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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
    FORM 10-Q x
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the Quarterly Period Ended May 28, 2004oro
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the Transition Period From
_______________ to
_______________
 Commission file number 33-68412    AVONDALE INCORPORATED  Georgia
(State or other jurisdiction of
incorporation or organization)
    
    58-0477150
(I.R.S. employer
identification no.)
 506 South Broad Street
Monroe, Georgia
(Address of principal executive offices)
    
    30655
(Zip code)
 Registrants telephone number,
including area code: (770) 267-2226 Former name, former address and
former fiscal year, if changed since last report: N/A 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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES o NO x Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. Description
    
    As Of
    
    Shares OutstandingClass A Common Stock
    
    July 2, 2004
    
    11,394,160 SharesClass B Common Stock
    
    July 2, 2004
    
    978,939 Shares




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INDEX TO FORM 10-Q   AVONDALE INCORPORATED PageReferencePART I - FINANCIAL INFORMATION (Unaudited)Item 1:
    
    Financial StatementsCondensed Consolidated Balance Sheets at August 29, 2003 and May 28, 2004
    
    
    2Condensed Consolidated Statements of
Operations for the Thirteen Weeks Ended May 30, 2003 and May 28, 2004
    
    
    3Condensed Consolidated Statements
of Operations for the Thirty-Nine Weeks Ended May 30, 2003 and May 28, 2004
    
    
    4Condensed Consolidated Statements
of Cash Flows for the Thirty-Nine Weeks Ended May 30, 2003 and May 28, 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2:
    
    Management's Discussion and Analysis
of Financial Condition and Results of Operations
    
    
    20Item 3:
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4:
    
    Controls and Procedures
    
    
    28PART II - OTHER INFORMATIONItem 1:
    
    Legal Proceedings
    
    
    29Item 2:
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    29Item 3:
    
    Defaults upon Senior Securities
    
    
    29Item 4:
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 5:
    
    Other Information
    
    
    29Item 6:
    
    Exhibits and Reports on Form 8-K
    
    
    30Signature
    
    
    
    
    
    31EX-10.50 FIRST AMENDMENT TO THE POST-MERGEREX-31.1 SECTION 302 CERTIFICATE OF THE CEOEX-31.2 SECTION 302 CERTIFICATE OF THE CFOEX-32.1 SECTION 906 CERTIFICATE OF THE CEOEX-32.2 SECTION 906 CERTIFICATE OF THE CFO




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PART I    FINANCIAL INFORMATION 
 Item 1. Financial Statements.
 AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 May 28,Aug. 29,
    
    20042003
    
    (unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    13,769
    
    
    $
    3,991Accounts receivable, less allowance for doubtful accounts
of $1,867 at August 29, 2003 and $1,015 at May 28, 2004
    
    
    29,157
    
    
    
    44,061Inventories
    
    
    82,887
    
    
    
    86,048Prepaid expenses
    
    
    1,980
    
    
    
    2,170Income taxes refundable
    
    
    2,825
    
    
    
    541Total current assets
    
    
    130,618
    
    
    
    136,811Assets held for sale
    
    
    2,640
    
    
    
    1,182Property, plant and equipmentLand
    
    
    6,484
    
    
    
    6,327Buildings
    
    
    79,647
    
    
    
    75,711Machinery and equipment
    
    
    497,213
    
    
    
    465,418583,344
    
    
    
    547,456Less accumulated depreciation
    
    
    (367,759
    )
    
    
    (358,508
    )215,585
    
    
    
    188,948Other assets
    
    
    7,712
    
    
    
    8,848Goodwill
    
    
    2,951
    
    
    
    2,951$
    359,506
    
    
    $
    338,740LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    18,724
    
    
    $
    23,336Accrued compensation, benefits and related expenses
    
    
    9,280
    
    
    
    10,866Accrued interest
    
    
    2,726
    
    
    
    6,073Other accrued expenses
    
    
    9,785
    
    
    
    8,983Long-term debt due in one year
    
    
    4,325
    
    
    
    4,325Total current liabilities
    
    
    44,840
    
    
    
    53,583Long-term debt
    
    
    163,512
    
    
    
    158,868Deferred income taxes and other long-term liabilities
    
    
    35,203
    
    
    
    27,110Shareholders equityPreferred stock$.01 par value; 10,000 shares authorized
    
    
    
    
    
    
    Common stockClass A, $.01 par value; 100,000 shares
Authorized; issued and outstanding - 11,402 shares at
August 29, 2003 and 11,394 shares at May 28, 2004
    
    
    114
    
    
    
    114Class B, $.01 par value; 5,000 shares authorized;
Issued and outstanding - 979 shares at
August 29, 2003 and May 28, 2004
    
    
    10
    
    
    
    10Capital in excess of par value
    
    
    39,194
    
    
    
    39,170Accumulated other comprehensive loss
    
    
    (151
    )
    
    
    Retained earnings
    
    
    76,784
    
    
    
    59,885Total shareholders equity
    
    
    115,951
    
    
    
    99,179$
    359,506
    
    
    $
    338,740
 The accompanying notes are an integral part of these condensed consolidated financial statements. 2




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AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED)
(In thousands, except per share data)
 Thirteen Weeks EndedMay 30,
    
    May 28,2003
    
    2004Net sales
    
    $
    152,336
    
    
    $
    151,345Operating costs and expensesCost of goods sold
    
    
    127,988
    
    
    
    138,043Depreciation
    
    
    10,402
    
    
    
    9,149Selling and administrative expenses
    
    
    6,644
    
    
    
    6,658Facility restructuring charges
    
    
    2,450
    
    
    
    2,250Operating income (loss)
    
    
    4,852
    
    
    
    (4,755
    )Interest expense, net
    
    
    4,328
    
    
    
    4,346Discount and expenses on sales of receivables
    
    
    679
    
    
    
    631Gain on extinguishment of debt
    
    
    
    
    
    
    (1,321
    )Other, net
    
    
    (150
    )
    
    
    110Loss before income taxes
    
    
    (5
    )
    
    
    (8,521
    )Provision for (benefit of) income taxes
    
    
    5
    
    
    
    (3,080
    )Net loss
    
    $
    (10
    )
    
    $
    (5,441
    )Per share data:Net loss-basic
    
    $
    
    
    
    $
    (.44
    )Net loss-diluted
    
    $
    
    
    
    $
    (.44
    )Dividends declared
    
    $
    .10
    
    
    $
    
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED)
(In thousands, except per share data)
 Thirty-Nine Weeks EndedMay 30,
    
    May 28,2003
    
    2004Net sales
    
    $
    461,136
    
    
    $
    412,267Operating costs and expensesCost of goods sold
    
    
    388,491
    
    
    
    373,392Depreciation
    
    
    32,120
    
    
    
    28,016Selling and administrative expenses
    
    
    21,001
    
    
    
    19,347Facility restructuring charges
    
    
    2,450
    
    
    
    2,250Operating income (loss)
    
    
    17,074
    
    
    
    (10,738
    )Interest expense, net
    
    
    13,418
    
    
    
    13,510Discount and expenses on sales of receivables
    
    
    2,096
    
    
    
    1,874Gain on extinguishment of debt
    
    
    
    
    
    
    (1,321
    )Other, net
    
    
    (162
    )
    
    
    (2,439
    )Income (loss) before income taxes
    
    
    1,722
    
    
    
    (22,362
    )Provision for (benefit of) income taxes
    
    
    665
    
    
    
    (7,975
    )Net income (loss)
    
    $
    1,057
    
    
    $
    (14,387
    )Per share data:Net income (loss)-basic
    
    $
    .08
    
    
    $
    (1.16
    )Net income (loss)-diluted
    
    $
    .08
    
    
    $
    (1.16
    )Dividends declared
    
    $
    .30
    
    
    $
    .20
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
(In thousands)
 Thirty-Nine Weeks EndedMay 30,
    
    May 28,2003
    
    2004Operating activitiesNet income (loss)
    
    $
    1,057
    
    
    $
    (14,387
    )Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:Depreciation and amortization
    
    
    32,394
    
    
    
    28,384Benefit of deferred income taxes
    
    
    (934
    )
    
    
    (8,072
    )Loss (gain) on disposal of equipment
and facility restructuring charges
    
    
    2,151
    
    
    
    (867
    )Gain on extinguishment of debt
    
    
    
    
    
    
    (1,321
    )Sale of accounts receivable, net
    
    
    (15,516
    )
    
    
    (6,442
    )Changes in operating assets and liabilities
    
    
    (714
    )
    
    
    (2,200
    )Net cash provided by (used in) operating activities
    
    
    18,438
    
    
    
    (4,905
    )Investing activitiesPurchases of property, plant and equipment
    
    
    (13,102
    )
    
    
    (4,540
    )Proceeds from sale of property, plant and equipment
and assets held for sale
    
    
    1,116
    
    
    
    5,447Net cash provided by (used in) investing activities
    
    
    (11,986
    )
    
    
    907Financing activitiesReduction in long-term debt
    
    
    (3,106
    )
    
    
    (3,244
    )Purchase and retirement of treasury stock
    
    
    (2,315
    )
    
    
    (60
    )Dividends paid
    
    
    (3,752
    )
    
    
    (2,476
    )Net cash used in financing activities
    
    
    (9,173
    )
    
    
    (5,780
    )Decrease in cash and cash equivalents
    
    
    (2,721
    )
    
    
    (9,778
    )Cash and cash equivalents at beginning of period
    
    
    2,859
    
    
    
    13,769Cash and cash equivalents at end of period
    
    $
    138
    
    
    $
    3,991
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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AVONDALE INCORPORATED 
 NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
May 28, 2004
 1.    Basis of Presentation: The accompanying unaudited condensed
consolidated financial statements include the accounts of Avondale Incorporated
and its wholly owned subsidiary, Avondale Mills, Inc. (Avondale Mills)
(collectively, the Company). Avondale Funding LLC (Funding), a special
purpose subsidiary of Avondale Mills, provides financing through the sale of
accounts receivable generated by the Company. The Company accounts for its
investment in Funding using the equity method of accounting. All significant
intercompany accounts and transactions have been eliminated. Certain prior year
amounts have been reclassified to conform with the current years presentation.
The August 29, 2003 balance sheet has been derived from the audited financial
statements at that date. The accounting policies and basis of presentation
followed by the Company are presented in Note 1 to the August 29, 2003 audited
consolidated financial statements. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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. These statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information. Accordingly, they do not include all of the information and
disclosures required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, including normal
recurring accruals, necessary for a fair presentation. Operating results for
the thirty-nine weeks ended May 28, 2004 are not necessarily indicative of the
results that may be expected for the fiscal year ending August 27, 2004. 2.    Inventories: Components of inventories are as follows (amounts in thousands): Aug. 29,
    
    May 28,2003
    
    2004Finished goods
    
    $
    26,579
    
    
    $
    32,255Work in process
    
    
    33,176
    
    
    
    34,187Raw materials
    
    
    9,072
    
    
    
    9,975Dyes and chemicals
    
    
    4,593
    
    
    
    5,007Inventories at FIFO
    
    
    73,420
    
    
    
    81,424Adjustment of carrying value to LIFO basis,
net of market adjustment
    
    
    3,565
    
    
    
    (935
    )76,985
    
    
    
    80,489Supplies at average cost
    
    
    5,902
    
    
    
    5,559$
    82,887
    
    
    $
    86,048
 6




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 28, 2004 The Companys inventories at May 28, 2004 under the last-in, first-out
(LIFO) method and the related impact on the statement of operations for the
thirteen and thirty-nine weeks then ended have been recorded using estimated
quantities and costs as of August 27, 2004, the end of fiscal 2004. As actual
inventory quantities and costs at August 27, 2004 could differ significantly
from these estimates, the inventory amounts at May 28, 2004 and the operating
results for the thirty-nine weeks ended May 28, 2004 are not necessarily
indicative of the inventory amounts at August 27, 2004 and operating results
for fiscal 2004 to be recorded using the final LIFO calculations. 3.    Earnings Per Share: Earnings per share is calculated by dividing the
reported net income (loss) for the period by the appropriate weighted average
number of shares of common stock outstanding, as shown below (amounts in
thousands): Thirteen Weeks Ended
    
    Thirty-Nine Weeks EndedMay 30,
    
    May 28,
    
    May 30,
    
    May 28,2003
    
    2004
    
    2003
    
    2004Weighted average shares outstanding  basic
    
    
    12,426
    
    
    
    12,376
    
    
    
    12,483
    
    
    
    12,379Effect of employee stock options
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    Weighted average shares outstanding  diluted
    
    
    12,426
    
    
    
    12,376
    
    
    
    12,573
    
    
    
    12,379
 The Company adopted the provisions of Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, during fiscal 2003, electing to continue its use of the intrinsic
value method. Accordingly, no stock-based compensation has been recorded, as
the exercise price of each option granted under the existing plan equals the
market value of the underlying common stock on the date of grant. If the
Company had elected to record stock-based compensation in accordance with the
fair value method and the provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, reported net income
and earnings per share would be adjusted to the pro forma amounts as shown
below (amounts in thousands, except per share data): Thirteen Weeks Ended
    
    Thirty-Nine Weeks EndedMay 30,
    
    May 28,
    
    May 30,
    
    May 28,2003
    
    2004
    
    2003
    
    2004Net income (loss) as reported
    
    $
    (10
    )
    
    $
    (5,441
    )
    
    $
    1,057
    
    
    $
    (14,387
    )Pro forma stock-based compensation, net of
income taxes
    
    
    (9
    )
    
    
    (9
    )
    
    
    (28
    )
    
    
    (27
    )Pro forma net income (loss)
    
    $
    (19
    )
    
    $
    (5,450
    )
    
    $
    1,029
    
    
    $
    (14,414
    )Per share data:Net income (loss)-basic as reported
    
    $
    
    
    
    $
    (.44
    )
    
    $
    .08
    
    
    $
    (1.16
    )Net income (loss)-basic pro forma
    
    $
    
    
    
    $
    (.44
    )
    
    $
    .08
    
    
    $
    (1.16
    )Net income (loss)-diluted as reported
    
    $
    
    
    
    $
    (.44
    )
    
    $
    .08
    
    
    $
    (1.16
    )Net income (loss)-diluted pro forma
    
    $
    
    
    
    $
    (.44
    )
    
    $
    .08
    
    
    $
    (1.16
    )
 7




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 28, 2004 4.    Segment Information: Condensed segment information is as follows
(amounts in thousands): Thirteen Weeks Ended
    
    Thirty-Nine Weeks EndedMay 30,
    
    May 28,
    
    May 30,
    
    May 28,2003
    
    2004
    
    2003
    
    2004Revenues:Apparel fabrics
    
    $
    119,574
    
    
    $
    112,601
    
    
    $
    366,576
    
    
    $
    307,330Yarns
    
    
    42,407
    
    
    
    47,714
    
    
    
    131,936
    
    
    
    135,087Other
    
    
    17,013
    
    
    
    16,203
    
    
    
    50,974
    
    
    
    44,991178,994
    
    
    
    176,518
    
    
    
    549,486
    
    
    
    487,408Less inter-segment sales
    
    
    26,658
    
    
    
    25,173
    
    
    
    88,350
    
    
    
    75,141Total
    
    $
    152,336
    
    
    $
    151,345
    
    
    $
    461,136
    
    
    $
    412,267Income (loss):Apparel fabrics
    
    $
    9,903
    
    
    $
    1,821
    
    
    $
    27,661
    
    
    $
    4,702Yarns
    
    
    301
    
    
    
    301
    
    
    
    2,413
    
    
    
    (547
    )Other
    
    
    1,641
    
    
    
    1,417
    
    
    
    3,775
    
    
    
    3,340Facility restructuring charges
    
    
    (2,450
    )
    
    
    (2,250
    )
    
    
    (2,450
    )
    
    
    (2,250
    )Unallocated
    
    
    (4,543
    )
    
    
    (6,044
    )
    
    
    (14,325
    )
    
    
    (15,983
    )Total operating income (loss)
    
    
    4,852
    
    
    
    (4,755
    )
    
    
    17,074
    
    
    
    (10,738
    )Interest expense, net
    
    
    4,328
    
    
    
    4,346
    
    
    
    13,418
    
    
    
    13,510Discount and expenses on sale of receivables
    
    
    679
    
    
    
    631
    
    
    
    2,096
    
    
    
    1,874Gain on extinguishment of debt
    
    
    
    
    
    
    (1,321
    )
    
    
    
    
    
    
    (1,321
    )Other, net
    
    
    (150
    )
    
    
    110
    
    
    
    (162
    )
    
    
    (2,439
    )Income (loss) before income taxes
    
    $
    (5
    )
    
    $
    (8,521
    )
    
    $
    1,722
    
    
    $
    (22,362
    )
 5.    Comprehensive Income (Loss): Comprehensive income (loss) includes
unrealized gains and losses in the fair value of certain derivative instruments
which qualify for hedge accounting. A reconciliation of net income (loss) to
comprehensive income (loss) is as follows (amounts in thousands): Thirteen Weeks Ended
    
    Thirty-Nine Weeks EndedMay 30,
    
    May 28,
    
    May 30,
    
    May 28,2003
    
    2004
    
    2003
    
    2004Net income (loss)
    
    $
    (10
    )
    
    $
    (5,441
    )
    
    $
    1,057
    
    
    $
    (14,387
    )Change in fair value of
interest rate swaps, net
of income taxes
    
    
    201
    
    
    
    
    
    
    
    443
    
    
    
    151Comprehensive income (loss)
    
    $
    191
    
    
    $
    (5,441
    )
    
    $
    1,500
    
    
    $
    (14,236
    )
 6.    Gain on Disposal of Property, Plant and Equipment and Assets Held for
Sale: In November 2003, the Company sold two tracts of land unrelated to its
manufacturing facilities and not utilized in the operation of its business. The
related gain on disposal of these properties, approximately $2.3 million, is
included in Other, net on the consolidated statement of income for the
thirty-nine weeks ended May 28, 2004. 8




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 28, 2004 7.    Facility Restructuring: In response to the highly competitive market
conditions and continued imbalance of global supply and demand for textile and
apparel products, in May 2004, the Company closed an open-end yarn
manufacturing facility located in North Carolina and the weaving operation of
an integrated greige fabric manufacturing facility located in Georgia. These
actions to rationalize excess manufacturing capacity, following the relocation
of certain equipment, are expected to improve capacity utilization of the
Companys remaining facilities and lower costs per unit produced. No reduction
in net sales is anticipated as a result of this capacity rationalization.
Flexibility of the Companys manufacturing facilities to shift production from
one product line to another and the Companys ability to source additional
yarns and greige fabrics from outside vendors to increase production of its
finished products in reaction to added demand are expected to be maintained.
Certain equipment will be relocated from these two operations to other
facilities located in Alabama, Georgia and South Carolina to retain certain
specialized manufacturing capabilities and replace older, less efficient
equipment. Other excess equipment has been sold, generating a gain of
approximately $0.9 million. In connection with these actions, the Company
recorded facility restructuring charges and other non-operating costs, net of
the gain on equipment sold, of approximately $2.3 million during the third
quarter of fiscal 2004. 8.    Gain on Extinguishment of Debt: On May 27, 2004, the Company recorded a
$1.3 million net gain on early extinguishment of debt related to a partial
exchange of its 10 1/4% Senior Subordinated Notes due 2013 (the 2013 Notes).
The Company executed the private transaction, exchanging $4.0 million of the 2013 Notes for $2.6 million of new senior,
unsecured Floating Rate Notes due 2012 (the 2012 Notes). Interest on the 2012
Notes is due quarterly in arrears commencing July 1, 2004, and is calculated
based on the three month LIBOR rate (subject to a minimum of 1.75% and a
maximum of 4.5%) plus 7.0%. After July 1, 2005, the 2012 Notes are redeemable
at the Companys option, in whole or in part, at a redemption price of 104.0%,
which declines in intervals to 100.0% in 2009 and thereafter. The 2012 Notes
have substantially the same covenants, events of default and other terms and
conditions as the 2013 Notes. In connection with the exchange, the Company
received a waiver of certain restrictions provided under the GECC revolving
credit facility pertaining to the reduction of subordinated debt. 9.    Post Retirement Benefits: The estimated cost of postretirement benefits
is recorded ratably over the service lives of the associates expected to
receive such benefits. The Company provides certain life and medical insurance
benefits which were granted in 1964 to a closed group of associates, the
majority of whom are now retired. Certain medical benefits are also provided to
three closed groups of retirees as a result of the acquisition of the textile
business of the Graniteville Company in fiscal 1996 (the Graniteville
Retirees). In addition, current associates (and their covered dependents) that
retire on or after age 55 with at least 15 years of service are eligible for
continued medical coverage through age 65 (the Early Retirees). Benefits are
paid from the general assets of the Company. 9




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 28, 2004 In December 2003, the Financial Accounting Standards Board amended and
reissued Statement No. 132, Employers Disclosures about Pensions and Other
Postretirement Benefits, which requires companies to provide additional
disclosures about retirement plan assets, benefit obligations, cash flows,
benefit costs and other relevant information. In addition to extended annual
disclosures, companies are required to report the various elements of pensions
and other postretirement benefit costs on a quarterly basis. The Company has
adopted amended Statement No. 132 effective with the third fiscal quarter ended
May 28, 2004. The table below details the estimated net period cost of the
Companys post retirement benefits. Thirteen Weeks Ended
    
    Thirty-Nine Weeks EndedMay 30,
    
    May 28,
    
    May 30,
    
    May 28,2003
    
    2004
    
    2003
    
    2004Components of net periodic benefit cost:Service cost
    
    $
    28
    
    
    $
    32
    
    
    $
    83
    
    
    $
    96Interest cost
    
    
    133
    
    
    
    119
    
    
    
    399
    
    
    
    357Amortization of prior service cost
    
    
    83
    
    
    
    83
    
    
    
    249
    
    
    
    249Amortization of gain (loss)
    
    
    (24
    )
    
    
    (9
    )
    
    
    (72
    )
    
    
    (27
    )Net periodic benefit cost
    
    $
    220
    
    
    $
    225
    
    
    $
    659
    
    
    $
    675
 Payment of post retirement benefits for the thirty-nine weeks ended May 28,
2004 amounted to $1.3 million, and is forecasted to be approximately $1.8 million
for the full fiscal year ended August 27, 2004. On April 28, 2004 the Company announced the elimination of medical
benefits for the Graniteville Retirees and the Early Retirees effective August
1, 2004. These retired participants may continue to submit claims until
December 31, 2004 for covered expenses incurred prior to August 1, 2004. The
Company is currently evaluating the impact of this elimination of post
retirement benefits on the Companys consolidated financial statements. 10.    New Accounting Pronouncements: In May 2003, the Financial Accounting
Standards Board issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which requires
certain financial instruments that were previously presented on the
consolidated balance sheets as equity or temporary equity to be presented as
liabilities. Such instruments include mandatorily redeemable preferred and
common stock, and certain options and warrants. Statement No. 150 is generally
effective for the first interim period beginning after December 15, 2003. The
adoption the provisions of Statement No. 150 for the thirteen weeks ended
May 28, 2004 had no impact on the Companys consolidated financial statements. 11.    Contingencies: The Company is involved in certain environmental
matters and claims. The Company has provided reserves to cover managements
estimates of the cost of investigating, monitoring and remediating these and
other environmental conditions. If more costly remediation measures are
necessary than those believed to be probable based on current facts and
circumstances, actual costs may exceed the reserves provided. However, based
on the information currently available, management does not believe that the
outcome of these matters will have a material adverse effect on the Companys
future results of operations or financial condition. For discussion of certain legal proceedings to which the Company is a
party, see Item 3 Legal Proceedings in the Companys Annual Report on
Form 10-K for the fiscal year ended August 29, 2003. The Company is also a party to
other litigation incidental to its business from time to time. The Company is
not currently a party to any litigation that management, in consultation with
legal counsel, believes will have a material adverse effect on the Companys
financial condition or results of operations. 10




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 28, 2004 The Company received a grand jury subpoena issued by the U. S. District
Court for the Eastern Division of North Carolina on January 20, 2004. The
subpoena concerns the production of documents and records in connection with an
investigation being conducted by the Antitrust Division of the U. S. Department
of Justice relating generally to the manufacture, sale, purchase and
distribution of open-end spun yarns. Based on the information currently
available, management does not believe that the outcome of this matter will
have a material adverse effect on the Companys financial condition or results
of operation. The Company is fully cooperating with the U. S. Department of
Justice in its investigation. In separate actions initiated by third parties based upon the public
disclosure of the investigation by the U. S. Department of Justice, the Company
and various other defendants have been named in three class action complaints
filed in the U. S. District Court for the Middle and Western Divisions of North
Carolina on May 12, May 28 and May 25, 2004, respectively, and one class action
complaint filed in the Circuit Court for Shelby County, Tennessee on April 21,
2004. All complaints seek, under antitrust laws, various damages and injunctive
relief related to the pricing and sale of open-end yarns. These complaints are
in preliminary procedural stages and do not have scheduled trial dates.
Additionally, the District Court complaints may be combined. The Company
intends to vigorously defend these cases and believes it has a number of
defenses available to it. While the outcome of these cases cannot be predicted
with certainty, based upon currently available information, the Company does
not believe that the resolution of these cases will have a material adverse
effect on the Companys financial condition or results of operations. 12.    Subsequent Events: On July 1, 2004 the Company executed a private
transaction, exchanging $5.0 million of
the 2013 Notes for $3.4 million of 2012 Notes. The terms and conditions were
not materially different from those of the exchange executed on May 27, 2004
(See Note 8). The Company anticipates recording a gain of approximately $1.6
million on extinguishment of debt related to this transaction during the fourth
quarter of fiscal 2004. In connection with the exchange, the Company received a
waiver of certain restrictions provided under the GECC revolving credit
facility pertaining to the reduction of subordinated debt. 13.    Consolidating Guarantor and Non-guarantor Financial Information: The
following consolidating financial information presents balance sheets,
statements of operation and statements of cash flows of the Company and its
subsidiaries. Avondale Incorporated, the parent company and sole shareholder of
Avondale Mills, has fully and unconditionally guaranteed the 2013 Notes and
2012 Notes issued by Avondale Mills. Avondale Mills Graniteville Fabrics, Inc.,
a wholly owned subsidiary of Avondale Mills and non-guarantor of the Notes,
operates a denim manufacturing facility and warehouse operation located in
South Carolina. 11




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 28, 2004 AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
May 28, 2004
(amounts in thousands) Non-GuarantorGuarantor
    
    Avondale MillsAvondale
    
    Avondale
    
    GranitevilleMills, Inc.
    
    Incorporated
    
    Fabrics, Inc.
    
    Eliminations
    
    ConsolidatedASSETSCurrent AssetsCash and cash equivalents
    
    $
    3,991
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,991Accounts receivable
    
    
    44,059
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    44,061Inventories
    
    
    86,048
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86,048Prepaid expenses
    
    
    2,170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,170Income taxes refundable
    
    
    541
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    541Total current assets
    
    
    136,809
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    136,811Assets held for sale
    
    
    1,182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,182Property, plant and equipmentLand
    
    
    6,131
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    6,327Buildings
    
    
    63,961
    
    
    
    
    
    
    
    11,750
    
    
    
    
    
    
    
    75,711Machinery and equipment
    
    
    427,597
    
    
    
    
    
    
    
    37,821
    
    
    
    
    
    
    
    465,418497,689
    
    
    
    
    
    
    
    49,767
    
    
    
    
    
    
    
    547,456Less accumulated depreciation
    
    
    (330,160
    )
    
    
    
    
    
    
    (28,348
    )
    
    
    
    
    
    
    (358,508
    )167,529
    
    
    
    
    
    
    
    21,419
    
    
    
    
    
    
    
    188,948Other assets
    
    
    8,848
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,848Investment in subsidiaries
    
    
    8,202
    
    
    
    88,810
    
    
    
    
    
    
    
    (97,012
    )
    
    
    Goodwill
    
    
    2,951
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,951$
    325,521
    
    
    $
    88,810
    
    
    $
    21,421
    
    
    $
    (97,012
    )
    
    $
    338,740LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    22,112
    
    
    $
    
    
    
    $
    1,224
    
    
    $
    
    
    
    $
    23,336Accrued compensation, benefits
    
    
    10,669
    
    
    
    
    
    
    
    197
    
    
    
    
    
    
    
    10,866Accrued interest
    
    
    6,073
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,073Other accrued expenses
    
    
    8,982
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    8,983Long-term debt due in one year
    
    
    4,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,325Total current liabilities
    
    
    52,161
    
    
    
    
    
    
    
    1,422
    
    
    
    
    
    
    
    53,583Long-term debt
    
    
    158,868
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158,868Deferred income taxes
and other long term liabilities
    
    
    27,110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,110Due to (from) subsidiaries
    
    
    (1,428
    )
    
    
    (10,369
    )
    
    
    11,797
    
    
    
    
    
    
    
    Shareholders equity
    
    
    88,810
    
    
    
    99,179
    
    
    
    8,202
    
    
    
    (97,012
    )
    
    
    99,179$
    325,521
    
    
    $
    88,810
    
    
    $
    21,421
    
    
    $
    (97,012
    )
    
    $
    338,740
 12




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 28, 2004 AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
August 29, 2003
(amounts in thousands) Non-GuarantorGuarantor
    
    Avondale MillsAvondale
    
    Avondale
    
    GranitevilleMills, Inc.
    
    Incorporated
    
    Fabrics, Inc.
    
    Eliminations
    
    ConsolidatedASSETSCurrent AssetsCash
    
    $
    13,769
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13,769Accounts receivable
    
    
    29,155
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    29,157Inventories
    
    
    82,887
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,887Prepaid expenses
    
    
    1,980
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,980Income taxes refundable
    
    
    2,825
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,825Total current assets
    
    
    130,616
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    130,618Assets held for sale
    
    
    2,640
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,640Property, plant and equipment
LandLand
    
    
    6,288
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    6,484Buildings
    
    
    67,897
    
    
    
    
    
    
    
    11,750
    
    
    
    
    
    
    
    79,647Machinery and equipment
    
    
    459,401
    
    
    
    
    
    
    
    37,812
    
    
    
    
    
    
    
    497,213533,586
    
    
    
    
    
    
    
    49,758
    
    
    
    
    
    
    
    583,344Less accumulated depreciation
    
    
    (342,217
    )
    
    
    
    
    
    
    (25,542
    )
    
    
    
    
    
    
    (367,759
    )191,369
    
    
    
    
    
    
    
    24,216
    
    
    
    
    
    
    
    215,585Other assets
    
    
    7,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,712Investment in subsidiaries
    
    
    8,202
    
    
    
    105,726
    
    
    
    
    
    
    
    (113,928
    )
    
    
    Goodwill
    
    
    2,951
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,951$
    343,490
    
    
    $
    105,726
    
    
    $
    24,218
    
    
    $
    (113,928
    )
    
    $
    359,506LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    17,675
    
    
    $
    
    
    
    $
    1,049
    
    
    $
    
    
    
    $
    18,724Accrued compensation, benefits
    
    
    9,203
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    9,280Accrued interest
    
    
    2,726
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,726Other accrued expenses
    
    
    9,784
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    9,785Long-term debt due in one year
    
    
    4,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,325Total current liabilities
    
    
    43,713
    
    
    
    
    
    
    
    1,127
    
    
    
    
    
    
    
    44,840Long-term debt
    
    
    163,512
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,512Deferred income taxes
and other long term liabilities
    
    
    35,203
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,203Due to (from) subsidiaries
    
    
    (4,664
    )
    
    
    (10,225
    )
    
    
    14,889
    
    
    
    
    
    
    
    Shareholders equity
    
    
    105,726
    
    
    
    115,951
    
    
    
    8,202
    
    
    
    (113,928
    )
    
    
    115,951$
    343,490
    
    
    $
    105,726
    
    
    $
    24,218
    
    
    $
    (113,928
    )
    
    $
    359,506
 13




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 28, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended May 28, 2004
(amounts in thousands) Non-GuarantorGuarantor
    
    Avondale MillsAvondale
    
    Avondale
    
    GranitevilleMills, Inc.
    
    Incorporated
    
    Fabrics, Inc.
    
    Eliminations
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    151,345
    
    
    $
    32
    
    
    $
    30,941
    
    
    $
    (30,973
    )
    
    $
    151,345Operating costs and expensesCost of goods sold
    
    
    139,615
    
    
    
    
    
    
    
    29,370
    
    
    
    (30,942
    )
    
    
    138,043Depreciation
    
    
    8,217
    
    
    
    
    
    
    
    932
    
    
    
    
    
    
    
    9,149Selling and administrative expenses
    
    
    6,689
    
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    6,658Facility restructuring charges
    
    
    2,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,250Operating income (loss)
    
    
    (5,426
    )
    
    
    32
    
    
    
    639
    
    
    
    
    
    
    
    (4,755
    )Interest expense, net
    
    
    4,346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,346Discount and expenses on sales
of receivables
    
    
    631
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    631Gain on extinguishment of debt
    
    
    (1,321
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,321
    )Other, net
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110Income (loss) before income taxes
    
    
    (9,192
    )
    
    
    32
    
    
    
    639
    
    
    
    
    
    
    
    (8,521
    )Provision for (benefit of) income taxes
    
    
    (3,325
    )
    
    
    11
    
    
    
    234
    
    
    
    
    
    
    
    (3,080
    )Equity in earnings (loss) of subsidiary
    
    
    405
    
    
    
    (5,462
    )
    
    
    
    
    
    
    5,057
    
    
    
    Net income (loss)
    
    $
    (5,462
    )
    
    $
    (5,441
    )
    
    $
    405
    
    
    $
    5,057
    
    
    $
    (5,441
    )
 14




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 28, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended May 30, 2003
(amounts in thousands) Non-GuarantorGuarantor
    
    Avondale MillsAvondale
    
    Avondale
    
    GranitevilleMills, Inc.
    
    Incorporated
    
    Fabrics, Inc.
    
    Eliminations
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    152,336
    
    
    $
    36
    
    
    $
    23,424
    
    
    $
    (23,460
    )
    
    $
    152,336Operating costs and expensesCost of goods sold
    
    
    129,733
    
    
    
    
    
    
    
    21,679
    
    
    
    (23,424
    )
    
    
    127,988Depreciation
    
    
    9,404
    
    
    
    
    
    
    
    998
    
    
    
    
    
    
    
    10,402Selling and administrative expenses
    
    
    6,680
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    6,644Facility restructuring charges
    
    
    2,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,450Operating income
    
    
    4,069
    
    
    
    36
    
    
    
    747
    
    
    
    
    
    
    
    4,852Interest expense, net
    
    
    4,328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,328Discount and expenses on sales
of receivables
    
    
    679
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    679Other, net
    
    
    (150
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (150
    )Income (loss) before income taxes
    
    
    (788
    )
    
    
    36
    
    
    
    747
    
    
    
    
    
    
    
    (5
    )Provision for (benefit of) income taxes
    
    
    (298
    )
    
    
    15
    
    
    
    288
    
    
    
    
    
    
    
    5Equity in earnings (loss) of subsidiary
    
    
    459
    
    
    
    (31
    )
    
    
    
    
    
    
    (428
    )
    
    
    Net income (loss)
    
    $
    (31
    )
    
    $
    (10
    )
    
    $
    459
    
    
    $
    (428
    )
    
    $
    (10
    )
 15




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 28, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirty-Nine weeks ended May 28, 2004
(amounts in thousands) Non-GuarantorGuarantor
    
    Avondale MillsAvondale
    
    Avondale
    
    GranitevilleMills, Inc.
    
    Incorporated
    
    Fabrics, Inc.
    
    Eliminations
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    412,267
    
    
    $
    83
    
    
    $
    75,301
    
    
    $
    (75,384
    )
    
    $
    412,267Operating costs and expensesCost of goods sold
    
    
    376,198
    
    
    
    
    
    
    
    72,495
    
    
    
    (75,301
    )
    
    
    373,392Depreciation
    
    
    25,209
    
    
    
    
    
    
    
    2,807
    
    
    
    
    
    
    
    28,016Selling and administrative expenses
    
    
    19,430
    
    
    
    
    
    
    
    
    
    
    
    (83
    )
    
    
    19,347Facility restructuring charges
    
    
    2,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,250Operating income (loss)
    
    
    (10,820
    )
    
    
    83
    
    
    
    (1
    )
    
    
    
    
    
    
    (10,738
    )Interest expense, net
    
    
    13,510
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,510Discount and expenses on sales
of receivables
    
    
    1,874
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,874Gain on extinguishment of debt
    
    
    (1,321
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,321
    )Other, net
    
    
    (2,439
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,439
    )Income (loss) before income taxes
    
    
    (22,444
    )
    
    
    83
    
    
    
    (1
    )
    
    
    
    
    
    
    (22,362
    )Provision for (benefit of) income taxes
    
    
    (8,004
    )
    
    
    30
    
    
    
    (1
    )
    
    
    
    
    
    
    (7,975
    )Equity in loss of subsidiary
    
    
    
    
    
    
    (14,440
    )
    
    
    
    
    
    
    14,440
    
    
    
    Net loss
    
    $
    (14,440
    )
    
    $
    (14,387
    )
    
    $
    
    
    
    $
    14,440
    
    
    $
    (14,387
    )
 16




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 28, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirty-Nine weeks ended May 30, 2003
(amounts in thousands) Non-GuarantorGuarantor
    
    Avondale MillsAvondale
    
    Avondale
    
    GranitevilleMills, Inc.
    
    Incorporated
    
    Fabrics, Inc.
    
    Eliminations
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    461,136
    
    
    $
    92
    
    
    $
    69,363
    
    
    $
    (69,455
    )
    
    $
    461,136Operating costs and expensesCost of goods sold
    
    
    392,315
    
    
    
    
    
    
    
    65,539
    
    
    
    (69,363
    )
    
    
    388,491Depreciation
    
    
    29,069
    
    
    
    
    
    
    
    3,051
    
    
    
    
    
    
    
    32,120Selling and administrative expenses
    
    
    21,093
    
    
    
    
    
    
    
    
    
    
    
    (92
    )
    
    
    21,001Facility restructuring charges
    
    
    2,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,450Operating income
    
    
    16,209
    
    
    
    92
    
    
    
    773
    
    
    
    
    
    
    
    17,074Interest expense, net
    
    
    13,418
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,418Discount and expenses on sales
of receivables
    
    
    2,096
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,096Other, net
    
    
    (162
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162
    )Income before income taxes
    
    
    857
    
    
    
    92
    
    
    
    773
    
    
    
    
    
    
    
    1,722Provision for income taxes
    
    
    335
    
    
    
    35
    
    
    
    295
    
    
    
    
    
    
    
    665Equity in earnings of subsidiary
    
    
    478
    
    
    
    1,000
    
    
    
    
    
    
    
    (1,478
    )
    
    
    Net income
    
    $
    1,000
    
    
    $
    1,057
    
    
    $
    478
    
    
    $
    (1,478
    )
    
    $
    1,057
 17




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 28, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Thirty-Nine weeks ended May 28, 2004
(amounts in thousands) Non-GuarantorGuarantor
    
    Avondale MillsAvondale
    
    Avondale
    
    GranitevilleMills, Inc.
    
    Incorporated
    
    Fabrics, Inc.
    
    Eliminations
    
    ConsolidatedOperating activitiesNet loss
    
    $
    (14,440
    )
    
    $
    (14,387
    )
    
    $
    
    
    
    $
    14,440
    
    
    $
    (14,387
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    25,577
    
    
    
    
    
    
    
    2,807
    
    
    
    
    
    
    
    28,384Benefit of deferred income taxes
    
    
    (8,072
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,072
    )Gain on disposal of property, plant
and equipment and assets held
for sale
    
    
    (867
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (867
    )Gain on extinguishment of debt
    
    
    (1,321
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,321
    )Sale of accounts receivable, net
    
    
    (6,442
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,442
    )Changes in operating assets and liabilities
    
    
    590
    
    
    
    7
    
    
    
    (2,797
    )
    
    
    
    
    
    
    (2,200
    )Dividends from subsidiary
    
    
    
    
    
    
    2,476
    
    
    
    
    
    
    
    (2,476
    )
    
    
    Equity in loss of subsidiary
    
    
    
    
    
    
    14,440
    
    
    
    
    
    
    
    (14,440
    )
    
    
    Net cash provided by (used in)
operating activities
    
    
    (4,975
    )
    
    
    2,536
    
    
    
    10
    
    
    
    (2,476
    )
    
    
    (4,905
    )Investing activitiesPurchase of property, plant and equipment
    
    
    (4,530
    )
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (4,540
    )Proceeds from sale of property, plant
and equipment and assets held for sale
    
    
    5,447
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,447Net cash provided by (used in)
investing activities
    
    
    917
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    907Financing activitiesNet payments on long-term debt
    
    
    (3,244
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,244
    )Purchase and retirement of
treasury stock
    
    
    
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    (60
    )Dividends paid
    
    
    (2,476
    )
    
    
    (2,476
    )
    
    
    
    
    
    
    2,476
    
    
    
    (2,476
    )Net cash used in financing activities
    
    
    (5,720
    )
    
    
    (2,536
    )
    
    
    
    
    
    
    2,476
    
    
    
    (5,780
    )Decrease in cash and cash equivalents
    
    
    (9,778
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,778
    )Cash and cash equivalentsAt beginning of period
    
    
    13,769
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,769Cash and cash equivalentsAt end of period
    
    $
    3,991
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,991
 18




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 28, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Thirty-Nine weeks ended May 30, 2003
(amounts in thousands) Non-GuarantorGuarantor
    
    Avondale MillsAvondale
    
    Avondale
    
    GranitevilleMills, Inc.
    
    Incorporated
    
    Fabrics, Inc.
    
    Eliminations
    
    ConsolidatedOperating activitiesNet income
    
    $
    1,000
    
    
    $
    1,057
    
    
    $
    478
    
    
    $
    (1,478
    )
    
    $
    1,057Adjustments to reconcile net income
to net cash provided by operating
activities:Depreciation and amortization
    
    
    29,343
    
    
    
    
    
    
    
    3,051
    
    
    
    
    
    
    
    32,394Benefit of deferred income taxes
    
    
    (934
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (934
    )Loss on disposal of equipment and
facility restructuring charges
    
    
    2,151
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,151Sale of accounts receivable, net
    
    
    (15,516
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,516
    )Changes in operating assets and liabilities
    
    
    557
    
    
    
    2,258
    
    
    
    (3,529
    )
    
    
    
    
    
    
    (714
    )Dividends from subsidiary
    
    
    
    
    
    
    3,752
    
    
    
    
    
    
    
    (3,752
    )
    
    
    Equity in income of subsidiary
    
    
    (478
    )
    
    
    (1,000
    )
    
    
    
    
    
    
    1,478
    
    
    
    Net cash provided by operating
activities
    
    
    16,123
    
    
    
    6,067
    
    
    
    
    
    
    
    (3,752
    )
    
    
    18,438Investing activitiesPurchase of property, plant and equipment
    
    
    (13,102
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,102
    )Proceeds from sale of property,
plant and equipment and assets held for sale
    
    
    1,116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,116Net cash used in investing activities
    
    
    (11,986
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,986
    )Financing activitiesNet payments on revolving line of credit
    
    
    (3,106
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,106
    )Purchase and retirement of
treasury stock
    
    
    
    
    
    
    (2,315
    )
    
    
    
    
    
    
    
    
    
    
    (2,315
    )Dividends paid
    
    
    (3,752
    )
    
    
    (3,752
    )
    
    
    
    
    
    
    3,752
    
    
    
    (3,752
    )Net cash used in financing activities
    
    
    (6,858
    )
    
    
    (6,067
    )
    
    
    
    
    
    
    3,752
    
    
    
    (9,173
    )Decrease in cash
    
    
    (2,721
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,721
    )Cash at beginning of period
    
    
    2,859
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,859Cash at end of period
    
    $
    138
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    138
 19




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. CRITICAL ACCOUNTING POLICIES The Companys analysis and discussion of its financial condition and
results of operations are based upon its consolidated financial statements that
have been prepared in accordance with generally accepted accounting principles
for interim financial information in the United States of America (GAAP). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company evaluates these estimates and assumptions on an ongoing basis,
including but not limited to those affecting inventories, allowances for
doubtful accounts, assets held for sale, long-lived assets, income taxes
payable and deferred income taxes, deferred compensation, associate and post
retirement benefits, and contingencies. Estimates and assumptions are based on
historical and other factors believed to be reasonable under the circumstances.
The results of these estimates and assumptions may form the basis of the
carrying value of certain assets and liabilities. Actual results, under
conditions and circumstances different from those assumed, may differ from
these estimates and assumptions. The Company believes the following accounting policies are critical to the
presentation and understanding of its financial condition and the results of
its operations and involve the more significant judgments and estimates
utilized in the preparation of its consolidated financial statements: Accounts Receivable and Credit Risks:The Company extends credit lines to
its customers in the normal course of business and performs ongoing evaluations
of the financial condition of its customers. In general, collateral is not
required to support such credit lines and the related receivables. The Company
establishes allowances for doubtful accounts based upon factors surrounding the
financial condition and credit risk of specific customers, historical payment
trends and other information. The Company generates funds through the sale of accounts receivable, at a
discount and without recourse, to a special purpose subsidiary established to
facilitate the acquisition and subsequent resale of certain accounts receivable
to General Electric Capital Corporation (GECC). The discount rate on the
accounts receivable purchased from the Company is established periodically by
the subsidiary based on the fair market value of the receivables. The Company
includes in accounts receivable in its consolidated balance sheets the portion
of accounts receivable sold to the subsidiary which have not been resold to
GECC. Inventories:Inventories are stated at the lower of cost or market value.
Except for certain supply inventories valued on an average cost basis, the
costs of the Companys inventories are determined on a last-in, first-out
(LIFO) basis. Under LIFO, current material and conversion costs are charged
to cost of goods sold while inventories are valued using costs incurred in the
initial and subsequent fiscal years following election of the LIFO method. In
periods of declining prices, LIFO values may exceed current replacement market
values and require downward adjustment. Estimates, including the estimated
costs to complete work in process inventories and the estimated realizable
values of all inventories, are used in determining the lower of LIFO cost or
market. During periods when current costs or inventory quantities fluctuate
significantly, use of the LIFO method may yield cost of goods sold that differs
significantly from that which would result under other inventory methods. Long-Lived Assets:The Company periodically reviews the values assigned to
long-lived assets, such as property, plant and equipment, assets held for sale
and goodwill. The associated depreciation and amortization periods are
reviewed on an annual basis. Estimated recoverability of long-lived asset
values is based on anticipated undiscounted cash flows from operations, or in
the case of assets held for sale, the lower of historical carrying amount or
estimated net realizable value. Management periodically reviews the values
assigned to these assets and if additional information becomes available which
indicates a decline in value, makes adjustments in that period. Revenue Recognition:The Company records revenues principally when
products are shipped to customers. Consistent with recognized practice in the
textile industry, the Company also records revenues to a lesser extent
throughout the fiscal year on a bill and hold basis, invoicing goods that have
been produced, packaged and made ready for shipment. These goods are
effectively segregated from inventory which is available for sale, the risks of
ownership of the goods have passed to the customer, and the remittance terms
and collection experience on the related invoicing is consistent with all other
sales by the Company. 20




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##### Table of Contents



Contingencies:The Company is involved in certain environmental matters
and claims. The Company has provided reserves to cover managements estimates
of the cost of investigating, monitoring and remediating these and other
environmental conditions. If more costly remediation measures are necessary
than those believed to be probable based on current facts and circumstances,
actual costs may exceed the reserves provided. However, based on the
information currently available, management does not believe that the outcome
of these matters will have a material adverse effect on the Companys future
results of operations or financial condition. For discussion of certain legal proceedings to which the Company is a
party, see Item 3 Legal Proceedings in the Companys Annual Report on Form
10-K for the fiscal year ended August 29, 2003. The Company is also a party to
other litigation incidental to its business from time to time. The Company is
not currently a party to any litigation that management, in consultation with
legal counsel, believes will have a material adverse effect on the Companys
financial condition or results of operations. The Company received a grand jury subpoena issued by the U. S. District
Court for the Eastern Division of North Carolina on January 20, 2004. The
subpoena concerns the production of documents and records in connection with an
investigation being conducted by the Antitrust Division of the U. S. Department
of Justice relating generally to the manufacture, sale, purchase and
distribution of open-end spun yarns. Based on the information currently
available, management does not believe that the outcome of this matter will
have a material adverse effect on the Companys financial condition or results
of operation. The Company is fully cooperating with the U. S. Department of
Justice in its investigation. In separate actions initiated by third parties based upon the public
disclosure of the investigation by the U. S. Department of Justice, the Company
and various other defendants have been named in three class action complaints
filed in the U. S. District Court for the Middle and Western Divisions of North
Carolina on May 12, May 28 and May 25, 2004, respectively, and one class action
complaint filed in the Circuit Court for Shelby County, Tennessee on April 21,
2004. All complaints seek, under antitrust laws, various damages and injunctive
relief related to the pricing and sale of open-end yarns. These complaints are
in preliminary procedural stages and do not have scheduled trial dates.
Additionally, the District Court complaints may be combined. The Company
intends to vigorously defend these cases and believes it has a number of
defenses available to it. While the outcome of these cases cannot be predicted
with certainty, based upon currently available information, the Company does
not believe that the resolution of these cases will have a material adverse
effect on the Companys financial condition or results of operations. RESULTS OF OPERATIONS Thirteen Weeks Ended May 28, 2004 Compared to Thirteen Weeks Ended May 30, 2003 Net Sales.Net sales decreased 0.7% to $151.3 million for the thirteen
weeks ended May 28, 2004 from $152.3 million for the thirteen weeks ended May
30, 2003. The decline in net sales for the thirteen weeks ended May 28, 2004
primarily reflected lower unit volume for all segments, as imported apparel
continued to capture market share of domestic retail sales and weak employment
and economic conditions within the United States impacted consumer demand.
Selling prices remained very competitive reflecting the significant
uncertainties presented by the economic and political environment, the
imbalance of global supply and demand for textile and apparel products and the
financial distress experienced by many of the Companys domestic competitors.
In addition, the manipulation of the Chinese yuan and currencies of other Asian
countries relative to the U.S. dollar and other trade distorting practices
employed by those countries create competitive advantages which continue to
promote the importation of goods from those countries by U.S. retailers,
exacerbating the already highly competitive market conditions. The Company
expects these conditions to continue into the foreseeable future. Operating Income (Loss).Company operations produced an operating loss
of ($4.8) million for the thirteen weeks ended May 28, 2004 compared to an
operating income of $4.9 million for the thirteen weeks ended May 30, 2003. The
operating loss reflected a significant increase in raw material costs,
partially offset by improved unit cost absorption generated through the
capacity rationalization programs. In addition, largely due to the increase in
raw material costs, the Company incurred a non-cash charge of $2.0 million to
adjust the carrying value of inventories to LIFO basis, net of market
adjustment, for the thirteen weeks ended May 28, 2004 compared to a charge of
$0.4 million for the thirteen weeks ended May 30, 2003. Consumption of
internally produced yarns and greige fabrics in the production of finished
apparel fabrics in lieu of outside purchases continued to provide higher
overall capacity utilization. Cost of goods sold increased 7.8% to $138.0
million for the thirteen weeks ended May 28, 2004 from $128.0 million for the
thirteen weeks ended May 30, 2003, reflecting the significant increase in raw material costs. 21




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##### Table of Contents



Cost of goods sold as a percentage of net sales increased to 91.2% for the
thirteen weeks ended May 28, 2004 from 84.0% for the thirteen weeks ended May 30, 2003. Selling and administrative expenses increased 1.5% to $6.7 million for the
thirteen weeks ended May 28, 2004 from $6.6 million for the thirteen weeks
ended May 30, 2003. Selling and administrative expenses as a percentage of net
sales were 4.4% for the thirteen weeks ended May 28, 2004 and 4.3% for the
thirteen weeks ended May 30, 2003. Segment Performance.Apparel fabric sales decreased 5.9% to $112.6
million for the thirteen weeks ended May 28, 2004 from $119.6 million for the
thirteen weeks ended May 30, 2003, reflecting a 7.9% decrease in yards
invoiced, while average invoice price improved 2.1% for the respective periods.
Operating income for apparel fabrics decreased 81.8% to $1.8 million for the
thirteen weeks ended May 28, 2004 from $9.9 million for the thirteen weeks
ended May 30, 2003, primarily due to higher raw material costs and the reduced
unit volume. Yarn sales, including intra-company sales to the Companys fabric
operations, increased 12.5% to $47.7 million for the thirteen weeks ended May
28, 2004 from $42.4 million for the thirteen weeks ended May 30, 2003. Pounds
invoiced declined 12.6%, primarily reflecting the closure of a yarn
manufacturing facility in North Carolina and reduced yarn requirements of the
apparel fabrics operation. Average invoice price increased 28.6% as improved
market demand for certain yarn products and higher raw material costs helped
increase both outside invoice prices and intra-company transfer prices. The
yarns operation produced operating income of $0.3 million for the thirteen
weeks ended May 28, 2004 and for the thirteen weeks ended May 30, 2003, as the
increase in average invoice price offset the higher raw material costs. Other sales, which include sales of greige and specialty fabrics and
revenues from the Companys trucking operation, decreased 4.7% to $16.2 million
for the thirteen weeks ended May 28, 2004 from $17.0 million for the thirteen
weeks ended May 30, 2003. The decrease in other sales was primarily
attributable to decreased intra-company sales of greige fabrics to the apparel
fabric operations. Operating income from other sales decreased 12.5%, from $1.6
million for the thirteen weeks ended May 30, 2003 to $1.4 million for the
thirteen weeks ended May 28, 2004, primarily due to higher raw material costs
and reduced volume within the greige fabric operation. Inter-segment sales decreased 5.6% to $25.2 million for the thirteen weeks
ended May 28, 2004 from $26.7 million for the thirteen weeks ended May 30,
2003, primarily reflecting the decrease in consumption of internally produced
yarns and greige fabrics by the Companys apparel fabrics operation. Unallocated amounts included in operating income reflect general and
administrative expenses, certain associate benefits and performance based
incentives, and adjustments of the carrying value of inventories to LIFO basis,
net of market adjustments. Facility Restructuring.In response to the highly competitive market
conditions and continued imbalance of global supply and demand for textile and
apparel products, in May 2004, the Company closed an open-end yarn
manufacturing facility located in North Carolina and the weaving operation of
an integrated greige fabric manufacturing facility located in Georgia. These
actions to rationalize excess manufacturing capacity, following the relocation
of certain equipment, are expected to improve capacity utilization of the
Companys remaining facilities and lower costs per unit produced. No reduction
in net sales is anticipated as a result of this capacity rationalization.
Flexibility of the Companys manufacturing facilities to shift production from
one product line to another and the Companys ability to source additional
yarns and greige fabrics from outside vendors to increase production of its
finished products in reaction to added demand are expected to be maintained.
Certain equipment will be relocated from these two operations to other
facilities located in Alabama, Georgia and South Carolina to retain certain
specialized manufacturing capabilities and replace older, less efficient
equipment. Other excess equipment has been sold, generating a gain of
approximately $0.9 million. In connection with these actions, the Company
recorded facility restructuring charges and other non-operating costs, net of
the gain on equipment sold, of approximately $2.3 million during the third
quarter of fiscal 2004. Interest Expense, Net.Net interest expense remained constant at $4.3
million for the thirteen weeks ended May 28, 2004 compared to the thirteen
weeks ended May 30, 2003, as slightly higher borrowings were offset by a lower
average interest rate. Discount and Expenses on Sale of Receivables.Discount and expenses on
sales of receivables were $0.6 million for the thirteen weeks ended May 28,
2004 compared to $0.7 million for the thirteen weeks ended May 30, 2003,
primarily reflecting a net decrease in accounts receivable sold under the
securitization facility. 22




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Provision for (benefit of) Income Taxes.An income tax benefit of $3.1
million was recorded for the thirteen weeks ended May 28, 2004, reflecting the
Companys loss before income taxes, compared to a provision for income taxes of
$5,000 for the thirteen weeks ended May 30, 2003. Thirty-nine Weeks Ended May 28, 2004 Compared to Thirty-nine Weeks Ended May 30, 2003 Net Sales.Net sales decreased 10.6% to $412.3 million for the
thirty-nine weeks ended May 28, 2004 from $461.1 million for the thirty-nine
weeks ended May 30, 2003. The decline in net sales for the thirty-nine weeks
ended May 28, 2004 primarily reflected lower unit volume for all segments, as
imported apparel continued to capture market share of domestic retail sales and
weak employment and economic conditions within the United States impacted
consumer demand. Selling prices remained very competitive reflecting the
significant uncertainties presented by the economic and political environment,
the imbalance of global supply and demand for textile and apparel products and
the financial distress experienced by many of the Companys domestic
competitors. In addition, the manipulation of the Chinese yuan and currencies
of other Asian countries relative to the U.S. dollar and other trade distorting
practices employed by those countries create competitive advantages which
continue to promote the importation of goods from those countries by U.S.
retailers, exacerbating the already highly competitive market conditions. The
Company expects these conditions to continue into the foreseeable future. Operating Income (Loss).Company operations produced an operating loss
of ($10.7) million for the thirty-nine weeks ended May 28, 2004 compared to an
operating income of $17.1 million for the thirty-nine weeks ended May 30, 2003.
The operating loss reflected a significant increase in raw material costs,
partially offset by improved unit cost absorption generated through the
capacity rationalization programs. In addition, largely due to the increase in
raw material costs, the Company incurred a non-cash charge of $4.5 million to
adjust the carrying value of inventories to LIFO basis, net of market
adjustment, for the thirty-nine weeks ended May 28, 2004 compared to a charge
of $0.7 million for the thirty-nine weeks ended May 30, 2003. Consumption of
internally produced yarns and greige fabrics in the production of finished
apparel fabrics in lieu of outside purchases continued to provide higher
overall capacity utilization. Cost of goods sold decreased 3.9% to $373.4
million for the thirty-nine weeks ended May 28, 2004 from $388.5 million for
the thirty-nine weeks ended May 30, 2003, reflecting the overall decrease in
unit volume. Cost of goods sold as a percentage of net sales increased to
90.6% for the thirty-nine weeks ended May 28, 2004 from 84.3% for the
thirty-nine weeks ended May 30, 2003, reflecting the significant increase in
raw material costs. Selling and administrative expenses decreased 8.1% to $19.3 million for
the thirty-nine weeks ended May 28, 2004 from $21.0 million for the thirty-nine
weeks ended May 30, 2003, reflecting reductions in staffing and certain
associate benefits in response to the decline in operating income. Selling and
administrative expenses as a percentage of net sales increased to 4.7% for the
thirty-nine weeks ended May 28, 2004 from 4.6% for the thirty-nine weeks ended
May 30, 2003. Segment Performance.Apparel fabric sales decreased 16.2% to $307.3
million for the thirty-nine weeks ended May 28, 2004 from $366.6 million for
the thirty-nine weeks ended May 30, 2003, reflecting a 16.2% decrease in yards
invoiced for the respective periods. Operating income for apparel fabrics
decreased 83.0% to $4.7 million for the thirty-nine weeks ended May 28, 2004
from $27.7 million for the thirty-nine weeks ended May 30, 2003, primarily due
to higher raw material costs and the reduced unit volume. Yarn sales, including intra-company sales to the Companys fabric
operations, increased 2.4% to $135.1 million for the thirty-nine weeks ended
May 28, 2004 from $131.9 million for the thirty-nine weeks ended May 30, 2003.
Pounds invoiced declined 16.1%, primarily reflecting the reduced yarn
requirements of the Companys apparel fabric operations. Average invoice price
increased 22.1% as improved market demand for certain yarn products and higher
raw material costs helped increase both outside invoice prices and
intra-company transfer prices. The yarn operations produced an operating loss
of ($0.5) million for the thirty-nine weeks ended May 28, 2004 compared to an
operating income of $2.4 million for the thirty-nine weeks ended May 30, 2003
due to the reduced volume, while the increase in average invoice price nearly
offset the higher raw material costs. Other sales, which include sales of greige and specialty fabrics and
revenues from the Companys trucking operation, decreased 11.8% to $45.0
million for the thirty-nine weeks ended May 28, 2004 from $51.0 million for the
thirty-nine weeks ended May 30, 2003. The decrease in other sales was
primarily attributable to reduced intra-company sales of greige fabrics to the
apparel fabric operations. Operating income from other sales decreased 13.2%
to $3.3 million for the thirty-nine weeks ended May 28, 2004 from $3.8 million
for the thirty-nine weeks ended May 30, 2003, primarily due to higher raw
material costs and reduced volume within the greige fabric operation. 23




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Inter-segment sales decreased 15.0% to $75.1 million for the thirty-nine
weeks ended May 28, 2004 from $88.4 million for the thirty-nine weeks ended May
30, 2003, primarily reflecting the decrease in consumption of internally
produced yarns and greige fabrics by the Companys apparel fabrics operation. Unallocated amounts included in operating income reflect general and
administrative expenses, certain associate benefits and performance based
incentives, and adjustments of the carrying value of inventories to LIFO basis,
net of market adjustments. Facility Restructuring.In response to the highly competitive market
conditions and continued imbalance of global supply and demand for textile and
apparel products, in May 2004, the Company closed an open-end yarn
manufacturing facility located in North Carolina and the weaving operation of
an integrated greige fabric manufacturing facility located in Georgia. These
actions to rationalize excess manufacturing capacity, following the relocation
of certain equipment, are expected to improve capacity utilization of the
Companys remaining facilities and lower costs per unit produced. No reduction
in net sales is anticipated as a result of this capacity rationalization.
Flexibility of the Companys manufacturing facilities to shift production from
one product line to another and the Companys ability to source additional
yarns and greige fabrics from outside vendors to increase production of its
finished products in reaction to added demand are expected to be maintained.
Certain equipment will be relocated from these two operations to other
facilities located in Alabama, Georgia and South Carolina to retain certain
specialized manufacturing capabilities and replace older, less efficient
equipment. Other excess equipment has been sold, generating a gain of
approximately $0.9 million. In connection with these actions, the Company
recorded facility restructuring charges and other non-operating costs, net of
the gain on equipment sold, of approximately $2.3 million during the third
quarter of fiscal 2004. Interest Expense, Net.Net interest expense increased 0.7% to $13.5
million for the thirty-nine weeks ended May 28, 2004 from $13.4 million for the
thirty-nine weeks ended May 30, 2003. Following execution of a new senior
secured revolving credit facility with GECC on November 7, 2003, the Company
wrote off approximately $400,000 of unamortized debt issue costs related to the
previous revolving credit facility. This charge to interest expense, net was
partially offset by lower average outstanding borrowings and lower market
interest rates applicable to those borrowings during the thirty-nine weeks
ended May 28, 2004. See Note 14. Subsequent Event in the Consolidated
Financial Statements in Item 8 of the Companys Annual Report on Form 10-K for
the fiscal year ended August 29, 2003 for further discussion of the new
revolving credit facility. Discount and Expenses on Sale of Receivables.Discount and expenses on
sales of receivables were $1.9 million for the thirty-nine weeks ended May 28,
2004 compared to $2.1 million for the thirty-nine weeks ended May 30, 2003,
primarily reflecting a net decrease in accounts receivable sold under the
securitization facility. Other, Net.In November 2003, the Company sold two tracts of land
unrelated to its manufacturing facilities and not utilized in the operation of
its business. The related gain on disposal of these properties, approximately
$2.3 million, is included in Other, net for the thirty-nine weeks ended May 28,
2004. Provision for (Benefit of) Income Taxes.An income tax benefit of $8.0
million was recorded for the thirty-nine weeks ended May 28, 2004, reflecting
the Companys loss before income taxes, compared to a provision for income
taxes of $0.7 million for the thirty-nine weeks ended May 30, 2003. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $4.9 million for the thirty-nine
weeks ended May 28, 2004. Principal working capital changes included a $8.5
million increase in accounts receivable, a $6.4 million decrease in accounts
receivable sold under the securitization facility, a $3.2 million increase in
inventories, and an $8.7 million increase in accounts payable and accrued
expenses. Investing activities were predominantly equipment purchases and
related costs of $4.5 million made in connection with the ongoing maintenance
of the Companys manufacturing facilities and proceeds of $5.4 million from the
sale of two tracts of land and certain excess equipment. Financing activities
included repayment of $3.2 million of long-term debt and payment of $2.5
million in dividends on outstanding common stock. The Companys capital expenditures, aggregating $4.5 million for the
thirty-nine weeks ended May 28, 2004, were used primarily to complete routine
maintenance projects. Management estimates that capital expenditures for the
balance of fiscal 2004 will be approximately $2.0 million. At May 28, 2004, the Company had no borrowings outstanding under its
revolving line of credit, and $30.9 million of borrowing availability as
determined using prescribed advance rates against qualified inventory
collateral, less outstanding letters of credit and required minimum
availability. 24




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On February 24, 2004, the Company executed an amendment to certain
financial covenants contained in the equipment note in anticipation of the
impact of the Companys reduced results of operation and cash flows. An
amendment fee of 0.25% of the outstanding balance of the note was paid to The
CIT Group, the holder of the equipment note. The indenture, under which the 2013 Notes were issued, includes, among
other provisions, covenants restricting the Companys payment of dividends and
purchase of its capital stock. In general, the amount of dividends and capital
stock purchases may not exceed an amount equal to $20 million plus 50% of net
income, or less 100% of net losses, all calculated on an accumulative basis
subsequent to the date of the indenture. With the loss reported for the
thirty-nine weeks ended May 28, 2004, the covenants of the indenture prohibit
further payment of dividends or purchases of capital stock until such time as
sufficient earnings are reported to eliminate the restriction. On May 27, 2004 the Company executed a private transaction with a holder
of the 2013 Notes, exchanging $4.0 million of the 2013 Notes for $2.6 million
of new senior, unsecured Floating Rate Notes due 2012 (the 2012 Notes).
Interest on the 2012 Notes is due quarterly in arrears commencing July 1, 2004,
and is calculated based on the three month LIBOR rate (subject to a minimum of
1.75% and a maximum of 4.5%) plus 7.0%. After July 1, 2005, the 2012 Notes are
redeemable at the Companys option, in whole or in part, at a redemption price
of 104.0%, which declines in intervals to 100.0% in 2009 and thereafter. The
2012 Notes have substantially the same covenants, events of default and other
terms and conditions as the 2013 Notes. In connection with the exchange, the
Company received a waiver of certain restrictions provided under the GECC
revolving credit facility pertaining to the reduction of subordinated debt.
From time to time, the Company may enter into additional exchange offers and/or
purchase its 2013 Notes in privately negotiated or open market transactions or
by tender offer. The receivables securitization facility is the Companys only off-balance
sheet financing arrangement. The Company generates funds through the sale of
accounts receivable to Funding, whose sole business purpose is the ongoing
acquisition and resale of specified trade receivables generated by the Company.
Funding retains no interest in the investment in the accounts receivable sold
to GECC, and has not experienced any gains or losses on the sale of the
investment in accounts receivable. The Company believes minimal counter party
risk exists due to the financial strength of GECC. Management believes that cash generated from operations, together with the
borrowings available under its revolving line of credit and proceeds from sales
of trade receivables, will be sufficient to meet the Companys working capital
and capital expenditure needs in the foreseeable future. SUBSEQUENT EVENTS On July 2, 2004 the Company executed a private transaction with another
holder of the 2013 Notes, exchanging $5.0 million of the 2013 Notes for $3.4
million of 2012 Notes. The terms and conditions were not materially different
from those of the exchange executed on May 27, 2004. In connection with the
exchange, the Company received a waiver of certain restrictions provided under
the GECC revolving credit facility pertaining to the reduction of subordinated
debt. 25




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FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the federal securities laws. In addition, management may
from time to time make forward looking statements in reports and other
documents we file with the Securities and Exchange Commission, or in connection
with oral statements made to the press, potential investors and others.
Statements that are not historical facts, including statements about our
beliefs and expectations, are forward-looking statements. Forward-looking
statements include statements generally preceded by, followed by or that
include the words believe, expect, anticipate, plan, estimate or
similar expressions. These statements include, among others, statements
regarding our business outlook, anticipated financial and operating results,
strategies, contingencies, working capital requirements, expected sources of
liquidity, estimated amounts and timing of capital expenditures, estimated
environmental compliance costs and other expenditures, and expected outcomes of
litigation. Forward-looking statements reflect our current expectations and are not
guarantees of performance. These statements are based on our managements
beliefs and assumptions, which in turn are based on currently available
information. Important assumptions relating to these forward-looking statements
include, among others, assumptions regarding product demand, selling prices,
raw material costs, timing and cost of capital expenditures, cost of
environmental compliance, outcomes of pending litigation, competitive
conditions and general economic conditions. These assumptions could prove
inaccurate. Forward-looking statements also involve risks and uncertainties,
which could cause actual results to differ materially from those contained in
any forward-looking statement. Many of these factors are beyond our ability to
control or predict. Such factors include, but are not limited to, all of the
risks described under the heading Risk Factors in the Companys Current
Report on Form 8-K dated June 20, 2003 and the following:  
    
    cyclical and competitive nature of the textile industry;
    
    pressures on selling prices due to competitive and economic conditions;
    
    deterioration of relationships with, or loss of, significant customers;
    
    strength of the U.S. dollar versus the currencies of other textile producing countries;
    
    changes in trade policies, including textile quotas and tariffs;
    
    ability to identify and respond to fashion trends;
    
    availability and pricing of cotton and other raw materials;
    
    changes in government policies affecting raw material costs;
    
    availability and desirability of technological advancements;
    
    retention of key management personnel;
    
    continued availability of financial resources;
    
    changes in environmental, health and safety regulations; and
    
    political or military responses to terrorist activities. You should not place undue reliance on any forward-looking statements,
which are based on current expectations. Further, forward-looking statements
speak only as of the date they are made, and we undertake no obligation to
update publicly any of them in light of new information or future events. 26




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OTHER DATA    NON-GAAP FINANCIAL MEASURE Adjusted EBITDA is a supplemental non-GAAP financial measure. EBITDA is
commonly defined as net income (loss) plus (a) interest expense, (b) provision
for (benefit of) income taxes and (c) depreciation and amortization. The
Companys definition of adjusted EBITDA differs due to the further addition to
net income (loss) of (a) discount and expenses on sale of receivables, (b) gain
on extinguishment of debt, (c) facility restructuring non cash charges and (d)
adjustment of carrying value of inventories to LIFO basis, net of market
adjustments. Adjusted EBITDA is presented because management believes that it
is a widely accepted indicator of a companys ability to service its
indebtedness and is used by investors and analysts to evaluate companies within
the textile and apparel industry. In addition, adjusted EBITDA is used to
determine compliance with certain covenants under the Companys receivables
securitization, revolving credit facility, equipment note, the 2013 Notes and
the 2012 Notes. Adjusted EBITDA as calculated by the Company is not necessarily comparable
to similarly titled measures used by other companies. Adjusted EBITDA (a) does
not represent net income (loss) or cash flow from operations as defined by
generally accepted accounting principles; (b) is not necessarily indicative of
cash available to fund cash requirements; and (c) should not be considered an
alternative to operating income, net income (loss) or net cash provided by
operating activities as determined in accordance with generally accepted
accounting principles. The following table reconciles adjusted EBITDA on a consolidated basis to
the line on the Companys consolidated statement of operations entitled net
income (loss) for the periods presented: Thirty-Nine Weeks EndedMay 30,
    
    May 28,2003
    
    2004Net income (loss)
    
    $
    1,057
    
    
    $
    (14,387
    )Interest expense, net
    
    
    13,418
    
    
    
    13,510Provision for (benefit of) income taxes
    
    
    665
    
    
    
    (7,975
    )Depreciation and amortization
    
    
    32,394
    
    
    
    28,384EBITDA
    
    
    47,534
    
    
    
    19,532Discount and expenses on sale of receivables
    
    
    2,096
    
    
    
    1,874Gain on extinguishment of debt
    
    
    
    
    
    
    (1,321
    )Facility restructuring non cash charges
    
    
    2,205
    
    
    
    2,829Adjustment of carrying value of inventories
to LIFO basis, net of market adjustment
    
    
    650
    
    
    
    4,500Adjusted EBITDA
    
    $
    52,485
    
    
    $
    27,414
 
 Item 3.   Quantitative and Qualitative Disclosures About Market Risk. For discussion of certain market risks related to the Company, see
Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk in
the Companys Annual Report on Form 10-K for the fiscal year ended August 29, 2003. 27




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Item 4.   Controls and Procedures. As required by Securities and Exchange Commission rules, the Company has
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this report.
This evaluation was carried out under the supervision and with the
participation of Company management, including the principal executive officer
and principal financial officer. Based on this evaluation, these officers have
concluded that the design and operation of the Companys disclosure controls
and procedures are effective. There were no changes to the Companys internal
controls over financial reporting during the period covered by this quarterly
report that materially affected, or are reasonably likely to materially affect,
the Companys internal controls over financial reporting. Disclosure controls and procedures are the Companys controls and other
procedures designed to ensure that information required to be disclosed by the
Company in the reports that the Company files or submits under the Securities
Exchange Act of 1934, as amended, (the Exchange Act) is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and Exchange Commissions rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that the
Company files or submits under the Exchange Act are accumulated and
communicated to the Companys management, including the Companys principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. 28




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##### Table of Contents



AVONDALE INCORPORATED 
 PART II  OTHER INFORMATION 
  Item 1.   Legal Proceedings.  There have been no significant changes in the matters reported
under Part I, Item 3 Legal Proceedings in the Companys Annual
Report on Form 10-K for the fiscal year ended August 29, 2003 other
than as described below.The Company received a grand jury subpoena issued by the U. S.
District Court for the Eastern Division of North Carolina on
January 20, 2004. The subpoena concerns the production of
documents and records in connection with an investigation being
conducted by the Antitrust Division of the U. S. Department of
Justice relating generally to the manufacture, sale, purchase and
distribution of open-end spun yarns. Based on the information
currently available, management does not believe that the outcome
of this matter will have a material adverse effect on the Companys
financial condition or results of operation. The Company is fully
cooperating with the U. S. Department of Justice in its
investigation.In separate actions initiated by third parties based upon the
public disclosure of the investigation by the U. S. Department of
Justice, the Company and various other defendants have been named
in three class action complaints filed in the U. S. District Court
for the Middle and Western Divisions of North Carolina on May 12,
May 28 and May 25, 2004, respectively, and one class action
complaint filed in the Circuit Court for Shelby County, Tennessee
on April 21, 2004. All complaints seek, under antitrust laws,
various damages and injunctive relief related to the pricing and
sale of open-end yarns. These complaints are in preliminary
procedural stages and do not have scheduled trial dates.
Additionally, the District Court complaints may be combined. The
Company intends to vigorously defend these cases and believes it
has a number of defenses available to it. While the outcome of
these cases cannot be predicted with certainty, based upon
currently available information, the Company does not believe that
the resolution of these cases will have a material adverse effect
on the Companys financial condition or results of operations. 
  Item 2.   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.  None. 
  Item 3.   Defaults Upon Senior Securities.  None 
  Item 4.   Submission of Matters to a Vote of Security Holders.  None 
  Item 5.   Other Information.  None 29




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Item 6.    Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits  3.1
    
    Restated and Amended Articles of
Incorporation of Avondale Incorporated (incorporated by
reference to Exhibit 3.1 to Avondale Incorporateds
Registration Statement on Form S-4, filed June 7, 1996,
File No. 333-05455-01).3.3
    
    Amended and Restated Bylaws of Avondale
Incorporated, adopted as of January 17, 2000
(incorporated by reference to Exhibit 3.3 to Avondale
Incorporateds Quarterly Report on Form 10-Q for the
period ended February 25, 2000, File No. 33-68412).4.3
    
    Indenture dated as of June 30, 2003 for
the 101/4% Senior Subordinated Notes due 2013 among
Avondale Incorporated, Avondale Mills, Inc. and Wachovia
Bank, National Association, as Trustee (incorporated by
reference to Exhibit 4.3 to Avondale Incorporateds
Registration Statement on Form S-4, filed August 29,
2003, File No. 333-108353-01).4.5
    
    Registration Rights Agreement, dated as
of June 30, 2003, among Avondale Mills, Inc., Avondale
Incorporated and Wachovia Securities, LLC (incorporated
by reference to Exhibit 4.5 to Avondale Incorporateds
Registration Statement on Form S-4, filed August 29,
2003, File No. 333-108353-01).10.50
    
    First Amendment to the Post-Merger Stock
Transfer and Repurchase Agreement, dated as of August 1993,
by and among Avondale Incorporated, Jack R. Altherr, Jr.
and G. Stephen Felker, dated April 12, 2004.31.1
    
    Certificate of Chief Executive Officer,
pursuant to Rule 13a  14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certificate of Chief Financial Officer,
pursuant to Rule 13a  14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certificate of Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.  (b)
    
    Reports on Form 8-K  1.
    
    On March 4, 2004, the Company filed a
current report on Form 8-K regarding the appointment of
Dixon Hughes PLLC, successor in the merger of Crisp
Hughes Evans LLP, the Companys former independent
accountants, and Dixon Odom PLLC, as its independent
accountants. 30




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. AVONDALE INCORPORATEDBy:
    
    /S/ JACK R. ALTHERR, JR.
Jack R. Altherr, Jr.
Vice Chairman and Chief Financial Officer
 Date: /s/ July 8, 2004 31