DELTA MILLS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended July 1, 2000

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 333-37617
---------

DELTA MILLS, INC.
---------------------------------------------
(Exact name of registrant as specified in its charter)

DELAWARE 13-2677657
------------------------ ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)

100 Augusta Street
Greenville, South Carolina 29601
- ---------------------------- -----------
(Address of principal executive offices) (Zip code)

864/255-4100
---------------------------------------------------------
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
---------------------- ------------------------

None Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

Title of each class
-------------------

None

1

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].

The aggregate market value of the common equity stock held by non-affiliates of
the registrant as of September 25, 2000 was:

Common Stock, $.01 par value - 0

The number of shares outstanding of each of the registrant's classes of Common
Stock, as of September 25, 2000 was:

Common Stock, par value $.01 100

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I)(1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.

2

DELTA MILLS, INC.
FOR THE FISCAL YEAR ENDED JULY 1, 2000
FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS
PAGE
PART I

Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . 10

PART II

Item 5. Market for Registrant's Common equity and Related Stockholder Matters. . . 10
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 7. Management's discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 7A Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . 16
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

PART III

Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . 34
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . 34
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . 34

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . 35

3

ITEM 1 BUSINESS
- -----------------

The following discussion contains various "forward-looking statements".
All statements, other than statements of historical fact, that address
activities, events or developments that the Company expects or anticipates will
or may occur in the future are forward-looking statements. Examples are
statements that concern future revenues, future costs, future capital
expenditures, business strategy, competitive strengths, competitive weaknesses,
goals, plans, references to future success or difficulties and other similar
information. The words "estimate", "project", "forecast", "anticipate",
"expect", "intend", "believe" and similar expressions, and discussions of
strategy or intentions, are intended to identify forward-looking statements.

The forward-looking statements in this document are based on the Company's
expectations and are necessarily dependent upon assumptions, estimates and data
that the Company believes are reasonable and accurate but may be incorrect,
incomplete or imprecise. Forward-looking statements are also subject to a
number of business risks and uncertainties, any of which could cause actual
results to differ materially from those set forth in or implied by the
forward-looking statements. Accordingly, any forward-looking statements do not
purport to be predictions of future events or circumstances and may not be
realized.

The Company does not undertake publicly to update or revise the
forward-looking statements even if it becomes clear that any projected results
will not be realized.

GENERAL

Delta Mills, Inc. ("Delta Mills" or the "Company") is a Delaware
corporation with its principal executive offices located at 100 Augusta Street,
Greenville, South Carolina 29601 (telephone number: 864-255-4100). The Company
is a wholly owned subsidiary of Delta Woodside Industries, Inc., a South
Carolina corporation, the common stock of which is listed on the New York Stock
Exchange. Unless the context otherwise requires, all references herein to
"Delta Mills" or the "Company" refer to Delta Mills, Inc. and any of its
existing and future subsidiaries.

The Company has one segment in continuing operations: Delta Mills Marketing
Company. The Company is a leading manufacturer and marketer of woven finished
cotton, synthetic and blended fabrics, which are sold for the ultimate
production of apparel. The Company sells a broad range of finished apparel
fabrics primarily to branded apparel manufacturers and resellers, including The
Gap, Levi Strauss, Haggar Corp., the Wrangler and Lee divisions of V.F.
Corporation, Farah Incorporated, Kellwood Company and Liz Claiborne, Inc. and
private label apparel manufacturers for J.C. Penney Company, Inc., Sears,
Roebuck & Co., Wal Mart Stores, Inc. and other retailers. The Company believes
that it is a leading producer of cotton pants-weight woven fabric used in the
manufacture of casual slacks such as Levi Strauss' Dockers and Haggar Corp.'s
Wrinkle-free . Other apparel items manufactured with the Company's woven
fabrics include women's chinos pants, women's blazers, career apparel (uniforms)
and battle dress camouflage military uniforms. During fiscal year 2000 the
Company also produced a variety of unfinished light-weight woven fabrics that
were sold to converters of finished products. Due to import pressure, the
unfinished fabrics business was discontinued and replaced with more profitable
product lines. This move away from the unfinished fabric production was
completed in the first half of fiscal 2000.

During fiscal 1998, the Company made the decision to exit the knit
textile market by closing its Stevcoknit Fabrics Company operating division.
Stevcoknit Fabrics Company has been reclassified and reported as discontinued
operations. Most of the liquidation of Stevcoknit Fabrics Company was completed
in fiscal 1998.

The Company was incorporated in Delaware in 1971 and acquired by a
predecessor of Delta Woodside Industries, Inc. in 1986.

4

PRODUCTS, MARKETING AND MANUFACTURING

The Company produces woven textile fabrics.

Woven textile fabrics produced for sale by the Company are manufactured
from cotton, wool or synthetic fibers or from synthetic filament yarns. Cotton
and wool are purchased from numerous suppliers. Synthetic fibers and synthetic
filament yarns are purchased from a smaller number of competitive suppliers.
The Company spins the major portion of the spun yarns used in its weaving
operations. In manufacturing these yarns, the cotton and synthetic fibers,
either separately or in blends, are carded (fibers straightened and oriented)
and then spun into yarn. The Company combs (removing short fibers) some cotton
fiber to make high quality yarns. In other fabrics, filament yarns are used.
The spun or filament yarn is then woven into fabric on looms. The unfinished
fabric at this stage is referred to as greige goods. Finished fabric refers to
fabric that has been treated by washing, bleaching, dyeing and applying certain
chemical finishes.

The Company produces finished woven fabrics used in the production of
apparel. Finished apparel fabric is ready to be cut and sewn into garments.

The Company has focused its marketing efforts on building close
relationships with major apparel companies that have broad distribution channels
and that the Company believes have positioned themselves for long-term growth.
The Company sells its woven fabrics primarily to numerous apparel manufacturers
and apparel resellers. The Company sells its fabrics through Delta Mills
Marketing Inc., a wholly owned subsidiary with a marketing office based in New
York City (which serves the United States, Canadian and Mexican markets), with
sales agents also operating in Atlanta, Chicago, Dallas, Los Angeles, San
Francisco and Mexico.

For fiscal year 2000, the Company had three customers, Levi Strauss, Haggar
Corp., and V.F. Corporation, that each exceeded 10% of consolidated net sales.
The Company's sales to these customers were $109 million, $150 million, and $136
million for fiscal 2000, 1999, and 1998, respectively. The loss of any of these
accounts could have a material adverse effect on the results of the Company.

During fiscal years 2000, 1999 and 1998, approximately 83%, 78% and 70%,
respectively, of the Company's finished woven fabric sales were of fabrics made
from cotton or cotton/synthetic blends, while approximately 17%, 22%, and 30%,
respectively, of such sales were of fabrics made from spun synthetics and other
natural fibers, including various blends of rayon, polyester, and wool. Woven
fabrics are generally produced and shipped pursuant to specific purchase orders,
which minimizes the Company's uncommitted inventory levels. The Company's
production of cotton and cotton/synthetic blend and spun synthetic finished
woven fabrics is largely vertically integrated, with the Company performing most
of its own spinning, weaving and finishing. In the production of military
fabrics, the Company purchases a portion of its greige goods needs and finishes
this fabric to specifications. The Company's woven finished fabrics plants are
currently operating at less than full capacity.

RAW MATERIALS

The Company's principal raw material is cotton, although it also spins
polyester, wool, linen fiber, acrylic, lyocell, nylon and rayon fibers and
weaves textured polyester filament. Polyester is obtained primarily from three
major suppliers, all of whom provide competitive prices. For fiscal 2000
polyester prices reached the lowest prices the Company has paid since fiscal
year 1993, but prices increased before the year ended. Management expects that
trend to continue in fiscal 2001. The Company's average price per pound of
cotton purchased and consumed (including freight, carrying cost and cost for the
relatively high amount of premium cotton the Company uses) was $.661 in fiscal
year 2000 as compared to $.770 in fiscal year 1999, and $.817 in fiscal year
1998. As of July 1, 2000, the Company had contracted to purchase about 85% and
had fixed the price for approximately 67% of its expected cotton requirements
for fiscal year 2001. The percentage of the Company's cotton requirements that
the Company fixes each year varies depending upon the Company's forecast of
future cotton prices. The Company believes that recent cotton prices have
enabled it to contract for cotton at prices that will permit it to be
competitive

5

RAW MATERIALS - CONTINUED

with other companies in the United States textile industry when the cotton
purchased for future use is put into production. To the extent that cotton
prices decrease before the Company uses these future purchases, the Company
could be materially and adversely affected, as there can be no assurance that it
would be able to pass along its higher costs to its customers. In addition, to
the extent that cotton prices increase and the Company has not provided for its
requirements with fixed price contracts, the Company may be materially and
adversely affected, as there can be no assurance that it would be able to pass
along these increased costs to its customers.

COMPETITION

The cyclical nature of the textile and apparel industries, characterized by
rapid shifts in fashion, consumer demand and competitive pressures, results in
both price and demand volatility. The demand for any particular product varies
from time to time based largely upon changes in consumer preferences and general
economic conditions affecting the textile and apparel industries, such as
consumer expenditures for non-durable goods. The textile and apparel industries
are also cyclical because the supply of particular products changes as
competitors enter or leave the market.

The Company sells primarily to domestic apparel manufacturers, many of
which operate offshore sewing operations. The Company competes with numerous
domestic and foreign fabric manufacturers, including companies larger in size
and having greater financial resources than the Company. The principal
competitive factors in the woven fabrics markets are price, service, delivery
time, quality and flexibility, with the relative importance of each factor
depending upon the needs of particular customers and the specific product
offering. Management believes that the Company maintains its ability to compete
effectively by providing its customers with a broad array of high-quality
fabrics at competitive prices on a timely basis.

The Company's competitive position varies by product line. There are
several major domestic competitors in the finished cotton and cotton/polyester
blend woven fabrics business, none of which dominates the market. The Company
believes, however, that it has a strong competitive position in the all cotton
pants-weight fabrics business. In addition, the Company believes that it is one
of only two finishers successful in printing camouflage for sale to apparel
suppliers of the U.S. Government and the only supplier that is vertically
integrated for camouflage production. Additional competitive strengths of the
Company include: knowledge of its customers' business needs; its ability to
produce special fabrics such as textured blends; state of the art spinning,
weaving and fabric finishing equipment at most of its facilities; substantial
vertical integration; and its ability to communicate electronically with its
customers.

Foreign competition is a significant factor in the United States fabric
market. The Company believes that its relatively small manual labor component,
highly-automated manufacturing processes and domestic manufacturing base allow
the Company to compete on a price basis and to respond more quickly than foreign
producers to changing fashion trends and to its domestic customers' delivery
schedules. In addition, the Company benefits from protections afforded to
apparel manufacturers based in certain Latin American and Caribbean countries
that ship finished garments into the United States. NAFTA has effectively
eliminated or substantially reduced tariffs on goods imported from Mexico if
such goods are made from fabric originating in Canada, Mexico, or the United
States. Section 807 provides for the duty free treatment of United States
origin components used in the assembly of imported articles. The result is that
duty is assessed only on the value of any foreign components that may be present
and the labor cost incurred offshore in the assembly of apparel using United
States origin fabric components. Because Section 807 creates an incentive to
use fabric manufactured in the United States, it is beneficial to the Company
and other domestic producers of apparel fabrics. In addition, pursuant to
Section 807A, apparel articles assembled in a Caribbean country, in which all
fabric components have been wholly formed and cut in the United States, are
subject to preferential quotas with respect to access into the United States for
such qualifying apparel, in addition to the significant tariff reduction
pursuant to Section 807. A similar program, enacted as a result of NAFTA and
referred to as the Special Regime Program, provides even greater benefits
(complete duty free, quota free treatment) for apparel assembled in Mexico from
fabric components formed and cut

6

COMPETITION - CONTINUED

in the United States. In contrast, apparel not meeting the criteria of Section
807, Section 807A, or the Special Regime Program, is subject to quotas and/or
relatively higher tariffs, except as may result under the Trade and Development
Act of 2000, as noted below. If Section 807, Section 807A or the Special Regime
Program were repealed or altered in whole or in part, the Company believes that
it could be at a serious competitive disadvantage relative to textile
manufacturers in other parts of the world seeking to enter the United States
market, which would have a material adverse effect on the Company. Moreover,
there can be no assurance that the current favorable regulatory environment will
continue or that other geographic areas will not be afforded similar regulatory
advantages.

The Trade and Development Act of 2000 (often referred to as the "CBI Parity
Bill") will become effective on October 1, 2000. The Company believes that the
provisions of the CBI Parity Bill will have the following effects most relevant
to its business:

-Apparel assembled in most Caribbean nations from fabric formed and
cut in the United States of U.S. yarn can enter the United
States duty-free;

-Apparel cut and sewn in most Caribbean nations from fabric formed in
the United States of U.S. yarn can enter the United States duty-free
so long as it is sewn with U.S. manufactured thread; and

-Certain limits of apparel made from fabric formed in certain
Caribbean nations of U.S. yarn and cut and sewn in those nations can
enter the United States duty-free.

Apparel entering the United States under any of these three provisions will not
be subject to any quotas that may exist for that specific category of goods.
The Company believes that the CBI Parity Bill will give it a competitive
advantage relative to fabric manufacturers outside of the United States.
Subsequent repeal or adverse alteration of the CBI Parity Bill could put the
Company at a serious competitive disadvantage relative to such manufacturers.

The World Trade Organization (which this document refers to as the "WTO"), a new
multilateral trade organization, was formed in January 1995 and is the successor
to the General Agreement on Tariffs and Trade. This new multilateral trade
organization has set forth mechanisms by which world trade in clothing is being
progressively liberalized by phasing-out quotas and reducing duties over a
period of time that began in January of 1995. As it implements the WTO
mechanisms, the U.S. government is negotiating bilateral trade agreements with
developing countries (which are generally exporters of textile and apparel
products) that are members of the WTO to get them to reduce their tariffs on
imports of textiles and apparel in exchange for reductions by the United States
in tariffs on imports of textiles and apparel. The elimination of quotas and
the reduction of tariffs under the WTO may result in increased imports of
certain textile and apparel products into North America. These factors could
make the Company's products less competitive against low cost imports from
developing countries.

EMPLOYEES

The Company has approximately 2,200 employees. The Company's employees are
not represented by unions. The Company believes that its relations with its
employees are good.

7

ENVIRONMENTAL AND REGULATORY MATTERS

The Company is subject to various federal, state and local environmental
laws and regulations concerning, among other things, wastewater discharges,
storm water flows, air emissions, ozone depletion and solid waste disposal. The
Company's plants generate very small quantities of hazardous waste which are
either recycled or disposed of off-site. Most of its plants are required to
possess one or more discharge permits.

The information contained under the subheading "Environmental Matters"
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations " included in Item 7 of this Form 10-K is incorporated
herein by reference.

Generally, the environmental rules applicable to the Company are becoming
increasingly stringent. The Company incurs capital and other expenditures in
each year that are aimed at achieving compliance with current and future
environmental standards.

The Company does not expect that the amount of such expenditures in the
future will have a material adverse effect on its operations or financial
condition. There can be no assurance, however, that future changes in federal,
state or local regulations, interpretations of existing regulations or the
discovery of currently unknown problems or conditions will not require
substantial additional expenditures. Similarly, the extent of the Company's
liability, if any, for past failures to comply with laws, regulations and
permits applicable to its operations cannot be determined.

DISCONTINUED OPERATIONS

Information concerning discontinued operations in Note F, "Notes To
Consolidated Financial Statements" included in Item 8 of this Form 10-K is
incorporated herein by reference.

OTHER

Information concerning order backlogs in "Management's Discussion and
Analysis of Financial Condition and Results of Operations, Results of
Operations, Fiscal 2000 Versus Fiscal 1999" included in Item 7 of this Form 10-K
is incorporated herein by reference.

8

ITEM 2 PROPERTIES
- ------- ----------

The following table provides a description of Delta Mills, Inc.'s principal
production and warehouse facilities.

Approximate
Square
Location Utilization Footage Owned/Leased
- ----------------------------------------- ------------- ----------------- -------------

Greenville, SC Admin Offices 17,400 Leased (1)
Beattie Plant, Fountain Inn, SC spin/weave 390,000 (2)
Furman Plant, Fountain Inn, SC weave 155,000 (2)
Estes Plant, Piedmont, SC spin/weave 332,000 (2)
Delta 3 Plant, Wallace, SC dye/finish 555,000 (2)
Pamplico and Cypress Plants, Pamplico, SC spin/weave 419,000 (2)
Delta 2 Plant, Wallace, SC dye/finish 347,000 (2)
Catawba Plant, Maiden, NC spin 115,000 Owned

(1) Lease expires in December 2003 with the right to renew for one additional five-year period.
(2) Title to these facilities and substantially all of the equipment located in these facilities
is held by three South Carolina counties under a fee-in-lieu-of-taxes arrangement,
which has the effect of substantially reducing the Company's property taxes in South
Carolina. Although the Company can reacquire such property at a nominal price, this would
currently cause a significant increase in the amount of property taxes paid by the Company.

Except as noted above all of the above facilities are owned by Delta Mills,
Inc., subject in certain cases to various outstanding security interests

Delta Mills Marketing, Inc. leases sales offices in New York, NY. The
lease on the sales offices expires in December 2004. A small sales office lease
in Dallas, Texas expires in September 2002.

At the date of execution of this Form 10-K, the Company believes that its
plants are operating at less than full production capacity.

The Company believes that its equipment and facilities are generally
adequate to allow it to remain competitive with its principal competitors.

The Company's accounts receivable and inventory, and certain other
intangible property, secure the Company's credit facility.

9

ITEM 3. LEGAL PROCEEDINGS
- -------- ------------------

On January 10, 2000, the North Carolina Department of Environment and
Natural Resources requested that Delta Mills, Inc. accept responsibility for
investigating the discharge of hazardous substances at an inactive hazardous
waste site known as the Glen Raven Mills Site, Kings Mountain, North Carolina
(the "Site"). A predecessor by merger of Delta Mills, Inc., Park Yarn Mills
Company, Inc. ("Park Yarn"), owned the Site for approximately six (6) years,
from approximately 1977 to 1983 (prior to the time Delta Mills, Inc. became a
subsidiary of Delta Woodside Industries, Inc.) Delta Mills, Inc. is aware of no
evidence that Park Yarn discharged or deposited any hazardous substance at the
Site or is otherwise a "responsible party" for the Site. Further, Park Yarn
filed bankruptcy and was discharged in 1983. Although no assurance can be
provided, any liability of Park Yarn for the Site may have been discharged by
the bankruptcy order. Accordingly, Delta Mills, Inc. has denied any
responsibility at the Site, has declined to undertake any activities concerning
the Site, and had not provided for any reserves for costs or liabilities
attributable to Park Yarn.

On January 13, 2000, Marion Mills, LLC, a supplier to Delta Mills, Inc.,
brought an action against Delta Mills, Inc. in North Carolina Superior Court in
McDowell County, North Carolina. Delta Mills, Inc. removed the case to federal
court in the Western District of North Carolina, Asheville Division, where it is
currently pending. Plaintiff seeks actual damages in excess of $1.8 million and
consequential and incidental damages in excess of $7.4 million. The actual
damages claim is based on an alleged failure by Delta Mills, Inc. to pay in
excess of $1.8 million of invoice amounts. The consequential and incidental
damages claim is based on the allegation that Delta Mills, Inc.'s. failure to
pay caused Marion Mills, LLC to shut down its business. The Company's position
is that Delta Mills, Inc. paid some of the invoices claimed to be unpaid and did
not pay the other invoices because of defects in the goods supplied by the
plaintiff (which were returned per the plaintiff's authorization). The Company
therefore denies and is vigorously contesting the claims.

All other litigation to which the Company is a party is ordinary routine
product liability litigation or contract breach litigation incident to its
business that does not depart from the normal kind of such actions. The Company
believes that none of these actions, if adversely decided, would have a material
adverse effect on its results of operations or financial condition taken as a
whole.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
- -------- -----------------------------------------------------------

Not applicable.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------- ----------------------------------------------------------------------

The Company is a wholly-owned subsidiary of Delta Woodside Industries, Inc.
Accordingly, there is no established public trading market for the Company's
common stock.

The Company declared no dividends in fiscal year 2000 and $7.5 million of
dividends in fiscal year 1999. The information concerning limitations on cash
distributions contained under the subheading "Liquidity and Sources of Capital"
under Item 7 is incorporated herein by reference.

10

ITEM 6. SELECTED FINANCIAL DATA
- ------- -------------------------
In Thousands, Except Ratios
Fiscal Year (1)
------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:(1)
2000 1999 1998 1997 1996
--------- --------- --------- --------- ----------

Net Sales $276,511 $348,955 $364,395 $358,204 $ 317,446
Cost of Goods Sold 243,254 292,914 300,556 293,145 283,776
--------- --------- --------- --------- ----------
Gross Profit 33,257 56,041 63,839 65,059 33,670

Selling, general and administrative expenses 15,345 16,937 17,585 16,323 13,624
Restructuring charges 0 1,596
Other income(expense) 446 96 146 1,553 (908)
--------- --------- --------- --------- ----------
Operating Profit 18,358 39,200 46,400 50,289 17,542
Interest expense 16,095 17,414 19,324 14,212 14,026
Interest (income) (958) (185) (152) 0 (19)
--------- --------- --------- --------- ----------
Income from Continuing Operations
Before Income Tax and Extraordinary Item 3,221 21,971 27,228 36,077 3,535
Income taxes 1,280 8,590 10,743 14,187 1,361
--------- --------- --------- --------- ----------
Income from Continuing Operations
Before Extraordinary Item 1,941 13,381 16,485 21,890 2,174
Extraordinary gain (net of taxes) 4,659
Profit(Loss) from Discontinued Operations (174) 3,802 (25,909) (5,337) (26,973)
--------- --------- --------- --------- ----------
Net Income(Loss) $ 6,426 $ 17,183 ($9,424) $ 16,553 ($24,799)
========= ========= ========= ========= ==========
OTHER DATA:(1)
Depreciation and amortization $ 14,015 $ 14,815 $ 14,127 $ 13,840 $ 12,238

Capital expenditures 4,340 9,075 4,065 14,122 43,378

EBITDA (2) 31,415 53,830 60,375 64,129 29,761

Ratio of EBITDA to interest expense (2) 2.0 3.1 3.1 4.5 2.1

BALANCE SHEET DATA: (1)
Working Capital (deficit) $ 95,158 $101,613 $107,423 ($7,525) $ 16,010

Total assets 229,612 260,951 290,290 345,010 333,577

Total debt and other long-term obligations (3) 115,078 150,000 176,635 268,658 289,587

Shareholder's equity (deficit) 56,187 49,761 40,078 7,844 (8,709)

NOTES TO SELECTED FINANCIAL DATA
(1) The amounts presented for years prior to fiscal 1998 have been restated to conform to the fiscal
1998, fiscal 1999 and fiscal 2000 presentation of discontinued operations. The Stevcoknit knitted
fabrics business is presented as part of discontinued operations.

(2) "EBITDA" is defined herein as operating profit, plus depreciation and amortization expense and
interest income, plus impairment and restructuring charges (credits). While EBITDA should not be
construed as an alternative to operating earnings (loss) or net income (loss), or as an indicator of
operating performance or liquidity, the Company believes that the ratio of EBITDA to interest expense
is a measure that is commonly used to evaluate a company's ability to service debt.

(3) Total debt and other long-term obligations, for fiscal years prior to fiscal 1998, consist of the
long-term debt due to affiliate, the current loan payable to affiliate and the noninterest-bearing
payable to affiliates. See Notes C and E to the Consolidated Financial Statements.

11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
- --------------

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

The following discussion contains various "forward-looking statements".
All statements, other than statements of historical fact, that address
activities, events or developments that the Company expects or anticipates will
or may occur in the future are forward-looking statements. Examples are
statements that concern future revenues, future costs, future capital
expenditures, business strategy, competitive strengths, competitive weaknesses,
goals, plans, references to future success or difficulties and other similar
information. The words "estimate", "project", "forecast", "anticipate",
"expect", "intend", "believe" and similar expressions, and discussions of
strategy or intentions, are intended to identify forward-looking statements.

The forward-looking statements in this document are based on the Company's
expectations and are necessarily dependent upon assumptions, estimates and data
that the Company believes are reasonable and accurate but may be incorrect,
incomplete or imprecise. Forward-looking statements are also subject to a
number of business risks and uncertainties, any of which could cause actual
results to differ materially from those set forth in or implied by the
forward-looking statements. Accordingly, any forward-looking statements do not
purport to be predictions of future events or circumstances and may not be
realized.

The Company does not undertake publicly to update or revise the
forward-looking statements even if it becomes clear that any projected results
will not be realized

RESULTS OF OPERATIONS FISCAL 2000 VERSUS FISCAL 1999

Net Sales. Consolidated net sales for the year ended July 1, 2000 totaled
$276.5 million, as compared to $349.0 million for the year ended July 3, 1999, a
decrease of 20.8% resulting from a decrease in unit sales and in prices. The
sales of finished synthetic products decreased 28% caused mainly by the
Company's decision to down size the finished synthetic business in order to
concentrate on a more fashion driven product line. The sale of cotton fabric
decreased 16% due to inventory adjustments by the Company's customers. Sales of
greige fabric decreased 84.0% as the Company exited the greige goods business.
Sales of yarn from the Rainsford plant to the Delta Apparel affiliate decreased
by 20% from the prior year. The Rainsford plant was sold to Delta Apparel in May
2000.

Gross Profit. Consolidated gross profit margin as a percent of sales for
the year ended July 1, 2000 was 12.0 %, as compared to 16.1% for the year ended
July 3, 1999. The decline in gross profit percent for the year was the result of
reduced volume and price along with a change in product mix. In addition to a
general market decline, these reductions were caused by cotton garment
manufacturers expanding their supplier base to gain a more competitive price and
by increased import pressure on synthetic products. Manufacturing cost
increases caused by reduced operating schedules in the first and second quarters
of fiscal 2000 also contributed to the decline in gross profit. The gross
profit margin improved in the third and fourth quarters as sales and operating
schedules improved.

Selling, General and Administrative Expenses. During the year ended July
1, 2000, selling, general and administrative expenses were $15.3 million, as
compared to $16.9 million during the year ended July 3, 1999, a decrease of
$1.6 million or 9.5%. The decrease was due primarily to a reduction of fixed
administrative service costs. Expenses in this category were 5.5% of sales in
fiscal 2000 as compared to 4.9% in fiscal 1999.

Operating Earnings. Operating earnings for the year ended July 1, 2000 were
$18.4 million, as compared to $39.2 million for the year ended July 3, 1999.
The decline in operating earnings was due to the factors described above.

Net Interest Expense. For the year ended July 1, 2000, net interest
expense was $15.1 million, as compared to $17.2 million for the year ended July
3, 1999. The decrease in interest expense resulted from the extinguishment of
$34.9 million of debt due to the purchase of a portion of the Company's 9.625%
unsecured senior notes.

Taxes. The effective tax rate of 39.7% for the year ended July 1, 2000 is
approximately the same as the effective tax rate for the year ended July 3,
1999.

12

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

Income from Continuing Operations. Income from Continuing Operations for
the year ended July 1, 2000 was $1.9 million, as compared to $13.4 million for
the year ended July 3, 1999. The decrease was due to the factors described
above.

Extraordinary gain, net of taxes. During fiscal 2000, the Company
purchased $34.9 million of face amount of its 9 5/8% Senior Notes for $26.6
million. The Company recognized an extraordinary gain of $4.7 million after a
tax cost of $2.8 million.

Order Backlog. The Company's order backlog at July 1, 2000 was $78.8
million, a 24.5% increase from the $63.3 million order backlog at July 3, 1999.
The Company believes that backlog orders can give a general indication of future
sales.

Adoption of Accounting Standards. In June of 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This standard, as subsequently amended by SFAS Nos. 137 and 138,
requires the recognition of all derivatives as either assets or liabilities in
the statement of financial position and the measurement of those instruments at
fair value.

Historically, the Company has not entered into any derivative contracts, as
defined by SFAS No.133 and its subsequent amendments. Accordingly, adoption of
the new standard on July 2, 2000 will not have an effect upon the Company's
consolidated financial statements, unless the Company enters into any derivative
contracts in the future.

RESULTS OF OPERATIONS FISCAL 1999 VERSUS FISCAL 1998

Net Sales. Consolidated net sales for the year ended July 3, 1999 totaled
$349.0 million, as compared to $364.4 million for the year ended June 27, 1998,
a decrease of 4.2% resulting from a decrease in unit sales. The decrease came
from the sales of finished synthetic fabric and greige sales to converters. The
principal decline in sales was from the sale of finished synthetic fabric, which
declined 30% from the prior year. These decreases were somewhat offset by an
increase in finished cotton fabric sales.

Gross Profit. Consolidated gross profit margin for the year ended July 3,
1999 was 16.1 %, as compared to 17.5% for the year ended June 27, 1998. The
decline in gross profit percent was due principally to the sale of knit yarn.
The decline in the finished fabric sales accounted for approximately one third
of the decline in gross profit percent. As a result of the declining market for
synthetic and greige sales, the synthetic business has been downsized to better
match capacity with market demand and the greige business assets have been
converted to the more profitable finished cotton fabrics product lines. The
movement away from the greige business was substantially completed during fiscal
1999.

Selling, General and Administrative Expenses. During the year ended July
3, 1999, selling, general and administrative expenses were $16.9 million, as
compared to $17.6 million during the year ended June 27, 1998, a decrease of
$.7 million or 4%. Expenses in this category were approximately the same as a
percent of sales in both years. The decrease was due primarily to a reduction
of fixed administrative services cost and the cost associated with information
technology system studies expensed in fiscal year 1998. Management believes it
has effectively controlled its selling, general and administrative expenses.

Operating Earnings. Operating earnings for the year ended July 3, 1999 were
$39.2 million, as compared to $46.4 million for the year ended June 27, 1998.
The decline in operating earnings was due to the factors described above.

Net Interest Expense. For the year ended July 3, 1999, net interest
expense was $17.2 million, as compared to $19.2 million for the year ended June
27, 1998. The decrease in interest expense resulted from repayment of the
amounts outstanding under the revolving line of credit facility.

13

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

Taxes. The effective tax rate of 39.1% for the year ended July 3, 1999 is
approximately the same as the effective tax rate for the year ended June 27,
1998.

Income from Continuing Operations. Income from Continuing Operations for
the year ended July 3, 1999 was $13.4 million, as compared to $16.5 million for
the year ended June 27, 1998. The decrease was due to the factors described
above.

Order Backlog. The Company's order backlog at July 3, 1999 was $63.3
million, a 40.6% decrease from the $106.6 million order backlog at June 27,
1998. The majority of this decrease was in finished woven fabrics due in part
to a decline in blanket contracts (contracts without specific color
requirements). The decline in blanket contracts accounted for approximately 45%
of the overall decline in the order backlog. Many customers have discontinued
the practice of issuing blanket contracts when specific color requirements are
unknown. Management believes this is an industry trend that will continue. The
balance of the decline is a result of market conditions, particularly in the
synthetics business.

LIQUIDITY AND SOURCES OF CAPITAL

During fiscal 2000, the Company financed its capital expenditures primarily
through cash generated from operations.

The Company generated operating cash flows of $26.3, $51.4, and $32.1
million for the 2000, 1999 and 1998 fiscal years, respectively. Cash generated
in fiscal year 2000 from both continuing and discontinued operations was used
primarily to finance capital expenditures, including equipment purchases, and to
reduce indebtedness. The Company generated cash from investing activities of
$8.7 million in fiscal 2000 and $6.6 million in fiscal year 1998, but used $7.6
million in fiscal year 1999. Cash generated in fiscal year 2000 was primarily
from the sale of the Rainsford Plant and associated operating assets to the
Delta Apparel affiliate for $13.6 million in May 2000. Cash generated in fiscal
year 1998 from investing activities was primarily from the disposal of
discontinued assets.

On August 25, 1997 the Company issued $150 million of unsecured ten-year
senior notes at an interest rate of 9.625%, and obtained a secured five-year
$100 million revolving line of credit subject to borrowing base limitations. The
$100 million revolving line of credit was replaced by a new credit facility on
March 31, 2000. Borrowings under the new credit facility are based on eligible
accounts receivable and inventory of the Company, subject to a maximum $50
million availability limit. The facility has a three-year term and is secured by
the accounts receivable, inventory and capital stock of the Company. The
interest rate on the credit facility is based on a spread over either LIBOR or a
base rate. On July 1, 2000, there were no borrowings and approximately $50
million was available for borrowing under this credit facility.

The credit facility contains restrictive covenants which require that Delta
Mills' maximum leverage ratio not exceed specified ratios. The agreement also
restricts additional indebtedness, dividends, and capital expenditures. The new
credit facility does not contain certain restrictions which were present in the
credit facility which it replaced. The payment of dividends with respect to
Delta Mills stock is permitted by the credit facility if there is no event of
default and there is at least $1 of undrawn availability under the facility.

Loan covenants in the senior notes and the Company's revolving credit
facility, among other matters, limit the Company's ability to make cash
distributions to Delta Woodside. At July 1, 2000, under the most restrictive of
these covenants $1.8 million was available for distribution by the Company to
Delta Woodside.

During the year the Company acquired for $26,615,179 a portion of its 9
5/8% Senior Notes. The aggregate principal face amount of the acquired Senior
Notes was $34,922,000. In July, August and through September 18, 2000, the
Company acquired for the sum of $14,270,481 an additional portion of its 9 5/8%
Senior Notes, the aggregate principal face amount of which was $15,653,000. The
future annual reduction in the Company's interest expense because of these
Senior Note repurchases will be $ 4,867,844.

14

LIQUIDITY AND SOURCES OF CAPITAL - CONTINUED

During fiscal 2000, the Company had capital expenditures of approximately
$4.3 million primarily for capital improvements, new equipment, and computer
system upgrades. During fiscal 2001, the Company plans to spend approximately
$10 million for capital improvements, new equipment, and computer system
upgrades. The Company believes that its equipment and facilities are generally
adequate to allow it to remain competitive with its principal competitors.

The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At July 1, 2000 minimum
payments under these contracts with non-cancelable contract terms were $25
million.

The Company believes that the cash flow generated by its operations and
funds available under its credit line should be sufficient to service its debt,
to satisfy its day-to-day working capital needs and to fund its planned capital
expenditures.

ENVIRONMENTAL MATTERS

Prior to fiscal year 2001, two of the Company's South Carolina plants, the
Delta 2 & 3 finishing plants, had been unable to comply with certain toxicity
and other permit-related limits contained in a National Pollutant Discharge
Elimination System ("NPDES") permit held by the Company. Additionally, high
nitrate levels had been observed at the spray field for those plants. To
achieve compliance with the non-toxicity NPDES permit limits, the Company
completed certain upgrades in October 1998 at a cost of approximately $2.3
million. Since then, the Company has had two non-toxicity permit violations
resulting in the payment of a de minimis penalty. On June 30,2000 the Company
was issued a discharge permit without toxicity limits. The Company is required
to monitor the toxicity level and report the results annually. The effective
date of this permit is August 1,2000, and is in effect until March 31, 2004.

On June 30,2000 the Company sold its Greensboro, North Carolina plant to
the City of Greensboro. The Company had been working with environmental
consultants in assessing groundwater contamination. Because of these studies,
one half of the proceeds from the sale of the plant was placed in an escrow
account to cover expenses related to this contamination. The Company has
recorded the sale net of estimated costs to remediate the property.

15

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------------------------------------------

COMMODITY RISK SENSITIVITY

As a part of the Company's business of converting fiber to finished fabric,
the Company makes raw cotton purchase commitments and then fixes prices with
cotton merchants who buy from producers and sell to textile manufacturers. The
Company may seek to fix prices up to 18 months in advance of delivery. Daily
price fluctuations are minimal, yet long-term trends in price movement can
result in unfavorable pricing of cotton for the Company. Before fixing prices,
the Company looks at supply and demand fundamentals, recent price trends and
other factors that affect cotton prices. The Company also reviews the backlog
of orders from customers as well as the level of fixed price cotton commitments
in the industry in general. At July 1, 2000, a 10% decline in the market price
of the cotton covered by the Company's fixed price contracts would have a
negative impact of approximately $2.5 million on the value of the contracts. At
the end of fiscal 1999, a 10% decline in the market price of the Company's fixed
price contracts would have had a negative impact of approximately $4.2 million
on the value of the contracts. The decline in the potential negative impact
from 1999 to 2000 is due principally to current cotton commitments being at
significantly lower average prices than in fiscal 1999.

INTEREST RATE SENSITIVITY

The $50 million secured three-year revolving credit facility expiring in 2003 is
sensitive to changes in interest rates. Interest is based on a spread over
LIBOR or a base rate. An interest rate increase would have a negative impact to
the extent the Company borrows against the revolving credit facility. The
impact would be dependent on the level of borrowings incurred. In fiscal year
2001, as of this date, the Company has not borrowed against the revolving credit
facility. An interest rate change would not have an impact on the fixed rate
ten year senior notes.

16

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------- -----------------------------------------------

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
-----
Report of KPMG LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . F2

Consolidated Balance Sheets as of July 1, 2000 and July 3, 1999 . . . . . . F3

Consolidated Statements of Operations for the fiscal years ended July 1, 2000,
July 3, 1999, and June 27, 1998 . . . . . . . . . . . . . . . . . . . . . F4

Consolidated Statements of Shareholder's Equity for the fiscal years
ended July 1, 2000, July 3, 1999, and June 27, 1998. . . . . . . . . . . . . F5

Consolidated Statements of Cash Flows for the fiscal years ended July 1,
2000, July 3, 1999 and June 27, 1998. . . . . . . . . . . . . . . . . . . F6

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . F7

17

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS
DELTA MILLS, INC.

We have audited the accompanying consolidated balance sheets of Delta Mills,
Inc. as of July 1, 2000 and July 3, 1999 and the related consolidated statements
of operations, shareholder's equity, and cash flows for each of the years in the
three-year period ended July 1, 2000. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Delta Mills, Inc. as
of July 1, 2000 and July 3, 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended July 1, 2000 in
conformity with accounting principles generally accepted in the United States of
America.

\s\KPMG LLP
------------
KPMG LLP

Greenville, South Carolina
August 4, 2000, except as to Note K (b), which is as of September 18, 2000

18

CONSOLIDATED BALANCE SHEETS
Delta Mills, Inc.
(In Thousands)

July 1, 2000 July 3, 1999
------------- -------------

ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 18,287 $ 9,903
Accounts receivable:
Factor and other 71,670 69,881
Affiliates 0 12,994
------------- -------------
71,670 82,875
Less allowances for doubtful accounts and returns 173 291
------------- -------------
71,497 82,584
Inventories
Finished goods 4,916 9,122
Work in process 31,324 29,201
Raw materials and supplies 7,679 7,144
------------- -------------
43,919 45,467

Current assets of discontinued operations 0 780
Deferred income taxes 1,208 2,032
Other assets 467 450
------------- -------------
TOTAL CURRENT ASSETS 135,378 141,216

PROPERTY, PLANT AND EQUIPMENT, at cost
Land and land improvements 2,068 2,988
Buildings 36,634 45,293
Machinery and equipment 119,996 145,467
Furniture and fixtures 1,952 1,993
Lease improvements 619 619
Construction in progress 401 4,363
------------- -------------
161,670 200,723
Less accumulated depreciation 70,322 85,743
------------- -------------
91,348 114,980

DEFERRED LOAN COSTS
less accumulated amortization of $3,207
and $1,288 in 2000 and 1999 respectively 2,886 4,755
------------- -------------
$ 229,612 $ 260,951
============= =============

19

CONSOLIDATED BALANCE SHEETS
Delta Mills, Inc.
(In Thousands)

LIABILITIES AND SHAREHOLDER'S EQUITY

July 1, 2000 July 3, 1999
------------- --------------

LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 14,514 $ 15,887
Payable to Affiliates 1,318 571
Accrued employee compensation 2,858 4,014
Accrued and sundry liabilities 21,530 18,381
Restructuring accruals 0 750
------------- --------------
TOTAL CURRENT LIABILITIES 40,220 39,603
LONG-TERM DEBT 115,078 150,000
DEFERRED INCOME TAXES 12,314 15,547
DEFERRED COMPENSATION 5,813 6,040
SHAREHOLDER'S EQUITY
Common Stock -- par value $.01 a share -- authorized
3000 shares, issued and outstanding 100 shares
Additional paid-in capital 51,792 51,792
Retained earnings(deficit) 4,395 (2,031)
------------- --------------
56,187 49,761
COMMITMENTS AND CONTINGENCIES
$ 229,612 $ 260,951
============= ==============

See notes to consolidated financial statements.

20

CONSOLIDATED STATEMENTS OF OPERATIONS
Delta Mills, Inc.
(In Thousands)
Year Ended Year Ended Year Ended
July 1, 2000 July 3, 1999 June 27, 1998
-------------- -------------- ---------------

Net sales to non-affiliates 249,918 318,733 342,732
Net sales to affiliated parties 26,593 30,222 21,663
-------------- -------------- ---------------
Net sales $ 276,511 $ 348,955 $ 364,395
Cost of goods sold 243,254 292,914 300,556
-------------- -------------- ---------------
Gross profit 33,257 56,041 63,839
Selling, general and administrative expenses 15,345 16,937 17,585
Other income 446 96 146
-------------- -------------- ---------------
OPERATING PROFIT 18,358 39,200 46,400
Other (expense) income:
Interest expense (16,095) (17,415) (17,160)
Interest income 958 186 152
Affiliate interest expense (2,164)
-------------- -------------- ---------------
(15,137) (17,229) (19,172)
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 3,221 21,971 27,228
-------------- -------------- ---------------
Income tax expense 1,280 8,590 10,743
-------------- -------------- ---------------
INCOME FROM CONTINUING
OPERATIONS 1,941 13,381 16,485

Extraordinary gain (net of taxes) 4,659

Discontinued operations:
Income (Loss) on disposal of discontinued operations net
of applicable income taxes 3,802 (21,079)

(Loss) from operations of discontinued businesses net of
applicable income taxes (174) (4,830)
-------------- ------------- ----------------
Total discontinued operations (174) 3,802 (25,909)
-------------- ------------- ---------------
NET INCOME (LOSS) $ 6,426 $ 17,183 ($9,424)
============= ============== ===============

See notes to consolidated financial statements.

21

CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Delta Mills, Inc.
(In Thousands)

Additional Retained Total
Common Stock Paid-In Earnings Shareholder's
Shares Amount Capital (Deficit) Equity
------------- ---------- --------- --------------- -------

Balance at June 28, 1997 100 0 2,134 5,710 7,844
Net (loss) (9,424) (9,424)
Cash dividends paid (8,000) (8,000)
Capital Contribution 49,658 49,658
------------- ---------- --------- --------------- -------
Balance at June 27, 1998 100 0 51,792 (11,714) 40,078
Net Income 17,183 17,183
Cash dividends paid (7,500) (7,500)
------------- ---------- --------- --------------- -------
Balance at July 3, 1999 100 0 51,792 (2,031) 49,761
------------- ---------- --------- --------------- -------
Net Income 6,426 6,426
------------- ---------- --------- --------------- -------
Balance at July 1, 2000 100 $ 0 $ 51,792 $ 4,395 $56,187
============= ========== ========= =============== =======

See notes to consolidated financial statements.

22

CONSOLIDATED STATEMENTS OF CASH FLOWS
Delta Mills, Inc.
(In Thousands)

Year Ended Year Ended Year Ended
-------------- -------------- ---------------
July 1, 2000 July 3, 1999 June 27, 1998
OPERATING ACTIVITIES

Net income (loss) $ 6,426 $ 17,183 ($9,424)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 13,408 14,109 14,095
Amortization 607 706 32
Write off of loan origination costs - line of credit 419
Gain on early retirement of debt (7,414)
Discontinued operations 1,359 22,087 29,751
Provision for losses on accounts receivable (118) 45 468
Provision for deferred income taxes (3,339) 605 3,068
Losses (gains) on disposition of property
and equipment 138 73 (6)
Deferred compensation (227) 317 638
Changes in operating assets and liabilities:
Accounts receivable 11,182 12,573 1,895
Inventories 1,548 10,372 (236)
Other current assets 0 (85) 41
Accounts payable and accrued expenses 2,308 (26,596) (8,244)
-------------- -------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 26,297 51,389 32,078

INVESTING ACTIVITIES
Property, plant and equipment:
Purchases (4,340) (9,075) (4,065)
Proceeds of dispositions 12,750 1,086 13
Other investing activities 0 140
Investing activities of discontinued operations 333 206 10,686
-------------- -------------- ---------------
NET CASH PROVIDED(USED) BY
INVESTING ACTIVITIES 8,743 (7,643) 6,634

FINANCING ACTIVITIES
Proceeds from revolving lines of credit 15,000 104,365 137,000
Repayments on revolving lines of credit (15,000) (131,000) (110,365)
Repurchase and retirement of long term debt (26,615)
Scheduled principal payments of long-term debt
Net proceeds/(repayments) of loan from parent company (202,093)
Proceeds from issuance of long-term debt 145,688
Dividends paid 0 (7,500) (8,000)
Other (41) (252) (1,493)
-------------- -------------- ---------------
NET CASH (USED) BY FINANCING ACTIVITIES (26,656) (34,387) (39,263)

(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 8,384 9,359 (551)

Cash and cash equivalents at beginning of year 9,903 544 1,095
-------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,287 $ 9,903 $ 544
============== ============== ===============

See notes to consolidated financial statements.

23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A-DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: The Company manufactures woven fabrics which are
sold through a separate sales subsidiary. The Company's operations, all within
the textile industry, are considered a single business segment.

BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Delta Mills, Inc. and Delta Mills Marketing, Inc. (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated. Delta Mills, Inc. and Delta Mills Marketing , Inc. are wholly-owned
subsidiaries of Delta Woodside Industries, Inc. ("DWI"). The Company has one
segment that is presented as a discontinued operation, Stevcoknit Fabrics
Company, which manufactured and sold knitted fabrics.

CASH EQUIVALENTS: The Company considers all highly liquid investments having
initial maturities of three months or less when purchased to be cash
equivalents.

INVENTORIES: Inventories are stated at the lower of the cost or market
determined using the first-in , first-out (FIFO) method.

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

IMPAIRMENT OF LONG-LIVED ASSETS: When required by circumstances, the Company
evaluates the recoverability of its long-lived assets by comparing estimated
future undiscounted cash flows with the asset's carrying amount to determine if
a write-down to market value is required

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

DEFERRED LOAN COSTS: Deferred loan costs are being amortized over periods of
five and ten years based on maturity of related debt.

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

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

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

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

FISCAL YEAR: The Company's operations are based on a fifty-two or fifty-three
week fiscal year ending on the Saturday closest to June 30. Fiscal year 2000
and fiscal year 1998 consisted of 52 weeks and fiscal year 1999 consisted of
53weeks.

24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B-ACCOUNTS RECEIVABLE

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

The Company operates within the textile industry, and its operations are
affected by the relative strength or weakness of the textile markets. The
Company has three major customers that together accounted for 39%, 43%, and 37%
of total net sales of continuing operations for fiscal years 2000, 1999, and
1998, respectively.

The Company's accounts receivable are due from many companies that produce
apparel products located throughout the United States. The many companies
represented in the Company's accounts receivable limit to a certain extent the
concentration of credit risk. The Company generally does not require collateral
for its accounts receivable.

NOTE C-LONG-TERM DEBT AND LEASES

On August 25, 1997 the Company issued $150 million of unsecured ten-year senior
notes at an interest rate of 9.625%, and obtained a secured five-year $100
million revolving line of credit subject to borrowing base limitations. The $100
million revolving line of credit was replaced by a new credit facility on March
31, 2000. Borrowings under the new credit facility are based on eligible
accounts receivable and inventory of the Company, subject to a maximum $50
million availability limit. The facility has a three-year term and is secured by
the accounts receivable, inventory and capital stock of the Company. The
interest rate on the credit facility is based on a spread over either LIBOR or a
base rate. On July 1, 2000, there were no borrowings and approximately $50
million was available for borrowing under this credit facility.

The credit facility contains restrictive covenants which require that Delta
Mills' maximum leverage ratio not exceed specified ratios. The agreement also
restricts additional indebtedness, dividends, and capital expenditures. The new
credit facility does not contain certain restrictions which were present in the
credit facility which it replaced. The payment of dividends with respect to
Delta Mills stock is permitted by the credit facility if there is no event of
default and there is at least $1 of undrawn availability under the facility.

The carrying value of the Company's revolving credit agreement approximates fair
value since the rates are tied to floating rates. At July 1, 2000 the carrying
value of the senior notes was $115,078,000 and the fair value, based on quoted
market prices was $96,666,000.

Total interest expense incurred by the Company was $16,095,000, $17,415,000 and
$17,160,000 for fiscal years 2000, 1999, and 1998, respectively, of which
$106,000 was capitalized during fiscal year 1999. Total interest paid during
fiscal years 2000, 1999, and 1998 was $16,343,000, $16,760,000 and $13,563,000,
respectively.

Rent expense relating to operating leases was approximately $3,507,000,
$3,407,000 and $ 3,821,000 for fiscal years 2000, 1999 and 1998 respectively.

25

NOTE C-CONTINUED

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

Long-term Operating
Fiscal Year Debt Leases
----------- ------------ ----------
2001 $3,280,000
2002 1,628,000
2003 446,000
2004 461,000
Later Years 115,078,000 528,000
------------ ----------
$115,078,000 $6,343,000
============ ==========

NOTE D-EMPLOYEE BENEFIT PLANS

The Company has participated in the Delta Woodside Industries, Inc. Retirement
and 40l(k) Plans. On September 27, 1997 the Delta Woodside Industries Employee
Retirement Plan ("Retirement Plan") merged into the Delta Woodside Employee
Savings and Investment Plan ("401(k) Plan"). Following the merger,
contributions to the 401(k) Plan in lieu of a contribution to the Retirement
Plan are made in cash and not in stock. In the 401(k) Plan employees may elect
to convert DWI stock to other funds, but may not increase the amount of stock in
their account. Each participant has the right to direct the trustee as to the
manner in which shares held are to be voted. The Retirement Plan qualified as
an Employee Stock Ownership Plan ("ESOP") under the Internal Revenue Code as a
defined contribution plan. A contribution of $236,000 was allocated to
participants in fiscal 1998. During fiscal 2000, 1999 and 1998, the Company
contributed $453,000, $497,000, and $455,000, respectively, to the 401(k) plan
to match employee contributions. In addition to the matching contributions, the
Company also made a discretionary contribution of $280,000 to the 401(k) plan in
fiscal 1999.

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

The Company participates in a Deferred Compensation Plan, managed by DWI, which
permits certain management employees to defer a portion of their compensation.
Deferred compensation accounts are credited with interest and are distributed
after retirement, disability or employment termination. As of July 1, 2000 and
July 3, 1999, the Company's liability was $5,813,000 and $6,040,000
respectively.

The Company also participates in the Delta Woodside Industries, Inc. Incentive
Stock Award Plan and Stock Option Plan. Including associated tax assistance,
under the Incentive Stock Award Plan the Company recognized expense of
$176,000, $321,000, and $404,000 for fiscal years 2000, 1999 and 1998,
respectively. Under the Stock Option Plan, the Company recognized expense of
$190,000, $152,000 and $104,000 for fiscal years 2000, 1999 and 1998,
respectively.

NOTE E-AFFILIATED PARTY TRANSACTIONS

The Company participated in a cash management system maintained by Delta
Woodside Industries, Inc. until August 25, 1997. Under this system excess cash
was forwarded to DWI each day, reducing the current loan payable to affiliate.
Likewise, cash requirements were funded daily by DWI, increasing loan payable to
affiliate. Interest was charged on loan payable to affiliate balances based on
the weighted average cost of DWI's borrowings.

26

NOTE E-CONTINUED

Accounts receivable due from affiliates include $13.0 million at July 3, 1999,
resulting from sales to Delta Apparel (then a division of another subsidiary of
DWI).

Current payable to affiliates bears no interest and includes amounts payable to
DWI for current activity as described in the following paragraphs.

Affiliated party transactions included in the statements of operations result
from a variety of services provided and goods transferred as shown in the
following table:

2000 1999 1998
----------- ----------- -----------

Textile and yarn sales $26,593,000 $30,221,000 $19,385,000
Corporate services expense 2,264,000 2,816,000 2,838,000
Income tax payments 154,000 74,000 88,000
Payroll taxes, insurance and
Employee related expenses 20,673,000 39,889,000 45,223,000
Printing services expense 0 0 220,000
Interest expense 0 0 2,193,000
Rental income 0 81,000 95,000

From March 29, 1997 until mid-May 2000, the Company sold textiles and yarn to an
affiliate at prices which approximate market. Prior to March 29, 1997, the
Company sold textiles and yarn to an affiliate at prices which approximate cost.
This arrangement was terminated in the fiscal 2000 fourth quarter when the
Company sold its Rainsford facility and associated operating assets to the
affiliate for $13.6 million which approximates net book value.

Corporate services included management, treasury, computer, purchasing,
benefits, payroll, auditing, accounting and tax services. For these services,
DWI charged actual cost based on relative usage and other factors. Actual cost
was charged for payroll taxes, insurance and employee related expenses, which
were managed by DWI as a corporate service. Printing services were charged at
market prices. Interest was charged based on fixed rates for long-term debt.
Interest on loan payable to affiliates was charged based on DWI 's weighted
average interest rate. These services are now performed by the Company.

NOTE F-DISCONTINUED OPERATIONS AND RESTRUCTURING CHARGES

The Company has one segment in continuing operations, Delta Mills Marketing
Company, which manufactures and sells woven fabrics for apparel and home
furnishings. Operating profit does not include interest expense or interest
income. The Company also has one segment which is presented as a discontinued
operation: Stevcoknit Fabrics Company which manufactured and sold knitted
fabrics.

On March 3, 1998, the Company made the decision to close Stevcoknit Fabrics.
Accordingly, operating results for this segment have been reclassified and
reported as discontinued operations.

In connection with the decision to discontinue this business, the Company, in
fiscal 1998, recognized an estimated loss on disposal of discontinued operations
of $21 million including an income tax benefit of $14 million. In fiscal 1999,
the Company decreased the estimate of the after-tax cost to discontinue these
businesses and recognized after-tax credits of $3.8 million. Proceeds from the
liquidation of this division have been used to make capital expenditures and to
reduce indebtedness.

27

NOTE F-CONTINUED

The assets of discontinued operations at July 1, 2000 and July 3, 1999 are as
follows:

(in thousands) July 1, 2000 July 3, 1999
------------- -------------

Accounts Receivable 0 $ 763
Inventory 0 0
Other current assets 0 17
------------- -------------
Total current assets $ 0 $ 780
============= =============

Summarized results of operations for the discontinued business are as follows:

(in thousands) July 1, 2000 July 3, 1999 June 27, 1998
-------------- -------------- ---------------

Net Sales $ 0 $ 2,080 $ 91,153
Cost and expense 276 2,080 112,899
(Loss) before income tax (276) 0 (21,746)
Income tax (benefit) 102 0 (16,916)
-------------- -------------- ---------------

(Loss) from operations of
discontinued operations $ (174) $ 0 $ (4,830)
============== ============== ==============

NOTE G-INCOME TAXES

The Company reports federal income taxes in the consolidated return of its
parent Delta Woodside Industries, Inc. (DWI) and had taxable income of $18
million which will be reported in the fiscal 2000 consolidated Federal income
tax return with its parent, DWI. The consolidated tax group had regular taxable
income of $13 million and alternative minimum taxable income (AMT) of $7
million, both of which were offset by available tax loss carry-forwards. The
Federal income tax obligation or refund that is allocated to the Company is
determined as if the company were filing a separate Federal income tax return.
The Company's Federal tax liability or receivable is paid to or is a receivable
from the parent company.

Deferred income taxes reflect the net tax effects of temporary differences
between the financial statement amounts and amounts reported for income tax
purposes. The company anticipates that the reversal of existing taxable
temporary differences will provide sufficient taxable income to realize the
remaining deferred tax assets. Accordingly, no valuation allowance has been
provided for in 2000. The valuation allowance was reduced to $ 0 for fiscal
year 2000 from the $ 37,000 balance in fiscal year 1999.

28

NOTE G-CONTINUED

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

2000 1999
-------------- ----------------
Assets

Deferred compensation $ 2,222,000 $ 2,325,000
Accrued and sundry liabilities 2,071,000 1,436,000
Net operating loss carryforwards 1,129,000 1,373,000
Restructuring reserves 82,000 303,000
Other 67,000 714,000
-------------- ----------------
Subtotal 5,571,000 6,151,000
Valuation allowance 0 (37,000)
-------------- ----------------
Deferred tax assets 5,571,000 6,114,000

Liabilities:
Depreciation 15,747,000 18,638,000
Inventory 269,000 0
Other 661,000 991,000
-------------- ----------------
Deferred tax liabilities 16,677,000 19,629,000
-------------- ----------------
Net deferred tax liabilities ($11,106,000) ($13,515,000)
============== ================

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

2000 1999 1998
Current:

Federal income taxes $ 4,190,000 $ 6,980,000 $ 7,270,000
State income taxes 429,000 1,005,000 405,000
------------- ----------- -------------
Total current $ 4,619,000 $ 7,985,000 $ 7,675,000
Deferred:
Federal income taxes (benefits) ($2,871,000) $ 520,000 $ 2,640,000
State income taxes (benefits) (468,000) 85,000 428,000
------------- ----------- -------------
Total Deferred ($3,339,000) $ 605,000 $ 3,068,000
------------- ----------- -------------
Total provision for Continuing Operations $ 1,280,000 $ 8,590,000 $ 10,743,000

Total provision for income taxes related to:
Extraordinary Items 2,755,000 0 0
Discontinued Operations (103,000) 2,335,000 (16,916,000)
------------- ----------- -------------
Total provision for income taxes $ 3,932,000 $10,925,000 ($6,173,000)
============= =========== =============

29

NOTE G-CONTINUED

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

2000 1999 1998
----------- ----------- ---------------

Income tax expense (benefit) at statutory rates $3,627,000 $ 9,835,000 ($5,459,000)
State taxes (benefits) net of federal benefit 364,000 991,000 (733,000)
Other (59,000) 99,000 19,000
----------- ----------- ---------------
$3,932,000 $10,925,000 ($6,173,000)
=========== =========== ===============

The Company made tax payments of $ 154,000, $81,000 and $110,000 during fiscal
years 2000, 1999 and 1998, respectively.

NOTE H-SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY

Delta Mills Marketing, Inc. (the "Guarantor") does not comprise a material
portion of the Company's assets or operations. The Guarantor is a wholly-owned
subsidiary of the Company and has fully and unconditionally guaranteed (the
"Guarantee") the Company's payment of principal, premium, interest and certain
liquidated damages, if any, on the Company's senior notes (the "Notes"). The
Guarantor's liability under the Guarantee is limited to such amount, the payment
of which would not have left the guarantor insolvent or with unreasonably small
capital at the time its Guarantee is entered into, after giving effect to the
incurrence of existing indebtedness immediately prior to such time.

The Guarantor is the sole subsidiary of the Company. All future subsidiaries of
the Company will provide guarantees identical to the one described in the
preceding paragraph unless such future subsidiaries are Receivables Subsidiaries
(as defined in the indenture relating to the Notes). Such additional guarantees
will be joint and several with the Guarantee of the Guarantor.

The Company has not presented separate financial statements or other disclosures
concerning the Guarantor because Company management has determined that such
information is not material to investors.

Summarized financial information for the Guarantor is as follows (in thousands):

JULY 1, 2000 JULY 3, 1999
------------- -------------

Current assets 234 194
Noncurrent assets 117 71
Current Liabilities 1,479 560
Noncurrent liabilities 785 980
Stockholders' equity (deficit) (1,913) (1,275)

Summarized results of operations for the Guarantor are as follows
(in thousands):

Twelve Months Ended
-----------------------------------------------
July 1, 2000 July 3, 1999 June 27, 1998
-------------- -------------- ---------------

Net sales -intercompany commissions $ 4,106 $ 5,207 $ 6,177
Cost and expenses 4,744 4,948 5,346
Income from continuing operations (638) 167 468
(Loss) from discontinued operations (519) (1,450)
Net (loss) (638) (352) (982)

30

NOTE I-COMMITMENTS AND CONTINGENCIES

The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At July 1, 2000 minimum
payments under these contracts with non-cancelable contract terms were
approximately $25 million.

During fiscal year 2001, the Company plans to spend approximately $ 10
million for capital improvements and to maintain existing facilities.

Prior to fiscal year 2001, two of the Company's South Carolina plants, the
Delta 2 & 3 finishing plants, had been unable to comply with certain toxicity
and other permit-related limits contained in a National Pollutant Discharge
Elimination System ("NPDES") permit held by the Company. Additionally, high
nitrate levels had been observed at the spray field for those plants. To
achieve compliance with the non-toxicity NPDES permit limits, the Company
completed certain upgrades in October 1998 at a cost of approximately $2.3
million. Since then, the Company has had two non-toxicity permit violations
resulting in the payment of a de minimis penalty. On June 30,2000 the Company
was issued a discharge permit without toxicity limits. The Company is required
to monitor the toxicity level and report the results annually. The effective
date of this permit is August 1,2000, and is in effect until March 31, 2004.

On June 30,2000 the Company sold its Greensboro, North Carolina plant to
the City of Greensboro. The Company had been working with environmental
consultants in assessing groundwater contamination. The Company has recorded
the sale net of estimated costs to remediate the property.

On January 10, 2000, the North Carolina Department of Environment and
Natural Resources requested that Delta Mills, Inc. accept responsibility for
investigating the discharge of hazardous substances at an inactive hazardous
waste site known as the Glen Raven Mills Site, Kings Mountain, North Carolina
(the "Site"). A predecessor by merger of Delta Mills, Inc., Park Yarn Mills
Company, Inc. ("Park Yarn"), owned the Site for approximately six (6) years,
from approximately 1977 to 1983 (prior to the time Delta Mills, Inc. became a
subsidiary of Delta Woodside Industries, Inc.) Delta Mills, Inc. is aware of no
evidence that Park Yarn discharged or deposited any hazardous substance at the
Site or is otherwise a "responsible party" for the Site. Further, Park Yarn
filed bankruptcy and was discharged in 1983. Although no assurance can be
provided, any liability of Park Yarn for the Site may have been discharged by
the bankruptcy order. Accordingly, Delta Mills, Inc. has denied any
responsibility at the Site, has declined to undertake any activities concerning
the Site, and has not provided for any reserves for costs or liabilities
attributable to Park Yarn.

On January 13, 2000, Marion Mills, LLC, a supplier to the Company, brought
an action against Delta Mills, Inc. in North Carolina Superior Court in McDowell
County, North Carolina. Delta Mills, Inc. removed the case to federal court in
the Western District of North Carolina, Asheville Division, where it is
currently pending. Plaintiff seeks actual damages in excess of $1.8 million and
consequential and incidental damages in excess of $7.4 million. The actual
damages claim is based on an alleged failure by Delta Mills, Inc. to pay in
excess of $1.8 million of invoice amounts. The consequential and incidental
damages claim is based on the allegation that Delta Mills, Inc.'s. failure to
pay caused Marion Mills, LLC to shut down its business. The Company's position
is that Delta Mills, Inc. paid some of the invoices claimed to be unpaid and did
not pay the other invoices because of defects in the goods supplied by the
plaintiff (which were returned per the plaintiff's authorization). The Company
therefore denies and is vigorously contesting the claims.

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

31

NOTE J-QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations for
the years ended July 1, 2000 and July 3, 1999

Quarter Ended
----------------------------------------------
October 2 January 1 April 1 July 1
------------- ----------- -------- --------

(In thousands)
2000
Net sales $ 65,318 $ 66,441 $ 70,624 $74,128
Gross profit 5,817 6,208 9,566 11,666
Income from continuing operations
before extraordinary items (1,050) (753) 918 2,826
Extraordinary gain net of taxes 0 0 3,502 1,157
Discontinued operations 0 0 0 (174)
Net income (loss) (1,050) (753) 4,420 3,809

September 26 December 26 March 27 July 3
------------- ----------- -------- --------
(In thousands)
1999
Net sales $ 92,417 $ 86,938 $ 81,049 $88,551
Gross profit 17,188 15,782 11,685 11,386
Income from continuing operations 5,397 4,186 2,260 1,538
Discontinued operations 2,632 0 1,141 29
Net income (loss) 8,029 4,186 3,401 1,567

During the third quarter of fiscal year 1998, the Company recognized
restructuring and impairment charges of $21 million in connection with
discontinued operations described in Note F. In fiscal 1999, the Company
decreased the estimate of the after-tax cost to discontinue these businesses and
recognized after-tax credits of $2.6 million and $1.2 million during the first
and third quarters of fiscal year 1999, respectively.

NOTE K-EXTRAORDINARY ITEMS AND SUBSEQUENT EVENTS

a) During the fiscal year 2000, the Company purchased $34,922,000 of face amount
of its 9 5/8% Senior Notes for $26,615,000. The Company recognized an
extraordinary gain of $4,659,000 after a tax benefit of $2,755,000.

b) Subsequent to the end of fiscal 2000, and through September 18, 2000, the
Company purchased $15,653,000 face amount of its 9 5/8% senior notes for
$14,270,481, resulting in a pre-tax extraordinary gain of $989,927.

32

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- -------- ------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------

Not applicable.

33

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------- --------------------------------------------------------

Not applicable.

ITEM 11. EXECUTIVE COMPENSATION

Not applicable.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------- ---------------------------------------------------------------------

Not applicable.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
- --------- ---------------------------------------------------------

Not applicable.

34

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
- ------------------------------------------------------------------------
FORM 8-K
- ----------

(a) (1) and (2) Financial Statements and Financial Statement Schedules
-----------------------------------------------------------

The response to this portion of Item 14 is set forth on page
F-2 included herein, which response is incorporated herein by reference.

(3) Listing of Exhibits:
---------------------

3.1 Restated and Amended Certificate of Incorporation of Delta Mills, Inc.:
Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4
of the Company and Delta Mills Marketing, Inc., File No. 333-37617 (the "S-4").
3.2 Bylaws of Delta Mills, Inc.: Incorporated by reference to Exhibit 3.2 to the S-4.
4.1 See Exhibits 3.1 and 3.2.
4.2 Indenture, dated as of August 25, 1997, by and among the Company, Delta Mills
Marketing, Inc. and The Bank of New York, as Trustee, with respect to the
Company's Series A and Series B 9-5/8% Senior Notes due 2007, $150,000,000 in
aggregate principal amount, together with forms of certain related instruments,
agreements and documents: Incorporated by reference to Exhibit 4.2.6 to the
Current Report on Form 8-K/A of Delta Woodside Industries, Inc. with the date of
September 25, 1997(the "DWI 8-K/A").*
4.3.1 Revolving Credit and Security Agreement, dated as of March 31, 2000, between
GMAC Commercial Credit LLC as agent and lender, and Delta Mills, Inc. as
borrower: Incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K dated March 31, 2000 and filed with the Securities and
Exchange Commission on April 13, 2000
4.3.1.1 Letter, dated July 28, 2000, amending Revolving Credit and Security Agreement:
Incorporated by reference to Exhibit 4.3.1.1 to Form 10-K of Delta Woodside
Industries, Inc. for the fiscal year ended July 1, 2000 (the "DWI 2000 10-K").*
4.3.2 Guarantee, dated as of March 31, 2000, of Delta Mills Marketing, Inc. in favor of
GMAC Commercial Credit LLC as agent: Incorporated by reference to Exhibit
99.2 to the Company's Current Report on Form 8-K dated March 31, 2000 and
filed with the Securities and Exchange Commission on April 13, 2000.
4.3.3 General Security Agreement, dated as of March 31, 2000, between Delta Mills
Marketing, Inc. and GMAC Commercial Credit LLC as agent: Incorporated by
reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated
March 31, 2000 and filed with the Securities and Exchange Commission on April
13, 2000.
4.3.4 Stock Pledge and Security Agreement, dated as of March 31, 2000, by Alchem
Capital Corporation in favor of GMAC Commercial Credit LLC as agent:
Incorporated by reference to Exhibit 99.4 to the Company's Current Report on
Form 8-K dated March 31, 2000 and filed with the Securities and Exchange
Commission on April 13, 2000.
4.3.5 Stock Pledge and Security Agreement, dated as of March 31, 2000, by Delta Mills,
Inc. in favor of GMAC commercial Credit LLC as agent: Incorporated by
reference to Exhibit 99.5 to the Company's Current Report on Form 8-K dated
March 31, 2000 and filed with the Securities and Exchange Commission on
April 13, 2000
4.3.6 Stock Pledge and Security Agreement, dated as of May 11, 2000, by Delta
Woodside Industries, Inc. in favor of GMAC Commercial Credit LLC as agent:
Incorporated by reference to Exhibit 4.3.6 to the DWI 2000 10-K.*
4.4 The Company hereby agrees to furnish to the Commission upon request of the
Commission a copy of any instrument with respect to long-term debt not being
registered in a principal amount less than 10% of the total assets of the Company
and its subsidiaries on a consolidated basis.

35

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
- ---------------------------------------------------------------
FORM 8-K - CONTINUED
- --------------------

10.1 Lease dated September 1, 1998, by and between Hammond Square, Ltd. and
Delta WoodsideIndustries, Inc.: Incorporated by reference to Exhibit 10.1 to Form
10-K of Delta Woodside Industries, Inc. for the fiscal year ended July 3, 1999 (the
"DWI 1999 10-K").*
10.1.1 Letter terminating lease between 233 N. Main, Inc. (formerly named Hammond
Square, Ltd.) and theCompany: Incorporated by reference to Exhibit 10.1.1 to the
DWI 2000 10-K.*
10.2** Delta Woodside Industries, Inc. Deferred Compensation Plan for Key
Managers, Amended and Restated effective June 30, 2000, as amended.
10.3.1** Delta Woodside Industries, Inc. Incentive Stock Award Plan effective July
1, 1990: Incorporated by reference to Exhibit 10.1 to the Form 10-Q of Delta
Woodside Industries, Inc. for the fiscal quarter ended March 31, 1990.*
10.3.2** 1995 Amendment to the Incentive Stock Award Plan effective as of
November 9, 1995: Incorporated by reference to Exhibit 10.3.1 to the Form 10-Q
of Delta Woodside Industries, Inc. for the quarterly period ended December 30,
1995 (the "DWI 12/95 10-Q").*
10.3.3** 1997 Amendment to the Incentive Stock Award Plan effective as of
November 6, 1997: Incorporated by reference to Exhibit 99.1 to the Registration
Statement on Form S-8 of Delta Woodside Industries, Inc. (File No. 333-45771).
10.4.1** Delta Woodside Industries, Inc. Stock Option Plan effective as of July 1,
1990: Incorporated by reference to Exhibit 10.11 to the Form 10-K of Delta Woodside
Industries, Inc. for the fiscal year ended June 30, 1999.*
10.4.2** Amendment No. 1 to Stock Option Plan: Incorporated by reference to
Exhibit 10.1 to the Form 10-Q of Delta Woodside Industries, Inc. for the quarterly
period ended December 29, 1990 (the "DWI 12/90 10-Q").*
10.4.3** Amendment to Stock Option Plan: Incorporated by reference to Exhibit 10.9.2
to the Form 10-K of Delta Woodside Industries, Inc. for the fiscal year ended June
29, 1991 (the "DWI 1991 10-K").*
10.4.4** 1995 Amendment to Stock Option Plan effective as of November 9, 1995:
Incorporated by reference to Exhibit 10.4.4 to the DWI 12/95 10-Q.*
10.4.5** 1997 Amendment to Stock Option Plan effective as of November 6, 1997: Incorporated
by reference to Exhibit 99.1 to the Registration Statement on Form S-8 of Delta
Woodside Industries, Inc. (File No. 333-45767).
10.4.6** Amendment to Stock Option Plan adopted April 25, 2000: Incorporated by
reference to Exhibit 10.4.6 to Form 10-Q of Delta Woodside Industries, Inc. for the
fiscal quarter ended April 1, 2000.*
10.4.7** Amendments to Stock Option Plan: Incorporated by reference to Exhibit 10.4.7
to the DWI 2000 10-K.*
10.5 Stock Transfer Restrictions and Right of First Refusal Agreement between
Delta Woodside Industries, Inc. and E. Erwin Maddrey, II: Incorporated by
reference to Exhibit 10.2 to the DWI 12/90 10-Q.*
10.5.1 Termination of Stock Transfer Restrictions and Right of First Refusal
Agreement with E. Erwin Maddrey, II, dated June 22, 2000: Incorporated by
reference to Exhibit 10.5.1 to the DWI 2000 10-K.*
10.6 Stock Transfer Restrictions and Right of First Refusal Agreement between
Delta Woodside Industries, Inc. and Bettis C. Rainsford: Incorporated by reference
to Exhibit 10.3 to the DWI 12/90 10-Q.*
10.6.1 Termination of Stock Transfer Restrictions and Right of First Refusal Agreement with
Bettis C.Rainsford, dated June 14, 2000: Incorporated by reference to Exhibit 10.6.1
to the DWI 2000 10-K.*
10.7** Form of Amendment of Certain Rights and Benefits Relating to Stock Options
and Deferred Compensation by and between the Company and certain pre-spin-off
plan participants: Incorporated by reference to Exhibit 10.7 to the DWI 2000 10-K.*
10.7.1 List of directors and officers of the Company who signed the document
described in Exhibit 10.7: Incorporated by reference to Exhibit 10.7.1 to DWI
2000 10-K.*
10.7.2** Form of Amendment of Stock Options by and between Delta Woodside Industries, Inc.
and certain pre-spin-off plan participants. Incorporated by reference to Exhibit 10.7.2
to DWI 2000 10-K*

36

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
- ---------------------------------------------------------------
FORM 8-K - CONTINUED
- --------------------

10.8.1** Directors Stock Acquisition Plan: Incorporated by reference to Exhibit 10.14
to the DWI 1991 10-K.*
10.8.2** Amendment to Directors Stock Acquisition Plan, dated April 30, 1992:
Incorporated by reference to Exhibit 10.12.2 to the DWI 1992 10-K.*
10.9** Delta Woodside Industries, Inc. Long Term Incentive Plan: Incorporated by
reference to Exhibit 10.2 to the Registration Statement on Form S-4 of the
Company (File No. 333-37617).
10.9.1** Amendments of Delta Woodside Industries, Inc. Long Term Incentive Plan:
Incorporated by reference to Exhibit 10.9.1 to the DWI 2000 10-K.*
10.9.2** Form of Agreement Respecting Delta Woodside Industries, Inc. Long Term
Incentive Plan, dated in June 2000: Incorporated by reference to Exhibit 10.9.2 to
the DWI 2000 10-K.*
10.10** 2000 Stock Option Plan of Delta Woodside Industries, Inc.: Incorporated by
reference to Exhibit 10.10 to the DWI 2000 10-K.*
10.11** 2000 Incentive Stock Award Plan of Delta Woodside Industries, Inc.:
Incorporated by reference to Exhibit 10.11 to the DWI 2000 10-K.*
10.12** Letter dated December 14, 1998 to Robert W. Humphreys: Incorporated by
reference to Exhibit 10.10 to the Form 10-Q/A of Delta Woodside Industries, Inc.
for the quarterly period ended December 26, 1998 (the "DWI 12/98 10-Q").*
10.12.1** Letter dated April 22, 1999 to Robert W. Humphreys: Incorporated by
reference to Exhibit 10.12.1 to the DWI 1999 10-K.*
10.13** Letter dated December 14,1998 to Jane H. Greer: Incorporated by reference to
Exhibit 10.11 to the DWI 12/98 10-Q.*
10.14** Letter dated June 28, 2000 to William F. Garrett: Incorporated by reference to
Exhibit 10.l4 to the DWI 2000 10-K.*
10.15** Election and Release Form for the Severance Plan for Salaried Employees of
Delta Woodside Industries, Inc., and its Adopting Subsidiaries with Bettis C.
Rainsford: Incorporated by reference to Exhibit 10.15 to the DWI
2000 10-K.*
10.16 Letter terminating lease with Bettis C. Rainsford: Incorporated by reference to
Exhibit 10.16 to the DWI 2000 10-K.*
10.17 See Exhibits 4.2, 4.3.1, 4.3.2, 4.3.3, 4.3.4, 4.3.5 and 4.3.6.
23 Report on Schedule by Independent Auditors.

* All reports previously filed with the Commission by Delta Woodside Industries, Inc. pursuant
to the Exchange Act and rules and regulations promulgated thereunder, exhibits of which are
incorporated by reference into this Report, were filed under Commission File No. 1-10095.

** This is a management contract or compensatory plan or arrangement.

The registrant agrees to furnish supplementally to the Securities and Exchange
Commission a copy of any omitted schedule or exhibit to any of the above filed
exhibits upon request of the Commission.

(b) Reports on Form 8-K
----------------------
The Company filed a Form 8-K with date of March 31, 2000. Items
reported were:
Item 5. Other Events
Item 7. Financial statements and exhibits

(c) Exhibits
--------
The response to this portion of Item 14 is submitted as a separate
section of this report.

(d) Financial Statement Schedules
-------------------------------
Not applicable

37

SIGNATURES
- ----------

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

DELTA MILLS, INC.
(Registrant)

9/28/2000 By: /s/ William F. Garrett
-------------- ------------------------------
Date William F. Garrett
President, Chief Executive Officer
and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

/s/ E. Erwin Maddrey, II 9/28/2000 /s/ William F. Garrett 9/28/2000
- -------------------------------------- ------------------------------------
E. Erwin Maddrey, II Date William F. Garrett Date
Director President, Chief Executive Officer
and Director

/s/ Buck A. Mickel 9/28/2000 /s/ William H. Hardman, Jr 9/25/2000
- -------------------------------------- ------------------------------------
Buck A. Mickel Date William H. Hardman, Jr. Date
Director Vice President, Treasurer and Chief
Financial Officer

/s/ Donald C. Walker 9/25/2000
---------------------------------
Donald C. Walker Date
Controller

38

EXHIBIT INDEX

ITEM 14 (a) (1) and (2), (c) and (d)

LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

CERTAIN EXHIBITS

FINANCIAL STATEMENT SCHEDULES

YEAR ENDED JULY 1, 2000

DELTA MILLS, INC.

GREENVILLE, SOUTH CAROLINA

F-1

FORM 10-K--ITEM 14(A)(1) AND (2)
- ------------------------------------

DELTA MILLS, INC.

LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

The following consolidated financial statements of Delta Mills, Inc. and for the
Year ended July 1, 2000 are incorporated by reference in Item 8:

Consolidated balance sheets-July 1, 2000 and July 3, 1999.

Consolidated statements of operations--Years ended July 1, 2000 and July 3,
1999, and June 27,1998.

Consolidated statements of shareholder's equity-- Years ended July 1, 2000
and July 3, 1999, and June 27,1998.

Consolidated statements of cash flows-- Years ended July 1, 2000
and July 3, 1999, and June 27,1998.

Notes to consolidated financial statements.

The following consolidated financial statement schedule of Delta Mills, Inc. is
included in Item 14(d):

Schedule II -- Valuation and qualifying accounts

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
Columns omitted from schedules filed have been omitted because the information
is not applicable.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
DELTA MILLS, INC.

- -------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
----------------------------
Balance at
DESCRIPTION Beginning (1) (2) Deductions Balance at End
of Period Charged to Charged to Describe of Period
Costs Other
and Expenses Accounts-Describe
- -------------------------------------------------------------------------------------------------------------------------------
Deducted from asset accounts
Allowance for Doubtful Accounts and Returns:

Year ended July 1, 2000 $ 291,000 $ 118,000 (2) $ 173,000
================== ========== ===============
Year ended July 3, 1999 $ 246,000 $ 45,000 (1) $ 291,000
================== ========== ===============
Year ended June 27, 1998 $ 128,000 $ 118,000 (1) $ 246,000
================== ========== ===============
Inventory reserves:

Year ended July 1, 2000 $ 1,347,000 $ 9,000 (2) $ 1,338,000
================== ========== ===============
Year ended July 3, 1999 $ 3,452,000 $2,105,000 (2) $ 1,347,000
================== ========== ===============
Year ended June 27, 1999 $ 2,638,000 $ 814,000 $ 3,452,000
================== ========== ===============

NOTES:

(1) Net change in sales allowances charged to income as a reduction of sales.
(2) Deducted from costs and expenses.