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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
    FORM 10-Q þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 For the Quarterly Period Ended November 26, 2004
 or oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From    to
 Commission file number 33-68412    AVONDALE INCORPORATED  Georgia
    
    58-0477150(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)506 South Broad Street
    
    30655Monroe, Georgia
    
    (Zip code)(Address of principal executive offices)
 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
þ 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 þ 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
    
    January 3, 2005
    
    
    11,394,160

    SharesClass B Common Stock
    
    January 3, 2005
    
    
    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 27, 2004 and November 26, 2004
    
    
    2Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended
November 28, 2003 and November 26, 2004
    
    
    3Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended
November 28, 2003 and November 26, 2004
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2: Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    16Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4: Controls and Procedures
    
    
    22PART II  OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    23Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3: Defaults upon Senior Securities
    
    
    23Item 4: Submission of Matters to a Vote of Security Holders
    
    
    24Item 5: Other Information
    
    
    24Item 6: Exhibits
    
    
    24Signature
    
    
    25EX-4.18 FORM OF REGISTRATION RIGHTS AGREEMENTEX-10.55 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORSEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION 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)
 Nov. 26,Aug. 27,
    
    
    20042004
    
    
    (unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    5,481
    
    
    $
    2,183Accounts receivable, less allowance for doubtful accounts
of $1,015 at August 27, 2004 and $870 at November 26, 2004
    
    
    50,975
    
    
    
    58,839Inventories
    
    
    78,282
    
    
    
    83,325Prepaid expenses
    
    
    1,275
    
    
    
    1,384Income taxes refundable
    
    
    506
    
    
    
    156Total current assets
    
    
    136,519
    
    
    
    145,887Assets held for sale
    
    
    1,037
    
    
    
    734Property, plant and equipmentLand
    
    
    6,289
    
    
    
    6,286Buildings
    
    
    75,771
    
    
    
    75,821Machinery and equipment
    
    
    465,647
    
    
    
    467,090547,707
    
    
    
    549,197Less accumulated depreciation
    
    
    (365,755
    )
    
    
    (374,363
    )181,952
    
    
    
    174,834Goodwill
    
    
    2,951
    
    
    
    2,951Other assets
    
    
    6,023
    
    
    
    5,881$
    328,482
    
    
    $
    330,287LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    24,167
    
    
    $
    24,978Accrued compensation, benefits and related expenses
    
    
    10,440
    
    
    
    10,391Accrued interest
    
    
    2,403
    
    
    
    4,442Other accrued expenses
    
    
    9,340
    
    
    
    9,527Long-term debt due in one year
    
    
    4,325
    
    
    
    4,325Total current liabilities
    
    
    50,675
    
    
    
    53,663Long-term debt
    
    
    141,039
    
    
    
    139,783Deferred income taxes and other long-term liabilities
    
    
    29,439
    
    
    
    29,313Shareholders equityPreferred stock$.01 par value; 10,000 shares authorized
    
    
    
    
    
    
    Common stockClass A, $.01 par value; 100,000 shares authorized;
issued and outstanding - 11,394 shares at
August 27, 2004 and November 26, 2004
    
    
    114
    
    
    
    114Class B, $.01 par value; 5,000 shares authorized;
issued and outstanding - 979 shares at
August 27, 2004 and November 26, 2004
    
    
    10
    
    
    
    10Capital in excess of par value
    
    
    39,170
    
    
    
    39,170Retained earnings
    
    
    68,035
    
    
    
    68,234Total shareholders equity
    
    
    107,329
    
    
    
    107,528$
    328,482
    
    
    $
    330,287
 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 EndedNov. 28,
    
    
    Nov. 26,2003
    
    
    2004Net sales
    
    $
    131,340
    
    
    $
    151,090Operating costs and expensesCost of goods sold
    
    
    117,771
    
    
    
    132,404Depreciation
    
    
    9,524
    
    
    
    8,617Selling and administrative expenses
    
    
    6,462
    
    
    
    6,142Operating income (loss)
    
    
    (2,417
    )
    
    
    3,927Interest expense, net
    
    
    4,830
    
    
    
    3,757Discount and expenses on sales of receivables
    
    
    628
    
    
    
    581Gain on extinguishment of debt
    
    
    
    
    
    
    (162
    )Other, net
    
    
    (2,372
    )
    
    
    (573
    )Income (loss) before income taxes
    
    
    (5,503
    )
    
    
    324Provision for (benefit of) income taxes
    
    
    (1,930
    )
    
    
    125Net income (loss)
    
    $
    (3,573
    )
    
    $
    199Per share data:Net income (loss)-basic
    
    $
    (.29
    )
    
    $
    .02Net income (loss)-diluted
    
    $
    (.29
    )
    
    $
    .02Dividends 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 CASH FLOWS (UNAUDITED)
 (In thousands)
 Thirteen Weeks EndedNov. 28,
    
    
    Nov. 26,2003
    
    
    2004Operating activitiesNet income (loss)
    
    $
    (3,573
    )
    
    $
    199Adjustments to reconcile net income (loss) to net
cash used in operating activities:Depreciation and amortization
    
    
    9,633
    
    
    
    8,839Provision for (benefit of) deferred income taxes
    
    
    (1,958
    )
    
    
    131Gain on disposal of property, plant
and equipment and assets held for sale
    
    
    (2,310
    )
    
    
    (406
    )Gain on extinguishment of debt
    
    
    
    
    
    
    (162
    )Sale of accounts receivable, net
    
    
    (7,448
    )
    
    
    (8,052
    )Changes in operating assets and liabilities
    
    
    (1,614
    )
    
    
    (1,979
    )Net cash used in operating activities
    
    
    (7,270
    )
    
    
    (1,430
    )Investing activitiesPurchases of property, plant and equipment
    
    
    (1,493
    )
    
    
    (1,501
    )Proceeds from sale of property, plant and equipment
and assets held for sale
    
    
    4,112
    
    
    
    714Net cash provided by (used in) investing activities
    
    
    2,619
    
    
    
    (787
    )Financing activitiesReduction in long-term debt
    
    
    (1,081
    )
    
    
    (1,081
    )Dividends paid
    
    
    (1,238
    )
    
    
    Net cash used in financing activities
    
    
    (2,319
    )
    
    
    (1,081
    )Decrease in cash and cash equivalents
    
    
    (6,970
    )
    
    
    (3,298
    )Cash and cash equivalents at beginning of period
    
    
    13,769
    
    
    
    5,481Cash and cash equivalents at end of period
    
    $
    6,799
    
    
    $
    2,183
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 4




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AVONDALE INCORPORATED 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 November 26, 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 27, 2004 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 27, 2004 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 thirteen weeks ended November 26, 2004 are not necessarily
indicative of the results that may be expected for the fiscal year ending August 26, 2005.  2.
    Inventories: Components of inventories are as follows (amounts in
thousands): Aug. 27,
    
    
    Nov. 26,2004
    
    
    2004Finished goods
    
    $
    29,187
    
    
    $
    32,242Work in process
    
    
    33,047
    
    
    
    34,776Raw materials
    
    
    8,173
    
    
    
    7,769Dyes and chemicals
    
    
    4,096
    
    
    
    4,116Inventories at FIFO
    
    
    74,503
    
    
    
    78,903Adjustment of carrying value to LIFO basis,
net of market adjustment
    
    
    (1,645
    )
    
    
    (1,145
    )72,858
    
    
    
    77,758Supplies at average cost
    
    
    5,424
    
    
    
    5,567$
    78,282
    
    
    $
    83,325
 5




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004 The Companys inventories at November 26, 2004 under the last-in, first-out (LIFO)
method and the related impact on the statement of operations for the thirteen weeks then ended have
been recorded using estimated quantities and costs as of August 26, 2005, the end of fiscal 2005.
As actual inventory quantities and costs at August 26, 2005 could differ significantly from these
estimates, the inventory amounts at November 26, 2004 and the operating results for the thirteen
weeks ended November 26, 2004 are not necessarily indicative of the inventory amounts at August 26,
2005 and operating results for fiscal 2005 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 EndedNov. 28,
    
    
    Nov 26,2003
    
    
    2004Weighted average shares outstanding  basic
    
    
    12,381
    
    
    
    12,373Effect of employee stock options
    
    
    
    
    
    
    Weighted average shares outstanding  diluted
    
    
    12,381
    
    
    
    12,373
 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 EndedNov. 28,
    
    
    Nov. 26,2003
    
    
    2004Net income (loss) as reported
    
    $
    (3,573
    )
    
    $
    199Pro forma stock-based compensation, net of
income taxes
    
    
    (9
    )
    
    
    (9
    )Pro forma net income (loss)
    
    $
    (3,582
    )
    
    $
    190Per share data:Net income (loss)-basic as reported
    
    $
    (.29
    )
    
    $
    .02Net income (loss)-basic pro forma
    
    $
    (.29
    )
    
    $
    .02Net income (loss)-diluted as reported
    
    $
    (.29
    )
    
    $
    .02Net income (loss)-diluted pro forma
    
    $
    (.29
    )
    
    $
    .02
 6




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004 4. Segment Information: Condensed segment information is as follows (amounts in
thousands): Thirteen Weeks EndedNov. 28,
    
    
    Nov. 26,2003
    
    
    2004Revenues:Apparel fabrics
    
    $
    100,362
    
    
    $
    114,780Yarns
    
    
    41,399
    
    
    
    41,652Other
    
    
    14,723
    
    
    
    8,428156,484
    
    
    
    164,860Less inter-segment sales
    
    
    25,144
    
    
    
    13,770Net sales
    
    $
    131,340
    
    
    $
    151,090Income (loss) before income taxes:Apparel fabrics
    
    $
    2,402
    
    
    $
    2,848Yarns
    
    
    (1,318
    )
    
    
    2,980Other
    
    
    1,043
    
    
    
    1,215Unallocated
    
    
    (4,544
    )
    
    
    (3,116
    )Total operating income (loss)
    
    
    (2,417
    )
    
    
    3,927Interest expense, net
    
    
    4,830
    
    
    
    3,757Discount and expenses on sale of receivables
    
    
    628
    
    
    
    581Gain on extinguishment of debt
    
    
    
    
    
    
    (162
    )Other, net
    
    
    (2,372
    )
    
    
    (573
    )Income (loss) before income taxes
    
    $
    (5,503
    )
    
    $
    324
 5. Post Retirement Benefits: The estimated cost of post retirement 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. The table below details the estimated
net period cost of the Companys post retirement benefits. Thirteen Weeks EndedNov. 28,
    
    
    Nov. 26,2003
    
    
    2004Components of net periodic benefit cost (benefit):Service cost
    
    $
    26
    
    
    $
    Interest cost
    
    
    114
    
    
    
    53Amortization of prior service cost
    
    
    83
    
    
    
    (127
    )Amortization of loss
    
    
    (15
    )
    
    
    Net periodic benefit cost (benefit)
    
    $
    208
    
    
    $
    (74
    )
 Payment of post retirement benefits for the thirteen weeks ended November 28, 2003 and
November 26, 2004 amounted to $163,000 and $283,000, respectively, and is forecasted to be
approximately $600,000 for the full fiscal year ended August 26, 2005. 7




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004 6. New Accounting Pronouncements: In November 2004, the Financial Accounting
Standards Board issued Statement No. 151, Inventory Costs as an amendment of ARB No. 43, chapter 4,
clarifying the accounting for abnormal amounts of idle facility expense, freight, handling costs
and wasted material (spoilage) in the determination of inventory carrying costs. The statement
requires such costs to be treated as a current period expense, and is effective for inventory costs
incurred during fiscal years beginning after July 15, 2005. The Company is currently evaluating
the impact of this statement, but does not believe the adoption of Statement No. 151 will have a
material impact on the Companys consolidated financial statements. In December 2004, the Financial Accounting Standards Board issued Statement No. 123R,
Share-Based Payments, which requires that companies record the fair value of their stock-based
compensation arrangements on the date they are granted to employees, as a liability or as a
component of equity, depending on whether the obligations can be settled in cash or stock.
Regardless of treatment as liabilities or equity, these amounts must be expensed over the vesting
period of the compensation arrangements. For non-public equity companies such as the Company,
Statement No. 123R is effective for the first annual reporting period beginning after December 15,
2005. Non-public equity companies that used the minimum value method of measuring stock options,
for either recognition or pro forma disclosure under earlier applicable statements, will apply
Statement 123R prospectively for new stock-based compensation arrangements and the unvested portion
of existing arrangements. The Company is currently evaluating the impact of this statement, but
does not believe the adoption of Statement No. 123R will have a material impact on the Companys
consolidated financial statements. 7. 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 27, 2004.
There have been no significant changes in the matters reported other than as described below. 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. 8




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004 On January 13, 2000, a complaint against Russell Corporation, Alabama Power Company and
the Company was filed in the Circuit Court of Jefferson County, Alabama (the Court) by Larry and
Cynthia Locke, and the owners of twenty-three other residences in the Raintree subdivision of Lake
Martin. The complaint alleges that the Company, among others, negligently and/or wantonly caused or
permitted the discharge and disposal of sewage sludge and contaminants into the lake adjacent to
the plaintiffs properties, which allegedly interfered with the plaintiffs use of the properties.
As a result of these alleged actions, the plaintiffs claim that the value of their properties have
been diminished and that they suffered other damages. The complaint seeks compensatory and
punitive damages in an undisclosed amount. The Court subsequently dismissed Alabama Power as a
defendant in the case, based on motion for summary judgment. After an initial series of actions,
the case was stayed by the Court pending resolution of an appeal in the case of Sullivan versus
Russell Corporation, the Company and others (the Sullivan case), which also involved the Raintree
subdivision. On January 12, 2001, the Alabama Supreme Court issued a final order in the Sullivan
case rendering that case in favor of the defendants. Subsequent to the Alabama Supreme Courts
actions with regard to the Sullivan case, plaintiffs counsel, which includes attorneys who acted
as co-plaintiffs counsel on the Sullivan case, presented arguments in a hearing before the Court
on May 4, 2001 based on a narrow legal theory that the nuisance claimed in this action is
sufficiently different from the Sullivan case, and therefore, that this case should be allowed to
proceed in spite of the fact that the Sullivan case was ultimately decided in favor of the
defendants. The Court allowed the case to proceed to the discovery phase. Ten plaintiffs
voluntarily dismissed their claims on August 29, 2001 and five more plaintiffs did so on October
31, 2001. On April 25, 2002, the Court held a hearing on summary judgment motions and, on May 22,
2002, entered judgment as a matter of law in the defendants favor on all counts except the narrow
legal theory involving public nuisance tort. Recently, in response to motions filed by the Company
and Russell Corporation, the Court entered an order reducing testimony that can be given by
plaintiffs proposed experts and held that plaintiffs can only recover damages arising from a
nuisance proven to have been caused by the defendants at any time since January 1998. The Company
ceased all dyeing operations at its Alexander City plant in April 1999. In addition, the Court
found that the plaintiffs have no evidence that would entitle them to recover damages for mental
anguish in this case and made a number of other specific evidentiary rulings in the defendants
favor. Plaintiffs counsel moved for reconsideration of all aspects of the Courts recent order
and a hearing was held on that motion on December 10, 2004. After the hearing, the Court allowed
the parties until December 23, 2004 to submit additional briefing. A final ruling on these matters
is expected from the Court in early 2005. A pre-trial conference has been scheduled for January
14, 2005, and the trial is expected to begin in February 2005. The Company intends to vigorously
defend this case and believes that it has a number of defenses available to it. While the outcome
of this case cannot be predicted with certainty, the Company does not believe that it will have a
material adverse effect on the Companys financial condition or results of operations. 8. 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 the
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. 9




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004 AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
November 26, 2004
(In thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent AssetsCash and cash equivalents
    
    $
    2,183
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,183Accounts receivable
    
    
    58,836
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    58,839Inventories
    
    
    83,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,325Prepaid expenses
    
    
    1,384
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,384Income taxes refundable
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156Total current assets
    
    
    145,884
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    145,887Assets held for sale
    
    
    734
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    734Property, plant and equipmentLand
    
    
    6,090
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    6,286Buildings
    
    
    64,071
    
    
    
    
    
    
    
    11,750
    
    
    
    
    
    
    
    75,821Machinery and equipment
    
    
    429,184
    
    
    
    
    
    
    
    37,906
    
    
    
    
    
    
    
    467,090499,345
    
    
    
    
    
    
    
    49,852
    
    
    
    
    
    
    
    549,197Less accumulated depreciation
    
    
    (344,154
    )
    
    
    
    
    
    
    (30,209
    )
    
    
    
    
    
    
    (374,363
    )155,191
    
    
    
    
    
    
    
    19,643
    
    
    
    
    
    
    
    174,834Goodwill
    
    
    2,951
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,951Investment in subsidiaries
    
    
    7,475
    
    
    
    97,123
    
    
    
    
    
    
    
    (104,598
    )
    
    
    Other assets
    
    
    5,881
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,881$
    318,116
    
    
    $
    97,123
    
    
    $
    19,646
    
    
    $
    (104,598
    )
    
    $
    330,287LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    23,852
    
    
    $
    
    
    
    $
    1,126
    
    
    $
    
    
    
    $
    24,978Accrued compensation, benefits
    
    
    10,179
    
    
    
    
    
    
    
    212
    
    
    
    
    
    
    
    10,391Accrued interest
    
    
    4,442
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,442Other accrued expenses
    
    
    9,526
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    9,527Long-term debt due in one year
    
    
    4,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,325Total current liabilities
    
    
    52,324
    
    
    
    
    
    
    
    1,339
    
    
    
    
    
    
    
    53,663Long-term debt
    
    
    139,783
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139,783Deferred income taxes
and other long term liabilities
    
    
    29,313
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,313Due to (from) subsidiaries
    
    
    (427
    )
    
    
    (10,405
    )
    
    
    10,832
    
    
    
    
    
    
    
    Shareholders equity
    
    
    97,123
    
    
    
    107,528
    
    
    
    7,475
    
    
    
    (104,598
    )
    
    
    107,528$
    318,116
    
    
    $
    97,123
    
    
    $
    19,646
    
    
    $
    (104,598
    )
    
    $
    330,287
 10




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004 AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
August 27, 2004
(In thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent AssetsCash and cash equivalents
    
    $
    5,481
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,481Accounts receivable
    
    
    50,973
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    50,975Inventories
    
    
    78,282
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,282Prepaid expenses
    
    
    1,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,275Income taxes refundable
    
    
    506
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    506Total current assets
    
    
    136,517
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    136,519Assets held for sale
    
    
    1,037
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,037Property, plant and equipmentLand
    
    
    6,093
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    6,289Buildings
    
    
    64,021
    
    
    
    
    
    
    
    11,750
    
    
    
    
    
    
    
    75,771Machinery and equipment
    
    
    427,807
    
    
    
    
    
    
    
    37,840
    
    
    
    
    
    
    
    465,647497,921
    
    
    
    
    
    
    
    49,786
    
    
    
    
    
    
    
    547,707Less accumulated depreciation
    
    
    (336,477
    )
    
    
    
    
    
    
    (29,278
    )
    
    
    
    
    
    
    (365,755
    )161,444
    
    
    
    
    
    
    
    20,508
    
    
    
    
    
    
    
    181,952Goodwill
    
    
    2,951
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,951Investment in subsidiaries
    
    
    7,840
    
    
    
    96,943
    
    
    
    
    
    
    
    (104,783
    )
    
    
    Other assets
    
    
    6,023
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,023$
    315,812
    
    
    $
    96,943
    
    
    $
    20,510
    
    
    $
    (104,783
    )
    
    $
    328,482LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    23,051
    
    
    $
    
    
    
    $
    1,116
    
    
    $
    
    
    
    $
    24,167Accrued compensation, benefits
    
    
    10,333
    
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    10,440Accrued interest
    
    
    2,403
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,403Other accrued expenses
    
    
    9,339
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    9,340Long-term debt due in one year
    
    
    4,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,325Total current liabilities
    
    
    49,451
    
    
    
    
    
    
    
    1,224
    
    
    
    
    
    
    
    50,675Long-term debt
    
    
    141,039
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141,039Deferred income taxes
and other long term liabilities
    
    
    29,439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,439Due to (from) subsidiaries
    
    
    (1,060
    )
    
    
    (10,386
    )
    
    
    11,446
    
    
    
    
    
    
    
    Shareholders equity
    
    
    96,943
    
    
    
    107,329
    
    
    
    7,840
    
    
    
    (104,783
    )
    
    
    107,329$
    315,812
    
    
    $
    96,943
    
    
    $
    20,510
    
    
    $
    (104,783
    )
    
    $
    328,482
 11




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended November 26, 2004
(In thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    151,090
    
    
    $
    31
    
    
    $
    27,436
    
    
    $
    (27,467
    )
    
    $
    151,090Operating costs and expensesCost of goods sold
    
    
    132,749
    
    
    
    
    
    
    
    27,089
    
    
    
    (27,434
    )
    
    
    132,404Depreciation
    
    
    7,686
    
    
    
    
    
    
    
    931
    
    
    
    
    
    
    
    8,617Selling and administrative expenses
    
    
    6,175
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    6,142Operating income (loss)
    
    
    4,480
    
    
    
    31
    
    
    
    (584
    )
    
    
    
    
    
    
    3,927Interest expense, net
    
    
    3,757
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,757Discount and expenses on sales
of receivables
    
    
    581
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    581Gain on extinguishment of debt
    
    
    (162
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162
    )Other, net
    
    
    (573
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (573
    )Income (loss) before income taxes
    
    
    877
    
    
    
    31
    
    
    
    (584
    )
    
    
    
    
    
    
    324Provision for (benefit of) income taxes
    
    
    332
    
    
    
    12
    
    
    
    (219
    )
    
    
    
    
    
    
    125Equity in earnings (loss) of subsidiary
    
    
    (365
    )
    
    
    180
    
    
    
    
    
    
    
    185
    
    
    
    Net income (loss)
    
    $
    180
    
    
    $
    199
    
    
    $
    (365
    )
    
    $
    185
    
    
    $
    199
 12




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended November 28, 2003
(In thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    131,340
    
    
    $
    26
    
    
    $
    22,012
    
    
    $
    (22,038
    )
    
    $
    131,340Operating costs and expensesCost of goods sold
    
    
    118,587
    
    
    
    
    
    
    
    21,197
    
    
    
    (22,013
    )
    
    
    117,771Depreciation
    
    
    8,586
    
    
    
    
    
    
    
    938
    
    
    
    
    
    
    
    9,524Selling and administrative expenses
    
    
    6,487
    
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    6,462Operating income (loss)
    
    
    (2,320
    )
    
    
    26
    
    
    
    (123
    )
    
    
    
    
    
    
    (2,417
    )Interest expense, net
    
    
    4,830
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,830Discount and expenses on sales
of receivables
    
    
    628
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    628Other, net
    
    
    (2,372
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,372
    )Income (loss) before income taxes
    
    
    (5,406
    )
    
    
    26
    
    
    
    (123
    )
    
    
    
    
    
    
    (5,503
    )Provision for (benefit of) income taxes
    
    
    (1,893
    )
    
    
    10
    
    
    
    (47
    )
    
    
    
    
    
    
    (1,930
    )Equity in loss of subsidiary
    
    
    (76
    )
    
    
    (3,589
    )
    
    
    
    
    
    
    3,665
    
    
    
    Net loss
    
    $
    (3,589
    )
    
    $
    (3,573
    )
    
    $
    (76
    )
    
    $
    3,665
    
    
    $
    (3,573
    )
 13




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Thirteen weeks ended November 26, 2004
(In thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedOperating activitiesNet Income (loss)
    
    $
    180
    
    
    $
    199
    
    
    $
    (365
    )
    
    $
    185
    
    
    $
    199Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    7,908
    
    
    
    
    
    
    
    931
    
    
    
    
    
    
    
    8,839Benefit of deferred income taxes
    
    
    131
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131Gain on disposal of property, plant
and equipment and assets held
for sale
    
    
    (406
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (406
    )Gain on extinguishment of debt
    
    
    (162
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162
    )Sale of accounts receivable, net
    
    
    (8,052
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,052
    )Changes in operating assets and liabilities
    
    
    (1,460
    )
    
    
    (19
    )
    
    
    (500
    )
    
    
    
    
    
    
    (1,979
    )Equity in earnings of subsidiary
    
    
    365
    
    
    
    (180
    )
    
    
    
    
    
    
    (185
    )
    
    
    Net cash provided by (used in)
operating activities
    
    
    (1,496
    )
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    (1,430
    )Investing activitiesPurchase of property, plant and equipment
    
    
    (1,435
    )
    
    
    
    
    
    
    (66
    )
    
    
    
    
    
    
    (1,501
    )Proceeds from sale of property, plant
and equipment and assets held for sale
    
    
    714
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    714Net cash used in investing activities
    
    
    (721
    )
    
    
    
    
    
    
    (66
    )
    
    
    
    
    
    
    (787
    )Financing activitiesNet payments on long-term debt
    
    
    (1,081
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,081
    )Net cash used in financing activities
    
    
    (1,081
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,081
    )Decrease in cash and cash equivalents
    
    
    (3,298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,298
    )Cash and cash equivalents
At beginning of period
    
    
    5,481
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,481Cash and cash equivalents
At end of period
    
    $
    2,183
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,183
 14




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
November 26, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Thirteen weeks ended November 28, 2003
(In thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedOperating activitiesNet loss
    
    $
    (3,589
    )
    
    $
    (3,573
    )
    
    $
    (76
    )
    
    $
    3,665
    
    
    $
    (3,573
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    8,695
    
    
    
    
    
    
    
    938
    
    
    
    
    
    
    
    9,633Benefit of deferred income taxes
    
    
    (1,958
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,958
    )Gain on disposal of property, plant
and equipment and assets held
for sale
    
    
    (2,310
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,310
    )Sale of accounts receivable, net
    
    
    (7,448
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,448
    )Changes in operating assets and liabilities
    
    
    (745
    )
    
    
    (16
    )
    
    
    (853
    )
    
    
    
    
    
    
    (1,614
    )Dividends from subsidiary
    
    
    
    
    
    
    1,238
    
    
    
    
    
    
    
    (1,238
    )
    
    
    Equity in loss of subsidiary
    
    
    76
    
    
    
    3,589
    
    
    
    
    
    
    
    (3,665
    )
    
    
    Net cash provided by (used in)
operating activities
    
    
    (7,279
    )
    
    
    1,238
    
    
    
    9
    
    
    
    (1,238
    )
    
    
    (7,270
    )Investing activitiesPurchase of property, plant and equipment
    
    
    (1,484
    )
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (1,493
    )Proceeds from sale of property, plant
and equipment and assets held for sale
    
    
    4,112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,112Net cash provided by (used in)
investing activities
    
    
    2,628
    
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    2,619Financing activitiesNet payments on long term debt
    
    
    (1,081
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,081
    )Dividends paid
    
    
    (1,238
    )
    
    
    (1,238
    )
    
    
    
    
    
    
    1,238
    
    
    
    (1,238
    )Net cash used in financing activities.
    
    
    (2,319
    )
    
    
    (1,238
    )
    
    
    
    
    
    
    1,238
    
    
    
    (2,319
    )Decrease in cash and cash equivalents
    
    
    (6,970
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,970
    )Cash and cash equivalents
at beginning of period
    
    
    13,769
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,769Cash and cash equivalents
at end of period
    
    $
    6,799
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    6,799
 15




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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 remain 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 and discounted cash flows from
operations, as appropriate, 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 that 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. 16




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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 27, 2004.
There have been no changes in the matters reported other than as described below. 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. On January 13, 2000, a complaint against Russell Corporation, Alabama Power Company and the
Company was filed in the Circuit Court of Jefferson County, Alabama (the Court) by Larry and
Cynthia Locke, and the owners of twenty-three other residences in the Raintree subdivision of Lake
Martin. The complaint alleges that the Company, among others, negligently and/or wantonly caused or
permitted the discharge and disposal of sewage sludge and contaminants into the lake adjacent to
the plaintiffs properties, which allegedly interfered with the plaintiffs use of the properties.
As a result of these alleged actions, the plaintiffs claim that the value of their properties have
been diminished and that they suffered other damages. The complaint seeks compensatory and
punitive damages in an undisclosed amount. The Court subsequently dismissed Alabama Power as a
defendant in the case, based on motion for summary judgment. After an initial series of actions,
the case was stayed by the Court pending resolution of an appeal in the case of Sullivan versus
Russell Corporation, the Company and others (the Sullivan case), which also involved the Raintree
subdivision. On January 12, 2001, the Alabama Supreme Court issued a final order in the Sullivan
case rendering that case in favor of the defendants. Subsequent to the Alabama Supreme Courts
actions with regard to the Sullivan case, plaintiffs counsel, which includes attorneys who acted
as co-plaintiffs counsel on the Sullivan case, presented arguments in a hearing before the Court
on May 4, 2001 based on a narrow legal theory that the nuisance claimed in this action is
sufficiently different from the Sullivan case, and therefore, that this case should be allowed to
proceed in spite of the fact that the Sullivan case was ultimately decided in favor of the
defendants. The Court allowed the case to proceed to the discovery phase. Ten plaintiffs
voluntarily dismissed their claims on August 29, 2001 and five more plaintiffs did so on October
31, 2001. On April 25, 2002, the Court held a hearing on summary judgment motions and, on May 22,
2002, entered judgment as a matter of law in the defendants favor on all counts except the narrow
legal theory involving public nuisance tort. Recently, in response to motions filed by the Company
and Russell Corporation, the Court entered an order reducing testimony that can be given by
plaintiffs proposed experts and held that plaintiffs can only recover damages arising from a
nuisance proven to have been caused by the defendants at any time since January 1998. The Company
ceased all dyeing operations at its Alexander City plant in April 1999. In addition, the Court
found that the plaintiffs have no evidence that would entitle them to recover damages for mental
anguish in this case and made a number of other specific evidentiary rulings in the defendants
favor. Plaintiffs counsel moved for reconsideration of all aspects of the Courts recent order
and a hearing was held on that motion on December 10, 2004. After the hearing, the Court allowed
the parties until December 23, 2004 to submit additional briefing. A final ruling on these matters
is expected from the Court in early 2005. A pre-trial conference has been scheduled for January
14, 2005, and the trial is expected to begin in February 2005. The Company intends to vigorously
defend this case and believes that it has a number of defenses available to it. While the outcome
of this case cannot be predicted with certainty, the Company does not believe that it will have a
material adverse effect on the Companys financial condition or results of operations. RESULTS OF OPERATIONS Thirteen Weeks Ended November 26, 2004 Compared to Thirteen Weeks Ended November 28, 2003 Net Sales. Net sales increased 15.1% to $151.1 million for the thirteen weeks ended
November 26, 2004 from $131.3 million for the thirteen weeks ended November 28, 2003. The increase
in net sales for the thirteen weeks ended November 26, 2004 primarily reflected improved unit
volume for the Companys apparel fabrics operation and generally higher average invoice prices for
all of the Companys operations, as the development of new and enhanced products enabled the
Company to increase its sales with existing customers and the overall improvement in market demand
for the Companys products continued from the previous fiscal quarter. However, the domestic
textile industry continues to face difficult challenges, including significant growth in imported
apparel, the elimination of all import quotas under the WTO effective December 31, 2004,
uncertainties presented by the economic and political 17




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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. Pending legislation to
impose tariffs on imports from China to offset Chinas undervalued currency and petitions filed by
industry trade organizations seeking safeguard relief through action by the U.S. government may
provide some assistance, but there can be no assurance that any of these proposals will be
implemented, and if so, in a timely manner. The Company expects these difficult conditions to
continue into the foreseeable future. Operating Income (Loss). The Company produced an operating income of $3.9 million
for the thirteen weeks ended November 26, 2004 compared to an operating loss of ($2.4) million for
the thirteen weeks ended November 28, 2003. The improvement in operating income reflected the
increases in average invoice prices and better unit cost absorptions achieved through the increased
unit volume and the Companys capacity rationalization programs. Additionally, the Company recorded
a non-cash benefit of $0.5 million to adjust the carrying value of inventories to LIFO basis for
the thirteen weeks ended November 26, 2004 compared to a charge of $0.5 million for the thirteen
weeks ended November 28, 2003. Cost of goods sold increased 12.4% to $132.4 million for the
thirteen weeks ended November 26, 2004 from $117.8 million for the thirteen weeks ended November
28, 2003, primarily reflecting the increased unit volume and higher raw material costs. Cost of
goods sold as a percentage of net sales decreased to 87.6% for the thirteen weeks ended November
26, 2004 from 89.7% for the thirteen weeks ended November 28, 2003 reflecting the impact of the
higher average invoice prices and improved unit cost absorptions. Selling and administrative expenses decreased 6.2% to $6.1 million for the thirteen weeks
ended November 26, 2004 from $6.5 million for the thirteen weeks ended November 28, 2003, primarily
reflecting the Companys ongoing cost reduction programs. Selling and administrative expenses as a
percentage of net sales were 4.1% for the thirteen weeks ended November 26, 2004 versus 4.9% for
the thirteen weeks ended November 28, 2003. Segment Performance. Apparel fabric sales increased 14.3% to $114.8 million for the
thirteen weeks ended November 26, 2004 from $100.4 million for the thirteen weeks ended November
28, 2003, reflecting a 10.4% increase in yards invoiced and a 3.6% increase in average invoice
price. Operating income for apparel fabrics increased 16.7% to $2.8 million for the thirteen weeks
ended November 26, 2004 from $2.4 million for the thirteen weeks ended November 28, 2003, primarily
due to the improved unit volume and higher average invoice price. Yarn sales, including intra-company sales to the Companys fabric operations, increased 0.7%
to $41.7 million for the thirteen weeks ended November 26, 2004 from $41.4 million for the thirteen
weeks ended November 28, 2003. Total pounds invoiced declined 13.2%, primarily reflecting the May
2004 closure of a yarn manufacturing facility in North Carolina and a greige weaving operation in
Georgia. Average invoice price increased 15.8% as improved market demand for certain yarn products
and higher raw material costs helped increase outside invoice prices as well as intra-company
transfer prices. The yarns operation produced operating income of $3.0 million for the thirteen
weeks ended November 26, 2004 compared to a loss of ($1.3) for the thirteen weeks ended November
28, 2003, primarily due to the increase in average invoice price. Other sales, which include sales of greige and specialty fabrics, initial sales of a new
apparel sourcing operation and revenues from the Companys trucking operation, decreased 42.9% to
$8.4 million for the thirteen weeks ended November 26, 2004 from $14.7 million for the thirteen
weeks ended November 28, 2003. The decrease in other sales was primarily attributable to decreased
intra-company sales of greige fabrics to the apparel fabric operations following the shutdown of
the greige weaving operation in Georgia and subsequent realignment of certain manufacturing
facilities. Operating income from other sales increased 20.0%, from $1.0 million for the thirteen
weeks ended November 28, 2003 to $1.2 million for the thirteen weeks ended November 26, 2004,
primarily reflecting improved income of the specialty fabrics operation. Inter-segment sales decreased 45.0% to $13.8 million for the thirteen weeks ended November 26,
2004 from $25.1 million for the thirteen weeks ended November 28, 2003, reflecting the capacity
rationalization actions and corresponding reduction in transfers of internally produced yarns and
greige fabrics. 18




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Unallocated amounts included in operating income represent 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. Interest Expense, Net. Net interest expense declined 20.8% to $3.8 million for the
thirteen weeks ended November 26, 2004 compared to $4.8 million for the thirteen weeks ended
November 28, 2003. Net interest expense for the thirteen weeks ended November 28, 2003 included the
write-off of approximately $400,000 of unamortized debt issue costs following execution of a new
senior secured revolving credit facility with GECC in November 2003. In addition, net interest
expense for the thirteen weeks ended November 26, 2004 reflected lower average borrowings
outstanding following the Companys exchange of approximately $60 million of its 2013 Notes for
approximately $42 million of its Floating Rate Notes due 2012. Discount and Expenses on Sale of Receivables. Discount and expenses on sales of
receivables were $0.6 million for both the thirteen weeks ended November 26, 2004 and the thirteen
weeks ended November 28, 2003. Provision for (benefit of) Income Taxes. A provision for income taxes of $0.1
million was recorded for the thirteen weeks ended November 26, 2004, reflecting the Companys
income before income taxes, compared to an income tax benefit of $1.9 million for the thirteen
weeks ended November 28, 2003. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $1.4 million for the thirteen weeks ended November
26, 2004. Principal working capital changes included an $8.1 million decrease in accounts
receivable sold under the securitization facility, a $5.0 million increase in inventories and an
$2.9 million increase in accounts payable and accrued expenses. Investing activities were
predominantly equipment purchases and related costs of $1.5 million made in connection with ongoing
maintenance of the Companys manufacturing facilities and proceeds of $0.7 million from the sale of
a tract of land and certain excess equipment. Financing activities included repayment of $1.1
million of long-term debt. The Companys capital expenditures, aggregating $1.5 million for the thirteen weeks ended
November 26, 2004, were used primarily to complete routine maintenance projects. Management
estimates that capital expenditures for the balance of fiscal 2005 will be approximately $8.5
million. At November 26, 2004, the Company had no borrowings outstanding under its revolving line of
credit, and $26.1 million of borrowing availability as determined using prescribed advance rates
against qualified inventory collateral, less outstanding letters of credit and required minimum
availability. Covenants of the revolving credit facility require the Company to maintain certain minimum
cash flow amounts and fixed charge coverage ratios in the event that combined excess availability
under the revolving credit facility and the Receivables Securitization Facility falls below $20
million for a period of four consecutive weeks. At November 26, 2004, combined excess availability
under these two facilities was approximately $65 million. Covenants of the indenture under which the 2013 Notes were issued contains, among other
things, certain restrictive covenants applicable to issuance of additional debt, payment of
dividends, retirement of capital stock or indebtedness, purchase of investments, sales or transfers
of assets, certain consolidations or mergers and certain transactions with affiliates. In general,
the amount of dividends and capital stock purchases may not exceed an amount equal to $20 million
plus 50% of adjusted net income, or less 100% of adjusted net loss, all calculated on an
accumulative basis subsequent to the date of the indenture. With the loss reported for fiscal
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. 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. 19




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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. FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
the federal securities laws. Statements that are not historical facts, including statements about
our beliefs and expectations, are forward-looking statements. Forward-looking statements include
statements generally preceded by, followed by or that include the words believe, expect,
anticipate, plan, estimate or similar expressions. These statements include, among others,
statements regarding our 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, and the
elimination of import quotas under the WTO effective December 31, 2004;
    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, including the
impact of WTO rulings against the U.S. agricultural support programs;
    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. 20




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OTHER DATA    NON-GAAP FINANCIAL MEASURE Adjusted EBITDA is a supplemental non-GAAP financial measure. 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, and is calculated by the Company as follows
(amounts in thousands): Thirteen Weeks EndedNov. 28,
    
    
    Nov. 26,2003
    
    
    2004Net income (loss)
    
    $
    (3,573
    )
    
    $
    199Interest expense, net
    
    
    4,830
    
    
    
    3,757Provision for (benefit of) income taxes
    
    
    (1,930
    )
    
    
    125Depreciation and amortization
    
    
    9,633
    
    
    
    8,839EBITDA
    
    
    8,960
    
    
    
    12,920Discount and expenses on sale of receivables
    
    
    628
    
    
    
    581Gain on extinguishment of debt
    
    
    
    
    
    
    (162
    )Adjustment of carrying value of inventories
to LIFO basis, net of market adjustment
    
    
    500
    
    
    
    (500
    )Adjusted EBITDA
    
    $
    10,088
    
    
    $
    12,839
 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 
 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 27, 2004. 21




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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 the Companys 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 the Companys management, including the Companys principal executive
officer and principal financial officer. Based on this evaluation, the principal executive officer
and principal financial officer 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 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 filed or submitted
under the Exchange Act are 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 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. 22




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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 27, 2004 other than as described below. On January 13, 2000, a complaint against Russell Corporation, Alabama Power Company
and the Company was filed in the Circuit Court of Jefferson County, Alabama (the
Court) by Larry and Cynthia Locke, and the owners of twenty-three other residences
in the Raintree subdivision of Lake Martin. The complaint alleges that the Company,
among others, negligently and/or wantonly caused or permitted the discharge and
disposal of sewage sludge and contaminants into the lake adjacent to the plaintiffs
properties, which allegedly interfered with the plaintiffs use of the properties.
As a result of these alleged actions, the plaintiffs claim that the value of their
properties have been diminished and that they suffered other damages. The complaint
seeks compensatory and punitive damages in an undisclosed amount. The Court
subsequently dismissed Alabama Power as a defendant in the case, based on motion for
summary judgment. After an initial series of actions, the case was stayed by the
Court pending resolution of an appeal in the case of Sullivan versus Russell
Corporation, the Company and others (the Sullivan case), which also involved the
Raintree subdivision. On January 12, 2001, the Alabama Supreme Court issued a final
order in the Sullivan case rendering that case in favor of the defendants.
Subsequent to the Alabama Supreme Courts actions with regard to the Sullivan case,
plaintiffs counsel, which includes attorneys who acted as co-plaintiffs counsel on
the Sullivan case, presented arguments in a hearing before the Court on May 4, 2001
based on a narrow legal theory that the nuisance claimed in this action is
sufficiently different from the Sullivan case, and therefore, that this case should
be allowed to proceed in spite of the fact that the Sullivan case was ultimately
decided in favor of the defendants. The Court allowed the case to proceed to the
discovery phase. Ten plaintiffs voluntarily dismissed their claims on August 29,
2001 and five more plaintiffs did so on October 31, 2001. On April 25, 2002, the
Court held a hearing on summary judgment motions and, on May 22, 2002, entered
judgment as a matter of law in the defendants favor on all counts except the narrow
legal theory involving public nuisance tort. Recently, in response to motions filed
by the Company and Russell Corporation, the Court entered an order reducing
testimony that can be given by plaintiffs proposed experts and held that plaintiffs
can only recover damages arising from a nuisance proven to have been caused by the
defendants at any time since January 1998. The Company ceased all dyeing operations
at its Alexander City plant in April 1999. In addition, the Court found that the
plaintiffs have no evidence that would entitle them to recover damages for mental
anguish in this case and made a number of other specific evidentiary rulings in the
defendants favor. Plaintiffs counsel moved for reconsideration of all aspects of
the Courts recent order and a hearing was held on that motion on December 10, 2004.
After the hearing, the Court allowed the parties until December 23, 2004 to submit
additional briefing. A final ruling on these matters is expected from the Court in
early 2005. A pre-trial conference has been scheduled for January 14, 2005, and the
trial is expected to begin in February 2005. The Company intends to vigorously
defend this case and believes that it has a number of defenses available to it.
While the outcome of this case cannot be predicted with certainty, the Company does
not believe that it will have a material adverse effect on the Companys financial
condition or results of operations. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None. 
 Item 3.Defaults Upon Senior Securities. None 23




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Item 4. Submission of Matters to a Vote of Security Holders.  (a)
    The Company held its Annual Meeting of Shareholders on November
18, 2004.(b)
    Nine directors were elected at the Annual Meeting to serve
until the Annual Meeting of Shareholders in 2005. The names of these Directors
are as follows: G. Stephen Felker
Jack R. Altherr, Jr.
Dale J. Boden
Robert B. Calhoun
Kenneth H. Callaway
Harry C. Howard
C. Linden Longino, Jr.
James A. Rubright
John P. Stevens  (c)
    The Company had outstanding shares of Class A Common Stock and
Class B Common Stock having an aggregate of 30,972,940 votes entitled to be
cast at the Annual Meeting. Of such aggregate outstanding votes, 414,190 votes
were not represented at the Annual Meeting in person or by proxy. The remaining
30,558,750 outstanding votes were represented at the Annual Meeting in person
or by proxy, with all votes cast for all nine directors that were
elected at the Annual Meeting. There were no broker non-votes and no votes were
withheld. 
 Item 5. Other Information. None 
 Item 6. 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).4.18
    
    
    Form of Registration Rights Agreement among Avondale Mills,
Inc., Avondale Incorporated and each of the holders from time to time of the
Senior Floating Rate Notes due 2012.10.55
    
    
    Avondale Incorporated Stock Option Plan for Non-Employee
Directors, Dated November 18, 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.
   24




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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/ January 7, 2005 25