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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q
 [x]
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the Quarterly Period Ended February 27, 2004
 or [  ]
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the Transition Period From _____________
to ___________
 Commission file number 33-68412   AVONDALE INCORPORATED  Georgia
    
    58-0477150(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)506 South Broad Street
    
    30655Monroe, Georgia
    
    (Zip code)(Address of principal executive offices)
 Registrants telephone number, including area code: (770) 267-2226 Former name, former address and former fiscal year, if changed since last report: N/A Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES
[X]  NO [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES [  ] NO [ü] Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. Description
    
    As Of
    
    Shares OutstandingClass A Common Stock
    
    April 1, 2004
    
    11,401,737 SharesClass B Common Stock
    
    April 1, 2004
    

978,939 Shares




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INDEX TO FORM 10-Q AVONDALE INCORPORATED PageReferencePART I - FINANCIAL INFORMATION (Unaudited)Item 1:
    
    Financial StatementsCondensed Consolidated Balance Sheets at August 29, 2003 and February 27, 2004
    
    
    2Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended
February 28, 2003 and February 27, 2004
    
    
    3Condensed Consolidated Statements of Operations for the Twenty-Six Weeks Ended
February 28, 2003 and February 27, 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended
February 28, 2003 and February 27, 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2:
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    16Item 3:
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4:
    
    Controls and Procedures
    
    
    25PART II - OTHER INFORMATIONItem 1:
    
    Legal Proceedings
    
    
    26Item 2:
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    26Item 3:
    
    Defaults upon Senior Securities
    
    
    26Item 4:
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Item 5:
    
    Other Information
    
    
    26Item 6:
    
    Exhibits and Reports on Form 8-K
    
    
    27Signature
    
    
    28EX-10.47 AMENDMENT NO.1 TO CREDIT AGREEMENTEX-10.48 AMENDMENT NO.4 TO RECEIVABLES PURCHASEEX-10.49 AMENDMENT NO.1 TO MASTER SECURITYEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO




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PART I  -  FINANCIAL INFORMATION 
 Item 1. Financial
Statements.
 AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 Feb. 27,Aug. 29,
    
    20042003
    
    (unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    13,769
    
    
    $
    3,364Accounts receivable, less allowance for doubtful accounts
of $1,867 at Aug. 29, 2003 and $1,090 at Feb. 27, 2004
    
    
    29,157
    
    
    
    35,125Inventories
    
    
    82,887
    
    
    
    90,432Prepaid expenses
    
    
    1,980
    
    
    
    2,477Income taxes refundable
    
    
    2,825
    
    
    
    494Total current assets
    
    
    130,618
    
    
    
    131,892Assets held for sale
    
    
    2,640
    
    
    
    682Property, plant and equipmentLand
    
    
    6,484
    
    
    
    6,484Buildings
    
    
    79,647
    
    
    
    79,630Machinery and equipment
    
    
    497,213
    
    
    
    498,661583,344
    
    
    
    584,775Less accumulated depreciation
    
    
    (367,759
    )
    
    
    (385,264
    )215,585
    
    
    
    199,511Other assets
    
    
    7,712
    
    
    
    8,581Goodwill
    
    
    2,951
    
    
    
    2,951$
    359,506
    
    
    $
    343,617LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    18,724
    
    
    $
    22,996Accrued compensation, benefits and related expenses
    
    
    9,280
    
    
    
    8,863Accrued interest
    
    
    2,726
    
    
    
    2,402Other accrued expenses
    
    
    9,785
    
    
    
    8,923Long-term debt due in one year
    
    
    4,325
    
    
    
    4,325Total current liabilities
    
    
    44,840
    
    
    
    47,509Long-term debt
    
    
    163,512
    
    
    
    161,349Deferred income taxes and other long-term liabilities
    
    
    35,203
    
    
    
    30,079Shareholders equityPreferred stock$.01 par value; 10,000 shares authorized
    
    
    
    
    
    
    Common stockClass A, $.01 par value; 100,000 shares
authorized, 11,402 issued and outstanding
    
    
    114
    
    
    
    114Class B, $.01 par value; 5,000 shares
authorized, 979 issued and outstanding
    
    
    10
    
    
    
    10Capital in excess of par value
    
    
    39,194
    
    
    
    39,194Accumulated other comprehensive loss
    
    
    (151
    )
    
    
    Retained earnings
    
    
    76,784
    
    
    
    65,362Total shareholders equity
    
    
    115,951
    
    
    
    104,680$
    359,506
    
    
    $
    343,617
 The accompanying notes are an integral part of these condensed consolidated financial statements. 2




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AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
 Thirteen Weeks EndedFeb. 28,
    
    Feb. 27,2003
    
    2004Net sales
    
    $
    141,618
    
    
    $
    129,582Operating costs and expensesCost of goods sold
    
    
    119,415
    
    
    
    117,578Depreciation
    
    
    10,851
    
    
    
    9,343Selling and administrative expenses
    
    
    6,652
    
    
    
    6,227Operating income (loss)
    
    
    4,700
    
    
    
    (3,566
    )Interest expense, net
    
    
    4,563
    
    
    
    4,334Discount and expenses on sales of receivables
    
    
    705
    
    
    
    615Other, net
    
    
    (21
    )
    
    
    (177
    )Loss before income taxes
    
    
    (547
    )
    
    
    (8,338
    )Benefit of income taxes
    
    
    (205
    )
    
    
    (2,965
    )Net loss
    
    $
    (342
    )
    
    $
    (5,373
    )Per share data:Net loss-basic
    
    $
    (.03
    )
    
    $
    (.43
    )Net loss-diluted
    
    $
    (.03
    )
    
    $
    (.43
    )Dividends declared
    
    $
    .10
    
    
    $
    .10
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
 Twenty-Six Weeks EndedFeb. 28,
    
    Feb. 27,2003
    
    2004Net sales
    
    $
    308,800
    
    
    $
    260,922Operating costs and expensesCost of goods sold
    
    
    260,503
    
    
    
    235,349Depreciation
    
    
    21,718
    
    
    
    18,867Selling and administrative expenses
    
    
    14,357
    
    
    
    12,689Operating income (loss)
    
    
    12,222
    
    
    
    (5,983
    )Interest expense, net
    
    
    9,090
    
    
    
    9,164Discount and expenses on sales of receivables
    
    
    1,417
    
    
    
    1,243Other, net
    
    
    (12
    )
    
    
    (2,549
    )Income (loss) before income taxes
    
    
    1,727
    
    
    
    (13,841
    )Provision for (benefit of) income taxes
    
    
    660
    
    
    
    (4,895
    )Net income (loss)
    
    $
    1,067
    
    
    $
    (8,946
    )Per share data:Net income (loss)-basic
    
    $
    .09
    
    
    $
    (.72
    )Net income (loss)-diluted
    
    $
    .08
    
    
    $
    (.72
    )Dividends declared
    
    $
    .20
    
    
    $
    .20
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 Twenty-Six Weeks EndedFeb. 28,
    
    Feb. 27,2003
    
    2004Operating activitiesNet income (loss)
    
    $
    1,067
    
    
    $
    (8,946
    )Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:Depreciation and amortization
    
    
    21,958
    
    
    
    19,103Provision for (benefit of) deferred income taxes
    
    
    112
    
    
    
    (5,035
    )Gain on disposal of property, plant and equipment
and assets held for sale
    
    
    (12
    )
    
    
    (2,633
    )Sale of accounts receivable, net
    
    
    (14,950
    )
    
    
    (4,932
    )Changes in operating assets and liabilities
    
    
    3,623
    
    
    
    (5,087
    )Net cash provided by (used in) operating activities
    
    
    11,798
    
    
    
    (7,530
    )Investing activitiesPurchases of property, plant and equipment
    
    
    (8,049
    )
    
    
    (2,833
    )Proceeds from sale of property, plant and equipment
and assets held for sale
    
    
    1,238
    
    
    
    4,597Net cash provided by (used in) investing activities
    
    
    (6,811
    )
    
    
    1,764Financing activitiesNet payments on long-term debt
    
    
    (4,025
    )
    
    
    (2,163
    )Purchase and retirement of treasury stock
    
    
    (1,181
    )
    
    
    Dividends paid
    
    
    (2,506
    )
    
    
    (2,476
    )Net cash used in financing activities
    
    
    (7,712
    )
    
    
    (4,639
    )Decrease in cash and cash equivalents
    
    
    (2,725
    )
    
    
    (10,405
    )Cash and cash equivalents at beginning of period
    
    
    2,859
    
    
    
    13,769Cash and cash equivalents at end of period
    
    $
    134
    
    
    $
    3,364
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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AVONDALE INCORPORATED 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
February 27, 2004
 1. Basis of Presentation: The accompanying unaudited condensed
consolidated financial statements include the accounts of Avondale Incorporated
and its wholly owned subsidiary, Avondale Mills, Inc. (Avondale Mills)
(collectively, the Company). Avondale Funding LLC (Funding), a special
purpose subsidiary of Avondale Mills, provides financing through the sale of
accounts receivable generated by the Company. The Company accounts for its
investment in Funding using the equity method of accounting. All significant
intercompany accounts and transactions have been eliminated. The August 29,
2003 balance sheet has been derived from the audited financial statements at
that date. The accounting policies and basis of presentation followed by the
Company are presented in Note 1 to the August 29, 2003 audited consolidated
financial statements. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. These statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information. Accordingly, they do not include all of the information and
disclosures required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, including normal
recurring accruals, necessary for a fair presentation. Operating results for
the twenty-six weeks ended February 27, 2004 are not necessarily indicative of
the results that may be expected for the fiscal year ending August 27, 2004. 2. Inventories: Components of inventories are as follows
(amounts in thousands): Aug. 29,
    
    Feb. 27,2003
    
    2004Finished goods
    
    $
    26,579
    
    
    $
    32,315Work in process
    
    
    33,176
    
    
    
    36,221Raw materials
    
    
    9,072
    
    
    
    10,227Dyes and chemicals
    
    
    4,593
    
    
    
    4,825Inventories at FIFO
    
    
    73,420
    
    
    
    83,588Adjustment of carrying value to LIFO basis,
net of market adjustment
    
    
    3,565
    
    
    
    1,06576,985
    
    
    
    84,653Supplies at average cost
    
    
    5,902
    
    
    
    5,779$
    82,887
    
    
    $
    90,432
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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004 The Companys inventories at February 27, 2004 under the last-in,
first-out (LIFO) method and the related impact on the statement of operations
for the thirteen and twenty-six weeks then ended have been recorded using
estimated quantities and costs as of August 27, 2004, the end of fiscal 2004.
As actual inventory quantities and costs at August 27, 2004 could differ
significantly from these estimates, the inventory amounts at February 27, 2004
and the operating results for the twenty-six weeks ended February 27, 2004 are
not necessarily indicative of the inventory amounts at August 27, 2004 and
operating results for fiscal 2004 to be recorded using the final LIFO
calculations. 3. Earnings Per Share: Earnings per share is calculated by dividing the
reported net income (loss) for the period by the appropriate weighted average
number of shares of common stock outstanding, as shown below (amounts in
thousands): Thirteen Weeks Ended
    
    Twenty-Six Weeks EndedFeb. 28,
    
    Feb. 27,
    
    Feb. 28,
    
    Feb. 27,2003
    
    2004
    
    2003
    
    2004Weighted
average shares outstanding  basic
    
    
    12,493
    
    
    
    12,381
    
    
    
    12,512
    
    
    
    12,381Effect of employee stock options
    
    
    
    
    
    
    
    
    
    
    94
    
    
    
    Weighted
average shares outstanding  diluted
    
    
    12,493
    
    
    
    12,381
    
    
    
    12,606
    
    
    
    12,381
 The Company adopted the provisions of Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, during fiscal 2003, electing to continue its use of the intrinsic
value method. Accordingly, no stock-based compensation has been recorded, as
the exercise price of each option granted under the existing plan equals the
market value of the underlying common stock on the date of grant. If the
Company had elected to record stock-based compensation in accordance with the
fair value method and the provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, reported net income
and earnings per share would be adjusted to the pro forma amounts as shown
below (amounts in thousands, except per share data): Thirteen Weeks Ended
    
    Twenty-Six Weeks EndedFeb. 28,
    
    Feb. 27,
    
    Feb. 28,
    
    Feb. 27,2003
    
    2004
    
    2003
    
    2004Net income (loss) as reported
    
    $
    (342
    )
    
    $
    (5,373
    )
    
    $
    1,067
    
    
    $
    (8,946
    )Pro forma stock-based compensation, net of
income taxes
    
    
    (9
    )
    
    
    (9
    )
    
    
    (18
    )
    
    
    (18
    )Pro forma net income (loss)
    
    $
    (351
    )
    
    $
    (5,382
    )
    
    $
    1,049
    
    
    $
    (8,964
    )Per share data:Net income (loss)-basic as reported
    
    $
    (.03
    )
    
    $
    (.43
    )
    
    $
    .09
    
    
    $
    (.72
    )Net income (loss)-basic pro forma
    
    $
    (.03
    )
    
    $
    (.43
    )
    
    $
    .08
    
    
    $
    (.72
    )Net income (loss)-diluted as reported
    
    $
    (.03
    )
    

    $
    (.43
    )
    
    $
    .08
    
    
    $
    (.72
    )Net income (loss)-diluted pro forma
    
    $
    (.03
    )
    
    $
    (.43
    )
    
    $
    .08
    
    
    $
    (.72
    )
 7




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004 4. Segment Information: Condensed segment information is as follows
(amounts in thousands): Thirteen Weeks Ended
    
    Twenty-Six Weeks EndedFeb. 28,
    
    Feb. 27,
    
    Feb. 28,
    
    Feb. 27,2003
    
    2004
    
    2003
    
    2004Revenues:Apparel fabrics
    
    $
    123,698
    
    
    $
    105,623
    
    
    $
    266,220
    
    
    $
    213,046Yarns
    
    
    41,833
    
    
    
    45,974
    
    
    
    89,529
    
    
    
    87,373Other
    
    
    17,050
    
    
    
    14,064
    
    
    
    33,961
    
    
    
    28,788182,581
    
    
    
    165,661
    
    
    
    389,710
    
    
    
    329,207Less inter-segment sales
    
    
    40,963
    
    
    
    36,079
    
    
    
    80,910
    
    
    
    68,285Total
    
    $
    141,618
    
    
    $
    129,582
    
    
    $
    308,800
    
    
    $
    260,922Income (loss):Apparel fabrics
    
    $
    6,149
    
    
    $
    479
    
    
    $
    17,758
    
    
    $
    2,881Yarns
    
    
    561
    
    
    
    470
    
    
    
    2,112
    
    
    
    (848
    )Other
    
    
    1,541
    
    
    
    880
    
    
    
    2,134
    
    
    
    1,923Unallocated
    
    
    (3,551
    )
    
    
    (5,395
    )
    
    
    (9,782
    )
    
    
    (9,939
    )Total operating income (loss)
    
    
    4,700
    
    
    
    (3,566
    )
    
    
    12,222
    
    
    
    (5,983
    )Interest expense, net
    
    
    4,563
    
    
    
    4,334
    
    
    
    9,090
    
    
    
    9,164Discount and expenses on sale of receivables
    
    
    705
    
    
    
    615
    
    
    
    1,417
    
    
    
    1,243Other, net
    
    
    (21
    )
    
    
    (177
    )
    
    
    (12
    )
    
    
    (2,549
    )Income (loss) before income taxes
    
    $
    (547
    )
    
    $
    (8,338
    )
    
    $
    1,727
    
    
    $
    (13,841
    )
 5. Comprehensive Income (Loss): Comprehensive income (loss) includes
unrealized gains and losses in the fair value of certain derivative instruments
which qualify for hedge accounting. A reconciliation of net income (loss) to
comprehensive income (loss) is as follows (amounts in thousands): Thirteen Weeks Ended
    
    Twenty-Six Weeks EndedFeb. 28,
    
    Feb. 27,
    
    Feb. 28,
    
    Feb. 27,2003
    
    2004
    
    2003
    
    2004Net income (loss)
    
    $
    (342
    )
    
    $
    (5,373
    )
    
    $
    1,067
    
    
    $
    (8,946
    )Change in fair value of
interest rate swaps, net
of
income taxes
    
    
    144
    
    
    
    
    
    
    
    242
    
    
    
    151Comprehensive income (loss)
    
    $
    (198
    )
    
    $
    (5,373
    )
    
    $
    1,309
    
    
    $
    (8,795
    )
 6. Gain on Disposal of Property, Plant and Equipment and Assets Held for
Sale: In November 2003, the Company sold two tracts of land unrelated to its
manufacturing facilities and not utilized in the operation of its business. The
related gain on disposal of these properties, approximately $2.3 million, is
included in Other, net on the consolidated statement of income for the
twenty-six weeks ended February 27, 2004. 7. New Accounting Pronouncements: In May 2003, the Financial Accounting
Standards Board issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which requires
certain financial instruments that were previously presented on the
consolidated balance sheets as equity or temporary equity to be presented as
liabilities. Such instruments include mandatorily redeemable preferred and
common stock, and certain options and warrants. Statement No. 150 is generally
effective for the first interim period beginning after December 15, 2003. The
Company is currently evaluating the impact of Statement No. 150 on the
consolidated financial statements. 8




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004 In December 2003, the Financial Accounting Standards Board amended and
reissued Statement No. 132, Employers Disclosures about Pensions and Other
Postretirement Benefits, which now requires companies to provide additional
disclosures about retirement plan assets, benefit obligations, cash flows,
benefit costs and other relevant information. In addition to extended annual
disclosures, companies will be required to report the various elements of
pensions and other postretirement benefit costs on a quarterly basis. Statement
No. 132, as revised, is effective for fiscal years ending after December 15,
2003, and for interim periods beginning after December 15, 2003. The Company is
currently evaluating the impact of Statement No. 132 on the consolidated
financial statements. 8. Contingencies: The Company is involved in certain environmental
matters and claims. The Company has provided reserves to cover managements
estimates of the cost of investigating, monitoring and remediating these and
other environmental conditions. If more costly remediation measures are
necessary than those believed to be probable based on current facts and
circumstances, actual costs may exceed the reserves provided. However, based
on the information currently available, management does not believe that the
outcome of these matters will have a material adverse effect on the Companys
future results of operations or financial condition. For discussion of certain legal proceedings to which the Company is a
party, see Item 3 Legal Proceedings in the Companys Annual Report on Form
10-K for the fiscal year ended August 29, 2003. The Company is also a party to
other litigation incidental to its business from time to time. The Company is
not currently a party to any litigation that management, in consultation with
legal counsel, believes will have a material adverse effect on the Companys
financial condition or results of operations. The Company received a grand jury subpoena issued by the U. S. District
Court for the Eastern Division of North Carolina on January 20, 2004. The
subpoena concerns the production of documents and records in connection with an
investigation being conducted by the Antitrust Division of the U. S. Department
of Justice relating generally to the manufacture, sale, purchase and
distribution of open-end spun yarns. Based on the information currently
available, management does not believe that the outcome of this matter will
have a material adverse effect on the Companys financial condition or results
of operation. The Company is fully cooperating with the U. S. Department of
Justice in its investigation. 9. Subsequent Events: In response to the highly competitive market
conditions and continued imbalance of global supply and demand for textile and
apparel products, in March 2004, the Company announced the closing of an
open-end yarn manufacturing facility located in North Carolina and the weaving
operation of an integrated greige fabric manufacturing facility located in
Georgia. These actions to rationalize excess manufacturing capacity, following
the relocation of certain equipment, are expected to improve capacity
utilization of the Companys remaining facilities and lower costs per unit
produced. No reduction in net sales is anticipated as a result of this
capacity rationalization. Flexibility of the Companys manufacturing
facilities to shift production from one product line to another and the
Companys ability to source additional yarns and greige fabrics from outside
vendors to increase production of its finished products in reaction to added
demand are expected to be maintained. Certain equipment will be relocated from
these two operations to other facilities located in Alabama, Georgia and South
Carolina to retain certain specialized manufacturing capabilities and replace
older, less efficient equipment. In connection with these actions, the Company
anticipates recording restructuring and other non-operating costs of
approximately $3.5 million during the third quarter of fiscal 2004. 10. Consolidating Guarantor and Non-guarantor Financial Information: The
following consolidating financial information presents balance sheets,
statements of income and statements of cash flows of the Company and its
subsidiaries. Avondale Incorporated, the parent company and sole shareholder of
Avondale Mills, has fully and unconditionally guaranteed the 10-1/4% Senior
Subordinated Notes due 2013 (Notes) issued by Avondale Mills. Avondale Mills
Graniteville Fabrics, Inc., a wholly owned subsidiary of Avondale Mills and
non-guarantor of the Notes, operates a denim manufacturing facility and
warehouse operation located in South Carolina. 9




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004 AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
February 27, 2004
(amounts in thousands) Non-GuarantorAvondaleMillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedASSETSCurrent AssetsCash and cash equivalents
    
    $
    3,364
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,364Accounts receivable
    
    
    35,122
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    35,125Inventories
    
    
    90,432
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,432Prepaid expenses
    
    
    2,477
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,477Income taxes refundable
    
    
    494
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    494Total current assets
    
    
    131,889
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    131,892Assets held for sale
    
    
    682
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    682Property, plant and equipmentLand
    
    
    6,288
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    6,484Buildings
    
    
    67,880
    
    
    
    
    
    
    
    11,750
    
    
    
    
    
    
    
    79,630Machinery and equipment
    
    
    460,840
    
    
    
    
    
    
    
    37,821
    
    
    
    
    
    
    
    498,661535,008
    
    
    
    
    
    
    
    49,767
    
    
    
    
    
    
    
    584,775Less accumulated depreciation
    
    
    (357,847
    )
    
    
    
    
    
    
    (27,417
    )
    
    
    
    
    
    
    (385,264
    )177,161
    
    
    
    
    
    
    
    22,350
    
    
    
    
    
    
    
    199,511Other assets
    
    
    8,581
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,581Investment in subsidiaries
    
    
    7,797
    
    
    
    94,272
    
    
    
    
    
    
    
    (102,069
    )
    
    
    Goodwill
    
    
    2,951
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,951$
    329,061
    
    
    $
    94,272
    
    
    $
    22,353
    
    
    $
    (102,069
    )
    
    $
    343,617LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    21,833
    
    
    $
    
    
    
    $
    1,163
    
    
    $
    
    
    
    $
    22,996Accrued compensation, benefits
    
    
    8,784
    
    
    
    
    
    
    
    79
    
    
    
    
    
    
    
    8,863Accrued interest
    
    
    2,402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,402Other accrued expenses
    
    
    8,921
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    8,923Long-term debt due in one year
    
    
    4,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,325Total current liabilities
    
    
    46,265
    
    
    
    
    
    
    
    1,244
    
    
    
    
    
    
    
    47,509Long-term debt
    
    
    161,349
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161,349Deferred income taxes
and other long term liabilities
    
    
    30,079
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,079Due to (from) subsidiaries
    
    
    (2,904
    )
    
    
    (10,408
    )
    
    
    13,312
    
    
    
    
    
    
    
    Shareholders equity
    
    
    94,272
    
    
    
    104,680
    
    
    
    7,797
    
    
    
    (102,069
    )
    
    
    104,680$
    329,061
    
    
    $
    94,272
    
    
    $
    22,353
    
    
    $
    (102,069
    )
    
    $
    343,617
 10




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##### Table of Contents



AVONDALE
INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004 AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
August 29, 2003
(amounts in thousands) Non-GuarantorAvondaleMillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedASSETSCurrent AssetsCash
    
    $
    13,769
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13,769Accounts receivable
    
    
    29,155
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    29,157Inventories
    
    
    82,887
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,887Prepaid expenses
    
    
    1,980
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,980Income taxes refundable
    
    
    2,825
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,825Total current assets
    
    
    130,616
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    130,618Assets held for sale
    
    
    2,640
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,640Property, plant and equipmentLand
    
    
    6,288
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    6,484Buildings
    
    
    67,897
    
    
    
    
    
    
    
    11,750
    
    
    
    
    
    
    
    79,647Machinery and equipment
    
    
    459,401
    
    
    
    
    
    
    
    37,812
    
    
    
    
    
    
    
    497,213533,586
    
    
    
    
    
    
    
    49,758
    
    
    
    
    
    
    
    583,344Less accumulated depreciation
    
    
    (342,217
    )
    
    
    
    
    
    
    (25,542
    )
    
    
    
    
    
    
    (367,759
    )191,369
    
    
    
    
    
    
    
    24,216
    
    
    
    
    
    
    
    215,585Other assets
    
    
    7,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,712Investment in subsidiaries
    
    
    8,202
    
    
    
    105,726
    
    
    
    
    
    
    
    (113,928
    )
    
    
    Goodwill
    
    
    2,951
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,951$
    343,490
    
    
    $
    105,726
    
    
    $
    24,218
    
    
    $
    (113,928
    )
    
    $
    359,506LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    17,675
    
    
    $
    
    
    
    $
    1,049
    
    
    $
    
    
    
    $
    18,724Accrued compensation, benefits
    
    
    9,203
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    9,280Accrued interest
    
    
    2,726
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,726Other accrued expenses
    
    
    9,784
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    9,785Long-term debt due in one year
    
    
    4,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,325Total current liabilities
    
    
    43,713
    
    
    
    
    
    
    
    1,127
    
    
    
    
    
    
    
    44,840Long-term debt
    
    
    163,512
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,512Deferred income taxes
and other long term liabilities
    
    
    35,203
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,203Due to (from) subsidiaries
    
    
    (4,664
    )
    
    
    (10,225
    )
    
    
    14,889
    
    
    
    
    
    
    
    Shareholders equity
    
    
    105,726
    
    
    
    115,951
    
    
    
    8,202
    
    
    
    (113,928
    )
    
    
    115,951$
    343,490
    
    
    $
    105,726
    
    
    $
    24,218
    
    
    $
    (113,928
    )
    
    $
    359,506
 11




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended February 27, 2004
(amounts in thousands) Non-GuarantorAvondaleMillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    129,582
    
    
    $
    25
    
    
    $
    22,348
    
    
    $
    (22,373
    )
    
    $
    129,582Operating costs and expensesCost of goods sold
    
    
    117,996
    
    
    
    
    
    
    
    21,928
    
    
    
    (22,346
    )
    
    
    117,578Depreciation
    
    
    8,406
    
    
    
    
    
    
    
    937
    
    
    
    
    
    
    
    9,343Selling and administrative expenses
    
    
    6,254
    
    
    
    
    
    
    
    
    
    
    
    (27
    )
    
    
    6,227Operating income (loss)
    
    
    (3,074
    )
    
    
    25
    
    
    
    (517
    )
    
    
    
    
    
    
    (3,566
    )Interest expense, net
    
    
    4,334
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,334Discount and expenses on sales
of receivables
    
    
    615
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    615Other, net
    
    
    (177
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (177
    )Income (loss) before income taxes
    
    
    (7,846
    )
    
    
    25
    
    
    
    (517
    )
    
    
    
    
    
    
    (8,338
    )Provision for (benefit of) income taxes
    
    
    (2,786
    )
    
    
    9
    
    
    
    (188
    )
    
    
    
    
    
    
    (2,965
    )Equity in loss of subsidiary
    
    
    (329
    )
    
    
    (5,389
    )
    
    
    
    
    
    
    5,718
    
    
    
    Net loss
    
    $
    (5,389
    )
    
    $
    (5,373
    )
    
    $
    (329
    )
    
    $
    5,718
    
    
    $
    (5,373
    )
 12




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended February 28, 2003
(amounts in thousands) Non-GuarantorAvondaleMillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    141,618
    
    
    $
    32
    
    
    $
    20,354
    
    
    $
    (20,386
    )
    
    $
    141,618Operating costs and expensesCost of goods sold
    
    
    120,269
    
    
    
    
    
    
    
    19,500
    
    
    
    (20,354
    )
    
    
    119,415Depreciation
    
    
    9,826
    
    
    
    
    
    
    
    1,025
    
    
    
    
    
    
    
    10,851Selling and administrative expenses
    
    
    6,684
    
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    6,652Operating income (loss)
    
    
    4,839
    
    
    
    32
    
    
    
    (171
    )
    
    
    
    
    
    
    4,700Interest expense, net
    
    
    4,563
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,563Discount and expenses on sales
of receivables
    
    
    705
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    705Other, net
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )Income (loss) before income taxes
    
    
    (408
    )
    
    
    32
    
    
    
    (171
    )
    
    
    
    
    
    
    (547
    )Provision for (benefit of) income taxes
    
    
    (147
    )
    
    
    10
    
    
    
    (68
    )
    
    
    
    
    
    
    (205
    )Equity in loss of subsidiary
    
    
    (103
    )
    
    
    (364
    )
    
    
    
    
    
    
    467
    
    
    
    Net loss
    
    $
    (364
    )
    
    $
    (342
    )
    
    $
    (103
    )
    
    $
    467
    
    
    $
    (342
    )
 13




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Twenty-Six weeks ended February 27, 2004
(amounts in thousands) Non-GuarantorAvondaleMillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    260,922
    
    
    $
    51
    
    
    $
    44,360
    
    
    $
    (44,411
    )
    
    $
    260,922Operating costs and expensesCost of goods sold
    
    
    236,583
    
    
    
    
    
    
    
    43,125
    
    
    
    (44,359
    )
    
    
    235,349Depreciation
    
    
    16,992
    
    
    
    
    
    
    
    1,875
    
    
    
    
    
    
    
    18,867Selling and administrative expenses
    
    
    12,741
    
    
    
    
    
    
    
    
    
    
    
    (52
    )
    
    
    12,689Operating income (loss)
    
    
    (5,394
    )
    
    
    51
    
    
    
    (640
    )
    
    
    
    
    
    
    (5,983
    )Interest expense, net
    
    
    9,164
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,164Discount and expenses on sales
of receivables
    
    
    1,243
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,243Other, net
    
    
    (2,549
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,549
    )Income (loss) before income taxes
    
    
    (13,252
    )
    
    
    51
    
    
    
    (640
    )
    
    
    
    
    
    
    (13,841
    )Provision for (benefit of) income taxes
    
    
    (4,679
    )
    
    
    19
    
    
    
    (235
    )
    
    
    
    
    
    
    (4,895
    )Equity in loss of subsidiary
    
    
    (405
    )
    
    
    (8,978
    )
    
    
    
    
    
    
    9,383
    
    
    
    Net loss
    
    $
    (8,978
    )
    
    $
    (8,946
    )
    
    $
    (405
    )
    
    $
    9,383
    
    
    $
    (8,946
    )
 14




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Twenty-Six weeks ended February 28, 2003
(amounts in thousands) Non-GuarantorAvondale MillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    308,800
    
    
    $
    57
    
    
    $
    45,939
    
    
    $
    (45,996
    )
    
    $
    308,800Operating costs and expensesCost of goods sold
    
    
    262,582
    
    
    
    
    
    
    
    43,860
    
    
    
    (45,939
    )
    
    
    260,503Depreciation
    
    
    19,665
    
    
    
    
    
    
    
    2,053
    
    
    
    
    
    
    
    21,718Selling and administrative expenses
    
    
    14,414
    
    
    
    
    
    
    
    
    
    
    
    (57
    )
    
    
    14,357Operating income
    
    
    12,139
    
    
    
    57
    
    
    
    26
    
    
    
    
    
    
    
    12,222Interest expense, net
    
    
    9,090
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,090Discount and expenses on sales
of receivables
    
    
    1,417
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,417Other, net
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Income before income taxes
    
    
    1,644
    
    
    
    57
    
    
    
    26
    
    
    
    
    
    
    
    1,727Provision for income taxes
    
    
    633
    
    
    
    20
    
    
    
    7
    
    
    
    
    
    
    
    660Equity in earnings of subsidiary
    
    
    19
    
    
    
    1,030
    
    
    
    
    
    
    
    (1,049
    )
    
    
    Net income
    
    $
    1,030
    
    
    $
    1,067
    
    
    $
    19
    
    
    $
    (1,049
    )
    
    $
    1,067
 15




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Twenty-Six weeks ended February 27, 2004
(amounts in thousands) Non-GuarantorAvondale MillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedOperating activitiesNet loss
    
    $
    (8,978
    )
    
    $
    (8,946
    )
    
    $
    (405
    )
    
    $
    9,383
    
    
    $
    (8,946
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    17,228
    
    
    
    
    
    
    
    1,875
    
    
    
    
    
    
    
    19,103Benefit of deferred income taxes
    
    
    (5,035
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,035
    )Gain on disposal of property, plant
and equipment and assets held
for sale
    
    
    (2,633
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,633
    )Sale of accounts receivable, net
    
    
    (4,932
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,932
    )Changes in operating assets and liabilities
    
    
    (3,594
    )
    
    
    (32
    )
    
    
    (1,461
    )
    
    
    
    
    
    
    (5,087
    )Dividends from subsidiary
    
    
    
    
    
    
    2,476
    
    
    
    
    
    
    
    (2,476
    )
    
    
    Equity in loss of subsidiary
    
    
    405
    
    
    
    8,978
    
    
    
    
    
    
    
    (9,383
    )
    
    
    Net cash provided by (used in)
operating activities
    
    
    (7,539
    )
    
    
    2,476
    
    
    
    9
    
    
    
    (2,476
    )
    
    
    (7,530
    )Investing activitiesPurchase of property, plant and equipment
    
    
    (2,824
    )
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (2,833
    )Proceeds from sale of property, plant
and equipment and assets held for sale
    
    
    4,597
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,597Net cash provided by (used in)
investing activities
    
    
    1,773
    
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    1,764Financing activitiesNet payments on long-term debt
    
    
    (2,163
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,163
    )Dividends paid
    
    
    (2,476
    )
    
    
    (2,476
    )
    
    
    
    
    
    
    2,476
    
    
    
    (2,476
    )Net cash used in financing activities
    
    
    (4,639
    )
    
    
    (2,476
    )
    
    
    
    
    
    
    2,476
    
    
    
    (4,639
    )Decrease in cash and cash equivalents
    
    
    (10,405
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,405
    )Cash and cash equivalentsAt beginning of period
    
    
    13,769
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,769Cash and cash equivalentsAt end of period
    
    $
    3,364
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,364
 16




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 27, 2004 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Twenty-Six weeks ended February 28, 2003
(amounts in thousands) Non-GuarantorAvondale MillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedOperating activitiesNet income
    
    $
    1,030
    
    
    $
    1,067
    
    
    $
    19
    
    
    $
    (1,049
    )

    
    $
    1,067Adjustments to reconcile net income
to net cash provided by operating
activities:Depreciation and amortization
    
    
    19,905
    
    
    
    
    
    
    
    2,053
    
    
    
    
    

    
    
    21,958Benefit of deferred income taxes
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    112Gain on sale of property, plant and
equipment
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    (12
    )Sale of accounts receivable, net
    
    
    (14,950
    )
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    (14,950
    )Changes in operating assets and liabilities
    
    
    4,448
    
    
    
    1,144
    
    
    
    (1,969
    )
    
    
    
    

    
    
    3,623Dividends from subsidiary
    
    
    
    
    
    
    2,506
    
    
    
    
    
    
    
    (2,506
    )

    
    
    Equity in income of subsidiary
    
    
    (19
    )
    
    
    (1,030
    )
    
    
    
    
    
    
    1,049
    

    
    
    Net cash provided by operating
activities
    
    
    10,514
    
    
    
    3,687
    
    
    
    103
    
    
    
    (2,506
    )

    
    
    11,798Investing activitiesPurchase of property, plant and equipment
    
    
    (7,946
    )
    
    
    
    
    
    
    (103
    )
    
    
    
    

    
    
    (8,049
    )Proceeds from sale of property, plant and
equipment and assets held for sale
    
    
    1,238
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    1,238Net cash used in investing activities
    
    
    (6,708
    )
    
    
    
    
    
    
    (103
    )
    
    
    
    

    
    
    (6,811
    )Financing activitiesNet payments on revolving line of credit
    
    
    (4,025
    )
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    (4,025
    )Purchase and retirement of
treasury stock
    
    
    
    
    
    
    (1,181
    )
    
    
    
    
    
    
    
    

    
    
    (1,181
    )Dividends paid
    
    
    (2,506
    )
    
    
    (2,506
    )
    
    
    
    
    
    
    2,506
    

    
    
    (2,506
    )Net cash used in financing activities
    
    
    (6,531
    )
    
    
    (3,687
    )
    
    
    
    
    
    
    2,506
    

    
    
    (7,712
    )Decrease in cash
    
    
    (2,725
    )
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    (2,725
    )Cash at beginning of period
    
    
    2,859
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    2,859Cash at end of period
    
    $
    134
    
    
    $
    
    
    
    $
    
    
    
    $
    
    

    
    $
    134
 17




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations. CRITICAL ACCOUNTING POLICIES The Companys analysis and discussion of its financial condition and
results of operations are based upon its consolidated financial statements that
have been prepared in accordance with generally accepted accounting principles
for interim financial information in the United States of America (GAAP). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company evaluates these estimates and assumptions on an ongoing basis,
including but not limited to those affecting inventories, allowances for
doubtful accounts, assets held for sale, long-lived assets, income taxes
payable and deferred income taxes, deferred compensation, associate and post
retirement benefits, and contingencies. Estimates and assumptions are based on
historical and other factors believed to be reasonable under the circumstances.
The results of these estimates and assumptions may form the basis of the
carrying value of certain assets and liabilities. Actual results, under
conditions and circumstances different from those assumed, may differ from
these estimates and assumptions. The Company believes the following accounting policies are critical to the
presentation and understanding of its financial condition and the results of
its operations and involve the more significant judgments and estimates
utilized in the preparation of its consolidated financial statements: Accounts Receivable and Credit Risks:The Company extends credit lines to
its customers in the normal course of business and performs ongoing evaluations
of the financial condition of its customers. In general, collateral is not
required to support such credit lines and the related receivables. The Company
establishes allowances for doubtful accounts based upon factors surrounding the
financial condition and credit risk of specific customers, historical payment
trends and other information. The Company generates funds through the sale of accounts receivable, at a
discount and without recourse, to a special purpose subsidiary established to
facilitate the acquisition and subsequent resale of certain accounts receivable
to General Electric Capital Corporation (GECC). The discount rate on the
accounts receivable purchased from the Company is established periodically by
the subsidiary based on the fair market value of the receivables. The Company
includes in accounts receivable in its consolidated balance sheets the portion
of accounts receivable sold to the subsidiary which have not been resold to
GECC. Inventories:Inventories are stated at the lower of cost or market value.
Except for certain supply inventories valued on an average cost basis, the
costs of the Companys inventories are determined on a last-in, first-out
(LIFO) basis. Under LIFO, current material and conversion costs are charged
to cost of goods sold while inventories are valued using costs incurred in the
initial and subsequent fiscal years following election of the LIFO method. In
periods of declining prices, LIFO values may exceed current replacement market
values and require downward adjustment. Estimates, including the estimated
costs to complete work in process inventories and the estimated realizable
values of all inventories, are used in determining the lower of LIFO cost or
market. During periods when current costs or inventory quantities fluctuate
significantly, use of the LIFO method may yield cost of goods sold that differs
significantly from that which would result under other inventory methods. Long-Lived Assets:The Company periodically reviews the values assigned to
long-lived assets, such as property, plant and equipment, assets held for sale
and goodwill. The associated depreciation and amortization periods are
reviewed on an annual basis. Estimated recoverability of long-lived asset
values is based on anticipated undiscounted cash flows from operations, or in
the case of assets held for sale, the lower of historical carrying amount or
estimated net realizable value. Management periodically reviews the values
assigned to these assets and if additional information becomes available which
indicates a decline in value, makes adjustments in that period. Revenue Recognition:The Company records revenues principally when
products are shipped to customers. Consistent with recognized practice in the
textile industry, the Company also records revenues to a lesser extent
throughout the fiscal year on a bill and hold basis, invoicing goods that have
been produced, packaged and made ready for shipment. These goods are
effectively segregated from inventory which is available for sale, the risks of
ownership of the goods have passed to the customer, and the remittance terms
and collection experience on the related invoicing is consistent with all other
sales by the Company. 18




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##### Table of Contents



Contingencies:The Company is involved in certain environmental matters
and claims. The Company has provided reserves to cover managements estimates
of the cost of investigating, monitoring and remediating these and other
environmental conditions. If more costly remediation measures are necessary
than those believed to be probable based on current facts and circumstances,
actual costs may exceed the reserves provided. However, based on the
information currently available, management does not believe that the outcome
of these matters will have a material adverse effect on the Companys future
results of operations or financial condition. For discussion of certain legal proceedings to which the Company is a
party, see Item 3 Legal Proceedings in the Companys Annual Report on Form
10-K for the fiscal year ended August 29, 2003. The Company is also a party to
other litigation incidental to its business from time to time. The Company is
not currently a party to any litigation that management, in consultation with
legal counsel, believes will have a material adverse effect on the Companys
financial condition or results of operations. The Company received a grand jury subpoena issued by the U. S. District
Court for the Eastern Division of North Carolina on January 20, 2004. The
subpoena concerns the production of documents and records in connection with an
investigation being conducted by the Antitrust Division of the U. S. Department
of Justice relating generally to the manufacture, sale, purchase and
distribution of open-end spun yarns. Based on the information currently
available, management does not believe that the outcome of this matter will
have a material adverse effect on the Companys financial condition or results
of operation. The Company is fully cooperating with the U. S. Department of
Justice in its investigation. RESULTS OF OPERATIONS Thirteen Weeks Ended February 27, 2004 Compared to Thirteen Weeks Ended February 28, 2003 Net Sales.Net sales decreased 8.5% to $129.6 million for the thirteen
weeks ended February 27, 2004 from $141.6 million for the thirteen weeks ended
February 28, 2003. The decline in net sales in the thirteen weeks ended
February 27, 2004 primarily reflected lower unit volume for all segments, as
imported apparel continued to capture market share of domestic retail sales and
weak employment and economic conditions within the United States impacted
consumer demand. Selling prices remained very competitive reflecting the
significant uncertainties presented by the economic and political environment,
the imbalance of global supply and demand for textile and apparel products and
the financial distress experienced by many of the Companys domestic
competitors. In addition, the manipulation of the Chinese yuan and currencies
of other Asian countries relative to the U.S. dollar and other trade distorting
practices employed by those countries create competitive advantages which
continue to promote the importation of goods from those countries by U.S.
retailers, exacerbating the already highly competitive market conditions. The
Company expects these conditions to continue into the foreseeable future. Operating Income (Loss).Company operations produced an operating loss
of ($3.6) million for the thirteen weeks ended February 27, 2004 compared to an
operating income of $4.7 million for the thirteen weeks ended February 28,
2003. The operating loss reflected a significant increase in raw material
costs, and reduced unit cost absorption and operating efficiencies resulting
from the lower unit volume. In addition, due to the increase in raw material
costs, the Company incurred a non-cash charge of $2.0 million to adjust the
carrying value of inventories to LIFO basis, net of market adjustment, for the
thirteen weeks ended February 27, 2004 compared to a charge of $0.2 million for
the thirteen weeks ended February 28, 2003. Consumption of internally produced
yarns and greige fabrics in the production of finished apparel fabrics in lieu
of outside purchases continued to provide higher overall capacity utilization.
Cost of goods sold decreased 1.5% to $117.6 million for the thirteen weeks
ended February 27, 2004 from $119.4 million for the thirteen weeks ended
February 28, 2003, reflecting the overall decrease in unit volume. Cost of
goods sold as a percentage of net sales increased to 90.7% for the thirteen
weeks ended February 27, 2004 from 84.3% for the thirteen weeks ended February
28, 2003. Selling and administrative expenses decreased 7.5% to $6.2 million for the
thirteen weeks ended February 27, 2004 from $6.7 million for the thirteen weeks
ended February 28, 2003, reflecting staffing reductions and a decrease in
certain associate benefits and performance based incentives corresponding to
the decline in operating income. Selling and administrative expenses as a
percentage of net sales increased to 4.8% for the thirteen weeks ended February
27, 2004 from 4.7% for the thirteen weeks ended February 28, 2003. Segment Performance.Apparel fabric sales decreased 14.6% to $105.6
million for the thirteen weeks ended February 27, 2004 from $123.7 million for
the thirteen weeks ended February 28, 2003, reflecting a 14.7% decrease in
yards invoiced, while average invoice price remained flat for the respective
periods. Operating income for 19




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##### Table of Contents



apparel fabrics decreased 91.8% to $0.5 million for the thirteen weeks ended
February 27, 2004 from $6.1 million for the thirteen weeks ended February 28,
2003, primarily due to higher raw material costs and the reduced unit volume. Yarn sales, including intra-company sales to the Companys fabric
operations, increased 10.0% to $46.0 million for the thirteen weeks ended
February 27, 2004 from $41.8 million for the thirteen weeks ended February 28,
2003. Pounds invoiced declined 16.0%, primarily reflecting the reduced yarn
requirements of the Companys apparel fabric operations. Average invoice price
increased 30.8% as improved market demand for certain yarn products and higher
raw material costs helped increase both outside invoice prices and
intra-company transfer prices. The yarns operation produced operating income
of $0.5 million for the thirteen weeks ended February 27, 2004 compared to
operating income of $0.6 million for the thirteen weeks ended February 28,
2003, as the higher average invoice price nearly offset the higher raw material
costs. Other sales, which include sales of greige and specialty fabrics and
revenues from the Companys trucking operation, decreased 17.5% to $14.1
million for the thirteen weeks ended February 27, 2004 from $17.1 million for
the thirteen weeks ended February 28, 2003. The decrease in other sales was
primarily attributable to decreased intra-company sales of greige fabrics to
the apparel fabric operations. Operating income from other sales decreased
40.0%, from $1.5 million for the thirteen weeks ended February 28, 2003 to $0.9
million for the thirteen weeks ended February 27, 2004, primarily due to higher
raw material costs and reduced volume within the greige fabric operation. Inter-segment sales decreased 12.0% to $36.1 million for the thirteen
weeks ended February 27, 2004 from $41.0 million for the thirteen weeks ended
February 28, 2003, primarily reflecting the decrease in consumption of
internally produced yarns and greige fabrics within the Companys apparel
fabrics operation. Unallocated amounts included in operating income reflect general and
administrative expenses, certain associate benefits and performance based
incentives, and adjustments of the carrying value of inventories to LIFO basis,
net of market adjustments. Interest Expense, Net.Net interest expense decreased 6.5% to $4.3
million for the thirteen weeks ended February 27, 2004 from $4.6 million for
the thirteen weeks ended February 28, 2003. This decrease reflected lower
average outstanding borrowings, and lower market interest rates applicable to
those borrowings, during the thirteen weeks ended February 27, 2004. Discount and Expenses on Sale of Receivables.Discount and expenses on
sales of receivables were $0.6 million for the thirteen weeks ended February
27, 2004 compared to $0.7 million for the thirteen weeks ended February 28,
2003, primarily reflecting a net decrease in accounts receivable sold under the
securitization facility. Benefit of Income Taxes.An income tax benefit of $3.0 million was
recorded for the thirteen weeks ended February 27, 2004, reflecting the
Companys loss before income taxes, compared to a tax benefit of $0.2 million
for the thirteen weeks ended February 28, 2003. Twenty-Six Weeks Ended February 27, 2004 Compared to Twenty-Six Weeks Ended February 28, 2003 Net Sales.Net sales decreased 15.5% to $260.9 million for the
twenty-six weeks ended February 27, 2004 from $308.8 million for the twenty-six
weeks ended February 28, 2003. The decline in net sales in the twenty-six weeks
ended February 27, 2004 primarily reflected lower unit volume for all segments,
as imported apparel continued to capture market share of domestic retail sales
and weak employment and economic conditions within the United States impacted
consumer demand. Selling prices remained very competitive reflecting the
significant uncertainties presented by the economic and political environment,
the imbalance of global supply and demand for textile and apparel products and
the financial distress experienced by many of the Companys domestic
competitors. In addition, the manipulation of the Chinese yuan and currencies
of other Asian countries relative to the U.S. dollar and other trade distorting
practices employed by those countries create competitive advantages which
continue to promote the importation of goods from those countries by U.S.
retailers, exacerbating the already highly competitive market conditions. The
Company expects these conditions to continue into the foreseeable future. Operating Income (Loss).Company operations produced an operating loss
of ($6.0) million for the twenty-six weeks ended February 27, 2004 compared to
an operating income of $12.2 million for the twenty-six weeks ended February
28, 2003. The operating loss reflected a significant increase in raw material
costs and reduced unit cost absorption and operating efficiencies resulting
from the lower unit volume. In addition, due to the increase in raw material
costs, the Company incurred a non-cash charge of $2.5 million to adjust the
carrying value of inventories to LIFO basis, net of market adjustment, for the
twenty-six weeks ended February 27, 2004 compared to a charge of 20




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##### Table of Contents



$0.3 million for the twenty-six weeks ended February 28, 2003. Consumption of
internally produced yarns and greige fabrics in the production of finished
apparel fabrics in lieu of outside purchases continued to provide higher
overall capacity utilization. Cost of goods sold decreased 9.7% to $235.3
million for the twenty-six weeks ended February 27, 2004 from $260.5 million
for the twenty-six weeks ended February 28, 2003, reflecting the overall
decrease in unit volume. Cost of goods sold as a percentage of net sales
increased to 90.2% for the twenty-six weeks ended February 27, 2004 from 84.4%
for the twenty-six weeks ended February 28, 2003. Selling and administrative expenses decreased 11.8% to $12.7 million for
the twenty-six weeks ended February 27, 2004 from $14.4 million for the
twenty-six weeks ended February 28, 2003, reflecting staffing reductions and a
decrease in certain associate benefits and performance based incentives
corresponding to the decline in operating income. Selling and administrative
expenses as a percentage of net sales increased to 4.9% for the twenty-six
weeks ended February 27, 2004 from 4.7% for the twenty-six weeks ended February
28, 2003. Segment Performance.Apparel fabric sales decreased 20.0% to $213.0
million for the twenty-six weeks ended February 27, 2004 from $266.2 million
for the twenty-six weeks ended February 28, 2003, reflecting a 19.9% decrease
in yards invoiced, while average invoice price remained flat for the respective
periods. Operating income for apparel fabrics decreased 83.7% to $2.9 million
for the twenty-six weeks ended February 27, 2004 from $17.8 million for the
twenty-six weeks ended February 28, 2003, primarily due to higher raw material
costs and the reduced unit volume. Yarn sales, including intra-company sales to the Companys fabric
operations, decreased 2.3% to $87.4 million for the twenty-six weeks ended
February 27, 2004 from $89.5 million for the twenty-six weeks ended February
28, 2003. Pounds invoiced declined 17.8%, primarily reflecting the reduced yarn
requirements of the Companys apparel fabric operations. Average invoice price
increased 18.7% as improved market demand for certain yarn products and higher
raw material costs helped increase both outside invoice prices and
intra-company transfer prices. The yarn operations produced an operating loss
of ($0.8) million for the twenty-six weeks ended February 27, 2004 compared to
an operating income of $2.1 million for the twenty-six weeks ended February 28,
2003 as the higher average invoice price nearly offset the higher raw material
costs. Other sales, which include sales of greige and specialty fabrics and
revenues from the Companys trucking operation, decreased 15.3% to $28.8
million for the twenty-six weeks ended February 27, 2004 from $34.0 million for
the twenty-six weeks ended February 28, 2003. The decrease in other sales was
primarily attributable to reduced intra-company sales of greige fabrics to the
apparel fabric operations. Operating income from other sales decreased 9.5% to
$1.9 million for the twenty-six weeks ended February 27, 2004 from $2.1 million
for the twenty-six weeks ended February 28, 2003, primarily due to higher raw
material costs and reduced volume within the greige fabric operation. Inter-segment sales decreased 15.6% to $68.3 million for the twenty-six
weeks ended February 27, 2004 from $80.9 million for the twenty-six weeks ended
February 28, 2003, primarily reflecting the decrease in consumption of
internally produced yarns and greige fabrics within the Companys apparel
fabrics operation. Unallocated amounts included in operating income reflect general and
administrative expenses, certain associate benefits and performance based
incentives, and adjustments of the carrying value of inventories to LIFO basis,
net of market adjustments. Interest Expense, Net.Net interest expense increased 1.1% to $9.2
million for the twenty-six weeks ended February 27, 2004 from $9.1 million for
the twenty-six weeks ended February 28, 2003. Following execution of a new
senior secured revolving credit facility with GECC on November 7, 2003, the
Company wrote off approximately $400,000 of unamortized debt issue costs
related to the previous revolving credit facility. This charge to interest
expense, net was partially offset by lower average outstanding borrowings and
lower market interest rates applicable to those borrowings during the
twenty-six weeks ended February 27, 2004. See Note 14. Subsequent Event in
the Consolidated Financial Statements in Item 8 of the Companys Annual Report
on Form 10-K for the fiscal year ended August 29, 2003 for further discussion
of the new revolving credit facility. Discount and Expenses on Sale of Receivables.Discount and expenses on
sales of receivables were $1.2 million for the twenty-six weeks ended February
27, 2004 compared to $1.4 million for the twenty-six weeks ended February 28,
2003, primarily reflecting a net decrease in accounts receivable sold under the
securitization facility Other, Net.In November 2003, the Company sold two tracts of land
unrelated to its manufacturing facilities and not utilized in the operation of
its business. The related gain on disposal of these properties, approximately
$2.3 million, is included in Other, net for the twenty-six weeks ended February
27, 2004. 21




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##### Table of Contents



Provision for (Benefit of) Income Taxes.An income tax benefit of $4.9
million was recorded for the twenty-six weeks ended February 27, 2004,
reflecting the Companys loss before income taxes, compared to a provision for
income taxes of $0.7 million for the twenty-six weeks ended February 28, 2003. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $7.5 million for the twenty-six
weeks ended February 27, 2004. Principal working capital changes included a
$1.0 million increase in accounts receivable, a $4.9 million decrease in
accounts receivable sold under the securitization facility, a $7.5 million
increase in inventories, and a $2.7 million increase in accounts payable and
accrued expenses. Investing activities were predominantly equipment purchases
and related costs of $2.8 million made in connection with the ongoing
maintenance of the Companys manufacturing facilities and proceeds of $4.6
million from the sale of two tracts of land not utilized in operations and
certain items of retired equipment. Financing activities included repayment of
$2.2 million of long-term debt and payment of $2.5 million in dividends on
outstanding common stock. The Companys capital expenditures, aggregating $2.8 million for the
twenty-six weeks ended February 27, 2004, were used primarily to complete
routine maintenance projects. Management estimates that capital expenditures
for the balance of fiscal 2004 will be approximately $5.2 million. At February 27, 2004, the Company had no borrowings outstanding under its
revolving line of credit, and $32.2 million of borrowing availability as
determined using prescribed advance rates against qualified inventory
collateral, less outstanding letters of credit and required minimum
availability. On February 24, 2004, the Company executed an amendment to certain
financial covenants contained in the equipment note in anticipation of the
impact of the Companys reduced results of operation and cash flows. An
amendment fee of 0.25% of the outstanding balance of the note was paid to The
CIT Group. The receivables securitization facility is the Companys only off-balance
sheet financing arrangement. The Company generates funds through the sale of
accounts receivable to Funding, whose sole business purpose is the ongoing
acquisition and resale of specified trade receivables generated by the Company.
Funding retains no interest in the investment in the accounts receivable sold
to GECC, and has not experienced any gains or losses on the sale of the
investment in accounts receivable. The Company believes minimal counter party
risk exists due to the financial strength of GECC. The indenture, under which the 2013 Notes were issued, includes, among
other provisions, covenants restricting the Companys payment of dividends and
purchase of its capital stock. In general, the amount of dividends and capital
stock purchases may not exceed an amount equal to $20 million plus 50% of net
income, or less 100% of net losses, all calculated on an accumulative basis
subsequent to the date of the indenture. With the loss reported for the
thirteen weeks ended February 27, 2004, the covenants of the indenture prohibit
further payment of dividends or purchases of capital stock until such time as
sufficient earnings are reported to eliminate the restriction. Management believes that cash generated from operations, together with the
borrowings available under its revolving line of credit and proceeds from sales
of trade receivables, will be sufficient to meet the Companys working capital
and capital expenditure needs in the foreseeable future. SUBSEQUENT EVENTS In response to the highly competitive market conditions and continued
imbalance of global supply and demand for textile and apparel products, in
March 2004, the Company announced the closing of an open-end yarn manufacturing
facility located in North Carolina and the weaving operation of an integrated
greige fabric manufacturing facility located in Georgia. These actions to
rationalize excess manufacturing capacity, following the relocation of certain
equipment, are expected to improve capacity utilization of the Companys
remaining facilities and lower costs per unit produced. No reduction in net
sales is anticipated as a result of this capacity rationalization. Flexibility
of the Companys manufacturing facilities to shift production from one product
line to another and the Companys ability to source additional yarns and greige
fabrics from outside vendors to increase production of its finished products in
reaction to added demand are expected to be maintained. Certain equipment will
be relocated from these two operations to other facilities located in Alabama,
Georgia and South Carolina to retain certain specialized manufacturing
capabilities and replace older, less efficient equipment. In connection with
these actions, the Company anticipates recording restructuring and other
non-operating costs of approximately $3.5 million during the third quarter of
fiscal 2004. 22




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FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the federal securities laws. In addition, management may
from time to time make forward looking statements in reports and other
documents we file with the Securities and Exchange Commission, or in connection
with oral statements made to the press, potential investors and others.
Statements that are not historical facts, including statements about our
beliefs and expectations, are forward-looking statements. Forward-looking
statements include statements generally preceded by, followed by or that
include the words believe, expect, anticipate, plan, estimate or
similar expressions. These statements include, among others, statements
regarding our business outlook, anticipated financial and operating results,
strategies, contingencies, working capital requirements, expected sources of
liquidity, estimated amounts and timing of capital expenditures, estimated
environmental compliance costs and other expenditures, and expected outcomes of
litigation. Forward-looking statements reflect our current expectations and are not
guarantees of performance. These statements are based on our managements
beliefs and assumptions, which in turn are based on currently available
information. Important assumptions relating to these forward-looking statements
include, among others, assumptions regarding product demand, selling prices,
raw material costs, timing and cost of capital expenditures, cost of
environmental compliance, outcomes of pending litigation, competitive
conditions and general economic conditions. These assumptions could prove
inaccurate. Forward-looking statements also involve risks and uncertainties,
which could cause actual results to differ materially from those contained in
any forward-looking statement. Many of these factors are beyond our ability to
control or predict. Such factors include, but are not limited to, all of the
risks described under the heading Risk Factors in the Companys Current
Report on Form 8-K dated June 20, 2003 and the following:  
    
    cyclical and competitive nature of the textile industry;  
    
    pressures on selling prices due to competitive and economic conditions;  
    
    deterioration of relationships with, or loss of, significant customers;  
    
    strength of the U.S. dollar versus the currencies of other textile producing countries;  
    
    changes in trade policies, including textile quotas and tariffs;  
    
    ability to identify and respond to fashion trends;  
    
    availability and pricing of cotton and other raw materials;  
    
    changes in government policies affecting raw material costs;  
    
    availability and desirability of technological advancements;  
    
    retention of key management personnel;  
    
    continued availability of financial resources;  
    
    changes in environmental, health and safety regulations; and  
    
    political or military responses to terrorist activities. You should not place undue reliance on any forward-looking statements,
which are based on current expectations. Further, forward-looking statements
speak only as of the date they are made, and we undertake no obligation to
update publicly any of them in light of new information or future events. 23




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OTHER DATA  -  NON-GAAP FINANCIAL MEASURE Adjusted EBITDA is a supplemental non-GAAP financial measure. EBITDA is
commonly defined as net income (loss) plus (a) interest expense, (b) provision
for (benefit of) income taxes and (c) depreciation and amortization. The
Companys definition of adjusted EBITDA differs due to the further addition to
net income (loss) of (a) discount and expenses on sale of receivables and (b)
adjustment of carrying value of inventories to LIFO basis, net of market
adjustments. Adjusted EBITDA is presented because management believes that it
is a widely accepted indicator of a companys ability to service its
indebtedness and is used by investors and analysts to evaluate companies within
the textile and apparel industry. In addition, adjusted EBITDA is used to
determine compliance with certain covenants under the Companys receivables
securitization, revolving credit facility, equipment note and indenture
governing the 2013 notes. Adjusted EBITDA as calculated by the Company is not necessarily comparable
to similarly titled measures used by other companies. Adjusted EBITDA (a) does
not represent net income (loss) or cash flow from operations as defined by
generally accepted accounting principles; (b) is not necessarily indicative of
cash available to fund cash requirements; and (c) should not be considered an
alternative to operating income, net income (loss) or net cash provided by
operating activities as determined in accordance with generally accepted
accounting principles. The following table reconciles adjusted EBITDA on a consolidated basis to
the line on the Companys consolidated statement of operations entitled net
income (loss) for the periods presented: Twenty-Six Weeks EndedFeb. 28,
    
    Feb. 27,2003
    
    2004Net income (loss)
    
    $
    1,067
    
    
    $
    (8,946
    )Interest expense, net
    
    
    9,090
    
    
    
    9,164Provision for (benefit of) income taxes
    
    
    660
    
    
    
    (4,895
    )Depreciation and amortization
    
    
    21,958
    
    
    
    19,103EBITDA
    
    
    32,775
    
    
    
    14,426Discount and expenses on sale of receivables
    
    
    1,417
    
    
    
    1,243Adjustment of carrying value of inventories
to LIFO basis, net of market adjustment
    
    
    300
    
    
    
    2,500Adjusted EBITDA
    
    $
    34,492
    
    
    $
    18,169
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk. For discussion of certain market risks related to the Company, see Part
II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk in
the Companys Annual Report on Form 10-K for the fiscal year ended August 29,
2003. 24




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Item 4. Controls and Procedures. As required by Securities and Exchange Commission rules, the Company has
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this report.
This evaluation was carried out under the supervision and with the
participation of Company management, including the principal executive officer
and principal financial officer. Based on this evaluation, these officers have
concluded that the design and operation of the Companys disclosure controls
and procedures are effective. There were no changes to the Companys internal
controls during the period covered by this quarterly report that materially
affected, or are reasonably likely to materially affect, the Companys internal
controls over financial reporting. Disclosure controls and procedures are the Companys controls and other
procedures designed to ensure that information required to be disclosed by the
Company in the reports that the Company files or submits under the Securities
Exchange Act of 1934, as amended, (the Exchange Act) is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and Exchange Commissions rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that the
Company files or submits under the Exchange Act are accumulated and
communicated to the Companys management, including the Companys principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. 25




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##### Table of Contents



AVONDALE INCORPORATED 
 PART II - OTHER INFORMATION 
 Item 1. Legal Proceedings. There have been no significant changes in the matters reported
under Part I, Item 3 Legal Proceedings in the Companys Annual
Report on Form 10-K for the fiscal year ended August 29, 2003 other
than as described below. The Company received a grand jury subpoena issued by the U. S.
District Court for the Eastern Division of North Carolina on
January 20, 2004. The subpoena concerns the production of
documents and records in connection with an investigation being
conducted by the Antitrust Division of the U. S. Department of
Justice relating generally to the manufacture, sale, purchase and
distribution of open-end spun yarns. Based on the information
currently available, management does not believe that the outcome
of this matter will have a material adverse effect on the Companys
financial condition or results of operation. The Company is fully
cooperating with the U. S. Department of Justice in its
investigation. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.  
 Item 3. Defaults upon Senior Securities.  
 Item 4. Submission of Matters to a Vote of Security Holders.  
 Item 5. Other Information.  26




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K. (a)
    
    Exhibits3.1
    
    Restated and Amended Articles of
Incorporation of Avondale Incorporated (incorporated by
reference to Exhibit 3.1 to Avondale Incorporateds
Registration Statement on Form S-4, filed June 7, 1996,
File No. 333-05455-01).3.3
    
    Amended and Restated Bylaws of Avondale
Incorporated, adopted as of January 17, 2000
(incorporated by reference to Exhibit 3.3 to Avondale
Incorporateds Quarterly Report on Form 10-Q for the
period ended February 25, 2000, File No. 33-68412).4.3
    

    Indenture dated as of June 30, 2003 for
the 10-1/4% Senior Subordinated Notes due 2013 among
Avondale Incorporated, Avondale Mills, Inc. and Wachovia
Bank, National Association, as Trustee (incorporated by
reference to Exhibit 4.3 to Avondale Incorporateds
Registration Statement on Form S-4, filed August 29,
2003, File No. 333-108353-01).4.5
    

    Registration Rights Agreement, dated as
of June 30, 2003, among Avondale Mills, Inc., Avondale
Incorporated and Wachovia Securities, LLC (incorporated
by reference to Exhibit 4.5 to Avondale Incorporateds
Registration Statement on Form S-4, filed August 29,
2003, File No. 333-108353-01).10.47
    

    Wavier and Amendment No. 1 to Credit
Agreement, dated as of November 7, 2003, among Avondale
Mills, Inc., Avondale Mills Graniteville Fabrics, Inc. and
General Electric Capital Corporation, GECC Capital Markets
Group, Inc., and from time to time various Lenders, dated
January 22, 2004.10.48
    

    Amendment No. 4 to Receivables Purchase
and Servicing Agreement, dated as of August 30, 2002, by
and among Avondale Mills, Inc., Avondale Funding, LLC and
General Electric Capital Corporation, dated January 22,
2004.10.49
    

    Amendment No. 1 to Master Security
Agreement, dated July 30, 2002, between Avondale Mills,
Inc. and The CIT Group/Equipment Financing, Inc., dated
February 24, 2004.31.1
    

    Certificate of Chief Executive Officer,
pursuant to Rule 13a  14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    

    Certificate of Chief Financial Officer,
pursuant to Rule 13a  14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    

    Certificate of Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(b)
    
    Reports on Form 8-KNone
 27




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. AVONDALE INCORPORATEDBy:
    
    /S/ JACK R. ALTHERR, JR.Jack R. Altherr, Jr.Vice Chairman and Chief Financial Officer
 Date: April 8, 2004 28