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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 February 25, 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
(Address of principal executive offices)
    
    30655
(Zip code)
 Registrants telephone number, including area code: (770) 267-2226 Former name, former address and former fiscal year, if changed since last report: N/A Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES 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
    
    April 1, 2005
    
    11,394,160 SharesClass B Common Stock
    
    April 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 February 25, 2005
    
    
    2Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended February 27, 2004 and February 25, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Twenty-Six Weeks Ended February 27, 2004 and February 25, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended February 27, 2004 and February 25, 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
    
    
    33Item 5:
    
    Other Information
    
    
    33Item 6:
    
    Exhibits
    
    
    33Signature
    
    
    
    
    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)
 Feb. 25,Aug. 27,
    
    
    20052004
    
    
    (unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    5,481
    
    
    $
    4,811Accounts receivable, less allowance for doubtful accounts
of $1,015 at August 27, 2004 and $885 at February 25, 2005
    
    
    50,975
    
    
    
    46,323Inventories
    
    
    78,282
    
    
    
    84,761Prepaid expenses
    
    
    1,275
    
    
    
    1,830Insurance claim receivable
    
    
    
    
    
    
    2,856Income taxes refundable
    
    
    506
    
    
    
    187Total current assets
    
    
    136,519
    
    
    
    140,768Assets held for sale
    
    
    1,037
    
    
    
    734Property, plant and equipmentLand
    
    
    6,289
    
    
    
    6,273Buildings
    
    
    75,771
    
    
    
    75,896Machinery and equipment
    
    
    465,647
    
    
    
    467,843547,707
    
    
    
    550,012Less accumulated depreciation
    
    
    (365,755
    )
    
    
    (381,182
    )181,952
    
    
    
    168,830Goodwill
    
    
    2,951
    
    
    
    2,951Other assets
    
    
    6,023
    
    
    
    5,999$
    328,482
    
    
    $
    319,282LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    24,167
    
    
    $
    23,886Accrued compensation, benefits and related expenses
    
    
    10,440
    
    
    
    10,111Accrued interest
    
    
    2,403
    
    
    
    2,188Other accrued expenses
    
    
    9,340
    
    
    
    8,962Long-term debt due in one year
    
    
    4,325
    
    
    
    4,325Total current liabilities
    
    
    50,675
    
    
    
    49,472Long-term debt
    
    
    141,039
    
    
    
    138,702Deferred income taxes and other long-term liabilities
    
    
    29,439
    
    
    
    27,089Shareholders 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 February 25, 2005
    
    
    114
    
    
    
    114Class B, $.01 par value; 5,000 shares authorized;
issued and outstanding  979 shares at
August 27, 2004 and February 25, 2005
    
    
    10
    
    
    
    10Capital in excess of par value
    
    
    39,170
    
    
    
    39,170Retained earnings
    
    
    68,035
    
    
    
    64,725Total shareholders equity
    
    
    107,329
    
    
    
    104,019$
    328,482
    
    
    $
    319,282
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 2




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AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (In thousands, except per share data)
 Thirteen Weeks EndedFeb. 27,
    
    
    Feb. 25,2004
    
    
    2005Net sales
    
    $
    129,582
    
    
    $
    124,306Operating costs and expensesCost of goods sold
    
    
    117,578
    
    
    
    110,962Depreciation
    
    
    9,343
    
    
    
    8,538Selling and administrative expenses
    
    
    6,227
    
    
    
    6,652Operating loss
    
    
    (3,566
    )
    
    
    (1,846
    )Interest expense, net
    
    
    4,334
    
    
    
    3,832Discount and expenses on sales of receivables
    
    
    615
    
    
    
    534Other, net
    
    
    (177
    )
    
    
    (578
    )Loss before income taxes
    
    
    (8,338
    )
    
    
    (5,634
    )Benefit of income taxes
    
    
    (2,965
    )
    
    
    (2,125
    )Net loss
    
    $
    (5,373
    )
    
    $
    (3,509
    )Per share data:Net loss-basic
    
    $
    (.43
    )
    
    $
    (.28
    )Net loss-diluted
    
    $
    (.43
    )
    
    $
    (.28
    )Dividends declared
    
    $
    .10
    
    
    $
    
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 3




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AVONDALE INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (In thousands, except per share data)
 Twenty-Six Weeks EndedFeb. 27,
    
    
    Feb. 25,2004
    
    
    2005Net sales
    
    $
    260,922
    
    
    $
    275,396Operating costs and expensesCost of goods sold
    
    
    235,349
    
    
    
    243,366Depreciation
    
    
    18,867
    
    
    
    17,155Selling and administrative expenses
    
    
    12,689
    
    
    
    12,794Operating income (loss)
    
    
    (5,983
    )
    
    
    2,081Interest expense, net
    
    
    9,164
    
    
    
    7,589Discount and expenses on sales of receivables
    
    
    1,243
    
    
    
    1,115Gain on extinguishment of debt
    
    
    
    
    
    
    (162
    )Other, net
    
    
    (2,549
    )
    
    
    (1,151
    )Loss before income taxes
    
    
    (13,841
    )
    
    
    (5,310
    )Benefit of income taxes
    
    
    (4,895
    )
    
    
    (2,000
    )Net loss
    
    $
    (8,946
    )
    
    $
    (3,310
    )Per share data:Net loss-basic
    
    $
    (.72
    )
    
    $
    (.27
    )Net loss-diluted
    
    $
    (.72
    )
    
    $
    (.27
    )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)
 Twenty-Six Weeks EndedFeb. 27,
    
    
    Feb. 25,2004
    
    
    2005Operating activitiesNet loss
    
    $
    (8,946
    )
    
    $
    (3,310
    )Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    19,103
    
    
    
    17,593Benefit of deferred income taxes
    
    
    (5,035
    )
    
    
    (1,983
    )Gain on disposal of property, plant
and equipment and assets held for sale
    
    
    (2,633
    )
    
    
    (971
    )Gain on extinguishment of debt
    
    
    
    
    
    
    (162
    )Sale of accounts receivable, net
    
    
    (4,932
    )
    
    
    (11,072
    )Changes in operating assets and liabilities
    
    
    (5,087
    )
    
    
    4,156Net cash provided by (used in) operating activities
    
    
    (7,530
    )
    
    
    4,251Investing activitiesPurchases of property, plant and equipment
    
    
    (2,833
    )
    
    
    (4,188
    )Proceeds from sale of property, plant and equipment
and assets held for sale
    
    
    4,597
    
    
    
    1,430Net cash provided by (used in) investing activities
    
    
    1,764
    
    
    
    (2,758
    )Financing activitiesReduction in long-term debt
    
    
    (2,163
    )
    
    
    (2,163
    )Dividends paid
    
    
    (2,476
    )
    
    
    Net cash used in financing activities
    
    
    (4,639
    )
    
    
    (2,163
    )Decrease in cash and cash equivalents
    
    
    (10,405
    )
    
    
    (670
    )Cash and cash equivalents at beginning of period
    
    
    13,769
    
    
    
    5,481Cash and cash equivalents at end of period
    
    $
    3,364
    
    
    $
    4,811
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 5




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AVONDALE INCORPORATED 
 NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)
 February 25, 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 twenty-six weeks ended February 25, 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,
    
    
    Feb. 25,2004
    
    
    2005Finished goods
    
    $
    29,187
    
    
    $
    33,467Work in process
    
    
    33,047
    
    
    
    34,666Raw materials
    
    
    8,173
    
    
    
    7,194Dyes and chemicals
    
    
    4,096
    
    
    
    4,459Inventories at FIFO
    
    
    74,503
    
    
    
    79,786Adjustment of carrying value to LIFO basis,
net of market adjustment
    
    
    (1,645
    )
    
    
    (645
    )72,858
    
    
    
    79,141Supplies at average cost
    
    
    5,424
    
    
    
    5,620$
    78,282
    
    
    $
    84,761
 6




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 25, 2005 The Companys inventories at February 25, 2005 under the last-in, first-out (LIFO)
method and the related impact on the statement of operations for the twenty-six 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 February 25, 2005 and the operating results for the
twenty-six weeks ended February 25, 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
    
    
    Twenty-Six Weeks EndedFeb. 27,
    
    
    Feb. 25,
    
    
    Feb. 27,
    
    
    Feb. 25,2004
    
    
    2005
    
    
    2004
    
    
    2005Weighted average shares outstanding  basic
    
    
    12,381
    
    
    
    12,373
    
    
    
    12,381
    
    
    
    12,373Effect of employee stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares outstanding  diluted
    
    
    12,381
    
    
    
    12,373
    
    
    
    12,381
    
    
    
    12,373
 The Company adopted the provisions of Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, during fiscal 2003, electing
to continue its use of the intrinsic value method. Accordingly, no stock-based compensation has
been recorded, as the exercise price of each option granted under the existing plan equals the
market value of the underlying common stock on the date of grant. If the Company had elected to
record stock-based compensation in accordance with the fair value method and the provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
reported net income and earnings per share would be adjusted to the pro forma amounts as shown
below (amounts in thousands, except per share data): Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedFeb. 27,
    
    
    Feb. 25,
    
    
    Feb. 27,
    
    
    Feb. 25,2004
    
    
    2005
    
    
    2004
    
    
    2005Net loss as reported
    
    $
    (5,373
    )
    
    $
    (3,509
    )
    
    $
    (8,946
    )
    
    $
    (3,310
    )Pro forma stock-based compensation, net of
income taxes
    
    
    (9
    )
    
    
    (9
    )
    
    
    (18
    )
    
    
    (9
    )Pro forma net loss
    
    $
    (5,382
    )
    
    $
    (3,518
    )
    
    $
    (8,964
    )
    
    $
    (3,319
    )Per share data:Net loss-basic as reported
    
    $
    (.43
    )
    
    $
    (.28
    )
    
    $
    (.72
    )
    
    $
    (.27
    )Net loss-basic pro forma
    
    $
    (.43
    )
    
    $
    (.28
    )
    
    $
    (.72
    )
    
    $
    (.27
    )Net loss-diluted as reported
    
    $
    (.43
    )
    
    $
    (.28
    )
    
    $
    (.72
    )
    
    $
    (.27
    )Net loss-diluted pro forma
    
    $
    (.43
    )
    
    $
    (.28
    )
    
    $
    (.72
    )
    
    $
    (.27
    )
 7




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AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 25, 2005 4. Segment Information: Condensed segment information is as follows (amounts in
thousands): Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedFeb. 27,
    
    
    Feb. 25,
    
    
    Feb. 27,
    
    
    Feb. 25,2004
    
    
    2005
    
    
    2004
    
    
    2005Revenues:Apparel fabrics
    
    $
    94,367
    
    
    $
    86,168
    
    
    $
    194,729
    
    
    $
    200,948Yarns
    
    
    45,974
    
    
    
    49,454
    
    
    
    87,373
    
    
    
    91,106Other
    
    
    14,065
    
    
    
    6,366
    
    
    
    28,788
    
    
    
    14,794154,406
    
    
    
    141,988
    
    
    
    310,890
    
    
    
    306,848Less inter-segment sales
    
    
    24,824
    
    
    
    17,682
    
    
    
    49,968
    
    
    
    31,452Total
    
    $
    129,582
    
    
    $
    124,306
    
    
    $
    260,922
    
    
    $
    275,396Income (loss):Apparel fabrics
    
    $
    479
    
    
    $
    (2,879
    )
    
    $
    2,881
    
    
    $
    (31
    )Yarns
    
    
    470
    
    
    
    4,542
    
    
    
    (848
    )
    
    
    7,522Other
    
    
    880
    
    
    
    397
    
    
    
    1,923
    
    
    
    1,612Unallocated
    
    
    (5,395
    )
    
    
    (3,906
    )
    
    
    (9,939
    )
    
    
    (7,022
    )Total operating income (loss)
    
    
    (3,566
    )
    
    
    (1,846
    )
    
    
    (5,983
    )
    
    
    2,081Interest expense, net
    
    
    4,334
    
    
    
    3,832
    
    
    
    9,164
    
    
    
    7,589Discount and expenses on sale of receivables
    
    
    615
    
    
    
    534
    
    
    
    1,243
    
    
    
    1,115Gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162
    )Other, net
    
    
    (177
    )
    
    
    (578
    )
    
    
    (2,549
    )
    
    
    (1,151
    )Loss before income taxes
    
    $
    (8,338
    )
    
    $
    (5,634
    )
    
    $
    (13,841
    )
    
    $
    (5,310
    )
 5. Post Retirement Benefits: The estimated cost of post retirement benefits is
recorded ratably over the service lives of the associates expected to receive such benefits. The
Company provides certain life and medical insurance benefits which were granted in 1964 to a closed
group of associates, the majority of whom are now retired. The table below details the estimated
net period cost of the Companys post retirement benefits. Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedFeb. 27,
    
    
    Feb. 25,
    
    
    Feb. 27,
    
    
    Feb. 25,2004
    
    
    2005
    
    
    2004
    
    
    2005Components of net periodic benefit cost (benefit):Service cost
    
    $
    26
    
    
    $
    
    
    
    $
    52
    
    
    $
    Interest cost
    
    
    114
    
    
    
    53
    
    
    
    228
    
    
    
    106Amortization of prior service cost
    
    
    83
    
    
    
    (127
    )
    
    
    166
    
    
    
    (254
    )Amortization of loss
    
    
    (15
    )
    
    
    
    
    
    
    (30
    )
    
    
    Net periodic benefit cost (benefit)
    
    $
    208
    
    
    $
    (74
    )
    
    $
    416
    
    
    $
    (148
    )
 Payment of post retirement benefits for the twenty-six weeks ended February 27, 2004 and
February 25, 2005 amounted to $720,000 and $384,000, respectively, and is forecasted to be
approximately $600,000 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)
February 25, 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. 7. January 6, 2005 Train Derailment: On Thursday, 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. 9




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 25, 2005 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 on going.
Operations in all facilities have been resumed in an orderly manner, taking place in stages during
January and February. Normal levels of production are being generated, with the exception of the
coated fabrics operation, 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 will occur over time, with a corresponding reduction in productive efficiency and
temporary loss of capacity. Shipments of finished goods from all of the Companys distribution
centers have resumed. 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 and has provided temporary clean up
assistance. Near the end of March 2005, Norfolk Southern terminated its clean up efforts and the
Company is taking steps to proceed with the required cleanup and remediation of the chlorine
induced damage. 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 twenty-six weeks ended
February 25, 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 $5.6 million
during the thirteen weeks ended February 25, 2005. The Company has recorded these costs, net of a
$5.0 million advance received from the Companys property damage insurance provider, as an
insurance claim receivable within current assets at February 25, 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 thirteen and twenty-six weeks ended February 25, 2005, as
such amounts are contingent upon final settlement with respective insurers and third parties. 8. 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 Item 3 Legal
Proceedings in the Companys Annual Report on Form 10-K for the fiscal year ended August 27, 2004.
There have been no significant changes in the matters reported other than as described below. The
Company is also a party to other litigation incidental to its business from time to time. The
Company is not currently a party to any litigation that management, in consultation with legal
counsel, believes will have a material adverse effect on the Companys financial condition or
results of operations. 10




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 25, 2005 On January 13, 2000, a complaint against Russell Corporation, Alabama Power Company and
the Company was filed in the Circuit Court of Jefferson County, Alabama (the Court) by Larry and
Cynthia Locke, and the owners of twenty-three other residences in the Raintree subdivision of Lake
Martin. The complaint alleges that the Company, among others, negligently and/or wantonly caused or
permitted the discharge and disposal of sewage sludge and contaminants into the lake adjacent to
the plaintiffs properties, which allegedly interfered with the plaintiffs use of the properties.
As a result of these alleged actions, the plaintiffs claim that the values of their properties have
been diminished and that they suffered other damages. The complaint seeks compensatory and
punitive damages in an undisclosed amount. The Court subsequently dismissed Alabama Power as a
defendant in the case, based on its motion for summary judgment. After an initial series of
actions, the case was stayed by the Court pending resolution of an appeal in the case of Sullivan
versus Russell Corporation, the Company and others (the Sullivan case), which also involved the
Raintree subdivision. On January 12, 2001, the Alabama Supreme Court issued a final order in the
Sullivan case rendering that case in favor of the defendants. Subsequent to the Alabama Supreme
Courts actions with regard to the Sullivan case, plaintiffs counsel, which includes attorneys who
acted as co-plaintiffs counsel on the Sullivan case, presented arguments in a hearing before the
Court on May 4, 2001 based on a narrow legal theory that the nuisance claimed in this action is
sufficiently different from the Sullivan case, and therefore, that this case should be allowed to
proceed in spite of the fact that the Sullivan case was ultimately decided in favor of the
defendants. The Court allowed the case to proceed to the discovery phase. Ten plaintiffs
voluntarily dismissed their claims on August 29, 2001 and five more plaintiffs did so on October
31, 2001. On April 25, 2002, the Court held a hearing on summary judgment motions and, on May 22,
2002, entered judgment as a matter of law in the defendants favor on all counts except the narrow
legal theory involving public nuisance tort. In response to motions filed by the Company and
Russell Corporation, the Court entered an order reducing testimony that can be given by plaintiffs
proposed experts and held that plaintiffs can only recover damages arising from a nuisance proven
to have been caused by the defendants at any time since January 1998. The Company ceased all dyeing
operations at its Alexander City plant in April 1999. In addition, the Court found that the
plaintiffs have no evidence that would entitle them to recover damages for mental anguish in this
case and made a number of other specific evidentiary rulings in the defendants favor. In response
to a motion filed by plaintiffs counsel for reconsideration of all aspects of the Courts order, a
hearing was held on December 10, 2004 and the Court allowed the parties until December 23, 2004 to
submit additional briefing. Subsequently, the Court retained the core of its rulings but clarified
that plaintiffs may be permitted to seek certain damages and present certain evidence during the
trial. The Court rescheduled the trial date on this matter to September 19, 2005 and ruled that the
plaintiffs must provide specific damage claims and calculations one month prior to the trial date.
A pre-trial conference, the date of which has not been set, will be held to resolve final
evidentiary issues and scheduling matters in advance of trial. The Company intends to vigorously
defend this case and believes that it has a number of defenses available to it. While the outcome
of this case cannot be predicted with certainty, the Company does not believe that it will have a
material adverse effect on the Companys financial condition or results of operations. 9. Consolidating Guarantor and Non-guarantor 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 non-guarantor of the Notes, operates a denim
manufacturing facility and warehouse operation located in South Carolina. 11




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 25, 2005 AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
February 25, 2005
(In thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent AssetsCash and cash equivalents
    
    $
    4,811
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,811Accounts receivable
    
    
    46,320
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    46,323Inventories
    
    
    84,761
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,761Prepaid expenses
    
    
    1,830
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,830Insurance claim receivable
    
    
    2,856
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,856Income taxes refundable
    
    
    187
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187Total current assets
    
    
    140,765
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    140,768Assets held for sale
    
    
    734
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    734Property, plant and equipmentLand
    
    
    6,077
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    6,273Buildings
    
    
    64,146
    
    
    
    
    
    
    
    11,750
    
    
    
    
    
    
    
    75,896Machinery and equipment
    
    
    429,908
    
    
    
    
    
    
    
    37,935
    
    
    
    
    
    
    
    467,843500,131
    
    
    
    
    
    
    
    49,881
    
    
    
    
    
    
    
    550,012Less accumulated depreciation
    
    
    (350,041
    )
    
    
    
    
    
    
    (31,141
    )
    
    
    
    
    
    
    (381,182
    )150,090
    
    
    
    
    
    
    
    18,740
    
    
    
    
    
    
    
    168,830Goodwill
    
    
    2,951
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,951Investment in subsidiaries
    
    
    6,889
    
    
    
    93,596
    
    
    
    
    
    
    
    (100,485
    )
    
    
    Other assets
    
    
    5,999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,999$
    307,428
    
    
    $
    93,596
    
    
    $
    18,743
    
    
    $
    (100,485
    )
    
    $
    319,282LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    23,048
    
    
    $
    
    
    
    $
    838
    
    
    $
    
    
    
    $
    23,886Accrued compensation, benefits
    
    
    9,989
    
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    10,111Accrued interest
    
    
    2,188
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,188Other accrued expenses
    
    
    8,961
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    8,962Long-term debt due in one year
    
    
    4,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,325Total current liabilities
    
    
    48,511
    
    
    
    
    
    
    
    961
    
    
    
    
    
    
    
    49,472Long-term debt
    
    
    138,702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138,702Deferred income taxes
and other long term liabilities
    
    
    27,089
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,089Due to (from) subsidiaries
    
    
    (470
    )
    
    
    (10,423
    )
    
    
    10,893
    
    
    
    
    
    
    
    Shareholders equity
    
    
    93,596
    
    
    
    104,019
    
    
    
    6,889
    
    
    
    (100,485
    )
    
    
    104,019$
    307,428
    
    
    $
    93,596
    
    
    $
    18,743
    
    
    $
    (100,485
    )
    
    $
    319,282
 12




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 25, 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
    
    
    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)
February 25, 2005 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended February 25, 2005
(In thousands) Non-GuarantorAvondaleMillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    124,306
    
    
    $
    28
    
    
    $
    22,661
    
    
    $
    (22,689
    )
    
    $
    124,306Operating costs and expensesCost of goods sold
    
    
    110,958
    
    
    
    
    
    
    
    22,667
    
    
    
    (22,663
    )
    
    
    110,962Depreciation
    
    
    7,607
    
    
    
    
    
    
    
    931
    
    
    
    
    
    
    
    8,538Selling and administrative expenses
    
    
    6,678
    
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    6,652Operating income (loss)
    
    
    (937
    )
    
    
    28
    
    
    
    (937
    )
    
    
    
    
    
    
    (1,846
    )Interest expense, net
    
    
    3,832
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,832Discount and expenses on sales
of receivables
    
    
    534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    534Other, net
    
    
    (578
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (578
    )Income (loss) before income taxes
    
    
    (4,725
    )
    
    
    28
    
    
    
    (937
    )
    
    
    
    
    
    
    (5,634
    )Provision for (benefit of) income taxes
    
    
    (1,784
    )
    
    
    10
    
    
    
    (351
    )
    
    
    
    
    
    
    (2,125
    )Equity in loss of subsidiary
    
    
    (586
    )
    
    
    (3,527
    )
    
    
    
    
    
    
    4,113
    
    
    
    Net loss
    
    $
    (3,527
    )
    
    $
    (3,509
    )
    
    $
    (586
    )
    
    $
    4,113
    
    
    $
    (3,509
    )
 14




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 25, 2005 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Thirteen weeks ended February 27, 2004
(In thousands) Non-GuarantorAvondale MillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    129,582
    
    
    $
    25
    
    
    $
    22,348
    
    
    $
    (22,373
    )
    
    $
    129,582Operating costs and expensesCost of goods sold
    
    
    117,996
    
    
    
    
    
    
    
    21,928
    
    
    
    (22,346
    )
    
    
    117,578Depreciation
    
    
    8,406
    
    
    
    
    
    
    
    937
    
    
    
    
    
    
    
    9,343Selling and administrative expenses
    
    
    6,254
    
    
    
    
    
    
    
    
    
    
    
    (27
    )
    
    
    6,227Operating income (loss)
    
    
    (3,074
    )
    
    
    25
    
    
    
    (517
    )
    
    
    
    
    
    
    (3,566
    )Interest expense, net
    
    
    4,334
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,334Discount and expenses on sales
of receivables
    
    
    615
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    615Other, net
    
    
    (177
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (177
    )Income (loss) before income taxes
    
    
    (7,846
    )
    
    
    25
    
    
    
    (517
    )
    
    
    
    
    
    
    (8,338
    )Provision for (benefit of) income taxes
    
    
    (2,786
    )
    
    
    9
    
    
    
    (188
    )
    
    
    
    
    
    
    (2,965
    )Equity in loss of subsidiary
    
    
    (329
    )
    
    
    (5,389
    )
    
    
    
    
    
    
    5,718
    
    
    
    Net loss
    
    $
    (5,389
    )
    
    $
    (5,373
    )
    
    $
    (329
    )
    
    $
    5,718
    
    
    $
    (5,373
    )
 15




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 25, 2005 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Twenty-Six weeks ended February 25, 2005
(In thousands) Non-GuarantorAvondale MillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    275,396
    
    
    $
    59
    
    
    $
    50,097
    
    
    $
    (50,156
    )
    
    $
    275,396Operating costs and expensesCost of goods sold
    
    
    243,707
    
    
    
    
    
    
    
    49,756
    
    
    
    (50,097
    )
    
    
    243,366Depreciation
    
    
    15,293
    
    
    
    
    
    
    
    1,862
    
    
    
    
    
    
    
    17,155Selling and administrative expenses
    
    
    12,853
    
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    12,794Operating income (loss)
    
    
    3,543
    
    
    
    59
    
    
    
    (1,521
    )
    
    
    
    
    
    
    2,081Interest expense, net
    
    
    7,589
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,589Discount and expenses on sales
of receivables
    
    
    1,115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,115Gain on extinguishment of debt
    
    
    (162
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162
    )Other, net
    
    
    (1,151
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,151
    )Income (loss) before income taxes
    
    
    (3,848
    )
    
    
    59
    
    
    
    (1,521
    )
    
    
    
    
    
    
    (5,310
    )Provision for (benefit of) income taxes
    
    
    (1,452
    )
    
    
    22
    
    
    
    (570
    )
    
    
    
    
    
    
    (2,000
    )Equity in loss of subsidiary
    
    
    (951
    )
    
    
    (3,347
    )
    
    
    
    
    
    
    4,298
    
    
    
    Net loss
    
    $
    (3,347
    )
    
    $
    (3,310
    )
    
    $
    (951
    )
    
    $
    4,298
    
    
    $
    (3,310
    )
 16




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 25, 2005 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Twenty-Six weeks ended February 27, 2004
(In thousands) Non-GuarantorAvondale MillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    260,922
    
    
    $
    51
    
    
    $
    44,360
    
    
    $
    (44,411
    )
    
    $
    260,922Operating costs and expensesCost of goods sold
    
    
    236,583
    
    
    
    
    
    
    
    43,125
    
    
    
    (44,359
    )
    
    
    235,349Depreciation
    
    
    16,992
    
    
    
    
    
    
    
    1,875
    
    
    
    
    
    
    
    18,867Selling and administrative expenses
    
    
    12,741
    
    
    
    
    
    
    
    
    
    
    
    (52
    )
    
    
    12,689Operating income (loss)
    
    
    (5,394
    )
    
    
    51
    
    
    
    (640
    )
    
    
    
    
    
    
    (5,983
    )Interest expense, net
    
    
    9,164
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,164Discount and expenses on sales
of receivables
    
    
    1,243
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,243Other, net
    
    
    (2,549
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,549
    )Income (loss) before income taxes
    
    
    (13,252
    )
    
    
    51
    
    
    
    (640
    )
    
    
    
    
    
    
    (13,841
    )Provision for (benefit of) income taxes
    
    
    (4,679
    )
    
    
    19
    
    
    
    (235
    )
    
    
    
    
    
    
    (4,895
    )Equity in loss of subsidiary
    
    
    (405
    )
    
    
    (8,978
    )
    
    
    
    
    
    
    9,383
    
    
    
    Net loss
    
    $
    (8,978
    )
    
    $
    (8,946
    )
    
    $
    (405
    )
    
    $
    9,383
    
    
    $
    (8,946
    )
 17




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 25, 2005 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Twenty-six weeks ended February 25, 2005
(In thousands) Non-GuarantorAvondale MillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedOperating activitiesNet loss
    
    $
    (3,347
    )
    
    $
    (3,310
    )
    
    $
    (951
    )
    
    $
    4,298
    
    
    $
    (3,310
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation and amortization
    
    
    15,731
    
    
    
    
    
    
    
    1,862
    
    
    
    
    
    
    
    17,593Benefit of deferred income taxes
    
    
    (1,983
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,983
    )Gain on disposal of property, plant
and equipment and assets held
for sale
    
    
    (971
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (971
    )Gain on extinguishment of debt
    
    
    (162
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162
    )Sale of accounts receivable, net
    
    
    (11,072
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,072
    )Changes in operating assets and liabilities
    
    
    5,009
    
    
    
    (37
    )
    
    
    (816
    )
    
    
    
    
    
    
    4,156Equity in loss of subsidiary
    
    
    951
    
    
    
    3,347
    
    
    
    
    
    
    
    (4,298
    )
    
    
    Net cash provided by operating
activities
    
    
    4,156
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    4,251Investing activitiesPurchase of property, plant and equipment
    
    
    (4,093
    )
    
    
    
    
    
    
    (95
    )
    
    
    
    
    
    
    (4,188
    )Proceeds from sale of property, plant
and equipment and assets held for sale
    
    
    1,430
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,430Net cash used in investing activities
    
    
    (2,663
    )
    
    
    
    
    
    
    (95
    )
    
    
    
    
    
    
    (2,758
    )Financing activitiesNet payments on long term debt
    
    
    (2,163
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,163
    )Net cash used in financing activities
    
    
    (2,163
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,163
    )Decrease in cash and cash equivalents
    
    
    (670
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (670
    )Cash and cash equivalents
at beginning of period
    
    
    5,481
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,481Cash and cash equivalents
at end of period
    
    $
    4,811
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,811
 18




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##### Table of Contents



AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
February 25, 2005 AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Twenty-Six weeks ended February 27, 2004
(In thousands) Non-GuarantorAvondale MillsGuarantor
    
    
    GranitevilleAvondale
    
    
    Avondale
    
    
    Fabrics,Mills, Inc.
    
    
    Incorporated
    
    
    Inc.
    
    
    Eliminations
    
    
    ConsolidatedOperating activitiesNet loss
    
    $
    (8,978
    )
    
    $
    (8,946
    )
    
    $
    (405
    )
    
    $
    9,383
    
    
    $
    (8,946
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    17,228
    
    
    
    
    
    
    
    1,875
    
    
    
    
    
    
    
    19,103Benefit of deferred income taxes
    
    
    (5,035
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,035
    )Gain on disposal of property, plant
and equipment and assets held
for sale
    
    
    (2,633
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,633
    )Sale of accounts receivable, net
    
    
    (4,932
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,932
    )Changes in operating assets and liabilities
    
    
    (3,594
    )
    
    
    (32
    )
    
    
    (1,461
    )
    
    
    
    
    
    
    (5,087
    )Dividends from subsidiary
    
    
    
    
    
    
    2,476
    
    
    
    
    
    
    
    (2,476
    )
    
    
    Equity in loss of subsidiary
    
    
    405
    
    
    
    8,978
    
    
    
    
    
    
    
    (9,383
    )
    
    
    Net cash provided by (used in)
operating activities
    
    
    (7,539
    )
    
    
    2,476
    
    
    
    9
    
    
    
    (2,476
    )
    
    
    (7,530
    )Investing activitiesPurchase of property, plant and equipment
    
    
    (2,824
    )
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (2,833
    )Proceeds from sale of property, plant
and equipment and assets held for sale
    
    
    4,597
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,597Net cash provided by (used in)
investing activities
    
    
    1,773
    
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    1,764Financing activitiesNet payments on long-term debt
    
    
    (2,163
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,163
    )Dividends paid
    
    
    (2,476
    )
    
    
    (2,476
    )
    
    
    
    
    
    
    2,476
    
    
    
    (2,476
    )Net cash used in financing activities
    
    
    (4,639
    )
    
    
    (2,476
    )
    
    
    
    
    
    
    2,476
    
    
    
    (4,639
    )Decrease in cash and cash equivalents
    
    
    (10,405
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,405
    )Cash and cash equivalentsAt beginning of period
    
    
    13,769
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,769Cash and cash equivalentsAt end of period
    
    $
    3,364
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,364
 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 Item 3 Legal
Proceedings in the Companys Annual Report on Form 10-K for the fiscal year ended August 27, 2004.
There have been no changes in the matters reported other than as set forth in Part II. Item 2.
Legal Proceedings included elsewhere in this Quarterly Report of Form 10-Q. The Company is also a
party to other litigation incidental to its business from time to time. The Company is not
currently a party to any litigation that management, in consultation with legal counsel, believes
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 February 25, 2005 Compared to Thirteen Weeks Ended February 27, 2004 Net Sales. Net sales decreased 4.1% to $124.3 million for the thirteen weeks ended
February 25, 2005 from $129.6 million for the thirteen weeks ended February 27, 2004. The Company
experienced significant improvement in net sales during the previous two fiscal quarters and the
first few weeks of the current reporting period, reflecting improved unit sales for the Companys
apparel fabrics and yarns operations and higher average invoice price for the Companys apparel
fabrics operation. This positive trend was negatively impacted when 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 located in Graniteville, South
Carolina. In the resulting 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, productive capacity representing more than 50% of the Companys sales was effectively
shutdown. In addition, the Companys computer systems, communications systems, electronic and
electrical systems, compressors and other equipment in affected facilities were damaged by
corrosion induced by chlorine gas exposure. The Company focused all available resources on its
recovery efforts and was able to resume operations in an orderly manner with recovery of a
substantial portion of its productive capacity and shipments of finished goods from all of the
Companys distribution centers. However, sales and production volumes were dramatically reduced
during January and February 2005 while these recovery efforts were underway, resulting in the
decline in net sales for the thirteen weeks ended February 25, 2005. 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, the elimination of all import quotas effective December 31, 2004 as set
forth by the World Trade Organization, uncertainties presented by the economic and political
environment, the imbalance of global supply and demand for textile and apparel products and the
financial distress experienced by many of the Companys domestic competitors. In addition, the
manipulation of the Chinese yuan and currencies of other Asian countries relative to the U.S.
dollar and other trade distorting practices employed by those countries create competitive
advantages which continue to promote the importation of goods from those countries by U.S.
retailers, exacerbating the already highly competitive market conditions. Pending legislation to
impose tariffs on imports from China to offset Chinas undervalued currency and petitions filed by
industry trade organizations seeking safeguard relief through action by the U.S. government may
provide some assistance, but there can be no assurance that any of these proposals will be
implemented, and if so, in a timely manner. The Company expects these difficult conditions to
continue into the foreseeable future. Operating Loss. The Company produced an operating loss of ($1.8) million for the
thirteen weeks ended February 25, 2005 compared to an operating loss of ($3.6) million for the
thirteen weeks ended February 27, 2004. The reduction in operating loss reflected improved unit
sales for the Companys yarns operation, higher average invoice price for the Companys apparel
fabrics operation and favorable LIFO inventory adjustment. Raw material costs per unit increased
slightly, as 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 offset generally
lower market prices of cotton. Conversion costs per unit increased slightly, due largely to lower
unit cost absorptions resulting from the loss in production volumes associated with the January 6,
2005 train derailment. Additionally, the Company recorded a non-cash benefit of $0.5 million to
adjust the carrying value of inventories to LIFO basis for the thirteen weeks ended February 25,
2005 compared to a non-cash charge of $2.0 million for the thirteen weeks ended February 27, 2004. Cost of goods sold decreased 5.6% to $111.0 million for the thirteen weeks ended February 25,
2005 from $117.6 million for the thirteen weeks ended February 27, 2004, primarily reflecting the
decreased unit volume and lower raw material costs. Cost of goods sold as a percentage of net
sales decreased to 89.3% for the thirteen weeks ended February 25, 2005 from 90.7% for the thirteen
weeks ended February 27, 2004, reflecting the impact of lower raw material costs and higher average
invoice prices. Selling and administrative expenses increased 8.1% to $6.7 million for the thirteen weeks
ended February 25, 2005 from $6.2 million for the thirteen weeks ended February 27, 2004, primarily
reflecting increased accrual of certain performance based incentives. Selling and administrative
expenses as a percentage of net sales were 5.4% for the thirteen weeks ended February 25, 2005
versus 4.8% for the thirteen weeks ended February 27, 2004, largely reflecting lower net sales due
to the January 6, 2005 train derailment. 22




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##### Table of Contents



Segment Performance. Apparel fabric sales decreased 8.7% to $86.2 million for the
thirteen weeks ended February 25, 2005 from $94.4 million for the thirteen weeks ended February 27,
2004, reflecting a 13.6% decrease in yards invoiced, largely due to the January 6, 2005 train
derailment, and a 5.5% increase in average invoice price. The apparel fabrics operation produced an
operating loss of ($2.9) million for the thirteen weeks ended February 25, 2005 compared to an
operating profit of $0.5 million for the thirteen weeks ended February 27, 2004, largely due to the
lower unit volume resulting from the January 6, 2005 train derailment. Yarn sales, including intra-company sales to the Companys fabric operations, increased 7.6%
to $49.5 million for the thirteen weeks ended February 25, 2005 from $46.0 million for the thirteen
weeks ended February 27, 2004. Total pounds invoiced increased 17.4%, primarily reflecting the
conversion of a greige fabric operation closed in May 2004 into a yarn manufacturing facility.
Decreased yarn requirements and associated internal transfers of yarns to the Companys apparel
fabrics operation following the January 6, 2005 train derailment were largely mitigated by a
redirection of this production to outside sales. Average invoice price decreased 8.4% as lower raw
material costs impacted outside invoice prices as well as intra-company transfer prices. The yarns
operation produced operating income of $4.5 million for the thirteen weeks ended February 25, 2005
compared to an operating income of $0.5 million for the thirteen weeks ended February 27, 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 a new apparel
sourcing operation and revenues from the Companys trucking operation, decreased 54.6% to $6.4
million for the thirteen weeks ended February 25, 2005 from $14.1 million for the thirteen weeks
ended February 27, 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 55.6%, from $0.9
million for the thirteen weeks ended February 27, 2004 to $0.4 million for the thirteen weeks ended
February 25, 2005, largely reflecting the lower unit volume resulting from the January 6, 2005
train derailment. Inter-segment sales decreased 28.6% to $17.7 million for the thirteen weeks ended February 25,
2005 from $24.8 million for the thirteen weeks ended February 27, 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. Interest Expense, Net. Net interest expense declined 11.6% to $3.8 million for the
thirteen weeks ended February 25, 2005 compared to $4.3 million for the thirteen weeks ended
February 27, 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 $0.5 million for the thirteen weeks ended February 25, 2005 compared to $0.6
million for the thirteen weeks ended February 27, 2004, primarily reflecting a net decrease in
accounts receivable sold under the securitization facility. Provision for (benefit of) Income Taxes. An income tax benefit of ($2.1) million was
recorded for the thirteen weeks ended February 25, 2005 compared to an income tax benefit of ($3.0)
million for the thirteen weeks ended February 27, 2004, reflecting reduced operating losses. 23




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Twenty-six Weeks Ended February 25, 2005 Compared to Twenty-six Weeks Ended February 27, 2004 Net Sales. Net sales increased 5.6% to $275.4 million for the twenty-six weeks ended
February 25, 2005 from $260.9 million for the twenty-six weeks ended February 27, 2004. The
increase in net sales for the twenty-six weeks ended February 25, 2005 primarily reflected higher
average invoice prices for all of the Companys operations, as the development of new and enhanced
products enabled the Company to increase its sales with existing customers and the overall
improvement in market demand for the Companys products continued. While overall unit sales
increased 2.0% for the twenty-six weeks ended February 25, 2005 compared to the twenty-six weeks
ended February 27, 2004, the Company anticipated a much 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 during January and
February 2005 while recovery efforts were underway. 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, the elimination of all import quotas effective December 31, 2004 as set
forth by the World Trade Organization, uncertainties presented by the economic and political
environment, the imbalance of global supply and demand for textile and apparel products and the
financial distress experienced by many of the Companys domestic competitors. In addition, the
manipulation of the Chinese yuan and currencies of other Asian countries relative to the U.S.
dollar and other trade distorting practices employed by those countries create competitive
advantages which continue to promote the importation of goods from those countries by U.S.
retailers, exacerbating the already highly competitive market conditions. Pending legislation to
impose tariffs on imports from China to offset Chinas undervalued currency and petitions filed by
industry trade organizations seeking safeguard relief through action by the U.S. government may
provide some assistance, but there can be no assurance that any of these proposals will be
implemented, and if so, in a timely manner. The Company expects these difficult conditions to
continue into the foreseeable future. Operating Income (Loss). The Company produced an operating income of $2.1 million
for the twenty-six weeks ended February 25, 2005 compared to an operating loss of ($6.0) million
for the twenty-six weeks ended February 27, 2004. The improvement in operating income reflected
higher average invoice prices for all of the Companys operations and lower raw material costs.
Raw material costs per unit decreased significantly, reflecting a significant decline in market
prices of cotton, partially offset by higher 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 resulting from the loss in production volume associated with the
January 6, 2005 train derailment. Additionally, the Company recorded a non-cash benefit of $1.0
million to adjust the carrying value of inventories to LIFO basis for the twenty-six weeks ended
February 25, 2005 compared to a non-cash charge of $2.5 million for the twenty-six weeks ended
February 27, 2004. Cost of goods sold increased 3.4% to $243.4 million for the twenty-six weeks ended February
25, 2005 from $235.3 million for the twenty-six weeks ended February 27, 2004, primarily reflecting
the increased unit volume and higher raw material costs. Cost of goods sold as a percentage of net
sales decreased to 88.4% for the twenty-six weeks ended February 25, 2005 from 90.2% for the
twenty-six weeks ended February 27, 2004, reflecting the impact of the higher average invoice
prices and improved unit cost absorptions. Selling and administrative expenses were largely unchanged at $12.8 million for the twenty-six
weeks ended February 25, 2005 compared to $12.7 million for the twenty-six weeks ended February 27,
2004. Selling and administrative expenses as a percentage of net sales were 4.6% for the twenty-six
weeks ended February 25, 2005 versus 4.9% for the twenty-six weeks ended February 27, 2004. Segment Performance. Apparel fabric sales increased 3.2% to $201.0 million for the
twenty-six weeks ended February 25, 2005 from $194.7 million for the twenty-six weeks ended
February 27, 2004, reflecting a 1.2% decrease in yards invoiced, largely due to the January 6, 2005
train derailment, and a 4.5% increase in average invoice price. The apparel fabrics operations
produced an operating loss of ($31,000) for the twenty-six weeks ended February 25, 2005 compared
to an operating income of $2.9 million for the twenty-six weeks ended February 27, 2004, largely
due to the lower unit volume resulting from the January 6, 2005 train derailment. 24




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Yarn sales, including intra-company sales to the Companys fabric operations, increased 4.2%
to $91.1 million for the twenty-six weeks ended February 25, 2005 from $87.4 million for the
twenty-six weeks ended February 27, 2004. Total pounds invoiced increased 2.0%. Decreased yarn
requirements and associated internal transfers of yarns to the Companys apparel fabrics operation
following the January 6, 2005 train derailment were largely mitigated by a redirection of this
production to outside sales. Average invoice price increased 2.3% as improved market demand for
certain yarn products helped increase outside invoice prices. The yarns operation produced
operating income of $7.5 million for the twenty-six weeks ended February 25, 2005 compared to a
loss of ($0.9) million for the twenty-six weeks ended February 27, 2004, primarily due to the
increase in average invoice price and lower raw material costs. Other sales, which include sales of greige and coated fabrics, initial sales of a new apparel
sourcing operation and revenues from the Companys trucking operation, decreased 48.6% to $14.8
million for the twenty-six weeks ended February 25, 2005 from $28.8 million for the twenty-six
weeks ended February 27, 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 15.8%, from $1.9
million for the twenty-six weeks ended February 27, 2004 to $1.6 million for the twenty-six weeks
ended February 25, 2005, largely reflecting the lower unit volume resulting from the January 6,
2005 train derailment. Inter-segment sales decreased 37.0% to $31.5 million for the twenty-six weeks ended February
25, 2005 from $50.0 million for the twenty-six weeks ended February 27, 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. Interest Expense, Net. Net interest expense declined 17.4% to $7.6 million for the
twenty-six weeks ended February 25, 2005 compared to $9.2 million for the twenty-six weeks ended
February 27, 2004. Net interest expense for the twenty-six weeks ended February 27, 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 twenty-six weeks ended February 25, 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 $1.1 million for the twenty-six weeks ended February 25, 2005 compared to $1.2
million for the twenty-six weeks ended February 27, 2004, primarily reflecting a net decrease in
accounts receivable sold under the securitization facility. Provision for (benefit of) Income Taxes. An income tax benefit of ($2.0) million was
recorded for the twenty-six weeks ended February 25, 2005 compared to an income tax benefit of
($4.9) million for the twenty-six weeks ended February 27, 2004, reflecting reduced operating
losses. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $4.3 million for the twenty-six weeks ended
February 25, 2005. Principal working capital changes included a $15.7 million decrease in accounts
receivable, an $11.1 million decrease in accounts receivable sold under the securitization
facility, a $6.5 million increase in inventories, a $2.9 million increase in net insurance claim
receivable relating to the January 6, 2005 train derailment and a $1.2 million decrease in accounts
payable and accrued expenses. The decrease in accounts receivable and accounts receivable sold
primarily reflect the reduced sales in January and February relating to the January 6, 2005 train
derailment. The increase in inventories reflects normal seasonal buildup of inventories during the
Companys second fiscal quarter, when the Companys customers shutdown for the holidays and the
Company produces goods against orders to be delivered during the strong Spring shipping season. The
fluctuation in accounts payable and accrued expenses is the result of normal differences in the
timing of invoice due dates in relation to the end of the respective reporting periods as well as
the timing of interest payments on the senior and subordinated notes. Investing activities were
predominantly equipment purchases and related costs of $4.2 million and proceeds of $1.4 million
from the sale of several small tracts of land and certain excess equipment. Financing activities
included repayment of $2.2 million of long-term debt. 25




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The Companys capital expenditures, aggregating $4.2 million for the twenty-six weeks ended
February 25, 2005, included purchases of approximately $1.3 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 $7.0 million, excluding purchases to replace additional equipment
damaged as a result of the January 6, 2005 train derailment. 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 February 25, 2005, the Company had no borrowings outstanding under its revolving line of
credit, and $27.8 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 February 25, 2005, combined excess availability
under these two facilities was approximately $51.7 million. Covenants of the indenture under which the 2013 Notes were issued 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 February 25, 2005, the covenants of the indenture prohibit further payment of dividends
or purchases of capital stock until such time as sufficient earnings are reported to eliminate the
restriction. The receivables securitization facility is the Companys only off-balance sheet financing
arrangement. The Company generates funds through the sale of accounts receivable to 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. JANUARY 6, 2005 TRAIN DERAILMENT On Thursday, 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. 26




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##### Table of Contents



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 on going. Operations in all
facilities have been resumed in an orderly manner, taking place in stages during January and
February. Normal levels of production are being generated, with the exception of the coated fabrics
operation, 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 will
occur over time, with a corresponding reduction in productive efficiency and temporary loss of
capacity. Shipments of finished goods from all of the Companys distribution centers have resumed. 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 and has provided temporary clean up
assistance. Near the end of March 2005, Norfolk Southern terminated its clean up efforts and the
Company is taking steps to proceed with the required cleanup and remediation of the chlorine
induced damage. 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 twenty-six weeks ended
February 25, 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 $5.6 million
during the thirteen weeks ended February 25, 2005. The Company has recorded these costs, net of a
$5.0 million advance received from the Companys property damage insurance provider, as an
insurance claim receivable within current assets at February 25, 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 thirteen and twenty-six weeks ended February 25, 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; and
    political or military responses to terrorist activities.
    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 non-cash 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, 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 February 25, 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, non-cash 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 included 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:

        . Twenty-Six Weeks EndedFeb. 27,
    
    
    Feb. 25,2004
    
    
    2005Net loss
    
    $
    (8,946
    )
    
    $
    (3,310
    )Interest expense, net
    
    
    9,164
    
    
    
    7,589Benefit of income taxes
    
    
    (4,895
    )
    
    
    (2,000
    )Depreciation and amortization
    
    
    19,103
    
    
    
    17,593EBITDA
    
    
    14,426
    
    
    
    19,872Discount and expenses on sale of receivables
    
    
    1,243
    
    
    
    1,115Gain on extinguishment of debt
    
    
    
    
    
    
    (162
    )Adjustment of carrying value of inventories
to LIFO basis, net of market adjustment
    
    
    2,500
    
    
    
    (1,000
    )Adjusted EBITDA
    
    $
    18,169
    
    
    $
    19,825Net cash provided by (used in) operating activities
    
    $
    (7,530
    )
    
    $
    4,251Net cash provided by (used in) investing activities
    
    $
    1,764
    
    
    $
    (2,758
    )Net cash used in financing activities
    
    $
    (4,639
    )
    
    $
    (2,163
    )
 
 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. There have been no significant changes in the matters reported under Part I, Item 3
Legal Proceedings in the Companys Annual Report on Form 10-K for the fiscal year
ended August 27, 2004 other than as described below. On January 13, 2000, a complaint against Russell Corporation, Alabama Power Company
and the Company was filed in the Circuit Court of Jefferson County, Alabama (the
Court) by Larry and Cynthia Locke, and the owners of twenty-three other residences
in the Raintree subdivision of Lake Martin. The complaint alleges that the Company,
among others, negligently and/or wantonly caused or permitted the discharge and
disposal of sewage sludge and contaminants into the lake adjacent to the plaintiffs
properties, which allegedly interfered with the plaintiffs use of the properties.
As a result of these alleged actions, the plaintiffs claim that the values of their
properties have been diminished and that they suffered other damages. The complaint
seeks compensatory and punitive damages in an undisclosed amount. The Court
subsequently dismissed Alabama Power as a defendant in the case, based on its motion
for summary judgment. After an initial series of actions, the case was stayed by the
Court pending resolution of an appeal in the case of Sullivan versus Russell
Corporation, the Company and others (the Sullivan case), which also involved the
Raintree subdivision. On January 12, 2001, the Alabama Supreme Court issued a final
order in the Sullivan case rendering that case in favor of the defendants.
Subsequent to the Alabama Supreme Courts actions with regard to the Sullivan case,
plaintiffs counsel, which includes attorneys who acted as co-plaintiffs counsel on
the Sullivan case, presented arguments in a hearing before the Court on May 4, 2001
based on a narrow legal theory that the nuisance claimed in this action is
sufficiently different from the Sullivan case, and therefore, that this case should
be allowed to proceed in spite of the fact that the Sullivan case was ultimately
decided in favor of the defendants. The Court allowed the case to proceed to the
discovery phase. Ten plaintiffs voluntarily dismissed their claims on August 29,
2001 and five more plaintiffs did so on October 31, 2001. On April 25, 2002, the
Court held a hearing on summary judgment motions and, on May 22, 2002, entered
judgment as a matter of law in the defendants favor on all counts except the narrow
legal theory involving public nuisance tort. In response to motions filed by the
Company and Russell Corporation, the Court entered an order reducing testimony that
can be given by plaintiffs proposed experts and held that plaintiffs can only
recover damages arising from a nuisance proven to have been caused by the defendants
at any time since January 1998. The Company ceased all dyeing operations at its
Alexander City plant in April 1999. In addition, the Court found that the
plaintiffs have no evidence that would entitle them to recover damages for mental
anguish in this case and made a number of other specific evidentiary rulings in the
defendants favor. In response to a motion filed by plaintiffs counsel for
reconsideration of all aspects of the Courts order, a hearing was held on December
10, 2004 and the Court allowed the parties until December 23, 2004 to submit
additional briefing. Subsequently, the Court retained the core of its rulings but
clarified that plaintiffs may be permitted to seek certain damages and present
certain evidence during the trial. The Court rescheduled the trial date on this
matter to September 19, 2005 and ruled that the plaintiffs must provide specific
damage claims and calculations one month prior to the trial date. A pre-trial
conference, the date of which has not been set, will be held to resolve final
evidentiary issues and scheduling matters in advance of trial. The Company intends
to vigorously defend this case and believes that it has a number of defenses
available to it. While the outcome of this case cannot be predicted with certainty,
the Company does not believe that it will have a material adverse effect on the
Companys financial condition or results of operations. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None. 
 Item 3. Defaults Upon Senior Securities. None 32




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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).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).
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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.
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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 INCORPORATEDDate: April 6, 2005
    
    By:
    
    /S/ JACK R. ALTHERR, JR.Jack R. Altherr, Jr.Vice Chairman and Chief Financial Officer
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