<PAGE>   1


================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                ---------------
                                   FORM 10-K

(MARK ONE)
   [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
            THE SECURITIES EXCHANGE ACT OF 1934 
            FOR THE FISCAL YEAR ENDED AUGUST 28, 1998
                                         OR
   [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
            THE SECURITIES EXCHANGE ACT OF 1934
            FOR THE TRANSITION PERIOD FROM              TO
                                           -------------  --------------

                        COMMISSION FILE NUMBER 33-68412
                              --------------------
                             AVONDALE INCORPORATED
             (Exact name of registrant as specified in its charter)


                GEORGIA                       58-0477150
    (State or other jurisdiction of        (I.R.S. employer
     incorporation or organization)       identification no.)

         506 SOUTH BROAD STREET                  30655
            MONROE, GEORGIA                   (Zip code)
(Address of principal executive offices)

     Registrant's telephone number, including area code: (770) 267-2226

     Securities registered pursuant to Section 12(b) of the Act: NONE

     Securities registered pursuant to Section 12(g) of the Act: NONE

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES  X    NO
                                              ---      ---

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  X
           ---

     The aggregate market value of the Class A Common Stock held by
non-affiliates of the registrant as of November 9, 1998 (based upon the book
value per share of Class A Common Stock as of October 2, 1998) was $15,748,489.

     As of November 9, 1998, the registrant had 11,698,184 and 978,939 shares of
Class A Common Stock and Class B Common Stock outstanding, respectively.
================================================================================


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                               INDEX TO FORM 10-K

                             AVONDALE INCORPORATED



<TABLE>
<CAPTION>
                                                                                      PAGE
                                                                                   REFERENCE
                                                                                   ---------
                                          PART I
<S>       <C>                                                                      <C>
Item  1.  Business...............................................................       2

Item  2.  Properties.............................................................      10

Item  3.  Legal Proceedings......................................................      10

Item  4.  Submission of Matters to a Vote of Security Holders....................      11

                                          PART II

Item  5.  Market for Registrant's Common Equity and Related Stockholder Matters..      12

Item  6.  Selected Financial Data................................................      13

Item  7.  Management's Discussion and Analysis of Financial Condition and 
             Results of Operations...............................................      15

Item 7a.  Quantitative and Qualitative Disclosures About Market Risk.............      22

Item  8.  Financial Statements and Supplementary Data............................      23
          
Item  9.  Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure............................................      39

                                         Part III

Item 10.  Directors and Executive Officers of the Registrant.....................      40

Item 11.  Executive Compensation.................................................      43

Item 12.  Security Ownership of Certain Beneficial Owners and Management.........      48

Item 13.  Certain Relationships and Related Transactions.........................      51

                                          PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K........      52
</TABLE>





<PAGE>   3







                                     PART I

     Unless the context otherwise requires, references herein to the Company
refer to Avondale Incorporated and its subsidiaries and any reference to a
"fiscal" year of the Company refers to the Company's fiscal year ending on the
last Friday in August in such year.

ITEM 1.  BUSINESS

GENERAL

     The Company's predecessor was founded in 1895 by the family of G. Stephen
Felker, the Company's Chairman, President and Chief Executive Officer. Prior to
1986, the Company's predecessor primarily manufactured and marketed greige
fabrics. In July 1986, the Company's predecessor, together with Mr. Felker and
certain other investors, acquired Avondale Mills, Inc., now a wholly owned
subsidiary of the Company ("Avondale Mills"). The acquisition of Avondale Mills
expanded the Company's product line to include yarns and finished fabrics and
significantly increased the Company's revenue base.

     In April 1996, pursuant to an asset purchase agreement with Triarc
Companies, Inc. and Graniteville Company, the Company acquired the assets of the
textile business of Graniteville Company and its subsidiaries ("Graniteville").
The acquisition of Graniteville, founded in 1845, enhanced the Company's
manufacturing and marketing of cotton and cotton-blend finished fabrics. The
Company acquired Graniteville for aggregate consideration of $242.8 million in
cash plus the assumption of certain liabilities other than long-term debt (the
"Graniteville Acquisition").

DESCRIPTION OF THE BUSINESS

Products

     Apparel fabrics. The Company's apparel fabrics consist of cotton and
cotton-blend fabrics used in the manufacture of jeans, sportswear, utility wear
and other apparel.

     The Company is a leading manufacturer of indigo-dyed denim fabrics used in
the production of branded and private label men's, women's and children's
fashion apparel as well as casual jeans, sportswear and outerwear. The Company
develops and manufactures new and innovative colors, textures, weaves and
finishes for its customers, which has helped make the Company's denim fabrics a
leader in the branded and private label, fashion-oriented segment of the apparel
market. Denim sales accounted for 37%, 36% and 34%, respectively, of the
Company's net sales in fiscal 1996, 1997 and 1998.

     The Company is one of the largest domestic manufacturers and marketers of
fabrics used in the manufacture of utility wear (principally uniforms and other
occupational apparel) for the U.S. rental and retail markets. The Company's
utility wear fabric customers require durable fabrics characterized by long wear
and easy care. The Company works closely with customers to develop fabrics with
these and other enhanced performance characteristics. Utility wear fabric sales
accounted for 11%, 21% and 21%, respectively, of the Company's net sales in
fiscal 1996, 1997 and 1998, reflecting the Company's entry into this market as a
result of the Graniteville Acquisition in April 1996.

     The Company is a leading manufacturer and marketer of woven cotton
piece-dyed fabrics used in the manufacture of men's, women's and children's
sportswear, casual wear and outerwear. Fabrics are produced for customers in a
wide variety of styles, colors, textures and weights according to individual
customer specifications. The Company's product design staff develops fabric
designs that are presented to customers and, once approved, are produced into
fabrics to meet customers' specifications. 


                                       2



<PAGE>   4




Sportswear fabric sales accounted for 7%, 12% and 12%, respectively, of the
Company's net sales in fiscal 1996, 1997 and 1998, reflecting the impact of the
Graniteville Acquisition in April 1996.

     Greige Fabrics. The Company produces undyed, unfinished cotton and
cotton-blend fabrics that are marketed to apparel, home furnishing and
industrial products manufacturers. The Company capitalizes on its manufacturing
flexibility by altering its overall product mix to meet changing customer needs
while maintaining high production efficiencies. The Company's product design
staff works with greige fabric customers to create new fabric styles and
constructions.

     Specialty Fabrics. The Company produces a variety of fabrics that are
marketed to recreational, industrial and military products manufacturers. The
Company's specialty products include coated fabrics for awnings, tents, boat
covers and life vests. The Company also finishes customers' fabrics on a
commission basis, which enables customers to meet short delivery schedules while
minimizing inventories.

     Yarns. The Company is one of the largest domestic producers and marketers
of cotton and cotton-blend yarns, which are used internally in the production of
woven fabrics or marketed to outside customers in the knitting and weaving
industries. The Company's yarns are used in the manufacture of a broad range of
items, including apparel (primarily T-shirts, underwear, hosiery, knitted
outerwear, denim, and woven and fleece sportswear) and home furnishings. Yarn
sales accounted for approximately 37%, 25% and 26%, respectively, of the
Company's net sales in fiscal 1996, 1997 and 1998.

Sales and Marketing

     The Company sold apparel fabrics (including denim, utility wear fabrics and
sportswear fabrics), greige and specialty fabrics, and yarns to approximately
1,500, 200 and 500 customers, respectively, in fiscal 1998. The Company believes
it is the leading supplier of denim to V.F. Corporation (the maker of Lee(R),
Rider(R), Wrangler(R), Rustler(R) and HealthTex(R) brand jeans), with total
sales of denim, other fabrics and yarns to V.F. Corporation accounting for 16%
of the Company's net sales in fiscal 1998. The Company believes that it has a
strong working relationship with V.F. Corporation. Other than V.F. Corporation,
none of the Company's customers accounted for 10% or more of the Company's net
sales in fiscal 1998.

     The Company targets customers who demand a high level of customer service.
The Company's five yarn sales offices are located geographically to be close to
customers' manufacturing facilities, and its eight fabrics sales offices are
generally located near the headquarters of key customers. Sales associates visit
their customers on a regular basis and are primarily responsible for
interpreting customers' needs, processing customer orders and interacting with
the Company's production scheduling personnel. The Company's sales associates
are paid a base salary plus sales incentives to the extent certain performance
targets are met. The Company's independent sales representatives are paid on a
commission basis.

Manufacturing

     The Company is a vertically integrated manufacturer of yarns and fabrics.
Through modernizing its manufacturing facilities, the Company has sought to
reduce lead times, lower costs, minimize inventory levels and maximize
flexibility to respond to changes in customer demand.

     Manufacturing Process. The Company's manufacturing processes involve
producing yarn, dyeing yarn, weaving yarn into fabrics and dyeing and finishing
fabrics. The Company's manufacturing plants employ computer control systems to
monitor the manufacturing process and computer product testing equipment to
measure the quality of the Company's yarns and fabrics.


                                       3
<PAGE>   5


     The Company's yarn manufacturing operations involve spinning raw cotton and
synthetic fibers into cotton and cotton-blend yarns. The Company uses advanced
carding, drawing, combing and open-end spinning equipment. The Company maintains
ring spinning capability and offers a full line of yarns to respond to varied
customer demand. Yarn produced by the Company is either sold to outside
customers or used internally in the production of woven fabrics.

     Yarn to be used in the manufacture of apparel fabrics may be dyed using
either "range" or "vat" dyeing techniques. The Company weaves dyed or undyed
yarn into fabric. Woven fabrics may be piece-dyed and finished according to
customer specifications. The Company uses modern, high-speed looms in its
weaving plants which enable the Company to manufacture fabrics that have a
variety of widths and weaves. The Company's dyeing and finishing facilities use
a wide range of technologies, including sophisticated computer monitoring and
control systems. These systems allow the Company to continuously monitor and
control each phase of the dyeing and finishing process, which helps to improve
productivity, efficiency, consistency and quality.

     Manufacturing Facilities. The Company currently operates 26 manufacturing
facilities in the U.S. Of the Company's manufacturing facilities, fifteen
produce yarn, six manufacture fabrics, six are dyeing facilities and four are
engaged in fabric finishing.

     Expansion and Modernization. The Company has expanded its operations
through acquisitions, an ongoing capital improvements program and management's
efforts to optimize the productive output of the Company's manufacturing
facilities. As part of its expansion and modernization efforts, the Company has
also redeployed capital by closing certain manufacturing facilities and, in some
cases, moving manufacturing equipment to other locations. The Company's
expansion and modernization efforts over the past seven fiscal years have
included, among others, the following principal initiatives:

      -    1992 and 1993 -- Replaced earlier generation open-end spinning
           equipment (which generally was less than 10 years old) with
           technologically advanced open-end spinning equipment;

      -    1992 and 1993 -- Replaced all remaining fly shuttle looms with
           state-of-the art rapier looms, replaced some earlier generation
           projectile looms with technologically advanced, high speed projectile
           looms, and began construction of a new state-of-the-art indigo dyeing
           range;

      -    1994 -- Completed construction of the additional indigo-dyeing range,
           continued replacement of earlier generation projectile looms with
           technologically advanced projectile looms, and installed a caustic
           recovery system;

      -    1995 -- Replaced earlier generation drawing systems and open-end
           spinning equipment with state-of-the art drawing and open-end
           spinning equipment, and installed a fiber reclamation system;

      -    1996 -- Replaced carding equipment in two plants with modern carding
           and drawing systems and earlier generation winders in a third plant
           with fully automated winders;

      -    1996 -- Acquired Graniteville, which consisted of four integrated
           yarn and fabric weaving plants, three indigo-dyeing facilities, one
           piece-dyeing and finishing facility, one fabric coating and finishing
           facility, and one garment dyeing facility;

      -    1996 and 1997 -- Replaced earlier generation projectile looms with
           new, high speed air jet looms and installed two new integrated
           finishing ranges;



                                       4
<PAGE>   6

      -    1997 -- Purchased additional computer controlled cleaning and
           blending equipment for one plant, replaced earlier generation
           open-end spinning equipment with technologically advanced spinning 
           equipment at a second plant, and replaced opening and carding 
           equipment at a third plant;

      -    1997 and 1998 -- Constructed a new denim weaving facility, completed
           in April 1998, housing technologically advanced slashing equipment
           and high speed air jet looms, upgraded fabric finishing equipment,
           and executed a lease for a new distribution center which began
           operating in December 1997;

      -    1998 -- Began expansion of an existing weaving facility, to be
           operational by the end of November 1998, which will include the
           installation of technologically advanced slashing equipment and high
           speed air jet looms for the production of additional greige fabrics
           to be piece-dyed for sportswear and utility wear end uses; and

      -    1998 -- Began construction of a new piece-dyeing range, to be
           completed by November 1998, and installation of technologically
           advanced fabric inspection equipment for piece-dyed fabrics, to be
           operational by March 1999.

Raw Materials

     The Company believes that it is one of the largest U.S. consumers of raw
cotton, the principal raw material used in the Company's manufacturing
processes. Consequently, the Company's results of operations may be impacted
significantly due to fluctuations in the price of cotton. Since cotton is an
agricultural product, its supply and quality, which affect prevailing prices,
are subject to forces of nature. Significant increases in cotton prices due to
any material shortage or interruption in the supply or variations in the quality
of cotton by reason of weather, disease or other factors could have a material
adverse effect on the Company's results of operations.

     Because the importation of cotton into the U.S. has generally been
prohibited, historically imbalances between the domestic and world price of
cotton have occurred. In recent years, Congress has passed a series of
legislative initiatives to ensure that U.S. cotton was priced competitively with
world markets. The Food, Agriculture, Conservation and Trade Act of 1990 (the
"1990 Trade Act") and the regulations promulgated thereunder established a
three-step competitiveness program designed to make domestic cotton prices
approximate world cotton prices. This program includes a mechanism that triggers
tariff free quotas for the importation of cotton if U.S. prices exceed world
prices for an extended period of time. This legislation and the increased
availability of cotton worldwide has reduced the imbalance between world and
domestic cotton prices, but there can be no assurance that this will continue to
be the case.

     In addition, the Federal Agricultural Improvement and Reform Act of 1996
established certain support programs that, among other things, continue through
the year 2002 the three-step competitiveness program established under the 1990
Trade Act. In fiscal 1997 and 1998, the Company received payments from the U.S.
Department of Agriculture under these support programs representing the
differential between domestic cotton prices and world cotton prices. Should such
price differentials continue, the Company would receive additional payments in
fiscal 1999. Based on published reports from the U.S. Department of Agriculture,
it is anticipated that financing for the program will be exhausted by early
calendar 1999. When funds are depleted, tariff-free quotas for the importation
of cotton will open.

     The Company closely monitors the cotton market and manages its
cotton-buying practices. The Company's Chief Executive Officer is an officer of
the National Cotton Council, a trade organization that spearheads initiatives to
implement U.S. cotton industry policy, which helps the Company stay abreast of



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<PAGE>   7

developments in the cotton market. The Company generally purchases cotton in
sufficient quantities to achieve planned manufacturing schedules. Such purchases
may be short of, or in excess of, the quantities needed to satisfy customers'
orders depending upon such factors as the Company's outlook for the cotton
market.

     The Company generally enters into cotton purchase contracts several months
in advance of the scheduled date of delivery. Prices for such purchases are
fixed either on the date of the contract or thereafter on a date prior to
delivery and, as a result, the Company may be favorably or adversely affected if
cotton prices fluctuate during the contract period. Periodically, the Company
also purchases cotton futures and options contracts to hedge exposure to price
fluctuations in cotton acquired from various suppliers.

     The principal man-made fiber purchased by the Company is polyester. The
Company currently purchases substantially all of the man-made fibers used in its
products from one supplier, but such fibers are readily available from other
suppliers. The Company maintains a limited supply of such fibers in inventory.
The Company has never experienced difficulty in obtaining sufficient quantities
of man-made fibers. The Company also purchases dyes and chemicals used in its
dyeing and finishing processes, and these dyes and chemicals normally have been
available in adequate supplies through a number of suppliers. In connection with
the Graniteville Acquisition, the Company entered into a 10-year supply
agreement (the "Supply Agreement") with C.H. Patrick & Co., Inc. ("Patrick").
The Supply Agreement generally stipulates that Patrick will have the opportunity
to provide certain dyes and chemicals utilized by the Company if Patrick meets
certain conditions, including competitive pricing and the ability to provide the
applicable dyes and chemicals in accordance with the Company's specifications
and delivery requirements. The Supply Agreement is terminable by the Company
prior to the end of the 10-year term in the event of a pattern of repeated,
material failures by Patrick to satisfy its obligations with respect to product
specifications, delivery schedules or other material terms.

Competition

     The textile industry is highly competitive, and no single company is
dominant. Management believes that the Company is one of the largest domestic
manufacturers of indigo-dyed denims, piece-dyed fabrics for utility wear and
sportswear, and cotton and cotton-blend yarns. The Company's competitors include
large, vertically integrated textile companies and numerous smaller companies.
In recent years there has been a trend toward consolidation within certain
markets of the textile industry and, within the Company's markets, increases in
manufacturing capacity. The primary competitive factors in the textile industry
are price, product styling and differentiation, quality, manufacturing
flexibility, delivery time and customer service. The importance of these factors
is determined by the needs of particular customers and the characteristics of
particular products. The failure of the Company to compete effectively with
respect to any of these key factors or to keep pace with rapidly changing
markets could have a material adverse effect on the Company's results of
operations and financial condition.

     Increases in domestic capacity and imports of foreign-made textile and
apparel products are a significant source of competition for many domestic
textile manufacturers. The U.S. government attempts to regulate the growth of
certain textile and apparel imports by establishing quotas on imports from
countries that historically account for significant shares of U.S. imports.
Although imported apparel represents a significant portion of the U.S. apparel
market, in recent years, a significant portion of import growth has been
attributable to imports of apparel products manufactured outside the U.S. of (or
using) domestic textile components. During fiscal 1998, imports of certain
textile products into the U.S. increased primarily as a result of declines in
consumer demand within Asia, hightened liquidity requirements of Asian textile
producers and devaluation of Asian currencies vis-a-vis the U.S.
dollar.



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<PAGE>   8

     The extent of import protection afforded by the U.S. government to domestic
textile producers has been, and is likely to remain, subject to considerable
domestic political deliberation and foreign considerations. In January 1995, a
new multilateral trade organization, the World Trade Organization (the
"WTO"), was formed by the members of the General Agreement on Tariffs and Trade
("GATT") to replace GATT. This new body has set forth the mechanisms by which
world trade in textiles and clothing will be progressively liberalized with the
elimination of quotas and the reduction of duties. The implementation began in
January 1995 with the phasing-out of quotas and the reduction of duties to take
place over a 10-year period. The selection of products at each phase is made by
each importing country and must be drawn from each of the four main textile
groups: yarns, fabrics, made-up textiles and apparel. As it implements the WTO
mechanisms, the U.S. government is negotiating bilateral trade agreements with
developing countries (which generally are exporters of textile products) that
are members of the WTO for the purpose of reducing their tariffs on imports of
textiles and apparel. The elimination of quotas and reduction of tariffs under
the WTO may result in increased imports of certain textile products and apparel
into North America. These factors could make the Company's products less
competitive against low cost imports from third world countries.

     The North American Free Trade Agreement ("NAFTA") among the United States,
Canada and Mexico, which became effective on January 1, 1994, has created the
world's largest free-trade zone. The agreement contains safeguards sought by the
U.S. textile industry, including a rule of origin requirement that products be
processed in one of the three countries in order to benefit from NAFTA. In
addition, NAFTA requires merchandise to be made from yarns and fabrics
originating in North America in order to avoid trade restrictions. Thus, not
only must apparel be made from North American fabric but the fabric must be
woven from North American spun yarn. Based on experience to date, NAFTA has had
a favorable impact on the Company's business.

     In 1986, the United States initiated the Special Access Program with the
Caribbean Basin Initiative ("CBI"). The program provided that apparel made,
using U.S. fabrics, by the 24 Caribbean and Central American countries,
excluding Cuba, would not be subject to quotas but only to tariffs. There has
been subsequent U.S. legislation proposed to grant CBI nations trade status
equal to the NAFTA countries, but such legislation has not been adopted to date.
Management believes that NAFTA parity for the CBI region would be favorable for
the Company as it would provide greater access to lower cost labor for apparel
assembly, making the U.S. a more attractive location for textile sourcing.

Backlog

     The Company's order backlog was approximately $375 million at August 28,
1998, as compared to approximately $337 million at August 29, 1997. Orders on
hand are not necessarily indicative of total future sales. Substantially all of
the orders outstanding at August 28, 1998 are expected to be filled by the end
of fiscal 1999.

Governmental Regulation

     The Company is subject to various federal, state and local environmental
laws and regulations limiting the discharge, storage, handling and disposal of a
variety of substances and wastes used in or resulting from its operations and
potential remediation obligations thereunder, particularly the Federal Water
Pollution Control Act, the Clean Air Act, the Resource Conservation and Recovery
Act (including amendments relating to underground storage tanks) and the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
referred to as "Superfund" or "CERCLA". The Company has obtained, and is in
compliance in all material respects with, all material permits required to be
issued by federal, state or local law in connection with the operation of the
Company's business as described herein.



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<PAGE>   9

     The Company's operations are also governed by laws and regulations relating
to workplace safety and worker health, principally the Occupational Safety and
Health Act and regulations thereunder which, among other things, establish
cotton dust, formaldehyde, asbestos and noise standards, and regulate the use of
hazardous chemicals in the workplace. The Company uses resins containing
formaldehyde in processing some of its products. Although the Company does not
use asbestos in the manufacture of its products, some of its facilities contain
some structural asbestos that management believes is properly contained.

     Many of the Company's manufacturing facilities have been in operation for
several decades. Historical waste disposal and hazardous substance releases and
storage practices may have resulted in on-site and off-site remediation
liability for which the Company may be responsible. In addition, certain
wastewater treatment facilities and air emission sources may have to be upgraded
to meet more stringent environmental requirements in the future. The Company
cannot with certainty assess at this time the impact of future emission
standards or enforcement practices under the foregoing environmental laws and
regulations and, in particular, under the 1990 Clean Air Act, upon its
operations or capital expenditure requirements. The Company believes it is
currently in compliance in all material respects with the foregoing
environmental and health and safety laws and regulations.

     In 1987, Graniteville Company was notified by the South Carolina Department
of Health and Environmental Control ("DHEC") that it had discovered certain
contamination of a pond near Graniteville, South Carolina and that Graniteville
may be one of the responsible parties. In 1990 and 1991, Graniteville provided
reports to DHEC summarizing its required study and investigation of the alleged
pollution and its sources which concluded that pond sediments should be left
undisturbed and that other remediation alternatives either provided no
significant benefit or themselves involved adverse effects. In 1995,
Graniteville submitted a proposal regarding periodic monitoring of the site, to
which DHEC responded with a request for additional information. Graniteville
provided such information to DHEC in February 1996. The Company is unable to
predict at this time whether any further actions will be required with respect
to the site or what the cost thereof may be. The Company has provided a reserve
for management's estimate of the cost of monitoring the site and believes the
ultimate outcome of this matter will not have a material adverse effect on its
results of operations or financial condition.

     As a result of the Graniteville Acquisition, the Company owns a nine acre
site in Aiken County, South Carolina, which was operated jointly by Graniteville
and Aiken County as a landfill from approximately 1950 through 1973. DHEC
conducted a site screening investigation in 1990. The United States
Environmental Protection Agency conducted a site investigation in 1991 and an
Expanded Site Inspection in January 1994. Graniteville conducted a groundwater
quality investigation in 1992 and a supplemental site assessment in 1994. Based
on these investigations, DHEC requested that Graniteville enter into a consent
agreement providing for comprehensive assessment of the nature and extent of
soil and groundwater contamination at the site, if any, and an evaluation of
appropriate remedial alternatives. DHEC and the Company entered into a consent
agreement in December 1997. The cost of the comprehensive assessment required by
the consent agreement is estimated to be between $200,000 and $400,000. Because
this investigation has not concluded, the Company is currently unable to predict
what further actions, if any, will be necessary to address the landfill. The
Company has provided a reserve for management's estimate of the cost of
investigating and remediating the site and believes the ultimate outcome of this
matter will not have a material adverse effect on its results of operations or
financial condition.

     The Company is currently defending three environmentally related lawsuits,
described under Item 3, legal proceedings.

Associates

     At August 28, 1998, the Company had approximately 7,000 associates. None of
the Company's associates is covered by a collective bargaining agreement, and
management believes that the Company's relations with its associates are good.


                                       8
<PAGE>   10


ITEM 2.  PROPERTIES

     The Company currently operates 26 manufacturing facilities in the U.S., of
which nine are located in Alabama, three are located in North Carolina, five are
located in Georgia and nine are located in South Carolina. The Company owns 24
of these facilities and leases two facilities in connection with its prior
issuance of industrial revenue bonds. Of the Company's manufacturing facilities,
fifteen produce yarn, six manufacture fabrics, six are dyeing facilities, and
four are engaged in fabric finishing. Additionally, the Company operates six
warehouses.

     The Company's plants generally operate 24 hours a day, seven days a week
throughout the year. The Company considers its plants and equipment to be in
good condition and adequate for its current operations. The Company's principal
executive offices are located in Monroe, Georgia in a building owned by the
Company. The Company also has executive offices in Sylacauga, Alabama, and
Graniteville, South Carolina, which are located in buildings owned by the
Company. All of the Company's sales offices are leased from unrelated third
parties.


ITEM 3.  LEGAL PROCEEDINGS

     On March 3, 1993, a case was filed in the Circuit Court of Jefferson
County, Alabama by Joe and Darnell Sullivan and Tommy and Stella Fay Gould
against the Alabama Power Company, the Company and certain other parties. The
complaint alleges that the Company and such other parties negligently or
willfully discharged industrial wastewater containing hazardous materials, which
allegedly damaged the plaintiffs' real properties and caused mental anguish to
the plaintiffs. The complaint seeks an award of compensatory and punitive
damages. After two years and eleven months of litigation, the plaintiffs amended
their complaint to include class action claims and treatment. Although the Trial
Court granted class certification, the Supreme Court of Alabama reversed the
class certification order, and the case will proceed as to the individual claims
of the four plaintiff families. The Company is vigorously defending this case in
a trial that began October 19, 1998 and believes that it has a number of
defenses available to it. The Company cannot currently predict whether the
plaintiffs will prevail on their claims or the magnitude of their potential
recovery, if any.

     Avondale Mills, along with Russell Corporation and the municipality of
Alexander City, Alabama, was named during fiscal 1998 in two almost identical
citizen suits. The first suit, filed on May 18, 1998, was brought pursuant to
the federal Clean Water Act ("CWA"). The second suit, filed on August 28, 1998,
was brought pursuant to both the CWA and the federal Resource Conservation and
Recovery Act ("RCRA"). In both lawsuits, the plaintiff has alleged that Avondale
Mills' permitted discharges of wastewater from its facility in Alexander City
into the waste water treatment plant of Alexander City have indirectly caused
the wastewater treatment plant to exceed the effluent limitation imposed upon
the plant's discharges into a local body of water, thereby violating the CWA.
The plaintiff repeated that claim in the second lawsuit, but also alleged that
Avondale Mills also violated RCRA by contributing to the disposal of a hazardous
waste in such a manner as to endanger human health or the environment. Avondale
Mills has filed motions to dismiss in each case which it believes are
meritorious. As of this date, the court has not ruled on the motions to dismiss,
although the two complaints have been consolidated into one lawsuit by the
court. Concurrently, the United States Environmental Protection Agency ("EPA")
is investigating the possibility of CWA violations at Avondale Mills' facility.
The EPA, however, has stated that, to date, no violations have been determined.
Avondale Mills believes these citizen suits to be without merit and intends to
continue its vigorous defense of that litigation.

     Although there can be no assurance, based on currently available
information, the Company does not believe that these cases will have a material
adverse effect on its results of operations or financial condition. The Company
is also a party to litigation incidental to its business from time to time. The
Company is not currently a party to any litigation that management believes, if
determined adversely to the Company, would have a material adverse effect on the
Company.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.


                                       9
<PAGE>   11

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

     There is no established public trading market for the Company's Class A
Common Stock or Class B Common Stock (collectively, "Common Stock"). As of
August 28, 1998 there were 123 and one holders of record of Class A Common Stock
and Class B Common Stock, respectively. The Company paid dividends aggregating
$3.7 million and $5.3 million in respect of its outstanding Common Stock during
fiscal 1997 and 1998, respectively. During fiscal 1998, approximately 592,000
shares of Class A Common Stock were repurchased pursuant to a tender offer
distributed by the Company to all shareholders and vested stock option holders
of Class A Common Stock.

     The Company has issued and outstanding $125 million aggregate principal
amount of 10 1/4% Senior Subordinated Notes due 2006 (the "Notes") under an
Indenture dated as of April 23, 1996 among the Company, Avondale Mills and The
Bank of New York, as trustee (the "Indenture"). The Indenture contains certain
covenants that could indirectly restrict the Company's ability to pay dividends.
The Company maintains a $200 million revolving credit facility under a loan
agreement among Avondale Mills and a syndicate of banks (the "Credit Facility").
The Credit Facility contains certain covenants that could indirectly restrict
the Company's ability to pay dividends.



















                                       10
<PAGE>   12




ITEM 6.  SELECTED FINANCIAL DATA

     The following table sets forth selected consolidated statement of income
data and selected consolidated balance sheet data of the Company for each of the
five fiscal years in the period ended August 28, 1998. Such data were derived
from the audited Consolidated Financial Statements of the Company. The audited
Consolidated Financial Statements and Notes thereto of the Company for each of
the three fiscal years in the period ended August 28, 1998 are included
elsewhere in this Annual Report. The selected consolidated financial data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto of the Company included elsewhere in this
Annual Report.


<TABLE>
<CAPTION>
                                                                                               FISCAL YEAR
                                                                  ---------------------------------------------------------------
                                                                       1994        1995         1996        1997           1998
                                                                       ----        ----         ----        ----           ----
                                                                           (IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
<S>                                                                <C>          <C>          <C>         <C>           <C>        
Statement of Income Data:
  Net sales ..................................................     $   481.6    $   538.7    $   706.2   $   1,049.5   $   1,056.1
  Gross profit ...............................................          51.0         71.2         76.9         126.2         137.3
  Facility restructuring .....................................            --           --           --            --           2.7
  Operating income ...........................................          28.9         47.6         44.9          79.0          86.6
  Interest expense, net ......................................           6.5         14.3         18.5          26.2          23.3
  Discount and expenses on sale of receivables ...............            --           --          3.7           6.6           7.3
  Loss attributable to investment in Oneita ..................            --           --           --           7.5            --
  Other (income) expense, net ................................          (0.2)        (0.8)          --           0.8           0.5
  Income before income taxes .................................          22.6         34.0         22.7          37.9          55.4
  Provision for income taxes .................................           8.5         13.1          9.0          15.0          21.1
  Net income .................................................          14.0         20.9         13.6          22.9          34.3

Per Share Data:
  Net income - basic .........................................     $     .85   $     1.89   $     1.16  $       1.73  $       2.62
  Net income - diluted .......................................           .85         1.88         1.15          1.70  $       2.58
  Dividends declared .........................................           .28          .28          .28           .28           .40
  Weighted average number of shares outstanding - basic ......          16.6         11.1         11.8          13.3          13.0
  Weighted average number of shares outstanding - diluted ....          16.6         11.1         11.9          13.5          13.3

Balance Sheet Data (at period end):
  Total assets ...............................................     $   267.6    $   257.4    $   493.1   $     461.2   $     463.6
  Long-term debt, including current portion ..................         200.0        169.9        303.1         251.3         246.8
  Shareholders' equity .......................................           0.1         18.0         67.5          86.4         100.0

Other Data:
  Capital expenditures .......................................     $    17.6    $    15.8    $    33.4   $      32.0   $      66.3
  Depreciation and amortization ..............................          23.3         23.8         30.4          40.8          39.9
  EBITDA(1) ..................................................          57.8         75.1         73.4         113.3         126.6
  Ratio of EBITDA to interest expense, net and discount
    and expenses on sale of receivables ......................           8.9x         5.2x         3.3x          3.2x          4.1x
  Ratio of earnings to fixed charges(2) ......................           4.5x         3.4x         2.0x          2.1x          2.8x
</TABLE>

------------
 
(1)  EBITDA is defined as net income plus (i) provision for income taxes, (ii)
     interest expense, net, (iii) discount and expenses on sale of receivables,
     (iv) depreciation and amortization, (v) loss attributable to investment in
     Oneita, (vi) facility restructuring charges and (vii) plus or minus, as the
     case may be, adjustments to cost of goods sold made under the LIFO
     inventory valuation method. EBITDA is presented not as an alternative
     measure of operating results or cash flow from operations (as determined in
     accordance with generally accepted accounting principles), but because it
     is a widely accepted financial indicator of a company's ability to incur
     and service debt.
(2)  The ratio of earnings to fixed charges is computed by dividing earnings by
     fixed charges. For this purpose, "earnings" include income before income
     taxes plus fixed charges. Fixed charges include interest, whether expensed
     or capitalized, amortization of deferred financing costs, discount and
     expenses on sale of receivables and the portion of rental expense that is
     representative of the interest factor in these rentals.




                                       11
<PAGE>   13



ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto of the Company included
elsewhere in this Annual Report.

RESULTS OF OPERATIONS

     The table below sets forth for the periods indicated statement of income
data expressed as a percentage of net sales:


<TABLE>
<CAPTION>
                                                                  FISCAL YEAR
                                                         ------------------------------
                                                          1996        1997        1998
                                                          ----        ----        ----
<S>                                                       <C>         <C>         <C>   
Net sales ........................................        100.0%      100.0%      100.0%
  Apparel fabric sales ...........................         55.1        68.4        67.4
  Greige and specialty fabric sales ..............          7.5         6.5         6.6
  Yarn sales .....................................         37.4        25.1        26.0
 Cost of goods sold:
  Raw materials ..................................         50.4        47.2        46.3
  Conversion costs ...............................         34.4        36.9        37.0
      Total ......................................         84.8        84.1        83.3
  Depreciation ...................................          4.3         3.9         3.7
  Selling and administrative expenses ............          4.5         4.5         4.5
  Facility restructuring .........................           --          --          .3
  Operating income ...............................          6.4         7.5         8.2
  Interest expense, net ..........................          2.6         2.5         2.2
  Discount and expenses on sale of receivables ...          0.5         0.6          .7
  Loss attributable to investment in Oneita ......           --         0.7          -- 
  Provision for income taxes .....................          1.4         1.4         2.0
  Net income .....................................          1.9         2.2         3.3
</TABLE>

  Fiscal 1998 Compared to Fiscal 1997

     Net Sales. Net sales increased 0.6% to $1,056.1 million for fiscal 1998
from $1,049.5 million for fiscal 1997, primarily as a result of improved yarn
sales.

     Apparel fabric sales decreased 0.9% to $711.4 million for fiscal 1998 from
$717.7 million for fiscal 1997. This decrease in sales reflected a 4.3% increase
in yards sold, which was offset by a 5.0% decline in average selling prices. The
decline in average selling prices resulted from softening market prices caused
by excess inventories of fabric and garments within the industry, as well as
increased production capacity of domestic and international suppliers.

     Greige and specialty fabric sales increased 1.2% to $69.3 million for
fiscal 1998 from $68.5 million for fiscal 1997. This increase in sales reflected
strong demand for greige fabrics by the apparel, home furnishing, luggage and
shoe industries.

     Yarn sales increased 4.6% to $275.4 million for fiscal 1998 from $263.3
million for fiscal 1997. This increase reflected a 7.1% increase in pounds sold
to outside customers, which was offset in part by a 2.4% decrease in average
selling prices for those pounds. Market prices for sales yarns remained very




                                       12
<PAGE>   14

competitive, reflecting continued excess production capacity within the industry
and increased imports of yarn and knitted apparel from Asia during fiscal 1998.

     Cost of Goods Sold. Cost of goods sold decreased 0.4% to $879.3 million for
fiscal 1998 from $882.8 million for fiscal 1997. Cost of goods sold as a
percentage of net sales decreased to 83.3% for fiscal 1998 from 84.1% for fiscal
1997, primarily due to improved capacity utilization and lower raw material
costs, which mitigated the impact of generally lower selling prices.

     Selling and Administrative Expenses. Selling and administrative expenses
increased 1.7% to $48.1 million for fiscal 1998 from $47.2 million for fiscal
1997, reflecting increased accrual of certain associate benefit expenses and
compensation expense related to the redemption of stock options by certain
current and former associates of the Company. Selling and administrative
expenses as a percentage of net sales remained constant at 4.5% for fiscal 1998
and for fiscal 1997.

     Interest Expense, Net. Interest expense, net decreased 11.0% to $23.3
million for fiscal 1998 from $26.2 million for fiscal 1997. This decrease
reflected lower interest rates and a lower average balance of outstanding
borrowings during fiscal 1998.

     Discount and Expenses on Sale of Receivables. Discount and expenses on sale
of receivables were $7.3 million for fiscal 1998 compared to $6.6 million for
fiscal 1997. This increase was primarily attributable to the payment of bank
fees relating to the receivables securitization facility as well as a net
increase in the amount of accounts receivable sold under the facility.

     Facility Restructuring. Charges incurred to consolidate facilities and
dispose of certain inefficient equipment in the Company's Graniteville, South
Carolina operations were $2.7 million for fiscal 1998.

     Provision for Income Taxes. Provision for income taxes increased to $21.1
million for fiscal 1998 from $15.0 million for fiscal 1997, reflecting the
increase in income before income taxes. The Company's effective tax rate was
38.1% for fiscal 1998 compared to 39.5% for fiscal 1997.

  Fiscal 1997 Compared to Fiscal 1996

     Net Sales. Net sales increased 48.6% to $1,049.5 million for fiscal 1997
from $706.2 million for fiscal 1996, primarily as a result of the Company's
acquisition of Graniteville in April 1996.

     Apparel fabric sales increased 84.4% to $717.7 million for fiscal 1997 from
$389.1 million for fiscal 1996. This increase in sales reflected a 96.0%
increase in yards sold, which was partially offset by a 5.9% decline in average
selling prices. The increase in yards sold was primarily attributable to the
acquisition of Graniteville and expansion of the Company's denim manufacturing
operations. The decline in average selling prices resulted from the inclusion of
a full year of net sales attributable to Graniteville, which generally were at
lower average selling prices than the Company's other apparel fabric sales, and
softening market prices for certain denim fabrics caused by excess inventories
of denim fabric and garments within the industry, as well as increased
production capacity of domestic and Mexican fabric suppliers.

     Greige and specialty fabric sales increased 30.0% to $68.5 million for
fiscal 1997 from $52.7 million for fiscal 1996. This increase in sales was
primarily the result of an increase in yards sold due to the inclusion of a full
year of net sales attributable to Graniteville.




                                       13
<PAGE>   15

     Yarn sales decreased 0.4% to $263.3 million for fiscal 1997 from $264.4
million for fiscal 1996. This decrease reflected a 2.0% increase in pounds sold
to outside customers offset by a 2.4% decrease in average selling prices for
those pounds. During this same period, yarn production was increased to satisfy
the yarn requirements of the Company's fabric operations. Market prices for
sales yarns remained very competitive, reflecting continued excess production
capacity within the industry during fiscal 1997.

     Cost of Goods Sold. Cost of goods sold increased 47.4% to $882.8 million
for fiscal 1997 from $599.1 million for fiscal 1996. Cost of goods sold as a
percentage of net sales decreased to 84.1% for fiscal 1997 from 84.8% for fiscal
1996, primarily due to lower raw material costs. The Company was able to achieve
cost savings to offset the impact of generally higher production costs of
certain Graniteville products.

     Selling and Administrative Expenses. Selling and administrative expenses
increased 47.6% to $47.2 million for fiscal 1997 from $32.0 million for fiscal
1996, primarily due to additional expenses attributable to Graniteville. Selling
and administrative expenses as a percentage of net sales remained constant at
4.5% for fiscal 1997 and fiscal 1996.

     Interest Expense, Net. Interest expense, net increased 41.6% to $26.2
million for fiscal 1997 from $18.5 million for fiscal 1996. This increase
reflected a higher level of outstanding borrowings during fiscal 1997, primarily
as a result of the acquisition of Graniteville.

     Discount and Expenses on Sale of Receivables. Discount and expenses on sale
of receivables were $6.6 million for fiscal 1997 compared to $3.7 million for
fiscal 1996. These expenses were related to the Receivables Securitization
Facility (as hereinafter defined) established by the Company in April 1996.

     Loss Attributable to Investment in Oneita. During fiscal 1997, the Company
recorded a loss of approximately $7.5 million attributable to its investment in
Oneita Industries, Inc. ("Oneita"), a yarn customer of the Company, reducing the
carrying value of its investment to zero. Such loss represented the Company's
prorata share of the net loss incurred by Oneita for its four fiscal quarters
ended June 28, 1997, limited to the Company's original investment.

     Provision for Income Taxes. Provision for income taxes increased to $15.0
million for fiscal 1997 from $9.0 million for fiscal 1996, reflecting the
increase in income before income taxes. The Company's effective tax rate was
39.5% for fiscal 1997 compared to 39.8% for fiscal 1996.



LIQUIDITY AND CAPITAL RESOURCES

  General

     The Company has funded its working capital requirements and capital
expenditures with cash generated from operations, borrowings under its Credit
Facility, proceeds received in connection with sales of trade receivables and
proceeds received in connection with the issuance of equity and debt securities.
At August 28, 1998, the Company had borrowings of $111.3 million outstanding
under the Credit Facility and $88.7 million of borrowing availability
thereunder. Such borrowings bore interest at a weighted average rate of 6.8% per
annum at August 28, 1998. In addition, at August 28, 1998, $125 million
aggregate principal amount of the Notes (which are fully and unconditionally
guaranteed by the Company) issued by Avondale Mills during fiscal 1996 was
outstanding.




                                       14
<PAGE>   16
  Credit Facility

     The Credit Facility consists of a five-year revolving line of credit of up
to $200 million. Borrowings under the Credit Facility include revolving loans to
be provided by the lenders ("Revolver Loans") and up to $5 million of revolving
swing loans ("Swing Revolver Loans") to be provided by Wachovia Bank, N.A.
("Wachovia"). Interest accrues on Revolver Loans (i) at the Company's option at
either LIBOR (adjusted for reserves) plus a specified number of basis points or
the base rate, which is the higher of Wachovia's prime rate and the overnight
federal funds rate plus 0.5%, or (ii) if the Company and the lenders under the
Credit Facility (the "Lenders") agree, at the "set" rate, which shall be an
interest rate agreed to by the Company and the Lenders at the time such Revolver
Loan is made. In addition, the Company is required to pay certain structuring,
administration and funding fees under the Credit Facility. The Credit Facility
is secured by substantially all of the Company's assets. The Credit Facility
contains customary covenants, including requirements to maintain certain
financial ratios.

  Swap Agreements

     The Company has used interest rate swap agreements to effectively fix the
interest rate with respect to a portion of the borrowings outstanding under the
Credit Facility, which otherwise bear interest at floating rates. Such
agreements involve the receipt of floating rate amounts in exchange for fixed
rate interest payments during the term of such agreements without an exchange of
the underlying principal amounts. The differential to be paid or received is
accrued as interest rates change and recognized as an adjustment to interest
expense related to the borrowings outstanding under the Credit Facility. The
related amount payable to or receivable from counterparties is included in other
liabilities or assets. At August 28, 1998, the Company had swap agreements with
notional amounts aggregating $105.0 million, providing an effective interest
rate of 6.9% on that equivalent portion of the outstanding Revolver Loans.

  Receivables Securitization Facility

     Pursuant to an agreement between Avondale Mills and The First National Bank
of Chicago ("First Chicago"), First Chicago has provided to the Company, through
a special purpose vehicle administered by it, a securitization facility
("Receivables Securitization Facility") of up to $120 million for the
securitization of certain trade receivables (the "Receivables") originated by
the Company. The Company acts as the servicer for the Receivables.

     Under the Receivables Securitization Facility, the Company transfers
Receivables to a wholly owned, limited-purpose subsidiary of the Company (the
"Receivables Company"), which sells the Receivables to a trust (the "Trust").
The Trust issues variable funding certificates to lending or financial
institutions or other investors evidencing undivided interests in the assets of
the Trust (the "Certificates"). The Receivables Securitization Facility permits
draws and repayments on a revolving basis prior to November 15, 2002 or such
earlier time as certain events occur (the "Amortization Commencement Date"). The
Certificates, which represent beneficial interests in the Trust, entitle the
holders thereof to (i) receipt of collections from the Receivables, (ii) all
rights of the Company or the Receivables Company in goods, the sale of which
gave rise to the Receivables, (iii) all collateral and other arrangements
supporting the Receivables, (iv) all rights to proceeds of any of the foregoing
held in lock-boxes and bank accounts of the Company or the Receivables Company,
(v) rights and interests of the Receivables Company under the documents for the
Receivables Securitization Facility and (vi) all collections and other proceeds
of the assets described above. The Certificates represent beneficial interests
in the Trust only, and do not represent obligations of, or interests in, and are
not guaranteed or insured by, the Receivables Company or the Company. At August
28, 1998, certificates of $112.0 million were outstanding.

     The rate of interest on the Receivables Securitization Facility is the
Eurodollar rate (adjusted for any reserves) plus 0.40% or First Chicago's
alternate base rate. The final maturity of the Certificates is



                                       15
<PAGE>   17

expected to occur six months after the Amortization Commencement Date. All
collections attributable to the Certificates will be set aside commencing on the
Amortization Commencement Date to repay the Certificates in full. Amounts set
aside will be applied on a monthly basis to repay the Certificates in full.

     The Receivables Securitization Facility contains covenants, representations
and warranties customary for such facilities and consistent with those that
First Chicago reasonably believes are required to obtain an "A" rating from the
rating agencies. Financial covenants are not included in the provisions of the
Receivables Securitization Facility nor are any provisions relating to cross
defaults to any other obligations of the Company.

  Capital Expenditures and Cash Flows Analysis

     The Company's capital expenditures aggregated $66.3 million for fiscal
1998. These expenditures were primarily to complete the construction of a new
denim weaving facility, begin the expansion of an existing greige weaving
facility, upgrade fabric finishing ranges and purchase other equipment.
Management estimates that capital expenditures for fiscal 1999 will be
approximately $60.0 million, and that such amounts will be used primarily to
complete the greige weaving expansion and improve fabric finishing facilities.

     Net cash provided by operating activities was $81.7 million in fiscal 1998.
Principal working capital changes included a $5.2 million decrease in accounts
receivable, a $6.2 million decrease in inventories and an $8.3 million decrease
in accounts payable and accrued expenses. The Company's investing activities
were primarily the capital improvements described above. Net cash used in
financing activities aggregated $15.1 million, including $5.2 million used to
pay dividends on Common Stock, $15.4 million used to repurchase approximately
592,000 shares of Class A Common Stock pursuant to a tender offer distributed by
the Company to all shareholders and vested stock option holders of Class A
Common Stock, and receipt of $10.0 million from the sale of additional accounts
receivable under the securitization facility.

     Net cash provided by operating activities was $83.2 million in fiscal 1997.
Principal working capital changes included an $8.7 million decrease in accounts
receivable, a $6.8 million decrease in inventories and a $6.9 million decrease
in accounts payable and accrued expenses. The Company's investing activities
were primarily expenditures for capital improvements and the receipt of the $7.3
million due from Triarc upon finalization of the Graniteville Acquisition
purchase price. Net cash used in financing activities aggregated $57.9 million,
including $51.8 million used to repay long-term indebtedness and $3.7 million
used to pay dividends on Common Stock.

     Net cash provided by operating activities was $25.5 million in fiscal 1996.
Principal working capital changes included a $21.9 million increase in accounts
receivable, a $1.9 million decrease in inventories (net of the Graniteville
Acquisition) and a $7.4 million increase in accounts payable and accrued
expenses. The changes in working capital were primarily attributable to the
substantial increase in net sales resulting from the Graniteville Acquisition
and an increase in raw material inventories. The Company's investing activities
included the Graniteville Acquisition, capital improvements of $33.4 million,
the sale of certain real estate for an aggregate purchase price of $12.1 million
and a $7.5 million subordinated loan to Oneita. Pursuant to an agreement with
Oneita, on August 27, 1996, the Company converted the Oneita note (principal
plus accrued interest), which bore interest at 10% per annum and would have
matured in February 1999, into 2,270,833 shares of common stock of Oneita
(representing a conversion price of $3.50 per share, which approximated fair
market value). On such date, such shares represented approximately 24.8% of
Oneita's outstanding common stock. Net cash provided by financing activities
aggregated $264.2 million, which was used primarily to finance the Graniteville
Acquisition.



                                       16
<PAGE>   18

     In April 1996, in connection with the Graniteville Acquisition, the Company
completed an equity private placement of 2,222,223 shares of Class A Common
Stock for an aggregate purchase price of $40 million (the "1996 Private
Placement"). Such shares were purchased by affiliates of Clipper Capital
Partners, L.P. ("Clipper"). In connection with the 1996 Private Placement, the
Company paid a closing fee of $600,000 to Clipper. In addition, Avondale Mills
issued $125 million aggregate principal amount of Notes in April 1996 in
connection with the Graniteville Acquisition. The Notes were issued under the
Indenture, which contains certain covenants that, among other things, restrict
the ability of Avondale Mills to incur debt, pay dividends on or redeem or
retire capital stock, make certain investments, enter into transactions with
affiliates, sell assets or consummate certain business combinations. The Company
fully and unconditionally guaranteed the Notes.

     Management believes that cash generated from operations, together with
borrowings available under the Credit Facility and proceeds received in
connection with sales of trade receivables, will be sufficient to meet the
Company's working capital and capital expenditure needs in the foreseeable
future. The Company will also continue to consider other options available to it
in connection with future working capital and capital expenditure needs,
including the issuance of additional debt and equity securities.


SEASONALITY

     The Company's sales are broadly distributed over markets with staggered
seasonality and, therefore, generally do not exhibit significant seasonal
trends.


YEAR 2000

     The Company utilizes computer systems and related software which process
dates using two digits to define specific years. Such systems may not be able to
distinguish the year 2000 from the year 1900, resulting in system failures or
miscalculations which may disrupt operations and other activities. During the
past two years, the Company has identified those systems which are not Year 2000
compliant and developed plans to modify or replace them. Execution of these
plans is ongoing and the Company expects to complete its remediation of all
business applications by December 31, 1998, and all process control and
manufacturing systems by June 30, 1999.

     Costs associated with remediation of the affected systems are being
expensed as incurred. The Company estimates that it has incurred costs of
approximately $3 million through fiscal 1998 to achieve Year 2000 compliant
systems and will incur additional costs of approximately $2.5 million in fiscal
1999 to complete the remediation.

     The Company has conducted limited surveys of its major suppliers and
customers and found that those contacted are aware of the Year 2000 problem and
their own remediation requirements. However, the Company has no means of
assuring that its suppliers and customers will be Year 2000 compliant, and their
inability to complete required remediations in a timely manner could have an
adverse effect on the Company.

     To date, the Company has not established a contingency plan for possible
Year 2000 issues. It is anticipated that a contingency plan will be implemented
by August 31, 1999 based upon actual remediation achievements and an assessment
of outside risks at that point in time.



                                       17
<PAGE>   19

     While management believes that its estimates of the costs to achieve Year
2000 compliance and the related completion dates are reasonable and achievable,
there can be no assurance that actual results will not differ significantly from
management's plans.

NEW ACCOUNTING STANDARDS

     In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information,"
which generally requires that companies report segment information for operating
segments which are revenue producing components for which separate financial
information is produced internally. The Company plans to adopt Statement No. 131
in the first quarter of fiscal 1999, but has not yet completed its analysis of
the impact, if any, Statement No. 131 may have on disclosures in its financial
statements.

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value, and changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. The Company plans to adopt Statement No. 133 in fiscal 1999. Management
does not believe the adoption of this statement will have a material effect on
the consolidated financial position or results of operations of the Company.

FORWARD LOOKING STATEMENTS

     Statements herein regarding the Company's anticipated capital expenditures,
Year 2000 compliance and anticipated performance in future periods constitute
forward looking statements within the meaning of the Securities Act of 1993 and
Securities Act of 1934. Such statements are subject to certain risks and
uncertainties that could cause actual amounts to differ materially from those
projected. With respect to anticipated capital expenditures, management has made
certain assumptions regarding, among other things, maintenance of existing
facilities and equipment, availability and desirability of new, technologically
advanced equipment, installation and start up times, cost estimates and
continued availability of financial resources. The estimated amount of capital
expenditures is subject to certain risks, including, among other things, the
risk that unexpected capital expenditures will be required and unexpected costs
and expenses will be incurred. With respect to Year 2000 compliance, management
has performed certain assessments to identify remediation needs of the Company's
computer systems and related software and contacted major suppliers and
customers to assess the impact of the Year 2000 problem on their operations. The
Company's expectations regarding the impact of the Year 2000 problem and its
estimate of the costs to achieve Year 2000 compliance are subject to certain
risks, including, among other things, the risk that the assessments have not
identified all required system modifications, system modifications can not be
completed in a timely manner, unexpected costs and expenses will be incurred in
connection with system modifications, and major suppliers and customers will not
successfully achieve Year 2000 compliance in a timely manner. Further,
statements herein regarding the Company's performance in future periods are
subject to risks relating to, among other things, the cyclical and competitive
nature of the textile industry in general, pressures on sales prices due to
competitive and economic conditions, deterioration of relationships with, or
loss of, significant customers, availability, sourcing and pricing of cotton and
other raw materials, technological advancements, employee relations, continued
availability of financial resources, difficulties integrating acquired
businesses and possible changes in governmental policies affecting raw material
costs. Management believes these forward looking statements are reasonable;
however, undue reliance should not be placed on such forward looking statements,
which are based on current expectations.



                                       18
<PAGE>   20

ITEM 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Upward or downward changes in market interest rates and their impact on the
reported interest expense of the Company's variable rate borrowings may affect
the Company's earnings. However, the Company's use of interest rate swap
agreements will limit the negative impact of higher interest rates. Assuming the
revolving credit facility and interest rate swap agreements at August 28, 1998
remain in effect throughout fiscal 1999, a 10% change in the effective average
interest rate would not have a material effect on the Company's pretax earnings
for fiscal 1999. In addition, a 10% change in interest rates would not have a
material effect on the fair value of the Company's interest rate swap agreements
and senior subordinated notes.

     Increases or decreases in the market price of cotton may affect the
valuation of the Company's inventories and fixed purchase commitments and,
accordingly, the Company's earnings. The potential decline in fair value of
these inventories and fixed purchase commitments resulting from a 10% decline in
market prices is estimated to be approximately $15 to $22 million.
















                                       19
<PAGE>   21





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                             AVONDALE INCORPORATED

                       CONSOLIDATED FINANCIAL STATEMENTS
                                AUGUST 28, 1998



<TABLE>
<CAPTION>
                                                            PAGE
                                                            ----
<S>                                                         <C>

Report of Independent Public Accountants ..............      24

Consolidated Balance Sheets ...........................      26

Consolidated Statements of Income .....................      27

Consolidated Statements of Shareholders' Equity .......      28

Consolidated Statements of Cash Flows .................      29

Notes to Consolidated Financial Statements ............      30
</TABLE>










                                       20
<PAGE>   22



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
Avondale Incorporated:

     We have audited the accompanying consolidated balance sheet of Avondale
Incorporated as of August 28, 1998, and the related consolidated statements of
income, shareholders' equity and cash flows for the fiscal year then ended.
These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit. The
consolidated balance sheet of Avondale Incorporated as of August 29, 1997, and
the related consolidated statements of income, shareholders' equity, cash flows
and the schedule referred to below for each of the two fiscal years in the
period ended August 29, 1997, were audited by other auditors whose report dated
October 7, 1997, expressed an unqualified opinion on those statements and
schedule.

     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Avondale
Incorporated at August 28, 1998, and the consolidated results of its operations
and its cash flows for the fiscal year then ended in conformity with generally
accepted accounting principles.

     Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index at Item
14 (a) is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Atlanta, Georgia
October 5, 1998




                                       21
<PAGE>   23



                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Avondale Incorporated

     We have audited the accompanying consolidated balance sheet of Avondale
Incorporated as of August 29, 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the two fiscal years in
the period ended August 29, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14 (a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Avondale
Incorporated at August 29, 1997, and the consolidated results of its operations
and its cash flows for each of the two fiscal years in the period ended August
29, 1997, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

                                                               ERNST & YOUNG LLP

Atlanta, Georgia
October 7, 1997












                                       22
<PAGE>   24



                             AVONDALE INCORPORATED

                          CONSOLIDATED BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                   AUGUST 29,       AUGUST 28,
                                                                                      1997             1998
                                                                                   ----------       ----------
                              ASSETS
<S>                                                                                <C>               <C>      
 Current assets
 Cash ....................................................................         $   8,517         $   9,259
 Accounts receivable, less allowance for doubtful accounts of $5,518
    in 1997 and $2,533 in 1998 ............................................           77,698            62,497
 Inventories .............................................................           120,860           114,684
 Prepaid expenses ........................................................             1,561               742
                                                                                   ---------         ---------
        Total current assets ..............................................          208,636           187,182
Property, plant and equipment
 Land ....................................................................             8,510             8,510
 Buildings ...............................................................            71,155            82,366
 Machinery and equipment .................................................           379,434           430,629
                                                                                   ---------         ---------
                                                                                     459,099           521,505
 Less accumulated depreciation ...........................................         (230,117)         (267,791)
                                                                                   ---------         ---------
                                                                                     228,982           253,714
Other assets ............................................................             23,604            22,686
                                                                                   ---------         ---------
                                                                                   $ 461,222         $ 463,582
                                                                                   =========         =========
                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
 Accounts payable .........................................................        $  41,884         $  34,839
 Accrued compensation, benefits and related expenses ......................           22,514            24,665
 Other accrued expenses ...................................................           22,416            18,970
 Long-term debt due in one year ...........................................            3,250             2,250
 Income taxes payable .....................................................            4,804             1,345
                                                                                   ---------         ---------
        Total current liabilities .........................................           94,868            82,069
 Long-term debt ...........................................................          248,075           244,575
 Deferred income taxes and other long-term liabilities ....................           31,917            36,894
 Commitments and contingencies
 Shareholders' equity
  Preferred Stock
   $.01 par value; 10,000 shares authorized ...............................               --                -- 
 Common Stock
  Class A, $.01 par value; 100,000 shares authorized; issued and
    outstanding -- 12,290 shares in 1997 and 11,698 shares in 1998 ........              123               117
  Class B, $.01 par value; 5,000 shares authorized; issued and
    outstanding -- 979 shares in 1997 and 1998 ............................               10                10
  Capital in excess of par value ..........................................           41,478            39,835
  Retained earnings .......................................................           44,751            60,082
                                                                                   ---------         ---------
        Total shareholders' equity ........................................           86,362           100,044
                                                                                   ---------         ---------
                                                                                   $ 461,222         $ 463,582
                                                                                   =========         =========
</TABLE>

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



                                       23
<PAGE>   25





                             AVONDALE INCORPORATED

                       CONSOLIDATED STATEMENTS OF INCOME
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                                                             FISCAL YEAR ENDED
                                                              ---------------------------------------------
                                                              AUGUST 30,       AUGUST 29,        AUGUST 28,
                                                                 1996            1997               1998
                                                              ---------       -----------       -----------
<S>                                                           <C>             <C>               <C>       
Net sales .............................................        $706,232        $1,049,474        $1,056,103
Operating costs and expenses
  Cost of goods sold ..................................         599,149           882,760           879,263
  Depreciation ........................................          30,139            40,508            39,497
  Selling and administrative expenses .................          32,018            47,243            48,067
  Facility restructuring ..............................              --                --             2,699
                                                               --------        ----------        ----------
      Operating income ................................          44,926            78,963            86,577
Interest expense ......................................          18,512            26,158            23,280
Discount and expenses on sale of receivables ..........           3,718             6,617             7,342
Loss attributable to investment in Oneita .............              --             7,500                -- 
Other expense, net ....................................              13               801               517
                                                               --------        ----------        ----------
  Income before income taxes ..........................          22,683            37,887            55,438
Provision for income taxes ............................           9,035            14,950            21,125
                                                               --------        ----------        ----------
      Net income ......................................        $ 13,648        $   22,937        $   34,313
                                                               ========        ==========        ==========
Per share data
      Net income - basic ..............................        $   1.16        $     1.73        $     2.62
                                                               ========        ==========        ==========
      Net income - diluted ............................        $   1.15        $     1.70        $     2.58
                                                               ========        ==========        ==========
</TABLE>
                                                      
   The accompanying notes are an integral part of these consolidated financial
                                  statements.



                                       24
<PAGE>   26


                             AVONDALE INCORPORATED

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                                                    COMMON STOCK            
                                                                       ISSUED              CAPITAL IN
                                                                ---------------------       EXCESS OF         RETAINED
                                                                SHARES        AMOUNT        PAR VALUE         EARNINGS
                                                                ------        ------        ---------         --------
<S>                                                             <C>            <C>           <C>              <C>     
Balance at August 25, 1995 ............................         11,069         $ 111         $  2,566         $ 15,297
  Net income ..........................................             --            --               --           13,648
  Cash dividends ($0.28 per share) ....................             --            --               --           (3,410)
  Shares issued in connection with the acquisition
    of the Textile Business ...........................          2,222            22           39,278               -- 
                                                               -------         -----         --------         --------
Balance at August 30, 1996 ............................         13,291           133           41,844           25,535
  Net income ..........................................             --            --               --           22,937
  Cash dividends ($0.28 per share) ....................             --            --               --           (3,721)
  Purchase and retirement of treasury stock ...........            (22)           --             (366)              -- 
                                                               -------         -----         --------         --------
Balance at August 29, 1997 ............................         13,269           133           41,478           44,751
  Net income ..........................................             --            --               --           34,313
  Cash dividends ($0.40 per share) ....................             --            --               --           (5,249)
  Purchase and retirement of treasury stock ...........           (592)           (6)          (1,643)         (13,733)
                                                               -------         -----         --------         --------
Balance at August 28, 1998 ............................         12,677         $ 127         $ 39,835         $ 60,082
                                                               =======         =====         ========         ========
</TABLE>

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



                                       25
<PAGE>   27






                             AVONDALE INCORPORATED

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                               FISCAL YEAR ENDED
                                                                   -----------------------------------------
                                                                    AUGUST 30,     AUGUST 29,     AUGUST 28,
                                                                       1996           1997           1998
                                                                    ----------     ----------     ----------
<S>                                                                 <C>             <C>            <C>     
Operating activities
  Net income .................................................      $  13,648       $ 22,937       $ 34,313
  Adjustments to reconcile net income to net cash
   provided by operating activities:
   Depreciation and amortization .............................         30,411         40,822         39,887
   Loss attributable to investment in Oneita .................             --          7,500             --
   Provision for (benefit of) deferred income taxes ..........         (5,632)          (318)         6,452
   Interest expense on payment-in-kind notes .................          2,671             --             --
   Loss (gain) on sale of equipment ..........................           (696)          (681)         1,877
   Changes in operating assets and liabilities:
    Accounts receivable ......................................        (21,898)         8,730          5,201
    Inventories ..............................................          1,888          6,838          6,173
    Prepaid expenses .........................................         (2,380)         1,230            819
    Other assets and liabilities, net ........................            310         (1,672)        (1,119)
    Accounts payable and accrued expenses ....................          7,401         (6,943)        (8,339)
    Income taxes payable .....................................           (265)         4,716         (3,459)
                                                                    ---------       --------       --------
      Net cash provided by operating activities ..............         25,458         83,159         81,805
Investing activities
  Acquisition of Textile Business of Graniteville ............       (247,956)            --             --
  Sale of real estate ........................................         11,484             --             --
  Due from Triarc ............................................         (7,250)         7,250             --
  Investment in Oneita securities ............................         (7,500)            --             --
  Purchase of property, plant and equipment ..................        (33,439)       (32,046)       (66,335)
  Proceeds from sale of property, plant and equipment ........            904            763            403
                                                                    ---------       --------       --------
      Net cash used in investing activities ..................       (283,757)       (24,033)       (65,932)
Financing activities
  Principal payments on long-term debt .......................         (4,000)        (3,250)        (3,250)
  Net borrowings (payments) on revolving line of credit ......         54,525        (48,525)        (1,250)
  Issuance of subordinated notes .............................        125,000             --             --
  Deferred financing costs ...................................         (6,184)            --             --
  Sale of accounts receivable, net ...........................        104,000         (2,000)        10,000
  Issuance of common stock ...................................         39,300             --             --
  Retirement of subordinated notes ...........................        (45,014)            --             --
  Purchase and retirement of treasury stock ..................             --           (366)       (15,382)
  Dividends paid .............................................         (3,410)        (3,721)        (5,249)
                                                                    ---------       --------       --------
      Net cash provided by (used in) financing activities ....        264,217        (57,862)       (15,131)
                                                                    ---------       --------       --------
  Increase in cash ...........................................          5,918          1,264            742
  Cash and cash equivalents at beginning of year .............          1,335          7,253          8,517
                                                                    ---------       --------       --------
      Cash and cash equivalents at end of year ...............      $   7,253       $  8,517       $  9,259
                                                                    =========       ========       ========
</TABLE>

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



                                       26
<PAGE>   28

                             AVONDALE INCORPORATED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                AUGUST 28, 1998

     1. Basis of Presentation: The accompanying consolidated financial
statements include the accounts of Avondale Incorporated and its wholly owned
subsidiaries, Avondale Mills, Inc. ("Avondale Mills") and Avondale Receivables
Company (collectively, the "Company"). All significant intercompany accounts and
transactions have been eliminated. Certain prior year financial statement
amounts have been reclassified to conform with the current year's presentation.
Unless otherwise stated, all references to years relate to the Company's fiscal
year, which ends on the last Friday in August, rather than calendar years.

     The preparation of financial statements in conformity with generally
accepted accounting principles 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.

     Avondale Incorporated is a holding company and has no operations,
liabilities or assets other than those related to its investment in Avondale
Mills, Inc.

     The Company operates in a single business segment, manufacturing cotton and
cotton-blend yarns and fabrics, which are marketed primarily to the apparel
market and, to a lesser extent, the home furnishings and industrial products
markets.

     Cash and Cash Equivalents: The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.

     Inventories:  Inventories are stated at the lower of cost or market value.
Except for certain supply inventories valued on an average cost basis, cost is
determined on a last-in, first-out ("LIFO") basis.

     Periodically, the Company purchases cotton futures and options contracts to
hedge exposure to price fluctuations in the cotton acquired from various
suppliers. Gains and losses on these hedging contracts, which are immaterial,
are deferred as an adjustment to the carrying value of inventories and
recognized when these inventories are sold.

     Property, Plant and Equipment: Property, plant and equipment is stated at
cost and depreciated over the estimated useful lives of the related assets.
Depreciation is calculated primarily using the straight-line method. Capital
lease amortization is included with depreciation expense in the consolidated
financial statements.

     Associate Benefit Plans: The Company has a discretionary profit sharing
plan covering substantially all associates. Annual contributions by the Company
are made to the plan in amounts determined by the board of directors. In
addition, the plan has 401(k) savings options that are available to all
associates. The Company matches 25% of the first 3% of compensation contributed
by each associate. The Company also has a deferred compensation plan for certain
key personnel. The related expense for these profit sharing and deferred
compensation plans is charged to operations currently and totaled $6.0 million,
$6.9 million and $8.1 million for fiscal 1996, 1997 and 1998, respectively.

     Other Assets and Other Long-Term Liabilities: Other assets consist
primarily of unamortized loan fees, goodwill, cash surrender value of life
insurance, deposits on machinery and equipment 




                                       27
<PAGE>   29

purchases, and investments in securities. Other long-term liabilities consist of
accrued postretirement and workers' compensation benefits and deferred
compensation for certain key management personnel.

     Fair Value of Financial Instruments: The carrying values of cash, accounts
receivable, certain other assets, accounts payable and accrued expenses
approximate reasonable estimates of their fair values at August 29, 1997 and
August 28, 1998. See Note 8 for disclosures related to the fair values of
long-term debt and interest rate swap agreements.

     Earnings Per Share: During 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." In accordance with Statement
128, basic and diluted earnings per share are reported for all periods
presented, replacing the previously reported primary and fully diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of stock options and similar items. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share.

     Earnings per share is calculated by dividing the reported net income for
the period by the appropriate weighted average number of shares of common stock
outstanding, as shown below (amounts in thousands):


<TABLE>
<CAPTION>
                                                             1996        1997       1998
                                                            ------      ------     ------
         <S>                                                <C>         <C>        <C>
         Weighted average shares outstanding -
            Basic                                           11,811      13,289      13,090
         Effect of employee and director stock options         108         180         215
                                                            ------      ------      ------
         Weighed average shares outstanding -
         Diluted                                            11,919      13,469      13,305
                                                            ======      ======      ======
</TABLE>

     Stock Based Compensation: The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related Interpretations in accounting for its employee and
director stock options and adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("FAS 123"). The Company grants stock options for a fixed number
of shares to employees and directors with an exercise price equal to the fair
value of the shares at the date of grant and, accordingly, recognizes no
compensation expense for the stock option grants.

     Recent Accounting Pronouncements:  In June 1997, the Financial Accounting
Standards Board issued Statement No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which generally requires that companies
report segment information for operating segments which are revenue producing
components for which separate financial information is produced internally.
The Company plans to adopt Statement No. 131 in the first quarter of fiscal
1999, but has not yet completed its analysis of the impact, if any,  Statement
No. 131 may have on  its financial statements.

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value, and changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. The Company plans to adopt Statement No. 133 in the first quarter of fiscal
2000. Management does not believe the adoption of this statement will have a
material effect on the consolidated financial statements of the Company.



                                       28
<PAGE>   30

     Revenue Recognition: The Company records revenues principally when products
are shipped to customers. Consistent with recognized practice in the textile
industry, the Company also records revenues to a lesser extent throughout the
year (14%, 10% and 10% of total revenues in 1996, 1997 and 1998, respectively)
on a bill and hold basis, invoicing goods that have been produced, packaged and
made ready for shipment. These goods are effectively segregated from inventory
which is available for sale, the risks of ownership of the goods have passed to
the customer, and the remittance terms and collection experience on the related
invoicing is consistent with all other sales by the Company.

     The credit status of each customer is approved and monitored by the
Company. Sales to V.F. Corporation and its affiliates represented 20% of net
sales for fiscal 1996, 18% of net sales for fiscal 1997, and 16% of net sales
for fiscal 1998.

     2. Facility Restructuring: During the third quarter of fiscal 1998, the
Company recorded pretax charges of $2.7 million to consolidate manufacturing
facilities and dispose of certain inefficient equipment in its Graniteville,
South Carolina operations.

     3. Purchase of the Textile Business of Graniteville Company: On April 29,
1996, the Company acquired substantially all of the textile assets (the "Textile
Business") of Graniteville Company from Triarc Companies, Inc. ("Triarc"), for
cash consideration of $242.8 million plus the assumption of certain liabilities
other than long term-debt.

     The funds used to acquire the Textile Business were provided by the
issuance of senior subordinated notes, the sale of accounts receivable under a
securitization facility, the sale of the Company's Class A Common Stock and
borrowings against the Company's amended revolving credit facility.

     The acquisition was accounted for as a purchase; accordingly, the results
of operations of the Textile Business have been included in the Company's
operating results since the date of acquisition. The excess of the aggregate
purchase price, including acquisition related expenses, over the fair market
value of tangible assets acquired and liabilities assumed of approximately $6.7
million, has been recognized as goodwill and is being amortized over 20 years.

     4. Receivables Securitization Facility: On November 21, 1997, the Company
executed a 5-year amendment to its April 29, 1996 agreement with a bank (the
"Agreement") under which it may sell an undivided interest in a defined pool of
revolving trade accounts receivable (the "Receivables") held by Avondale
Receivables Company. Under the facility, the Receivables are transferred to a
trust at a discount. The trust sells variable funding certificates to lending
institutions or other investors representing undivided ownership interests in a
defined portion of the Receivables. Such certificates do not represent
obligations of or interests in, and are not guaranteed or insured by, the
Company. The proceeds from the issuance of the certificates are remitted to the
Company.

     The Company retains a residual interest in the Receivables in an amount
equal to the excess of the Receivables over the certificates sold. Such residual
interest is included in accounts receivable in the Consolidated Balance Sheets.
All losses, credits or other adjustments relating to the Receivables constitute
deductions applicable to the Company's residual interest in the Receivables.
Accordingly, the Company maintains an allowance for such deductions based upon
the expected collectibility of the Receivables. At August 29, 1997 and August
28, 1998, an allowance of $7.6 million and $4.5 million, respectively, related
to the Receivables is included in other accrued expenses in the Consolidated
Balance Sheets.

     The Agreement requires the Company to maintain sufficient levels of
Receivables to collateralize the outstanding certificates. The Agreement also
contains various covenants, representations and warranties customary to the
operation of such securitization programs, but does not include financial



                                       29
<PAGE>   31

covenants or cross defaults to any other obligations of the Company. The
Company, as agent for the trust, is responsible for the collection and
administrative processing of the Receivables.

     Under the Agreement, the trust may issue certificates of up to $120
million. Certificates of $102 million and $112 million, respectively, were
outstanding at August 29, 1997 and August 28, 1998. Accounts receivable in the
Consolidated Balance Sheets have been reduced by approximately $103 million and
$113 million, respectively, representing the face amount of the outstanding
receivables sold at those dates.

     For the fiscal years ended August 30, 1996, August 29, 1997 and August 28,
1998, discounts of $3.7 million, $6.6 million and $6.8 million, respectively, on
sales of Receivables have been included in discount and expenses on sale of
receivables in the Consolidated Statements of Income. The Company sells the
Receivables as an alternative to incurring additional debt. Viewed on this
basis, the Company's ongoing cost of the facility at August 28, 1998 is equal to
the Eurodollar rate (adjusted for any reserves) plus 0.40% or the bank's base
rate of interest.

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


<TABLE>
<CAPTION>
                                                                         AUGUST 29,     AUGUST 28,
                                                                            1997           1998
                                                                         ----------     ----------
          <S>                                                            <C>            <C>     
          Finished goods ...........................................      $  32,907       $ 28,744
          Work in process ..........................................         51,345         49,434
          Raw materials ............................................         24,556         23,279
          Dyes and chemicals .......................................          6,518          6,084
                                                                          ---------       --------
          Inventories at FIFO ......................................        115,326        107,541
          Less allowance to reduce carrying value to LIFO basis ....         (2,027)            --
                                                                          ---------       --------
                                                                            113,299        107,541
          Supplies at average cost .................................          7,561          7,143
                                                                          ---------       --------
                                                                          $ 120,860       $114,684
                                                                          =========       ========
</TABLE>

     6. Investment in Securities: In January 1996, the Company purchased a $7.5
million subordinated note due February 26, 1999, having convertible features,
from Oneita Industries, Inc. ("Oneita"). On August 27, 1996, the Company
converted the subordinated note plus accrued interest into 2,270,833 shares of
common stock of Oneita, representing ownership of 24.8% of Oneita's outstanding
shares.

     The following summarizes the results of operations reported by Oneita for
its four fiscal quarters ended June 28, 1997 (amounts in thousands):


<TABLE>
        <S>                                                    <C>
        Net sales............................................  $136,672
                                                               =========

        Loss from operations.........................          $(27,562)
                                                               =========

        Net loss.............................................  $(35,659)
                                                               =========
</TABLE>



     During the fiscal year ended August 29, 1997, the Company recorded a loss
of $7.5 million attributable to its investment in Oneita, reducing the carrying
value of its investment to zero. Such loss represented the Company's pro rata
share of the net loss incurred by Oneita for its four fiscal quarters noted
above, limited to the Company's original investment. Oneita has continued to
report net losses since that time.




                                       30
<PAGE>   32

     7. Income Taxes: Provision for income taxes is composed of the following
(in thousands):


<TABLE>
<CAPTION>
                                                1996           1997           1998
                                              --------       --------       -------
      <S>                                     <C>            <C>            <C>    
      Current:
       Federal .........................      $ 12,784       $ 13,232       $13,578
       State ...........................         1,883          2,036         1,095
                                              --------       --------       -------
                                                14,667         15,268        14,673
      Deferred:
       Federal .........................        (4,870)          (275)        5,506
       State ...........................          (762)           (43)          946
                                              --------       --------       -------
                                                (5,632)          (318)        6,452
                                              --------       --------       -------
                                              $  9,035       $ 14,950       $21,125
                                              ========       ========       =======
</TABLE>

     The following table shows the reconciliation of federal income tax expense
at the statutory rate on income before income taxes to reported income tax
expense (in thousands):



<TABLE>
<CAPTION>
                                                                  1996        1997         1998
                                                                -------      ------       ------
         <S>                                                    <C>          <C>          <C>
         Federal income taxes ............................      $ 7,939      $13,261      $19,403
         State income taxes, net of federal tax benefit ..          729        1,276        1,407
         Other ...........................................          367          413          315
                                                                -------      -------      -------
                                                                $ 9,035      $14,950      $21,125
                                                                =======      =======      =======
</TABLE>

     The Company made income tax payments of $14.3 million, $10.4 million and
$11.5 million during fiscal 1996, 1997 and 1998, respectively.

     Deferred income taxes are provided for temporary differences in financial
and income tax reporting. Significant components of the Company's year-end
deferred tax liabilities and assets are as follows (in thousands):


<TABLE>
<CAPTION>

                                                 AUGUST 29,   AUGUST 28,
                                                    1997         1998
                                                 ----------   ----------
        <S>                                     <C>          <C>    
        Deferred tax liabilities:
          Depreciation ......................      $21,784      $25,084
          Inventory valuation ...............        7,395        6,989
          Goodwill ..........................        2,638        2,496
          Other .............................        1,414        1,804
                                                   -------      -------
             Deferred tax liabilities .......       33,231       36,373
        Deferred tax assets:
          Employee benefit programs .........        8,015        8,948
          Receivable reserves ...............        5,285        2,842
          Other .............................        3,364        1,564
                                                   -------      -------
             Deferred tax assets ............       16,664       13,354
                                                   -------      -------
        Net deferred tax liabilities ........      $16,567      $23,019
                                                   =======      =======
</TABLE>




                                       31
<PAGE>   33





     8. Long-Term Debt: Long-term debt consists of the following (in thousands):



<TABLE>
<CAPTION>
                                                                                    AUGUST 29,      AUGUST 28,
                                                                                       1997            1998
                                                                                    ----------      ----------
     <S>                                                                            <C>             <C>
     Revolving credit facility, interest tied to banks' base rate or
     alternative rates, 6.4% - 8.5% in 1998, due April 2000 ..................      $ 112,575       $ 111,325

     Industrial revenue bonds, floating rate, 3.0% - 4.5% in 1998, due in
     various installments through 2004 .......................................         13,750          10,500

     Senior subordinated notes, 10.25%, due May 1, 2006 ......................        125,000         125,000
                                                                                    ---------       ---------
                                                                                      251,325         246,825
     Less current portion ....................................................         (3,250)         (2,250)
                                                                                    ---------       ---------
                                                                                    $ 248,075       $ 244,575
                                                                                    =========       =========
</TABLE>

     The Company maintains a secured revolving credit facility with a group of
banks which provides aggregate borrowing availability of a maximum of $200
million through April 2001. Under the terms of this agreement, the Company can
designate an interest rate tied to the banks' base rate or alternative rates
negotiated with the banks, for specified time periods. A commitment fee of 0.25%
per annum is payable quarterly on the average daily unused portion of the
revolving credit commitment. The revolving credit facility is secured by
substantially all of the Company's assets. Covenants of the credit agreement
require the Company to maintain certain cash flow ratios and debt to equity
ratios, and contain restrictions on payment of dividends. Under the most
restrictive of these covenants, $16.2 million of retained earnings was available
for payment of dividends at August 28, 1998.

     The Company uses interest rate swap agreements to effectively convert a
portion of its outstanding revolving credit facility to a fixed rate basis, thus
reducing the impact of interest rate changes on future income. These agreements
involve the receipt of floating rate amounts in exchange for fixed rate interest
payments over the lives of the agreements without an exchange of the underlying
principal amounts. The differential to be paid or received is accrued as
interest rates change and recognized as an adjustment to interest expense
related to the debt. The related amount payable to or receivable from
counterparties is included in other liabilities or assets. At August 28, 1998,
the Company had interest rate swap agreements with notional amounts aggregating
$105 million providing an effective interest rate of 6.9% on that equivalent
portion of the revolving credit facility. These interest rate swap agreements
had no significant market value at August 29, 1997, and an unrealized loss of
approximately $1 million at August 28, 1998. The Company does not anticipate
realization of this loss as the interest rate swap agreements are anticipated to
remain outstanding through maturity.

     Two of the industrial revenue bonds which were issued to acquire property,
plant and equipment represent capital lease obligations. These lease obligations
plus the other industrial revenue bonds are secured by letter of credit
agreements with a bank. The letter of credit agreements are, in turn, secured by
the property, plant and equipment at three plant locations, which had a carrying
value of approximately $24.6 million at August 28, 1998. Covenants of the letter
of credit agreements substantially adopt the restrictive covenant provisions of
the revolving credit facility.

     In conjunction with the acquisition discussed in Note 3, Avondale Mills
issued $125 million of 10.25% senior subordinated notes which mature on May 1,
2006. The notes are unsecured and the guarantee of these notes by the Company is
subordinated to all existing and future senior indebtedness of the Company.
Interest on the notes is due on May 1 and November 1 of each year. At August 30,
1996, the quoted market value of the notes approximated their carrying value. At
August 29, 1997 and August 28, 1998, the market value of the notes was
approximately $133 million and $131 million, respectively. 



                                       32
<PAGE>   34

The Company does not anticipate settlement of the notes at fair value and
currently expects the notes to remain outstanding through maturity.

     The senior subordinated notes contain a redemption feature allowing the
Company, at any time prior to May 1, 1999, to redeem up to an aggregate of $25
million of the principal amount of the notes with the proceeds of one or more
public equity offerings, at a redemption price of 110% plus accrued interest to
the redemption date, provided that at least $100 million aggregate principal
amount of the notes remains outstanding after such redemption. On or after May
1, 2001, the notes will be redeemable at the Company's option, in whole or in
part, at a scheduled redemption price of 105.125% in 2001 declining to 100% in
2004 and thereafter.

     The indenture under which the senior subordinated notes were issued
contains, among other things, certain restrictive covenants which apply to
Avondale Mills on 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.

     At August 28, 1998, the Company was in compliance with the covenants of the
revolving credit facility, subordinated note indenture and letter of credit
agreements.

     The carrying value of the Company's revolving credit facility and
industrial revenue bonds approximates fair value.

     Aggregate maturities of long-term debt are as follows (in thousands):


<TABLE>
      <S>                                          <C>
      1999 ..................................      $  2,250
      2000 ..................................         3,250
      2001 ..................................       113,825
      2002 ..................................           500
      2003 ..................................         1,000
      Thereafter through 2006 ...............       126,000
                                                   --------
                                                   $246,825
                                                   ========
</TABLE>

     In connection with the Company's borrowings, no interest has been
capitalized. The Company paid interest on revolving credit, long-term debt and
interest rate swap agreements of approximately $15.1 million , $25.4 million and
$23.5 million in 1996, 1997 and 1998, respectively.

     9. Common Stock: Each share of Class A Common Stock is entitled to one vote
and each share of Class B Common Stock is entitled to 20 votes with respect to
matters submitted to a vote of shareholders. Each share of the Class B Common
Stock is convertible at any time, at the option of its holder, into one share of
Class A Common Stock. The Class B Common Stock will convert automatically into
Class A Common Stock, and thereby lose its special voting rights, if such Class
B Common Stock is sold or otherwise transferred to any person or entity other
than certain designated transferees.

     To finance a portion of the purchase price for the Textile Business, the
Company sold 2.2 million shares of Class A Common Stock to investors for $40
million, less fees and expenses of $700,000. In connection with the sale, the
Company entered into shareholder and registration rights agreements which, among
other matters, grant the investors certain preemptive rights with respect to
future sales of common stock and certain registration rights with respect to the
investors' shares.

     During fiscal 1998, the Company repurchased approximately 592,000 shares of
Class A Common Stock for an aggregate purchase price of $15.4 million. These
shares were repurchased



                                       33
<PAGE>   35

pursuant to a tender offer, distributed to all shareholders and vested stock
option holders of the Company's Class A Common Stock, to purchase for cash up to
$18.0 million worth of Class A Common Stock. All shares repurchased have been
canceled and reinstated as authorized but unissued shares of Class A Common
Stock.

     The Company maintains an employee Stock Option Plan that allows for the
grant of non-qualified and incentive stock options. Under this Stock Option
Plan, options to purchase up to 1,081,250 shares of Class A Common Stock may be
granted to full-time employees, including executive officers of the Company.
Activity under the plan is summarized as follows (option shares in thousands):


<TABLE>
<CAPTION>
                                                                Grant Price Per Share
                                                                ---------------------
     <S>                                                          <C>       <C>
                                                                  $12.50    $18.00
                                                                  ------    ------
     Stock Options outstanding at August 25, 1995 ..........         640        --
        Options granted ....................................          --       390
        Options forfeited ..................................         (50)       --
                                                                    ----      ----
     Stock Options outstanding at August 30, 1996 ..........         590       390
        Options forfeited ..................................          --       (25)
                                                                    ----      ----
     Stock Options outstanding at August 29, 1997 ..........         590       365
        Options redeemed at $24.00 to $28.00 per share .....         (85)      (10)
        Options forfeited ..................................          --       (30)
                                                                    ----      ----
     Stock Options outstanding at August 28, 1998 ..........         505       325
                                                                    ====      ====
     Stock Options Exercisable at August 28, 1998 ..........         269       127
                                                                    ====      ====
</TABLE>

     The exercise prices of the options granted approximated the fair market
value of the Company's Common Stock on the dates of grant. In conjunction with
the stock repurchase described above, certain participants in the Company's
Stock Option Plan redeemed options in exchange for an aggregate cash payment of
$1.2 million. The Company recorded the cost of the redemption as compensation
expense, which is included in selling and administrative expenses. Options
forfeited by employees leaving the Company are reinstated as available for
grant. All options granted vest ratably over five years and may be exercised for
a period of ten years. At August 28, 1998, there were 156,000 stock options
available for grant.

     The Company adopted a Stock Option Plan for Non-employee Directors,
effective September 1, 1997, under which 100,000 shares of the Company's Class A
Common Stock are reserved for issuance. Under the plan, each director will
automatically be granted annually, on the fifth day following the annual
shareholders meeting, a fully vested option to purchase 2,000 shares of Class A
Common Stock, at an option price equal to the fair market value of such stock on
the date the option is granted. Options granted are exercisable for a period of
ten years, subject to certain limitations. During 1998, 12,000 non-qualified
options were granted and remain outstanding and exercisable at August 28, 1998.

     Pro forma information regarding the effect on the Company's results of
operations, assuming employee and non-employee director stock options had been
accounted for under the fair value method of FAS 123, was calculated using the
"minimum value" method which is permitted for companies with nonpublic equity.
The following weighted average assumptions were used in these calculations for
options granted in fiscal 1996 and 1998:



<TABLE>
    <S>                                                    <C>
    Risk free interest rate.........................          4.6%
    Expected dividend yield.........................          2.2%
    Expected lives..................................       8 years
</TABLE>





                                       34
<PAGE>   36





     The total value of the options granted during fiscal 1996 and 1998 was
computed as approximately $669,000 and $21,000, respectively, which would be
amortized over the vesting period of the options. If the Company had accounted
for these plans in accordance with FAS 123, the reported net income and net
income per share would have decreased by the following pro forma amounts (in
thousands, except per share data):


<TABLE>
<CAPTION>
                                                        1996         1997          1998
                                                      -------       -------       -------
    <S>                                               <C>           <C>           <C> 
    Net income:
      As reported................................     $13,648       $22,937       $34,313
      Pro forma..................................      13,603        22,815        34,191
    Net income per share:
      Basic
        As reported..............................     $  1.16       $  1.73       $  2.62
        Pro forma................................        1.15          1.72          2.61
      Diluted 
        As reported..............................     $  1.15       $  1.70       $  2.58
        Pro forma................................        1.14          1.69          2.57
</TABLE>

     Because the accounting provisions of FAS 123 only apply to options granted
after fiscal 1995, the pro forma compensation cost presented may not be
representative of that to be expected in future years.

     10. Commitments and Contingencies: The Company is involved in certain
environmental matters and claims. The Company has provided reserves to cover
management's estimates of the cost of investigating, monitoring and remediating
these and other environmental conditions. If more costly remediation measures
are necessary than those believed to be probable based on current facts and
circumstances, actual costs may exceed the reserves provided. However, based on
the information currently available, management does not believe that the
outcome of these matters will have a materially adverse effect on its future
results of operations or financial position.

     The Company is also a party to 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, if determined
adversely to the Company, would have a materially adverse effect on the
Company's financial condition or results of operations.

     The Company leases certain of its facilities and equipment, primarily a
warehouse, several sales offices and computer equipment. Future minimum rental
payments required under such leases that have lease terms in excess of one year
are as follows (in thousands):



<TABLE>
                     <S>                                                 <C>
                     1999............................................    $ 1,567
                     2000............................................      1,531
                     2001............................................      1,525
                     2002............................................      1,158
                     2003............................................      1,016
                     Thereafter......................................      3,852
                                                                         -------
                                                                         $10,649
                                                                         =======
</TABLE>



                                       35
<PAGE>   37

     Rent expense for operating leases totaled $2.1 million, $3.5 million and
$2.6 million for fiscal 1996, 1997 and 1998, respectively.

     Commitments for future additions to plant and equipment were approximately
$14.0 million at August 28, 1998. Commitments for the purchase of raw materials
for fiscal 1999 and 2000 were approximately $170 million and $4 million,
respectively, at August 28, 1998.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

     The information required by Item 9 was previously reported by the Company
as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended.
Please see the Company's report on Form 8-K filed on April 22, 1998.






















                                       36
<PAGE>   38




                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The executive officers and directors of the Company and its wholly owned
subsidiary, Avondale Mills, are as follows:


<TABLE>
<CAPTION>
 NAME                              AGE  POSITIONS HELD
-----                              ---  --------------
<S>                                <C>  <C>
 G. Stephen Felker...........       46  Chairman of the Board, President and Chief      
                                          Executive Officer of the Company and          
                                          Avondale Mills                                
 Jack R. Altherr, Jr.........       49  Vice Chairman, Chief Financial Officer,         
                                          Secretary and Director of the Company 
                                          and Avondale Mills                                         
 T. Wayne Spraggins..........       61  Vice President of Avondale Mills and President, 
                                          Manufacturing Operations                      
 Keith M. Hull...............       45  Vice President of Avondale Mills and            
                                          President, Apparel Fabrics                    
 Robert G. Nelson............       50  Vice President of Avondale Mills and            
                                          President, Avondale Yarns                     
 Craig S. Crockard...........       56  Vice President, Planning and Development of     
                                          Avondale Mills                                
 Bill W. Henry...............       64  Vice President, Raw Material Purchasing of      
                                          Avondale Mills                                
 M. Delen Boyd...............       42  Vice President, Controller of Avondale          
                                          Mills, and Assistant Secretary of the Company 
                                          and Avondale Mills                            
 J. Elliott Woodward.........       46  Vice President, Treasurer of Avondale           
                                          Mills, and Assistant Secretary of the Company 
                                          and Avondale Mills                            
 Sharon L. Rodgers...........       42  Vice President, Human Resources of Avondale     
                                          Mills                                         
 Kenneth H. Callaway(1)......       43  Director of the Company and Avondale Mills      
 Robert B. Calhoun(1)(2)(3)..       56  Director of the Company and Avondale Mills      
 Harry C. Howard(2)..........       69  Director of the Company and Avondale Mills      
 C. Linden Longino, Jr.(2)...       62  Director of the Company and Avondale Mills      
 Dale J. Boden(1)............       41  Director of the Company and Avondale Mills      
 John P. Stevens(1)..........       69  Director of the Company and Avondale Mills      
</TABLE>                            

-----------------------

(1)  Member of Compensation Committee.
(2)  Member of Audit Committee.
(3)  Mr. Calhoun has been elected a director of the Company pursuant to that
     certain shareholder's agreement dated as of April 29, 1996 by and among the
     Company and certain shareholders of the Company.

     G. Stephen Felker has served as Chairman of the Board of the Company since
1992, President and Chief Executive Officer of the Company since 1980, and in
various other capacities since 1974. Mr. Felker has served as Chairman of the
Board and Chief Executive Officer of Avondale Mills since 1986, when the Company
acquired Avondale Mills, and President of Avondale Mills since 1995. Mr. Felker
serves as Chairman of the Georgia State Advisory Board of Wachovia Bank, N.A.
and as a director of Oneita Industries, Inc.



                                       37
<PAGE>   39

     Jack R. Altherr, Jr. has served as Vice Chairman of the Company and
Avondale Mills since May 1996, Chief Financial Officer and a director of the
Company since December 1989, Chief Financial Officer and Secretary of Avondale
Mills since October 1988 and a director of Avondale Mills since 1993. With the
exception of fiscal 1995, he has served as Secretary of the Company and
Avondale Mills since August 1993.  Mr. Altherr has served the Company and
Avondale Mills in various other capacities since July 1982. Mr. Altherr serves
as a director of Oneita Industries, Inc.

     T. Wayne Spraggins has served as Vice President of Avondale Mills and
President, Manufacturing Operations since May 1996. Mr. Spraggins joined
Avondale Mills as a standards engineer in August 1961 and has served Avondale
Mills in various other capacities, including Vice President, Manufacturing of
Avondale Mills, since that time.

     Keith M. Hull has served as President, Apparel Fabrics, the apparel fabrics
division of Avondale Mills following the Graniteville Acquisition, since May
1996. Mr. Hull has served as Vice President of Avondale Mills since April 1989,
and has served the Company in various other capacities, including Vice
President, Marketing since 1977. Mr. Hull serves as a director of Cherokee, Inc.

     Robert G. Nelson has served as President, Avondale Yarns, the yarns
division of Avondale Mills, since March 1996 and Vice President of Avondale
Mills since August 1993. Mr. Nelson has served the Company in various other
capacities, including Vice President, Walton Fabrics, since 1988.

     Craig S. Crockard has served as Vice President, Planning and Development
of Avondale Mills since September 1983. Mr. Crockard has served Avondale Mills
in various other capacities, including Vice President, Corporate Services,
since September 1966.

     Bill W. Henry has served as Vice President, Raw Material Purchasing of
Avondale Mills since July 1987. Mr. Henry has served Avondale Mills in various
other capacities, including Manager of the Cotton Department, since January
1969.

     M. Delen Boyd has served as Vice President, Controller of Avondale Mills
and Assistant Secretary of the Company and Avondale Mills since May 1996. Mr.
Boyd has served as Controller of Avondale Mills since 1987. Mr. Boyd joined
Avondale Mills in 1982 and has served in various capacities, including Assistant
Controller and Corporate Director of Accounting and Taxes.

     J. Elliott Woodward has served as Vice President, Treasurer of Avondale
Mills since May 1996. Mr. Woodward served as Vice President and Controller of
Graniteville Company from November 1993 to May 1996. Mr. Woodward joined
Graniteville Company in 1984 and served in various capacities from 1984 to May
1996, including Manager of General Accounting and Controller.

     Sharon L. Rodgers has served as Vice President, Human Resources of
Avondale Mills since May 1996. Ms. Rodgers served as Vice President, Legal and
Assistant Secretary of Graniteville Company from 1993 to May 1996.  Ms. Rodgers
joined Graniteville Company in 1980 and served in various other capacities at
Graniteville Company during the thirteen years ended in 1993.

     Kenneth H. Callaway has served as a director of the Company since November
1987 and of Avondale Mills since August 1993. Mr. Callaway has been President of
Calgati Chemical Company, a specialty chemical manufacturer, since December
1991. From 1987 through 1991, Mr. Callaway served as president of three
privately-owned retail computer businesses.

     Robert B. Calhoun has served as a director of the Company since August 1993
and of Avondale Mills since November 1991. He is presently a Managing Director
and Co-founder of Monitor Clipper Partners. Mr. Calhoun is also President of
Clipper Asset Management Corporation, the sole general



                                       38
<PAGE>   40

partner of The Clipper Group, L.P., a private investment firm, since January
1991, and of Clipper Capital Corporation, the sole general partner of Clipper,
an affiliated private investment firm, since 1993. From 1975 to 1991, Mr.
Calhoun was a Managing Director of CS First Boston Corporation, an investment
banking firm. Mr. Calhoun is also a director of Interstate Bakeries Corporation,
Travel Centers of America, Inc., HVIDE Marine, Inc., Long John Silver's Corp.
and David's Bridal.

     Harry C. Howard has served as a director of the Company since August 1993
and of Avondale Mills since July 1986. Mr. Howard retired from the law firm of
King & Spalding, where he had practiced law since 1956, as of December 31,
1992. Mr. Howard serves as a director of Crescent Banking Company, a bank
holding company.

     C. Linden Longino, Jr. has served as a director of the Company since
November 1975 and of Avondale Mills since August 1993. Mr. Longino served as
Senior Vice President of SunTrust Bank, Atlanta from December 1978 until his
retirement in July 1996. During his 34-year career with SunTrust Bank, Atlanta,
Mr. Longino served in various management capacities.

     Dale J. Boden has served as a director of the Company and Avondale Mills
since November 1994. Mr. Boden has served as President and Chief Executive
Officer of B.F. Capital, Inc., a private investment company, since January
1993.

     John P. Stevens has served as a director of the Company since January 1970
and of Avondale Mills since July 1986. Mr. Stevens served as Executive Vice
President of Wachovia Bank, N.A. from April 1981 until his retirement in
January 1994 and was responsible for managing the Government Banking and Public
Finance Department. Mr. Stevens served as a consultant to Wachovia Bank, N.A.
from February 1994 to February 1996. In addition, from February 1994 until the
present time, Mr. Stevens has been a partner in The Stevens Group, a consulting
firm specializing in providing assistance in a wide range of business and
governmental affairs.

     During fiscal 1998, the Company paid each non-employee director a quarterly
fee of $5,250 plus reimbursement of out-of-pocket expenses.

     The Company adopted a stock option plan for its non-employee directors,
effective September 1, 1997, under which 100,000 shares of the Company's Class A
Common Stock are reserved for issuance. Under the plan, each director will
automatically be granted annually, on the fifth day following the annual
shareholders meeting, a fully vested option to purchase 2,000 shares of Class A
Common Stock, at an option price equal to the fair market value of such stock on
the date the option is granted. Options granted are exercisable for a period of
ten years, subject to certain limitations. During 1998, 12,000 non-qualified
options were granted, and remained outstanding and exercisable at August 28,
1998.

     The directors of the Company are elected annually by the shareholders of
the Company. All executive officers of the Company are elected annually by and
serve at the discretion of the Board of Directors.






                                       39
<PAGE>   41




ITEM 11.  EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

     Summary Compensation Table. The table below sets forth certain information
concerning the compensation earned during fiscal 1998, 1997 and 1996 by the
Company's Chief Executive Officer and its four other most highly compensated
executive officers (collectively, the "Named Executive Officers").



                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                          ANNUAL COMPENSATION(1)
                                         -----------------------
                                   FISCAL                             ALL OTHER
NAME AND PRINCIPAL POSITION        YEAR   SALARY($)  BONUS($)(2)   COMPENSATION($)(3)
----------------------------      ------  ---------  -----------   ------------------
<S>                               <C>     <C>        <C>           <C>  
 G. Stephen Felker.............    1998    800,016      914,326           7,039
   Chairman of the Board,          1997    800,016    1,073,601          16,783
   President and Chief             1996    795,516      918,587          14,076
   Executive Officer               

 Jack R. Altherr, Jr...........    1998    308,340      174,731          10,413
   Vice Chairman, Chief            1997    291,668      197,470           8,769
   Financial Officer and           1996    248,008      153,925           7,304
   Secretary                       

 T. Wayne Spraggins............    1998    258,348      140,016          15,999
   Vice President and              1997    241,260      162,157          12,783
   President, Manufacturing        1996    196,268      120,797          10,654
   Operations                      

 Keith M. Hull.................    1998    258,348      134,940           9,036
   Vice President and              1997    240,008      160,418           7,329
   President, Apparel Fabrics      1996    187,508      101,835           6,232
                                   
 Robert G. Nelson..............    1998    152,500       72,160           8,243
   Vice President and              1997    150,000       68,285           7,072
  President, Avondale Yarns        1996    133,758       32,379           5,988
</TABLE>
---------------

(1)  The aggregate amount of perquisites and other personal benefits, if any,
     did not exceed the lesser of $50,000 or 10% of the total annual salary and
     bonus reported for each Named Executive Officer and has therefore been
     omitted.
(2)  Amounts shown include cash bonuses earned under the Company's management
     incentive plan, payments received in the Company's distribution of cash
     profit sharing to all eligible associates of the Company, payments received
     in lieu of profit sharing contributions under the Company's Associate
     Profit Sharing and Savings Plan on compensation in excess of qualified plan
     limits, and such other payments as the Compensation Committee of the Board
     of Directors elects to make based upon the Company's and respective
     officer's performance.
(3)  Amounts shown reflect, for fiscal 1996, (i) matching 401(k) contributions
     made by the Company to the Company's Associate Profit Sharing and Savings
     Plan of $1,125 on behalf of each Named Executive Officer, (ii) profit
     sharing contributions made by the Company to the Company's Associate Profit
     Sharing and Savings Plan of $3,560 on behalf of each Named Executive
     Officer and (iii) life insurance premiums of $9,391, $2,619, $5,969, $1,547
     and $1,303 paid by the Company on behalf of Messrs. Felker, Altherr,
     Spraggins, Hull and Nelson, respectively. Amounts shown reflect, for fiscal
     1997, (i) matching 401(k) contributions made by the Company


                                       40
<PAGE>   42


     to the Company's Associate Profit Sharing and Savings Plan of $1,125 on
     behalf of each Named Executive Officer, (ii) profit sharing contributions
     made by the Company to the Company's Associate Profit Sharing and Savings
     Plan of $4,456 on behalf of each Named Executive Officer and (iii) life
     insurance premiums of $11,202, $3,188, $7,202, $1,748 and $1,491 paid by
     the Company on behalf of Messrs. Felker, Altherr, Spraggins, Hull and
     Nelson, respectively. Amounts shown reflect, for fiscal 1998, (i) matching
     401(k) contributions made by the Company to the Company's Associate Profit
     Sharing and Savings Plan of $1,200 on behalf of each Named Executive
     Officer, (ii) profit sharing contributions made by the Company to the
     Company's Associate Profit Sharing and Savings Plan of $5,032 on behalf of
     each Named Executive Officer and (iii) life insurance premiums of $4,181,
     $9,767, $2,804 and $2,011 paid by the Company on behalf of Messrs. Altherr,
     Spraggins, Hull and Nelson, respectively and taxable income of $807 to Mr.
     Felker, in conjunction with a split dollar insurance agreement.

     Aggregated Options Table. The table below sets forth certain information
with respect to options held at the end of fiscal 1998 by each Named Executive
Officer. No options were granted to employees during fiscal 1998.



                            AGGREGATED OPTIONS TABLE


<TABLE>
<CAPTION>
                                                     NUMBER OF            VALUE OF
                                                 SHARES UNDERLYING      UNEXERCISED
                                                    UNEXERCISED         IN-THE-MONEY
                                                    OPTIONS AT           OPTIONS AT
                          SHARES                    FISCAL YEAR END     FISCAL YEAR END
                         ACQUIRED       VALUE        EXERCISABLE/         EXERCISABLE/
                        ON EXERCISE  REALIZED(1)    UNEXERCISABLE      UNEXERCISABLE(2)
                        -----------  -----------   -----------------  --------------------
 <S>                    <C>          <C>         <C>                  <C>
 G. Stephen Felker....         --            --      154,000/111,000  $1,408,000/ $972,000
 Jack R. Altherr, Jr..         --            --       70,000/  55,000    610,000/  440,000
 T. Wayne Spraggins...     30,000      $345,000       10,000/  35,000     40,000/  250,000
 Keith M. Hull........      3,999        61,985       36,001/  35,000    287,010/  250,000
 Robert G. Nelson.....      2,399        37,185       11,601/  16,000     66,210/   86,000
</TABLE>
-----------------

(1)  The values shown are based on the amount paid by the Company to repurchase
     shares of its Class A Common Stock on May 10, 1998 in connection with a
     tender offer made to all holders of Class A Common Stock.
(2)  All options are options to purchase Class A Common Stock of Avondale
     Incorporated. There is no existing public market for the Class A Common
     Stock. The values shown are based on management's estimate of the fair
     market value of the Class A Common Stock at August 28, 1998.

     Long-Term Incentive Plans. The table below sets forth certain information
with respect to phantom units held at the end of fiscal 1998 by each Named
Executive Officer. No phantom units were awarded during fiscal 1998.





                                       41
<PAGE>   43






           LONG-TERM INCENTIVE PLANS -- UNITS HELD AT AUGUST 28, 1998



<TABLE>
<CAPTION>

                                AGGREGATE                       ESTIMATED FUTURE
                              PHANTOM UNITS   PERIOD UNTIL       PAYOUTS FOR ALL
 NAME                            HELD(1)     PAYOUT (YEARS)   PHANTOM UNITS HELD(2)
 ----                         -------------  --------------   ---------------------
<S>                           <C>            <C>             <C>
 G. Stephen Felker.....            150              18               $1,293,278
 Jack R. Altherr, Jr...             90              16                  775,967
 T. Wayne Spraggins....             50               4                  431,093
 Keith M. Hull.........             90              19                  775,967
 Robert G. Nelson......             --              --                       --
</TABLE>
----------------

(1)  Each phantom unit equals 398.606 phantom shares. The value of each phantom
     share is equal to the result obtained by dividing (i) five times Avondale's
     earnings before depreciation, amortization, LIFO inventory adjustments,
     interest and income taxes for the 10 fiscal quarters immediately preceding
     such date divided by 2.5, plus (ii) certain "balance sheet adjustments" by
     the sum of (i) the aggregate number of outstanding phantom shares plus (ii)
     the aggregate number of outstanding shares of Class A Common Stock and
     Class B Common Stock of the Company. Phantom units vest at the rate of 5.0%
     per year for each full and uninterrupted year that the Named Executive
     Officer remains employed by the Company after August 31, 1989, and vest
     fully if the Named Executive Officer dies before his employment is
     terminated. The value of vested phantom units is payable beginning on the
     later of the date on which the Named Executive Officer reaches the age of
     65 or the date on which the employment of such Named Executive Officer
     terminates (the "Normal Payment Date"), in 10 equal annual installments,
     with interest equal to the one-year U.S. Treasury Bill rate in effect on
     the Normal Payment Date. If the Named Executive Officer dies before his
     employment with the Company is terminated, the value of his phantom units
     on the date of death is payable to his beneficiary as described above. If
     the Named Executive Officer dies after his Normal Payment Date, the present
     value of the balance of the annual installments is payable in a lump sum to
     his beneficiary. A Named Executive Officer will forfeit all interest in his
     Phantom Stock Units (whether or not vested) if he violates certain
     non-compete covenants applicable during such Named Executive Officer's
     employment and for a period of five years after termination of such
     employment.
(2)  There are no threshold, target or maximum amounts payable with respect to
     phantom unit awards made by the Company. The amounts shown reflect the
     future value, excluding interest payable during the installment payment
     period, as of September 1, 1998, of vested and non-vested phantom units
     held at the end of fiscal 1998 based on the results of the Company for the
     10 fiscal quarters ended August 28, 1998.






                                       42
<PAGE>   44





                        REPORT ON EXECUTIVE COMPENSATION

     The Compensation Committee of the Board of Directors during fiscal 1998
consisted of John P. Stevens, Chairman of the Compensation Committee, Dale J.
Boden, Robert B. Calhoun and Kenneth H. Callaway. None of the members of the
Compensation Committee is an employee of the Company. During fiscal 1998, the
Compensation Committee was responsible for (i) establishing the compensation
for the Company's Named Executive Officers and (ii) administering the Company's
Stock Option Plan.

     Compensation Policy.  The Company's executive compensation policy is
designed to attract, retain and motivate executive officers to maximize the
Company's performance and shareholder value by:

     -    providing base salaries that are market-competitive;

     -    rewarding the achievement of the Company's business plan goals and
          earnings objectives; and

     -    creating stock ownership opportunities to align the interests of
          executive officers with those of shareholders.

     In light of the Company's compensation policy, the primary components of
its executive compensation program for fiscal 1998 included base salaries, cash
bonuses and stock options.

     Base Salary. Each executive officer's base salary, including the Chief
Executive Officer's base salary, is determined based upon a number of factors
including the executive officer's responsibilities, contribution to the
achievement of the Company's business plan goals, demonstrated leadership skills
and overall effectiveness, and length of service. Base salaries are also
designed to be competitive with those offered in the various markets in which
the Company competes for executive talent and are analyzed with a view towards
desired base salary levels over a three-year to five-year time period. Each
executive officer's salary is reviewed annually and although these and other
factors are considered in setting base salaries, no specific weight is given to
any one factor. During fiscal 1998, the base salary of each Named Executive
Officer other than the Chief Executive Officer was increased by 2% to 4% over
each such executive officer's fiscal 1997 base salary. Mr. Felker's base salary
has not been adjusted since November 1, 1995.

     Cash Bonuses. Each executive officer, including the Chief Executive
Officer, is eligible to receive an annual cash bonus under the management
incentive plan. The Company's management incentive plan is designed to motivate
key managers and sales people as well as executive officers and reward the
achievement of specific business plan goals. Under the Company's management
incentive plan, in fiscal 1998, certain executive officers were eligible to earn
a cash bonus in an amount from 12.5% up to 125% of their respective base
salaries depending on a number of factors including, without limitation, the
Company's financial performance. In addition, the executive officers may receive
additional cash bonuses at the discretion of the Compensation Committee of the
Board of Directors based upon the Company's and the respective officer's
performance, including payments in lieu of profit sharing contributions under
the Company's Associate Profit Sharing and Savings Plan on compensation in
excess of qualified plan limits. During fiscal 1998, the Named Executive
Officers other than the Chief Executive Officer earned bonuses ranging from 47%
to 57% of their respective base salaries. Mr. Felker's bonus was equal to 114%
of his base salary.

     Stock Options. The grant of stock options is designed to align the
interests of executive officers with those of shareholders in the Company's
long-term performance. Stock options granted have exercise prices equal to the
fair market value of the underlying shares on the date of grant so that
compensation is earned only through long-term appreciation in the fair market
value of the underlying shares. Stock




                                       43
<PAGE>   45

options are granted from time to time if warranted by the Company's growth and
profitability and individual grants are based on, among other things, the
executive officer's responsibilities and individual performance. To encourage an
executive officer's long-term performance, stock options generally vest over
five years and terminate ten years after the date of grant. The creation of
opportunities to own stock is considered the most significant component in an
executive officer's compensation package. During fiscal 1998, the Named
Executive Officers did not receive any stock option grants.


                                         John P. Stevens
                                         Dale J. Boden
                                         Robert B. Calhoun
                                         Kenneth H. Callaway


     THE FOREGOING REPORT SHALL NOT BE DEEMED INCORPORATED BY REFERENCE BY ANY
GENERAL STATEMENT INCORPORATING BY REFERENCE THIS ANNUAL REPORT INTO ANY FILING
UNDER THE SECURITIES ACT OF 1993, AS AMENDED, OR UNDER THE SECURITIES EXCHANGE
ACT OF 1934 (TOGETHER, THE "ACTS"), EXCEPT TO THE EXTENT THAT THE COMPANY
SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE, AND SHALL NOT OTHERWISE
BE DEEMED FILED UNDER SUCH ACTS.



















                                       44
<PAGE>   46





ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

     The table below sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of November 9, 1998, by (i) each
person who is known to the Company to be the beneficial owner of more than 5% of
the outstanding Class A Common Stock or Class B Common Stock, (ii) each of the
Named Executive Officers, (iii) each of the directors of the Company and (iv)
all directors and executive officers of the Company as a group. Except as set
forth below, the shareholders named below have sole voting and investment power
with respect to all shares of Common Stock shown as being beneficially owned by
them.


<TABLE>
                                        BENEFICIAL OWNERSHIP    BENEFICIAL OWNERSHIP
                                             OF CLASS A              OF CLASS B         PERCENTAGE
                                            COMMON STOCK            COMMON STOCK            OF
                                         NUMBER     PERCENT      NUMBER     PERCENT      COMBINED
NAME OF BENEFICIAL OWNER(1)            OF SHARES    OF CLASS   OF SHARES    OF CLASS   VOTING POWER
---------------------------            ----------  ----------  ----------  ----------  ------------
<S>                                    <C>         <C>         <C>         <C>         <C>
G. Stephen Felker(2).................   4,274,689     33.2%     978,939        100%         72.7%
Jack R. Altherr, Jr.(3)..............     197,199      1.7%          --         --              *
T. Wayne Spraggins(4)................      90,000         *          --         --              *
Keith M. Hull(5).....................      96,001         *          --         --              *
Robert G. Nelson(6)..................      15,051         *          --         --              *
Dale J. Boden(7).....................     105,000         *          --         --              *
Kenneth H. Callaway(8)...............      12,000         *          --         --              *
Robert B. Calhoun(9)(10)(11).........   2,302,823     19.7%          --         --           7.4%
Harry C. Howard(12)..................      47,000         *          --         --              *
C. Linden Longino, Jr.(13)...........      27,250         *          --         --              *
John P. Stevens(14)..................     105,000         *          --         --              *
The Clipper Group(10)(11)(15)........   2,277,523     19.5%          --         --           7.3%
Grayward Company(16).................   3,497,740     29.9%          --         --          11.2%
Felker Investments, Ltd.(17).........   2,093,750     17.9%          --         --           6.7%
Avondale Mills, Inc. Associate Profit
Sharing and Savings Plan(18).........     600,000      5.1%          --         --           1.9%
All directors and executive officers
as a group (16 persons)..............   7,310,791     55.9%     978,939        100%         81.8%
</TABLE>
----------------
*    Less than 1%

(1)  Except as otherwise noted, the address of each person who is an officer or
     a director of the Company is c/o Avondale Mills, Inc., 506 South Broad
     Street, Monroe, Georgia 30655.
(2)  Includes (i) 2,093,750 shares of Class A Common Stock held of record by
     Felker Investments, Ltd., a partnership of which Mr. Felker is the general
     partner (as the general partner, Mr. Felker is deemed to beneficially own
     such shares under Rule 13d-3 under the Exchange Act), (ii) 978,939 shares
     of Class A Common Stock issuable upon conversion of the 978,939 shares of
     Class B Common Stock beneficially owned by Mr. Felker and (iii) 202,000
     shares of Class A Common Stock issuable upon exercise of stock options
     beneficially owned by Mr. Felker, which shares are deemed beneficially
     owned by Mr. Felker under Rule 13d-3 under the Exchange Act.
(3)  Includes 90,000 shares of Class A Common Stock issuable upon exercise of
     stock options beneficially owned by Mr. Altherr, which shares are deemed
     beneficially owned by Mr. Altherr under Rule 13d-3 under the Exchange Act.
(4)  Includes 20,000 shares of Class A Common Stock issuable upon exercise of
     stock options beneficially owned by Mr. Spraggins, which shares are deemed
     beneficially owned by Mr. Spraggins under Rule 13d-3 under the Exchange
     Act.



                                       45
<PAGE>   47




(5)  Includes 46,001 shares of Class A Common Stock issuable upon exercise of
     stock options beneficially owned by Mr. Hull, which shares are deemed
     beneficially owned by Mr. Hull under Rule 13d-3 under the Exchange Act.
(6)  Includes 13,601 shares of Class A Common Stock issuable upon exercise of
     stock options beneficially owned by Mr. Nelson, which shares are deemed
     beneficially owned by Mr. Nelson under Rule 13d-3 under the Exchange Act.
(7)  Reflects (i) 2,000 shares of Class A Common Stock issuable upon exercise
     of stock options beneficially owned by Mr. Boden, which shares are deemed
     beneficially owned by Mr. Boden under Rule 13d-3 under the Exchange Act,
     and  (ii) 3,000 shares beneficially owned by Textile Capital Partners,
     and (iii) 100,000 shares beneficially owned by The Sterling Trust;
     Hilliard Lyons Trust Co. Trustee, with respect to which Mr. Boden is a
     beneficiary and has shared voting and investment power. Mr. Boden is the
     majority shareholder of Textile Capital Partners and, consequently is
     deemed to beneficially own under Rule 13d-3 under the Exchange Act all of
     the shares beneficially owned by these entities.
(8)  Includes 2,000 shares of Class A Common Stock issuable upon exercise of
     stock options beneficially owned by Mr. Callaway, which shares are deemed
     beneficially owned by Mr. Callaway under Rule 13d-3 under the Exchange Act.
(9)  The address of Mr. Calhoun is c/o Clipper Capital Partners, L.P., 650
     Madison Avenue, New York, New York 10022.
(10) Includes (i) 2,000 shares of Class A Common Stock issuable upon exercise of
     stock options beneficially owned by Mr. Calhoun, which shares are deemed
     beneficially owned by Mr. Calhoun under Rule 13d-3 under the Exchange Act,
     (ii) shares beneficially owned by Clipper Capital Associates, L.P. ("CCA"),
     Clipper/Merchant Partners, L.P., Clipper Equity Partners I, L.P.,
     Clipper/Merban L.P. ("Merban"), Clipper/European Re, L.P. and CS First
     Boston Merchant Investments 1995/96, L.P. ("Merchant"), (whose address is
     650 Madison Avenue, 9th Floor, New York, New York 10022).
(11) CCA is the general partner of all of the Clipper Group partnerships other
     than Merchant. The general partner of CCA is Clipper Capital Associates,
     Inc. ("CCI"), and Mr. Calhoun is the sole stockholder and a director of
     CCI. Clipper, an affiliate of Mr. Calhoun, has sole voting and investment
     power with respect to the shares of Class A Common Stock beneficially owned
     by Merchant. As a result, each of Mr. Calhoun, CCA and CCI is deemed to
     beneficially own all shares of Class A Common Stock beneficially owned by
     the Clipper Group (other than Merchant), and Mr. Calhoun is deemed to
     beneficially own the shares of Class A Common Stock beneficially owned by
     Merchant. It is anticipated that Merban will beneficially own shares of
     Class A Common Stock representing approximately 5.9% of the outstanding
     Class A Common Stock and Clipper/Merchant Partners, L.P., will beneficially
     own shares of Class A Common Stock representing approximately 5.0% of the
     outstanding Class A Common Stock. Each of the other members of the Clipper
     Group will beneficially own less than 5.0% of the outstanding Class A
     Common Stock.
(12) Includes 2,000 shares of Class A Common Stock issuable upon exercise of
     stock options beneficially owned by Mr. Howard, which shares are deemed
     beneficially owned by Mr. Howard under Rule 13d-3 under the Exchange Act.
(13) Includes (i) 14,500 shares beneficially owned by Mr. Longino's spouse, and
     (ii) 2,000 shares of Class A Common Stock issuable upon exercise of stock
     options beneficially owned by Mr. Longino, which shares are deemed
     beneficially owned by Mr. Longino under Rule 13d-3 under the Exchange Act.
(14) Includes (i) 13,000 shares beneficially owned by Mr. Stevens' spouse, for
     which Mr. Stevens shares neither voting nor investment power, and (ii)
     2,000 shares of Class A Common Stock issuable upon exercise of stock
     options beneficially owned by Mr. Stevens, which shares are deemed
     beneficially owned by Mr. Stevens under Rule 13d-3 under the Exchange Act.
(15) Merchant Capital, Inc. ("Merchant Capital"), an affiliate of CS First
     Boston Corporation, is the general partner of Merchant and the 99% limited
     partner of Clipper/Merchant Partners, L.P. CS



                                       46
<PAGE>   48



     Holding, an affiliate of CS First Boston Corporation, is the indirect 99%
     limited partner of Merban. None of Merchant, Merchant Capital, CS First
     Boston Corporation and CS Holding is an affiliate of Clipper or CCA.
(16) Grayward Company's address is c/o SunTrust Bank, Nashville, N.A., P.O. Box
     305110, Nashville, Tennessee 37230. Grayward Company is a trust of which
     SunTrust Bank, Nashville, N.A. serves as trustee. As trustee, SunTrust
     Bank, Nashville, N.A. is deemed to beneficially own under Rule 13d-3 under
     the Exchange Act all of the shares beneficially owned by Grayward Company.
(17) The address of Felker Investments, Ltd. is c/o G. Stephen Felker, 506 South
     Broad Street, Monroe, Georgia 30655.
(18) The address of the Avondale Mills, Inc. Associate Profit Sharing and
     Savings Plan (the "Plan") is c/o Wachovia Bank, N.A., P.O. Box 3099,
     Winston-Salem, N.C. 27150. Wachovia Bank, N.A., serves as trustee for the
     Plan and, as such, is deemed to beneficially own under Rule 13d-3 under the
     Exchange Act all of the shares beneficially owned by the Plan.






















                                       47
<PAGE>   49



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Not Applicable.
























                                       48
<PAGE>   50




                                    PART IV

     ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
     (a) 1.  Financial Statements.

         The following Consolidated Financial Statements of the Company and its
consolidated subsidiaries and the Report of the Independent Auditors, included
in the Registrant's Annual Report to Shareholders for the year ended August 28,
1998 are included in Part II, Item 8.

     Report of Independent Auditors
     Consolidated Balance Sheets as of August 29, 1997 and August 28, 1998
     Consolidated Statements of Income -- Fiscal Years Ended August 30, 1996,
     August 29, 1997 and August 28, 1998
     Consolidated Statements of Shareholders' Equity -- Fiscal Years Ended
     August 30, 1996, August 29, 1997 and August 28, 1998
     Consolidated Statements of Cash Flows -- Fiscal Years Ended August 30,
     1996, August 29, 1997 and August 28, 1998
     Notes to Consolidated Financial Statements

2.   Financial Statement Schedules of the Company.

     Schedule II -- Valuation and Qualifying Accounts

3.   Exhibits.


<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S>      <C>      <C>
  2.1    --       Asset Purchase Agreement, dated March 31, 1996 among Avondale
                  Incorporated, Avondale Mills, Inc., Graniteville Company and
                  Triarc Companies, Inc. (incorporated by reference to Exhibit
                  2.1 to the Avondale Incorporated's Registration Statement on
                  Form S-4, File No. 333-5455-01).
  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,
                  File No. 333-5455-01).
  3.2   --        Bylaws of Avondale Incorporated (incorporated by reference to
                  Exhibit 3.2 to Avondale Incorporated's Registration Statement
                  on Form S-4, File No. 333-5455-01).
  4.1    --       Indenture for the Notes between Avondale Incorporated,
                  Avondale Mills, Inc. and The Bank of New York, as Trustee
                  (incorporated by reference to Exhibit 4.1 to Avondale
                  Incorporated's Registration Statement on Form S-4, File No.
                  333-5455-01).
  4.2    --       Amended and Restated Credit Agreement, dated as of April 29,
                  1996, among Avondale Mills, Inc., the Banks listed therein and
                  Wachovia Bank, N.A., as Agent (incorporated by reference to
                  Exhibit 4.3 to Avondale Incorporated's Registration Statement
                  on Form S-4, File No. 333-5455-01).
  4.3    --       Amended and Restated Security Agreement, dated April 29, 1996,
                  between Avondale Mills, Inc. and Wachovia Bank, N.A., as Agent
                  for the Banks which are parties to the Amended and Restated
                  Credit Agreement (incorporated by reference to Exhibit 4.4 to
                  Avondale Incorporated's Registration Statement on Form S-4,
                  File No. 333-5455-01).
  4.4    --       Amended and Restated Parent Guaranty, dated April 29, 1996,
                  executed by Avondale Incorporated in favor of Wachovia Bank,
                  N.A., as Agent for the Banks which are parties to the Amended
                  and Restated Credit Agreement (incorporated by
</TABLE>



                                       49
<PAGE>   51

<TABLE>
  <S>    <C>      <C>
                  reference to Exhibit 4.5 to Avondale Incorporated's
                  Registration Statement on Form S-4, File No. 333-5455-01).
  4.5    --       Amended and Restated Stock Pledge Agreement, dated April 29,
                  1996, between Wachovia Bank, N.A., as Agent for the Banks
                  which are parties to the Amended and Restated Credit
                  Agreement, and Avondale Incorporated (incorporated by
                  reference to Exhibit 4.6 to Avondale Incorporated's
                  Registration Statement on Form S-4, File No. 333-5455-01).
  4.6    --       Agreement to Provide Certain Debt Instruments to the
                  Commission upon Request (incorporated by reference to Exhibit
                  4.7 to Avondale Incorporated's Registration Statement on Form
                  S-4, File No. 333-5455-01).
 10.1    --       Receivables Purchase Agreement, dated April 29, 1996, among
                  Avondale Mills, Inc., as Servicer, and Avondale Receivables
                  Company (incorporated by reference to Exhibit 10.1 to Avondale
                  Incorporated's Registration Statement on Form S-4, File No.
                  333-5455-01).
 10.2    --       Pooling and Servicing Agreement, dated April 29, 1996, among
                  Avondale Receivables Company, Avondale Mills, Inc. and
                  Manufacturers and Traders Trust Company (incorporated by
                  reference to Exhibit 10.2 to Avondale Incorporated's
                  Registration Statement on Form S-4, File No. 333-5455-01).
 10.3    --       Amendment No. 1 to Pooling and Service Agreement and
                  Receivables Purchase Agreement; dated November 21, 1997, among
                  Avondale Receivables Company, Avondale Mills, Inc., and
                  Manufacturers and Traders Trust Company.
 10.4    --       Amended and Restated Series 1996-1 Supplement to the Pooling
                  and Servicing Agreement, dated November 21, 1997, among
                  Avondale Receivables Company, Avondale Mills, Inc. and
                  Manufacturers and Traders Trust Company.
 10.5    --       Amended and Restated Certificate Purchase Agreement, dated
                  November 21, 1997, among Avondale Receivables Company,
                  Avondale Mills, Inc., the purchasers described therein and
                  First National Bank of Chicago, as Agent.
 10.6    --       Registration Rights Agreement, dated April 29, 1996 between
                  Avondale Incorporated and the Persons listed therein
                  (incorporated by reference to Exhibit 10.8 to Avondale
                  Incorporated's Registration Statement on Form S-4, File No.
                  333-5455-01).
 10.7    --       Shareholders Agreement, dated April 29, 1996 among Avondale
                  Incorporated, the Investors listed therein, the Shareholders
                  listed therein and Clipper Capital Partners, L.P., in its
                  capacity as Purchaser Representative under the Agreement
                  (incorporated by reference to Exhibit 10.9 to Avondale
                  Incorporated's Registration Statement on Form S-4, File No.
                  333-5455-01).
 10.8    --       Post-Merger Stock Transfer and Repurchase Agreement, dated
                  August 27, 1993 by and among Avondale Incorporated,
                  Metropolitan Life Insurance Company, 1985 Merchant Investment
                  Partnership, Merchant LBO, Inc., G. Stephen Felker, John F.
                  Maypole and Jack R. Altherr, Jr. (incorporated by reference to
                  Exhibit 10.10 to Avondale Incorporated's Registration
                  Statement on Form S-4, File No. 333-5455-01).
 10.9    --       Post-Merger Stock Transfer and Repurchase Agreement, dated
                  August 27, 1993 by and among Avondale Incorporated,
                  Metropolitan Life Insurance Company, 1985 Merchant Investment
                  Partnership, Merchant LBO, Inc., G. Stephen Felker, John F.
                  Maypole and T. Wayne Spraggins (incorporated by reference to
                  Exhibit 10.11 to Avondale Incorporated's Registration
                  Statement on Form S-4, File No. 333-5455-01).
 10.10   --       Avondale Incorporated Stock Option Plan (incorporated by
                  reference to Exhibit 10.12 to Avondale Incorporated's
                  Registration Statement on Form S-4, File No. 333-5455-01).
 10.11   --       Avondale Mills, Inc. Associate Profit Sharing and Savings Plan
                  (incorporated by reference to Exhibit 10.13 to Avondale
                  Incorporated's Registration Statement on Form S-4, File No.
                  333-5455-01).
 10.12   --       Avondale Mills, Inc. Fiscal 1998 Management Incentive Plan for
                  G. Stephen Felker.
 10.13   --       Avondale Mills, Inc. Fiscal 1998 Management Incentive
                  Plan for Jack R. Altherr, Jr.
 10.14   --       Avondale Mills, Inc. Fiscal 1998 Management Incentive Plan for
                  T. Wayne Spraggins.
 10.15   --       Avondale Mills, Inc. Fiscal 1998 Management Incentive Plan for
                  Keith Hull.
</TABLE>

                                       50
<PAGE>   52


<TABLE>
<S>      <C>      <C>
 10.16   --       Avondale Mills, Inc. Fiscal 1998 Management Incentive Plan for
                  Robert G. Nelson.
 10.17   --       Phantom Unit Awards to G. Stephen Felker (incorporated by
                  reference to Exhibit 10.19 to Avondale Incorporated's
                  Registration Statement on Form S-4, File No. 333-5455-01).
 10.18   --       Phantom Unit Awards to Jack R. Altherr, Jr. (incorporated by
                  reference to Exhibit 10.21 to Avondale Incorporated's
                  Registration Statement on Form S-4, File No. 333-5455-01).
 10.19   --       Phantom Unit Awards to T. Wayne Spraggins (incorporated by
                  reference to Exhibit 10.23 to Avondale Incorporated's
                  Registration Statement on Form S-4, File No. 333-5455-01).
 10.20   --       Phantom Unit Awards to Keith M. Hull (incorporated by
                  reference to Exhibit 10.19 to Avondale Incorporated 's 1996
                  Annual Report on Form 10-K,File No. 33-68412).
 10.21   --       Supply Agreement dated March 31, 1996 between the Company and
                  C.H. Patrick & Co., Inc. (incorporated by reference to Exhibit
                  10.24 to Avondale Incorporated's Registration Statement on
                  Form S-4, File No. 33-5455-01).
 10.22   --       Avondale Incorporated Stock Option Plan for Non-Employee
                  Directors, Dated April 10, 1997 (incorporated by reference to
                  Exhibit 10.23 to Avondale Incorporated's 1997 Annual Report on
                  Form 10-K, File No. 33-68412).
 12.1    --       Computation of Ratio of Earnings to Fixed Charges. 
 27.1    --       Financial Data Schedule (for SEC use only).
 27.2    --       Restated Financial Data Schedule (for SEC use only).
</TABLE>
-------------
      (b) Reports on Form 8-K

           Not applicable.

      (c) See Item 14(a)(3) and separate Index to Exhibits attached hereto.











                                       51
<PAGE>   53



                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
                                      
                                       AVONDALE INCORPORATED         
                                                                     
                                       By: /s/ G. STEPHEN FELKER     
                                       ------------------------------------
                                       Name:  G. Stephen Felker       
                                       Title: Chairman of the Board, 
                                              President and                 
                                              Chief Executive Officer       
                                       
Date:   November 11, 1998

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:


<TABLE>
<CAPTION>
NAME                                                 TITLE                     DATE
----                                                 -----                     ----
<S>                                          <C>                            <C>

/s/  G. STEPHEN FELKER                       Chairman of the Board,         November 11, 1998
----------------------                       President and Chief Executive
G. Stephen Felker                            Officer


PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:


/s/  JACK R. ALTHERR, JR.                    Vice Chairman, Chief           November 11, 1998
-------------------------                    Financial Officer and
Jack R. Altherr, Jr.                         Director

DIRECTORS:


/s/  DALE J. BODEN                           Director                       November 11, 1998
------------------
Dale J. Boden


/s/  ROBERT B. CALHOUN                       Director                       November  11, 1998
----------------------
Robert B. Calhoun


/s/  KENNETH H. CALLAWAY                     Director                       November  11, 1998
------------------------
Kenneth H. Callaway


/s/  HARRY C. HOWARD                         Director                       November  11, 1998
--------------------
Harry C. Howard


/s/  C. LINDEN LONGINO, JR.                  Director                       November  11, 1998
---------------------------
C. Linden Longino, Jr.


/s/  JOHN P. STEVENS                         Director                       November  11, 1998
--------------------
John P. Stevens
</TABLE>




                                       52
<PAGE>   54





                                                                    SCHEDULE  II

                             AVONDALE INCORPORATED

                   CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
                VALUATION AND QUALIFYING ACCOUNTS (in thousands)




<TABLE>
<CAPTION>
                                                                                        ACQUIRED                       (B)
                                                    BALANCE AT                             IN                       BALANCE 
                                                    BEGINNING      CHARGED TO COSTS   GRANITEVILLE        (A)      AT END OF
                                 DESCRIPTION        OF PERIOD         AND EARNINGS      ACQUISITION   DEDUCTIONS    PERIOD
                                 -----------        ---------       ---------------     -----------   ----------    ------
<S>                         <C>                     <C>             <C>               <C>             <C>           <C>
Year Ended August 30, 1996  Allowance for              $ 2,239            $1,629          $8,907        $(1,615)    $11,160
                            doubtful accounts
Year Ended August 29, 1997  Allowance for               11,160             3,473              --         (1,550)     13,083
                            doubtful accounts
Year Ended August 28, 1998  Allowance for doubtful      13,083             1,532              --         (7,572)      7,043
                            Accounts
</TABLE>
----------------------------

(A)      Deductions represent customer account balances written off during the
         period.

(B)      At August 29, 1997 and August 28, 1998, the Balance at end of period
         includes $7,565 and $4,510, respectively, related to accounts
         receivable sold. These amounts are included in other accrued expenses
         in the Consolidated Balance Sheets.
<PAGE>   55


                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                   DESCRIPTION OF EXHIBITS
------                                   -----------------------
<S>          <C>  <C>                
2.1          --   Asset Purchase Agreement, dated March 31, 1996 among Avondale
                  Incorporated, Avondale Mills, Inc., Graniteville Company and Triarc
                  Companies, Inc. (incorporated by reference to Exhibit 2.1 to the
                  Avondale Incorporated's Registration Statement on Form S-4, File No.
                  333-5455-01).
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, File No. 333-5455-01).
3.2          --   Bylaws of Avondale Incorporated (incorporated by reference to Exhibit
                  3.2 to Avondale Incorporated's Registration Statement on Form S-4,
                  File No. 333-5455-01).
4.1          --   Indenture for the Notes between Avondale Incorporated, Avondale
                  Mills, Inc. and The Bank of New York, as Trustee (incorporated by reference
                  to Exhibit 4.1 to Avondale Incorporated's Registration Statement on Form
                  S-4, File No. 333-5455-01).
4.2          --   Amended and Restated Credit Agreement, dated as of April 29, 1996,
                  among Avondale Mills, Inc., the Banks listed therein and Wachovia
                  Bank, N.A., as Agent (incorporated by reference to Exhibit 4.3 to
                  Avondale Incorporated's Registration Statement on Form S-4, File No.
                  333-5455-01).
4.3          --   Amended and Restated Security Agreement, dated April 29, 1996, between
                  Avondale Mills, Inc. and Wachovia Bank, N.A., as Agent for
                  the Banks which are parties to the Amended and Restated Credit
                  Agreement (incorporated by reference to Exhibit 4.4 to Avondale
                  Incorporated's Registration Statement on Form S-4, File No.
                  333-5455-01).
4.4          --   Amended and Restated Parent Guaranty, dated April 29, 1996, executed
                  by Avondale Incorporated in favor of Wachovia Bank, N.A., as
                  Agent for the Banks which are parties to the Amended and
                  Restated Credit Agreement (incorporated by reference to
                  Exhibit 4.5 to Avondale Incorporated's Registration Statement
                  on Form S-4, File No. 333-5455-01).
4.5          --   Amended and Restated Stock Pledge Agreement, dated April 29, 1996,
                  between Wachovia Bank, N.A., as Agent for the Banks which
                  are parties to the Amended and Restated Credit Agreement, and Avondale
                  Incorporated (incorporated by reference to Exhibit 4.6 to Avondale
                  Incorporated's Registration Statement on Form S-4, File No. 333-5455-01).
4.6          --   Agreement to Provide Certain Debt Instruments to the Commission upon
                  Request (incorporated by reference to Exhibit 4.7 to Avondale
                  Incorporated's Registration Statement on Form S-4, File No. 333-5455-01).
10.1         --   Receivables Purchase Agreement, dated April 29, 1996, among Avondale
                  Mills, Inc., as Servicer, and Avondale Receivables Company
                  (incorporated by reference to Exhibit 10.1 to Avondale Incorporated's
                  Registration Statement on Form S-4, File No. 333-5455-01).
10.2         --   Pooling and Servicing Agreement, dated April 29, 1996, among Avondale
                  Receivables Company, Avondale Mills, Inc. and Manufacturers and Traders
                  Trust Company (incorporated by reference to Exhibit 10.2 to Avondale
                  Incorporated's Registration Statement on Form S-4, File No. 333-5455-01).
</TABLE>



<PAGE>   56

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                DESCRIPTION OF EXHIBITS
------                                -----------------------
<S>          <C>  <C>                                  
10.3         --   Amendment No. 1 to Pooling and Service Agreement and 
                  Receivables Purchase Agreement, dated November 21, 1997, among
                  Avondale Receivables Company, Avondale Mills, Inc.,
                  and Manufacturers and Traders Trust Company.
10.4         --   Amended and Restated Series 1996-1Supplement to the Pooling 
                  and Servicing Agreement, dated November 21, 1997, among 
                  Avondale Receivables Company, Avondale Mills, Inc. and 
                  Manufacturers and Traders Trust Company.
10.5         --   Amended and Restated Certificate Purchase Agreement, dated
                  November 21, 1997, among Avondale Receivables Company,
                  Avondale Mills, Inc., the purchasers described therein and
                  First National Bank of Chicago, as Agent.
10.6         --   Registration Rights Agreement, dated April 29, 1996 between
                  Avondale Incorporated and the Persons listed therein
                  (incorporated by reference to Exhibit 10.8 to Avondale
                  Incorporated's Registration Statement on
                  Form S-4, File No. 333-5455-01).
10.7         --   Shareholders Agreement, dated April 29, 1996 among Avondale
                  Incorporated, the Investors listed therein, the Shareholders
                  listed therein and Clipper Capital Partners, L.P., in its
                  capacity as Purchaser Representative under the Agreement
                  (incorporated by reference to Exhibit 10.9 to Avondale
                  Incorporated's Registration Statement on
                  Form S-4, File No. 333-5455-01).
10.8         --   Post-Merger Stock Transfer and Repurchase Agreement, dated
                  August 27, 1993 by and among Avondale Incorporated,
                  Metropolitan Life Insurance Company, 1985 Merchant Investment
                  Partnership, Merchant LBO, Inc., G. Stephen Felker, John F.
                  Maypole and Jack R. Altherr, Jr. (incorporated by reference to
                  Exhibit 10.10 to Avondale Incorporated's Registration
                  Statement on Form S-4, File No. 333-5455-01).
10.9         --   Post-Merger Stock Transfer and Repurchase Agreement, dated
                  August 27, 1993 by and among Avondale Incorporated,
                  Metropolitan Life Insurance Company, 1985 Merchant Investment
                  Partnership, Merchant LBO, Inc., G. Stephen Felker, John F.
                  Maypole and T. Wayne Spraggins (incorporated by reference to
                  Exhibit 10.11 to Avondale Incorporated's Registration
                  Statement on Form S-4, File No. 333-5455-01).
10.10        --   Avondale Incorporated Stock Option Plan (incorporated by reference to
                  Exhibit 10.12 to Avondale Incorporated's Registration Statement on Form
                  S-4, File No. 333-5455-01).
10.11        --   Avondale Mills, Inc. Associate Profit Sharing and Savings Plan
                  (incorporated by reference to Exhibit 10.13 to Avondale Incorporated's
                  Registration Statement on Form S-4, File No. 333-5455-01).
10.12       --    Avondale Mills, Inc. Fiscal 1998 Management Incentive Plan for 
                  G. Stephen Felker.
10.13       --    Avondale Mills, Inc. Fiscal 1998 Management Incentive Plan for 
                  Jack R. Altherr, Jr.
10.14       --    Avondale Mills, Inc. Fiscal 1998  Management Incentive Plan for
                  T. Wayne Spraggins.
</TABLE>





<PAGE>   57


                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION OF EXHIBITS
------                             -----------------------
<S>          <C>  <C>                                         
10.15        --   Avondale Mills, Inc. Fiscal 1998 Management Incentive Plan for Keith Hull.
10.16        --   Avondale Mills, Inc. Fiscal 1998 Management Incentive Plan for Robert G. Nelson.
10.17        --   Phantom Unit Awards to G. Stephen Felker (incorporated by reference to
                  Exhibit 10.19 to Avondale Incorporated's Registration Statement on Form
                  S-4, File No. 333-5455-01).
10.18        --   Phantom Unit Awards to Jack R. Altherr, Jr. (incorporated by reference
                  to Exhibit 10.21 to Avondale Incorporated's Registration Statement on
                  Form S-4, File No. 333-5455-01).
10.19        --   Phantom Unit Awards to T. Wayne Spraggins (incorporated by reference to
                  Exhibit 10.23 to Avondale Incorporated's Registration Statement on Form
                  S-4, File No. 333-5455-01).
10.20        --   Phantom Unit Awards to Keith M. Hull (incorporated by
                  reference to Exhibit 10.19 to Avondale Incorporated's
                  1996 Annual Report on Form 10-K, File No.33-68412).
10.21        --   Supply Agreement dated March 31, 1996 between the Company
                  and C.H. Patrick & Co., Inc. (incorporated by reference to
                  Exhibit 10.24 to Avondale Incorporated's Registration
                  Statement on Form S-4, File No. 333-5455-01).
10.22        --   Avondale Incorporated Stock Option Plan for Non-Employee
                  Directors, dated April 10, 1997 (incorporated by reference to
                  Exhibit 10.23 to Avondale Incorporated's 1997 Annual Report on
                  Form 10-K, File No. 33-68412).
12.1         --   Computation of Ratio of Earnings to Fixed Charges.
27.1         --   Financial Data Schedule (for SEC use only).
27.2         --   Restated Financial Data Schedule (for SEC use only).
</TABLE>

----------

         (b) Reports on Form 8-K

             Not applicable.

         (c) See Item 14(a)(3) and separate Index to Exhibits attached hereto.

         (d) Not applicable.