##### Table of Contents



---

---

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



---



FORM 10-Q

|    |  |                                                                                         
|--- |  | ----------------------------------------------------------------------------------------
|[x] |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 
|    |  | For the Period Ended May 31, 2002                                                       
|    |  |                                                                                         
|    |  | or                                                                                      
|    |  |                                                                                         
|[ ] |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|    |  | For the Transition Period From______________  to_______________                         

Commission file number 33-68412



---



AVONDALE INCORPORATED

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Georgia                                                        |  | 58-0477150                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. employer
identification no.)
|                                                               |  |                                     
|506 South Broad Street
Monroe, Georgia                         |  | 30655
(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  X    NO

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 Outstanding
|                     |  |               |  |                   
|Class A Common Stock |  | July 10, 2002 |  |                    | 11,551,737 | Shares
|Class B Common Stock |  | July 10, 2002 |  |                    | 978,939    | Shares



---

---





---

TABLE OF CONTENTS



|                                             |                                                                                               |                                                      |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|                                             | PART I  FINANCIAL INFORMATION                                                               
|                                             | Item 1. Financial Statements                                                                 
|                                             |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME         
|                                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME         
|                                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                             |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                             | Item 3. Quantitative and Qualitative Disclosures about Market Risk.                          
|                                             | PART II  OTHER INFORMATION                                                                  
|                                             | Item 1. Legal Proceedings                                                                    
|                                             | Item 2. Changes in Securities and Use of Proceeds                                            
|                                             | Item 3. Defaults upon Senior Securities                                                      
|                                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                             | Item 5. Other Information                                                                    
|                                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                                   
|FOURTH AMENDMENT TO AMENDED CREDIT AGREEMENT



---



##### Table of Contents



INDEX TO FORM 10-Q

AVONDALE INCORPORATED

|                                           |           |  |                                                                                                               |    |           |    | 
|------------------------------------------ | --------- |  | ------------------------------------------------------------------------------------------------------------- | -- | --------- | -- | 
|                                           |           |  |                                                                                                               |    | Page     
|                                           |           |  |                                                                                                               |    | Reference
|PART I  FINANCIAL INFORMATION (Unaudited) |           |  |                                                                                                               |   
|                                           |           |  |                                                                                                               |   
|                                           | Item 1:   |  | Financial Statements                                                                                          |    |           |    | 
|                                           |           |  |                                                                                                               |   
|                                           |           |  | Condensed Consolidated Balance Sheets at August 31, 2001 and May 31, 2002                                     |    |           | 1  | 
|                                           |           |  |                                                                                                               |   
|                                           |           |  | Condensed Consolidated Statements of Income for the Thirteen Weeks Ended
May 25, 2001 and May 31, 2002        |    |           | 2  | 
|                                           |           |  |                                                                                                               |   
|                                           |           |  | Condensed Consolidated Statements of Income for the Thirty-nine Weeks Ended
May 25, 2001 and May 31, 2002     |    |           | 3  | 
|                                           |           |  |                                                                                                               |   
|                                           |           |  | Condensed Consolidated Statements of Cash Flows for the Thirty-nine Weeks Ended
May 25, 2001 and May 31, 2002 |    |           | 4  | 
|                                           |           |  |                                                                                                               |   
|                                           |           |  | Notes to Condensed Consolidated Financial Statements                                                          |    |           | 5  | 
|                                           |           |  |                                                                                                               |   
|                                           | Item 2:   |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                         |    |           | 8  | 
|                                           |           |  |                                                                                                               |   
|                                           | Item 3:   |  | Quantitative and Qualitative Disclosures about Market Risk                                                    |    |           | 13 | 
|                                           |           |  |                                                                                                               |   
|PART II - OTHER INFORMATION                |           |  |                                                                                                               |   
|                                           |           |  |                                                                                                               |   
|                                           | Item 1:   |  | Legal Proceedings                                                                                             |    |           | 14 | 
|                                           |           |  |                                                                                                               |   
|                                           | Item 2:   |  | Changes in Securities and Use of Proceeds                                                                     |    |           | 14 | 
|                                           |           |  |                                                                                                               |   
|                                           | Item 3:   |  | Defaults upon Senior Securities                                                                               |    |           | 14 | 
|                                           |           |  |                                                                                                               |   
|                                           | Item 4:   |  | Submission of Matters to a Vote of Security Holders                                                           |    |           | 14 | 
|                                           |           |  |                                                                                                               |   
|                                           | Item 5:   |  | Other Information                                                                                             |    |           | 14 | 
|                                           |           |  |                                                                                                               |   
|                                           | Item 6:   |  | Exhibits and Reports on Form 8-K                                                                              |    |           | 14 | 
|                                           |           |  |                                                                                                               |   
|                                           | Signature |  |                                                                                                               | 15 |          





---



##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1.  Financial Statements




AVONDALE INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands, except per share data)

|                                                      |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |             |          |         |         | 
|----------------------------------------------------- | --------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | -------------------- | --------------------------------------------------------------------------------- | -------- | -------- | ------- | ----------- | -------- | ------- | ------- | 
|                                                      |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |             |          | May 31,
|                                                      |                                                     |                                                                                                              |                      |                                                                                   |          | Aug. 31, |         | 2002       
|                                                      |                                                     |                                                                                                              |                      |                                                                                   |          | 2001     |         | (unaudited)
|                                                      |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |            
|ASSETS                                               
|Current Assets                                        |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |            
|                                                      |                                                     | Cash                                                                                                         |                      | $                                                                                 | 2,969    |          |         | $           | 3,233    |        
|                                                      |                                                     | Accounts receivable, less allowance for doubtful accounts
of $2,616 in fiscal 2001 and $2,900 in fiscal 2002 |                      |                                                                                   | 46,573   |          |         |             | 48,435   |        
|                                                      |                                                     | Inventories                                                                                                  |                      |                                                                                   | 99,671   |          |         |             | 89,937   |        
|                                                      |                                                     | Prepaid expenses                                                                                             |                      |                                                                                   | 1,409    |          |         |             | 1,582    |        
|                                                      |                                                     | Income taxes refundable                                                                                      |                      |                                                                                   | 6,721    |          |         |             | 5,472    |        
|                                                      |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |            
|                                                      |                                                     |                                                                                                              | Total current assets |                                                                                   |          | 157,343  |         |             |          | 148,659 |        
|Assets held for sale                                  |                                                     |                                                                                                              |                     |                                                                                   |          |          | 3,932   |            
|Property, plant and equipment                         |                                                     |                                                                                                              | 8,400                |                                                                                   |          |          | 6,634   |            
|                                                      |                                                     | Land
Buildings                                                                                               |                      |                                                                                   | 91,383   |          |         |             | 81,615   |        
|                                                      |                                                     | Machinery and equipment                                                                                      |                      |                                                                                   | 566,279  |          |         |             | 520,409  |        
|                                                      |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |            
|                                                      |                                                     |                                                                                                              | 666,062              |                                                                                   |          |          | 608,658 |            
|                                                      |                                                     | Less accumulated depreciation                                                                                |                      |                                                                                   | (379,228 | )        |         |             | (355,404 | )      
|                                                      |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |            
|                                                      |                                                     |                                                                                                              | 286,834              |                                                                                   |          |          | 253,254 |            
|Other assets                                          |                                                     |                                                                                                              | 10,641               |                                                                                   |          |          | 9,833   |            
|                                                      |                                                     | $                                                                                                            | 454,818              |                                                                                   |          | $        | 415,678 |            
|                                                      |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |            
|LIABILITIES AND SHAREHOLDERS EQUITY                 
|Current liabilities                                   |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |            
|                                                      | Accounts payable                                    |                                                                                                              | $                    | 24,147                                                                            |          |          | $       | 29,741      |         
|                                                      | Accrued compensation, benefits and related expenses |                                                                                                              |                      | 10,194                                                                            |          |          |         | 11,069      |         
|                                                      | Accrued interest                                    |                                                                                                              |                      | 4,595                                                                             |          |          |         | 1,626       |         
|                                                      | Other accrued expenses                              |                                                                                                              |                      | 14,248                                                                            |          |          |         | 14,665      |         
|                                                      | Long-term debt due in one year                      |                                                                                                              |                      | 500                                                                               |          |          |         | 500         |         
|                                                      |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |            
|                                                      |                                                     |                                                                                                              |                      | Total current liabilities                                                         |          |          | 53,684  |             |          |         | 57,601  | 
|Long-term debt                                        |                                                     |                                                                                                              | 229,650              |                                                                                   |          |          | 196,400 |            
|Deferred income taxes and other long-term liabilities |                                                     |                                                                                                              | 45,483               |                                                                                   |          |          | 44,207  |            
|Shareholders equity                                  |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |            
|                                                      |                                                     | Preferred stock                                                                                              |                      |                                                                                   |          |          |         |             |          |        
|                                                      |                                                     |                                                                                                              |                      | $.01 par value; 10,000 shares authorized                                          |          |          |        |             |          |         |        | 
|                                                      |                                                     | Common stock                                                                                                 |                      |                                                                                   |          |          |         |             |          |        
|                                                      |                                                     |                                                                                                              |                      | Class A, $.01 par value; 100,000 shares
authorized, 11,552 issued and outstanding |          |          | 115     |             |          |         | 115     | 
|                                                      |                                                     |                                                                                                              |                      | Class B, $.01 par value; 5,000 shares
authorized, 979 issued and outstanding      |          |          | 10      |             |          |         | 10      | 
|                                                      |                                                     | Capital in excess of par value                                                                               |                      |                                                                                   | 39,669   |          |         |             | 39,669   |        
|                                                      |                                                     | Accumulated other comprehensive loss                                                                         |                      |                                                                                   | (561     | )        |         |             | (756     | )      
|                                                      |                                                     | Retained earnings                                                                                            |                      |                                                                                   | 86,768   |          |         |             | 78,432   |        
|                                                      |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |            
|                                                      |                                                     |                                                                                                              |                      | Total shareholders equity                                                        |          |          | 126,001 |             |          |         | 117,470 | 
|                                                      |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |            
|                                                      |                                                     | $                                                                                                            | 454,818              |                                                                                   |          | $        | 415,678 |            
|                                                      |                                                     |                                                                                                              |                      |                                                                                   |          |          |         |            

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

1



---



##### Table of Contents






AVONDALE INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except per share data)

|                                              |                                     |   |                      |         |         |   |         |         | 
|--------------------------------------------- | ----------------------------------- | - | -------------------- | ------- | ------- | - | ------- | ------- | 
|                                              |                                     |   | Thirteen Weeks Ended
|                                              |                                     |   |                     
|                                              |                                     |   | May 25,              |         | May 31,
|                                              |                                     |   | 2001                 |         | 2002   
|                                              |                                     |   |                      |         |        
|Net sales                                     |                                     | $ | 203,406              |         |         | $ | 182,525 |        
|Operating costs and expenses                  |                                     |   |                      |         |         |   |         |        
|                                              | Cost of goods sold                  |   |                      | 177,534 |         |   |         | 152,124 | 
|                                              | Depreciation                        |   |                      | 11,714  |         |   |         | 11,005  | 
|                                              | Selling and administrative expenses |   |                      | 8,297   |         |   |         | 7,417   | 
|                                              | Facility and restructuring charges  |   |                      |        |         |   |         | 500     | 
|                                              |                                     |   |                      |         |         |   |         |        
|                                              | Operating income                    |   |                      | 5,861   |         |   |         | 11,479  | 
|Interest expense                              |                                     |   | 5,104                |         |         |   | 5,168   |        
|Discount and expenses on sales of receivables |                                     |   | 1,204                |         |         |   | 398     |        
|Other, net                                    |                                     |   | 344                  |         |         |   | (243    | )      
|                                              |                                     |   |                      |         |         |   |         |        
|                                              | Income (loss) before income taxes   |   |                      | (791    | )       |   |         | 6,156   | 
|Provision for (benefit of) income taxes       |                                     |   | (264                 | )       |         |   | 1,850   |        
|                                              |                                     |   |                      |         |         |   |         |        
|                                              | Net income (loss)                   |   | $                    | (527    | )       |   | $       | 4,306   | 
|                                              |                                     |   |                      |         |         |   |         |        
|Per share data:                               |                                     |   |                      |         |         |   |         |        
|                                              | Net income (loss)-basic             |   | $                    | (.04    | )       |   | $       | .34     | 
|                                              |                                     |   |                      |         |         |   |         |        
|                                              | Net income (loss)-diluted           |   | $                    | (.15    | )       |   | $       | .34     | 
|                                              |                                     |   |                      |         |         |   |         |        
|                                              | Dividends declared                  |   | $                    | .10     |         |   | $       | .10     | 
|                                              |                                     |   |                      |         |         |   |         |        

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

2



---



##### Table of Contents






AVONDALE INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except per share data)

|                                              |                                     |   |                         |         |         |   |         |         |  
|--------------------------------------------- | ----------------------------------- | - | ----------------------- | ------- | ------- | - | ------- | ------- | -
|                                              |                                     |   | Thirty-nine Weeks Ended
|                                              |                                     |   |                        
|                                              |                                     |   | May 25,                 |         | May 31,
|                                              |                                     |   | 2001                    |         | 2002   
|                                              |                                     |   |                         |         |        
|Net sales                                     |                                     | $ | 594,461                 |         |         | $ | 475,163 |        
|Operating costs and expenses                  |                                     |   |                         |         |         |   |         |        
|                                              | Cost of goods sold                  |   |                         | 503,885 |         |   |         | 406,810 |  
|                                              | Depreciation                        |   |                         | 33,810  |         |   |         | 33,995  |  
|                                              | Selling and administrative expenses |   |                         | 27,344  |         |   |         | 21,594  |  
|                                              | Facility restructuring charges      |   |                         |        |         |   |         | 7,000   |  
|                                              |                                     |   |                         |         |         |   |         |        
|                                              | Operating income                    |   |                         | 29,422  |         |   |         | 5,764   |  
|Interest expense                              |                                     |   | 15,156                  |         |         |   | 15,342  |        
|Discount and expenses on sales of receivables |                                     |   | 4,053                   |         |         |   | 1,314   |        
|Other, net                                    |                                     |   | 471                     |         |         |   | (382    | )      
|                                              |                                     |   |                         |         |         |   |         |        
|                                              | Income (loss) before income taxes   |   |                         | 9,742   |         |   |         | (10,510 | )
|Provision for (benefit of) income taxes       |                                     |   | 3,586                   |         |         |   | (4,680  | )      
|                                              |                                     |   |                         |         |         |   |         |        
|                                              | Net income (loss)                   |   | $                       | 6,156   |         |   | $       | (5,830  | )
|                                              |                                     |   |                         |         |         |   |         |        
|Per share data:                               |                                     |   |                         |         |         |   |         |        
|                                              | Net income (loss)-basic             |   | $                       | .49     |         |   | $       | (.47    | )
|                                              |                                     |   |                         |         |         |   |         |        
|                                              | Net income (loss)-diluted           |   | $                       | .49     |         |   | $       | (.47    | )
|                                              |                                     |   |                         |         |         |   |         |        
|                                              | Dividends declared                  |   | $                       | .30     |         |   | $       | .20     |  
|                                              |                                     |   |                         |         |         |   |         |        

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

3



---



##### Table of Contents






AVONDALE INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

|                            |                                                                                   |                                                                  |        |                         |         |         |       |         |         |  
|--------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------ | ----------------------- | ------- | ------- | ----- | ------- | ------- | -
|                            |                                                                                   |                                                                  |        | Thirty-nine Weeks Ended
|                            |                                                                                   |                                                                  |        |                        
|                            |                                                                                   |                                                                  |        | May 25,                 |         | May 31,
|                            |                                                                                   |                                                                  |        | 2001                    |         | 2002   
|                            |                                                                                   |                                                                  |        |                         |         |        
|Operating activities        |                                                                                   |                                                                  |        |                         |         |         |       |        
|                            | Net income (loss)                                                                 |                                                                  | $      | 6,156                   |         |         | $     | (5,830  | )      
|                            | Adjustments to reconcile net income to net
cash provided by operating activities: |                                                                  |        |                         |         |         |       |         |        
|                            |                                                                                   | Depreciation and amortization                                    |        |                         | 34,347  |         |       |         | 34,437  |  
|                            |                                                                                   | Provision for (benefit of) deferred income taxes                 |        |                         | 251     |         |       |         | (1,807  | )
|                            |                                                                                   | Loss on disposal of equipment and facility restructuring
charges |        |                         | 468     |         |       |         | 4,652   |  
|                            |                                                                                   | Sale of accounts receivable, net                                 |        |                         | (3,000  | )       |       |         | 4,000   |  
|                            |                                                                                   | Changes in operating assets and liabilities                      |        |                         | (17,169 | )       |       |         | 9,142   |  
|                            |                                                                                   |                                                                  |        |                         |         |         |       |        
|                            |                                                                                   | Net cash provided by operating activities                        |        |                         | 21,053  |         |       |         | 44,594  |  
|Investing activities        |                                                                                   |                                                                  |        |                         |         |         |       |        
|                            | Purchases of property, plant and equipment                                        |                                                                  |        | (74,777                 | )       |         |       | (9,674  | )      
|                            | Proceeds from sale of property, plant and equipment                               |                                                                  |        | 874                     |         |         |       | 1,100   |        
|                            |                                                                                   |                                                                  |        |                         |         |         |       |        
|                            |                                                                                   | Net cash used in investing activities                            |        |                         | (73,903 | )       |       |         | (8,574  | )
|Financing activities        |                                                                                   |                                                                  |        |                         |         |         |       |        
|                            | Net advances (payments) on revolving line of credit                               |                                                                  |        | 51,225                  |         |         |       | (33,250 | )      
|                            | Issuance of common stock                                                          |                                                                  |        | 20                      |         |         |       |        |        
|                            | Purchase and retirement of common stock                                           |                                                                  |        | (204                    | )       |         |       |        |        
|                            | Dividends paid                                                                    |                                                                  |        | (3,762                  | )       |         |       | (2,506  | )      
|                            |                                                                                   |                                                                  |        |                         |         |         |       |        
|                            |                                                                                   | Net cash provided by (used in) financing activities              |        |                         | 47,279  |         |       |         | (35,756 | )
|                            |                                                                                   |                                                                  |        |                         |         |         |       |        
|Increase (decrease) in cash |                                                                                   |                                                                  | (5,571 | )                       |         |         | 264   |        
|Cash at beginning of period |                                                                                   |                                                                  | 7,867  |                         |         |         | 2,969 |        
|                            |                                                                                   |                                                                  |        |                         |         |         |       |        
|Cash at end of period       |                                                                                   | $                                                                | 2,296  |                         |         | $       | 3,233 |        
|                            |                                                                                   |                                                                  |        |                         |         |         |       |        

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

4



---



##### Table of Contents






AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
May 31, 2002

1.     Basis of Presentation: The accompanying unaudited condensed
consolidated financial statements include the accounts of Avondale Incorporated
and its wholly owned subsidiaries, Avondale Mills, Inc. and Avondale
Receivables Company (collectively, the Company). 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 footnotes required by accounting principles
generally accepted in the United States for complete financial statements.
Certain prior year financial statement amounts have been reclassified to
conform with the current years presentation. The August 31, 2001 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 31, 2001 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.

In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation. Operating results for
the thirty-nine weeks ended May 31, 2002 are not necessarily indicative of the
results that may be expected for the fiscal year ending August 30, 2002.

2.     Inventories: Components of inventories are as follows
(amounts in thousands):

|                                               |  |          |        |         |  |   |        | 
|---------------------------------------------- |  | -------- | ------ | ------- |  | - | ------ | 
|                                               |  | Aug. 31, |        | May 31,
|                                               |  | 2001     |        | 2002   
|                                               |  |          |        |        
|Finished goods                                 |  | $        | 33,955 |         |  | $ | 29,442 | 
|Work in process                                |  |          | 39,470 |         |  |   | 35,141 | 
|Raw materials                                  |  |          | 11,713 |         |  |   | 8,261  | 
|Dyes and chemicals                             |  |          | 5,058  |         |  |   | 6,199  | 
|                                               |  |          |        |         |  |   |        | 
|Inventories at FIFO                            |  |          | 90,196 |         |  |   | 79,043 | 
|Premium to adjust carrying value to
LIFO basis |  |          | 2,750  |         |  |   | 4,550  | 
|                                               |  |          |        |         |  |   |        | 
|                                               |  |          | 92,946 |         |  |   | 83,593 | 
|Supplies at average cost                       |  |          | 6,725  |         |  |   | 6,344  | 
|                                               |  |          |        |         |  |   |        | 
|                                               |  | $        | 99,671 |         |  | $ | 89,937 | 
|                                               |  |          |        |         |  |   |        | 

5



---



##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 31, 2002

Valuation of the Companys inventories under the last-in, first-out (LIFO)
method at May 31, 2002 and the related impact on the statement of income for
the thirty-nine weeks then ended has been determined using estimated quantities
and costs as of the fiscal 2002 year-end. As a result, interim amounts are
subject to the final year-end LIFO valuation.

3.     Earnings Per Share: Earnings per share is calculated by dividing the
reported net income 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 Ended
|                                              |  |                      |        |                        
|                                              |  | May 25,              |        | May 31,                 |  | May 25, |        | May 31,
|                                              |  | 2001                 |        | 2002                    |  | 2001    |        | 2002   
|                                              |  |                      |        |                         |  |         |        |        
|Weighted
average shares outstanding  basic   |  |                      | 12,531 |                         |  |         | 12,531 |         |  |  | 12,537 |  |  |  | 12,531 | 
|Effect of employee stock options              |  |                      |       |                         |  |         | 115    |         |  |  | 133    |  |  |  |       | 
|                                              |  |                      |        |                         |  |         |        |         |  |  |        |  |  |  |        | 
|Weighted average shares outstanding  diluted |  |                      | 12,531 |                         |  |         | 12,646 |         |  |  | 12,670 |  |  |  | 12,531 | 
|                                              |  |                      |        |                         |  |         |        |         |  |  |        |  |  |  |        | 

4.     Segment Information: Condensed segment information is as follows
(amounts in thousands):

|               |                                              |                                   |         |                         |         |         |         |         |         |  
|-------------- | -------------------------------------------- | --------------------------------- | ------- | ----------------------- | ------- | ------- | ------- | ------- | ------- | -
|               |                                              |                                   |         | Thirty-nine Weeks Ended
|               |                                              |                                   |         |                        
|               |                                              |                                   |         | May 25,                 |         | May 31,
|               |                                              |                                   |         | 2001                    |         | 2002   
|               |                                              |                                   |         |                         |         |        
|Revenues:      |                                              |                                   |         |                         |         |         |         |        
|               | Apparel fabrics                              |                                   | $       | 479,750                 |         |         | $       | 398,534 |        
|               | Yarns                                        |                                   |         | 182,734                 |         |         |         | 137,052 |        
|               | Other                                        |                                   |         | 59,289                  |         |         |         | 51,575  |        
|               |                                              |                                   |         |                         |         |         |         |        
|               |                                              |                                   | 721,773 |                         |         |         | 587,161 |        
|               | Less intersegment sales                      |                                   |         | 127,312                 |         |         |         | 111,998 |        
|               |                                              |                                   |         |                         |         |         |         |        
|               |                                              | Total                             |         | $                       | 594,461 |         |         | $       | 475,163 |  
|               |                                              |                                   |         |                         |         |         |         |        
|Income (loss): |                                              |                                   |         |                         |         |         |         |        
|               | Apparel fabrics                              |                                   | $       | 43,650                  |         |         | $       | 28,024  |        
|               | Yarns                                        |                                   |         | 3,044                   |         |         |         | (5,868  | )      
|               | Other                                        |                                   |         | 4,100                   |         |         |         | 2,616   |        
|               | Facility restructuring charges               |                                   |         |                        |         |         |         | (7,000  | )      
|               | Unallocated                                  |                                   |         | (21,372                 | )       |         |         | (12,008 | )      
|               |                                              |                                   |         |                         |         |         |         |        
|               |                                              | Total operating income            |         |                         | 29,422  |         |         |         | 5,764   |  
|               | Interest expense                             |                                   |         | 15,156                  |         |         |         | 15,342  |        
|               | Discount and expenses on sale of receivables |                                   |         | 4,053                   |         |         |         | 1,314   |        
|               | Other expense (income), net                  |                                   |         | 471                     |         |         |         | (382    | )      
|               |                                              |                                   |         |                         |         |         |         |        
|               |                                              | Income (loss) before income taxes |         | $                       | 9,742   |         |         | $       | (10,510 | )
|               |                                              |                                   |         |                         |         |         |         |        

6



---



##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 31, 2002

5.     Comprehensive income: Comprehensive income includes unrealized
gains and losses in the fair value of certain derivative instruments which
qualify for hedge accounting. A reconciliation of net income to
comprehensive income is as follows:

|                                                                                                          |  |                         |       |         |  |   |        |  
|--------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ------- |  | - | ------ | -
|                                                                                                          |  | Thirty-nine Weeks Ended
|                                                                                                          |  |                        
|                                                                                                          |  | May 25,                 |       | May 31,
|                                                                                                          |  | 2001                    |       | 2002   
|                                                                                                          |  |                         |       |        
|Net income (loss)                                                                                         |  | $                       | 6,156 |         |  | $ | (5,830 | )
|Cumulative effect of adoption of Statement of
Financial Accounting Standards No. 133,
net of income taxes |  |                         | 427   |         |  |   |       |  
|Change in fair value of interest rate swaps,
net of
income taxes                                          |  |                         | (669  | )       |  |   | (194   | )
|                                                                                                          |  |                         |       |         |  |   |        |  
|Comprehensive income (loss)                                                                               |  | $                       | 5,914 |         |  | $ | (6,024 | )
|                                                                                                          |  |                         |       |         |  |   |        |  

6.     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 31, 2001 and Part II  Other
Information, Item 1 Legal Proceedings in this quarterly report on Form
10-Q. 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
would have a material adverse effect on the Companys financial condition or
results of operations.

7.     Facility Restructuring: In response to the highly competitive market
conditions and continued oversupply of open-end yarns, in January 2002, the
Company completed the closing of two separate open-end yarn manufacturing
facilities located in North Carolina. In connection with these closings, the
Company recorded facility restructuring charges and other non-operating costs
of approximately $5.3 million during the thirteen weeks ended November 30,
2001 and approximately $0.5 million during the thirteen weeks ended May 31,
2002. Additionally, the Company implemented a program in September 2001 to
reduce certain manufacturing overhead costs and selling, general and
administrative expenses. In conjunction with these actions and the two plant
closings, the Company recorded severance expense of approximately $1.2
million related to the termination of approximately 70 associates holding
manufacturing, marketing and administrative positions. At May 31, 2002,
accruals of approximately $230,000 related to the facility restructuring
costs, remain outstanding and are included in other accrued expenses in the
consolidated balance sheets.

At May 31, 2002, the two closed plant facilities and certain real estate
properties and other equipment have been identified as available for sale and
are included in assets held for sale in the consolidated balance sheets.

7



---



##### 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
in the United States for interim financial information (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, 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
also establishes allowances for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical payment trends
and other information.

Inventories:Inventories are stated at the lower of cost or market value.
Except for certain supply inventories valued on an average cost basis, cost is
determined on a last-in, first-out (LIFO) basis. The Company uses estimated
year-end quantities and costs in determining LIFO cost of its interim
inventories. Estimates, including the estimated cost to complete work in
process inventories and the estimated realizable values of all inventories, are
also used in determining the lower of LIFO cost and market.

Long-Lived Assets:The Company periodically reviews the values assigned to
long-lived assets, such as property, plant and equipment and goodwill. The
associated depreciation and amortization periods are reviewed on an annual
basis. Recoverability is measured based on the anticipated undiscounted cash
flows from operations, or in the case of assets held for sale, at the lower of
historical carrying amount of the assets or estimated fair value less cost to
sell. Management periodically reviews the carrying amount and provides for
adjustments in the period where information becomes available that suggests
that the amounts need to be adjusted.

Recent Accounting Pronouncements:The Financial Accounting Standards Board
has issued Statement No. 141, Business Combinations, Statement No. 142,
Goodwill and other Intangible Assets and Statement No. 144, Accounting for
the Impairment or Disposal of Long-lived Assets, which the Company plans to
adopt in the first quarter of fiscal 2003. While a Statement No. 142 assessment
of the recovery value of goodwill ($4.9 million balance at May 31, 2002) is
still in progress, management does not believe the adoption of these statements
will have a material effect on the consolidated financial statements of the
Company.

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.

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

8



---



##### Table of Contents



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 31, 2001 and Part II  Other Information,
Item 1 Legal Proceedings in this quarterly report on Form 10-Q. 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 would have a material adverse
effect on the Companys financial condition or results of operations.

RESULTS OF OPERATIONS

Thirteen Weeks Ended May 31, 2002 Compared to Thirteen Weeks Ended May 25, 2001

Net Sales.Net sales decreased 10.3% to $182.5 million for the thirteen
weeks ended May 31, 2002 from $203.4 million for the thirteen weeks ended May
25, 2001. Retail sales of apparel continued to reflect weak consumer demand
and a general decline in consumer confidence following the tragic events of
September 11, 2001 and subsequent developments. In addition, the strength of
the U.S. dollar in comparison to the currencies of many Asian countries
continues to promote the importation of goods from those countries by U.S.
retailers, exacerbating the already highly competitive market conditions
resulting from the imbalance of global supply and demand for textile and
apparel products. While the Company expects these conditions to continue into
the fourth quarter of fiscal 2002, demand for the Companys products,
particularly denim and yarns, has shown recent improvement and increased unit
volume and pricing are anticipated.

Operating Income.Operating income was $11.5 million for the thirteen
weeks ended May 31, 2002 compared to $5.9 million for the thirteen weeks ended
May 25, 2001, reflecting significantly lower raw material costs. Cost of goods
sold decreased 14.3% to $152.1 million for the thirteen weeks ended May 31,
2002 from $177.5 million for the thirteen weeks ended May 25, 2001, reflecting
the reduction in unit sales and lower raw material costs. Cost of goods sold
as a percentage of net sales decreased to 83.3% for the thirteen weeks ended
May 31, 2002 from 87.3% for the thirteen weeks ended May 25, 2001.

Selling and administrative expenses decreased 10.6% to $7.4 million for
the thirteen weeks ended May 31, 2002 from $8.3 million for the thirteen weeks
ended May 25, 2001. This decrease reflected the impact of a program initiated
in September 2001 to reduce selling, general and administrative staffing and
related expenses, and a reduction in certain associate benefits and performance
based incentives corresponding to the decline in operating income for the year
to date period. Selling and administrative expenses as a percentage of net
sales remained constant at 4.1% for the thirteen weeks ended May 31, 2002
compared to the thirteen weeks ended May 25, 2001.

Segment Performance.Apparel fabric sales decreased 10.3% to $155.0
million for the thirteen weeks ended May 31, 2002 from $172.8 million for the
thirteen weeks ended May 25, 2001. The decline in sales reflected a 3.6%
decrease in yards sold, while average selling prices declined 7.0% for the
respective periods. Operating income for apparel fabrics increased 71.9% to
$15.3 million for the thirteen weeks ended May 31, 2002 from $8.9 million for
the thirteen weeks ended May 25, 2001, primarily due to lower raw material
costs.

Yarn sales, including intracompany sales to the fabric operations,
decreased 23.7% to $50.0 million for the thirteen weeks ended May 31, 2002 from
$65.5 million for the thirteen weeks ended May 25, 2001, reflecting the closing
of two open-end yarn plants in North Carolina, a 13.6% decrease in pounds sold
and an 11.7% decrease in average selling price. Market pricing for sales yarns
remained very competitive, reflecting continued excess production capacity
within the domestic industry and continued imports of yarns and knitted apparel
from Asia. The yarn operations produced an operating loss of $0.8 million for
the thirteen weeks ended May 31, 2002 compared to an operating income of $1.9
million for the thirteen weeks ended May 25, 2001, primarily as a result of the
reduced unit volumes and lower average selling prices.

Other sales, which include sales of greige and specialty fabrics and
revenues from the Companys trucking operation, increased 2.3% to $19.7 million
for the thirteen weeks ended May 31, 2002 from $19.2 million for the thirteen
weeks ended May 25, 2001. The increase in other sales was primarily
attributable to increased intracompany sales of greige fabrics to the apparel
fabric operations. Operating income increased 171.4% to $1.9 million for the
thirteen weeks ended May 31, 2002 from $0.7 million for the thirteen weeks
ended May 25, 2001, primarily due to lower raw material costs.

9



---



##### Table of Contents



Inter-segment sales decreased 22.2% to $42.2 million for the thirteen
weeks ended May 31, 2002 from $54.2 million for the thirteen weeks ended May
25, 2001, primarily reflecting the decrease in consumption of internally
produced yarns within the Companys apparel fabrics operation.

Interest Expense, Net.Net interest expense increased 1.3% to $5.2
million for the thirteen weeks ended May 31, 2002 from $5.1 million for the
thirteen weeks ended May 25, 2001. The increase was primarily the result of
higher interest rates paid on borrowings outstanding during the thirteen weeks
ended May 31, 2002.

Discount and Expenses on Sale of Receivables.Discount and expenses on
sales of receivables were $0.4 million for the thirteen weeks ended May 31,
2002 compared to $1.2 million for the thirteen weeks ended May 25, 2001. This
decrease was attributable to a net decrease in the amount of accounts
receivable sold under the facility, reflecting the overall decline in net sales
of the Company, and to lower market interest rates and the resulting decline in
discounts incurred on the receivables sold.

Provision for (Benefit of) Income Taxes.An income tax provision of $1.9
million was recorded for the thirteen weeks ended May 31, 2002, reflecting the
Companys return to profitability, compared to a benefit of income taxes of
$0.3 million for the thirteen weeks ended May 25, 2001.

Thirty-nine Weeks Ended May 31, 2002 Compared to Thirty-nine Weeks Ended May
25, 2001

Net Sales.Net sales decreased 20.1% to $475.2 million for the
thirty-nine weeks ended May 31, 2002 from $594.5 million for the thirty-nine
weeks ended May 25, 2001. Retail sales of apparel, already suffering from weak
consumer demand, softened further following the tragic events of September 11,
2001 and subsequent developments. With the resulting decline in consumer
confidence and expecting reduced demand for products made using apparel fabrics
and yarns, apparel producers and retailers targeted production and inventory
levels far below those normal for the holiday season. In addition, the strength
of the U.S. dollar in comparison to the currencies of many Asian countries
continues to promote the importation of goods from those countries by U.S.
retailers, exacerbating the already highly competitive market conditions
resulting from the imbalance of global supply and demand for textile and
apparel products. While the Company expects these conditions to continue into
the fourth quarter of fiscal 2002, demand for the Companys products,
particularly denim and yarns, has shown recent improvement and increased unit
volume and pricing are anticipated.

Operating Income.An operating income of $5.8 million was experienced
for the thirty-nine weeks ended May 31, 2002 compared to an operating income of
$29.4 million for the thirty-nine weeks ended May 25, 2001, reflecting lower
average selling prices for most products, the negative impact of reduced
volumes on unit cost absorption and operational efficiencies, and the facility
restructuring charges recorded upon the closing of two open-end yarn
manufacturing facilities. Cost of goods sold decreased 19.3% to $406.8 million
for the thirty-nine weeks ended May 31, 2002 from $503.9 million for the
thirty-nine weeks ended May 25, 2001, reflecting the reduction in unit sales
and significantly lower raw material costs. Cost of goods sold as a percentage
of net sales increased to 85.6% for the thirty-nine weeks ended May 31, 2002
from 84.8% for the thirty-nine weeks ended May 25, 2001.

Selling and administrative expenses decreased 21.0% to $21.6 million for
the thirty-nine weeks ended May 31, 2002 from $27.3 million for the thirty-nine
weeks ended May 25, 2001. This decrease reflected the impact of a program
initiated in September 2001 to reduce selling, general and administrative
staffing and related expenses, and a reduction in certain associate benefits
and performance based incentives corresponding to the decline in operating
income for the period. Selling and administrative expenses as a percentage of
net sales decreased to 4.5% for the thirty-nine weeks ended May 31, 2002 from
4.6% for the thirty-nine weeks ended May 25, 2001.

Segment Performance.Apparel fabric sales decreased 16.9% to $398.5
million for the thirty-nine weeks ended May 31, 2002 from $479.8 million for
the thirty-nine weeks ended May 25, 2001. The decline in sales reflected a
14.5% decrease in yards sold as demand for denim and bottom-weight fabrics
weakened. Average selling prices declined 2.8% for the respective periods.
Operating income for apparel fabrics decreased 35.8% to $28.0 million for the
thirty-nine weeks ended May 31, 2002 from $43.7 million for the thirty-nine
weeks ended May 25, 2001, primarily due to the reduced unit volumes.

Yarn sales, including intracompany sales to the fabric operations,
decreased 25.0% to $137.1 million for the thirty-nine weeks ended May 31, 2002
from $182.7 million for the thirty-nine weeks ended May 25, 2001, reflecting
the closing of two open-end yarn plants in North Carolina, a 17.8% decrease in
pounds sold and an 8.8% decrease in average selling price. Market pricing for
sales yarns remained very competitive, reflecting continued excess production
capacity within the domestic industry and continued imports of yarns and
knitted apparel from Asia. The

10



---



##### Table of Contents



yarn operations produced an operating loss of $5.9 million for the thirty-nine
weeks ended May 31, 2002 compared to an operating income of $3.0 million for
the thirty-nine weeks ended May 25, 2001, primarily as a result of the reduced
unit volumes and lower average selling prices.

Other sales, which include sales of greige and specialty fabrics and
revenues from the Companys trucking operation, decreased 13.0% to $51.6
million for the thirty-nine weeks ended May 31, 2002 from $59.3 million for the
thirty-nine weeks ended May 25, 2001. The decrease in other sales was
primarily attributable to continued softness in the greige and specialty
fabrics markets. Operating income decreased 36.6% to $2.6 million for the
thirty-nine weeks ended May 31, 2002 from $4.1 million for the thirty-nine
weeks ended May 25, 2001, primarily due to the lower unit volumes.

Inter-segment sales decreased 12.0% to $112.0 million for the thirty-nine
weeks ended May 31, 2002 from $127.3 million for the thirty-nine weeks ended
May 25, 2001, reflecting the decrease in consumption of internally produced
yarns within the Companys apparel fabrics operation.

Interest Expense, Net.Net interest expense increased 1.2% to $15.3
million for the thirty-nine weeks ended May 31, 2002 from $15.2 million for the
thirty-nine weeks ended May 25, 2001. The increase was primarily the result of
higher interest rates paid on borrowings outstanding during the thirty-nine
weeks ended May 31, 2002.

Discount and Expenses on Sale of Receivables.Discount and expenses on
sales of receivables were $1.3 million for the thirty-nine weeks ended May 31,
2002 compared to $4.1 million for the thirty-nine weeks ended May 25, 2001.
This decrease was attributable to a net decrease in the amount of accounts
receivable sold under the facility, reflecting the overall decline in net sales
of the Company, and to lower market interest rates and the resulting decline in
discounts incurred on the receivables sold.

Provision for (Benefit of) Income Taxes.An income tax benefit of $4.7
million was recorded for the thirty-nine weeks ended May 31, 2002, reflecting
the loss before income taxes, compared to a provision for income taxes of $3.6
million for the thirty-nine weeks ended May 25, 2001.

Facility Restructuring Charges.In response to the highly competitive
market conditions and continued oversupply of open-end yarns, in January 2002,
the Company completed the closing of two separate open-end yarn manufacturing
facilities located in North Carolina. In connection with these closings, the
Company recorded facility restructuring charges and other non-operating costs
of approximately $5.3 million during the thirteen weeks ended November 30, 2001
and approximately $0.5 million during the thirteen weeks ended May 31, 2002.
Additionally, the Company implemented a program in September 2001 to reduce
certain manufacturing overhead costs and selling, general and administrative
expenses. In conjunction with these actions and the two plant closings, the
Company recorded severance expense of approximately $1.2 million related to the
termination of approximately 70 associates holding manufacturing, marketing and
administrative positions. At May 31, 2002, accruals of approximately $230,000
related to the facility restructuring costs remain outstanding and are included
in other accrued expenses in the consolidated balance sheets.

At May 31, 2002, the two closed plant facilities and certain real estate
properties and other equipment have been identified as available for sale and
are included in assets held for sale in the consolidated balance sheets.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $44.6 million for the
thirty-nine weeks ended May 31, 2002. Principal working capital changes
included a $5.9 million increase in accounts receivable, a $4.0 million
increase in accounts receivable sold under the securitization facility, a $9.7
million decrease in inventories, and a $3.9 million increase in accounts
payable and accrued expenses. Investing activities were predominantly equipment
purchases and related costs of $9.7 million made in connection with the ongoing
modernization of the Companys manufacturing facilities. Financing activities
included a $33.3 million net decrease in borrowings under the revolving credit
facility and payment of $2.5 million in dividends on outstanding common stock.

11



---



##### Table of Contents



At May 31, 2002, the Company had borrowings of $69.4 million outstanding
under its revolving line of credit and $54.5 million of borrowing availability
thereunder.

The Companys capital expenditures, aggregating $9.7 million for the
thirty-nine weeks ended May 31, 2002, were used primarily to complete the
linked ring spinning and other modernization projects initiated in fiscal
2001. Having completed these major modernization projects, management
estimates that capital expenditures for the balance of fiscal 2002 will be
approximately $3 million.

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

Statements herein regarding anticipated capital expenditures and
anticipated performance in future periods constitute forward looking statements
within the meaning of the Securities Act of 1933 and Securities Exchange Act of
1934. Such statements are subject to certain risks and uncertainties that
could cause actual amounts to differ materially from those projected. With
respect to anticipated capital expenditures, management has made certain
assumptions regarding, among other things, maintenance of existing facilities
and equipment, availability and desirability of new, technologically advanced
equipment, installation and start up times, cost estimates and continued
availability of financial resources. The estimated amount of capital
expenditures is subject to certain risks, including, among other things, the
risk that unexpected capital expenditures will be required and unexpected costs
and expenses will be incurred. Statements herein regarding the Companys
performance in future periods are subject to risks relating to, among other
things, the cyclical and competitive nature of the textile industry in general,
pressures on selling prices due to competitive and economic conditions,
deterioration of relationships with, or loss of, significant customers,
availability, sourcing and pricing of cotton and other raw materials,
technological advancements, employee relations, continued availability of
financial resources, difficulties integrating acquired businesses and possible
changes in governmental policies affecting raw material costs. Management
believes these forward-looking statements are reasonable; however, undue
reliance should not be placed on such forward-looking statements, which are
based on current expectations.

12



---



##### Table of Contents



OTHER DATA

EBITDA, which is presented not as an alternative measure of operating
results or cash flow from operations (as determined in accordance with
generally accepted accounting principles) but because it is a widely accepted
financial indicator of the ability to incur and service debt, is calculated by
the Company as follows (amounts in thousands):

|                                                                            |  |                         |        |         |  |   |        |  
|--------------------------------------------------------------------------- |  | ----------------------- | ------ | ------- |  | - | ------ | -
|                                                                            |  | Thirty-nine Weeks Ended
|                                                                            |  |                        
|                                                                            |  | May 25,                 |        | May 31,
|                                                                            |  | 2001                    |        | 2002   
|                                                                            |  |                         |        |        
|Net income (loss)                                                           |  | $                       | 6,156  |         |  | $ | (5,830 | )
|Interest expense                                                            |  |                         | 15,156 |         |  |   | 15,342 |  
|Discount and expenses on sale of receivables                                |  |                         | 4,053  |         |  |   | 1,314  |  
|Provision for (benefit of) income taxes                                     |  |                         | 3,586  |         |  |   | (4,680 | )
|Depreciation and amortization                                               |  |                         | 34,347 |         |  |   | 34,429 |  
|Facility restructuring non cash charges                                     |  |                         |       |         |  |   | 5,338  |  
|Net change in allowance to adjust carrying
value of inventory to LIFO basis |  |                         | 1,500  |         |  |   | (1,800 | )
|                                                                            |  |                         |        |         |  |   |        |  
|EBITDA                                                                      |  | $                       | 64,798 |         |  | $ | 44,113 |  
|                                                                            |  |                         |        |         |  |   |        |  




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 fiscal year ended August 31, 2001.

13



---



##### Table of Contents



AVONDALE INCORPORATED




PART II  OTHER INFORMATION




Item 1.    Legal Proceedings



| |  | On January 13, 2000, a case was filed in the Circuit Court of
Jefferson County, Alabama by Larry and Cynthia Locke and the owners
of fourteen other residences in the Raintree subdivision of Lake
Martin, against Russell Corporation, Alabama Power and the Company.
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 property, which allegedly interfered with the
plaintiffs use of the property. As a result of these alleged
actions, the plaintiffs claim that the value of their property has
been diminished and that they suffered other damages. The
complaint seeks compensatory and punitive damages in an undisclosed
amount. After an initial series of actions, the case was stayed by
the trial court pending resolution of an appeal in the case of
Sullivan versus Russell Corporation, the Company, and others
(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, plaintiffs counsel, which includes
attorneys who acted as co-plaintiffs counsel on the Sullivan case,
presented arguments in a hearing before the trial judge on May 4,
2001 based on certain narrow legal theories that the damages
claimed in this action are 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 trial court judge has allowed the case
to proceed to the discovery phase, with the trial scheduled to
begin in August, 2002. 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, based upon currently available information, 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. |  | Changes in Securities and Use of Proceeds
|------- |  | -----------------------------------------



| |  | 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
| |  | ----






|Item 6. |  | Exhibits and Reports on Form 8-K
|------- |  | --------------------------------

| |  |     |  |                                                                                                                                                                                                                                   |                                                                                                                           
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------
| |  | (a) |  | Exhibits                                                                                                                                                                                                                          |                                                                                                                           
| |  |     |  |                                                                                                                                                                                                                                  
| |  |     |  | 10.29  Fourth Amendment to Second Amended and Restated
Credit Agreement and First Amendment to Security Agreement
dated, as of May 24, 2002, among Avondale Mills, Inc.,
various listed banks and Wachovia Bank, N.A., as agent.
| |  |     |  |                                                                                                                                                                                                                                   |                                                                                                                           
| |  | (b) |  | Reports on Form 8-K                                                                                                                                                                                                              
| |  |     |  |                                                                                                                                                                                                                                   |                                                                                                                           
| |  |     |  | 1.                                                                                                                                                                                                                                | On May 14, 2002, the Company filed a
current report on Form 8-K regarding a change in the
Companys certifying accountant.

14



---



##### Table of Contents






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 INCORPORATED                                         
| |  |     |  |                                                               
| |  | By: |  | /s/ JACK R. ALTHERR, JR.                                      
| |  |     |  |                                                               
| |  |     |  | Jack R. Altherr, Jr.
Vice Chairman and Chief Financial Officer

Date:  /s/ July 12, 2002

15