DAN RIVER INC /GA/ - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________

Form 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2004
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to _____________

Commission file number 1-13421

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

GEORGIA 58-1854637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2291 Memorial Drive 24541
Danville, Virginia (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (434) 799-7000

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes / / No /x/

As of October 2, 2004, the registrant had 21,068,060 and 1,431,011 shares of
Class A Common Stock and Class B Common Stock outstanding, respectively.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

See Following Pages.

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DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
CONDENSED CONSOLIDATED BALANCE SHEETS

October 2, January 3,
2004 2004
------------ ------------

(in thousands, except share
and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 3,223 $ 1,630
Accounts receivable, net 55,239 50,111
Inventories 129,475 148,248
Assets held for sale 6,964 9,796
Prepaid expenses and other current assets 8,045 8,417
Deferred income taxes 5,162 8,993
------------ -----------
Total current assets 208,108 227,195

Property, plant and equipment 404,957 443,230
Less accumulated depreciation and amortization (251,999) (256,139)
------------ -----------
Net property, plant and equipment 152,958 187,091

Other assets 7,632 18,180
------------ -----------
$ 368,698 $ 432,466
============ ===========

4

DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes.

5
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes.

6

DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

7

DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

8

DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Chapter 11 Filing

On March 31, 2004 (the "Petition Date"), Dan River Inc. and its domestic
subsidiaries (the "Debtors") filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the Northern District of Georgia. Since that date,
the Debtors have been operating their businesses as debtors-in-
possession pursuant to the Bankruptcy Code.

In conjunction with the commencement of the Chapter 11 cases, the
Debtors sought and obtained several orders from the Bankruptcy Court
which were intended to enable the Debtors to operate to the extent
possible in the normal course of business during the Chapter 11 process.
The most significant of these orders:

. permit the Debtors to operate their consolidated cash management system
during the Chapter 11 cases in substantially the same manner as it was
operated prior to the commencement of the Chapter 11 cases,

. authorize payment of certain pre-petition employee salaries, wages, and
benefits and reimbursement of pre-petition employee business expenses,

. authorize payment of pre-petition sales, payroll, and use taxes owed by
the Debtors,

. authorize payment of certain pre-petition obligations to customers and
certain customs brokers, common carriers and warehousemen, and

. authorize payment of certain pre-petition obligations to critical
vendors to aid the Debtors in maintaining operation of their business.

On May 28, 2004, the Bankruptcy Court granted final approval for the
Debtors to enter into a $145.0 million debtor-in-possession financing
facility (the "DIP Facility") with Deutsche Bank Trust Company Americas
as agent for a syndicate of financial institutions comprised of certain
of the Company's pre-petition senior secured lenders. See Note 5 for a
further discussion regarding the DIP Facility.

Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11, a debtor is authorized to continue
to operate its business in the ordinary course and to reorganize its
business for the benefit of its creditors. A debtor-in-possession under
Chapter 11 may not engage in transactions outside of the ordinary
course of business without the approval of the Bankruptcy Court, after
notice and an opportunity for a hearing.

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DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Pursuant to the Bankruptcy Code, pre-petition obligations of the
Debtors, including obligations under debt instruments, generally may not
be enforced against the Debtors. In addition, any actions to collect pre-
petition indebtedness are automatically stayed unless the stay is lifted
by the Bankruptcy Court. While under bankruptcy protection, the Debtors
have not paid and do not expect to pay the interest obligations on the
12 3/4% senior notes due 2009 unless ordered to do so by the Bankruptcy
Court.

As debtors-in-possession, the Debtors have the right, subject to
Bankruptcy Court approval and certain other limitations, to assume or
reject executory contracts and unexpired leases. In this context,
"assumption" means that the Debtors agree to perform their obligations
and cure all existing defaults under the contract or lease, and
"rejection" means that the Debtors are relieved from their obligations
to perform further under the contract or lease, but are subject to a
claim for damages for the breach thereof. Any damages resulting from
rejection of executory contracts and unexpired leases will be treated as
general unsecured claims in the Chapter 11 process, unless such claims
had been secured on a pre-petition basis. The Bankruptcy Court has
approved the rejection of certain executory contracts and leases, and
the Debtors are in the process of reviewing their remaining executory
contracts and unexpired leases to determine which, if any, they will
reject. The Debtors cannot presently determine or reasonably estimate
the ultimate liability that may result from rejecting contracts or
leases or from the filing of claims for any rejected contracts or
leases, and no provisions have yet been made for these items.

Since the petition date, the Debtors have conducted business in the
ordinary course to the extent permitted by the Bankruptcy Code. The
Debtors filed a Plan of Reorganization with the Bankruptcy Court on July
28, 2004. The plan does not provide for any recovery for holders of Dan
River Inc. equity securities, including its Class A and Class B Common
Stock.

The Debtors are actively engaged in discussions with a number of
potential providers of exit financing. The Debtors expect to seek the
requisite acceptance of the plan by impaired creditors and confirmation
of the plan by the Bankruptcy Court, all in accordance with the
applicable provisions of the Bankruptcy Code.

The accompanying condensed consolidated financial statements are
presented in accordance with American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization under the Bankruptcy Code" ("SOP 90-7"), and have been
prepared in accordance with accounting principles generally accepted in
the United States applicable to a going concern, which principles
assume, except as disclosed, that assets will be realized and
liabilities will be discharged in the ordinary course of business. The
Debtors are currently operating as debtors-in-possession

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DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

under Chapter 11 of the Bankruptcy Code, and their continuation as a
going concern is contingent upon, among other things, their ability to
gain approval of the plan of reorganization by the requisite parties
under the Bankruptcy Code and have the plan confirmed by the Bankruptcy
Court, comply with the DIP Facility, return to profitability, generate
sufficient cash flows from operations and obtain financing sources to
meet future obligations. There can be no assurance that the Debtors
will be able to achieve any of these results. The accompanying
condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities
that might result from the outcome of these uncertainties.

While under the protection of Chapter 11, the Debtors may sell or
otherwise dispose of assets, and liquidate or settle liabilities, for
amounts other than those reflected in the financial statements. In
addition, the amounts reported on the condensed consolidated balance
sheet could materially change because of various factors, including
changes in business strategies and the effects of any proposed plan or
reorganization. In the Chapter 11 proceedings, substantially all
unsecured liabilities as of the Petition Date are subject to compromise
or other treatment under a plan of reorganization which must be
confirmed by the Bankruptcy Court after submission to any required vote
by affected parties. Generally, all actions to enforce or otherwise
effect repayment of prepetition liabilities, as well as all pending
litigation against the Debtors, are stayed while the Debtors continue
their business operations as debtors-in-possession. The ultimate amount
of and settlement terms for such liabilities are not presently
determinable. Under SOP 90-7, those liabilities and obligations whose
treatment and satisfaction is dependent on the outcome of the Chapter 11
proceedings have been segregated and classified as liabilities subject
to compromise on the condensed consolidated balance sheet. The
principal categories of liabilities subject to compromise as of October
2, 2004 are as follows (in thousands):

12 3/4% senior notes due 2009, net of unamortized
discount and deferred financing costs $ 145,198
Other borrowings and capital lease obligations 6,579
Accrued interest 9,643
Accounts payable and other accrued expenses 21,835
Nonqualified deferred compensation 10,035
---------
$ 193,290
=========

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DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Pursuant to SOP 90-7, professional fees associated with the Chapter 11
proceedings are expensed as incurred and reported as reorganization
items. Interest expense is reported only to the extent that it will be
paid during the Chapter 11 proceedings or that it is probable that it
will be an allowed claim. During the first nine months of fiscal 2004,
the Company recognized charges of $12,648,000 for reorganization items,
including $8,423,000 for professional fees related to the Chapter 11
proceedings, $2,802,000 for the non-cash write-off of a portion of the
deferred financing costs associated with the prepetition credit
agreement (Note 5), and $1,423,000 related to employee retention
incentives for services rendered through October 2, 2004.

Assets of Dan River Inc.'s foreign subsidiaries, which are not included
in the bankruptcy proceedings, totaled $6,646,000 as of October 2, 2004,
or 1.8% of total assets included on the accompanying condensed consoli-
dated balance sheet. Net sales of the foreign subsidiaries were
$4,452,000, or 1.3% of consolidated net sales for the first nine months
of fiscal 2004.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
include the accounts of Dan River Inc. and its wholly-owned
subsidiaries, (collectively, the "Company"). In the opinion of
management, all normal recurring adjustments 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 in the Company's Annual
Report on Form 10-K for the year ended January 3, 2004.

3. Stock-Based Compensation

The Company's stock-based compensation plans are accounted for based on
the intrinsic value method set forth in APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Compensa-
tion for restricted stock awards is recognized ratably over the vesting
period, based on the fair value of the stock on the date of grant. No
compensation expense has been recognized relative to stock option
awards, as all options granted under the Company's stock option plans
have an exercise price equal to the market value of the underlying stock
on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock options granted:

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DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4. Inventories

The components of inventory are as follows:

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DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. Indebtedness

Indebtedness is as follows (in thousands):

Indebtedness not subject to compromise:

Indebtedness subject to compromise:

14
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As discussed in Note 1 above, on May 28, 2004, the Bankruptcy Court
approved the $145 million DIP Facility. On May 27, 2004, the Debtors
entered into an amendment which, among other things, revised the Minimum
Operating EBITDA which they were required to maintain during the term of
the DIP Facility and revised the cash budget which they were required to
meet. On July 20, 2004, the Debtors entered into a second amendment to
the DIP Facility which, among other things, required that revolving
loans under the DIP Facility could not exceed $73 million during the
period from July 20, 2004 through July 31, 2004. On July 31, 2004, the
Debtors entered into a third amendment to the DIP Facility which, among
other things, provided that during the period from July 31, 2004 through
August 21, 2004, revolving loans under the DIP Facility could not exceed
$75 million. On August 18, 2004, the Debtors entered into a fourth
amendment to the DIP Facility. The fourth amendment waived until
November 6, 2004 a default of the financial covenant pertaining to
minimum operating EBITDA for the fiscal month ended July 3, 2004, and
established new monthly operating EBITDA covenants through the fiscal
month ending October 2, 2004. The amendment also provided that
commencing on the date of the amendment and ending on November 6, 2004,
outstanding Revolving Loans could not exceed $75 million and the
aggregate amount of Letter of Credit Obligations and Revolving Loans
together could not exceed $82 million. In addition to certain business
plans and other information and analyses that the Debtors were required
to deliver to the Agent on or before September 15, 2004, the Debtors
were required to provide a commitment letter for exit financing which
was acceptable to the Agent and the Majority Lenders. As approved by the
bankruptcy court, the amendment required that the commitment letter be
delivered no later than October 15, 2004. Finally, the amendment
increased interest rates by 100 basis points on all loans outstanding
under the DIP Facility during the period from the date of the amendment
until November 6, 2004.

On or before October 15, 2004, the Debtors received financing commitment
letters from potential lenders for the funding required to emerge from
Chapter 11.

On November 1, 2004, the bankruptcy entered an interim order permitting
the Debtors to use cash collateral and approved on an interim basis an
additional new $10 million senior, secured credit facility which was
provided by certain of the Debtor's existing bondholders. The Debtors
obtained the additional financing when they could not reach an agreement
with the existing DIP lenders regarding certain non-financial covenants,
and the Debtors determined that it was in the best interest of creditors
to seek alternative financing. The new $10 million facility was senior
to the existing DIP Facility.

On November 19, 2004, the Debtors entered into a fifth amendment to the
DIP Facility. Pursuant to the amendment, the Company's current and
ongoing operations will continue to be funded pursuant to the existing
DIP Facility. The parties agreed that the interim order entered by the
bankruptcy court on November 1, 2004 would be vacated, and the
outstanding indebtedness under the interim facility was repaid on the
date of the amendment. Pursuant to the fifth amendment, certain

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DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

covenants under the DIP Facility, including those which required
maintenance of minimum operating EBITDA and approval of a budget, were
eliminated. Certain limitations applicable to the borrowing base were
also eliminated, which is expected to provide the Company with
approximately $10 million of additional liquidity. Also, certain
deadlines for completion of various steps in the bankruptcy emergence
process were extended. Finally, all defaults alleged under the financing
documents were waived.

The Debtors' access to financing necessary for their operations is again
limited to borrowings under the DIP Facility. If in the future they
were unable to maintain compliance with the covenants contained in the
DIP Facility, as amended, there can be no assurance that they would be
able to reach agreement with the lenders concerning further amendments
or waivers. If the Debtors did not have access to the DIP Facility for
working capital there can be no assurance that the Bankruptcy Court
would again permit access to cash collateral, or that cash available
would be sufficient to continue the Debtor's operations in the ordinary
course of business. Additionally, inability to obtain exit financing
could delay or prevent the Debtors successful reorganization and
emergence from bankruptcy.

The DIP financing order authorized the Debtors to grant first priority
mortgages, security interests, liens, and superpriority claims on
substantially all of the assets of the Debtors to secure the DIP
Facility.

Pursuant to the Bankruptcy Court's final order on May 28, 2004, the
Debtors repaid $34.3 million on the term loan which was outstanding at
the Petition Date with proceeds from a $34.3 million term loan included
in the DIP Facility. The remaining prepetition revolving credit balance
of $4.8 million was also repaid with proceeds of the DIP Facility.

Amounts borrowed under the DIP Facility boar interest, at the option of
the Debtors, at the rate of the London Interbank Offering Rate ("LIBOR")
plus 4.50% (6.53% as of October 2, 2004), or the Alternate Base Rate
plus 3.50% (8.25% as of October 2, 2004), for borrowings under the
revolving credit, and at the rate LIBOR plus 4.75% (6.78% as of October
2, 2004), or the Alternate Base Rate plus 3.75% (8.50% as of October 2,
2004), for borrowings under the Term Loan. As provided in the fourth
amendment to the DIP Facility, applicable rates were reduced by 100
basis points as of November 6, 2004. In addition, there is a fee of
0.50% on the unused commitment and a fee of 4.50% on letters of credit
outstanding. The DIP Facility is secured by substantially all of the
Debtors' assets. The DIP Facility imposes restrictions relating to,
among other things, capital expenditures, asset sales, incurrence or
guarantee of debt, acquisitions, sale of receivables, certain payments
and investments, affiliate and subsidiary transactions, payment of
dividends and repurchases of stock, derivatives, and excess cash. The
DIP Facility also requires that proceeds from sales of certain assets be
used to repay specified borrowings and permanently reduce the commitment
amount under the facility. Availability under the revolving credit of
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DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

the DIP Facility is based upon a borrowing base determined by reference
to eligible accounts receivable and inventory, as defined. At October
2, 2004, there was $69.5 million outstanding in borrowings under the
revolving credit facility at an average interest rate of 6.40%, and $6.0
million in letters of credit. Also at October 2, 2004, a total of $27.9
million was outstanding under the term loan, at an average interest rate
of 6.52%.

In connection with the finalization of the DIP Facility, and in
accordance with Emerging Issues Task Force Issue No. 98-14, "Debtor's
Accounting for Changes in Line-of-Credit or Revolving-Debt Arrange-
ments," the Company wrote off $2,802,000 of unamortized deferred
financing costs related to the prepetition borrowing base facility. The
write-off, which represented the portion of unamortized costs associated
with the decrease in borrowing capacity resulting from the refinancing
of the borrowing base facility into the DIP Facility, was included under
"Reorganization items" on the Condensed Consolidated Statement of
Operations.

6. Other Operating Costs, Net

Other operating costs, net for the nine months ended October 2, 2004
totaled $16,338,000 and consisted of pre-tax charges of: $13,748,000
relating to plant closures and staff reductions, all of which result
from actions taken by the Company to reduce manufacturing capacity and
fixed costs in light of recent declines in sales volume; and, $2,590,000
resulting from an adjustment to the carrying value of assets held for
sale.

In the second quarter of fiscal 2004, the Company decided to close its
garment manufacturing operations in Mexico, because of the continuing
losses generated by these operations. In connection with the closure, a
$3,903,000 pre-tax charge was recorded, consisting of a $3,385,000 non-
cash writedown of fixed assets, and $518,000 for severance and benefits
associated with the termination of approximately 350 employees. The
shutdown of the operations and payment of severance and benefits is
expected to be completed by the end of fiscal 2004.

On June 22, 2004 the Company announced that, in order to reduce
overhead, it would be terminating approximately 320 employees through
staff reductions and shift eliminations. The estimated cost of
severance and benefits associated with these terminations is $1,902,000,
most of which is expected to be paid by the end of fiscal 2004.

In the third quarter of fiscal 2004 the Company commenced the closure of
its finishing and sheet sewing facility in Danville, VA and a warehouse
in Portsmouth, VA. In connection with the closures, a $7,943,000 pre-
tax charge was recorded, consisting of a $6,764,000 non-cash writedown
of fixed assets and $1,179,000 for severance and benefits associated
with the termination of approximately 420 employees. The shutdown of
operations at the affected plants is expected to be completed in the
fourth quarter of fiscal 2004 and substantially all of the severance and
benefits will be paid by the end of the second quarter of fiscal 2005.
17

DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The $2,590,000 adjustment to the carrying value of assets held for sale,
which was recorded in the second quarter of fiscal 2004, represents a
reduction in the Company's estimate of proceeds that will be realized
from the future sale of the its plants in Greenville, South Carolina,
Fort Valley, Georgia, and Juliette, Georgia, which were closed in fiscal
2003. The reduction in estimated proceeds was due to the deterioration
in market conditions for textile facilities.

Other operating costs, net for the first nine months of fiscal 2003
consisted of: a $440,000 gain from the sale of surplus equipment,
recorded in the first quarter; a $12,189,000 pre-tax charge relating to
the closure of two manufacturing facilities, recorded in the second
quarter; and, $800,000 in severance and benefits expense relating to
staff reductions, recorded in the third quarter.

On June 11, 2003 the Company announced that it would be closing a home
fashions weaving facility located in Greenville, South Carolina and a
comforter sewing plant in Fort Valley, Georgia, in order to rationalize
capacity in its home fashions business. In connection with the
closings, a $12,189,000 pre-tax charge was recorded in the second
quarter of fiscal 2003, consisting of a $10,238,000 non-cash writedown
of fixed assets, and $1,951,000 of other exit costs, primarily severance
and benefits associated with the termination of 630 employees. The
shutdown of the plants was substantially completed in the third quarter
of fiscal 2003, and substantially all severance and exit costs were paid
prior to the end of the first quarter of fiscal 2004.

On August 22, 2003 the Company announced that, in order to reduce
overhead costs, it had eliminated approximately 80 salaried positions
throughout the Company's operations. As a result, a pre-tax charge of
$800,000 was recorded, representing the estimated severance and benefit
costs associated with the staff reductions. Substantially all of these
costs has been paid by the end of the first quarter of fiscal 2004.

Following is a summary of the reserve account activity relating to exit
costs for the first nine months of fiscal 2004 (in thousands):

Balance at January 3, 2004 $2,283
Expenses accrued 3,599
Expenditures (2,339)
------
Balance at October 2, 2004 $3,543
======
18

DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. Goodwill Impairment

Due to the deterioration in the performance of its home fashions bedding
business that occurred in fiscal 2003, which is considered an indication
of possible impairment under accounting guidelines, the Company
evaluated goodwill for impairment as of the third quarter of fiscal
2003, rather than waiting for the annual impairment review that is
normally performed in the fourth quarter of the fiscal year. With the
assistance of an outside consultant, the Company completed the
impairment test, which, based on a comparison of the fair value of the
home fashions bedding business unit to its book value, indicated that
the goodwill was, in fact, fully impaired. For this purpose, the fair
value of the business unit was determined primarily by a discounted cash
flow approach. The Company recorded a $91,701,000 charge for impairment
of goodwill, which represented the write-off of the entire remaining
balance of goodwill, all of which related to the home fashions bedding
unit.

8. Income Taxes

No income tax benefits were recorded against the pre-tax losses for the
three- and nine- month periods ended October 2, 2004 or September 27,
2003, as potential future tax benefits associated with the losses for
these periods were fully offset by increases to the valuation allowance
against deferred tax assets. Additions to the allowance were $7,100,000
and $25,600,000 for the three- and nine-month periods ended October 2,
2004, respectively, and $3,784,000 and $10,552,000 for the three- and
nine-month periods ended September 27, 2003, respectively. As of the
end of each fiscal period presented, the Company's net deferred tax
assets were fully offset by the valuation allowance. The valuation
allowance is necessary because, in light of the Company's recent history
of operating losses and other available evidence, management does not
believe that it is more likely than not that the tax benefits associated
with the deferred tax assets, to the extent they exceed the deferred tax
liabilities, will be realized.

9. Pension Plans

The Company sponsors qualified noncontributory defined benefit pension
plans that cover the majority of its full-time employees. In fiscal 2001
the Company adopted nonqualified supplemental retirement plans covering
certain key management employees. These supplemental plans are unfunded
and provide participants with retirement benefits in excess of qualified
plan limitations. On July 21, 2004 the Company adopted amendments to
freeze benefit accruals under its qualified defined benefit plans
effective September 20, 2004. The Company has suspended benefit
accruals under the supplemental plans pending the results of the
bankruptcy proceedings.
19

DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Net periodic benefit cost included the following components:

20

DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company contributed $5,580,000 to its pension plans in the first nine
months of fiscal 2004 and estimates that it will contribute an additional
$1,633,000 to the plans in the remainder of fiscal 2004.

10. Shareholders' Equity

Activity in Shareholders' Equity is as follows:

Accumu-
lated Unearned
Addi- Other Compen- Total
tional Accumu- Compre- sation- Share-
Common Stock Paid-in lated hensive Restricted holders'
Class A Class B Capital Deficit Loss Stock Equity
------- ------- -------- -------- ------- -------- --------
(in thousands)

Balance at
January 3,
2004 $ 204 $ 21 $ 210,090 $(119,340)$(11,197)$ (293) $ 79,485

Comprehensive loss:
Net loss -- -- -- (72,669) -- -- (72,669)
Unrealized loss on
securities -- -- -- -- (29) -- (29)
---------
Comprehensive loss (72,698)
---------
Retirement of
common stock -- -- (33) -- -- -- (33)
Restricted stock
awards -- -- 90 -- -- (90) --
Amortization of
unearned
compensation -- -- -- -- -- 174 174
Conversion of
shares 7 (7) -- -- -- -- --
------- ------ --------- --------- -------- ------- --------
Balance at
Oct. 2, 2004$ 211 $ 14 $ 210,147 $(192,009) $(11,226)$ (209) $ 6,928
======= ====== ========= ========= ======== ======== =========

21

DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11. Earnings Per Share

The following table sets forth the computation of basic and diluted
earnings per share:

The effect of potentially dilutive securities is computed using the
treasury stock method. Because the Company reported a loss in each of
the periods presented, all outstanding restricted stock and stock
options were excluded from the computations of diluted loss per share,
as their inclusion would have been antidilutive.

22

DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12. Segment Information

Beginning in the third quarter of fiscal 2004, the Company's segment
reporting has been changed to reflect changes in the Company's
organizational and internal financial reporting structures. The
Company's apparel fabrics business, which previously had been reported
as a separate segment, has been combined with the former home fashions
segment. Together, these businesses are now reported as the Dan River
segment. The Company will continue to report the engineered products
business as a separate segment.

Summarized information by reportable segment is shown below. Prior
period information has been restated to reflect the reporting change
discussed above.

23

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

CHAPTER 11 FILINGS

As more fully described in Note 1 to the condensed consolidated financial
statements, on March 31, 2004, the Debtors filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the Northern District of Georgia. The Debtors are
currently operating their businesses as debtors-in-possession pursuant to the
Bankruptcy Code.

The Debtors filed a plan of reorganization in the Bankruptcy Court on July
28, 2004. The plan does not provide for any recovery for holders of Dan
River Inc. equity securities, including the Class A and Class B Common Stock.
The Debtors are actively engaged in discussions with a number of potential
providers of exit financing. The Debtors expect to seek the requisite
acceptance of the plan by creditors and third parties and confirmation of the
plan by the Bankruptcy Court, all in accordance with the applicable
provisions of the Bankruptcy Code.

As a result of the bankruptcy filing, our creditors were automatically stayed
from taking certain enforcement actions under their respective agreements
with us unless the stay is lifted by the Bankruptcy Court. In addition, the
Debtors have entered into the DIP facility, which is more fully described
below under "Liquidity and Capital Resources."

During the Chapter 11 process, we may with Bankruptcy Court approval sell
assets and settle liabilities, including for amounts other than those
reflected in our financial statements. As permitted under the Bankruptcy
Code, we have rejected certain executory contracts and leases that are not
necessary for the business going forward, and are in the process of reviewing
our remaining executory contracts and unexpired leases to determine which, if
any, we will reject. We cannot presently estimate the ultimate liability
that may result from rejecting contracts or leases or from the filing of
claims for any rejected contracts or leases, and no provisions have yet been
made for these items. The administrative and reorganization expenses
resulting from the Chapter 11 process will unfavorably affect our results of
operations. Future results of operations may also be affected by other
factors related to the Chapter 11 process.

Our condensed consolidated financial statements are presented in accordance
with American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" ("SOP 90-7"), and have been prepared in accordance with accounting
principles generally accepted in the United States applicable to a going
concern, which principles assume, except as disclosed, that assets will be
realized and liabilities will be discharged in the ordinary course of
business. The Debtors are currently operating as debtors-in-possession under
Chapter 11 of the Bankruptcy Code, and their continuation as a going concern
is contingent upon, among other things, their ability to gain approval of the
plan of reorganization by the requisite parties under the Bankruptcy Code and
have the plan confirmed by the Bankruptcy Court, comply with the DIP
24

facility, return to profitability, generate sufficient cash flows from
operations and obtain financing sources to meet future obligations. There can
be no assurance that the Debtors will be able to achieve any of these
results. The condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might
result from the outcome of these uncertainties.

While under the protection of Chapter 11, the Debtors may sell or otherwise
dispose of assets, and liquidate or settle liabilities, for amounts other
than those reflected in the financial statements. In addition, the amounts
reported could materially change because of various factors, including
changes in business strategies and the effects of any proposed plan or
reorganization. In the Chapter 11 proceedings, substantially all unsecured
liabilities as of the petition date are subject to compromise or other
treatment under a plan of reorganization which must be confirmed by the
Bankruptcy Court after submission to any required vote by affected parties.
Generally, all actions to enforce or otherwise effect repayment of
prepetition liabilities, as well as all pending litigation against the
Debtors, are stayed while the Debtors continue their business operations as
debtors-in-possession. The ultimate amount of and settlement terms for such
liabilities are not presently determinable. Under SOP 90-7, those
liabilities and obligations whose treatment and satisfaction is dependent on
the outcome of the Chapter 11 proceedings have been segregated and classified
as liabilities subject to compromise on the condensed consolidated balance
sheet. Pursuant to SOP 90-7, professional fees associated with the Chapter 11
proceedings are expensed as incurred and reported as reorganization items.
Interest expense is reported only to the extent that it will be paid during
the Chapter 11 proceedings or that it is probable that it will be an allowed
claim.

RESULTS OF OPERATIONS

CHANGE IN SEGMENT REPORTING

Beginning in the third quarter of fiscal 2004, our segment reporting has been
changed to reflect changes in Dan River's organizational and internal
financial reporting structures. Our apparel fabrics business, which
previously had been reported as a separate segment, has been combined with
the former home fashions segment. Together, these businesses are now
reported as the Dan River segment. We will continue to report the engineered
products business as a separate segment. In the discussion below, prior
period information has been restated to reflect the reporting change.

Comparison of Three Months Ended October 2, 2004 and September 27, 2003:

NET SALES

Net sales for the third quarter of fiscal 2004 were $105.2 million, an
increase of $1.5 million or 1.4% over the third quarter of fiscal 2003.

Net sales for the Dan River segment were $96.8 million for the third quarter
of fiscal 2004, approximately the same level as for the third quarter of
fiscal 2003. However, net sales of home fashions products declined by $6.1
million or 8% from $76.4 million to $70.3 million over the comparable
25

period. Offsetting this decline was an increase of $6.0 million in net sales
of apparel fabrics products, a 29% increase from $20.5 million to $26.5
million in the third quarter of fiscal 2004 compared to the same period in
fiscal 2003. Net sales of home fashions products decreased in all major
retail distribution channels, reflecting slow retail business conditions,
expiring juvenile bedding licenses, and concerns from certain customers over
our Chapter 11 status. Net sales to Kmart, our largest home fashions
customer, were $1.1 million lower in the third quarter of fiscal 2004
compared to the third quarter of fiscal 2003. The increase in apparel
fabrics net sales is due to higher sales of sportswear fabric to a major
customer for a pant fabric program and increased sales of career apparel
fabrics.

Net sales of engineered products for the third quarter of fiscal 2004 were
$8.4 million, an increase of $1.6 million or 23.9% over the third quarter of
fiscal 2003. The increase in net sales this year reflects shipments to
several additional customers whereas during the same quarter last year net
sales were lower due to slow business conditions.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $13.0 million for the third
quarter of fiscal 2004 (12.3% of net sales), a decrease of $0.8 million or
6.1% from $13.8 million (13.3% of net sales) for the third quarter of fiscal
2003. The decrease was generally caused by lower salary and benefit costs,
which was attributable to staff reductions made in the third quarter of
fiscal 2003 and the second quarter of fiscal 2004.

OPERATING INCOME (LOSS)

We had a consolidated operating loss of $18.1 million in the third quarter of
fiscal 2004, compared to a $97.5 million operating loss in the third quarter
of fiscal 2003.

Segment Operating Income (Loss):

The Dan River segment had a $9.4 million operating loss in the third quarter
of fiscal 2004, compared to a $3.4 million operating loss for the third
quarter of fiscal 2003. The larger operating loss in the third quarter of
fiscal 2004 reflects a $6.9 million reduction in gross profit, offset by a
$0.9 million decrease in selling, general and administrative expenses. Gross
margins decreased to 3.1% of net sales in the third quarter of fiscal 2004
from 10.2% in the third quarter of fiscal 2003. Contributing to the decrease
in gross margins were promotional pricing of home fashions products, lower
first quality manufacturing yields in apparel fabrics sportswear products,
and higher per unit manufacturing costs due to lower production capacity
utilization.

The engineered products segment generated $0.1 million in operating income
for the third quarter of fiscal 2004 compared to a $1.0 million operating
loss in the third quarter of fiscal 2003. The $0.9 million improvement in
operating income primarily reflects higher net sales during the quarter and
lower manufacturing costs due to lower overhead and improvements in
manufacturing processes.

26

Corporate Items:

Impairment of Goodwill

Due to the deterioration in the performance of our home fashions bedding
business that occurred in fiscal 2003, which is considered an indication of
possible impairment under accounting guidelines, we evaluated goodwill for
impairment as of the third quarter of fiscal 2003, rather than waiting for
the annual impairment review that is normally performed in the fourth quarter
of the fiscal year. With the assistance of an outside consultant, we
completed the impairment test, which, based on a comparison of the fair value
of the home fashions bedding business to its book value, indicated that the
goodwill was, in fact, fully impaired. Accordingly, we recorded a $91.7
million charge for impairment of goodwill, which represented the write-off of
the entire remaining balance of goodwill, all of which relates to our home
fashions bedding unit.

Other Operating Costs, Net

Other operating costs, net for the third quarter of fiscal 2004 consisted of
a $7.9 million pre-tax charge relating to the closure of our finishing and
sheet sewing facility in Danville, VA and our warehouse in Portsmouth, VA.
The charge included a $6.7 million non-cash writedown of fixed assets and
$1.2 million of severance and benefits associated with the termination of
approximately 420 employees. We expect that the shutdown of the affected
facilities will be completed in the fourth quarter of fiscal 2004 and that
substantially all of the severance and benefits will be paid by the end of
the second quarter of fiscal 2005.

Other operating costs, net for the third quarter of fiscal 2003 consisted of
a $0.8 million pre-tax charge for estimated severance and employee benefit
costs associated with the elimination of approximately 80 salaried positions.
Substantially all of these costs were been paid by the end of the first
quarter of fiscal 2004.

Other Corporate Items

Other corporate items not allocated to segments, which consisted of idle
facility costs and other expenses totaled $0.8 million for the third quarter
of fiscal 2004, compared to $0.6 million (expense) for the third quarter of
fiscal 2003.

OTHER INCOME, NET

Other income, net was $0.8 million for the third quarter of fiscal 2004,
compared to $1.1 million for the third quarter of fiscal 2003. The amounts
for both periods were attributable to gains related to life insurance
policies.

INTEREST EXPENSE

For periods subsequent to our Chapter 11 filing, interest expense is reported
only to the extent that it will be paid during the bankruptcy proceedings or
that it is probable that it will be an allowed claim. Interest expense
reported for the third quarter of fiscal 2004 was $2.8 million. Total
contractual interest for the period, including interest that was not reported
27

because it did not meet the criteria described above, was $8.3 million, an
increase of $1.2 million over interest expense reported for the third quarter
of fiscal 2003. The majority of the increase was attributable to higher
average debt levels.

REORGANIZATION ITEMS

During the third quarter of fiscal 2004, we recognized charges of $4.0
million for reorganization items, including $3.2 million for professional
fees related to the Chapter 11 proceedings and $0.8 million for employee
retention incentives for services rendered through October 2, 2004.

INCOME TAXES

No income tax benefits were recorded against the pre-tax losses for the third
quarter of fiscal 2004 or fiscal 2003, as potential future tax benefits
associated with the losses for these periods were fully offset by increases
to the valuation allowance against deferred tax assets. Additions to the
allowance were $7.1 million and $3.8 million for the third quarter of fiscal
2004 and fiscal 2003, respectively. As of October 2, 2004 and September 27,
2003, our net deferred tax assets were fully offset by the valuation
allowance. The valuation allowance is necessary because, in light of our
recent history of operating losses and other available evidence, management
does not believe that it is more likely than not that the tax benefits
associated with the deferred tax assets, to the extent they exceed the
deferred tax liabilities, will be realized.

Comparison of Nine Months Ended October 2, 2004 and September 27, 2003:

NET SALES

Net sales for the first nine months of fiscal 2004 were $336.3 million, a
decrease of $31.2 million or 8.5% from the first nine months of fiscal 2003.

Net sales for the Dan River segment were $310.3 million for the first nine
months of fiscal 2004, a decrease of $31.6 million or 9.2% from the first
nine months of fiscal 2003. The decrease is primarily due to a $32.3 million
reduction in net sales of home fashions products, where sales were lower in
all channels of distribution except in the hospitality and sheeting area, in
which net sales increased by $10.5 million. The lower sales reflect slow
retail business conditions, expiring juvenile bedding licenses, and concerns
from certain customers over our Chapter 11 status. Net sales to Kmart, our
largest home fashions customer, were $18.4 million lower in the first nine
months of fiscal 2004 compared to the first nine months of fiscal 2003.

Net sales of engineered products for the first nine months of fiscal 2004
were $25.9 million, an increase of $0.4 million or 1.5% over the first nine
months of fiscal 2003.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $43.0 million for the first
nine months of fiscal 2004 (12.8% of net sales), a decrease of $4.1 million
or 8.7% from $47.1 million (12.8% of net sales) for the first nine months of
fiscal 2003. The decrease amount was generally caused by lower salary and
benefit costs, which was attributable to staff reductions made in the third
quarter of fiscal 2003 and the second quarter of fiscal 2004.
28

OPERATING INCOME (LOSS)

We had a consolidated operating loss of $47.7 million in the first nine
months of fiscal 2004, compared to a $100.1 million operating loss in the
first nine months of fiscal 2003.

Segment Operating Income (Loss):

The Dan River segment had a $27.2 million operating loss in the first nine
months of fiscal 2004, compared to $7.8 million in operating income for the
first nine months of fiscal 2003. The lower profitability in the first nine
months of fiscal 2003 reflects a $39.5 million reduction in gross profit,
offset by a $4.9 million decrease in selling, general and administrative
expenses. The lower gross profit reflects the $31.6 million decrease in
sales, discussed above, and lower gross margins, which decreased to 4.2% of
net sales in the first nine months of fiscal 2004 from 15.5% in the first
nine months of fiscal 2003. Contributing to the decrease in gross margins
were promotional pricing of home fashions products, lower first quality
manufacturing yields in apparel fabrics sportswear products, and higher per
unit manufacturing costs due to lower production capacity utilization.

The engineered products segment had a $0.4 million operating loss in the
first nine months of fiscal 2004 compared to a $2.5 million operating loss in
the first nine months quarter of fiscal 2003. This improvement reflects
overhead reductions, inventory reductions, improved manufacturing processes
and lower selling, general and administrative expenses.

Corporate Items:

Impairment of Goodwill

As discussed above, we recorded a $91.7 million charge for impairment of
goodwill in the third quarter of fiscal 2003, which represents the write-off
of the entire remaining balance of goodwill, all of which relates to our home
fashions bedding business unit.

Other Operating Costs, Net

Other operating costs, net for the first nine months of fiscal 2004 totaled
$16.3 million and consisted of pre-tax charges of: $13.7 million relating to
plant closures and staff reductions, all of which result from actions we have
taken to reduce manufacturing capacity and fixed costs in light of recent
declines in sales volume; and $2.6 million resulting from an adjustment to
the carrying value of assets held for sale.

In the second quarter of fiscal 2004, we decided to close our garment
manufacturing operations in Mexico, because of the continuing losses
generated by these operations. In connection with the closure, a $3.9
million pre-tax charge was recorded, consisting of a $3.4 million non-cash
writedown of fixed assets, and $0.5 million for severance and benefits
associated with the termination of approximately 350 employees. The shutdown
of the operations and payment of severance and benefits is expected to be
completed by the end of fiscal 2004.

On June 22, 2004 we announced that, in order to reduce overhead we would be
terminating approximately 320 employees through staff reductions and shift
29

eliminations. The estimated cost of severance and benefits associated with
these terminations is $1.9 million, most of which is expected to be paid by
the end of fiscal 2004.

As discussed above, in the third quarter of fiscal 2004 we recorded a pre-tax
charge of $7.9 million relating to the closure of our finishing and sheet
sewing facility in Danville, VA and our warehouse in Portsmouth, VA.

The $2.6 million adjustment to the carrying value of assets held for sale,
which was recorded in the second quarter of fiscal 2004, represents a
reduction in our estimate of proceeds that will be realized from the future
sale of our plants in Greenville, South Carolina, Fort Valley, Georgia, and
Juliette, Georgia, which were closed in fiscal 2003. The reduction in
estimated proceeds was due to the deterioration in market conditions for
textile facilities.

Other operating costs, net for the first nine months of fiscal 2003 consisted
of: a $0.4 million gain from the sale of surplus equipment, recorded in the
first quarter; a $12.2 million pre-tax charge relating to the closure of two
manufacturing facilities, recorded in the second quarter; and $0.8 million in
severance and benefits expense relating to staff reductions, recorded in the
third quarter (discussed above).

On June 11, 2003 we announced that we would be closing a home fashions
weaving facility located in Greenville, South Carolina and a comforter sewing
plant in Fort Valley, Georgia, in order to rationalize capacity in our home
fashions business. In connection with the closings, a $12.2 million pre-tax
charge was recorded in the second quarter of fiscal 2003, consisting of a
$10.2 million non-cash writedown of fixed assets, and $2.0 million of other
exit costs, primarily severance and benefits associated with the termination
of 630 employees. The shutdown of the plants was substantially completed in
the third quarter of fiscal 2003, and substantially all severance and exit
costs were paid prior to the end of the first quarter of fiscal 2004.

Other Corporate Items

Other corporate items not allocated to segments totaled $3.7 million for the
first nine months of fiscal 2004 and is comprised of: $1.4 million of idle
facility costs; a $0.7 million writedown of inventories in connection with
the closure of our Mexican operations (discussed above); $0.8 million for
professional fees incurred prior to our bankruptcy filing for debt-related
matters; and $0.8 million of other expenses not directly related to segment
business.

Other corporate items not allocated to segments totaled $1.2 million for the
first nine months of fiscal 2003 and consisted of idle facility costs and
other expenses.

OTHER INCOME, NET

Other income, net was $0.5 million for the first nine months of fiscal 2004,
and consisted of $0.6 million in gains related to life insurance policies and
$0.1 million in interest income, offset by various expenses of $0.2 million.
For the first nine months of fiscal 2003, other income, net was $0.9 million,
and consisted of $1.6 million in gains related to life insurance policies,
30

interest income of $0.3 million and various other income items of $0.3
million, offset in part by a $1.3 million expense for the write-off of
unamortized costs associated with debt retired in connection with our
refinancing completed in April 2003.

INTEREST EXPENSE

For periods subsequent to our Chapter 11 filing, interest expense is reported
only to the extent that it will be paid during the bankruptcy proceedings or
that it is probable that it will be an allowed claim. Interest expense
reported for the first nine months of fiscal 2004 was $12.8 million. Total
contractual interest for the period, including interest that was not reported
because it did not meet the criteria described above, was $24.3 million, an
increase of $3.5 million over interest expense reported for the first nine
months of fiscal 2003. The majority of the increase was attributable to
higher average debt levels.

REORGANIZATION ITEMS

During the first nine months of fiscal 2004, we recognized charges of $12.6
million for reorganization items, including $8.4 million for professional
fees related to the Chapter 11 proceedings, $2.8 million for the non-cash
write-off of a portion of the deferred financing fees associated with our
prepetition credit agreement which was refinanced under the DIP facility, and
$1.4 million for employee retention incentives for services rendered through
October 2, 2004.

INCOME TAXES

No income tax benefits were recorded against the pre-tax losses for the first
nine months of fiscal 2004 or fiscal 2003, as potential future tax benefits
associated with the losses for these periods were fully offset by increases
to the valuation allowance against deferred tax assets. Additions to the
allowance were $25.6 million and $10.6 million for the first nine months of
fiscal 2004 and 2003, respectively. As of October 2, 2004 and September 27,
2003, our net deferred tax assets were fully offset by the valuation
allowance. The valuation allowance is necessary because, in light of our
recent history of operating losses and other available evidence, management
does not believe that it is more likely than not that the tax benefits
associated with the deferred tax assets, to the extent they exceed the
deferred tax liabilities, will be realized.

LIQUIDITY AND CAPITAL RESOURCES

General

With the filing of our petition for reorganization on March 31, 2004, our
administrative expenses of the proceedings, working capital needs, and
capital improvements are provided for by cash from operations and the DIP
Facility, discussed below.

Working Capital

Our operations are working capital intensive. Our operating working capital
(accounts receivable and inventories less accounts payable and accrued
expenses) typically increases and decreases in relation to sales and
operating activity levels.
31

Net cash generated by operating activities in the nine months ended October
2, 2004 was $7.8 million. The net loss, adjusted for noncash expense items,
net, used $27.7 million of cash. This was offset by a $35.5 million source
of cash from changes in operating assets and liabilities, comprised of a
$34.7 million source from operating working capital (accounts receivable -
$5.1 million use, inventories - $18.5 million source, and accounts payable
and accrued expenses - $21.4 million source) and a $0.8 million source of
cash for prepaid expenses and other assets and other liabilities.

In the first nine months of fiscal 2003, net cash generated from operating
activities was $18.3 million. The net loss for that period, adjusted for
noncash expense items, net, generated $15.7 million of cash. Additionally,
changes in operating assets and liabilities generated $2.7 million of cash,
comprised of a $4.4 million source of cash from operating working capital
(accounts receivable - $20.3 million source, inventories - $8.3 million use,
and accounts payable and accrued expenses - $7.6 million use) and a $1.7
million use of cash for prepaid expenses and other assets and other
liabilities.

DIP Financing Facility

On April 1, 2004, the Bankruptcy Court approved a $145 million DIP Facility
on an interim basis. The DIP Facility authorized us to grant first priority
mortgages, security interests, liens, and superpriority claims on
substantially all of the assets of the Debtors to secure the DIP Facility.
On May 27, 2004, we entered into an amendment which, among other things,
revised the Minimum Operating EBITDA which we were required to maintain
during the term of the DIP Facility and revised the cash budget which we were
required to meet. A final order with respect to the DIP Facility was entered
on May 28, 2004.

On July 20, 2004, we entered into a second amendment to the DIP Facility,
which among other things, required that revolving loans under the DIP
Facility could not exceed $73 million during the period from July 20, 2004
through July 31, 2004. On July 31, 2004, we entered into a third amendment
to the DIP Facility which, among other things, provided that during the
period from July 31, 2004 through August 21, 2004, revolving loans under the
DIP Facility could not exceed $75 million. On August 18, 2004, we entered
into a fourth amendment to the DIP Facility. The fourth amendment waived
until November 6, 2004 a default of the financial covenant pertaining to
minimum operating EBITDA for the fiscal month ended July 3, 2004, and
established new monthly operating EBITDA covenants through the fiscal month
ending October 2, 2004. The amendment also provided that commencing on the
date of the amendment and ending on November 6, 2004, outstanding Revolving
Loans could not exceed $75 million, and the aggregate amount of Letter of
Credit Obligations and Revolving Loans together could not exceed $82 million.
In addition to certain business plans and other information and analyses that
we were required to deliver to the Agent on or before September 15, 2004, we
were required to provide a commitment letter for exit financing which was
acceptable to the Agent and the Majority Lenders. As approved by the
bankruptcy court, the amendment required that the commitment letter be
delivered no later than October 15, 2004. Finally, the amendment increased
interest rates by 100 basis points on all loans outstanding under the DIP
Facility during the period from the date of the amendment until November 6,
2004.
32

On or before October 15, 2004, we received financing commitment letters from
potential lenders for the funding required to emerge from Chapter 11.

On November 1, 2004, the bankruptcy court entered an interim order permitting
us to use cash collateral and approved on an interim basis an additional new
$10 million senior, secured credit facility which was provided by certain of
our existing bondholders. We obtained the additional financing when we could
not reach an agreement with the existing DIP lenders regarding certain non-
financial covenants, and we determined that it was in the best interest of
creditors to seek alternative financing. The new $10 million facility was
senior to the existing DIP Facility.

On November 19, 2004, we entered into a fifth amendment to the DIP Facility.
Pursuant to the amendment, our current and ongoing operations will continue
to be funded pursuant to the existing DIP Facility. The parties agreed that
the interim order entered by the bankruptcy court on November 1, 2004 would
be vacated, and the outstanding indebtedness under the interim facility was
repaid on the date of the amendment. Pursuant to the fifth amendment,
certain covenants under the DIP Facility, including those which required
maintenance of minimum operating EBITDA and approval of a budget, were
eliminated. Certain limitations applicable to the borrowing base were also
eliminated, which is expected to provide us with approximately $10 million of
additional liquidity. Also, certain deadlines for completion of various
steps in the bankruptcy emergence process were extended. Finally, all
defaults alleged under the financing documents were waived.

Our access to financing necessary for our operations is presently limited to
borrowings under the DIP Facility. If in the future we were unable to
maintain compliance with the covenants contained in the DIP Facility, as
amended, there can be no assurance that we would be able to reach agreement
with the lenders concerning further amendments or waivers. If we did not
have access to the DIP Facility for our working capital, there can be no
assurance that the Bankruptcy Court would again permit access to our cash
collateral, or that cash available would be sufficient to continue our
operations in the ordinary course of business. Additionally, our inability
to obtain exit financing could delay or prevent our successful reorganization
and emergence from bankruptcy.

Pursuant to the final order of May 28, 2004 we repaid $34.3 million on the
term loan which was outstanding at the Petition Date with proceeds from a
$34.3 million term loan included in the DIP Facility. At November 19, 2004,
there was $23.5 million outstanding under the term loan at an average
interest rate of 7.75%. Also at November 19, 2004, there was $73.2 million
outstanding in borrowings under the revolving credit facility at an average
interest rate of 7.08%, and $4.6 million in letters of credit.

Amounts borrowed under the DIP Facility will bear interest at our option at
the rate of the London Interbank Offering Rate ("LIBOR") plus 3.50% (5.89% as
of November 19, 2004), or the Alternate Base Rate plus 2.50% (7.50% as of
November 19, 2004), for borrowings under the revolving credit, and at LIBOR
plus 3.75% (6.14% as of November 19, 2004), or the Alternate Base Rate plus
2.75% (7.75% as of November 19, 2004), for borrowings under the Term Loan.
In addition, there is a fee of 0.50% on the unused commitment and a fee of
3.50% on letters of credit outstanding.

33

The DIP Facility, as amended, imposes restrictions relating to, among other
things, capital expenditures, asset sales, incurrence or guarantee of debt,
acquisitions, sale or of receivables, certain payments and investments,
affiliate and subsidiary transactions, payment of dividends and repurchases
of stock, derivatives, and excess cash. The DIP Facility also requires that
proceeds from sales of certain assets be used to repay specified borrowings
and permanently reduce the commitment amount under the facility. Availability
under the revolving credit of the DIP Facility is based upon a borrowing base
determined by reference to eligible accounts receivable and inventory, as
defined.

Investing Activities

During the first nine months of fiscal 2004, we purchased $1.9 million in
equipment and manufacturing improvements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes to the disclosure contained in our Annual
Report on Form 10-K for the fiscal year ended January 3, 2004.

Item 4. Controls and Procedures.

As of the end of the period covered by this report, management, including our
chief executive officer and chief financial officer, evaluated the
effectiveness of the design and operation of the company's disclosure
controls and procedures. Based upon, and as of the date of, that evaluation,
our chief executive officer and chief financial officer concluded that the
disclosure controls and procedures were effective, in all material respects,
to ensure that information required to be disclosed in the reports we file
and submit under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported as and when required.

There have been no significant changes in the company's internal control over
financial reporting that occurred during our last fiscal quarter that has
materially effected, or is reasonably likely to materially effect, our
internal control over financed reporting. There were no significant
deficiencies or material weaknesses identified in the evaluation and,
therefore, no corrective actions were taken.

34

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the federal securities laws. Statements that are not
historical facts, including statements about our beliefs and expectations,
are forward-looking statements. Forward-looking statements include statements
generally preceded by, followed by or that include the words "believe,"
"expect," "anticipate," "plan," "estimate" or similar expressions. These
statements include, among others, statements regarding our expected business
outlook, the Chapter 11 process, anticipated financial and operating results,
strategies, contingencies, financing plans, working capital needs, sources of
liquidity, estimated amounts and timing of capital expenditures,
environmental compliance costs and other expenditures, and expected outcomes
of litigation.

Forward-looking statements reflect our current expectations and are not
guarantees of performance. These statements are based on our management's
beliefs and assumptions, which in turn are based on currently available
information. Important assumptions relating to these forward-looking
statements include, among others, assumptions regarding demand for our
products, continued availability of the DIP Facility, expected pricing
levels, raw material costs, the timing and cost of planned capital
expenditures, the estimated cost of environmental compliance, expected
outcomes of pending litigation, competitive conditions and general economic
conditions. These assumptions could prove inaccurate. Forward-looking
statements also involve risks and uncertainties, which could cause actual
results to differ materially from those contained in any forward-looking
statement. Many of these factors are beyond our ability to control or
predict. Such factors include, but are not limited to, the factors set forth
in Exhibit 99.1, "Cautionary Statements relating to Forward Looking
Statements," filed with our Annual Report on Form 10-K for the fiscal year
ended January 3, 2004, and the following:

. general economic and political conditions and the cyclicality of the
textile industry;

. developing, securing approval of, and implementing a successful plan of
reorganization in the Chapter 11 process;

. obtaining financing for our exit from bankruptcy;

. competitive conditions in the textile industry;

. our ability to operate our business under the restrictions imposed by
the Chapter 11 process and in compliance with the limitations in the DIP
Facility;

. our ability to implement manufacturing cost reductions, efficiencies and
other improvements;

. fluctuations in the supply of raw materials or shortages of the supply
of raw materials;

. our ability to maintain or acquire licenses;
35

. our ability to fund our capital expenditure requirements needed to
maintain our competitive position;

. the effect of U.S. governmental policies regarding imports on our
competitiveness;

. our compliance with environmental, health and safety laws and
regulations;

. changes in our relationship with our large customers, including the
ability to maintain relationships with these customers, licensors and other
constituencies, in light of the Chapter 11 process;

. business-related difficulties of our customers;

. our dependence on outside production sources;

. our ability to compete with foreign imports;

. the significant time that will be required by management to structure
and implement a plan of reorganization;

. our reliance on key management personnel, including the effects of the
Chapter 11 process on our ability to attract and retain key management
personnel; and

. our relationship with the union representing some of our employees.

You should not place undue reliance on any forward-looking statements,
which are based on current expectations. Further, forward-looking statements
speak only as of the date they are made, and we undertake no obligation to
update publicly any of them in light of new information or future events.

36

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

On March 31, 2004, we and our domestic subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in the U.S. Bankruptcy Court for the Northern
District of Georgia (Case Nos. 04-10990 though 04-10993). We are
currently operating our businesses as debtors-in-possession
pursuant to the Bankruptcy Code. As a result of the filing, pre-
petition obligations of the Debtors, including obligations under
debt instruments, generally may not be enforced against the
Debtors, and any actions to collect pre-petition indebtedness are
automatically stayed, unless the stay is lifted by the Bankruptcy
Court. For more information about the filing, see Part I, Item 2.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."

From time to time, we are a party to litigation arising in the
ordinary course of our business. We are not currently a party to
any litigation that we believe could reasonably be expected to have
a material adverse effect on our results of operations or financial
condition.

Item 5. (a) In lieu of filing a Current Report on Form 8-K, we are
disclosing the following information in this Quarterly Report on
Form 10-Q:

Entry into a Material Definitive Agreement (1.01) and Termination
of a Material Definitive Agreement (1.02).

On November 19, 2004 we entered into an amendment to our existing
$110 million Debtor-in-Possession (DIP) revolving credit facility
and $35 million DIP term loan with Deutsche Bank Trust Company
Americas, as Agent, and the lenders party thereto. (See Exhibit
10.1 to this Quarterly Report on Form 10-Q.) Pursuant to the
amendment, the lenders will continue to fund our current and
ongoing operations. Additionally, the parties agreed that an
interim order entered by the bankruptcy court on November 1, 2004
would be vacated. The interim order provided that we could use
cash collateral and approved, on an interim basis, an additional
new $10 million senior, secured credit facility to be provided by
certain of our existing bondholders. The outstanding indebtedness
under the interim facility was repaid on November 19, 2004.

Pursuant to the amendment, certain covenants under the existing DIP
agreement, including those which required maintenance of minimum
operating EBITDA and approval of a budget were eliminated. Certain
limitations applicable to the borrowing base were also eliminated,
which is expected to provide us with approximately $10 million of
additional liquidity. Also, certain deadlines for completion of
various steps in the bankruptcy emergence process were extended.
Finally, the existing DIP lenders waived all defaults alleged under
the financing documents.

37

Item 6. Exhibits.

(a) Exhibits.

The Exhibits listed as applicable on the accompanying
Exhibit Index are filed as part of this Quarterly Report.

38

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.

DAN RIVER INC.

Date: November 22, 2004 /s/ Barry F. Shea
-----------------------------------
Barry F. Shea
Executive Vice President-Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)

39

EXHIBIT INDEX
-------------

Exhibit No. Description of Exhibit
- ----------- ----------------------

2.1 Joint Plan of Reorganization of Dan River Inc., The Bibb
Company LLC, Dan River International Ltd. and Dan River
Factory Stores, Inc. (incorporated by reference to Exhibit
99.1 in Current Report on Form 8-K filed August 2, 2004 (File
No. 1-13421))

2.2 Disclosure Statement for Joint Plan of Reorganization Filed by
Dan River Inc., The Bibb Company LLC, Dan River International
Ltd. and Dan River Factory Stores, Inc. (incorporated by
Reference to Exhibit 99.2 in Current Report on Form 8-K filed
August 2, 2004 (File No. 1-13421))

3.1 Amended and Restated Articles of Incorporation of Dan River
Inc.(incorporated by reference to Exhibit 3.1 in Amendment No.
1 to Registration Statement on Form S-1 (File No. 333-36479))

3.2 Bylaws of Dan River Inc.(incorporated by reference to
Exhibit 3.2 in Amendment No. 1 to Registration Statement on
Form S-1 (File No. 333-36479))

10.1* Fifth Amendment dated as of November 19, 2004 to Post-Petition
Credit Agreement dated April 1, 2004 between Dan River Inc.
and Deutsche Bank Trust Company Americas

11 Statement regarding Computation of Earnings per
share (incorporated by reference to Note 11 to the Unaudited
Condensed Consolidated Financial Statements included in this
Quarterly Report on Form 10-Q)

31.1* Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

31.2* Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

32.1* Certificate of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

40

Exhibit No. Description of Exhibit
- ----------- ----------------------

32.2* Certificate of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

- -----------------
*Filed herewith.