasonable terms,
all material patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names currently employed by them in
connection with the business now operated by them, except where the failure
to own or possess or to have the right to acquire does not have a material
adverse effect on the Company and its subsidiaries taken as a whole; and
neither the Company nor any of its subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to
any of the foregoing which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would have a material adverse
effect on the Company and its subsidiaries, taken as a whole.

(t) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, or, to the knowledge of the Company, is
imminent except for disputes that do not or would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole.

(u) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the business in which they are
engaged; neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company nor any
such subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole.

(v) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses except where the failure to possess any certificate,
authorization or permit would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole, and neither the Company nor
any such subsidiary has received any notice of proceedings relating to the
revocation or modification of
<PAGE>

any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a material adverse effect on the Company and its subsidiaries,
taken as a whole, except as described in or contemplated by the Prospectus.

(w) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (1) transactions are executed in accordance with management's general
or specific authorizations; (2) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (3)
access to assets is permitted only in accordance with management's general
or specific authorization; and (4) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.

(x) The Company has not offered, or caused the Underwriters to offer,
Shares to any person pursuant to the Directed Share Program with the
specific intent to unlawfully influence (i) a customer or supplier of the
Company to alter the customer's or supplier's level or type of business
with the Company, or (ii) a trade journalist or publication to write or
publish favorable information about the Company or its products.

2. Representations and Warranties of the Selling Shareholders. Each
of the Selling Shareholders represents and warrants to and agrees with each of
the Underwriters that:

(a) This Agreement has been duly authorized, executed and delivered
by or on behalf of such Selling Shareholder.

(b) The execution and delivery by such Selling Shareholder of, and
the performance by such Selling Shareholder of its obligations under, this
Agreement, and the Power of Attorney and Custody Agreement signed by such
Selling Shareholder, the attorneys-in-fact named therein (as defined below)
and Wachovia Bank, N.A., as Custodian, relating to the deposit of the
Shares to be sold by such Selling Shareholder and appointing certain
individuals as such Selling Shareholder's attorneys-in-fact (the
"Attorneys-in-Fact") to the extent set forth therein, relating to the
transactions contemplated hereby and by the Registration Statement (the
"POWER OF ATTORNEY AND CUSTODY AGREEMENT") will not violate any provision
of any statute, rule or regulation applicable to such Selling Shareholder,
or the certificate of incorporation or by-laws of such Selling Shareholder
(if such Selling Shareholder is a corporation), or any material agreement
or other material instrument binding upon such Selling Shareholder or any
judgment, order or decree of any governmental body, agency
<PAGE>

or court having jurisdiction over such Selling Shareholder; and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by such Selling
Shareholder of its obligations under this Agreement or the Power of
Attorney and Custody Agreement of such Selling Shareholder, except such as
has been obtained under the Securities Act and such as may be required by
the securities or Blue Sky laws of the various states in connection with
the offer and sale of the Shares.

(c) Such Selling Shareholder has, and on the Closing Date will have,
valid title to the Shares to be sold by such Selling Shareholder and the
legal right and power, and all authorization and approval required by law,
to enter into this Agreement, and the Power of Attorney and Custody
Agreement and to sell, transfer and deliver the Shares to be sold by such
Selling Shareholder.

(d) The Power of Attorney and Custody Agreement has been duly
authorized, executed and delivered by such Selling Shareholder and is a
valid and binding agreement of such Selling Shareholder.

(e) Upon, delivery of the Shares to be sold by such Selling
Shareholder pursuant to this Agreement against payment therefor as provided
herein, good and valid title to such Shares will pass to the Underwriters
free and clear of any security interests, claims, liens, equities and other
encumbrances.

(f) (i) The information furnished by or on behalf of such Selling
Shareholder for use in the Registration Statement and the Prospectus does
not, and on the Closing Date will not, contain any untrue statement of a
material fact or omit to state any material fact necessary to make such
information not misleading; and (ii) the sale of Shares by such Selling
Shareholder pursuant hereto is not prompted by any material non-public
information relating to or concerning the Company.

3. Agreements to Sell and Purchase. Each Seller, severally and not
jointly, hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from such Seller at $______ a share (the "PURCHASE
PRICE") the number of Firm Shares (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
number of Firm Shares to be sold by such Seller as the number of Firm Shares set
forth in Schedule II hereto opposite the name of such Underwriter bears to the
total number of Firm Shares.

On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and
<PAGE>

conditions, the Selling Shareholders agree, severally and not jointly, to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, all or any portion of the
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
elect to exercise such option, you shall so notify the Attorneys-in-Fact for the
Selling Shareholders in writing not later than 30 days after the date of this
Agreement, which notice shall specify the number of Additional Shares to be
purchased by the Underwriters and the date on which such shares are to be
purchased. Such date may be the same as the Closing Date (as defined below) but
not earlier than the Closing Date nor later than ten business days after the
date of such notice. Additional Shares may be purchased as provided in Section 5
hereof solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. If any Additional Shares are to be
purchased, each Underwriter agrees, severally and not jointly, to purchase the
number of Additional Shares (subject to such adjustments to eliminate fractional
shares as you may determine) that bears the same proportion to the total number
of Additional Shares to be purchased as the number of Firm Shares set forth in
Schedule II hereto opposite the name of such Underwriter bears to the total
number of Firm Shares.

Each Seller hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during
the period ending 180 days after the date of the Prospectus, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase,
lend, or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or (ii) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Shares to be sold hereunder, (B) the issuance by the Company of shares of
Common Stock upon the exercise of an option or warrant or the conversion of a
security outstanding on the date of the Prospectus of which the Underwriters
have been advised in writing or which is set forth in the Prospectus, (C)
transactions by any person other than the Company relating to shares of Common
Stock or other securities acquired in open market transactions after the
completion of the offering of the Shares or (D) bona fide gifts to donees who
agree in writing to be bound by the restrictions set forth in the foregoing
sentence. Notwithstanding the foregoing, the restrictions contained in this
paragraph shall cease to be binding on the Sellers if the offering of shares
contemplated hereby has not been consummated on or before January 31, 1998.

<PAGE>

4. Terms of Public Offering. The Sellers are advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.

5. Payment and Delivery. Payment for the Firm Shares to be sold by each
Seller shall be made to such Seller in Federal or other funds immediately
available in New York City against delivery of such Firm Shares for the
respective accounts of the several Underwriters at 10:00 a.m., New York City
time, on ____________, 1997, or at such other time on the same or such other
date, not later than _________, 1997, as shall be designated in writing by you.
The time and date of such payment are hereinafter referred to as the "CLOSING
DATE".

Payment for any Additional Shares shall be made to the Company in Federal
or other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at
10:00 a.m., New York City time, on the date specified in the notice described in
Section 3 or at such other time on the same or on such other date, in any event
not later than _______, 1997, as shall be designated in writing by you. The
time and date of such payment are hereinafter referred to as the "OPTION CLOSING
DATE".

Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.

6. Conditions to the Underwriters' Obligations. The obligations of the
Sellers to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 5:00 p.m. (New York City time) on the date hereof.

<PAGE>

The several obligations of the Underwriters are subject to the following
further conditions:

(a) Subsequent to the execution and delivery of this Agreement and prior
to the Closing Date:

(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act; and

(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.

(b) The Underwriters shall have received on the Closing Date (i) a
certificate, dated the Closing Date and signed by an executive officer of the
Company, to the effect set forth in Section 6(a)(i) above and to the effect
that the representations and warranties of the Company contained in this
Agreement are true and correct as of the Closing Date and that the Company has
complied with all of the agreements and satisfied all of the conditions on its
part to be performed or satisfied hereunder on or before the Closing Date and
(ii) a certificate, dated the Closing Date and signed by each of the Selling
Shareholders, to the effect that the representations and warranties of the
Selling Shareholders contained in this Agreement are true and correct as of
the Closing Date and that the Selling Shareholders have complied with all of
the agreements and satisfied all of the conditions on their part to be
performed or satisfied hereunder on or before the Closing Date.

The officer signing and delivering such certificate may rely upon the best
of his or her knowledge as to proceedings threatened.

(c) The Underwriters shall have received on the Closing Date an opinion of
King & Spalding, outside counsel for the Company, dated the Closing Date, to
the effect that:

<PAGE>

(i) (A) the Company has been duly incorporated, and based solely on
an attached certificate from the Secretary of State of Georgia is
validly existing as a corporation in good standing under the laws of
the State of Georgia and (B) has the corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Registration Statement;

(ii) the authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof
contained in the Prospectus under the caption "Description of Capital
Stock";

(iii) the shares of Common Stock (including the Shares to be sold
by the Selling Shareholders) outstanding prior to the issuance of the
Shares to be sold by the Company have been duly authorized and are
validly issued, fully paid and non-assessable;

(iv) the Shares to be sold by the Company have been duly authorized
and, when issued and delivered in accordance with the terms of this
Agreement against payment therefor as provided herein, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any statutory or, to such counsel's knowledge,
contractual, preemptive rights;

(v) this Agreement has been duly authorized, executed and delivered
by the Company;

(vi) to such counsel's knowledge, (a) there are no contracts or
other instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto that are not
filed as required, and (b) no default exists in the performance or
observance of any material obligation, agreement, covenant or
condition contained in the Loan and Security Agreement, dated
February 3, 1997, among the Company and Fleet Capital Corporation, or
the Indenture, dated December 15, 1993, between the Company and Marine
Midland Bank, N.A., except for any such default that would not have a
material adverse effect on the Company and its subsidiaries, taken as
a whole;
<PAGE>

(vii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not violate (A) any statute, rule or regulation applicable to the
Company or any of its subsidiaries, (B) the Restated and Amended
Articles of Incorporation or Bylaws of the Company, (C) any agreement
or other instrument binding upon the Company or its subsidiaries that
is filed as an exhibit to the Registration Statement, or (D) any
judgment, order or decree known to us of any governmental body, agency
or court having jurisdiction over the Company or any of its
subsidiaries; and no consent, approval, authorization or order of or
qualification with any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement,
except such as has been obtained under the Securities Act and such as
may be required by the securities or Blue Sky laws of the various
states in connection with the offer and sale of the Shares;

(viii) the statements (A) in the Prospectus under the captions
"Certain Transactions-Recapitalization", "Description of Capital
Stock" and "Underwriters" and (B) in the Registration Statement in
Items 14 and 15, in each case insofar as such statements constitute
summaries of the legal matters or documents (or provisions thereof)
referred to therein, fairly present the information required to be
described with respect to such legal matters and documents (or
provisions thereof) and fairly summarize in all material respects such
legal matters and documents (or provisions thereof) required to be
described;

(ix) to such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened to which the Company or
any of its subsidiaries is a party or to which any of the properties
of the Company or any of its subsidiaries is subject which are
required to be disclosed in the Registration Statement or the
Prospectus, other than those disclosed therein;

(x) the Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as
such term is defined in the Investment Company Act of 1940, as
amended;

(xi) the Registration Statement is effective under the Securities
Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued under the
Securities Act or proceedings therefor initiated or threatened by the
Commission;
<PAGE>

(xii) at the time the Registration Statement became effective,
the Registration Statement (other than the financial statements and
other financial and statistical data included therein, as to which no
opinion need be rendered) complied as to form in all material respects
with the requirements of the Securities Act and the rules and
regulations of the Commission thereunder;

(xiii) nothing has come to their attention that would lead them
to believe that the Registration Statement and any amendment thereto
made prior to the Closing Date (other than the financial statements
and schedules and the other financial and statistical data therein, as
to which such counsel need express no belief) at the time it became
effective contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus
(other than the financial statements and schedules and the other
financial and statistical data therein, as to which such counsel need
express no belief), at the date of the Prospectus or at the Closing
Date, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they are made,
not misleading;

(xiv) Factory Stores (A) has been duly incorporated, and based
solely on the attached certificate from the Secretary of State of
Georgia, is validly existing as a corporation in good standing under
the laws of the State of Georgia, (B) has the corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement, (C) based solely
on the certificates of the Secretaries of State of the Commonwealth of
Virginia and the states of North Carolina, Ohio, Pennsylvania, South
Carolina, Tennessee and West Virginia, is duly qualified as a foreign
corporation to transact business and is in good standing in each such
jurisdiction and (D) all of the issued shares of capital stock of
Factory Stores have been duly authorized and validly issued, are fully
paid and non-assessable and, as of the close of business on the
Closing Date are owned of record by the Company and, to such counsel's
knowledge, free and clear of any liens, encumbrances, equities or
claims; and

(xv) DanPren (A) based solely on the attached certificate from
the Secretary of State of Mississippi is validly existing as a limited
liability company in good standing under
<PAGE>

the laws of Mississippi, (B) has the corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Registration Statement, (C) based solely on the
certificates of the Secretaries of State of [insert states where
qualified to transact business], is duly qualified as a foreign
corporation to transact business and is in good standing in each such
jurisdiction and (D) the Company owns a 50% membership interest in
DanPren and, as of the close of business on the Closing Date such
membership interest is owned of record by the Company and, to such
counsel's knowledge, free and clear of any liens, encumbrances,
equities or claims.

(d) The Underwriters shall have received on the Closing Date an
opinion of Roberts, Sheridan & Kotel, counsel for the Selling Shareholders,
dated the Closing Date, to the effect that:

(i) this Agreement has been duly authorized, executed and
delivered by or on behalf of each of the Selling Shareholders;

(ii) the execution and delivery by each Selling Shareholder of,
and the performance by such Selling Shareholder of its obligations
under, this Agreement and the Power of Attorney and Custody Agreement
of such Selling Shareholder will not contravene any provision of any
statute, rule or regulation applicable to such Selling Shareholder, or
the certificate of incorporation or by-laws of such Selling
Shareholder (if such Selling Shareholder is a corporation), or, to the
best of such counsel's knowledge, any material agreement or other
instrument binding upon such Selling Shareholder or, to the best of
such counsel's knowledge, any judgment, order or decree of any
governmental body, agency or court having jurisdiction over such
Selling Shareholder, and no consent, approval, authorization or order
of, or qualification with, any governmental body or agency is required
for the performance by such Selling Shareholder of its obligations
under this Agreement or the Power of Attorney and Custody Agreement of
such Selling Shareholder, except such as has been obtained under the
Securities Act and such as may be required by the securities or Blue
Sky laws of the various states in connection with offer and sale of
the Shares;

(iii) each of the Selling Shareholders is the sole registered
owner of the Shares to be sold by such Selling Shareholder and each
Selling Shareholder has

<PAGE>

the legal right and power, and all authorization and approval required
by law, to enter into this Agreement and the Power of Attorney and
Custody Agreement of such Selling Shareholder and to sell, transfer
and deliver the Shares to be sold by such Selling Shareholder;

(iv) the Power of Attorney and Custody Agreement of each Selling
Shareholder has been duly authorized, executed and delivered by such
Selling Shareholder and is a valid and binding agreement of such
Selling Shareholder; and

(v) upon delivery of the Shares to be sold by each Selling
Shareholder pursuant to this Agreement and the Power of Attorney and
Custody Agreement against payment therefor, and assuming that such
Shares are purchased in good faith and without notice of any adverse
claim (in each case within the meaning of the New York Uniform
Commercial Code (the "UCC"), the Underwriters purchasing such Shares
will acquire good and valid title to such Shares free and clear of any
adverse claim pursuant to Section 8-302 of the UCC.

(e) The Underwriters shall have received on the Closing Date an
opinion of Cravath, Swaine & Moore, counsel for the Underwriters, dated the
Closing Date, covering the matters referred to in Sections 6(c)(v),
6(c)(vi), 6(c)(viii) (but only as to the statements in the Prospectus under
"Description of Capital Stock" and "Underwriters") and 6(c)(xiii) above.

With respect to Section 6(c)(xiii) above, King & Spalding and Cravath,
Swaine & Moore may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check or
verification, except as specified. In rendering the foregoing opinions,
such counsel shall be entitled to rely (i) with respect to matters of fact,
on certificates of officers of the Company and (ii) as to matters set forth
therein, on certificates and telegrams of public officials. With respect
to Section 6(d) above, Roberts, Sheridan & Kotel may rely upon an opinion
or opinions of counsel for any Selling Shareholders and, with respect to
factual matters and to the extent such counsel deems appropriate, upon the
representations of each Selling Shareholder contained herein and in the
Custody Agreement and Power of Attorney of such Selling Shareholder and in
other documents and instruments; provided that (A) each such counsel for
the Selling Shareholders is reasonably satisfactory to your counsel, (B) a
copy of each opinion so relied upon is delivered to you and is in form and
substance reasonably satisfactory to your counsel, (C) copies of the

<PAGE>

Power of Attorney and Custody Agreement and of any such other documents and
instruments shall be delivered to you and shall be in form and substance
satisfactory to your counsel and (D) Roberts, Sheridan & Kotel shall state
in their opinion that they are justified in relying on each such other
opinion.

The opinions of King & Spalding, and Roberts, Sheridan & Kotel
described in Sections 6(c), and 6(d) above, respectively (and any opinions
of counsel for any Selling Shareholder referred to in the immediately
preceding paragraph), are to the Underwriters at the request of the Company
or one or more of the Selling Shareholders, as the case may be, and shall
so state therein.

(f) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance reasonably satisfactory to the
Underwriters, from Ernst & Young LLP, independent auditors, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus; provided that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.

(g) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, officers and
directors of the Company relating to sales and certain other dispositions
of shares of Common Stock or certain other securities, delivered to you on
or before the date hereof, shall be in full force and effect on the Closing
Date.

(h) Each of the Company and the Selling Shareholders shall have
furnished to you and to your counsel, in form and substance reasonably
satisfactory to you and your counsel, such other documents, certificates
and opinions as your counsel may reasonably request in order to pass upon
the matters referred to in Section 6(e) and in order to evidence the
accuracy and completeness of any of the representations, warranties or
statements, the performance of any covenant by any of the Company or the
Selling Shareholders theretofore to be performed, or the compliance with
any of the conditions herein contained.

The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional Shares.

<PAGE>

7. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:

(a) To furnish to you, without charge, [4] signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 7(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.

(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.

(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
under which they were made when the Prospectus is delivered to a purchaser,
not misleading, or if, in the opinion of counsel for the Underwriters, it
is necessary to amend or supplement the Prospectus to comply with
applicable law, forthwith to prepare, file with the Commission and furnish,
at its own expense, to the Underwriters and to the dealers (whose names and
addresses you will furnish to the Company) to which Shares may have been
sold by you on behalf of the Underwriters and to any other dealers upon
request, either amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will not, in the
light of the circumstances when the Prospectus is delivered to a purchaser,
be misleading or so that the Prospectus, as amended or supplemented, will
comply with law.

(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request; provided, that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent
to service of process in any jurisdiction.

<PAGE>

(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-
month period ending December 26, 1998 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.

(f) That in connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. Morgan Stanley will notify the
Company as to which Participants will need to be so restricted. The
Company will direct the transfer agent to place stop transfer restrictions
upon such securities for such period of time.

(g) To pay all fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp
duties, similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program.

8. Expenses. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, the Company agrees to
pay or cause to be paid all expenses incident to the performance of the Sellers'
obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel, the Company's accountants and one counsel for
the Selling Shareholders in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated there with, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all reasonable expenses in connection
with the qualification of the Shares for offer and sale under state securities
laws as provided in Section 7(d) hereof, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in

<PAGE>

connection with such qualification and in connection with the Blue Sky
memorandum, (iv) all filing fees and the reasonable fees and disbursements of
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association of
Securities Dealers, Inc., (v) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to listing the Shares on the
New York Stock Exchange, (vi) the cost of printing certificates representing the
Shares, (vii) the costs and charges of any transfer agent, registrar or
depositary, (viii) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the marketing of
the offering of the Shares, including, without limitation, expenses associated
with the production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and the
cost of any aircraft chartered in connection with the road show, and (ix) all
other costs and expenses incident to the performance of the obligations of the
Company hereunder for which provision is not otherwise made in this Section.
Notwithstanding the foregoing, it is understood that the Selling Shareholders
will pay or cause to be paid all transfer taxes and counsel fees (of any
additional counsel retained in addition to the one counsel provided by the
Company to the Selling Shareholders) in connection with the Shares to be sold by
them. It is further understood, that except as provided in this Section, Section
9 entitled "Indemnity and Contribution", and the last paragraph of Section 11
below, the Underwriters will pay all of their costs and expenses, including
without limitation fees and disbursements of their counsel, stock transfer taxes
payable on resale of any of the Shares by them and any advertising expenses
connected with any offers they may make.

The provisions of this Section shall not supersede or otherwise affect
any agreement that the Sellers may otherwise have for the allocation of such
expenses among themselves.

9. Indemnity and Contribution. (a) The Company agrees to indemnify
and hold harmless each Underwriter, each Selling Shareholder and each
person, if any, who controls any Underwriter, or any Selling Shareholder
within the meaning of either Section 15 of the Securities Act or Section 20
of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"),
from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action or
claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any

<PAGE>

omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities
are caused by any such untrue statement or omission or alleged untrue
statement or omission (i) with respect to any Selling Shareholder, based
upon information relating to any Selling Shareholder furnished to the
Company in writing by such Selling Shareholder through you expressly for
use therein, or (ii) with respect to any Underwriter, based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein;
provided, however, that the foregoing indemnity agreement with respect to
-------- -------
any preliminary prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages
or liabilities purchased Shares, or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or supplemented
if the Company shall have furnished any amendments or supplements thereto)
was not sent or given by or on behalf of such Underwriter to such person,
if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such losses, claims, damages or liabilities, unless such
failure is the result of noncompliance by the Company with Section 7(a) or
Section 7(c).

(b) The Company agrees to indemnify and hold harmless Morgan Stanley
and each person, if any, who controls Morgan Stanley within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act
("MORGAN STANLEY ENTITIES"), from and against any and all losses, claims,
damages, and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating
any such action of claim) (i) caused by the failure of any Participant to
pay for and accept delivery of the shares which, immediately following the
effectiveness of the Registration Statement, were subject to a properly
confirmed agreement to purchase; or (ii) related to, arising out of, or in
connection with the Directed Share Program, provided that, the Company
shall not be responsible under this subparagraph (ii) for any losses,
claim, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have
<PAGE>

resulted from the bad faith or gross negligence of Morgan Stanley Entities.

(c) Each Selling Shareholder agrees, severally and not jointly, to
indemnify and hold harmless each Underwriter, the Company, its directors,
its officers who sign the Registration Statement and each person, if any,
who controls any Underwriter or the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, from
and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any amendment thereof, any
preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading, but only to the extent such losses, claims, damages or
liabilities are based upon any untrue statement or omission or alleged
untrue statement or omission based upon information relating to such
Selling Shareholder furnished in writing by or on behalf of such Selling
Shareholder expressly for use in the Registration Statement, any
preliminary prospectus, the Prospectus or any amendments or supplements
thereto. Notwithstanding anything contained herein to the contrary, no
Selling Shareholder shall be liable under this Section 9 for any amount in
excess of the total proceeds (before deducting expenses) received by such
Selling Shareholder from the Underwriters for the Shares sold by such
Selling Shareholder hereunder.

(d) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, the Selling Shareholders, the directors of
the Company, the officers of the Company who sign the Registration
Statement and each person, if any, who controls the Company or any Selling
Shareholder within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal
or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the
Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, but
only to the extent such losses, claims, damages or liabilities are based
upon any untrue statement or omission or alleged

<PAGE>

untrue statement or omission based upon information relating to such
Underwriter furnished to the Company in writing by such Underwriter through
you expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto.

(e) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to Section 9(a), 9(b), 9(c) or 9(d), such person (the
"INDEMNIFIED PARTY") shall promptly notify the person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in
such proceeding and shall pay the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any indemnified party
shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless
(i) the indemnifying party and the indemnified party shall have mutually
agreed to the retention of such counsel or (ii) the named parties to any
such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related proceedings
in the same jurisdiction, be liable for (i) the fees and expenses of more
than one separate firm (in addition to any local counsel) for all
Underwriters and all persons, if any, who control any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, (ii) the fees and expenses of more than one separate firm (in
addition to any local counsel) for the Company, its directors, its officers
who sign the Registration Statement and each person, if any, who controls
the Company within the meaning of either such Section and (iii) the fees
and expenses of more than one separate firm (in addition to any local
counsel) for all Selling Shareholders and all persons, if any, who control
any Selling Shareholder within the meaning of either such Section, and that
all such reasonable fees and expenses shall be reimbursed as they are
incurred. Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to Section 9(b) hereof in respect of such
action or proceeding, then in addition to such separate firm for the
indemnified parties, the indemnifying party shall be liable for the
reasonable fees and expenses of not more than one separate firm (in
addition to any local counsel) for Morgan Stanley for the defense of any
losses, claims, damages and liabilities arising out of the Directed Share
Program, and all persons, if any, who control Morgan Stanley

<PAGE>

within the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act. In the case of any such separate firm for the Underwriters
and such control persons of any Underwriters, such firm shall be designated
in writing by Morgan Stanley & Co. Incorporated. In the case of any such
separate firm for the Company, and such directors, officers and control
persons of the Company, such firm shall be designated in writing by the
Company. In the case of any such separate firm for the Selling Shareholders
and such control persons of any Selling Shareholders, such firm shall be
designated in writing by the persons named as attorneys-in-fact for the
Selling Shareholders under the Powers of Attorney. The indemnifying party
shall not be liable for any settlement of any proceeding effected without
its written consent, but if settled with such consent or if there be a
final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by
reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by the second and third sentences of this
paragraph, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i)
such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying
party shall not have reimbursed the indemnified party in accordance with
such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened proceeding in respect of which
any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such proceeding.

(f) To the extent the indemnification provided for in Section 9(a),
9(b), 9(c) or 9(d), is unavailable to an indemnified party or insufficient
in respect of any losses, claims, damages or liabilities referred to
therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the
amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the indemnifying
party or parties on the one hand and the indemnified party or parties on
the other hand from the offering of the Shares or (ii) if the allocation
provided by clause 9(f)(i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause 9(f)(i) above but also the relative

<PAGE>

fault of the indemnifying party or parties on the one hand and of the
indemnified party or parties on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Sellers on the one hand and the
Underwriters on the other hand in connection with the offering of the
Shares shall be deemed to be in the same respective proportions as the net
proceeds from the offering of the Shares (before deducting expenses)
received by each Seller and the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover of the Prospectus, bear to the aggregate Public Offering
Price of the Shares. The relative fault of the Sellers on the one hand and
the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Sellers or by the Underwriters and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
Underwriters' respective obligations to contribute pursuant to this Section
9 are several in proportion to the respective number of Shares they have
purchased hereunder, and not joint. Notwithstanding anything contained
herein to the contrary, no Selling Shareholder shall be liable under this
Section 9 for any amount in excess of the total proceeds (before deducting
expenses) received by such Selling Shareholder from the Underwriters for
the Shares sold by such Selling Shareholder hereunder.

(g) The Sellers and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 9 were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in Section 9(f). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this Section 9, (i) no Underwriter
shall be required to contribute any amount in excess of the amount by which
the total price at which the Shares underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages
that such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission and (ii)
no Selling Shareholder shall be required to contribute any amount in excess
of the amount by which the net proceeds received from the sale of

<PAGE>

Shares by such Selling Shareholder exceeds the amount of any damages that
such Selling Shareholder has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
remedies provided for in this Section 9 are not exclusive and shall not
limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.

(h) The indemnity and contribution provisions contained in this
Section 9 and the representations, warranties and other statements of the
Company and the Selling Shareholders contained in this Agreement shall
remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf
of any Underwriter or any person controlling any Underwriter, any Selling
Shareholder or any person controlling any Selling Shareholder, or the
Company, its officers or directors or any person controlling the Company
and (iii) acceptance of and payment for any of the Shares.

10. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 10(a)(i) through 10(a)(iv), such event, singly
or together with any other such event, makes it, in your judgment, impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus.

11. Effectiveness; Defaulting Underwriters. This Agreement shall
become effective upon the later of (a) execution and delivery hereof by the
parties hereto or (b) notification of the effectiveness of the Registration
Statement by the Commission.

If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of

<PAGE>

Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is not more than one-tenth of the aggregate number of the
Shares to be purchased on such date, the other Underwriters shall be obligated
severally in the proportions that the number of Firm Shares set forth opposite
their respective names in Schedule II bears to the aggregate number of Firm
Shares set forth opposite the names of all such non-defaulting Underwriters, or
in such other proportions as you may specify, to purchase the Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
on such date; provided that in no event shall the number of Shares that any
Underwriter has agreed to purchase pursuant to this Agreement be increased
pursuant to this Section 11 by an amount in excess of one-ninth of such number
of Shares without the written consent of such Underwriter. If, on the Closing
Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm
Shares and the aggregate number of Firm Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Firm Shares to
be purchased, and arrangements satisfactory to you, the Company and the Selling
Shareholders for the purchase of such Firm Shares are not made within 36 hours
after such default, this Agreement shall terminate without liability on the part
of any non-defaulting Underwriter, the Company or the Selling Shareholders. In
any such case either you or the relevant Sellers shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. If, on the
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
Additional Shares or (ii) purchase not less than the number of Additional Shares
that such non-defaulting Underwriters would have been obligated to purchase in
the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.

If this Agreement shall be terminated (other than pursuant to Section
10) by the Underwriters, or any of them, because of any failure or refusal on
the part of any Seller to comply with the terms or to fulfill any of the
conditions of this Agreement, or if for any reason any Seller shall be unable to
perform its obligations under this Agreement, the Sellers will reimburse the
Underwriters or such Underwriters as have so terminated this Agreement with
respect to themselves, severally, for all out-of-pocket expenses (including the
reasonable fees and disbursements of their counsel) reasonably incurred by such
Underwriters in connection with this Agreement or the offering contemplated
hereunder.

<PAGE>

12. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.

13. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.

14. Headings. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.

Very truly yours,

Dan River Inc.

By:____________________________
Name:
Title:

The Selling Shareholders
named in Schedule I hereto,
acting severally

By:____________________________
Attorney-in-Fact

Accepted as of the date hereof

Morgan Stanley & Co. Incorporated
J.P. Morgan Securities Inc.
SBC Warburg Dillon Read Inc.

Acting severally on behalf
of themselves and the
several Underwriters named
in Schedule II hereto.

By: Morgan Stanley & Co. Incorporated

By:___________________________
Name:
Title:

<PAGE>

SCHEDULE I

NUMBER OF
FIRM SHARES
SELLING SHAREHOLDER TO BE SOLD

_______________

Total........
===============
<PAGE>

SCHEDULE II

NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED

Morgan Stanley & Co. Incorporated

J.P. Morgan Securities Inc.

SBC Warburg Dillon Read Inc.

_______________

Total ........
===============
<PAGE>

EXHIBIT A
[FORM OF LOCK-UP LETTER]

____________, 1997

Morgan Stanley & Co. Incorporated
J.P. Morgan Securities Inc.
SBC Warburg Dillon Read Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036

Dear Sirs and Mesdames:

The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") proposes to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with Dan River Inc., a Georgia corporation (the
"COMPANY"), providing for the public offering (the "PUBLIC OFFERING") by the
several Underwriters, including Morgan Stanley (the "UNDERWRITERS"), of ___
shares (the "SHARES") of the Class A Common Stock [par value] of the Company
(the "COMMON STOCK").

To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 180 days after the date of the final prospectus
relating to the Public Offering (the "PROSPECTUS"), (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (a) the sale of
any Shares to the Underwriters pursuant to the Underwriting Agreement, (b)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering or (c) bona
fide gifts to donees who agree in writing to be bound by the restrictions set
forth in the foregoing sentence. In addition, the undersigned agrees that,
without the prior written consent of Morgan Stanley on behalf of the
Underwriters, it will not during the period commencing on the date hereof and
ending 180 days after the date of the Prospectus, make any demand for or
exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.

Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
<PAGE>

This Agreement shall automatically terminate if the Public Offering
has not been consummated on or before January 31, 1998.

Very truly yours,

_________________________
(Name)

_________________________
(Address)

<PAGE>

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 7, 1997, except as to Note 3 and the last
paragraph of Note 7, as to which the date is November 3, 1997, in Amendment
No. 3 to the Registration Statement (Form S-1 No. 333-36479) and related
Prospectus of Dan River Inc. for the registration of 6,700,000 shares of its
common stock.

Our audits also include the financial statement schedules of Dan River Inc.
listed in Item 16(b). These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Charlotte, North Carolina

November 18, 1997

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 18, 1996 (except for Notes 8 and 19, as to
which the dates are October 31, 1996 and November 20, 1996, respectively), in
Amendment No. 3 to the Registration Statement (Form S-1 No. 333-36479) and
related Prospectus of Dan River Inc. for the registration of 6,700,000 shares
of its common stock.

/s/ Pugh & Company, P.C.
Knoxville, Tennessee

November 18, 1997