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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended May 27, 2005
 or o
    
    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  Georgia
(State or other jurisdiction of
incorporation or organization)
    
    58-0477150
(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 þ NO o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). 
YES o NO þ Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date. Description
    
    As Of
    
    Shares OutstandingClass A Common Stock
    
    July 1, 2005
    
    11,394,160 SharesClass B Common Stock
    
    July 1, 2005
    
    978,939 Shares




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INDEX TO FORM 10-Q 
 AVONDALE INCORPORATED PageReferencePART I  - FINANCIAL INFORMATION (Unaudited)Item 1: Financial StatementsCondensed Consolidated Balance Sheets at August 27, 2004 and May 27, 2005
    
    
    2Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended
May 28, 2004 and May 27, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Thirty-Nine Weeks Ended
May 28, 2004 and May 27, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended
May 28, 2004 and May 27, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2: Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    20Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4: Controls and Procedures
    
    
    31PART II  -OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    32Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3: Defaults upon Senior Securities
    
    
    32Item 4: Submission of Matters to a Vote of Security Holders
    
    
    32Item 5: Other Information
    
    
    32Item 6: Exhibits
    
    
    32Signature
    
    
    34EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFO




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PART I  -  FINANCIAL INFORMATION 
 Item 1.     Financial Statements.
 AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share data)
 May 27,Aug. 27,
    
    
    20052004
    
    
    (unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    5,481
    
    
    $
    12,900Accounts receivable, less allowance for doubtful accounts
of $1,015 at August 27, 2004 and $900 at May 27, 2005.
    
    
    50,975
    
    
    
    60,240Inventories
    
    
    78,282
    
    
    
    81,321Prepaid expenses
    
    
    1,275
    
    
    
    1,438Income taxes refundable
    
    
    506
    
    
    
    Total current assets
    
    
    136,519
    
    
    
    155,899Assets held for sale
    
    
    1,037
    
    
    
    734Property, plant and equipmentLand
    
    
    6,289
    
    
    
    6,271Buildings
    
    
    75,771
    
    
    
    75,986Machinery and equipment
    
    
    465,647
    
    
    
    464,734547,707
    
    
    
    546,991Less accumulated depreciation
    
    
    (365,755
    )
    
    
    (383,113
    )181,952
    
    
    
    163,878Goodwill
    
    
    2,951
    
    
    
    2,951Other assets
    
    
    6,023
    
    
    
    5,656$
    328,482
    
    
    $
    329,118LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    24,167
    
    
    $
    27,477Accrued compensation, benefits and related expenses
    
    
    10,440
    
    
    
    11,971Accrued interest
    
    
    2,403
    
    
    
    4,564Other accrued expenses
    
    
    9,340
    
    
    
    10,745Income taxes payable
    
    
    
    
    
    
    567Long-term debt due in one year
    
    
    4,325
    
    
    
    4,325Total current liabilities
    
    
    50,675
    
    
    
    59,649Long-term debt
    
    
    141,039
    
    
    
    137,620Deferred income taxes and other long-term liabilities
    
    
    29,439
    
    
    
    26,815Shareholders equityPreferred stock$.01 par value; 10,000 shares authorized
    
    
    
    
    
    
    Common stockClass A, $.01 par value; 100,000 shares authorized;
issued and outstanding  11,394 shares at
August 27, 2004 and May 27, 2005
    
    
    114
    
    
    
    114Class B, $.01 par value; 5,000 shares authorized;
issued and outstanding  979 shares at
August 27, 2004 and May 27, 2005
    
    
    10
    
    
    
    10Capital in excess of par value
    
    
    39,170
    
    
    
    39,170Retained earnings
    
    
    68,035
    
    
    
    65,740Total shareholders equity
    
    
    107,329
    
    
    
    105,034$
    328,482
    
    
    $
    329,118
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 2




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AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (In thousands, except per share data)
 Thirteen Weeks EndedMay 28,
    
    
    May 27,2004
    
    
    2005Net sales
    
    $
    151,345
    
    
    $
    156,570Operating costs and expensesCost of goods sold
    
    
    138,043
    
    
    
    135,787Depreciation
    
    
    9,149
    
    
    
    8,225Selling and administrative expenses
    
    
    6,658
    
    
    
    6,671Facility restructuring charges
    
    
    2,250
    
    
    
    Operating income (loss)
    
    
    (4,755
    )
    
    
    5,887Interest expense, net
    
    
    4,346
    
    
    
    3,816Discount and expenses on sales of receivables
    
    
    631
    
    
    
    662Gain on extinguishment of debt
    
    
    (1,321
    )
    
    
    Other, net
    
    
    110
    
    
    
    (266
    )Income (loss) before income taxes
    
    
    (8,521
    )
    
    
    1,675Provision for (benefit of) income taxes
    
    
    (3,080
    )
    
    
    660Net income (loss)
    
    $
    (5,441
    )
    
    $
    1,015Per share data:Net income (loss)-basic
    
    $
    (.44
    )
    
    $
    .08Net income (loss)-diluted
    
    $
    (.44
    )
    
    $
    .08Dividends declared
    
    $
    
    
    
    $
    
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 3




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AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (In thousands, except per share data)
 Thirty-Nine Weeks EndedMay 28,
    
    
    May 27,2004
    
    
    2005Net sales
    
    $
    412,267
    
    
    $
    431,966Operating costs and expensesCost of goods sold
    
    
    373,392
    
    
    
    379,153Depreciation
    
    
    28,016
    
    
    
    25,380Selling and administrative expenses
    
    
    19,347
    
    
    
    19,465Facility restructuring charges
    
    
    2,250
    
    
    
    Operating income (loss)
    
    
    (10,738
    )
    
    
    7,968Interest expense, net
    
    
    13,510
    
    
    
    11,405Discount and expenses on sales of receivables
    
    
    1,874
    
    
    
    1,777Gain on extinguishment of debt
    
    
    (1,321
    )
    
    
    (162
    )Other, net
    
    
    (2,439
    )
    
    
    (1,417
    )Loss before income taxes
    
    
    (22,362
    )
    
    
    (3,635
    )Benefit of income taxes
    
    
    (7,975
    )
    
    
    (1,340
    )Net loss
    
    $
    (14,387
    )
    
    $
    (2,295
    )Per share data:Net loss-basic
    
    $
    (1.16
    )
    
    $
    (.19
    )Net loss-diluted
    
    $
    (1.16
    )
    
    $
    (.19
    )Dividends declared
    
    $
    .20
    
    
    $
    
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 4




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AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 (In thousands)
 Thirty-Nine Weeks EndedMay 28,
    
    
    May 27,2004
    
    
    2005Operating activitiesNet loss
    
    $
    (14,387
    )
    
    $
    (2,295
    )Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    28,384
    
    
    
    26,028Benefit of deferred income taxes
    
    
    (8,072
    )
    
    
    (2,144
    )Gain on disposal of property, plant
and equipment and assets held for sale
    
    
    (867
    )
    
    
    (1,145
    )Gain on extinguishment of debt
    
    
    (1,321
    )
    
    
    (162
    )Sale of accounts receivable, net
    
    
    (6,442
    )
    
    
    (5,033
    )Changes in operating assets and liabilities
    
    
    (2,200
    )
    
    
    1,271Net cash provided by (used in) operating activities
    
    
    (4,905
    )
    
    
    16,520Investing activitiesPurchases of property, plant and equipment
    
    
    (4,540
    )
    
    
    (7,486
    )Proceeds from sale of property, plant and equipment
and assets held for sale
    
    
    5,447
    
    
    
    1,629Net cash provided by (used in) investing activities
    
    
    907
    
    
    
    (5,857
    )Financing activitiesReduction in long-term debt
    
    
    (3,244
    )
    
    
    (3,244
    )Purchase and retirement of treasury stock
    
    
    (60
    )
    
    
    Dividends paid
    
    
    (2,476
    )
    
    
    Net cash used in financing activities
    
    
    (5,780
    )
    
    
    (3,244
    )Increase (decrease) in cash and cash equivalents
    
    
    (9,778
    )
    
    
    7,419Cash and cash equivalents at beginning of period
    
    
    13,769
    
    
    
    5,481Cash and cash equivalents at end of period
    
    $
    3,991
    
    
    $
    12,900
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 5




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AVONDALE INCORPORATED 
 NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)
 May 27, 2005
 1. Basis of Presentation: The accompanying unaudited condensed consolidated
financial statements include the accounts of Avondale Incorporated and its wholly owned subsidiary,
Avondale Mills, Inc. (Avondale Mills) (collectively, the Company). Avondale Funding LLC
(Funding), a special purpose subsidiary of Avondale Mills, provides financing through the sale of
accounts receivable generated by the Company. The Company accounts for its investment in Funding
using the equity method of accounting. All significant intercompany accounts and transactions have
been eliminated. Certain prior year amounts have been reclassified to conform with the current
years presentation. The August 27, 2004 balance sheet has been derived from the audited financial
statements at that date. The accounting policies and basis of presentation followed by the Company
are presented in Note 1 to the August 27, 2004 audited consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. These statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information. Accordingly, they do not include
all of the information and disclosures required by accounting principles generally accepted in the
United States for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments, including normal recurring accruals, necessary for a fair
presentation. Operating results for the thirty-nine weeks ended May 27, 2005 are not necessarily
indicative of the results that may be expected for the fiscal year ending August 26, 2005. 2. Inventories: Components of inventories are as follows (amounts in
thousands): Aug. 27,
    
    
    May 27,2004
    
    
    2005Finished goods
    
    $
    29,187
    
    
    $
    31,100Work in process
    
    
    33,047
    
    
    
    33,000Raw materials
    
    
    8,173
    
    
    
    7,617Dyes and chemicals
    
    
    4,096
    
    
    
    4,475Inventories at FIFO
    
    
    74,503
    
    
    
    76,192Adjustment of carrying value to LIFO basis,
net of market adjustment
    
    
    (1,645
    )
    
    
    (295
    )72,858
    
    
    
    75,897Supplies at average cost
    
    
    5,424
    
    
    
    5,424$
    78,282
    
    
    $
    81,321
 6




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 27, 2005 The Companys inventories at May 27, 2005 under the last-in, first-out (LIFO) method
and the related impact on the statement of operations for the thirty-nine weeks then ended have
been recorded using estimated quantities and costs as of August 26, 2005, the end of fiscal 2005.
As actual inventory quantities and costs at August 26, 2005 could differ significantly from these
estimates, the inventory amounts at May 27, 2005 and the operating results for the thirty-nine
weeks ended May 27, 2005 are not necessarily indicative of the inventory amounts at August 26, 2005
and operating results for fiscal 2005 to be recorded using the final LIFO calculations. 3. Earnings Per Share: Earnings per share is calculated by dividing the reported net
income (loss) for the period by the appropriate weighted average number of shares of common stock
outstanding, as shown below (amounts in thousands): Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedMay 28,
    
    
    May 27,
    
    
    May 28,
    
    
    May 27,2004
    
    
    2005
    
    
    2004
    
    
    2005Weighted average shares outstanding  basic
    
    
    12,376
    
    
    
    12,373
    
    
    
    12,379
    
    
    
    12,373Effect of employee stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares outstanding  diluted
    
    
    12,376
    
    
    
    12,373
    
    
    
    12,379
    
    
    
    12,373
 The Company adopted the provisions of Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, during fiscal 2003, electing
to continue its use of the intrinsic value method. Accordingly, no stock-based compensation has
been recorded, as the exercise price of each option granted under the existing plan equals the
market value of the underlying common stock on the date of grant. If the Company had elected to
record stock-based compensation in accordance with the fair value method and the provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
reported net income and earnings per share would be adjusted to the pro forma amounts as shown
below (amounts in thousands, except per share data): Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedMay 28,
    
    
    May 27,
    
    
    May 28,
    
    
    May 27,2004
    
    
    2005
    
    
    2004
    
    
    2005Net income (loss) as reported
    
    $
    (5,441
    )
    
    $
    1,015
    
    
    $
    (14,387
    )
    
    $
    (2,295
    )Pro forma stock-based compensation, net of
income taxes
    
    
    (9
    )
    
    
    
    
    
    
    (27
    )
    
    
    (9
    )Pro forma net income (loss)
    
    $
    (5,450
    )
    
    $
    1,015
    
    
    $
    (14,414
    )
    
    $
    (2,304
    )Per share data:Net income (loss)-basic as reported
    
    $
    (.44
    )
    
    $
    .08
    
    
    $
    (1.16
    )
    
    $
    (.19
    )Net income (loss)-basic pro forma
    
    $
    (.44
    )
    
    $
    .08
    
    
    $
    (1.16
    )
    
    $
    (.19
    )Net income (loss)-diluted as reported
    
    $
    (.44
    )
    
    $
    .08
    
    
    $
    (1.16
    )
    
    $
    (.19
    )Net income (loss)-diluted pro forma
    
    $
    (.44
    )
    
    $
    .08
    
    
    $
    (1.16
    )
    
    $
    (.19
    )
 7




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 27, 2005 4. Segment Information: Condensed segment information is as follows (amounts in
thousands): Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedMay 28,
    
    
    May 27,
    
    
    May 28,
    
    
    May 27,2004
    
    
    2005
    
    
    2004
    
    
    2005Revenues:Apparel fabrics
    
    $
    112,601
    
    
    $
    117,692
    
    
    $
    307,330
    
    
    $
    318,640Yarns
    
    
    47,714
    
    
    
    45,183
    
    
    
    135,087
    
    
    
    136,289Other
    
    
    16,203
    
    
    
    8,049
    
    
    
    44,991
    
    
    
    22,843176,518
    
    
    
    170,924
    
    
    
    487,408
    
    
    
    477,772Less inter-segment sales
    
    
    25,173
    
    
    
    14,354
    
    
    
    75,141
    
    
    
    45,806Total
    
    $
    151,345
    
    
    $
    156,570
    
    
    $
    412,267
    
    
    $
    431,966Income (loss):Apparel fabrics
    
    $
    1,821
    
    
    $
    4,074
    
    
    $
    4,702
    
    
    $
    4,043Yarns
    
    
    301
    
    
    
    4,877
    
    
    
    (547
    )
    
    
    12,399Other
    
    
    1,417
    
    
    
    1,126
    
    
    
    3,340
    
    
    
    2,738Facility restructuring charges
    
    
    (2,250
    )
    
    
    
    
    
    
    (2,250
    )
    
    
    Unallocated
    
    
    (6,044
    )
    
    
    (4,190
    )
    
    
    (15,983
    )
    
    
    (11,212
    )Total operating income (loss)
    
    
    (4,755
    )
    
    
    5,887
    
    
    
    (10,738
    )
    
    
    7,968Interest expense, net
    
    
    4,346
    
    
    
    3,816
    
    
    
    13,510
    
    
    
    11,405Discount and expenses on sale of receivables
    
    
    631
    
    
    
    662
    
    
    
    1,874
    
    
    
    1,777Gain on extinguishment of debt
    
    
    (1,321
    )
    
    
    
    
    
    
    (1,321
    )
    
    
    (162
    )Other, net
    
    
    110
    
    
    
    (266
    )
    
    
    (2,439
    )
    
    
    (1,417
    )Income (loss) before income taxes
    
    $
    (8,521
    )
    
    $
    1,675
    
    
    $
    (22,362
    )
    
    $
    (3,635
    )
 5. Post Retirement Benefits: The estimated cost of post retirement benefits is
recorded ratably over the service lives of the associates expected to receive such benefits. The
Company provides certain life and medical insurance benefits which were granted in 1964 to a closed
group of associates, the majority of whom are now retired. The table below details the estimated
net period cost of the Companys post retirement benefits (amounts in thousands). Thirty-Nine WeeksThirteen Weeks Ended
    
    
    EndedMay 28,
    
    
    May 27,
    
    
    May 28,
    
    
    May 27,2004
    
    
    2005
    
    
    2004
    
    
    2005Components of net periodic benefit cost (benefit):Service cost
    
    $
    26
    
    
    $
    
    
    
    $
    78
    
    
    $
    Interest cost
    
    
    114
    
    
    
    53
    
    
    
    342
    
    
    
    159Amortization of prior service cost
    
    
    83
    
    
    
    (127
    )
    
    
    249
    
    
    
    (381
    )Amortization of loss
    
    
    (15
    )
    
    
    
    
    
    
    (45
    )
    
    
    Net periodic benefit cost (benefit)
    
    $
    208
    
    
    $
    (74
    )
    
    $
    624
    
    
    $
    (222
    )
 Payment of post retirement benefits for the thirty-nine weeks ended May 28, 2004 and May 27,
2005 amounted to $780,000 and $514,000, respectively, and is forecasted to be approximately
$625,000 for the full fiscal year ending August 26, 2005. The reduction in current year expense
reflects the elimination of medical benefits for certain retired participants effective August 1,
2004, including a deadline for claims submission of December 31, 2004. 8




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 27, 2005 6. New Accounting Pronouncements: In November 2004, the Financial Accounting
Standards Board issued Statement No. 151, Inventory Costs, as an amendment of ARB No. 43, chapter
4, clarifying the accounting for abnormal amounts of idle facility expense, freight, handling costs
and wasted material (spoilage) in the determination of inventory carrying costs. The statement
requires such costs to be treated as a current period expense, and is effective for inventory costs
incurred during fiscal years beginning after July 15, 2005. The Company is currently evaluating
the impact of this statement, but does not believe the adoption of Statement No. 151 will have a
material impact on the Companys consolidated financial statements. In December 2004, the Financial Accounting Standards Board issued Statement No. 123R,
Share-Based Payments, which requires that companies record the fair value of their stock-based
compensation arrangements on the date they are granted to employees, as a liability or as a
component of equity, depending on whether the obligations can be settled in cash or stock.
Regardless of treatment as liabilities or equity, these amounts must be expensed over the vesting
period of the compensation arrangements. For non public-equity companies such as the Company,
Statement No. 123R is effective for the first annual reporting period beginning after December 15,
2005. Non public-equity companies that used the minimum value method of measuring stock options,
for either recognition or pro forma disclosure under earlier applicable statements, will apply
Statement No. 123R prospectively for new stock-based compensation arrangements and the unvested
portion of existing arrangements. The Company does not believe the adoption of Statement No. 123R
will have a material impact on the Companys consolidated financial statements. In December 2004, the Financial Accounting Standards Board issued Statement No. 153, Exchange
of Nonmonetary Assets, an amendment to APB No. 29. The guidance in APB No. 29 included certain
exceptions to the principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. Statement No. 153 amends APB No. 29 to eliminate the exception
for nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as
a result of the exchange. The provisions of this statement are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company is currently
evaluating the impact of this statement, but does not believe the adoption of Statement No. 153
will have a material impact on the Companys consolidated financial statements. In May 2005, the Financial Accounting Standards Board issued Statement No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. This
statement applies to the accounting and reporting of all voluntary accounting principle changes,
and requires such changes be retrospectively applied to financial statements from previous periods
unless such application is impracticable, as defined. This statement also addresses the reporting
of a correction of an error by restating previously issued financial statements. Under the
statement, changes in depreciation, amortization, or depletion for long-lived, nonfinancial assets
must be accounted for as a change in accounting estimate effected by a change in accounting
principle. Statement No. 154 carries forward many provisions of Opinion 20 and FASB 3 without
change, including those provisions related to reporting a change in accounting estimate, a change
in reporting entity, correction of an error and reporting accounting changes in interim financial
statements. Statement No. 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company is currently evaluating the impact of
this statement, but does not believe the adoption of Statement No. 154 will have a material impact
on the Companys consolidated financial statements. 7. Gain on Extinguishment of Debt: On May 27, 2004, the Company recorded a $1.3
million net gain on early extinguishment of debt related to a partial exchange of its 101/4% Senior
Subordinated Notes due 2013 (the 2013 Notes). The Company executed the private transaction,
exchanging $4.0 million of the 2013 Notes for $2.6 million of new senior, unsecured Floating Rate
Notes due 2012 (the 2012 Notes). Interest on the 2012 Notes is due quarterly in arrears
commencing July 1, 2004, and is calculated based on the three month LIBOR rate (subject to a
minimum of 1.75% and a maximum of 4.5%) plus 7.0%. After July 1, 2005, the 2012 Notes are
redeemable at the Companys option, in whole or in part, at a redemption price of 104.0%, which
declines in intervals to 100.0% in 2009 and thereafter. The 2012 Notes have substantially the same
covenants, events of default and other terms and conditions as the 2013 Notes. In connection with
the exchange, the Company received a waiver of certain restrictions provided under the GECC
revolving credit facility pertaining to the reduction of subordinated debt. 9




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 27, 2005 8. Facility Restructuring: In response to highly competitive market conditions
and continued imbalance of global supply and demand for textile and apparel products, in May 2004,
the Company closed an open-end yarn manufacturing facility located in North Carolina and the
weaving operation of an integrated greige fabric manufacturing facility located in Georgia. These
actions to rationalize excess manufacturing capacity, following the relocation of certain
equipment, improved capacity utilization of the Companys remaining facilities and lowered costs
per unit produced. No reduction in net sales resulted from 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 were
maintained. Certain equipment was relocated from these two operations to other facilities located
in Alabama, Georgia and South Carolina to retain certain specialized manufacturing capabilities and
replace older, less efficient equipment. Other excess equipment was sold, generating a gain of
approximately $0.9 million. In connection with these actions, the Company recorded facility
restructuring charges, and other non-operating costs, net of the gain on equipment sold, of
approximately $2.3 million during the third quarter of fiscal 2004. At May 28, 2004, approximately
$80,000 of minor property disposal costs remained unpaid and was included in other accrued expenses
in the Companys consolidated financial statements. 9. January 6, 2005 Train Derailment: On January 6, 2005, a Norfolk Southern freight
train collided with a stationary Norfolk Southern train parked on a railroad spur near the
Companys manufacturing and administrative facilities in Graniteville, South Carolina. In the
ensuing derailment, rail cars ended up on the Companys property and a tanker car was breached,
releasing chlorine gas. Due to the release of the toxic and corrosive chlorine gas, the surrounding
area, including the Companys adjacent facilities, was evacuated. Nine individuals, six of whom
were associates of the Company, were killed by chlorine gas inhalation and many others were
hospitalized as a result of their injuries. Local, state and federal authorities restricted access to the Companys facilities near the
collision site for a period of approximately eight days. Due to the Companys product flow and
interdependence of the Companys manufacturing facilities within and outside the evacuation zone,
productive capacity representing more than 50% of the Companys sales was effectively shutdown as a
result of these events. As the chlorine gas dissipated and removal of the wrecked rail cars began,
the Company was allowed to access portions of the affected facilities and initiated steps to
determine the extent of damage and resume operations. The Companys computer systems, communication
systems, electronic and electrical systems, compressors and other machinery in affected facilities
were damaged by corrosion induced by chlorine gas exposure. In addition, boilers servicing
finishing operations were damaged by fire because necessary life saving evacuation precluded
orderly shutdown of those units. The Company focused all available resources on the recovery effort. Temporary boilers have
been installed, and replacement electrical distribution, compressors and computers are in place and
operational. Repairs to textile processing facilities and machines are ongoing. Operations in all
facilities and shipments of finished goods from all of the Companys distribution centers were
resumed in an orderly manner, taking place in stages during January and February. Normal levels of
production are being generated, although full remediation of the chlorine damage has yet to be
completed. Due to the progressive nature of damage resulting from chlorine gas exposure, further
equipment failures may occur over time, with a corresponding reduction in productive efficiency and
temporary loss of capacity. The Company also anticipates temporary reduction in productive
capacity during the restoration of equipment to fully remediated, pre-loss condition. The Company maintains property damage and business interruption insurance to provide
reimbursement of losses stemming from an incident of this nature. In addition, Norfolk Southern has
acknowledged responsibility to the Company for the incident. The Company is utilizing appropriate
resources to identify and document losses incurred as a result of the incident, and will pursue
claims under its property damage, business interruption and other insurance policies and against
third parties. 10




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 27, 2005 Disruption of the Companys operations and loss of production volume as a result of this
incident negatively impacted results of operations for the thirteen and thirty-nine weeks ended May
27, 2005. The Company will continue to suffer losses caused by this incident in future periods. The
Company is assessing the extent of losses that will be incurred due to this incident but is unable
to estimate at this time the full amount of loss. The Company expects that all losses incurred will
be recovered through insurance and third party claims. Any differences between amounts ultimately
received from insurance and third parties and losses incurred by the Company may negatively impact
future results of operations. In connection with the incident, the Company has incurred labor continuation costs of
approximately $2.3 million and various clean up and repair costs of approximately $16.1 million
during the thirty-nine weeks ended May 27, 2005. The Company has received advances totaling $20.0
million during the thirty-nine weeks ended May 27, 2005 from the Companys property damage
insurance provider. The Company has included the net balance of advances received in excess of
expenses incurred of $1.6 million in other accrued expenses at May 27, 2005. The Company expects to
request additional advances as the recovery progresses and additional costs are incurred. The
Company has not recognized gains relating to recovery of lost profits, involuntary conversions of
assets or other such recoveries for the thirty-nine weeks ended May 27, 2005, as such amounts are
contingent upon final settlement with respective insurers and third parties. 10. Contingencies: The Company is involved in certain environmental matters and
claims. The Company has identified those environmental matters where it is probable that
expenditures will be required, including a pond with certain contamination and land previously used
as a landfill, both acquired in a 1996 transaction, and various other minor environmental matters
that are expected to be resolved by much smaller expenditures. Based on discussions with outside
consultants and regulatory authorities, the Company believes that the costs to provide full
remediation of these items will be between $2.0 million and $3.0 million. Accordingly, the Company
has established a reserve of $2.5 million to cover the costs to investigate, monitor and remediate
these 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 Part I, Item
3 Legal Proceedings in the Companys Annual Report on Form 10-K for the fiscal year ended August
27, 2004 and Part II, Item 1 Legal Proceedings in the Companys Quarterly Report on Form 10-Q for
the quarter ended February 27, 2005. There have been no significant changes in the matters
reported. 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. 11. Consolidating Guarantor and Nonguarantor Financial Information: The following
consolidating financial information presents balance sheets, statements of operations and
statements of cash flows of the Company and its subsidiaries. Avondale Incorporated, the parent
company and sole shareholder of Avondale Mills, has fully and unconditionally guaranteed the 2013
Notes and the 2012 Notes issued by Avondale Mills. Avondale Mills Graniteville Fabrics, Inc., a
wholly owned subsidiary of Avondale Mills and nonguarantor of the Notes, operates a denim
manufacturing facility and warehouse operation located in South Carolina. 11




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 27, 2005 AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
May 27, 2005
(In thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assetsCash and cash equivalents
    
    $
    12,900
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    12,900Accounts receivable
    
    
    60,237
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    60,240Inventories
    
    
    81,321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,321Prepaid expenses
    
    
    1,438
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,438Total current assets
    
    
    155,896
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    155,899Assets held for sale
    
    
    734
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    734Property, plant and equipmentLand
    
    
    6,075
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    6,271Buildings
    
    
    64,236
    
    
    
    
    
    
    
    11,750
    
    
    
    
    
    
    
    75,986Machinery and equipment
    
    
    426,791
    
    
    
    
    
    
    
    37,943
    
    
    
    
    
    
    
    464,734497,102
    
    
    
    
    
    
    
    49,889
    
    
    
    
    
    
    
    546,991Less accumulated depreciation
    
    
    (351,049
    )
    
    
    
    
    
    
    (32,064
    )
    
    
    
    
    
    
    (383,113
    )146,053
    
    
    
    
    
    
    
    17,825
    
    
    
    
    
    
    
    163,878Goodwill
    
    
    2,951
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,951Investment in subsidiaries
    
    
    6,277
    
    
    
    94,554
    
    
    
    
    
    
    
    (100,831
    )
    
    
    Other assets
    
    
    5,656
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,656$
    317,567
    
    
    $
    94,554
    
    
    $
    17,828
    
    
    $
    (100,831
    )
    
    $
    329,118LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    26,393
    
    
    $
    
    
    
    $
    1,084
    
    
    $
    
    
    
    $
    27,477Accrued compensation,
benefits and related
expenses
    
    
    11,742
    
    
    
    
    
    
    
    229
    
    
    
    
    
    
    
    11,971Accrued interest
    
    
    4,564
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,564Other accrued expenses
    
    
    10,745
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,745Income taxes payable
    
    
    567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    567Long-term debt due in one year
    
    
    4,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,325Total current liabilities
    
    
    58,336
    
    
    
    
    
    
    
    1,313
    
    
    
    
    
    
    
    59,649Long-term debt
    
    
    137,620
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137,620Deferred income taxes
and other long term liabilities
    
    
    26,815
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,815Due to (from) subsidiaries
    
    
    242
    
    
    
    (10,480
    )
    
    
    10,238
    
    
    
    
    
    
    
    Shareholders equity
    
    
    94,554
    
    
    
    105,034
    
    
    
    6,277
    
    
    
    (100,831
    )
    
    
    105,034$
    317,567
    
    
    $
    94,554
    
    
    $
    17,828
    
    
    $
    (100,831
    )
    
    $
    329,118
 12




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 27, 2005 AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
August 27, 2004
(In thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assetsCash and cash equivalents
    
    $
    5,481
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,481Accounts receivable
    
    
    50,973
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    50,975Inventories
    
    
    78,282
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,282Prepaid expenses
    
    
    1,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,275Income taxes refundable
    
    
    506
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    506Total current assets
    
    
    136,517
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    136,519Assets held for sale
    
    
    1,037
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,037Property, plant and equipmentLand
    
    
    6,093
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    6,289Buildings
    
    
    64,021
    
    
    
    
    
    
    
    11,750
    
    
    
    
    
    
    
    75,771Machinery and equipment
    
    
    427,807
    
    
    
    
    
    
    
    37,840
    
    
    
    
    
    
    
    465,647497,921
    
    
    
    
    
    
    
    49,786
    
    
    
    
    
    
    
    547,707Less accumulated depreciation
    
    
    (336,477
    )
    
    
    
    
    
    
    (29,278
    )
    
    
    
    
    
    
    (365,755
    )161,444
    
    
    
    
    
    
    
    20,508
    
    
    
    
    
    
    
    181,952Goodwill
    
    
    2,951
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,951Investment in subsidiaries
    
    
    7,840
    
    
    
    96,943
    
    
    
    
    
    
    
    (104,783
    )
    
    
    Other assets
    
    
    6,023
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,023$
    315,812
    
    
    $
    96,943
    
    
    $
    20,510
    
    
    $
    (104,783
    )
    
    $
    328,482LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    23,051
    
    
    $
    
    
    
    $
    1,116
    
    
    $
    
    
    
    $
    24,167Accrued compensation,
benefits and related expenses
    
    
    10,333
    
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    10,440Accrued interest
    
    
    2,403
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,403Other accrued expenses
    
    
    9,339
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    9,340Long-term debt due in one year
    
    
    4,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,325Total current liabilities
    
    
    49,451
    
    
    
    
    
    
    
    1,224
    
    
    
    
    
    
    
    50,675Long-term debt
    
    
    141,039
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141,039Deferred income taxes
and other long term liabilities
    
    
    29,439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,439Due to (from) subsidiaries
    
    
    (1,060
    )
    
    
    (10,386
    )
    
    
    11,446
    
    
    
    
    
    
    
    Shareholders equity
    
    
    96,943
    
    
    
    107,329
    
    
    
    7,840
    
    
    
    (104,783
    )
    
    
    107,329$
    315,812
    
    
    $
    96,943
    
    
    $
    20,510
    
    
    $
    (104,783
    )
    
    $
    328,482
 13




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 27, 2005 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended May 27, 2005
(In thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    156,570
    
    
    $
    91
    
    
    $
    25,380
    
    
    $
    (25,471
    )
    
    $
    156,570Operating costs and expensesCost of goods sold
    
    
    135,729
    
    
    
    
    
    
    
    25,438
    
    
    
    (25,380
    )
    
    
    135,787Depreciation
    
    
    7,301
    
    
    
    
    
    
    
    924
    
    
    
    
    
    
    
    8,225Selling and administrative expenses
    
    
    6,762
    
    
    
    
    
    
    
    
    
    
    
    (91
    )
    
    
    6,671Operating income (loss)
    
    
    6,778
    
    
    
    91
    
    
    
    (982
    )
    
    
    
    
    
    
    5,887Interest expense, net
    
    
    3,816
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,816Discount and expenses on sales
of receivables
    
    
    662
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    662Other, net
    
    
    (266
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (266
    )Income (loss) before income taxes
    
    
    2,566
    
    
    
    91
    
    
    
    (982
    )
    
    
    
    
    
    
    1,675Provision for (benefit of) income taxes
    
    
    996
    
    
    
    34
    
    
    
    (370
    )
    
    
    
    
    
    
    660Equity in income (loss) of subsidiary
    
    
    (612
    )
    
    
    958
    
    
    
    
    
    
    
    (346
    )
    
    
    Net income (loss)
    
    $
    958
    
    
    $
    1,015
    
    
    $
    (612
    )
    
    $
    (346
    )
    
    $
    1,015
 14




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 27, 2005 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended May 28, 2004
(amounts in thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    151,345
    
    
    $
    32
    
    
    $
    30,941
    
    
    $
    (30,973
    )
    
    $
    151,345Operating costs and expensesCost of goods sold
    
    
    139,615
    
    
    
    
    
    
    
    29,370
    
    
    
    (30,942
    )
    
    
    138,043Depreciation
    
    
    8,217
    
    
    
    
    
    
    
    932
    
    
    
    
    
    
    
    9,149Selling and administrative expenses
    
    
    6,689
    
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    6,658Facility restructuring charges
    
    
    2,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,250Operating income (loss)
    
    
    (5,426
    )
    
    
    32
    
    
    
    639
    
    
    
    
    
    
    
    (4,755
    )Interest expense, net
    
    
    4,346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,346Discount and expenses on sales
of receivables
    
    
    631
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    631Gain on extinguishment of debt
    
    
    (1,321
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,321
    )Other, net
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110Income (loss) before income taxes
    
    
    (9,192
    )
    
    
    32
    
    
    
    639
    
    
    
    
    
    
    
    (8,521
    )Provision for (benefit of) income taxes
    
    
    (3,325
    )
    
    
    11
    
    
    
    234
    
    
    
    
    
    
    
    (3,080
    )Equity in earnings (loss) of subsidiary
    
    
    405
    
    
    
    (5,462
    )
    
    
    
    
    
    
    5,057
    
    
    
    Net income (loss)
    
    $
    (5,462
    )
    
    $
    (5,441
    )
    
    $
    405
    
    
    $
    5,057
    
    
    $
    (5,441
    )
 15




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 27, 2005 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirty-Nine weeks ended May 27, 2005
(In thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    431,966
    
    
    $
    150
    
    
    $
    75,477
    
    
    $
    (75,627
    )
    
    $
    431,966Operating costs and expensesCost of goods sold
    
    
    379,436
    
    
    
    
    
    
    
    75,194
    
    
    
    (75,477
    )
    
    
    379,153Depreciation
    
    
    22,594
    
    
    
    
    
    
    
    2,786
    
    
    
    
    
    
    
    25,380Selling and administrative expenses
    
    
    19,615
    
    
    
    
    
    
    
    
    
    
    
    (150
    )
    
    
    19,465Operating income (loss)
    
    
    10,321
    
    
    
    150
    
    
    
    (2,503
    )
    
    
    
    
    
    
    7,968Interest expense, net
    
    
    11,405
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,405Discount and expenses on sales
of receivables
    
    
    1,777
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,777Gain on extinguishment of debt
    
    
    (162
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162
    )Other, net
    
    
    (1,417
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,417
    )Income (loss) before income taxes
    
    
    (1,282
    )
    
    
    150
    
    
    
    (2,503
    )
    
    
    
    
    
    
    (3,635
    )Provision for (benefit of) income taxes
    
    
    (456
    )
    
    
    56
    
    
    
    (940
    )
    
    
    
    
    
    
    (1,340
    )Equity in loss of subsidiary
    
    
    (1,563
    )
    
    
    (2,389
    )
    
    
    
    
    
    
    3,952
    
    
    
    Net loss
    
    $
    (2,389
    )
    
    $
    (2,295
    )
    
    $
    (1,563
    )
    
    $
    3,952
    
    
    $
    (2,295
    )
 16




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 27, 2005 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirty-Nine weeks ended May 28, 2004
(amounts in thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    412,267
    
    
    $
    83
    
    
    $
    75,301
    
    
    $
    (75,384
    )
    
    $
    412,267Operating costs and expensesCost of goods sold
    
    
    376,198
    
    
    
    
    
    
    
    72,495
    
    
    
    (75,301
    )
    
    
    373,392Depreciation
    
    
    25,209
    
    
    
    
    
    
    
    2,807
    
    
    
    
    
    
    
    28,016Selling and administrative expenses
    
    
    19,430
    
    
    
    
    
    
    
    
    
    
    
    (83
    )
    
    
    19,347Facility restructuring charges
    
    
    2,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,250Operating income (loss)
    
    
    (10,820
    )
    
    
    83
    
    
    
    (1
    )
    
    
    
    
    
    
    (10,738
    )Interest expense, net
    
    
    13,510
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,510Discount and expenses on sales
of receivables
    
    
    1,874
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,874Gain on extinguishment of debt
    
    
    (1,321
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,321
    )Other, net
    
    
    (2,439
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,439
    )Income (loss) before income taxes
    
    
    (22,444
    )
    
    
    83
    
    
    
    (1
    )
    
    
    
    
    
    
    (22,362
    )Provision for (benefit of) income taxes
    
    
    (8,004
    )
    
    
    30
    
    
    
    (1
    )
    
    
    
    
    
    
    (7,975
    )Equity in loss of subsidiary
    
    
    
    
    
    
    (14,440
    )
    
    
    
    
    
    
    14,440
    
    
    
    Net loss
    
    $
    (14,440
    )
    
    $
    (14,387
    )
    
    $
    
    
    
    $
    14,440
    
    
    $
    (14,387
    )
 17




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 27, 2005 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Thirty-Nine weeks ended May 27, 2005
(In thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedOperating activitiesNet loss
    
    $
    (2,389
    )
    
    $
    (2,295
    )
    
    $
    (1,563
    )
    
    $
    3,952
    
    
    $
    (2,295
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation and amortization
    
    
    23,242
    
    
    
    
    
    
    
    2,786
    
    
    
    
    
    
    
    26,028Benefit of deferred income taxes
    
    
    (2,144
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,144
    )Gain on disposal of property, plant
and equipment and assets held
for sale
    
    
    (1,145
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,145
    )Gain on extinguishment of debt
    
    
    (162
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162
    )Sale of accounts receivable, net
    
    
    (5,033
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,033
    )Changes in operating assets and liabilities
    
    
    2,485
    
    
    
    (94
    )
    
    
    (1,120
    )
    
    
    
    
    
    
    1,271Equity in loss of subsidiary
    
    
    1,563
    
    
    
    2,389
    
    
    
    
    
    
    
    (3,952
    )
    
    
    Net cash provided by operating
activities
    
    
    16,417
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    16,520Investing activitiesPurchase of property, plant and equipment
    
    
    (7,383
    )
    
    
    
    
    
    
    (103
    )
    
    
    
    
    
    
    (7,486
    )Proceeds from sale of property, plant
and equipment and assets held for sale
    
    
    1,629
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,629Net cash used in investing activities
    
    
    (5,754
    )
    
    
    
    
    
    
    (103
    )
    
    
    
    
    
    
    (5,857
    )Financing activitiesReductions in long term debt
    
    
    (3,244
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,244
    )Net cash used in financing activities
    
    
    (3,244
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,244
    )Increase in cash and cash equivalents
    
    
    7,419
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,419Cash and cash equivalents
at beginning of period
    
    
    5,481
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,481Cash and cash equivalents
at end of period
    
    $
    12,900
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    12,900
 18




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
May 27, 2005 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Thirty-Nine weeks ended May 28, 2004
(amounts in thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedOperating activitiesNet loss
    
    $
    (14,440
    )
    
    $
    (14,387
    )
    
    $
    
    
    
    $
    14,440
    
    
    $
    (14,387
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    25,577
    
    
    
    
    
    
    
    2,807
    
    
    
    
    
    
    
    28,384Benefit of deferred income taxes
    
    
    (8,072
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,072
    )Gain on disposal of property, plant
and equipment and assets held
for sale
    
    
    (867
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (867
    )Gain on extinguishment of debt
    
    
    (1,321
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,321
    )Sale of accounts receivable, net
    
    
    (6,442
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,442
    )Changes in operating assets and liabilities
    
    
    590
    
    
    
    7
    
    
    
    (2,797
    )
    
    
    
    
    
    
    (2,200
    )Dividends from subsidiary
    
    
    
    
    
    
    2,476
    
    
    
    
    
    
    
    (2,476
    )
    
    
    Equity in loss of subsidiary
    
    
    
    
    
    
    14,440
    
    
    
    
    
    
    
    (14,440
    )
    
    
    Net cash provided by (used in)
operating activities
    
    
    (4,975
    )
    
    
    2,536
    
    
    
    10
    
    
    
    (2,476
    )
    
    
    (4,905
    )Investing activitiesPurchase of property, plant and equipment
    
    
    (4,530
    )
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (4,540
    )Proceeds from sale of property, plant
and equipment and assets held for sale
    
    
    5,447
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,447Net cash provided by (used in)
investing activities
    
    
    917
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    907Financing activitiesReductions in long-term debt
    
    
    (3,244
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,244
    )Purchase and retirement of
treasury stock
    
    
    
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    (60
    )Dividends paid
    
    
    (2,476
    )
    
    
    (2,476
    )
    
    
    
    
    
    
    2,476
    
    
    
    (2,476
    )Net cash used in financing activities
    
    
    (5,720
    )
    
    
    (2,536
    )
    
    
    
    
    
    
    2,476
    
    
    
    (5,780
    )Decrease in cash and cash equivalents
    
    
    (9,778
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,778
    )Cash and cash equivalentsAt beginning of period
    
    
    13,769
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,769Cash and cash equivalentsAt end of period
    
    $
    3,991
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,991
 19




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##### Table of Contents



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




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##### Table of Contents



Revenue Recognition:The Company records revenues principally when products are shipped to
customers. Generally, risks of ownership pass to customers when goods are shipped, or in
circumstances where risk of ownership passes upon delivery, all such shipments are made under fixed
price and delivery terms. Consistent with recognized practice in the textile industry, the Company
also records revenues to a lesser extent throughout the fiscal year on a bill and hold basis,
invoicing goods that have been produced, packaged and made ready for shipment. These goods are
effectively segregated from inventory that is available for sale, the risks of ownership of the
goods have passed to the customer, and the remittance terms and collection experience on the
related invoicing is consistent with all other sales by the Company. All international sales are
denominated in U. S. dollars. All amounts billed to customers for shipping and handling are
included in net sales in accordance with EITF 00-01. Contingencies:The Company is involved in certain environmental matters and claims. The
Company has identified those environmental matters where it is probable that expenditures will be
required, including a pond with certain contamination and land previously used as a landfill, both
acquired in a 1996 transaction, and various other minor environmental matters that are expected to
be resolved by much smaller expenditures. Based on discussions with outside consultants and
regulatory authorities, the Company believes that the costs to provide full remediation of these
items will be between $2.0 million and $3.0 million. Accordingly, the Company has established a
reserve of $2.5 million to cover the costs to investigate, monitor and remediate these
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 part I, Item
3 Legal Proceedings in the Companys Annual Report on Form 10-K for the fiscal year ended August
27, 2004 and Part II, Item 1 Legal Proceedings in the Companys Quarterly Report on Form 10-Q for
the quarter ended February 27, 2005. There have been no significant changes in the matters
reported. 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. 21




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##### Table of Contents



RESULTS OF OPERATIONS Thirteen Weeks Ended May 27, 2005 Compared to Thirteen Weeks Ended May 28, 2004 Net Sales. Net sales increased 3.5% to $156.6 million for the thirteen weeks ended
May 27, 2005 from $151.3 million for the thirteen weeks ended May 28, 2004. The increase in net
sales for the thirteen weeks ended May 27, 2005 primarily reflected generally higher shipment
volume of apparel fabrics and yarns as the overall improvement in market demand for the Companys
products continued. While overall unit sales increased 4.8% for the thirteen weeks ended May 27,
2005 compared to the thirteen weeks ended May 28, 2004, the Company anticipated a larger
improvement prior to the effects of the January 6, 2005 train derailment, as plant operations are
periodically interrupted by clean up projects. See further discussion under the caption January 6,
2005 Train Derailment included under Part 1, Item 2 of this Quarterly Report on Form 10-Q. The domestic textile industry continues to face difficult challenges, including significant
growth in imported apparel, elimination of quotas on imports received from World Trade Organization
member countries effective December 31, 2004, uncertainties presented by the economic and political
environment, imbalance of global supply and demand for textile and apparel products and financial
distress experienced by many of the Companys domestic competitors. In addition, 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 difficult conditions to
continue into the foreseeable future. Recent actions by the U.S. government to impose safeguard
relief on certain categories of imported garments from China are expected to provide positive
benefits to domestic suppliers of those products, and indirectly improve demand and pricing for the
Companys products for a limited period of time. Other pending legislation to impose tariffs on
imports from China to offset Chinas undervalued currency may provide additional relief, but there
can be no assurance that any of these proposals will be implemented, and if so, in a timely manner. Operating Income (Loss). The Company produced an operating income of $5.9 million
for the thirteen weeks ended May 27, 2005 compared to an operating loss of ($4.8) million for the
thirteen weeks ended May 28, 2004. The improvement in operating income reflected improved unit
sales for the Companys apparel fabrics and yarns operations, and favorable LIFO inventory
adjustment. Raw material costs per unit declined, as generally lower market prices of cotton
offset higher market prices for synthetic fibers and higher costs associated with increased
purchases of yarns and greige fabrics following the May 2004 closure of a yarn manufacturing
facility in North Carolina and a weaving operation in Georgia. Conversion costs per unit increased
slightly, due largely to plant disruptions associated with the January 6, 2005 train derailment and
increases in chemical and energy costs. Additionally, the Company recorded a noncash benefit of
$0.4 million to adjust the carrying value of inventories to LIFO basis for the thirteen weeks ended
May 27, 2005 compared to a noncash charge of $2.0 million for the thirteen weeks ended May 28,
2004. Cost of goods sold, which includes all direct manufacturing costs, inbound freight charges,
inspection and warehousing costs and internal transfer costs, decreased 1.6% to $135.8 million for
the thirteen weeks ended May 27, 2005 from $138.0 million for the thirteen weeks ended May 28,
2004, primarily reflecting the impact of lower raw material costs and favorable LIFO inventory
adjustment. Cost of goods sold as a percentage of net sales decreased to 86.7% for the thirteen
weeks ended May 27, 2005 from 91.2% for the thirteen weeks ended May 28, 2004, also reflecting the
impact of lower raw material costs and favorable LIFO inventory adjustment. Selling and administrative expenses, which include compensation and benefits, office expenses,
travel and entertainment expenses and computer expenses of all administration and support functions
not directly related to the production of product, were $6.7 million for both the thirteen weeks
ended May 27, 2005 and the thirteen weeks ended May 28, 2004. Selling and administrative expenses
as a percentage of net sales were 4.3% for the thirteen weeks ended May 27, 2005 versus 4.4% for
the thirteen weeks ended May 28, 2004. Segment Performance. Apparel fabric sales increased 4.5% to $117.7 million for the
thirteen weeks ended May 27, 2005 from $112.6 million for the thirteen weeks ended May 28, 2004,
reflecting a 5.8% increase in yards invoiced and a 1.2% decrease in average invoice price. The
apparel fabrics operation produced an operating income of $4.1 million for the thirteen weeks ended
May 27, 2005 compared to an operating income of $1.8 million for the thirteen weeks ended May 28,
2004, largely due to the improved unit volume and lower raw material costs. 22




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##### Table of Contents



Yarn sales, including intra-company sales to the Companys fabric operations, decreased 5.2%
to $45.2 million for the thirteen weeks ended May 27, 2005 from $47.7 million for the thirteen
weeks ended May 28, 2004. Total pounds invoiced increased 9.6%, primarily reflecting the conversion
of a greige fabric operation closed in May 2004 into a yarn manufacturing facility. The decrease in
yarn requirements and associated internal transfers of yarns to the Companys apparel fabrics
operation following the January 6, 2005 train derailment was largely mitigated by a redirection of
certain yarn production to outside sales. Average invoice price decreased 13.5% as lower raw
material costs impacted outside invoice prices as well as intra-company transfer prices. The yarns
operation produced operating income of $4.9 million for the thirteen weeks ended May 27, 2005
compared to an operating income of $0.3 million for the thirteen weeks ended May 28, 2004,
primarily due to the improved unit volume and reduced raw material costs. Other sales, which include sales of greige and coated fabrics, initial sales of an apparel
sourcing operation and revenues from the Companys trucking operation, decreased 50.6% to $8.0
million for the thirteen weeks ended May 27, 2005 from $16.2 million for the thirteen weeks ended
May 28, 2004. The decrease in other sales was primarily attributable to the May 2004 shutdown of
the greige weaving operation in Georgia and lower unit volume resulting from the January 6, 2005
train derailment, principally in coated fabrics. Operating income from other sales decreased 21.4%,
from $1.4 million for the thirteen weeks ended May 28, 2004 to $1.1 million for the thirteen weeks
ended May 27, 2005, largely reflecting the lower unit volume resulting from the January 6, 2005
train derailment. Inter-segment sales decreased 42.9% to $14.4 million for the thirteen weeks ended May 27, 2005
from $25.2 million for the thirteen weeks ended May 28, 2004, reflecting the previous capacity
rationalization actions and corresponding reduction in transfers of internally produced yarns and
greige fabrics as well as the redirection of yarn production to outside sales following the January
6, 2005 train derailment. Unallocated amounts included in operating income represent general and administrative
expenses, certain associate benefits and performance based incentives, and adjustments of the
carrying value of inventories to LIFO basis, net of market adjustments. Facility Restructuring: In response to highly competitive market conditions and
continued imbalance of global supply and demand for textile and apparel products, in May 2004, the
Company closed an open-end yarn manufacturing facility located in North Carolina and the weaving
operation of an integrated greige fabric manufacturing facility located in Georgia. These actions
to rationalize excess manufacturing capacity, following the relocation of certain equipment,
improved capacity utilization of the Companys remaining facilities and lowered costs per unit
produced. No reduction in net sales resulted from 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 were maintained. Certain equipment
was relocated from these two operations to other facilities located in Alabama, Georgia and South
Carolina to retain certain specialized manufacturing capabilities and replace older, less efficient
equipment. Other excess equipment was sold, generating a gain of approximately $0.9 million. In
connection with these actions, the Company recorded facility restructuring charges, and other
non-operating costs, net of the gain on equipment sold, of approximately $2.3 million during the
third quarter of fiscal 2004. At May 28, 2004, approximately $80,000 of minor property disposal
costs remained unpaid and was included in other accrued expenses in the Companys consolidated
financial statements. Interest Expense, Net. Net interest expense declined 11.6% to $3.8 million for the
thirteen weeks ended May 27, 2005 compared to $4.3 million for the thirteen weeks ended May 28,
2004, primarily reflecting lower average borrowings outstanding following the Companys exchange of
approximately $60 million of its 2013 Notes for approximately $42 million of its Floating Rate
Notes due 2012 during fiscal 2004. Discount and Expenses on Sale of Receivables. Discount and expenses on sales of
receivables were $0.7 million for the thirteen weeks ended May 27, 2005 compared to $0.6 million
for the thirteen weeks ended May 28, 2004, primarily reflecting the impact of higher market
interest rates on discounts associated with accounts receivable sold under the securitization
facility. Provision for (benefit of) Income Taxes. A provision for income taxes of $0.7
million was recorded for the thirteen weeks ended May 27, 2005 compared to an income tax benefit of
($3.1) million for the thirteen weeks ended May 28, 2004, reflecting improved operating income. 23




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Thirty-nine Weeks Ended May 27, 2005 Compared to Thirty-nine Weeks Ended May 28, 2004 Net Sales. Net sales increased 4.8% to $432.0 million for the thirty-nine weeks
ended May 27, 2005 from $412.3 million for the thirty-nine weeks ended May 28, 2004. The increase
in net sales for the thirty-nine weeks ended May 27, 2005 primarily reflected higher average
invoice prices for the Companys apparel fabrics operations, as the development of new and enhanced
products enabled the Company to increase its sales with existing customers and the overall
improvement in market demand for the Companys products continued. While overall unit sales
increased 3.0% for the thirty-nine weeks ended May 27, 2005 compared to the thirty-nine weeks ended
May 28, 2004, the Company anticipated a larger improvement prior to the January 6, 2005 train
derailment, which effectively shut down productive capacity representing more than 50% of the
Companys sales. Sales and production volumes were dramatically reduced in January and February
2005 during initial recovery efforts, and continue to be impacted as plant operations are
periodically interrupted by clean up projects. See further discussion under the caption January 6,
2005 Train Derailment included under Part 1, Item 2 of this Quarterly Report on Form 10-Q. The domestic textile industry continues to face difficult challenges, including significant
growth in imported apparel, elimination of quotas on imports received from World Trade Organization
member countries effective December 31, 2004, uncertainties presented by the economic and political
environment, imbalance of global supply and demand for textile and apparel products and financial
distress experienced by many of the Companys domestic competitors. In addition, 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 difficult conditions to
continue into the foreseeable future. Recent actions by the U.S. government to impose safeguard
relief on certain categories of imported garments from China are expected to provide positive
benefits to domestic suppliers of those products, and indirectly improve demand and pricing for the
Companys products for a limited period of time. Other pending legislation to impose tariffs on
imports from China to offset Chinas undervalued currency may provide additional relief, but there
can be no assurance that any of these proposals will be implemented, and if so, in a timely manner. Operating Income (Loss). The Company produced an operating income of $8.0 million
for the thirty-nine weeks ended May 27, 2005 compared to an operating loss of ($10.7) million for
the thirty-nine weeks ended May 28, 2004. The improvement in operating income reflected higher
average invoice prices for the Companys apparel fabrics operations and generally lower raw
material costs. Raw material costs per unit decreased significantly, reflecting significant
decline in the market price of cotton, partially offset by higher market prices for synthetic
fibers and increased purchases of yarns and greige fabrics following the May 2004 closure of a yarn
manufacturing facility in North Carolina and weaving operation in Georgia. Conversion costs
increased significantly, primarily reflecting higher energy costs and reduced unit cost absorptions
associated with the January 6, 2005 train derailment. Additionally, the Company recorded a noncash
benefit of $1.4 million to adjust the carrying value of inventories to LIFO basis for the
thirty-nine weeks ended May 27, 2005 compared to a noncash charge of $4.5 million for the
thirty-nine weeks ended May 28, 2004. Cost of goods sold, which includes all direct manufacturing costs, inbound freight charges,
inspection and warehousing costs and internal transfer costs, increased 1.6% to $379.2 million for
the thirty-nine weeks ended May 27, 2005 from $373.4 million for the thirty-nine weeks ended May
28, 2004, primarily reflecting the slight increase in sales unit volume, offset by lower raw
material costs and favorable LIFO inventory adjustments. Cost of goods sold as a percentage of net
sales decreased to 87.8% for the thirty-nine weeks ended May 27, 2005 from 90.6% for the
thirty-nine weeks ended May 28, 2004, reflecting the impact of higher average invoice prices, lower
raw material costs and favorable LIFO inventory adjustments. Selling and administrative expenses, which include compensation and benefits, office expenses,
travel and entertainment expenses and computer expenses of all administration and support functions
not directly related to the production of product, were $19.5 million for the thirty-nine weeks
ended May 27, 2005 compared to $19.3 million for the thirty-nine weeks ended May 28, 2004. Selling
and administrative expenses as a percentage of net sales were 4.5% for the thirty-nine weeks ended
May 27, 2005 versus 4.7% for the thirty-nine weeks ended May 28, 2004. 24




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##### Table of Contents



Segment Performance. Apparel fabric sales increased 3.7% to $318.6 million for the
thirty-nine weeks ended May 27, 2005 from $307.3 million for the thirty-nine weeks ended May 28,
2004, reflecting a 1.3% increase in yards invoiced and a 2.4% increase in average invoice price.
The apparel fabrics operations produced an operating income of $4.0 million for the thirty-nine
weeks ended May 27, 2005 compared to an operating income of $4.7 million for the thirty-nine weeks
ended May 28, 2004, largely due to production disruptions and higher associated costs resulting
from the January 6, 2005 train derailment. Yarn sales, including intra-company sales to the Companys fabric operations, increased 0.9%
to $136.3 million for the thirty-nine weeks ended May 27, 2005 from $135.1 million for the
thirty-nine weeks ended May 28, 2004. Total pounds invoiced increased 4.4%. The decrease in yarn
requirements and associated internal transfers of yarns to the Companys apparel fabrics operation
following the January 6, 2005 train derailment was largely mitigated by a redirection of this
production to outside yarn sales. Average invoice price decreased 3.3% as lower raw material costs
impacted outside invoice prices as well as intra-company transfer prices. The yarns operation
produced operating income of $12.4 million for the thirty-nine weeks ended May 27, 2005 compared to
a loss of ($0.5) million for the thirty-nine weeks ended May 28, 2004, primarily due to the
increase in unit sales and lower raw material costs. Other sales, which include sales of greige and coated fabrics, initial sales of an apparel
sourcing operation and revenues from the Companys trucking operation, decreased 49.3% to $22.8
million for the thirty-nine weeks ended May 27, 2005 from $45.0 million for the thirty-nine weeks
ended May 28, 2004. The decrease in other sales was primarily attributable to the May 2004
shutdown of the greige weaving operation in Georgia and lower unit volume resulting from the
January 6, 2005 train derailment. Operating income from other sales decreased 18.2%, from $3.3
million for the thirty-nine weeks ended May 28, 2004 to $2.7 million for the thirty-nine weeks
ended May 27, 2005, largely reflecting the lower unit volume resulting from the January 6, 2005
train derailment. Inter-segment sales decreased 39.0% to $45.8 million for the thirty-nine weeks ended May 27,
2005 from $75.1 million for the thirty-nine weeks ended May 28, 2004, reflecting the previous
capacity rationalization actions and corresponding reduction in transfers of internally produced
yarns and greige fabrics as well as the redirection of certain yarn production to outside sales
following the January 6, 2005 train derailment. Unallocated amounts included in operating income represent general and administrative
expenses, certain associate benefits and performance based incentives, and adjustments of the
carrying value of inventories to LIFO basis, net of market adjustments. Facility Restructuring: In response to highly competitive market conditions and
continued imbalance of global supply and demand for textile and apparel products, in May 2004, the
Company closed an open-end yarn manufacturing facility located in North Carolina and the weaving
operation of an integrated greige fabric manufacturing facility located in Georgia. These actions
to rationalize excess manufacturing capacity, following the relocation of certain equipment,
improved capacity utilization of the Companys remaining facilities and lowered costs per unit
produced. No reduction in net sales resulted from 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 were maintained. Certain equipment
was relocated from these two operations to other facilities located in Alabama, Georgia and South
Carolina to retain certain specialized manufacturing capabilities and replace older, less efficient
equipment. Other excess equipment was sold, generating a gain of approximately $0.9 million. In
connection with these actions, the Company recorded facility restructuring charges, and other
non-operating costs, net of the gain on equipment sold, of approximately $2.3 million during the
third quarter of fiscal 2004. At May 28, 2004, approximately $80,000 of minor property disposal
costs remained unpaid and was included in other accrued expenses in the Companys consolidated
financial statements. Interest Expense, Net. Net interest expense declined 15.6% to $11.4 million for the
thirty-nine weeks ended May 27, 2005 compared to $13.5 million for the thirty-nine weeks ended May
28, 2004. Net interest expense for the thirty-nine weeks ended May 28, 2004 included the write-off
of approximately $400,000 of unamortized debt issue costs following execution of a new senior
secured revolving credit facility with GECC in November 2003. In addition, net interest expense for
the thirty-nine weeks ended May 27, 2005 reflected lower average borrowings outstanding following
the Companys exchange of approximately $60 million of its 2013 Notes for approximately $42 million
of its Floating Rate Notes due 2012 during fiscal 2004. Discount and Expenses on Sale of Receivables. Discount and expenses on sales of
receivables were $1.8 million for the thirty-nine weeks ended May 27, 2005 compared to $1.9 million
for the thirty-nine weeks ended May 28, 2004, primarily reflecting a net decrease in accounts
receivable sold under the securitization facility. 25




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##### Table of Contents



Provision for (benefit of) Income Taxes. An income tax benefit of ($1.3) million was
recorded for the thirty-nine weeks ended May 27, 2005 compared to an income tax benefit of ($8.0)
million for the thirty-nine weeks ended May 28, 2004, reflecting reduced operating losses. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $16.5 million for the thirty-nine weeks ended
May 27, 2005. Principal working capital changes included a $4.2 million increase in accounts
receivable, a $5.0 million decrease in accounts receivable sold under the securitization facility,
a $3.0 million increase in inventories and an $8.4 million increase in accounts payable and accrued
expenses. The increase in accounts receivable primarily reflects the improved sales trend during
the thirteen weeks ended May 27, 2005 compared to the thirteen weeks ended August 27, 2004, in
addition to the net decrease in accounts receivable sold under the securitization facility. The
reduction in accounts receivable sold reflects normal fluctuations in day-to-day cash management
needs. The increase in inventories reflects quantity adjustments to support the improved level of
sales. The increase in accounts payable and accrued expenses is the result of normal fluctuations
in the timing of invoice due dates in relation to the end of the respective reporting period and
timing of interest payments on the senior and subordinated notes. Additionally, the increase in
accounts payable and accrued expenses includes a $1.6 million increase in net insurance claim
advances related to the January 6, 2005 train derailment, resulting from the receipt of $20.0
million in advances from the Companys insurance carrier, offset by recovery expenditures incurred
of approximately $18.4 million. Investing activities were predominantly equipment purchases and
related costs of $7.5 million and proceeds of $1.6 million from the sale of several small tracts of
land and certain excess equipment. Financing activities included repayment of $3.2 million of
long-term debt. The Companys capital expenditures, aggregating $7.5 million for the thirty-nine weeks ended
May 27, 2005, included purchases of approximately $3.1 million to replace equipment damaged as a
result of the January 6, 2005 train derailment, with the balance used primarily to complete routine
maintenance projects. Management estimates that capital expenditures for the balance of fiscal
2005 will be approximately $3.0 million. The Company is unable to estimate at this time the amount
of damaged equipment that will require replacement but expects such expenditures to be funded by
insurance and third party claims. At May 27, 2005, the Company had no borrowings outstanding under its revolving line of credit,
and $24.7 million of borrowing availability as determined using prescribed advance rates against
qualified inventory collateral, less outstanding letters of credit and required minimum
availability. Covenants of the revolving credit facility require the Company to maintain certain minimum
cash flow amounts and fixed charge coverage ratios in the event that combined excess availability
under the revolving credit facility and the Receivables Securitization Facility falls below $20
million for a period of four consecutive weeks. At May 27, 2005, combined excess availability under
these two facilities was approximately $55.7 million. Covenants of the indenture under which the 2013 Notes were issued, and provisions of the
senior floating rate notes due 2012, include, among other things, certain restrictive covenants
applicable to issuance of additional debt, payment of dividends, retirement of capital stock or
indebtedness, purchase of investments, sales or transfers of assets, certain consolidations or
mergers and certain transactions with affiliates. In general, the amount of dividends and capital
stock purchases may not exceed an amount equal to $20 million plus 50% of adjusted net income, or
less 100% of adjusted net loss, all calculated on an accumulative basis subsequent to the date of
the indenture. With the accumulative loss reported through the thirteen weeks ended May 27, 2005,
the covenants of the indenture prohibit further payment of dividends and purchases of capital stock
until such time as sufficient earnings are reported to eliminate the restriction. The receivables securitization facility is the Companys only off-balance sheet financing
arrangement. The Company generates funds through the sale of accounts receivable to Avondale
Funding LLC, whose sole business purpose is the ongoing acquisition and subsequent resale of
certain undivided interests in trade accounts receivable generated by the Company. Funding retains
no interest in the investment in the accounts receivable sold to GECC, and has not experienced any
gains or losses on the sale of the investment in accounts receivable. The Company believes minimal
counter party risk exists due to the financial strength of GECC. Management believes that cash generated from operations, anticipated insurance and third party
claims relating to the January 6, 2005 train derailment, 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 for the next twelve months. 26




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JANUARY 6, 2005 TRAIN DERAILMENT On January 6, 2005, a Norfolk Southern freight train collided with a stationary Norfolk
Southern train parked on a railroad spur near the Companys manufacturing and administrative
facilities in Graniteville, South Carolina. In the ensuing derailment, rail cars ended up on the
Companys property and a tanker car was breached, releasing chlorine gas. Due to the release of the
toxic and corrosive chlorine gas, the surrounding area, including the Companys adjacent
facilities, was evacuated. Nine individuals, six of whom were associates of the Company, were
killed by chlorine gas inhalation and many others were hospitalized as a result of their injuries. Local, state and federal authorities restricted access to the Companys facilities near the
collision site for a period of approximately eight days. Due to the Companys product flow and
interdependence of the Companys manufacturing facilities within and outside the evacuation zone,
productive capacity representing more than 50% of the Companys sales was effectively shutdown as a
result of these events. As the chlorine gas dissipated and removal of the wrecked rail cars began,
the Company was allowed to access portions of the affected facilities and initiated steps to
determine the extent of damage and resume operations. The Companys computer systems, communication
systems, electronic and electrical systems, compressors and other machinery in affected facilities
were damaged by corrosion induced by chlorine gas exposure. In addition, boilers servicing
finishing operations were damaged by fire because necessary life saving evacuation precluded
orderly shutdown of those units. The Company focused all available resources on the recovery effort. Temporary boilers have
been installed, and replacement electrical distribution, compressors and computers are in place and
operational. Repairs to textile processing facilities and machines are ongoing. Operations in all
facilities and shipments of finished goods from all of the Companys distribution centers were
resumed in an orderly manner, taking place in stages during January and February. Normal levels of
production are being generated, although full remediation of the chlorine damage has yet to be
completed. Due to the progressive nature of damage resulting from chlorine gas exposure, further
equipment failures may occur over time, with a corresponding reduction in productive efficiency and
temporary loss of capacity. The Company also anticipates temporary reduction in productive
capacity during the restoration of equipment to fully remediated, pre-loss condition. The Company maintains property damage and business interruption insurance to provide
reimbursement of losses stemming from an incident of this nature. In addition, Norfolk Southern has
acknowledged responsibility to the Company for the incident. The Company is utilizing appropriate
resources to identify and document losses incurred as a result of the incident, and will pursue
claims under its property damage, business interruption and other insurance policies and against
third parties. Disruption of the Companys operations and loss of production volume as a result of this
incident negatively impacted results of operations for the thirteen and thirty-nine weeks ended May
27, 2005. The Company will continue to suffer losses caused by this incident in future periods. The
Company is assessing the extent of losses that will be incurred due to this incident but is unable
to estimate at this time the full amount of loss. The Company expects that all losses incurred will
be recovered through insurance and third party claims. Any differences between amounts ultimately
received from insurance and third parties and losses incurred by the Company may negatively impact
future results of operations. In connection with the incident, the Company has incurred labor continuation costs of
approximately $2.3 million and various clean up and repair costs of approximately $16.1 million
during the thirty-nine weeks ended May 27, 2005. The Company has received advances totaling $20.0
million during the thirty-nine weeks ended May 27, 2005 from the Companys property damage
insurance provider. The Company has included the net balance of advances received in excess of
expenses incurred of $1.6 million in other accrued expenses at May 27, 2005. The Company expects to
request additional advances as the recovery progresses and additional costs are incurred. The
Company has not recognized gains relating to recovery of lost profits, involuntary conversions of
assets or other such recoveries for the thirty-nine weeks ended May 27, 2005, as such amounts are
contingent upon final settlement with respective insurers and third parties. 27




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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. 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 (including anticipated
insurance and third party claims arising from the January 6, 2005 train derailment), estimated
amounts and timing of capital expenditures, estimated environmental compliance costs and other
expenditures, and expected outcomes of litigation. Forward-looking statements reflect our current expectations and are not guarantees of
performance. These statements are based on our managements beliefs and assumptions, which in turn
are based on currently available information. Important assumptions relating to these
forward-looking statements include, among others, assumptions regarding product demand, selling
prices, raw material costs, timing and cost of capital expenditures, cost of environmental
compliance, outcomes of pending litigation, competitive conditions and general economic conditions.
These assumptions could prove inaccurate. Forward-looking statements also involve risks and
uncertainties, which could cause actual results to differ materially from those contained in any
forward-looking statement. Many of these factors are beyond our ability to control or predict. Such
factors include, but are not limited to, all of the risks described under the heading Risk
Factors in the Companys Current Report on Form 8-K dated June 20, 2003 and the following:  
    
    cyclical and competitive nature of the textile industry;
    
    pressures on selling prices due to competitive and economic conditions;
    
    deterioration of relationships with, or loss of, significant customers;
    
    strength of the U.S. dollar versus the currencies of other textile producing countries;
    
    changes in trade policies, including textile quotas and tariffs, and the
elimination of import quotas under the World Trade Organization effective December 31,
2004;
    
    ability to identify and respond to fashion trends;
    
    availability and pricing of cotton and other raw materials;
    
    changes in government policies affecting raw material costs, including the
impact of World Trade Organization rulings against the U.S. agricultural support
programs;
    
    availability and desirability of technological advancements;
    
    retention of key management personnel;
    
    continued availability of financial resources;
    
    changes in environmental, health and safety regulations;
    
    political or military responses to terrorist activities; and
    
    our ability to recover claims from insurance and third parties related to
the January 6, 2005 train derailment. 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. 28




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OTHER DATA  -  NON-GAAP FINANCIAL MEASURE EBITDA and Adjusted EBITDA are presented as management believes these measures to be widely
accepted indicators of a companys ability to service its indebtedness and are used by investors
and analysts to evaluate companies within the textile and apparel industry. EBITDA is commonly
defined as net income (loss) plus (a) interest expense, (b) provision for (benefit of) income taxes
and (c) depreciation and amortization. Adjusted EBITDA, as defined by the Company, differs due to
the further addition to net income (loss) of (a) discount and expenses on sales of receivables, (b)
gain on extinguishment of debt, (c) restructuring noncash charges and (d) adjustment of carrying
value of inventories to LIFO basis. Adjusted EBITDA is also presented because it is a defined
value used in the calculation of certain financial covenants, including an interest coverage ratio,
a fixed charge coverage ratio and minimum Adjusted EBITDA, under the Companys revolving credit
facility, accounts receivable securitization facility, equipment note, senior notes due 2012 and
subordinated notes due 2013 (the Facilities). The Company presents Adjusted EBITDA to facilitate
verification, by its lenders and noteholders, of the Companys compliance with these financial
covenants. If the Company is unable to comply with these financial covenants, incurrence of
additional indebtedness may be limited and events of default may be triggered. Under the most
restrictive of these financial covenants applicable to fiscal 2005, in the event that combined
excess availability under the revolving credit facility and the Receivables Securitization Facility
falls below $20 million for a period of four consecutive weeks, the Company must maintain an
interest coverage ratio greater than 2.0, a fixed charge coverage ratio greater than 1.50 and
minimum annual Adjusted EBITDA of greater than $45.0 million. As of May 27, 2005, the Company was
in compliance with each of these financial covenants. Failure to comply with one or more of these
covenants could have a material adverse effect on the Companys financial condition. As defined in the Facilities, discount and expenses on sales of receivables are to be treated
as interest expense in calculating the financial covenants. In addition, noncash items such as
gains or losses on extinguishment of debt, restructuring charges and equipment disposals, and
adjustments of carrying value of inventories to LIFO basis are to be excluded in the calculation of
Adjusted EBITDA. Adjusted EBITDA as calculated in accordance with the Facilities 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 GAAP. 29




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The following table reconciles Adjusted EBITDA on a consolidated basis to the line on the
Companys consolidated statement of operations entitled net loss for the periods presented in the
table above:

        . Thirty-Nine Weeks EndedMay 28,
    
    
    May 27,2004
    
    
    2005Net loss
    
    $
    (14,387
    )
    
    $
    (2,295
    )Interest expense, net
    
    
    13,510
    
    
    
    11,405Benefit of income taxes
    
    
    (7,975
    )
    
    
    (1,340
    )Depreciation and amortization
    
    
    28,384
    
    
    
    26,028EBITDA
    
    
    19,532
    
    
    
    33,798Discount and expenses on sale of receivables
    
    
    1,874
    
    
    
    1,777Gain on extinguishment of debt
    
    
    (1,321
    )
    
    
    (162
    )Facility restructuring non cash charges
    
    
    2,829Adjustment of carrying value of inventories
to LIFO basis, net of market adjustment
    
    
    4,500
    
    
    
    (1,350
    )Adjusted EBITDA
    
    $
    27,414
    
    
    $
    34,063Net cash provided by (used in) operating activities
    
    $
    (4,905
    )
    
    $
    16,520Net cash provided by (used in) investing activities
    
    $
    907
    
    
    $
    (5,857
    )Net cash used in financing activities
    
    $
    (5,780
    )
    
    $
    (3,244
    )
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk. For discussion of certain market risks related to the Company, see Part II, Item 7A.
Quantitative and Qualitative Disclosures about Market Risk in the Companys Annual Report on Form
10-K for the fiscal year ended August 27, 2004. 30




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Item 4. Controls and Procedures. As required by Securities and Exchange Commission rules, the Company has evaluated the
effectiveness of the design and operation of the Companys disclosure controls and procedures as of
the end of the period covered by this report. This evaluation was carried out under the supervision
and with the participation of the Companys management, including the Companys principal executive
officer and principal financial officer. Based on this evaluation, the principal executive officer
and principal financial officer have concluded that the design and operation of the Companys
disclosure controls and procedures are effective. There were no changes to the Companys internal
control over financial reporting during the period covered by this quarterly report that materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting. Disclosure controls and procedures are the Companys controls and other procedures designed to
ensure that information required to be disclosed by the Company in the reports filed or submitted
under the Exchange Act are recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that the Company files under the Exchange
Act is 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. 31




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##### Table of Contents



AVONDALE INCORPORATED 
 PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings. For discussion of certain legal proceedings to which the Company is a party, see
Part I, Item 3 Legal Proceedings in the Companys Annual Report on Form 10-K for
the fiscal year ended August 27, 2004 and Part II, Item 1 Legal Proceedings in the
Companys Quarterly Report on Form 10-Q for the quarter ended February 27, 2005.
There have been no significant changes in the matters reported. 
 Item 2. Unregistered Sales of Equity 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.  3.1
    
    Restated and Amended Articles of Incorporation of Avondale
Incorporated (incorporated by reference to Exhibit 3.1 to Avondale
Incorporateds Registration Statement on Form S-4, filed June 7, 1996, File No.
333-05455-01).  3.3
    
    Amended and Restated Bylaws of Avondale Incorporated, adopted
as of January 17, 2000 (incorporated by reference to Exhibit 3.3 to Avondale
Incorporateds Quarterly Report on Form 10-Q for the period ended February 25,
2000, File No. 33-68412).  4.3
    
    Indenture dated as of June 30, 2003 for the 101/4% Senior
Subordinated Notes due 2013 among Avondale Incorporated, Avondale Mills, Inc.
and Wachovia Bank, National Association, as Trustee (incorporated by reference
to Exhibit 4.3 to Avondale Incorporateds Registration Statement on Form S-4,
filed August 29, 2003, File No. 333-108353-01).  4.5
    
    Registration Rights Agreement, dated as of June 30, 2003, among
Avondale Mills, Inc., Avondale Incorporated and Wachovia Securities, LLC
(incorporated by reference to Exhibit 4.5 to Avondale Incorporateds
Registration Statement on Form S-4, filed August 29, 2003, File No.
333-108353-01).  4.10
    
    Exchange Agreement, dated as of May 27, 2004, by and among
Avondale Mills, Inc., Avondale Incorporated and Cohanzick Management, L.L.C.,
as agent for Cohanzick Credit Opportunities Master Fund, Ltd., Gabriel Capital,
L.P. and Ariel Fund Limited (incorporated by reference to Exhibit 4.10 to
Avondale Incorporateds Current Report on Form 8-K, dated August 26, 2004, File
No. 33-68412).  4.11
    
    Exchange Agreement, dated as of July 1, 2004, by and among
Avondale Mills, Inc., Avondale Incorporated and Allstate Life Insurance
Company, Allstate Insurance Company, Allstate Plans Master Trust and Allstate
Investments, LLC (incorporated by reference to Exhibit 4.11 to Avondale
Incorporateds Current Report on Form 8-K, dated August 26, 2004, File No.
33-68412). 32




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4.12
    
    Exchange Agreement, dated as of July 30, 2004, by and among
Avondale Mills, Inc., Avondale Incorporated and Cohanzick Management, L.L.C.,
as agent for Cohanzick Credit Opportunities Master Fund, Ltd., and Gabriel
Capital, L.P. (incorporated by reference to Exhibit 4.12 to Avondale
Incorporateds Current Report on Form 8-K, dated August 26, 2004, File No.
33-68412).  4.13
    
    Exchange Agreement, dated as of August 26, 2004, by and among
Avondale Mills, Inc., Avondale Incorporated and 3V Capital Master Fund Ltd.
(incorporated by reference to Exhibit 4.13 to Avondale Incorporateds Current
Report on Form 8-K, dated August 26, 2004, File No. 33-68412).  4.14
    
    Exchange Agreement, dated as of August 26, 2004, by and among
Avondale Mills, Inc., Avondale Incorporated and Deutsche Asset Management Inc.
and Deutsche Investment Management Americas, Inc. (incorporated by reference to
Exhibit 4.14 to Avondale Incorporateds Current Report on Form 8-K, dated
August 26, 2004, File No. 33-68412).  4.15
    
    Exchange Agreement, dated as of August 26, 2004, by and among
Avondale Mills, Inc., Avondale Incorporated and T. Rowe Price Associates, Inc.
(incorporated by reference to Exhibit 4.15 to Avondale Incorporateds Current
Report on Form 8-K, dated August 26, 2004, File No. 33-68412).  4.18
    
    Form of Registration Rights Agreement among Avondale Mills,
Inc., Avondale Incorporated and each of the holders from time to time of the
Senior Floating Rate Notes due 2012 (incorporated by reference to Exhibit 4.18
to Avondale Incorporateds Quarterly Report on Form 10-Q for the period ended
November 26, 2004, File No. 33-68412).  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. 33




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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: July 8, 2005 34