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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549
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FORM 10-K

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|[X]        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)       
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|           |  | For the fiscal year ended August 30, 2002                                                                 
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|[   ]      |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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|           |  | For the transition period from      to                                                                    

Commission file number 33-68412
____________________

AVONDALE INCORPORATED

(Exact name of registrant as specified in its charter)


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

The aggregate market value of the Class A Common Stock held by
non-affiliates of the registrant as of November 1, 2002 (based upon the book
value per share of Class A Common Stock as of August 30, 2002) was $15,800,000.

As of November 1, 2002, the registrant had 11,551,737 and 978,939 shares
of Class A Common Stock and Class B Common Stock outstanding, respectively.





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TABLE OF CONTENTS



|                                               |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                        
|                                               | ITEM 1. BUSINESS                                                                             
|                                               | ITEM 2. PROPERTIES                                                                           
|                                               | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                               | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                       
|                                               | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|                                               | ITEM 6. SELECTED FINANCIAL DATA                                                              
|                                               | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                               | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                               | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                               | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                      
|                                               | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                               | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                               | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                               | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|                                               | ITEM 14. CONTROLS AND PROCEDURES                                                             
|PART IV                                       
|                                               | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.                    
|EX-10.12 FISCAL 2002 MANAGEMENT INCENTIVE PLAN
|EX-10.13 FISCAL 2002 MANAGEMENT INCENTIVE PLAN
|EX-10.14 FISCAL 2002 MANAGEMENT INCENTIVE PLAN
|EX-10.15 FISCAL 2002 MANAGEMENT INCENTIVE PLAN
|EX-10.16 FISCAL 2002 MANAGEMENT INCENTIVE PLAN
|EX-10.30 MASTER SECURITY AGREEMENT            
|EX-10.31 INTERCREDITOR AGREEMENT              
|EX-10.32 SALE AND CONTRIBUTION AGREEMENT      
|EX-10.33 RECEIVABLES PURCHASE AND SERVICING   
|EX-10.34 ANNEX X TO SALE AND CONTRIBUTION     
|EX-10.35 RECEIVABLES PURCHASE TERMINATION     
|EX-10.36 BLOCKED ACCOUNT AGREEMENT            
|EX-10.37 INTERCREDITOR AGREEMENT              
|EX-10.38 FIFTH AMENDMENT TO SECOND AMENDED    
|EX-10.39 BORROW PLEDGE AGREEMENT              
|EX-12.1 COMPUTATION OF RATIO OF EARNINGS      



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INDEX TO FORM 10-K

AVONDALE INCORPORATED

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|         |  |                                                                                       |  |  |          |         |  | Reference
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|         |  |                                                                                       |  |  |          | PART I  |  |           |  | 
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|Item 1.  |  | Business                                                                              |  |  | 2        |        
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|Item 2.  |  | Properties                                                                            |  |  | 9        |        
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|Item 3.  |  | Legal Proceedings                                                                     |  |  | 10       |        
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|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |  | 10       |        
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|         |  |                                                                                       |  |  |          | PART II |  |           |  | 
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|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  |  | 11       |        
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|Item 6.  |  | Selected Financial Data                                                               |  |  | 12       |        
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|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations |  |  | 14       |        
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|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |  | 25       |        
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|Item 8.  |  | Financial Statements and Supplementary Data                                           |  |  | 26       |        
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|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure  |  |  | 47       |        
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|         |  |                                                                                       |  |  | Part III |         |  |           | 
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|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  |  | 48       |        
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|Item 11. |  | Executive Compensation                                                                |  |  | 51       |        
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|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  |  | 57       |        
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|Item 13. |  | Certain Relationships and Related Transactions                                        |  |  | 60       |        
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|Item 14. |  | Control and Procedures                                                                |  |  | 60       |        
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|         |  |                                                                                       |  |  |          | PART IV |  |           |  | 
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|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  |  | 61       |        





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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 is one of the largest domestic manufacturers of indigo-dyed
denim fabrics, cotton and cotton-blend piece-dyed fabrics, and cotton and
cotton-blend yarns. The Company operates 22 manufacturing facilities in four
southeastern states and is organized in three principal business segments:
apparel fabrics, yarns and other sales.

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. In
April 1996 the Company acquired the assets of the textile business of
Graniteville Company (Graniteville). The acquisition of Graniteville, founded
in 1845, enhanced the Companys manufacturing and marketing of cotton and
cotton-blend finished fabrics.

Description of the Business

The Company operates principally in three segments: apparel fabrics, yarns
and other sales. Financial information relating to these segments is presented
in Note 3 to the consolidated financial statements. In accordance with the
adoption of Emerging Issues Task Force Issue No. 00-10, the Company reports as
revenues the shipping and handling charges billed to customers. In addition,
certain prior year segment information has been reclassified to conform to the
current years presentation.

Products

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

The Company is a leading manufacturer of indigo-dyed denim fabrics used in
the production of branded and private label 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.

The Company is one of the largest domestic manufacturers and marketers of
fabrics used in the production of utilitywear (principally uniforms and other
occupational apparel) for the U.S. rental and retail markets. The Companys
utilitywear 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.

The Company is a leading manufacturer and marketer of woven cotton
piece-dyed fabrics used in the production of 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

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develops fabric designs that are presented
to customers and, once approved, are produced into fabrics to meet customers
specifications.

Apparel fabrics sales accounted for 74%, 78% and 79%, respectively, of the
Companys net sales in fiscal 2000, 2001 and 2002.

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. The
Companys yarn sales accounted for approximately 28%, 31% and 29%,
respectively, of the Companys net sales in fiscal 2000, 2001 and 2002.

Other.Other sales include sales of greige and specialty fabrics and
revenues from the Companys trucking operation.

The Company produces undyed, unfinished cotton and cotton-blend greige
fabrics that are marketed to apparel, home furnishing and industrial products
manufacturers. The Companys product design staff works with greige fabric
customers to create new fabric styles and constructions, and the Company is
able to alter its overall product mix to meet changing customer needs. The
Company also has the manufacturing flexibility to maintain high production
efficiencies by producing greige fabric for consumption within the apparel
fabrics operation.

The Company produces a variety of specialty 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.

The Companys other sales accounted for 10%, 10% and 11%, respectively, of
the Companys net sales in fiscal 2000, 2001 and 2002.

Intersegment Sales. Intersegment sales represent the transfer of yarns
and greige fabrics among the three business segments. These items ultimately
are consumed in the production of finished products, and therefore are
eliminated from net sales. Intersegment sales accounted for (12%), (19%) and
(19%), respectively, of the Companys net sales in fiscal 2000, 2001 and 2002.

Sales and Marketing

During fiscal 2002, the Company sold apparel fabrics, greige and specialty
fabrics, and yarns to approximately 700, 400 and 400 customers, respectively,
or approximately 1,200 customers in total after eliminating duplications. The
Company is one of the leading suppliers of denim to V.F. Corporation (the maker
of Lee®, Rider®, Wrangler®, Rustler®, Brittania®, Red Kap®, Timbercreek®,
Chic®, and HealthTex® brands), with total sales of apparel fabrics and yarns to
V.F. Corporation accounting for 20% of the Companys net sales in fiscal 2002.
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 2002. The
Companys sales billed to customers domiciled outside the U.S. accounted for
8%, 6% and 7%, respectively, of the Companys net sales in fiscal 2000, 2001
and 2002.

The Company targets customers who demand a high level of customer service.
The Companys two yarn sales offices are located geographically to be close to
customers manufacturing facilities, and its seven fabric 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

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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 and market conditions.

Manufacturing Processes.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 automated control systems to
monitor the manufacturing process and electronic product testing equipment to
measure the quality of the Companys yarns and fabrics.

The Companys yarn manufacturing operations involve spinning raw cotton
and synthetic fibers into cotton and cotton-blend yarns. The Company uses
modern carding, drawing, combing, open-end spinning and ring spinning equipment
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
range dyeing techniques. The Company weaves dyed or undyed yarn using modern,
high-speed looms to manufacture fabrics that have a variety of widths and
weaves. The woven fabrics may be piece-dyed and finished according to customer
specifications. The Companys dyeing and finishing facilities use a wide range
of technologies, including sophisticated electronic 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 22 manufacturing
facilities in the U.S. Of the Companys manufacturing facilities, twelve
produce yarn, six manufacture fabrics, four are dyeing facilities and four are
engaged in fabric finishing.

In response to the highly competitive market conditions and continued
oversupply of open-end yarns, in January 2002, the Company completed the
closing of two separate open-end yarn manufacturing facilities located in North
Carolina. The closing of these two facilities will allow the Company to reduce
its sales of open-end yarns which have proven to be unprofitable in recent
years and improve the capacity utilization and operating efficiencies of its
remaining yarn manufacturing facilities.

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 six fiscal years have
included, among others, the following principal initiatives:



| |  |  | 1997  Completed replacement of earlier generation
projectile looms with new, high speed air jet looms and installation
of two new integrated finishing ranges in an existing integrated
denim facility;                                                                               
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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;

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| |  |  | 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;                                          
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 1998 and 1999  Completed expansion of an existing weaving
facility in June 1999, which included 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 utilitywear end uses;
|
| |  |  | 1998 and 1999  Completed construction of a new piece-dyeing
range in February 1999, and installed technologically advanced
fabric inspection equipment for piece-dyed fabrics;                                                                                                                        
|
| |  |  | 2000  Completed replacement of earlier generation air jet
looms with new, high speed air jet looms in November 1999 for
production of greige fabrics to be piece-dyed for sportswear and
utilitywear end uses;                                                                                        
|
| |  |  | 2000  Completed modernization of an existing ring spinning
facility in August 2000, including the replacement of earlier
generation roving, ring spinning and winding equipment with
technologically advanced linked ring spinning;                                                                   
|
| |  |  | 2001  Completed expansion of an existing piece-dyed
finishing facility in January 2001, for the production of additional
finished piece-dyed fabrics for sportwear and utilitywear end uses;                                                                                                          
|
| |  |  | 2001  Completed expansion and modernization of an existing
greige weaving facility in May 2001, including the construction of a
new building addition and the installation of modern air jet looms
for the production of additional greige fabrics;                                                   
|
| |  |  | 2001  Completed expansion and modernization of an existing
integrated denim weaving facility in May 2001, including the
installation of modern air jet looms for the production of
additional denim fabrics;                                                                                          
|
| |  |  | 2001   Completed expansion of linked ring spinning facility
which was modernized in August 2000;                                                                                                                                                                                                      
|
| |  |  | 2002  Completed replacement of earlier generation winding
equipment at an existing ring spinning facility in September 2001
with technologically advanced, fully automated winders;                                                                                                                   
|
| |  |  | 2002  Completed modernization of existing spinning
operation within integrated fabric weaving facility in October 2001,
including installation of technologically advanced linked ring
spinning equipment; and                                                                                        
|
| |  |  | 2002  Completed construction of a new ring spinning
facility using existing manufacturing floor space, in October 2001,
including installation of technologically advanced linked ring
spinning equipment.                                                                                            

Raw Materials

The Company 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

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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 is 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.

The Federal Agricultural Improvement and Reform Act of 1996 established
certain support programs that, among other things, continued through the year
2002 the three-step competitiveness program established under the 1990 Trade
Act. Under these support programs, the Company received compensation from the
U.S. Department of Agriculture representing the differential between domestic
cotton prices and world cotton prices, in excess of 1.25 cents per pound.
However, these payments ceased as of December 15, 1998 when financing for the
program was exhausted, and tariff-free quotas for the importation of cotton
were opened in March 1999.

Effective October 1, 1999, the Fiscal 2000 Agriculture Appropriations Bill
restored funding of payments under the three-step competitiveness program and
redefined import quota triggers. The Farm Security and Rural Investment Act of
2002 extended the program until July 31, 2008, and suspended, from May 14, 2002
through July 31, 2006, the exclusion of 1.25 cents per pound from payments for
the differential between domestic cotton prices and world cotton prices.
Accordingly, the Company has continued to receive compensation from the U.S.
Department of Agriculture relating to the differential between domestic cotton
prices and world cotton prices for cotton consumed on or after October 1, 1999.

The Company closely monitors the cotton market and manages its
cotton-buying practices. The Companys Chief Executive Officer is a director 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 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 option 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 two suppliers, but such fibers are readily available from
other suppliers. The Company maintains a limited supply of such fibers in
inventory. The Company generally has no difficulty in obtaining sufficient
quantities of man-made fibers.

The Company 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
acquisition of Graniteville, the Company entered into an agreement (the Supply
Agreement), extending through March 2006, with C.H. Patrick & Co., Inc. which
was subsequently acquired by B.F. Goodrich (Goodrich). In 2000, Goodrich sold
the chemical portion of their business to Noveon, Inc. (Noveon), formerly
B.F. Goodrich PMD Group and the textile dye portion of their business to C.H.
Patrick & Co, Inc. (Patrick), formerly CHP Acquisition Group, Inc. On
February 28, 2001, the Company executed an assignment of the Supply Agreement
whereby the Company will purchase textile dyes from Patrick and chemicals from
Noveon. This Supply Agreement

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generally stipulates that Patrick and Noveon (the
Suppliers) will have the opportunity to provide certain dyes and chemicals
utilized by the Company if the Suppliers meet 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 original 10-year term in the event of a pattern of repeated,
material failures by the Suppliers to satisfy their obligations with respect to
product specifications, delivery schedules or other material terms. Under the
Supply Agreement, a default by one supplier will not constitute a default by
the other supplier.

The Company purchases yarns and greige fabrics to supplement its internal
yarn and fabric production, and consumes these products in the production of
greige and finished fabrics for its customers. These yarns and greige fabrics
are readily available from a number of suppliers.

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 denim, piece-dyed fabrics for utilitywear and
sportswear, and cotton and cotton-blend yarns. The Companys competitors
include large, vertically integrated textile companies and numerous smaller
companies. There has been a general trend toward consolidation within certain
markets of the textile industry and, within the Companys markets, some
increases in manufacturing capacity. However, the resulting excess
manufacturing capacity, an increase in the U.S. importation of textiles and
apparel from countries having significantly devalued currencies, a downturn in
the U. S. economy and the reaction of U. S. consumers to reports of terrorism
throughout the world and possible military action in response to those
terrorist acts have created intensely competitive market conditions leading to
severe financial difficulties of several domestic yarn and apparel fabric
manufacturers, and the accompanying closure of domestic 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, including the Company.. The U.S. government attempts to
regulate the growth of certain textile and apparel imports by establishing
quotas and tariffs 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. In
addition, imports of certain textile products into the U.S. have increased in
recent years primarily as a result of significant devaluation of the currencies
of other textile producing countries, particularly within Asia, against the
U.S. dollar.

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 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. The WTO 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

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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.

On May 2, 2000, the United States passed the United States-Caribbean Basin
Trade Partnership Act (CBI) and the Africa Growth and Opportunity Act
(AGOA). Under these acts, apparel manufactured in the Caribbean and
Sub-Saharan regions using yarns or fabrics produced in the United States may be
imported to the U.S. duty and quota free. In effect, this legislation extends
the favorable trade terms afforded to Mexico under NAFTA to the Caribbean and
Sub-Saharan countries. Management believes that NAFTA parity for the Caribbean
region will have a favorable effect on the Company by providing access to lower
cost labor for apparel assembly, making the U.S. a more attractive location for
textile sourcing.

The Andean Trade Promotion and Drug Eradication Act was passed on August
6, 2002 to renew and enhance the Andean Trade Preference Act (ATPA). Under the
enhanced ATPA, apparel manufactured in Bolivia, Columbia, Ecuador and Peru
using yarns and fabrics produced in the United States may be imported into the
United States duty and quota free through December 31, 2006, effectively
granting these four countries the favorable trade terms afforded Mexico and the
Caribbean region. Management believes this legislation further enhances the
attractiveness of U.S. textiles and will have a favorable impact on the
Company.

Backlog

The Companys order backlog was approximately $294 million at August 30,
2002, as compared to approximately $278 million at August 31, 2001, primarily
reflecting improved demand for denim fabrics. Orders on hand are not
necessarily indicative of total future sales. Substantially all of the orders
outstanding at August 30, 2002 are expected to be filled by the end of fiscal
2003.

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 (RCRA) (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.

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.

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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 acquisition of Graniteville, 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 an environmentally related lawsuit,
described under Item 3, Legal Proceedings of this Annual Report on Form 10-K.

Associates

At August 30, 2002, the Company had approximately 5,700 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.




ITEM 2. PROPERTIES

The Company currently operates 22 manufacturing facilities in the U.S., of
which nine are located in Alabama, one is located in North Carolina, three are
located in Georgia and nine are located in South Carolina. The Company owns all
22 of these facilities. Of the Companys manufacturing facilities, twelve
produce yarn, six manufacture fabrics, four are dyeing facilities and four are
engaged in fabric finishing. Additionally, the Company operates six
warehouses.

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In January 2002, the Company completed the closing of two separate
open-end yarn manufacturing facilities located in North Carolina which allowed
the Company to reduce its sales of unprofitable open-end yarns and improve
capacity utilization and operating efficiencies at its remaining yarn
manufacturing facilities.

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 January 13, 2000, a case was filed in the Circuit Court of Jefferson
County, Alabama by Larry and Cynthia Locke and the owners of fourteen other
residences in the Raintree subdivision of Lake Martin, against Russell
Corporation, Alabama Power and the Company. The complaint alleges that the
Company, among others, negligently and/or wantonly caused or permitted the
discharge and disposal of sewage sludge and contaminants into the lake adjacent
to the plaintiffs property, which allegedly interfered with the plaintiffs
use of the property. As a result of these alleged actions, the plaintiffs claim
that the value of their property has been diminished and that they suffered
other damages. The complaint seeks compensatory and punitive damages in an
undisclosed amount. After an initial series of actions, the case was stayed by
the trial court pending resolution of an appeal in the case of Sullivan versus
Russell Corporation, the Company and others (Sullivan case), which also
involved the Raintree subdivision. On January 12, 2001, the Alabama Supreme
Court issued a final order in the Sullivan case rendering that case in favor of
the defendants. Subsequent to the Alabama Supreme Courts actions with regard
to the Sullivan case, plaintiffs counsel, which includes attorneys who acted
as co-plaintiffs counsel on the Sullivan case, presented arguments in a
hearing before the trial judge on May 4, 2001 based on a narrow legal theory
that the nuisance claimed in this action is sufficiently different from the
Sullivan case, and therefore, that this case should be allowed to proceed in
spite of the fact that the Sullivan case was ultimately decided in favor of the
defendants. The trial court allowed the case to proceed to the discovery phase.
On April 25, 2002, the trial court held a hearing on summary judgment motions
and, on May 22, 2002, entered judgement as a matter of law in the Companys
favor on all counts except the narrow legal theory involving public nuisance
tort. A trial on this single count is scheduled to begin in February 2003. The
Company intends to vigorously defend this case and believes that it has a
number of defenses available to it. While the outcome of this case cannot be
predicted with certainty, based upon currently available information, the
Company does not believe that it will have a material adverse effect on the
Companys financial condition or results of operations.

The Company is also a party to other litigation incidental to its business
from time to time. The Company is not currently a party to any litigation that
management 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.

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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 30, 2002 there were 130 and one holders of record of Class A Common
Stock and Class B Common Stock, respectively. The Company paid dividends
aggregating $5.1 million, $5.0 million and $3.8 million in respect of its
outstanding Common Stock during fiscal 2000, 2001 and 2002, respectively.

The Company has issued and outstanding $125 million aggregate principal
amount of 10 1/4% Senior Subordinated Notes due 2006 (the Senior Subordinated
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 limit the Companys ability to pay
dividends. As amended effective August 30, 2002 the Company maintains a $100
million revolving credit facility under an agreement among Avondale Mills and a
syndicate of banks (the Revolving Credit Facility). The Revolving Credit
Facility contains certain covenants that limit the Companys ability to pay
dividends.

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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 30, 2002. 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 30, 2002 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.

|                                    |                                                                                           |  |                                                 |         |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       |  
|----------------------------------- | ----------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ------- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- | -
|                                    |                                                                                           |  | Fiscal Year                                    
|                                    |                                                                                           |  |                                                
|                                    |                                                                                           |  | 1998                                            |         | 1999 |  | 2000 |       | 2001 |  | 2002
|                                    |                                                                                           |  |                                                 |         |      |  |      |       |      |  |     
|                                    |                                                                                           |  | (In millions, except per share data and ratios)
|Statement of Income Data:           |                                                                                           |  |                                                 |         |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |      
|                                   
|                                   
|                                   
|                                   
|                                    | Net sales                                                                                 |  | $                                               | 1,064.3 |      |  | $    | 890.9 |      |  | $    | 836.5 |  |  | $ | 772.8 |  |  | $ | 659.7 |  
|                                   
|                                   
|                                   
|                                   
|                                    | Gross profit                                                                              |  |                                                 | 137.3   |      |  |      | 89.7  |      |  |      | 116.3 |  |  |   | 60.9  |  |  |   | 54.0  |  
|                                   
|                                   
|                                   
|                                   
|                                    | Facility restructuring                                                                    |  |                                                 | 2.7     |      |  |      | 6.2   |      |  |      |      |  |  |   |      |  |  |   | 7.0   |  
|                                   
|                                   
|                                   
|                                   
|                                    | Operating income                                                                          |  |                                                 | 86.6    |      |  |      | 45.3  |      |  |      | 77.9  |  |  |   | 27.9  |  |  |   | 18.7  |  
|                                   
|                                   
|                                   
|                                   
|                                    | Interest expense, net                                                                     |  |                                                 | 23.3    |      |  |      | 23.0  |      |  |      | 20.2  |  |  |   | 20.4  |  |  |   | 18.4  |  
|                                   
|                                   
|                                   
|                                   
|                                    | Discount and expenses on sale of receivables                                              |  |                                                 | 7.3     |      |  |      | 5.6   |      |  |      | 5.6   |  |  |   | 4.9   |  |  |   | 1.1   |  
|                                   
|                                   
|                                   
|                                   
|                                    | Other expense (income), net                                                               |  |                                                 | 0.5     |      |  |      | 0.5   |      |  |      | 0.5   |  |  |   | 0.8   |  |  |   | (0.5  | )
|                                   
|                                   
|                                   
|                                   
|                                    | Income (loss) before income taxes                                                         |  |                                                 | 55.4    |      |  |      | 16.3  |      |  |      | 51.6  |  |  |   | 1.8   |  |  |   | (0.3  | )
|                                   
|                                   
|                                   
|                                   
|                                    | Provision for (benefit of) income taxes                                                   |  |                                                 | 21.1    |      |  |      | 6.3   |      |  |      | 18.6  |  |  |   | 0.5   |  |  |   | (0.2  | )
|                                   
|                                   
|                                   
|                                   
|                                    | Net income (loss)                                                                         |  |                                                 | 34.3    |      |  |      | 10.0  |      |  |      | 33.0  |  |  |   | 1.3   |  |  |   | (0.1  | )
|                                   
|                                   
|                                   
|                                   
|Per Share Data:                     |                                                                                           |  |                                                 |         |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |      
|                                   
|                                   
|                                   
|                                   
|                                    | Net income (loss)  basic                                                                 |  | $                                               | 2.62    |      |  | $    | 0.79  |      |  | $    | 2.61  |  |  | $ | 0.10  |  |  | $ | (0.01 | )
|                                   
|                                   
|                                   
|                                   
|                                    | Net income (loss)  diluted                                                               |  |                                                 | 2.58    |      |  |      | 0.77  |      |  |      | 2.57  |  |  |   | 0.10  |  |  |   | (0.01 | )
|                                   
|                                   
|                                   
|                                   
|                                    | Dividends declared                                                                        |  |                                                 | 0.40    |      |  |      | 0.40  |      |  |      | 0.40  |  |  |   | 0.40  |  |  |   | 0.30  |  
|                                   
|                                   
|                                   
|                                   
|                                    | Weighted average number of shares outstanding  basic                                     |  |                                                 | 13.0    |      |  |      | 12.7  |      |  |      | 12.7  |  |  |   | 12.5  |  |  |   | 12.5  |  
|                                   
|                                   
|                                   
|                                   
|                                    | Weighted average number of shares outstanding  diluted                                   |  |                                                 | 13.3    |      |  |      | 12.9  |      |  |      | 12.8  |  |  |   | 12.7  |  |  |   | 12.5  |  
|                                   
|                                   
|                                   
|                                   
|Balance Sheet Data (at period end): |                                                                                           |  |                                                 |         |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |      
|                                   
|                                   
|                                   
|                                   
|                                    | Total assets                                                                              |  | $                                               | 463.6   |      |  | $    | 439.7 |      |  | $    | 438.7 |  |  | $ | 453.0 |  |  |   | 396.8 |  
|                                   
|                                   
|                                   
|                                   
|                                    | Long-term debt, including current portion                                                 |  |                                                 | 246.8   |      |  |      | 219.5 |      |  |      | 187.7 |  |  |   | 230.1 |  |  |   | 170.0 |  
|                                   
|                                   
|                                   
|                                   
|                                    | Shareholders equity (1)                                                                  |  |                                                 | 104.0   |      |  |      | 109.0 |      |  |      | 134.5 |  |  |   | 130.0 |  |  |   | 130.3 |  
|                                   
|                                   
|                                   
|                                   
|Other Data:                         |                                                                                           |  |                                                 |         |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |      
|                                   
|                                   
|                                   
|                                   
|                                    | Capital expenditures                                                                      |  | $                                               | 66.3    |      |  | $    | 50.1  |      |  | $    | 30.5  |  |  | $ | 91.1  |  |  |   | 13.1  |  
|                                   
|                                   
|                                   
|                                   
|                                    | Depreciation and amortization                                                             |  |                                                 | 39.9    |      |  |      | 42.8  |      |  |      | 42.8  |  |  |   | 46.4  |  |  |   | 45.5  |  
|                                   
|                                   
|                                   
|                                   
|                                    | EBITDA(2)                                                                                 |  |                                                 | 126.6   |      |  |      | 93.9  |      |  |      | 115.5 |  |  |   | 75.5  |  |  |   | 67.9  |  
|                                   
|                                   
|                                   
|                                   
|                                    | Ratio of EBITDA to interest expense, net and discount
and expenses on sale of receivables |  |                                                 | 4.1x    |      |  |      | 3.3x  |      |  |      | 4.5x  |  |  |   | 3.0x  |  |  |   | 3.5x  |  
|                                   
|                                   
|                                   
|                                   
|                                    | Ratio of earnings to fixed charges(3)                                                     |  |                                                 | 2.8x    |      |  |      | 1.5x  |      |  |      | 2.9x  |  |  |   | 1.1x  |  |  |   | 1.0x  |  



---

|(1) |  | For discussion related to the adjustment of shareholders equity, see
Footnote 8. Income Taxes in the notes to Consolidated Financial
Statements included in Item 8, Financial Statements and Supplementary Data
of this Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | 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) non-cash portion of facility
restructuring charges and (vi) 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

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|    |  | accounting principles), but because it is a widely
accepted financial indicator of a companys ability to incur
and service debt. EBITDA as calculated by the Company is not necessarily
comparable with similarly-titled measures presented by other companies.                                                                                                                                                                        
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(3) |  | 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 capital
lease payments that is representative of interest or financing charges.

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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.

Critical Accounting Policies

The Companys analysis and discussion of its financial condition and
results of operations are based upon its consolidated financial statements that
have been prepared in accordance with generally accepted accounting principles
in the United States (GAAP). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.

The Company evaluates these estimates and assumptions on an ongoing basis,
including but not limited to those affecting inventories, allowances for
doubtful accounts, assets held for sale, long-lived assets, income taxes
payable and deferred income taxes, deferred compensation, associate and post
retirement benefits, and contingencies. Estimates and assumptions are based on
historical and other factors believed to be reasonable under the circumstances.
The results of these estimates and assumptions may form the basis of the
carrying value of certain assets and liabilities. Actual results, under
conditions and circumstances different from those assumed, may differ from
these estimates and assumptions.

The Company believes the following accounting policies are critical to the
presentation and understanding of its financial condition and the results of
its operations and involve the more significant judgments and estimates
utilized in the preparation of its consolidated financial statements:

Accounts Receivable and Credit Risks:The Company extends credit lines to
its customers in the normal course of business and performs ongoing evaluations
of the financial condition of its customers. In general, collateral is not
required to support such credit lines and the related receivables. The Company
establishes allowances for doubtful accounts based upon factors surrounding the
financial condition and credit risk of specific customers, historical payment
trends and other information.

The Company generates funds through the sale of accounts receivable, at a
discount and without recourse, to a special purpose subsidiary established to
facilitate the acquisition and subsequent resale of certain accounts receivable
to an independent issuer of receivables-backed commercial paper. The discount
rate on the accounts receivable purchased from the Company is established
periodically by the subsidiary based on the fair market value of the
receivables. The Company includes in accounts receivable in its consolidated
balance sheets the portion of accounts receivable sold to the subsidiary which
have not been resold to the commercial paper issuer.

Inventories:Inventories are stated at the lower of cost or market value.
Except for certain supply inventories valued on an average cost basis, the
costs of the Companys inventories are determined on a last-in, first-out
(LIFO) basis. Under LIFO, current material and conversion costs are charged
to cost of goods sold while inventories are valued using costs incurred in the
initial and subsequent fiscal years following election of the LIFO method. In
periods of declining prices, LIFO values may exceed current replacement market
values and require downward adjustment. Estimates, including the estimated
costs to complete work in process inventories and the estimated realizable
values of all inventories, are used in determining the lower of LIFO cost and
market. During periods when current costs or inventory quantities fluctuate
significantly, use of the LIFO method may yield cost of goods sold that differs
significantly from that which would result under other inventory methods.

Long-Lived Assets:The Company periodically reviews the values assigned to
long-lived assets, such as property, plant and equipment, assets held for sale
and goodwill. The associated depreciation and amortization

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periods are
reviewed on an annual basis. Estimated recoverability of long-lived asset
values is based on anticipated
undiscounted cash flows from operations, or in the case of assets held for
sale, the lower of historical carrying amount or estimated net realizable
value. Management periodically reviews the values assigned to these assets and
if additional information becomes available which indicates a decline in value,
makes adjustments in that period. See comments below under Results of
Operations  Facility Restructuring in this Item 7 of this Annual Report on
Form 10-K, concerning an adjustment in asset values in fiscal 2002.

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

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

For discussion of a certain legal proceeding to which the Company is a
party, see Item 3 Legal Proceedings of this Annual Report on Form 10-K for
the fiscal year ended August 30, 2002. The Company is not currently a party to
litigation that management, in consultation with legal counsel, believes would
have a material adverse effect on the Companys financial condition or results
of operations.

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Results of Operations

The Company operates principally in three segments: apparel fabrics, yarns
and other sales. In accordance with Emerging Issues Task Force Issue No. 00-10,
the Company reports as revenues the shipping and handling charges billed to
customers. In addition, certain prior year segment information has been
reclassified to conform to the current years presentation.

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

|                                             |                    |                      |       |       |             |      |       |       |      |      |       |       |      |      | 
|-------------------------------------------- | ------------------ | -------------------- | ----- | ----- | ----------- | ---- | ----- | ----- | ---- | ---- | ----- | ----- | ---- | ---- | 
|                                             |                    |                      |       |       | Fiscal Year
|                                             |                    |                      |       |       |            
|                                             |                    |                      |       |       | 2000        |      | 2001  |       | 2002
|                                             |                    |                      |       |       |             |      |       |       |     
|Net sales                                    |                    |                      | 100.0 | %     |             |      | 100.0 | %     |      |      | 100.0 | %    
|                                            
|                                            
|                                            
|                                            
|                                             |                    | Apparel fabric sales |       |       | 73.7        |      |       |       | 78.2 |      |       |       | 79.5 |     
|                                            
|                                            
|                                            
|                                            
|                                             |                    | Yarn sales           |       |       | 27.7        |      |       |       | 30.7 |      |       |       | 28.7 |     
|                                            
|                                            
|                                            
|                                            
|                                             |                    | Other sales          |       |       | 10.3        |      |       |       | 10.1 |      |       |       | 10.7 |     
|                                            
|                                            
|                                            
|                                            
|                                             | Intersegment sales |                      |       | (11.7 | )           |      |       | (19.0 | )    |      |       | (18.9 | )   
|                                            
|                                            
|                                            
|                                            
|Cost of goods sold:                          |                    |                      |       |       |             |      |       |       |      |      |       |      
|                                            
|                                            
|                                            
|                                            
|                                             |                    | Raw materials        |       |       | 37.5        |      |       |       | 39.9 |      |       |       | 34.8 |     
|                                            
|                                            
|                                            
|                                            
|                                             |                    | Conversion costs     |       |       | 43.5        |      |       |       | 46.3 |      |       |       | 50.2 |     
|                                            
|                                            
|                                            
|                                            
|                                             |                    |                      | Total |       |             | 81.0 |       |       |      | 86.2 |       |       |      | 85.0 | 
|                                            
|                                            
|                                            
|                                            
|Depreciation                                 |                    |                      | 5.1   |       |             |      | 5.9   |       |      |      | 6.8   |      
|                                            
|                                            
|                                            
|                                            
|Selling and administrative expenses          |                    |                      | 4.6   |       |             |      | 4.3   |       |      |      | 4.3   |      
|                                            
|                                            
|                                            
|                                            
|Facility restructuring charges               |                    |                      |      |       |             |      |      |       |      |      | 1.1   |      
|                                            
|                                            
|                                            
|                                            
|Operating income                             |                    |                      | 9.3   |       |             |      | 3.6   |       |      |      | 2.8   |      
|                                            
|                                            
|                                            
|                                            
|Interest expense, net                        |                    |                      | 2.4   |       |             |      | 2.6   |       |      |      | 2.8   |      
|                                            
|                                            
|                                            
|                                            
|Discount and expenses on sale of receivables |                    |                      | 0.6   |       |             |      | 0.6   |       |      |      | .2    |      
|                                            
|                                            
|                                            
|                                            
|Provision for income taxes                   |                    |                      | 2.2   |       |             |      | 0.1   |       |      |      | (0.0  | )    
|                                            
|                                            
|                                            
|                                            
|Net income                                   |                    |                      | 4.0   |       |             |      | 0.2   |       |      |      | (0.0  | )    

Fiscal 2002 Compared to Fiscal 2001

Net Sales.Net sales decreased 14.6% to $659.7 million for fiscal 2002
from $772.8 million for fiscal 2001, as the Company experienced intensely
competitive conditions in its markets. Retail sales of apparel continued to be
slow during the first half of fiscal 2002, reducing demand for apparel fabrics
and yarns as retailers and apparel producers exercised tighter management of
their supply chains and the U.S. consumer reacted to the tragic events of
September 11, 2001 and subsequent developments. Financial difficulties of
several yarn and apparel fabric manufacturers served to further depress selling
prices through distressed sales of inventory during the year. The Company
experienced a rebound in sales in the second half of fiscal 2002 as lean
inventories were restocked by retailers and apparel producers. However, sales
slowed near the end of fiscal 2002 as inventories were replenished and retail
sales of apparel continued their weakness into the back to school season. In
addition, the strength of the U.S. dollar in comparison to the currencies of
many Asian countries continues to promote the importation of goods from those
countries by U.S. retailers, exacerbating the already highly competitive market
conditions resulting from the imbalance of global supply and demand for textile
and apparel products. The Company expects these conditions to continue,
adversely impacting sales during fiscal 2003.

Operating Income. Operating income decreased 33.0% to $18.7 million for
fiscal 2002 from $27.9 million for fiscal 2001, reflecting declines in unit
volume and average selling prices and the negative impact on overall unit cost
absorption of the reduced unit volumes. These factors were somewhat mitigated
by declining raw material costs during fiscal 2002. The Company continued its
consumption of internally produced yarns and greige fabrics in the production
of finished apparel fabrics to maintain higher capacity utilization and sales
rationalization. Cost of goods sold decreased 15.8% to $560.8 million for
fiscal 2002 from $666.2 million for fiscal 2001, reflecting the reduction

16



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##### Table of Contents



Results of Operations (continued)

in unit sales, lower costs of raw materials and reduced purchases of
outside yarns and greige fabrics. Cost of goods sold as a percentage of net
sales decreased to 85.0% for fiscal 2002 from 86.2% for fiscal 2001.

Selling and administrative expenses decreased 14.3% to $28.3 million for
fiscal 2002 from $33.0 million for fiscal 2001. This decrease reflected
reductions in selling, general and administrative staffing and related expenses
implemented in September 2001, and a reduction in certain associate benefits
and performance based incentives corresponding to the decline in operating
income for fiscal 2002. Selling and administrative expenses represented 4.3% of
net sales for fiscal 2002, the same percentage as for fiscal 2001, despite the
decline in net sales.

Segment Performance. Apparel fabric sales decreased 13.1% to $524.8
million for fiscal 2002 from $604.2 million for fiscal 2001. The decline in
sales reflected a 9.0% decrease in yards sold and a 4.5% decrease in average
selling prices, as demand for denim and other bottom-weight fabrics weakened
significantly in the first half of fiscal 2002. Operating income for apparel
fabrics decreased 14.9% to $40.0 million for fiscal 2002 from $47.0 million for
fiscal 2001, primarily due to the lower selling prices and reduced unit volume.

Yarn sales, including intracompany sales to the apparel fabric operation,
decreased 20.2% to $189.1 million for fiscal 2002 from $236.8 million for
fiscal 2001, reflecting a 13.0% decrease in pounds sold, as two open-end yarn
plants in North Carolina were closed, and an 8.3% decrease in average selling
prices. Market pricing for sales yarns remained very competitive, reflecting
continued excess production capacity within the domestic industry and continued
imports of yarns and knitted apparel, predominately from Asia and South
America. An operating loss of ($4.3) million was experienced by the yarns
operation for fiscal 2002 compared to a loss of ($0.4) million for fiscal 2001,
primarily due to the lower selling prices and reduced unit volume.

Other sales, which include sales of greige and specialty fabrics and
revenue from the Companys trucking operation, decreased 10.0% to $70.7 million
for fiscal 2002 from $78.6 million for fiscal 2001. The decrease in sales
reflected an 8.7% decrease in units sold, a 1.4% decrease in average selling
prices, primarily reflecting weakened demand in the greige and specialty
fabrics markets, and the impact of reduced yarn and fabric volume on the
Companys trucking operation. Operating income for other sales increased 20.6%
to $4.1 million for fiscal 2002 from $3.4 million for fiscal 2001, reflecting
lower raw material costs and continued intracompany sales of yarn and greige
fabric production to the apparel fabric operation.

Intersegment sales decreased 15.0% percent to $124.8 million for fiscal
2002 from $146.8 million for fiscal 2001, primarily reflecting a decrease in
consumption of internally produced yarns by the apparel fabrics operation.

Interest Expense, Net.Interest expense, net decreased 9.8% to $18.4
million for fiscal 2002 from $20.4 million for fiscal 2001. This decrease
reflected lower average outstanding borrowings during fiscal 2002, partially
offset by higher average interest rates applicable to the revolving credit
agreement, as amended. In addition, net interest expense for fiscal 2002 was
reduced by $1.7 million for interest received in conjunction with a refund of
income taxes. For discussion of the income tax refund, see Footnote 8. Income
Taxes in the Notes to Consolidated Financial Statements included in Item 8 of
this Annual Report on Form 10-K.

Discount and Expenses on Sale of Receivables.Discount and expenses on
sale of receivables were $1.1 million for fiscal 2002 compared to $4.9 million
for fiscal 2001. This decrease was attributable to a net decrease in the
amount of accounts receivable sold under the facility, reflecting the overall
decline in net sales of the Company, and lower market interest rates and the
resulting decline in discounts incurred on the receivables sold.

Provision for Income Taxes.An income tax benefit of ($0.2) million was
recorded for fiscal 2002 compared to a provision for income taxes of $0.5
million for fiscal 2001, reflecting the loss before income taxes. The Companys
effective tax rate for fiscal 2002 was 63.5% of the pre-tax loss, compared to
30.1% of the pre-tax income for fiscal 2001, reflecting minor permanent
differences affecting the provision for income taxes and the nominal level of
the operating loss.

17



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Results of Operations (continued)

Facility Restructuring.In response to the highly competitive market
conditions and continued oversupply of open-end yarns, in January 2002, the
Company completed the closing of two separate open-end yarn manufacturing
facilities located in North Carolina. In connection with these closings, the
Company recorded facility restructuring charges and other non-operating costs
of approximately $5.8 million during fiscal 2002. Additionally, the Company
implemented reductions in certain manufacturing overhead costs and selling,
general and administrative expenses in September 2001. In conjunction with
these actions and the two plant closings, the Company recorded expense of
approximately $1.2 million related to the termination of approximately 70
associates holding manufacturing, marketing and administrative positions. At
August 30, 2002, estimated costs of approximately $180,000 related to the
facility restructuring remain outstanding and are included in other accrued
expenses in the consolidated balance sheets.

At August 30, 2002, the two closed plant facilities, certain real estate
properties and certain items of equipment have been identified as available for
sale and are included at estimated net realizable values in assets held for
sale in the consolidated balance sheets.

Fiscal 2001 Compared to Fiscal 2000

Net Sales.Net sales decreased 7.6% to $772.8 million for fiscal 2001 from
$836.5 million for fiscal 2000, as the Company experienced intensely
competitive conditions in its markets. Retail sales of apparel slowed
considerably during the second half of the fiscal year, reducing demand for
apparel fabrics and yarns. In addition, the strength of the U.S. dollar in
comparison to the currencies of many Asian countries promoted the importation
of goods from those countries by U.S. retailers, exacerbating the already
highly competitive market conditions resulting from the imbalance of global
supply and demand for textile and apparel products.

Operating Income. Operating income decreased 64.2% to $27.9 million for
fiscal 2001 from $77.9 million for fiscal 2000, reflecting higher costs of raw
materials, dyes and chemicals, and energy, in addition to generally lower
average selling prices. Plant disruption during construction and equipment
installation in addition to the reduced unit volumes of the period also impeded
the realization of benefits to be derived from the significant capital
expenditure projects as well as negatively impacted overall unit cost
absorption. In response to these intensely competitively conditions, the
Company significantly increased its consumption of internally produced yarns
and greige fabrics in the production of finished apparel fabrics and thereby
improved capacity utilization and sales rationalization. Cost of goods sold
decreased 1.7% to $666.2 million for fiscal 2001 from $678.0 million for fiscal
2000, reflecting the reduction in unit sales. Cost of goods sold as a
percentage of net sales increased to 86.2% for fiscal 2001 from 81.0% for
fiscal 2000.

Selling and administrative expenses decreased 14.3% to $33.0 million for
fiscal 2001 from $38.5 million for fiscal 2000, primarily reflecting reductions
in certain associate benefits and performance based incentives corresponding to
the decline in operating income for the fiscal year. Selling and
administrative expenses as a percentage of net sales decreased to 4.3% for
fiscal 2001 from 4.6% for fiscal 2000.

Segment Performance. Apparel fabric sales decreased 2.0% to $604.2
million for fiscal 2001 from $616.4 million for fiscal 2000. The decline in
sales reflected a 1.7% decrease in yards sold and a 0.3% decrease in average
selling prices, as demand for denim and other bottom-weight fabrics weakened in
the second half of the fiscal year. Operating income for apparel fabrics
decreased 45.3% to $47.0 million for fiscal 2001 from $85.9 million for fiscal
2000, primarily due to reduced unit volume and higher costs of raw materials,
dyes and chemicals, and energy.

Yarn sales, including intracompany sales to the apparel fabric operations,
increased 2.2% to $236.8 million for fiscal 2001 from $231.7 million for fiscal
2000, reflecting a 1.2% increase in pounds sold and a 1.0% increase in average
selling prices. Market pricing for sales yarns remained very competitive,
reflecting continued excess production capacity within the domestic industry
and continued imports of yarns and knitted apparel from Asia.

18



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##### Table of Contents



Results of Operations (continued)

Operating income
for yarns decreased to a loss of $0.4 million for fiscal 2001 from income of
$7.9 million for fiscal 2000, primarily as a result of higher raw material
costs.

Other sales, which include sales of greige and specialty fabrics and
revenue from the Companys trucking operation, decreased 8.7% to $78.6 million
for fiscal 2001 from $86.1 million for fiscal 2000. The decrease in sales
reflected a 2.3% increase in units sold and a 10.8% decrease in average selling
prices, primarily reflecting weakened demand in the greige and specialty
fabrics markets. Operating income for other sales decreased 66.3% to $3.4
million for fiscal 2001 from $10.1 million for fiscal 2000, reflecting lower
unit sales volume and higher raw material costs.

Intersegment sales increased 50.2% percent to $146.8 million for fiscal
2001 from $97.7 million for fiscal 2000, primarily reflecting the significant
increase in consumption of internally produced yarns and greige fabrics within
the Companys apparel fabrics operation.

Interest Expense, Net.Interest expense, net increased 1.0% to $20.4
million for fiscal 2001 from $20.2 million for fiscal 2000. This increase
reflected higher average outstanding borrowings during fiscal 2001, partially
offset by a decline in market interest rates applicable to those borrowings.

Discount and Expenses on Sale of Receivables.Discount and expenses on
sale of receivables were $4.9 million for fiscal 2001 compared to $5.6 million
for fiscal 2000. This decrease was attributable to a net decrease in the
amount of accounts receivable sold under the facility, reflecting the overall
decline in net sales of the Company, and to lower market interest rates and the
resulting decline in discounts incurred on the receivables sold.

Provision for Income Taxes.Provision for income taxes decreased to $0.5
million for fiscal 2001 from $18.6 million for fiscal 2000, reflecting the
decrease in income before income taxes. The Companys effective tax rate
declined to 30.1% for fiscal 2001, compared to 36.0% for fiscal 2000.

Liquidity and Capital Resources

General

The Company has funded its working capital requirements and capital
expenditures with cash generated from operations, borrowings under its
Revolving Credit Facility and Equipment Note, and proceeds received in
connection with sales of trade receivables and issuance of equity and debt
securities. At August 30, 2002, the Company had borrowings of $25.0 million
outstanding under the Revolving Credit Facility and $73.6 million of borrowing
availability thereunder. Such borrowings bore interest at a weighted average
rate of 5.5% per annum at August 30, 2002. In addition, at August 30, 2002, a
$20 million Equipment Note and $125 million aggregate principal amount of the
Senior Subordinated Notes (which are fully and unconditionally guaranteed by
the Company on a senior subordinated basis) were outstanding.

Revolving Credit Facility

The Revolving Credit Facility, a secured revolving line of credit of up to
$100 million expiring on January 31, 2004, was amended August 30, 2002 to
revise certain financial covenants and adjust interest rate pricing. Borrowings
under the Revolving Credit Facility are in the form of revolving loans provided
by the lenders (Revolving Loans) and up to $12.5 million of revolving swing
loans (Revolving Swing Loans) provided by the facilitys agent, Wachovia
Bank, N.A. (Wachovia). Interest accrues on Revolving Loans 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 or the
overnight federal funds rate, plus a specified number of basis
points.
Interest accrues on Revolving Swing Loans at the Companys option at either the
base rate plus a specified number of basis

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Liquidity and Capital Resources (continued)

points or at the set rate, which
shall be an interest rate agreed to by the Company and Wachovia at the time
such loan is made. The Company is required to pay certain structuring,
administration and funding fees relating to the
Revolving Credit Facility. The Revolving Credit Facility is secured by
substantially all of the Companys assets and 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 the borrowings outstanding under the Revolving
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 Revolving Credit
Facility. The related amount payable to or receivable from counterparties is
included in other liabilities or assets. At August 30, 2002, the Company had
swap agreements with notional amounts aggregating $35 million, providing an
effective weighted average interest rate of 5.3%.

Equipment Note

The Equipment Note, a secured five-year installment loan, was executed
with The CIT Group/Equipment Financing, Inc. on July 30, 2002 in the amount of
$20.0 million. The Equipment Note is to be repaid in 53 monthly payments of
approximately $360,000 commencing March 1, 2003 and a final payment of
approximately $896,000 on August 1, 2007. Interest accrues on the unpaid
principal balance of the Equipment Note at a rate established annually on
August 1 at LIBOR plus a specified number of basis points, and is paid monthly
commencing September 1, 2002 through the final payment date. The Company may,
at its one time option, elect a fixed interest rate for the remaining term of
the Equipment Note based on the Federal Reserve Interest Rate Swap rate of
interest, as quoted for the term closest to the remaining term of the Equipment
Note, plus a specified number of basis points. The Equipment Note is secured by
a senior lien on substantially all of the equipment of two plant locations,
which had a carrying value of approximately $ 37.5 million at August 30, 2002.
The Equipment Note contains customary covenants, including requirements to
maintain certain financial covenants, and includes provisions relating to cross
defaults to other debt obligations of the Company.

Receivables Securitization Facility

On August 30, 2002, the Company and its wholly-owned, special purpose
subsidiary, Avondale Funding, LLC (Funding), entered into an arrangement
(Receivables Securitization Facility) with General Electric Capital
Corporation (GECC) and Redwood Receivables Corporation (Redwood), an issuer
of commercial paper, to provide financing of up to $90 million through the sale
of certain trade receivables (Receivables) originated by the Company. The
Receivables Securitization Facility extends until the earlier of 90 days before
the specified final purchase date, August 29, 2007, or certain specified
termination events. The Receivables Securitization Facility replaced a previous
receivables securitization program with Bank One. The Company has been engaged
by Funding and Redwood to service the receivables.

Funding is a separate corporate entity with its own creditors who, in the
event of Fundings liquidation, will be entitled to a claim on Fundings assets
prior to any distribution to the Company.

Pursuant to the Receivables Securitization Facility, the Company sells, or
transfers as a contribution of capital, the Receivables, at a discount and
without recourse, to Funding, whose sole business is the acquisition and
financing of the Receivables. Funding sells an undivided interest in a
specified portion of the Receivables to Redwood to provide the funds required
by Funding to purchase the Receivables from the Company. Proceeds from the
collection of the Receivables are used by Funding to purchase additional
Receivables from the Company, repay Redwood in the event that sufficient
additional Receivables are not available to maintain Redwoods investment, or
pay fees and expenses. In the event Redwood is unable to maintain its capital
investment in the Receivables, GECC

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Liquidity and Capital Resources (continued)

has agreed to purchase Redwoods investment
and continue the funding of the Receivables Securitization Facility. At August
31, 2002, the outstanding amount of Redwoods investment in the Receivables was
$74 million.

The discount rate on the Receivables purchased from the Company by Funding
is based on the fair market value of the receivables. The discount rate on the
undivided interest in the Receivables purchased by Redwood from Funding is tied
to Redwoods commercial paper rate plus a specified number of basis points.
Funding is required to pay certain unused availability fees under the
Receivables Securitization Facility.

The Receivables Securitization Facility contains customary covenants,
including requirements to maintain certain financial ratios, and includes
provisions relating to cross defaults to other debt obligations of the Company.

Senior Subordinated Notes

The Company issued $125 million of 10.25% Senior Subordinated Notes on
April 23, 1996. The Senior Subordinated Notes, which mature on May 1, 2006, are
unsecured and subordinated to all existing and future senior indebtedness of
the Company. Interest on the Senior Subordinated Notes is due semiannually, on
May 1 and November 1. The Senior Subordinated Notes are redeemable at the
Companys option, in whole or in part, at a current redemption price of
103.417%, which declines in intervals to 100% in 2004 and thereafter. The
indenture under which the senior subordinated notes were issued contains, among
other things, certain restrictive covenants applicable to issuance of
additional debt, payment of dividends, retirement of capital stock or
indebtedness, purchase of investments, sales or transfers of assets, certain
consolidations or mergers and certain transactions with affiliates.

Capital Expenditures and Cash Flows Analysis

The Companys capital expenditures aggregated $13 million for fiscal 2002.
These expenditures reflected completion of the linked ring spinning and other
modernization projects initiated in fiscal 2001 and general maintenance of
facilities and equipment. Management estimates that capital expenditures for
fiscal 2003 will be approximately $20 million, and that such amounts will be
used primarily for general maintenance and upgrade of facilities and equipment.

Net cash provided by operating activities was $71.1 million in fiscal
2002. Principal working capital changes included a $6.5 million increase in
accounts receivable and $12.4 million increase in accounts receivable sold
under the securitization facilities, a $12.7 million reduction in inventories,
and a $2.0 million increase in accounts payable and accrued expenses. The
Companys investing activities were primarily the capital improvements
described above. Net cash provided by financing activities aggregated $59.4
million, including issuance of the Equipment Note of $20.0 million, a net
decrease in the Revolving Credit facility and other long term debt of $80.2
million and $3.8 million used to pay dividends on Common Stock.

Net cash provided by operating activities was $48.1 million in fiscal
2001. Principal working capital changes included a $28.0 million decrease in
accounts receivable and corresponding $20.0 million decrease in accounts
receivable sold under the securitization facility, a $6.3 million decrease in
inventories, a $14.7 million decrease in other assets, primarily deposits on
equipment orders, a $23.1 million decrease in accounts payable and accrued
expenses, and a $9.1 million decrease in income taxes payable. The Companys
investing activities were primarily capital improvements of $91.1 million. Net
cash provided by financing activities aggregated $37.3 million, including a net
increase in the Revolving Credit facility and other long term debt of $42.5
million, and $5.0 million used to pay dividends on Common Stock.

Net cash provided by operating activities was $67.7 million in fiscal
2000. Principal working capital changes included a $2.4 million decrease in
accounts receivable, a $7.0 million decrease in accounts receivable sold under
the securitization facility, a $7.0 million increase in other assets, primarily
deposits on equipment orders, and a $4.7 million increase in accounts payable
and accrued expenses. The Companys investing activities were

21



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Liquidity and Capital Resources (continued)

primarily capital
improvements of $30.5 million. Net cash used in financing activities
aggregated $39.3 million, including a net reduction in the Revolving Credit
Facility and other long term debt of $31.9 million, and $5.1 million used to
pay dividends on Common Stock.

The table below summarizes the Companys outstanding contractual
obligations as of August 30, 2002, and the effect such obligations are expected
to have on liquidity and cash flow in future periods (amounts in thousands).

|                             |       |       |                        |                  |  |             |        |             |  |         |         |         |  |   |       |       |  |   |       |   | 
|---------------------------- | ----- | ----- | ---------------------- | ---------------- |  | ----------- | ------ | ----------- |  | ------- | ------- | ------- |  | - | ----- | ----- |  | - | ----- | - | 
|                             |       |       | Payments Due by Period
|                             |       |       |                       
|                             |       |       |                        |                  |  |             |        |             |  |         |         |         |  |   |       |       |  |   | After
|Contractual Obligations      |       | Total |                        | Less than 1 year |  | 1  3 years |        | 4  5 years |  | 5 years
|                             |       |       |                        |                  |  |             |        |             |  |        
|Short-term Debt              |       | $     | 2,523                  |                  |  | $           | 2,523  |             |  | $       |        |         |  | $ |      |       |  | $ |      |  
|                            
|                            
|                            
|                            
|Long-term Debt               |       |       | 167,477                |                  |  |             |       |             |  |         | 162,975 |         |  |   | 4,502 |       |  |   |      |  
|                            
|                            
|                            
|                            
|Operating Leases             |       |       | 7,059                  |                  |  |             | 1,861  |             |  |         | 4,050   |         |  |   | 1,148 |       |  |   |      |  
|                            
|                            
|                            
|                            
|Equipment purchase orders    |       |       | 2,600                  |                  |  |             | 2,600  |             |  |         |        |         |  |   |      |       |  |   |      |  
|                            
|                            
|                            
|                            
|Raw material purchase
orders |       |       | 63,000                 |                  |  |             | 63,000 |             |  |         |        |         |  |   |      |       |  |   |      |  
|                             |       |       |                        |                  |  |             |        |             |  |         |         |         |  |   |       |       |  |   |       |  
|                             | Total |       | $                      | 242,659          |  |             | $      | 69,984      |  |         | $       | 167,025 |  |   | $     | 5,650 |  |   | $     |  | 
|                             |       |       |                        |                  |  |             |        |             |  |         |         |         |  |   |       |       |  |   |       |  

For discussion related to contractual obligations, see Footnote 9.
Long-Term Debt and Footnote 12. Commitments and Contingencies in the Notes
to Consolidated Financial Statements included in Item 8, Financial Statement
and Supplemental Data of this Annual Report on Form 10-K.

Management believes that cash generated from operations, together with
borrowings available under the Revolving 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.

Refund of prior year income taxes

A net benefit of $4.5 million, related to receipt of an income tax refund
resulting from a settlement with the Internal Revenue Service Appeals Division
in the fourth quarter of fiscal 2002, is included as an addition to retained
earnings for fiscal 2002 on the consolidated statement of shareholders equity.
The claim for the refund was filed in fiscal 1997 utilizing tax basis
deductions against fiscal 1994 taxable income, related to consideration paid in
the repurchase of treasury stock. Given the technical nature of the claim and
resulting uncertainty of recovery, recognition of the refund claim was deferred
until successful resolution in fiscal 2002. Interest received in conjunction
with the refund of approximately $1.7 million is included as a reduction in
interest expense, net for fiscal 2002 on the consolidated statements of income.

Adjustment of deferred income taxes

Following the successful settlement of the refund claim noted above, the
Company reassessed the balance of certain deferred income taxes. Based on this
evaluation, the Company determined that the estimates used to establish
deferred income taxes prior to fiscal 1998 were too conservative and resulted
in an overstatement of deferred income tax liabilities. Accordingly, an
adjustment of $4.0 million has been recorded as an addition to the balance of
retained earnings at August 27, 1999 on the consolidated statements of
shareholders equity.

Off-Balance Sheet Financing Arrangements

22



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Liquidity and Capital Resources (continued)

The Receivables Securitization Facility is the Companys only off-balance
sheet financing arrangement. The Company generates funds through the sale of
Receivables to Funding, whose sole business purpose is the ongoing acquisition
and resale of specified trade receivables generated by the Company. Funding
retains no interest in the investment in the Receivables sold to Redwood, an
independent issuer of receivables-backed commercial paper, and has not
experienced any gains or losses on the sale of the investment in Receivables to
Redwood. The Company believes minimal counter party risk exists due to the
financial strength of the independent issuer of the commercial paper.

Seasonality

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

New Accounting Standards

In June 2001, the Financial Accounting Standards Board issued Statement
No. 141, Business Combinations, and Statement No. 142, Goodwill and Other
Intangible Assets. Statement No. 141 prohibits the pooling of interest method
of accounting for business combinations initiated after June 2001. Statement
No. 142 specifies that goodwill and some intangible assets will no longer be
amortized but instead will be subject to testing for impairment on an annual
basis, or as events occur that would reduce the fair value of such asset below
its carrying value. The Company plans to adopt Statement No. 142 in the first
quarter of fiscal 2003. Management does not believe the adoption of these
statements will have a material effect on the consolidated financial statements
of the Company.

In June 2001, the Financial Accounting Standards Board issued Statement
No. 143, Accounting for Asset Retirement Obligations, which addresses
accounting and reporting for asset retirement costs of long-lived assets
resulting from legal obligations associated with acquisition, construction or
development transactions. The Company plans to adopt Statement No. 143 in the
first quarter of fiscal 2003. Management has determined the adoption of this
statement will not have a material effect on the consolidated financial
statements of the Company.

In August 2001, the Financial Accounting Standards Board issued Statement
No. 144, Accounting for the Impairment or Disposal of Long-lived Assets,
which clarifies accounting and reporting for assets held for sale, scheduled
for abandonment or other disposal, and recognition of impairment loss related
to the carrying value of long-lived assets. The Company plans to adopt
Statement No. 144 in the first quarter of fiscal 2003. Management does not
believe the adoption of this statement will have a material effect on the
consolidated financial statements of the Company.

In April 2002, the Financial Accounting Standards Board issued Statement
No. 145, Rescission of Statements No. 4, 44, and 64, Amendment of Statement
No. 13, and Technical Corrections. Statement No. 145 provides that gains and
losses from extinguishment of debt that do not meet the criteria for
classification as extraordinary items in Accounting Principles Board Opinion
No. 30, Reporting the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, should not be classified as
extraordinary items. The Company plans to adopt Statement No. 145 during fiscal
2003. Management does not believe the adoption of this statement will have a
material effect on the consolidated financial statements of the Company.

In June 2002, the Financial Accounting Standards Board issued Statement
No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
addressing financial accounting and reporting for costs associated with exit or
disposal activities, and requiring that a liability for costs associated with
an exit or disposal activity be recognized when the liability is incurred. In
summary, Statement No. 146 requires that the liability be recognized

23



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##### Table of Contents



and
measured initially at its fair value in the period in which the liability is
incurred, except for one-time termination benefits that meet certain
requirements. The Company plans to adopt Statement No. 146 during fiscal 2003.
Management does not believe the adoption of this statement will have a material
effect on the consolidated financial statements of the Company.

Forward Looking Statements

Statements herein regarding the Companys anticipated capital expenditures
and anticipated performance in future periods constitute forward looking
statements within the meaning of the Securities Exchange Act of 1933 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. Statements herein regarding the Companys
performance in future periods are subject to risks relating to, among other
things, the cyclical and competitive nature of the textile industry in general,
pressures on selling prices due to competitive and economic conditions,
deterioration of relationships with, or loss of, significant customers,
availability, sourcing and pricing of cotton and other raw materials,
technological advancements, employee relations, continued availability of
financial resources and possible changes in governmental policies affecting raw
material costs. In addition, governmental trade policies, including
establishment of textile quotas and tariffs, may be changed in response to
terrorist attacks and related military action and the Companys performance in
future periods is subject to other risks associated with possible future
terrorist activity or the governmental or the military response thereto.
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.

24



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##### Table of Contents



Other Data

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

|                                                                                    |  |             |         |      |  |      |        |  |  |   |        |  
|----------------------------------------------------------------------------------- |  | ----------- | ------- | ---- |  | ---- | ------ |  |  | - | ------ | -
|                                                                                    |  | Fiscal Year
|                                                                                    |  |            
|                                                                                    |  | 2000        |         | 2001 |  | 2002
|                                                                                    |  |             |         |      |  |     
|Net income (loss)                                                                   |  | $           | 33,003  |      |  | $    | 1,257  |  |  | $ | (130   | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Interest expense, net                                                               |  |             | 20,249  |      |  |      | 20,396 |  |  |   | 18,449 |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Discount and expenses on
sale of receivables                                        |  |             | 5,578   |      |  |      | 4,935  |  |  |   | 1,117  |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Provision for income taxes                                                          |  |             | 18,580  |      |  |      | 540    |  |  |   | (227   | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Depreciation and amortization                                                       |  |             | 42,838  |      |  |      | 46,399 |  |  |   | 45,538 |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Facility restructuring                                                              |  |             |        |      |  |      |       |  |  |   | 5,330  |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Adjustment of carrying value of inventories
to LIFO basis, net of market adjustment |  |             | (4,700  | )    |  |      | 1,950  |  |  |   | (2,150 | )
|                                                                                    |  |             |         |      |  |      |        |  |  |   |        |  
|EBITDA                                                                              |  | $           | 115,548 |      |  | $    | 75,477 |  |  | $ | 67,927 |  
|                                                                                    |  |             |         |      |  |      |        |  |  |   |        |  

EBITDA as calculated by the Company is not necessarily comparable with
similarly titled measures presented by other companies.




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 30, 2002 remain in effect throughout fiscal 2003, a 10% change in the
effective average interest rate would not have a material effect on the
Companys pretax earnings for fiscal 2002. 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 $8 to $11 million.

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##### Table of Contents






ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AVONDALE INCORPORATED

CONSOLIDATED FINANCIAL STATEMENTS

Years Ended August 25, 2000, August 31, 2001
and August 30, 2002

|                                                |  |      |    | 
|----------------------------------------------- |  | ---- | -- | 
|                                                |  | Page
|                                                |  |     
|Report of Management                            |  |      | 27 | 
|                                               
|                                               
|                                               
|                                               
|Reports of Independent Public Accountants       |  |      | 28 | 
|                                               
|                                               
|                                               
|                                               
|Consolidated Balance Sheets                     |  |      | 30 | 
|                                               
|                                               
|                                               
|                                               
|Consolidated Statements of Income               |  |      | 31 | 
|                                               
|                                               
|                                               
|                                               
|Consolidated Statements of Shareholders Equity |  |      | 32 | 
|                                               
|                                               
|                                               
|                                               
|Consolidated Statements of Cash Flows           |  |      | 33 | 
|                                               
|                                               
|                                               
|                                               
|Notes to Consolidated Financial Statements      |  |      | 34 | 

26



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##### Table of Contents



REPORT OF MANAGEMENT

The consolidated financial statements of the Company included in this Annual
Report on Form 10-K have been prepared by its management, who are responsible
for the content of those consolidated financial statements. In managements
opinion, the consolidated financial statements reflect amounts based upon
managements best estimates and informed judgments and present fairly the
financial position, results of operations and cash flows of the Company in
conformity with accounting principles generally accepted in the United States
of America. Management has also prepared the other information contained in
this Annual Report and is responsible for its accuracy and consistency with the
consolidated financial statements.

The Company maintains a system of internal accounting controls and
procedures intended, consistent with justifiable cost, to provide reasonable
assurance that transactions are executed as authorized, that they are properly
recorded to produce reliable financial records, and that accountability for
assets is maintained. The system includes a code of business conduct,
employment of qualified personnel, segregation of duties, prescribed procedures
creating checks and balances, an internal auditing function and senior
management review of operating results in comparison to predetermined
standards, budgets, forecasts and historical results. Crisp Hughes Evans LLP,
our independent accountants, have evaluated the Companys internal controls and
performed tests of procedures and accounting records in connection with their
audit of the 2002 consolidated financial statements in accordance with auditing
standards generally accepted in the United States of America. Their report on
the 2002 consolidated financial statements is included in this Annual Report.

The Board of Directors has appointed an Audit Committee composed entirely of
directors who are not employees of the Company. The Audit Committee meets with
representatives of management, the internal auditors and the independent
accountants jointly and independently, as needed. Functions of the Audit
Committee include approving the selection and fees of the independent
accountants; conferring with the independent accountants and reviewing the
scope of the annual audit examination and the results thereof; reviewing the
Companys Annual Report and other filings with the Securities and Exchange
Commission; reviewing the adequacy of the Companys internal auditing function,
as well as the accounting and financial controls and procedures of the Company;
and approving the nature and scope of non-audit services performed by the
independent accountants.

|                                                                              |  |                                                                      | 
|----------------------------------------------------------------------------- |  | -------------------------------------------------------------------- | 
|AVONDALE INCORPORATED                                                         |  |                                                                     
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              |  |                                                                     
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|By: /s/ G. Stephen Felker                                                     |  | By:/s/ Jack R. Altherr, Jr.                                         
|                                                                              |  |                                                                     
|Name: G. Stephen Felker                                                       |  | Name: Jack R. Altherr, Jr.                                          
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Title: Chairman of the Board, President
and
          Chief Executive Officer |  | Title: Vice Chairman, Chief Financial
Officer
          and Director
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              |  |                                                                     
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Date: November 11, 2002                                                       |  | Date: November 11, 2002                                             

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##### Table of Contents



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Avondale Incorporated:

We have audited the accompanying consolidated balance sheet of Avondale
Incorporated and subsidiaries as of August 30, 2002, and the related
consolidated statements of income, shareholders equity and cash flows for the
year then ended. These consolidated 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 and subsidiaries as of August 31, 2001 and the related
consolidated statements of income, shareholders equity and cash flows and the
schedule referred to below for each of the fiscal years ended August 25, 2000
and August 31, 2001 were audited by other auditors who have ceased operations.
Those auditors expressed an unqualified opinion on those financial statements
and schedule, prior to the restatement as described in note 8, in their report
dated October 9, 2001.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 2002 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Avondale Incorporated and subsidiaries as of August 30, 2002, and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.

Our audit was made for the purpose of forming an opinion on the 2002 basic
consolidated 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 consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, the 2002 information fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.

As described in note 8, the consolidated financial statements for the
years ended August 25, 2000 and August 31, 2001 have been restated. We audited
the adjustments described in note 8 which were applied to restate those
consolidated financial statements. In our opinion, such adjustments are
appropriate and have been properly applied. However, we were not engaged to
audit, review, or apply any other procedures to the 2000 and 2001 consolidated
financial statements of the Company other than with respect to such adjustments
and, accordingly, we do not express an opinion or any other form of assurance
on the 2000 and 2001 consolidated financial statements taken as a whole.

CRISP HUGHES EVANS LLP

Atlanta, Georgia
October 11, 2002

28



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##### Table of Contents



The report that appears below is a copy of the report issued by the
Companys previous independent accountants, Arthur Andersen, LLP. That firm has
discontinued performing auditing and accounting services.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Avondale Incorporated:

We have audited the accompanying consolidated balance sheets of Avondale
Incorporated as of August 31, 2001, and the related consolidated statements of
income, shareholders equity and cash flows for each of the two years in the
period ended August 31, 2001. 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 audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 as of August 31, 2001, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
August 31, 2001 in conformity with accounting principles generally accepted in
the United States.

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 9, 2001

29



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##### Table of Contents



AVONDALE INCORPORATED

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

|                                                      |                                                                                                |                                                                                                             |                            |                                      |     |            |         |            |     |         |  | 
|----------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | --- | ---------- | ------- | ---------- | --- | ------- |  | 
|                                                      |                                                                                                |                                                                                                             |                            |                                      |     | August 31, |         | August 30,
|                                                      |                                                                                                |                                                                                                             |                            |                                      |     | 2001       |         | 2002      
|                                                      |                                                                                                |                                                                                                             |                            |                                      |     |            |         |           
|                                                      |                                                                                                |                                                                                                             |                            | ASSETS                               |     |            |         |            |     |         |  | 
|                                                     
|                                                     
|                                                     
|                                                     
|Current assets                                        |                                                                                                |                                                                                                             |                            |                                      |     |            |         |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cash                                                                                           |                                                                                                             | $                          | 2,969                                |     |            | $       | 2,261      |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accounts receivable, less allowance for doubtful accounts of
$2,616 in 2001 and $2,199 in 2002 |                                                                                                             |                            | 46,573                               |     |            |         | 40,730     |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Inventories                                                                                    |                                                                                                             |                            | 99,671                               |     |            |         | 86,946     |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Prepaid expenses                                                                               |                                                                                                             |                            | 1,409                                |     |            |         | 385        |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Income taxes refundable                                                                        |                                                                                                             |                            | 6,721                                |     |            |         | 6,550      |    
|                                                      |                                                                                                |                                                                                                             |                            |                                      |     |            |         |           
|                                                      |                                                                                                |                                                                                                             | Total current assets       |                                      |     | 157,343    |         |            |     | 136,872 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Assets held for sale                                  |                                                                                                |                                                                                                             |                           |                                      |     |            | 3,645   |           
|                                                     
|                                                     
|                                                     
|                                                     
|Property, plant and equipment
Land                    |                                                                                                |                                                                                                             | 8,400                      |                                      |     |            | 6,634   |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Buildings                                                                                      |                                                                                                             |                            | 91,383                               |     |            |         | 81,823     |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Machinery and equipment                                                                        |                                                                                                             |                            | 566,279                              |     |            |         | 526,897    |    
|                                                      |                                                                                                |                                                                                                             |                            |                                      |     |            |         |           
|                                                      |                                                                                                |                                                                                                             | 666,062                    |                                      |     |            | 615,354 |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Less accumulated depreciation                                                                  |                                                                                                             |                            | (379,228                             | )   |            |         | (369,728   | )  
|                                                      |                                                                                                |                                                                                                             |                            |                                      |     |            |         |           
|                                                      |                                                                                                |                                                                                                             | 286,834                    |                                      |     |            | 245,626 |           
|                                                     
|                                                     
|                                                     
|                                                     
|Other assets                                          |                                                                                                |                                                                                                             | 8,817                      |                                      |     |            | 10,672  |           
|                                                      |                                                                                                |                                                                                                             |                            |                                      |     |            |         |           
|                                                      |                                                                                                | $                                                                                                           | 452,994                    |                                      |     | $          | 396,815 |           
|                                                      |                                                                                                |                                                                                                             |                            |                                      |     |            |         |           
|                                                      |                                                                                                |                                                                                                             |                            | LIABILITIES AND SHAREHOLDERS EQUITY |     |            |         |            |     |         |  | 
|                                                     
|                                                     
|                                                     
|                                                     
|Current liabilities                                   |                                                                                                |                                                                                                             |                            |                                      |     |            |         |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accounts payable                                                                               |                                                                                                             | $                          | 24,147                               |     |            | $       | 29,993     |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accrued compensation, benefits and related expenses                                            |                                                                                                             |                            | 10,194                               |     |            |         | 10,369     |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accrued interest                                                                               |                                                                                                             |                            | 4,595                                |     |            |         | 4,576      |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Other accrued expenses                                                                         |                                                                                                             |                            | 14,248                               |     |            |         | 10,207     |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Long-term debt due in one year                                                                 |                                                                                                             |                            | 500                                  |     |            |         | 2,523      |    
|                                                      |                                                                                                |                                                                                                             |                            |                                      |     |            |         |           
|                                                      |                                                                                                |                                                                                                             | Total current liabilities  |                                      |     | 53,684     |         |            |     | 57,668  | 
|                                                     
|                                                     
|                                                     
|                                                     
|Long-term debt                                        |                                                                                                |                                                                                                             | 229,650                    |                                      |     |            | 167,477 |           
|                                                     
|                                                     
|                                                     
|                                                     
|Deferred income taxes and other long-term liabilities |                                                                                                |                                                                                                             | 39,659                     |                                      |     |            | 41,415  |           
|                                                     
|                                                     
|                                                     
|                                                     
|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  11,552 shares in 2001 and 2002 |                            |                                      | 115 |            |         |            | 115 |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                                | Class B, $.01 par value; 5,000 shares authorized; issued and
outstanding  979 shares in 2001 and 2002      |                            |                                      | 10  |            |         |            | 10  |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Capital in excess of par value                                                                 |                                                                                                             |                            | 39,669                               |     |            |         | 39,669     |    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accumulated other comprehensive loss                                                           |                                                                                                             |                            | (561                                 | )   |            |         | (889       | )  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Retained earnings                                                                              |                                                                                                             |                            | 90,768                               |     |            |         | 91,350     |    
|                                                      |                                                                                                |                                                                                                             |                            |                                      |     |            |         |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                                |                                                                                                             | Total shareholders equity |                                      |     | 130,001    |         |            |     | 130,255 | 
|                                                      |                                                                                                |                                                                                                             |                            |                                      |     |            |         |           
|                                                      |                                                                                                | $                                                                                                           | 452,994                    |                                      |     | $          | 396,815 |           
|                                                      |                                                                                                |                                                                                                             |                            |                                      |     |            |         |           

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

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##### Table of Contents



AVONDALE INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

|                                                |                                     |                             |         |                   |        |            |         |            |        |   |         |        |        |  
|----------------------------------------------- | ----------------------------------- | --------------------------- | ------- | ----------------- | ------ | ---------- | ------- | ---------- | ------ | - | ------- | ------ | ------ | -
|                                                |                                     |                             |         | Fiscal Year Ended
|                                                |                                     |                             |         |                  
|                                                |                                     |                             |         | August 25,        |        | August 31, |         | August 30,
|                                                |                                     |                             |         | 2000              |        | 2001       |         | 2002      
|                                                |                                     |                             |         |                   |        |            |         |           
|Net sales                                       |                                     | $                           | 836,544 |                   |        | $          | 772,768 |            |        | $ | 659,735 |       
|                                               
|                                               
|                                               
|                                               
|Operating costs and expenses
Cost of goods sold |                                     |                             | 677,952 |                   |        |            | 666,205 |            |        |   | 560,794 |       
|                                               
|                                               
|                                               
|                                               
|                                                | Depreciation                        |                             |         | 42,250            |        |            |         | 45,681     |        |   |         | 44,956 |       
|                                               
|                                               
|                                               
|                                               
|                                                | Selling and administrative expenses |                             |         | 38,474            |        |            |         | 32,989     |        |   |         | 28,289 |       
|                                               
|                                               
|                                               
|                                               
|                                                | Facility restructuring charges      |                             |         |                  |        |            |         |           |        |   |         | 7,000  |       
|                                                |                                     |                             |         |                   |        |            |         |            |        |   |         |       
|                                                |                                     | Operating income            |         |                   | 77,868 |            |         |            | 27,893 |   |         |        | 18,696 |  
|                                               
|                                               
|                                               
|                                               
|Interest expense, net                           |                                     |                             | 20,249  |                   |        |            | 20,396  |            |        |   | 18,449  |       
|                                               
|                                               
|                                               
|                                               
|Discounts and expenses on sales of receivables  |                                     |                             | 5,578   |                   |        |            | 4,935   |            |        |   | 1,117   |       
|                                               
|                                               
|                                               
|                                               
|Other expenses (income), net                    |                                     |                             | 458     |                   |        |            | 765     |            |        |   | (513    | )     
|                                                |                                     |                             |         |                   |        |            |         |            |        |   |         |       
|                                                | Income (loss) before income taxes   |                             |         | 51,583            |        |            |         | 1,797      |        |   |         | (357   | )     
|                                               
|                                               
|                                               
|                                               
|Provision for (benefit of) income taxes         |                                     |                             | 18,580  |                   |        |            | 540     |            |        |   | (227    | )     
|                                                |                                     |                             |         |                   |        |            |         |            |        |   |         |       
|                                                |                                     | Net income (loss)           |         | $                 | 33,003 |            |         | $          | 1,257  |   |         | $      | (130   | )
|                                                |                                     |                             |         |                   |        |            |         |            |        |   |         |       
|Per share data                                  |                                     |                             |         |                   |        |            |         |            |        |   |         |       
|                                               
|                                               
|                                               
|                                               
|                                                |                                     | Net income (loss)  basic   |         | $                 | 2.61   |            |         | $          | .10    |   |         | $      | (.01   | )
|                                                |                                     |                             |         |                   |        |            |         |            |        |   |         |       
|                                                |                                     | Net income (loss)  diluted |         | $                 | 2.57   |            |         | $          | .10    |   |         | $      | (.01   | )
|                                                |                                     |                             |         |                   |        |            |         |            |        |   |         |       

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

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AVONDALE INCORPORATED

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands, except per share data)

|                                                  |                                                                         |  |        |              |   |            |     |           |   |           |        |               |   |          |      |              |   |   |        |        |   |   |         |        |   | 
|------------------------------------------------- | ----------------------------------------------------------------------- |  | ------ | ------------ | - | ---------- | --- | --------- | - | --------- | ------ | ------------- | - | -------- | ---- | ------------ | - | - | ------ | ------ | - | - | ------- | ------ | - | 
|                                                  |                                                                         |  |        |              |   |            |     |           |   |           |        |               |   |          |      | Accumulated  |   |   |        |        |   |   |         |       
|                                                  |                                                                         |  |        | Common Stock |   | Capital in |     | Other     |   |           |        |               |   | Total   
|                                                  |                                                                         |  |        |              |   |            |     | Issued    |   | Excess of |        | Comprehensive |   | Retained |      | Shareholders
|                                                  |                                                                         |  |        | Shares       |   | Amount     |     | Par Value |   | Loss      |        | Earnings      |   | Equity  
|                                                  |                                                                         |  |        |              |   |            |     |           |   |           |        |               |   |         
|Balance as previously reported at August
27, 1999 |                                                                         |  | 12,677 |              |   | $          | 127 |           |   | $         | 39,835 |               |   | $        |     |              |   | $ | 65,034 |        |   | $ | 104,996 |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Adjustment of deferred income taxes                                     |  |        |             |   |            |     |          |   |           |        |              |   |          |      |             |   |   |        | 4,000  |   |   |         | 4,000  |  
|                                                  |                                                                         |  |        |              |   |            |     |           |   |           |        |               |   |          |      |              |   |   |        |        |   |   |         |       
|Balance at August 27, 1999                        |                                                                         |  | 12,677 |              |   |            | 127 |           |   |           | 39,835 |               |   |          |     |              |   |   | 69,034 |        |   |   | 108,996 |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net income                                                              |  |        |             |   |            |     |          |   |           |        |              |   |          |      |             |   |   |        | 33,003 |   |   |         | 33,003 |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash dividends ($0.40 per share)                                        |  |        |             |   |            |     |          |   |           |        |              |   |          |      |             |   |   |        | (5,062 | ) |   |         | (5,062 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Common stock issued                                                     |  |        | 22           |   |            |     |          |   |           |        | 349           |   |          |      |             |   |   |        |       |   |   |         | 349    |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase and retirement of treasury stock                               |  |        | (155         | ) |            |     | (2        | ) |           |        | (488          | ) |          |      |             |   |   |        | (2,291 | ) |   |         | (2,781 | )
|                                                  |                                                                         |  |        |              |   |            |     |           |   |           |        |               |   |          |      |              |   |   |        |        |   |   |         |       
|Balance at August 25, 2000                        |                                                                         |  | 12,544 |              |   |            | 125 |           |   |           | 39,696 |               |   |          |     |              |   |   | 94,684 |        |   |   | 134,505 |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net income                                                              |  |        |             |   |            |     |          |   |           |        |              |   |          |      |             |   |   |        | 1,257  |   |   |         | 1,257  |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cumulative effect of adoption of
Statement No. 133, net of
income taxes |  |        |             |   |            |     |          |   |           |        |              |   |          |      | 427          |   |   |        |       |   |   |         | 427    |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Change in fair value of interest rate
swaps, net of income taxes        |  |        |             |   |            |     |          |   |           |        |              |   |          |      | (988         | ) |   |        |       |   |   |         | (988   | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash dividends ($0.40 per share)                                        |  |        |             |   |            |     |          |   |           |        |              |   |          |      |             |   |   |        | (5,015 | ) |   |         | (5,015 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Common stock issued                                                     |  |        | 1            |   |            |     |          |   |           |        | 20            |   |          |      |             |   |   |        |       |   |   |         | 20     |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase and retirement of treasury
stock                               |  |        | (14          | ) |            |     |          |   |           |        | (47           | ) |          |      |             |   |   |        | (158   | ) |   |         | (205   | )
|                                                  |                                                                         |  |        |              |   |            |     |           |   |           |        |               |   |          |      |              |   |   |        |        |   |   |         |       
|Balance at August 31, 2001                        |                                                                         |  | 12,531 |              |   |            | 125 |           |   |           | 39,669 |               |   |          | (561 | )            |   |   | 90,768 |        |   |   | 130,001 |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Refund of prior year income taxes                                       |  |        |             |   |            |     |          |   |           |        |              |   |          |      |             |   |   |        | 4,471  |   |   |         | 4,471  |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net loss                                                                |  |        |             |   |            |     |          |   |           |        |              |   |          |      |             |   |   |        | (130   | ) |   |         | (130   | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Change in fair value of interest rate
swaps, net of income taxes        |  |        |             |   |            |     |          |   |           |        |              |   |          |      | (328         | ) |   |        |       |   |   |         | (328   | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash dividends ($0.30 per share)                                        |  |        |             |   |            |     |          |   |           |        |              |   |          |      |             |   |   |        | (3,759 | ) |   |         | (3,759 | )
|                                                  |                                                                         |  |        |              |   |            |     |           |   |           |        |               |   |          |      |              |   |   |        |        |   |   |         |       
|Balance at August 30, 2002                        |                                                                         |  | 12,531 |              |   | $          | 125 |           |   | $         | 39,669 |               |   | $        | (889 | )            |   | $ | 91,350 |        |   | $ | 130,255 |       
|                                                  |                                                                         |  |        |              |   |            |     |           |   |           |        |               |   |          |      |              |   |   |        |        |   |   |         |       

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

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AVONDALE INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                               |                                                                                         |                                                                     |                                       |                                                     |        |                   |         |            |         |            |         |         |        |        |         |  
|---------------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------- | --------------------------------------------------- | ------ | ----------------- | ------- | ---------- | ------- | ---------- | ------- | ------- | ------ | ------ | ------- | -
|                                               |                                                                                         |                                                                     |                                       |                                                     |        | Fiscal Year Ended
|                                               |                                                                                         |                                                                     |                                       |                                                     |        |                  
|                                               |                                                                                         |                                                                     |                                       |                                                     |        | August 25,        |         | August 31, |         | August 30,
|                                               |                                                                                         |                                                                     |                                       |                                                     |        | 2000              |         | 2001       |         | 2002      
|                                               |                                                                                         |                                                                     |                                       |                                                     |        |                   |         |            |         |           
|Operating activities                           |                                                                                         |                                                                     |                                       |                                                     |        |                   |         |            |         |            |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Net income (loss)                                                                       |                                                                     | $                                     | 33,003                                              |        |                   | $       | 1,257      |         |            | $       | (130    | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Adjustments to reconcile net income (loss) to net cash
provided by operating activities
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                         | Depreciation and amortization                                       |                                       |                                                     | 42,838 |                   |         |            | 46,399  |            |         |         | 45,538 |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                         | Provision for deferred income taxes                                 |                                       |                                                     | 2,181  |                   |         |            | 6,543   |            |         |         | 3,534  |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                         | Loss (gain) on sale of equipment and facility
restructuring charges |                                       |                                                     | (99    | )                 |         |            | 640     |            |         |         | 5,379  |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                         | Sales of accounts receivable, net                                   |                                       |                                                     | (7,000 | )                 |         |            | (20,000 | )          |         |         | 12,390 |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                         | Changes in operating assets and liabilities                         |                                       |                                                     |        |                   |         |            |         |            |         |         |        |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                         |                                                                     | Accounts receivable                   |                                                     |        | 2,417             |         |            |         | 27,958     |         |         |        | (6,547 | )      
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                         |                                                                     | Inventories                           |                                                     |        | 594               |         |            |         | 6,294      |         |         |        | 12,725 |        
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                         |                                                                     | Other assets and liabilities, net     |                                                     |        | (9,908            | )       |            |         | 11,165     |         |         |        | (3,773 | )      
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                         |                                                                     | Accounts payable and accrued expenses |                                                     |        | 4,736             |         |            |         | (23,069    | )       |         |        | 1,961  |        
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                         |                                                                     | Income taxes payable                  |                                                     |        | (1,035            | )       |            |         | (9,096     | )       |         |        |       |        
|                                               |                                                                                         |                                                                     |                                       |                                                     |        |                   |         |            |         |            |         |        
|                                               |                                                                                         |                                                                     |                                       | Net cash provided by operating activities           |        |                   | 67,727  |            |         |            | 48,091  |         |        |        | 71,077  |  
|                                              
|                                              
|                                              
|                                              
|Investing activities                           |                                                                                         |                                                                     |                                       |                                                     |        |                   |         |            |         |            |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Purchase of property, plant and equipment                                               |                                                                     |                                       | (30,477                                             | )      |                   |         | (91,139    | )       |            |         | (13,086 | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from sale of property, plant and equipment                                     |                                                                     |                                       | 1,416                                               |        |                   |         | 875        |         |            |         | 739     |       
|                                               |                                                                                         |                                                                     |                                       |                                                     |        |                   |         |            |         |            |         |        
|                                               |                                                                                         |                                                                     |                                       | Net cash used in investing activities               |        |                   | (29,061 | )          |         |            | (90,264 | )       |        |        | (12,347 | )
|                                              
|                                              
|                                              
|                                              
|Financing activities                           |                                                                                         |                                                                     |                                       |                                                     |        |                   |         |            |         |            |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Payments on long-term debt                                                              |                                                                     |                                       | (3,250                                              | )      |                   |         | (10,000    | )       |            |         | (2,500  | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Advances (payments) on revolving line of credit, net                                    |                                                                     |                                       | (36,100                                             | )      |                   |         | 52,475     |         |            |         | (77,650 | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Issuance of long-term debt                                                              |                                                                     |                                       | 7,500                                               |        |                   |         |           |         |            |         | 20,000  |       
|                                              
|                                              
|                                              
|                                              
|                                               | Refund of prior year income taxes                                                       |                                                                     |                                       |                                                    |        |                   |         |           |         |            |         | 4,471   |       
|                                              
|                                              
|                                              
|                                              
|                                               | Issuance of common stock                                                                |                                                                     |                                       | 349                                                 |        |                   |         | 20         |         |            |         |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Purchase and retirement of treasury stock                                               |                                                                     |                                       | (2,781                                              | )      |                   |         | (205       | )       |            |         |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Dividends paid                                                                          |                                                                     |                                       | (5,062                                              | )      |                   |         | (5,015     | )       |            |         | (3,759  | )     
|                                               |                                                                                         |                                                                     |                                       |                                                     |        |                   |         |            |         |            |         |        
|                                               |                                                                                         |                                                                     |                                       | Net cash provided by (used in) financing activities |        |                   | (39,344 | )          |         |            | 37,275  |         |        |        | (59,438 | )
|                                               |                                                                                         |                                                                     |                                       |                                                     |        |                   |         |            |         |            |         |        
|Decrease in cash                               |                                                                                         |                                                                     | (678                                  | )                                                   |        |                   | (4,898  | )          |         |            | (708    | )      
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents at beginning of year |                                                                                         |                                                                     | 8,545                                 |                                                     |        |                   | 7,867   |            |         |            | 2,969   |        
|                                               |                                                                                         |                                                                     |                                       |                                                     |        |                   |         |            |         |            |         |        
|                                               |                                                                                         |                                                                     |                                       | Cash and cash equivalents at end of year            |        | $                 | 7,867   |            |         | $          | 2,969   |         |        | $      | 2,261   |  
|                                               |                                                                                         |                                                                     |                                       |                                                     |        |                   |         |            |         |            |         |        

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

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AVONDALE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 30, 2002

1.     Basis of Presentation:The accompanying consolidated financial
statements include the accounts of Avondale Incorporated and its wholly owned
subsidiary, Avondale Mills, Inc. (Avondale Mills) and, prior to its
dissolution on August 30, 2002, Avondale Receivables Company, a special purpose
subsidiary of Avondale Mills, (collectively, the Company). All significant
intercompany accounts and transactions have been eliminated. Certain prior year
financial statement amounts have been reclassified to conform to 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, and may contain 52 or 53 weeks.

As described in note 6, on August 30, 2002, Avondale Funding, LLC, a
special purpose subsidiary of Avondale Mills, was established to replace
Avondale Receivables Corporation, and to provide financing through the sale of
accounts receivable generated by the Company. The Company accounts for its
investment in Avondale Funding, LLC using the equity method of accounting.

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 preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

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, the cost
of the Companys inventories is determined on a last-in, first-out (LIFO)
basis. Under LIFO, current material and conversion costs are charged to cost of
goods sold while inventories are valued using costs incurred in the initial and
subsequent fiscal years following election of the LIFO method. In periods of
declining prices, LIFO values may exceed current replacement market values and
require downward adjustment. Estimates, including the estimated costs to
complete work in process inventories and the estimated realizable values of all
inventories, are used in determining the lower of LIFO cost and market. During
periods when current costs or inventory quantities fluctuate significantly, use
of the LIFO method may produce cost of goods sold that differs significantly
from that which would be produced under other inventory methods.

Property, Plant and Equipment:Property, plant and equipment is stated at
cost and depreciated over the estimated useful lives of the related assets,
which range from three to thirty years. Depreciation is calculated primarily
using the straight-line method.

Long-Lived Assets:The Company periodically reviews the values assigned to
long-lived assets, such as property, plant and equipment and goodwill. The
associated depreciation and amortization periods are reviewed on an annual
basis. Recoverability is measured based on the anticipated undiscounted cash
flows from operations. Management believes that long-lived assets included in
the accompanying balance sheets are appropriately valued.

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

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##### Table of Contents



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 $7.3 million and $0.1 million for
fiscal 2000 and 2001, respectively. Due primarily to a decline in vested
values under provisions of the deferred compensation plan, these plans yielded
a net credit or reversal of expense of $0.8 million for fiscal 2002.

Self-insurance Programs:The Company maintains self-insurance programs
which provide workers compensation benefits, long-term disability benefits for
claims incurred prior to January 1, 2001, and medical and dental benefits for
its associates. Workers compensation insurance is purchased to provide
coverage up to statutory limits, in excess of a self-insurance retention of
$350,000 per occurrence. Long-term disability benefits for claims incurred
subsequent to January 1, 2001 are covered by a purchased insurance policy.

Self-insurance reserves for workers compensation benefits are recorded
based on actuarial estimates. Self-insurance reserves for long-term disability
benefits relating to claims incurred prior to January 1, 2001 and medical and
dental benefits are recorded based on the estimates of management taking into
consideration claims payment experience and current conditions which may affect
future experience. Actual experience may differ from those estimates.

Other Assets and Other Long-Term Liabilities:Other assets consist
primarily of unamortized loan fees, goodwill, cash surrender value of life
insurance, and deposits on machinery and equipment purchases. Loan fees are
amortized on a straight line basis over the outstanding term of the related
debt. Goodwill is amortized on a straight line basis over 20 years. 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 31, 2001 and
August 30, 2002. See Notes 5 and 9 for disclosures related to the fair values
of interest rate swap agreements and long-term debt.

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. For Fiscal 2002, employee and director
options are not considered due to their antidilutive effect. Share information
is summarized as follows (in thousands):

|                                              |         |  |      |        |      |  |      |        |  |  |   |        | 
|--------------------------------------------- | ------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                              |         |  | 2000 |        | 2001 |  | 2002
|                                              |         |  |      |        |      |  |     
|Weighted average shares outstanding -         |         |  |      |        |      |  |      |        |  |  |   |       
|                                             
|                                             
|                                             
|                                             
|                                              | Basic   |  |      | 12,652 |      |  |      | 12,536 |  |  |   | 12,531 | 
|                                             
|                                             
|                                             
|                                             
|Effect of employee and director stock options |         |  | 174  |        |      |  | 128  |        |  |  |  |       
|                                              |         |  |      |        |      |  |      |        |  |  |   |       
|Weighted average shares outstanding -         |         |  |      |        |      |  |      |        |  |  |   |       
|                                             
|                                             
|                                             
|                                             
|                                              | Diluted |  |      | 12,826 |      |  |      | 12,664 |  |  |   | 12,531 | 
|                                              |         |  |      |        |      |  |      |        |  |  |   |       

Stock Based Compensation:The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees 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.

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 (7%, 7% and 7% of total revenues in fiscal 2000, 2001 and
2002, respectively) on a bill and hold basis, invoicing goods that have been
produced, packaged and made ready for shipment. These goods are

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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 15% of net
sales for fiscal 2000, 17% of net sales for fiscal 2001 and 20% of net sales
for fiscal 2002.

Recent Accounting Pronouncements:In June 2001, the Financial Accounting
Standards Board issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141
prohibits the pooling of interest method of accounting for business
combinations initiated after June 2001. Statement No. 142 specifies that
goodwill and some intangible assets will no longer be amortized but instead
will be subject to testing for impairment on an annual basis, or as events
occur that would reduce the fair value of such asset below its carrying value.
The Company plans to adopt Statement No. 142 in the first quarter of fiscal
2003. Management does not believe the adoption of these statements will have a
material effect on the consolidated financial statements of the Company.

In June 2001, the Financial Accounting Standards Board issued Statement
No. 143, Accounting for Asset Retirement Obligations, which addresses
accounting and reporting for asset retirement costs of long-lived assets
resulting from legal obligations associated with acquisition, construction or
development transactions. The Company plans to adopt Statement No. 143 in the
first quarter of fiscal 2003. Management has determined the adoption of this
statement will not have a material effect on the consolidated financial
statements of the Company.

In August 2001, the Financial Accounting Standards Board issued Statement
No. 144, Accounting for the Impairment or Disposal of Long-lived Assets,
which clarifies accounting and reporting for assets held for sale, scheduled
for abandonment or other disposal, and recognition of impairment loss related
to the carrying value of long-lived assets. The Company plans to adopt
Statement No. 144 in the first quarter of fiscal 2003. Management does not
believe the adoption of this statement will have a material effect on the
consolidated financial statements of the Company.

In April 2002, the Financial Accounting Standards Board issued Statement
No. 145, Rescission of Statements No. 4, 44, and 64, Amendment of Statement
No. 13, and Technical Corrections. Statement No. 145 provides that gains and
losses from extinguishment of debt that do not meet the criteria for
classification as extraordinary items in Accounting Principles Board Opinion
No. 30, Reporting the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, should not be classified as
extraordinary items. The Company plans to adopt Statement No. 145 during fiscal
2003. Management does not believe the adoption of this statement will have a
material effect on the consolidated financial statements of the Company.

In June 2002, the Financial Accounting Standards Board issued Statement
No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
addressing financial accounting and reporting for costs associated with exit or
disposal activities, and requiring that a liability for costs associated with
an exit or disposal activity be recognized when the liability is incurred. In
summary, Statement No. 146 requires that the liability be recognized and
measured initially at its fair value in the period in which the liability is
incurred, except for one-time termination benefits that meet certain
requirements. The Company plans to adopt Statement No. 146 during fiscal 2003.
Management does not believe the adoption of this statement will have a material
effect on the consolidated financial statements of the Company.

2.     Facility Restructuring: In response to the highly competitive market
conditions and continued oversupply of open-end yarns, in January 2002, the
Company completed the closing of two separate open-end yarn manufacturing
facilities located in North Carolina. In connection with these closings, the
Company recorded facility restructuring charges and other non-operating costs
of approximately $5.8 million during fiscal 2002. Additionally,

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the Company
implemented reductions in certain manufacturing overhead costs and selling,
general and administrative expenses in September 2001. In conjunction with
these actions and the two plant closings, the Company recorded expense of
approximately $1.2 million related to the termination of approximately 70
associates holding manufacturing, marketing and administrative positions. At
August 30, 2002, estimated costs of
approximately $180,000 related to the facility restructuring remain
outstanding, and are included in other accrued expenses in the consolidated
balance sheets.

At August 30, 2002, the two closed plant facilities, certain real estate
properties and certain items of equipment have been identified as available for
sale and are included at estimated net realizable values in assets held for
sale in the consolidated balance sheets.

3.     Segment Information: The Company operates principally in three
segments: apparel fabrics, yarns and other sales. Apparel fabrics manufactures
and markets cotton and cotton-blend fabrics used in the manufacture of jeans,
sportswear and utilitywear. Yarns manufactures and markets cotton and
cotton-blend yarns to customers in the knitting and weaving industries. Other
sales include the manufacturing and marketing of a variety of greige and
specialty fabrics to apparel, home furnishings, industrial, military and
recreational product manufacturers, and revenues from the Companys trucking
operation. The unallocated amounts shown below reflect expenses, assets and
capital expenditures for centralized transportation, warehouse and
administrative services (in thousands).

|                     |                                                |                                   |         |         |         |  |         |         |         |  |         |         |         |   | 
|-------------------- | ---------------------------------------------- | --------------------------------- | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- | - | 
|                     |                                                |                                   |         |         | 2000    |  | 2001    |         | 2002   
|                     |                                                |                                   |         |         |         |  |         |         |        
|Revenues:            |                                                |                                   |         |         |         |  |         |         |         |  |         |        
|                    
|                    
|                    
|                    
|                     | Apparel fabrics                                |                                   | $       | 616,436 |         |  | $       | 604,168 |         |  | $       | 524,766 |        
|                    
|                    
|                    
|                    
|                     | Yarns                                          |                                   |         | 231,748 |         |  |         | 236,842 |         |  |         | 189,057 |        
|                    
|                    
|                    
|                    
|                     | Other                                          |                                   |         | 86,091  |         |  |         | 78,570  |         |  |         | 70,715  |        
|                     |                                                |                                   |         |         |         |  |         |         |         |  |         |        
|                     |                                                |                                   | 934,275 |         |         |  | 919,580 |         |         |  | 784,538 |        
|                    
|                    
|                    
|                    
|                     | Less intersegment sales                        |                                   |         | 97,731  |         |  |         | 146,812 |         |  |         | 124,803 |        
|                     |                                                |                                   |         |         |         |  |         |         |         |  |         |        
|                     |                                                | Total                             |         | $       | 836,544 |  |         | $       | 772,768 |  |         | $       | 659,735 |  
|                     |                                                |                                   |         |         |         |  |         |         |         |  |         |        
|Income (loss):       |                                                |                                   |         |         |         |  |         |         |         |  |         |        
|                    
|                    
|                    
|                    
|                     | Apparel fabrics                                |                                   | $       | 85,887  |         |  | $       | 46,953  |         |  | $       | 39,976  |        
|                    
|                    
|                    
|                    
|                     | Yarns                                          |                                   |         | 7,942   |         |  |         | (357    | )       |  |         | (4,313  | )      
|                    
|                    
|                    
|                    
|                     | Other                                          |                                   |         | 10,100  |         |  |         | 3,390   |         |  |         | 4,060   |        
|                    
|                    
|                    
|                    
|                     | Unallocated                                    |                                   |         | (26,061 | )       |  |         | (22,093 | )       |  |         | (21,027 | )      
|                     |                                                |                                   |         |         |         |  |         |         |         |  |         |        
|                     |                                                | Total operating income            |         |         | 77,868  |  |         |         | 27,893  |  |         |         | 18,696  |  
|                    
|                    
|                    
|                    
|                     | Interest expense                               |                                   |         | 20,249  |         |  |         | 20,396  |         |  |         | 18,449  |        
|                    
|                    
|                    
|                    
|                     | Discounts and expenses on sales of
receivables |                                   |         | 5,578   |         |  |         | 4,935   |         |  |         | 1,117   |        
|                    
|                    
|                    
|                    
|                     | Other expenses (income), net                   |                                   |         | 458     |         |  |         | 765     |         |  |         | (513    | )      
|                     |                                                |                                   |         |         |         |  |         |         |         |  |         |        
|                     |                                                | Income (loss) before income taxes |         | $       | 51,583  |  |         | $       | 1,797   |  |         | $       | (357    | )
|                     |                                                |                                   |         |         |         |  |         |         |         |  |         |        
|Identifiable Assets: |                                                |                                   |         |         |         |  |         |         |         |  |         |        
|                    
|                    
|                    
|                    
|                     | Apparel fabrics                                |                                   | $       | 308,306 |         |  | $       | 298,399 |         |  | $       | 253,348 |        
|                    
|                    
|                    
|                    
|                     | Yarns                                          |                                   |         | 73,658  |         |  |         | 92,972  |         |  |         | 75,018  |        
|                    
|                    
|                    
|                    
|                     | Other                                          |                                   |         | 27,653  |         |  |         | 23,022  |         |  |         | 17,728  |        
|                    
|                    
|                    
|                    
|                     | Unallocated                                    |                                   |         | 29,091  |         |  |         | 38,601  |         |  |         | 50,721  |        
|                     |                                                |                                   |         |         |         |  |         |         |         |  |         |        
|                     |                                                | Total                             |         | $       | 438,708 |  |         | $       | 452,994 |  |         | $       | 396,815 |  
|                     |                                                |                                   |         |         |         |  |         |         |         |  |         |        

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|                               |                 |       |   |         |         |      |   |         |         |  |   |         |         | 
|------------------------------ | --------------- | ----- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                               |                 |       |   | 2000    |         | 2001 |   | 2002   
|                               |                 |       |   |         |         |      |   |        
|Depreciation and Amortization: |                 |       |   |         |         |      |   |         |         |  |   |        
|                              
|                              
|                              
|                              
|                               | Apparel fabrics |       | $ | 26,653  |         |      | $ | 31,396  |         |  | $ | 28,188  |        
|                              
|                              
|                              
|                              
|                               | Yarns           |       |   | 10,162  |         |      |   | 8,968   |         |  |   | 11,019  |        
|                              
|                              
|                              
|                              
|                               | Other           |       |   | 3,924   |         |      |   | 3,937   |         |  |   | 3,597   |        
|                              
|                              
|                              
|                              
|                               | Unallocated     |       |   | 2,099   |         |      |   | 2,098   |         |  |   | 2,734   |        
|                               |                 |       |   |         |         |      |   |         |         |  |   |        
|                               |                 | Total |   | $       | 42,838  |      |   | $       | 46,399  |  |   | $       | 45,538  | 
|                               |                 |       |   |         |         |      |   |         |         |  |   |        
|Capital Expenditures:          |                 |       |   |         |         |      |   |         |         |  |   |        
|                              
|                              
|                              
|                              
|                               | Apparel fabrics |       | $ | 18,698  |         |      | $ | 46,302  |         |  | $ | 6,391   |        
|                              
|                              
|                              
|                              
|                               | Yarns           |       |   | 8,377   |         |      |   | 41,855  |         |  |   | 4,820   |        
|                              
|                              
|                              
|                              
|                               | Other           |       |   | 2,564   |         |      |   | 1,994   |         |  |   | 344     |        
|                              
|                              
|                              
|                              
|                               | Unallocated     |       |   | 838     |         |      |   | 988     |         |  |   | 1,531   |        
|                               |                 |       |   |         |         |      |   |         |         |  |   |        
|                               |                 | Total |   | $       | 30,477  |      |   | $       | 91,139  |  |   | $       | 13,086  | 
|                               |                 |       |   |         |         |      |   |         |         |  |   |        
|Geographic Sales Information:  |                 |       |   |         |         |      |   |         |         |  |   |        
|                              
|                              
|                              
|                              
|                               | United States   |       | $ | 773,426 |         |      | $ | 723,758 |         |  | $ | 612,706 |        
|                              
|                              
|                              
|                              
|                               | All Other       |       |   | 63,118  |         |      |   | 49,010  |         |  |   | 47,029  |        
|                               |                 |       |   |         |         |      |   |         |         |  |   |        
|                               |                 | Total |   | $       | 836,544 |      |   | $       | 772,768 |  |   | $       | 659,735 | 
|                               |                 |       |   |         |         |      |   |         |         |  |   |        

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

|                                                                                                          |  |      |       |      |  |   |      |  
|--------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ---- | -
|                                                                                                          |  | 2001 |       | 2002
|                                                                                                          |  |      |       |     
|Net income (loss)                                                                                         |  | $    | 1,257 |      |  | $ | (130 | )
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Cumulative effect of adoption of Statement of
Financial Accounting Standards No. 133,
net of income taxes |  |      | 427   |      |  |   |     |  
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Change in fair value of interest rate swaps, net of
income taxes                                          |  |      | (988  | )    |  |   | (328 | )
|                                                                                                          |  |      |       |      |  |   |      |  
|Comprehensive income (loss)                                                                               |  | $    | 696   |      |  | $ | (458 | )
|                                                                                                          |  |      |       |      |  |   |      |  

5.     Derivatives: The Company has adopted Financial Accounting Standards
Board Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, which requires that derivative instruments be recorded
in the balance sheet as either assets or liabilities measured at fair value,
and that changes in the fair value of the derivative instruments be recorded as
unrealized gains or losses in either net income or other comprehensive income
depending on whether specific hedge accounting criteria are met.

Upon adoption of Statement No. 133, the Company recorded the fair value of
the interest rate swap agreements, approximately $427,000 net of income taxes,
in other assets and accumulated other comprehensive income at the beginning of
fiscal 2001. For the fiscal years ended August 31, 2001 and August 30, 2002,
declines in fair value of approximately $988,000 and $327,000, respectively,
net of income taxes, were recorded as unrealized losses in other comprehensive
income.

6.     Receivables Securitization Facilities:On August 30, 2002, the Company
and its wholly owned, special purpose subsidiary, Avondale Funding, LLC
(Funding), entered into an arrangement (Receivables Securitization
Facility) with an independent issuer of receivables-backed commercial paper to
provide financing of up to $90 million through the sale of undivided interests
in certain trade receivables (Receivables) originated by the

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Company. The
Receivables Securitization Facility extends until the earlier of 90 days before
the specified final receivables purchase date, August 29, 2007, or certain
specified termination events. The Receivables Securitization Facility replaced
a previous securitization facility with a bank. The Company has been engaged by
Funding and the issuer of commercial paper to service the receivables.

The Company sells, or transfers as a contribution of capital, the
Receivables, at a discount and without recourse, to Funding, whose sole
business purpose is the acquisition and financing of the Receivables. Funding
sells an undivided interest in a specified portion of the Receivables to the
issuer of commercial paper to provide the funds required to purchase the
Receivables from the Company. Proceeds from the collection of the Receivables
are used by Funding to purchase additional Receivables from the Company, repay
the issuer of commercial paper in the event that sufficient additional
Receivables are not available to maintain its investment, and pay fees and
expenses. Funding retains no interest in the investment in the Receivables sold
to the issuer of commercial paper, and has experienced no gains or losses on
such sales. Funding is a separate corporate entity with it own creditors who,
in the event of Fundings liquidation, will be entitled to a claim on Fundings
assets prior to any distribution to the Company.

The discount rate on the Receivables purchased from the Company by Funding
is based on the fair market value of the Receivables. The discount rate on the
undivided interest in the Receivables purchased by the commercial paper issuer
from Funding is tied to the commercial paper rate plus a specified number of
basis points. Funding is required to pay certain unused availability fees under
the Receivables Securitization Facility.

The Receivables Securitization Facility contains customary covenants,
including requirements to maintain certain financial ratios, and includes
provisions relating to cross defaults to other debt obligations of the Company.

In accordance with the provisions of Financial Accounting Standards Board
Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets, the Company includes in accounts receivable in its consolidated
balance sheets the portion of Receivables sold to Funding which have not been
resold by Funding to the commercial paper issuer.

At August 31, 2001 and August 30, 2002, the outstanding amount of
investments by third parties under the agreements was $66 million and $74
million, respectively. Accounts receivable in the consolidated balance sheets
have been reduced by approximately $67.2 million and $74.6 million at August
31, 2001 and August 30, 2002, respectively, representing the face amount of the
outstanding receivables sold at those dates. During fiscal 2001 and 2002, the
Company received approximately $748 million and $595 million, respectively,
from sales of receivables under the facilities. The cost to service the
receivables is remitted weekly and therefore no servicing asset or liability
has been recorded.

Under the securitization agreements, discounts of $5.6 million, $4.9
million and $1.1 million for fiscal years 2000, 2001, and 2002, respectively,
have been included in discounts and expenses on sales of receivables in the
consolidated statements of income.

Under the securitization agreement in effect prior to August 30, 2002, the
Company sold an undivided interest in a defined pool of receivables held by
Avondale Receivables Company. The receivables were transferred to a trust at a
discount, and the trust then sold variable funding certificates to lending
institutions or other investors representing undivided ownership interests in a
defined portion of the receivables. Such certificates did not represent
obligations of, or interests in, and were not guaranteed or insured by, the
Company. Proceeds from the issuance of the certificates were remitted to the
Company.

The Company retained a residual interest in the receivables under the
previous securitization agreement in an amount equal to the excess of the
receivables over the certificates sold. Such residual interest was included in
accounts receivable in the consolidated balance sheets. The carrying value of
the residual interest approximated fair value due to the short period of time
required to collect the underlying receivables. All losses, credits or other

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adjustments relating to the receivables were applied as deductions to the
Companys residual interest in the receivables. At August 31, 2001, an
allowance of $4.6 million related to the receivables is included in other
accrued expenses in the consolidated balance sheets.

The previous securitization agreement required the Company to maintain
sufficient levels of receivables to collateralize the outstanding certificates.
The agreement also contained various covenants, representations and
warranties customary to the operation of such securitization programs. The
agreement did not include financial covenants but contained cross defaults to
other debt obligations of the Company. The Company, as agent for the trust, was
responsible for the collection and administrative processing of the
receivables. No servicing asset or liability was recorded since the cost to
service the receivables approximated the servicing income.

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

|                                                                     |  |            |        |            |  |   |        | 
|-------------------------------------------------------------------- |  | ---------- | ------ | ---------- |  | - | ------ | 
|                                                                     |  | August 31, |        | August 30,
|                                                                     |  | 2001       |        | 2002      
|                                                                     |  |            |        |           
|Finished goods                                                       |  | $          | 33,955 |            |  | $ | 27,013 | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Work in process                                                      |  |            | 39,470 |            |  |   | 33,586 | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Raw materials                                                        |  |            | 11,713 |            |  |   | 9,042  | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Dyes and chemicals                                                   |  |            | 5,058  |            |  |   | 6,163  | 
|                                                                     |  |            |        |            |  |   |        | 
|                                                                     |  |            | 90,196 |            |  |   | 75,804 | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Adjustment of carrying value to LIFO basis,
net of market adjustment |  |            | 2,750  |            |  |   | 4,900  | 
|                                                                     |  |            |        |            |  |   |        | 
|                                                                     |  |            | 92,946 |            |  |   | 80,704 | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Supplies at average cost                                             |  |            | 6,725  |            |  |   | 6,242  | 
|                                                                     |  |            |        |            |  |   |        | 
|                                                                     |  | $          | 99,671 |            |  | $ | 86,946 | 
|                                                                     |  |            |        |            |  |   |        | 

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

|          |         |   |        |        |      |   |        |        |   |   |        |        |  
|--------- | ------- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|          |         |   | 2000   |        | 2001 |   | 2002  
|          |         |   |        |        |      |   |       
|Current:  |         |   |        |        |      |   |        |        |   |   |        |       
|         
|         
|         
|         
|          | Federal |   | $      | 16,116 |      |   | $      | (4,280 | ) |   | $      | (3,602 | )
|         
|         
|         
|         
|          | State   |   |        | 283    |      |   |        | (1,723 | ) |   |        | (159   | )
|          |         |   |        |        |      |   |        |        |   |   |        |       
|          |         |   | 16,399 |        |      |   | (6,003 | )      |   |   | (3,761 | )     
|         
|         
|         
|         
|Deferred: |         |   |        |        |      |   |        |        |   |   |        |       
|         
|         
|         
|         
|          | Federal |   |        | 1,888  |      |   |        | 5,662  |   |   |        | 3,079  |  
|         
|         
|         
|         
|          | State   |   |        | 293    |      |   |        | 881    |   |   |        | 455    |  
|          |         |   |        |        |      |   |        |        |   |   |        |       
|          |         |   | 2,181  |        |      |   | 6,543  |        |   |   | 3,534  |       
|          |         |   |        |        |      |   |        |        |   |   |        |       
|          |         | $ | 18,580 |        |      | $ | 540    |        |   | $ | (227   | )     
|          |         |   |        |        |      |   |        |        |   |   |        |       

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

|                                              |  |      |        |      |  |      |      |   |  |   |      |  
|--------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                              |  | 2000 |        | 2001 |  | 2002
|                                              |  |      |        |      |  |     
|Federal income taxes at statutory rate        |  | $    | 18,055 |      |  | $    | 629  |   |  | $ | (125 | )
|                                             
|                                             
|                                             
|                                             
|State income taxes, net of federal tax effect |  |      | 374    |      |  |      | (548 | ) |  |   | 192  |  
|                                             
|                                             
|                                             
|                                             
|Other                                         |  |      | 151    |      |  |      | 459  |   |  |   | (294 | )
|                                              |  |      |        |      |  |      |      |   |  |   |      |  
|                                              |  | $    | 18,580 |      |  | $    | 540  |   |  | $ | (227 | )
|                                              |  |      |        |      |  |      |      |   |  |   |      |  

At August 30, 2002, income taxes refundable represent the estimated tax
benefit on tax basis operating losses for fiscal 2001 and 2002. The Company
expects to receive approximately $1.5 million of the refund in early fiscal
2003 and use the remaining amount to offset taxes due on fiscal 2003 earnings.

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The Company made income tax payments of $17.3 million and $6.1 million
during fiscal 2000 and 2001. During fiscal 2002, the Company made no income tax
payments, but received a refund of estimated fiscal 2001 income taxes paid of
approximately $5.0 million.

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):

|                             |                           |   |            |        |            |   |        |        | 
|---------------------------- | ------------------------- | - | ---------- | ------ | ---------- | - | ------ | ------ | 
|                             |                           |   | August 31, |        | August 30,
|                             |                           |   | 2001       |        | 2002      
|                             |                           |   |            |        |           
|Deferred tax liabilities:    |                           |   |            |        |            |   |        |       
|                            
|                            
|                            
|                            
|                             | Depreciation              |   | $          | 28,523 |            |   | $      | 28,404 | 
|                            
|                            
|                            
|                            
|                             | Inventory valuation       |   |            | 5,852  |            |   |        | 6,631  | 
|                            
|                            
|                            
|                            
|                             | Other                     |   |            | 2,529  |            |   |        | 2,098  | 
|                             |                           |   |            |        |            |   |        |       
|                             |                           |   | 36,904     |        |            |   | 37,133 |       
|                            
|                            
|                            
|                            
|Deferred tax assets:         |                           |   |            |        |            |   |        |       
|                            
|                            
|                            
|                            
|                             | Employee benefit programs |   |            | 9,036  |            |   |        | 6,308  | 
|                            
|                            
|                            
|                            
|                             | Receivable reserves       |   |            | 2,910  |            |   |        | 2,750  | 
|                            
|                            
|                            
|                            
|                             | Other                     |   |            | 891    |            |   |        | 474    | 
|                             |                           |   |            |        |            |   |        |       
|                             |                           |   | 12,837     |        |            |   | 9,532  |       
|                             |                           |   |            |        |            |   |        |       
|Net deferred tax liabilities |                           | $ | 24,067     |        |            | $ | 27,601 |       
|                             |                           |   |            |        |            |   |        |       

A net benefit of $4.5 million, related to receipt of an income tax refund
resulting from a settlement with the Internal Revenue Service Appeals Division
in the fourth quarter of fiscal 2002, is included as an addition to retained
earnings for fiscal 2002 on the consolidated statement of shareholders equity.
The claim for the refund was filed in fiscal 1997 utilizing tax basis
deductions against fiscal 1994 taxable income, related to consideration paid in
the repurchase of treasury stock. Given the technical nature of the claim and
resulting uncertainty of recovery, recognition of the refund claim was deferred
until successful resolution in fiscal 2002. Interest received in conjunction
with the refund of approximately $1.7 million is included as a reduction in
interest expense, net for fiscal 2002 on the consolidated statements of income.

Following the successful settlement of the refund claim noted above, the
Company reassessed the balance of certain deferred income taxes. Based on this
evaluation, the Company determined that the estimates used to establish
deferred taxes prior to fiscal 1998 were too conservative and resulted in an
overstatement of deferred income tax liabilities. Accordingly, an adjustment of
$4.0 million has been recorded as an addition to the balance of retained
earnings at August 27, 1999 on the consolidated statements of shareholders
equity.

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

|                                                                                                                                                                |  |            |         |            |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | ------- | ---------- |  | - | ------- | -
|                                                                                                                                                                |  | August 31, |         | August 30,
|                                                                                                                                                                |  | 2001       |         | 2002      
|                                                                                                                                                                |  |            |         |           
|Revolving credit facility, interest tied to banks base rate
or alternative rates, 4.72% - 7.75% in 2002, due January 2004                                      |  | $          | 102,650 |            |  | $ | 25,000  |  
|                                                                                                                                                               
|                                                                                                                                                               
|                                                                                                                                                               
|                                                                                                                                                               
|Equipment note, 5.35% in 2002, due in monthly installments
of approximately $360 beginning March 2003, with final
payment of approximately $876 due August 2007 |  |            |        |            |  |   | 20,000  |  
|                                                                                                                                                               
|                                                                                                                                                               
|                                                                                                                                                               
|                                                                                                                                                               
|Industrial revenue bonds, floating rate, 4.38% - 5.7% in 2002                                                                                                   |  |            | 2,500   |            |  |   |        |  
|                                                                                                                                                               
|                                                                                                                                                               
|                                                                                                                                                               
|                                                                                                                                                               
|Senior subordinated notes, 10.25%, due May 1, 2006                                                                                                              |  |            | 125,000 |            |  |   | 125,000 |  
|                                                                                                                                                                |  |            |         |            |  |   |         |  
|                                                                                                                                                                |  |            | 230,150 |            |  |   | 170,000 |  
|                                                                                                                                                               
|                                                                                                                                                               
|                                                                                                                                                               
|                                                                                                                                                               
|Less current portion                                                                                                                                            |  |            | (500    | )          |  |   | (2,523  | )
|                                                                                                                                                                |  |            |         |            |  |   |         |  
|                                                                                                                                                                |  | $          | 229,650 |            |  | $ | 167,477 |  
|                                                                                                                                                                |  |            |         |            |  |   |         |  

The Company maintains a secured revolving credit facility with a group of
banks, amended August 30, 2002 to revise certain financial covenants and adjust
interest rate pricing, which provides aggregate borrowing availability of a
maximum of $100 million through January 2004. Under the terms of this
agreement, the Company can designate an interest rate tied to the Eurodollar
rate (adjusted for any reserves) or the banks base rate, or at alternative
rates negotiated with the lead bank, for specified time periods. A commitment
fee 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, $11.6 million of retained earnings was available for payment
of dividends at August 30, 2002.

The Company uses interest rate swap agreements to effectively convert a
portion of the borrowings outstanding under the revolving credit facility to a
fixed rate, 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 30, 2002, the Company had interest rate swap agreements with notional
amounts aggregating $35 million providing an effective weighted average
interest rate of 5.3%. See Note 5 for disclosures related to the fair market
value of the interest rate swap agreements at August 30, 2002.

The equipment note, a secured five-year installment loan, was executed on
July 30, 2002 in the amount of $20.0 million. The equipment note is to be
repaid in 53 monthly payments of approximately $360,000 commencing March 1,
2003 and a final payment of approximately $896,000 on August 1, 2007. Interest
accrues on the unpaid principal balance of the equipment note at a rate
established annually on August 1 based on the Eurodollar rate plus a specified
number of basis points, and is paid monthly commencing September 1, 2002
through the final payment date. The Company may, at its one time option, elect
a fixed interest rate for the remaining term of the equipment note based on the
Federal Reserve Interest Rate Swap rate of interest, as quoted for the term
closest to the remaining term of the equipment note, plus a specified number of
basis points. The equipment note is secured by a senior lien on substantially
all of the equipment of two plant locations, which had a carrying value of
approximately $37.5 million at August 30, 2002. The equipment note contains
customary covenants, including requirements to maintain certain financial
covenants, and includes provisions relating to cross defaults to other debt
obligations of the Company.

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During fiscal 2002, the Company repaid $2.5 million of industrial revenue
bonds without penalty.

The Company has $125 million of 10.25% senior subordinated notes
outstanding which mature on May 1, 2006. The notes are unsecured and
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 both
August 31, 2001 and August 30, 2002, the market value of the notes was
approximately $116 million. 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 are redeemable at the Companys option, in
whole or in part, at a scheduled redemption price of 103.417%, which declines
in intervals 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 30, 2002, the Company was in compliance with the covenants of
the revolving credit facility, receivables securitization facility, equipment
note and subordinated note indenture.

The carrying value of the Companys revolving credit facility, industrial
revenue bonds and equipment note approximates fair value.

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

|     |  |   |         | 
|---- |  | - | ------- | 
|2003 |  | $ | 2,523   | 
|    
|    
|    
|    
|2004 |  |   | 29,325  | 
|    
|    
|    
|    
|2005 |  |   | 4,325   | 
|    
|    
|    
|    
|2006 |  |   | 129,325 | 
|    
|    
|    
|    
|2007 |  |   | 4,502   | 
|     |  |   |         | 
|     |  | $ | 170,000 | 
|     |  |   |         | 

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 $19.3 million, $19.6 million and
$18.8 million in fiscal 2000, 2001 and 2002, respectively.

10.     Postretirement Benefits:The estimated cost of postretirement benefits
is recorded ratably over the service lives of the associates expected to
receive such benefits. The Company provides certain life and medical insurance
benefits granted in 1964 to a closed group of associates, the majority of whom
have retired, who were in designated positions of management and met certain
age requirements at the time of grant. Certain medical benefits are also
provided to three closed groups of early retirees as a result of the
acquisition of the textile business of Graniteville Company in fiscal 1996. In
addition, current associates (and their covered dependents) that retire on or
after age 55 with at least 15 years of service are eligible for continued
medical coverage through age 65. Benefits are paid from the general assets of
the company.

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Changes in the accumulated postretirement benefit obligation were as
follows (in thousands):

|                  |                                    |   |       |      |      |   |       |        |  
|----------------- | ---------------------------------- | - | ----- | ---- | ---- | - | ----- | ------ | -
|                  |                                    |   | 2001  |      | 2002
|                  |                                    |   |       |      |     
|Beginning balance |                                    | $ | 7,901 |      |      | $ | 8,214 |       
|                 
|                 
|                 
|                 
|                  | Service cost                       |   |       | 95   |      |   |       | 102    |  
|                 
|                 
|                 
|                 
|                  | Interest cost                      |   |       | 576  |      |   |       | 590    |  
|                 
|                 
|                 
|                 
|                  | Amortization of prior service cost |   |       | 332  |      |   |       | 332    |  
|                 
|                 
|                 
|                 
|                  | Benefits paid                      |   |       | (486 | )    |   |       | (1,185 | )
|                 
|                 
|                 
|                 
|                  | Actuarial gain                     |   |       | (204 | )    |   |       | (202   | )
|                  |                                    |   |       |      |      |   |       |       
|Ending balance    |                                    | $ | 8,214 |      |      | $ | 7,851 |       
|                  |                                    |   |       |      |      |   |       |       

Components of the accrued postretirement benefit obligation included in
other long-term liabilities in the accompanying consolidated balance sheets
were as follows (in thousands):

|                                               |  |            |        |           |  |   |        |  
|---------------------------------------------- |  | ---------- | ------ | --------- |  | - | ------ | -
|                                               |  | August 31, |        | August 30
|                                               |  | 2001       |        | 2002     
|                                               |  |            |        |          
|Accumulated post retirement
benefit obligation |  | $          | (7,623 | )         |  | $ | (7,667 | )
|                                              
|                                              
|                                              
|                                              
|Unrecognized prior service cost                |  |            | 1,992  |           |  |   | 1,660  |  
|                                              
|                                              
|                                              
|                                              
|Unrecognized net gain                          |  |            | (2,583 | )         |  |   | (1,844 | )
|                                               |  |            |        |           |  |   |        |  
|Accrued postretirement benefit liability       |  | $          | (8,214 | )         |  | $ | (7,851 | )
|                                               |  |            |        |           |  |   |        |  

The Company recorded postretirement benefit costs based on actuarial
calculations using a weighted average discount rate of 8% for fiscal 2000 and
2001 and 7% for fiscal 2002. Net postretirement benefit costs include the
following components (in thousands):

|                                |  |      |       |      |  |      |      |   |  |   |      |  
|------------------------------- |  | ---- | ----- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                |  | 2000 |       | 2001 |  | 2002
|                                |  |      |       |      |  |     
|Service cost                    |  | $    | 95    |      |  | $    | 95   |   |  | $ | 102  |  
|                               
|                               
|                               
|                               
|Interest cost                   |  |      | 677   |      |  |      | 576  |   |  |   | 590  |  
|                               
|                               
|                               
|                               
|Net amortization                |  |      | 332   |      |  |      | 332  |   |  |   | 332  |  
|                               
|                               
|                               
|                               
|Recognized actuarial gain       |  |      | (43   | )    |  |      | (204 | ) |  |   | (202 | )
|                                |  |      |       |      |  |      |      |   |  |   |      |  
|Net postretirement benefit cost |  | $    | 1,061 |      |  | $    | 799  |   |  | $ | 822  |  
|                                |  |      |       |      |  |      |      |   |  |   |      |  

A weighted average annual rate of increase in the per capita cost of
covered health care benefits of 6% was assumed for 2002, decreasing gradually
to 5% in 2004 and thereafter. An increase of 1% in the assumed health care cost
rate of increase would not have a significant impact on the accumulated post
retirement benefit obligation or the aggregate net periodic postretirement
benefit cost.

11.     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.

During fiscal 2000 and 2001, the Company repurchased approximately 155,000
and 14,000 shares of Class A Common Stock, respectively, for aggregate purchase
prices of $2.8 million and $205,000, pursuant to offers to

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sell made by various shareholders. 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):

|                                             |                   |  |                       |     |        |  |        |     |   |  |     |     |  
|-------------------------------------------- | ----------------- |  | --------------------- | --- | ------ |  | ------ | --- | - |  | --- | --- | -
|                                             |                   |  | Grant Price
Per Share
|                                             |                   |  |                      
|                                             |                   |  | $12.50                |     | $18.00 |  | $19.00
|                                             |                   |  |                       |     |        |  |       
|Stock options outstanding at August 27, 1999 |                   |  | 505                   |     |        |  | 325    |     |   |  |    |    
|                                            
|                                            
|                                            
|                                            
|                                             | Options granted   |  |                       |    |        |  |        |    |   |  |     | 110 |  
|                                            
|                                            
|                                            
|                                            
|                                             | Options redeemed  |  |                       | (30 | )      |  |        |    |   |  |     |    |  
|                                             |                   |  |                       |     |        |  |        |     |   |  |     |    
|Stock options outstanding at August 25, 2000 |                   |  | 475                   |     |        |  | 325    |     |   |  | 110 |    
|                                            
|                                            
|                                            
|                                            
|                                             | Options exercised |  |                       |    |        |  |        | (1  | ) |  |     |    |  
|                                            
|                                            
|                                            
|                                            
|                                             | Options forfeited |  |                       |    |        |  |        | (68 | ) |  |     |    |  
|                                             |                   |  |                       |     |        |  |        |     |   |  |     |    
|Stock options outstanding at August 31, 2001 |                   |  | 475                   |     |        |  | 256    |     |   |  | 110 |    
|                                            
|                                            
|                                            
|                                            
|                                             | Options exercised |  |                       |    |        |  |        |    |   |  |     |    |  
|                                            
|                                            
|                                            
|                                            
|                                             | Options forfeited |  |                       |    |        |  |        | (8  | ) |  |     | (10 | )
|                                             |                   |  |                       |     |        |  |        |     |   |  |     |    
|Stock options outstanding at August 30, 2002 |                   |  | 475                   |     |        |  | 248    |     |   |  | 100 |    
|                                             |                   |  |                       |     |        |  |        |     |   |  |     |    
|Average contractual life remaining in years  |                   |  | 2.3                   |     |        |  | 3.8    |     |   |  | 7.3 |    
|                                             |                   |  |                       |     |        |  |        |     |   |  |     |    
|Stock options exercisable at August 30, 2002 |                   |  | 475                   |     |        |  | 248    |     |   |  | 40  |    
|                                             |                   |  |                       |     |        |  |        |     |   |  |     |    

The exercise prices of the options granted approximated the fair market
value of the Companys Common Stock on the dates of grant. 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 30, 2002, there were 132,000 stock options available
for grant.

The Company maintains a Stock Option Plan for Non-employee Directors,
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 fiscal 2000, 12,000 non-qualified options were
granted. During fiscal 2001 and 2002, 14,000 non-qualified options were granted
in each year. The exercise price of each grant was $19.00, $19.00 and $16.50
per share, respectively. At August 30, 2002, 36,000 non-qualified options
remain available for grant.

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 Financial Accounting Standards
Board Statement No. 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 2000, 2001 and 2002:

|                        |  |         |     |         |  |         |     |   |  |  |     |  
|----------------------- |  | ------- | --- | ------- |  | ------- | --- | - |  |  | --- | -
|                        |  | 2000    |     | 2001    |  | 2002   
|                        |  |         |     |         |  |        
|Risk free interest rate |  |         | 4.6 | %       |  |         | 4.8 | % |  |  | 4.3 | %
|                       
|                       
|                       
|                       
|Expected dividend yield |  |         | 1.8 | %       |  |         | 1.8 | % |  |  | 2.4 | %
|                       
|                       
|                       
|                       
|Expected lives          |  | 8 years |     | 8 years |  | 8 years

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The total values of the options granted during fiscal 2000, 2001 and 2002
were computed as approximately $332,000, $53,000 and $30,000, respectively,
which would be amortized over the vesting period of the options. If the
Company had accounted for these plans in accordance with Statement No. 123, the
reported net income (loss) and net income (loss) per share would be revised to
the following pro forma amounts (in thousands, except per share data):

|                             |             |             |             |        |      |      |      |       |      |     |   |      |      |      |  
|---------------------------- | ----------- | ----------- | ----------- | ------ | ---- | ---- | ---- | ----- | ---- | --- | - | ---- | ---- | ---- | -
|                             |             |             |             |        | 2000 |      | 2001 |       | 2002
|                             |             |             |             |        |      |      |      |       |     
|Net income (loss):           |             |             |             |        |      |      |      |       |      |     |   |     
|                            
|                            
|                            
|                            
|                             | As reported |             | $           | 33,003 |      |      | $    | 1,257 |      |     | $ | (130 | )   
|                            
|                            
|                            
|                            
|                             | Pro forma   |             |             | 32,413 |      |      |      | 1,204 |      |     |   | (169 | )   
|                            
|                            
|                            
|                            
|Net income (loss) per share: |             |             |             |        |      |      |      |       |      |     |   |     
|                            
|                            
|                            
|                            
|                             | Basic       |             |             |        |      |      |      |       |      |     |   |      |     
|                            
|                            
|                            
|                            
|                             |             |             | As reported |        | $    | 2.61 |      |       | $    | .10 |   |      | $    | (.01 | )
|                            
|                            
|                            
|                            
|                             |             |             | Pro forma   |        |      | 2.56 |      |       |      | .10 |   |      |      | (.01 | )
|                            
|                            
|                            
|                            
|                             | Diluted     |             |             |        |      |      |      |       |      |     |   |      |     
|                            
|                            
|                            
|                            
|                             |             | As reported |             | $      | 2.57 |      |      | $     | .10  |     |   | $    | (.01 | )   
|                            
|                            
|                            
|                            
|                             |             | Pro forma   |             |        | 2.53 |      |      |       | .10  |     |   |      | (.01 | )   

Because the accounting provisions of Statement No. 123 only apply to
options granted after December 1995, the pro forma compensation cost presented
may not be representative of that to be expected in future years.

12.     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 costs of investigating, monitoring and
remediating these and other environmental conditions. If more costly
remediation measures are necessary than those believed to be probable based on
current facts and circumstances, actual costs may exceed the reserves provided.
However, based on the information currently available, management does not
believe that the outcome of these matters will have a material adverse effect
on its future results of operations or financial position.

On January 13, 2000, a case was filed in the Circuit Court of Jefferson
County, Alabama by Larry and Cynthia Locke and the owners of fourteen other
residences in the Raintree subdivision of Lake Martin, against Russell
Corporation, Alabama Power and the Company. The complaint alleges that the
Company, among others, negligently and/or wantonly caused or permitted the
discharge and disposal of sewage sludge and contaminants into the lake adjacent
to the plaintiffs property, which allegedly interfered with the plaintiffs
use of the property.As a result of these alleged actions, the plaintiffs claim
that the value of their property has been diminished and that they suffered
other damages. The complaint seeks compensatory and punitive damages in an
undisclosed amount. After an initial series of actions, the case was stayed by
the trial court pending resolution of an appeal in the case of Sullivan versus
Russell Corporation, the Company, and others (Sullivan case), which also
involved the Raintree subdivision. On January 12, 2001, the Alabama Supreme
Court issued a final order in the Sullivan case rendering that case in favor of
the defendants. Subsequent to the Alabama Supreme Courts actions with regard
to the Sullivan case, plaintiffs counsel, which includes attorneys who acted
as co-plaintiffs counsel on the Sullivan case, presented arguments in a
hearing before the trial judge on May 4, 2001 based on a narrow legal theory
that the nuisance claimed in this action is sufficiently different from the
Sullivan case, and therefore, that this case should be allowed to proceed in
spite of the fact that the Sullivan case was ultimately decided in favor of the
defendants. The trial court allowed the case to proceed to the discovery
phase. On April 25, 2002, the trial court held a hearing on summary judgement
motions and, on May 22, 2002, entered judgment as a matter of law in the
Companys favor on all counts except the narrow legal theory involving public
nuisance tort. A trial on this single count is scheduled to begin in February
2003. The Company intends to vigorously defend this case and believes that it
has a number of defenses available to it. While the outcome of this case
cannot be predicted with certainty, based upon currently available information,
the Company does not believe that it will have a material adverse effect on the
Companys financial condition or results of operations.

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The Company is also a party to other litigation incidental to its business
from time to time. The Company is not currently a party to any litigation that
management, in consultation with legal counsel, believes, if determined
adversely to the Company, would have a material 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):

|           |  |   |       | 
|---------- |  | - | ----- | 
|2003       |  | $ | 1,861 | 
|          
|          
|          
|          
|2004       |  |   | 1,612 | 
|          
|          
|          
|          
|2005       |  |   | 1,473 | 
|          
|          
|          
|          
|2006       |  |   | 965   | 
|          
|          
|          
|          
|2007       |  |   | 965   | 
|          
|          
|          
|          
|Thereafter |  |   | 183   | 
|           |  |   |       | 
|           |  | $ | 7,059 | 
|           |  |   |       | 

Rent expense for operating leases totaled $2.3 million, $2.6 million and
$2.6 for fiscal 2000, 2001 and 2002, respectively.

Commitments for future additions to plant and equipment were approximately
$2.6 million at August 30, 2002. Commitments for the purchase of raw materials
were approximately $63.0 million at August 30, 2002.




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

At a meeting held on May 14, 2002, the audit committee of the Board of
Directors of the Company approved the engagement of Crisp Hughes Evans LLP as
its independent accountants for the fiscal year ended August 30, 2002.
Concurrently, the audit committee of the Board of Directors determined to
dismiss Arthur Andersen LLP, the Companys former independent accountants. The
Company notified both Arthur Andersen LLP and Crisp Hughes Evans LLP of the
dismissal of Arthur Andersen LLP and the engagement of Crisp Hughes Evans LLP
on May 15, 2002.

The reports of Arthur Andersen LLP on the Companys consolidated financial
statements for the past two fiscal years did not contain an adverse opinion or
a disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles, nor was there any event of the type
requiring disclosure under Item 304(a)(1)(v) of Regulation S-K.

In connection with the audits of the Companys consolidated financial
statements for each of the two fiscal years ended August 31, 2001, and in the
subsequent interim period, there were no disagreements with Arthur Andersen LLP
on any matters of accounting principles or practices, financial statement
disclosure or auditing scope and procedures which, if not resolved to the
satisfaction of Arthur Andersen LLP, would have caused Arthur Andersen LLP to
make reference to the matter in their report.

47



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##### Table of Contents






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:

|                           |  |     |    |                |  |                                                                                                                                             
|-------------------------- |  | --- | -- | -------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|Name                       |  | Age |    | Positions Held
|                           |  |     |    |               
|G. Stephen Felker          |  |     | 50 |                |  | Chairman of the Board, President and Chief Executive
Officer of the Company and Avondale Mills                                              
|                          
|                          
|                          
|                          
|Jack R. Altherr, Jr.       |  |     | 53 |                |  | Vice Chairman, Chief Financial Officer, and
Director of the Company and Avondale Mills                                                      
|                          
|                          
|                          
|                          
|T. Wayne Spraggins         |  |     | 65 |                |  | Vice President of Avondale Mills and President,
Manufacturing Operations                                                                    
|                          
|                          
|                          
|                          
|Keith M. Hull              |  |     | 49 |                |  | Vice President of Avondale Mills and President,
Marketing and Sales                                                                         
|                          
|                          
|                          
|                          
|Craig S. Crockard          |  |     | 60 |                |  | Vice President and Assistant Secretary of the Company
and Vice President, Planning and Development and
Assistant Secretary of Avondale Mills
|                          
|                          
|                          
|                          
|M. Delen Boyd              |  |     | 46 |                |  | Vice President, Controller and Secretary of the Company
and Avondale Mills                                                                  
|                          
|                          
|                          
|                          
|Sharon L. Rodgers          |  |     | 46 |                |  | Vice President, Human Resources of Avondale Mills and
Assistant Secretary of the Company and Avondale Mills                                 
|                          
|                          
|                          
|                          
|Dale J. Boden(1)           |  |     | 45 |                |  | Director of the Company and Avondale Mills                                                                                                  
|                          
|                          
|                          
|                          
|Kenneth H. Callaway(1)     |  |     | 47 |                |  | Director of the Company and Avondale Mills                                                                                                  
|                          
|                          
|                          
|                          
|Robert B. Calhoun(1)(2)(3) |  |     | 60 |                |  | Director of the Company and Avondale Mills                                                                                                  
|                          
|                          
|                          
|                          
|Harry C. Howard(2)         |  |     | 73 |                |  | Director of the Company and Avondale Mills                                                                                                  
|                          
|                          
|                          
|                          
|C. Linden Longino, Jr.(2)  |  |     | 66 |                |  | Director of the Company and Avondale Mills                                                                                                  
|                          
|                          
|                          
|                          
|James A. Rubright (2)      |  |     | 55 |                |  | Director of the Company and Avondale Mills                                                                                                  
|                          
|                          
|                          
|                          
|John P. Stevens(1)         |  |     | 73 |                |  | Director of the Company and Avondale Mills                                                                                                  



---

|(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 Felkerhas 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 served as Chairman of the Georgia State Advisory Board of Wachovia
Bank, N.A. from 1989 to 2000 and is currently a director of American Fibers
and Yarns, Inc. and Rock-Tenn Company.

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 of Avondale Mills since
October 1988 and a director of Avondale Mills since 1993. With the exception of
fiscal 1995, he served as Secretary of the Company and Avondale Mills from
August 1993 until November 1998. Mr. Altherr has served the Company and
Avondale Mills in various other capacities since July 1982.

48



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##### Table of Contents



T. Wayne Spragginshas 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. Hullhas served as President, Marketing and Sales, of Avondale
Mills, Inc. since August 1999, having served as President, Apparel Fabrics, the
apparel fabrics division of Avondale Mills since May 1996 and Vice President of
Avondale Mills since April 1989. He has served the Company in various other
capacities including Vice President, Marketing since 1977. Mr. Hull serves as
a director of Cherokee, Inc.

Craig S. Crockardhas 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.

M. Delen Boydhas served as Vice President, Controller of Avondale Mills
since May 1996 and Secretary of the Company and Avondale Mills since November
1998. Mr. Boyd served as Assistant Secretary of the Company and Avondale Mills
from May 1996 until November 1998. 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.

Sharon L. Rodgershas 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.

Dale J. Bodenhas 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.

Kenneth H. Callawayhas 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.

Robert B. Calhounhas 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 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 Credit Suisse First Boston Corporation, an investment
banking firm. Mr. Calhoun is also a director of Interstate Bakeries Corporation
and Lord Abbett Family of Funds.

Harry C. Howardhas 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.

C. Linden Longino, Jr.has served as a director of the Company since
November 1975 and of Avondale Mills since August 1993. Mr. Longino was a 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 positions. He now serves in various
capacities with several community and educational organizations.

James A. Rubrighthas served as a director of the Company since November
2000. Mr. Rubright is Chairman and Chief Executive Officer of Rock-Tenn
Company, an integrated paperboard and packaging company.

49



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##### Table of Contents



Before joining
Rock-Tenn Company, Mr. Rubright served as Executive Vice President of Sonat,
Inc., an energy company, and as a partner in the law firm of King & Spalding.
Mr. Rubright is also a director of Rock-Tenn Company and AGL Resources, Inc.

John P. Stevenshas 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.

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

The directors of the Company are elected annually by the shareholders of
the Company. During the fiscal year ended August 30, 2002, the Board of
Directors of the Company held four meetings.

The Compensation Committee of the Board of Directors during fiscal 2002
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. The Compensation
Committees principal responsibilities consist of establishing the compensation
for the Companys Named Executive Officers and administering the Companys
Stock Option Plan. During the fiscal year ended August 30, 2002, the
Compensation Committee held one meeting. See Report on Executive Compensation.

The Audit Committee of the Board of Directors during fiscal 2002 consisted
of Harry C. Howard, Chairman of the Audit Committee, Robert B. Calhoun, C.
Linden Longino, Jr., and James A. Rubright. None of the members of the Audit
Committee is an employee of the Company. During the fiscal year ended August
30, 2002, the Audit Committee held four meetings.

The Audit Committee meets with the independent public accountants,
internal auditors and management to assure that all are carrying out their
respective responsibilities. The Audit Committee reviews the performance and
fees of the independent public accountants prior to recommending their
appointment, and meets with them, without management present, to discuss the
scope and results of their audit work, including the adequacy of internal
controls and the quality of financial reporting. Both the independent public
accountants and the internal auditors have full access to the Audit Committee.
A written charter for the Audit Committee was approved by the Board of
Directors effective July 13, 2000.

During fiscal 2002, 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 fiscal 2000,
12,000 non-qualified options were granted. During fiscal 2001 and 2002, 14,000
non-qualified options were granted in each respective year. At August 30, 2002,
36,000 non-qualified options remained available for grant.

50



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##### Table of Contents






ITEM 11. EXECUTIVE COMPENSATION

Executive Compensation

Summary Compensation Table.The table below sets forth certain
information concerning the compensation earned during fiscal 2002, 2001 and
2000 by the Companys Chief Executive Officer and its four other most highly
compensated executive officers (collectively, the Named Executive Officers).

Summary Compensation Table

|                                         |                                                   |      |                        |           |  |             |         |                    |  |  |         |           |           |  |        |        | 
|---------------------------------------- | ------------------------------------------------- | ---- | ---------------------- | --------- |  | ----------- | ------- | ------------------ |  |  | ------- | --------- | --------- |  | ------ | ------ | 
|                                         |                                                   |      | Annual Compensation(1)
|                                         |                                                   |      |                       
|                                         |                                                   |      | Fiscal                 |           |  |             |         |                    |  |  |         |           | All Other
|Name and Principal Position              |                                                   | Year |                        | Salary($) |  | Bonus($)(2) |         | Compensation($)(3)
|                                         |                                                   |      |                        |           |  |             |         |                   
|G. Stephen Felker                        |                                                   |      | 2002                   |           |  |             | 800,016 |                    |  |  | 400,000 |           |           |  | 1,578  |       
|                                         | Chairman of the Board, President and Chief        |      |                        | 2001      |  |             |         | 800,016            |  |  |         |          |           |  |        | 2,983  | 
|                                         | Executive Officer                                 |      |                        | 2000      |  |             |         | 800,016            |  |  |         | 1,015,359 |           |  |        | 7,230  | 
|                                        
|                                        
|                                        
|                                        
|Jack R. Altherr, Jr.                     |                                                   |      | 2002                   |           |  |             | 355,008 |                    |  |  | 100,000 |           |           |  | 5,760  |       
|                                         | Vice Chairman and Chief Financial Officer         |      |                        | 2001      |  |             |         | 353,340            |  |  |         |          |           |  |        | 7,577  | 
|                                         |                                                   |      | 2000                   |           |  |             | 342,500 |                    |  |  | 236,327 |           |           |  | 9,898  |       
|                                        
|                                        
|                                        
|                                        
|T. Wayne Spraggins                       |                                                   |      | 2002                   |           |  |             | 296,016 |                    |  |  | 75,000  |           |           |  | 11,050 |       
|                                         | Vice President and President, Manufacturing       |      |                        | 2001      |  |             |         | 294,680            |  |  |         |          |           |  |        | 15,875 | 
|                                         | Operations                                        |      |                        | 2000      |  |             |         | 285,836            |  |  |         | 190,664   |           |  |        | 15,030 | 
|                                        
|                                        
|                                        
|                                        
|Keith M. Hull                            |                                                   |      | 2002                   |           |  |             | 298,032 |                    |  |  | 75,000  |           |           |  | 4,115  |       
|                                         | Vice President and President, Marketing and Sales |      |                        | 2001      |  |             |         | 296,360            |  |  |         |          |           |  |        | 5,380  | 
|                                         |                                                   |      | 2000                   |           |  |             | 285,836 |                    |  |  | 195,919 |           |           |  | 8,401  |       
|                                        
|                                        
|                                        
|                                        
|Craig S. Crockard                        |                                                   |      | 2002                   |           |  |             | 134,520 |                    |  |  | 25,000  |           |           |  | 3,915  |       
|Vice President, Planning and Development |                                                   |      | 2001                   |           |  |             | 133,768 |                    |  |  |        |           |           |  | 4,800  |       
|                                         |                                                   |      | 2000                   |           |  |             | 129,176 |                    |  |  | 53,806  |           |           |  | 7,188  |       



---

|(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 2000, (i) matching 401(k) contributions
made by the Company to the Companys Associate Profit Sharing and Savings
Plan of $1,275 on behalf of Messrs. Felker, Altherr, Spraggins and Hull,
respectively, and $1,002 on behalf of Mr. Crockard, (ii) profit sharing
contributions made by the Company to the Companys Associate Profit
Sharing and Savings Plan of $4,617 on behalf of Messrs. Felker, Altherr,
Spraggins and Hull, respectively, and $3,590 on behalf of Mr. Crockard and
(iii) life insurance premiums of $4,006, $9,138, $2,509, and $2,596 paid
by the Company on behalf of Messrs. Altherr, Spraggins, Hull and Crockard,
respectively, and taxable income of $1,339 to Mr. Felker in

51



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##### Table of Contents





| |  | conjunction with a split dollar insurance agreement. Amounts shown
reflect, for fiscal 2001, (i) matching 401(k) contributions made by the
Company to the Companys Associate Profit Sharing and Savings Plan of
$1,275 on behalf of Messrs. Felker, Altherr, Spraggins and Hull
respectively and $1,003 on behalf of Mr. Crockard, and (ii) life
insurance premiums of $6,302, $14,600, $4,105, and $3,797 paid by the
Company on behalf of Messrs. Altherr, Spraggins, Hull and Crockard,
respectively, and taxable income of $1,708 to Mr. Felker in conjunction
with a split dollar insurance agreement. Amounts shown reflect, for
fiscal 2002, (i) matching 401(k) contributions made by the Company to the
Companys Associate Profit Sharing and Savings Plan of $1,500 on behalf
of Messrs. Felker and Altherr and $1,398, $1,397 and $1,009 on behalf of
Messrs. Spraggins, Hull and Crockard, respectively and (ii) life
insurance premiums of $4,260, $9,662, $2,718 and $2,906 paid by the
Company on behalf of Messrs. Altherr, Spraggins, Hull and Crockard,
respectively, and taxable income of $78 to Mr. Felker in conjunction with
a split dollar insurance agreement.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Option Grants Table.The table below sets forth certain information
relating to options granted during fiscal 2002 to each Named Executive Officer.

Option Grants Table

|                    |  |                      |   |                  |  |            |   |            |  |             |   |                  |  |  |   |                   |  |  |   |  |  |  |   | 
|------------------- |  | -------------------- | - | ---------------- |  | ---------- | - | ---------- |  | ----------- | - | ---------------- |  |  | - | ----------------- |  |  | - |  |  |  | - | 
|                    |  |                      |   |                  |  |            |   |            |  |             |   |                  |  |  |   |                   |  | 
|                    |  | Individual Grants    |   | Potential       
|                    |  |                      |   | Realizable
Value
|                    |  |                      |   |                  |  | % of Total |   |            |  |             |   |                  |  |  |   | at Assumed Annual
|                    |  |                      |   |                  |  | Options    |   |            |  |             |   |                  |  |  |   | Rates of Stock   
|                    |  |                      |   |                  |  | Granted to |   |            |  |             |   |                  |  |  |   | Price            
|                    |  | Number of Securities |   | Employees        |  | Exercise   |   |            |  |             |   | Appreciation for
|                    |  | Underlying Options   |   | in Fiscal        |  | Price Per  |   | Expiration |  | Option Term
|                    |  |                      |   |                  |  |            |   |            |  |            
|                    |  | Granted              |   | Year             |  | Share      |   | Date       |  | 5%          |   | 10%             
|                    |  |                      |   |                  |  |            |   |            |  |             |   |                 
|G. Stephen Felker   |  |                      |  |                  |  |            |  |            |  |             |  |                  |  |  |  |                   |  |  |  |  |  |  |  | 
|                   
|                   
|                   
|                   
|Jack R. Altherr, Jr |  |                      |  |                  |  |            |  |            |  |             |  |                  |  |  |  |                   |  |  |  |  |  |  |  | 
|                   
|                   
|                   
|                   
|T. Wayne Spraggins  |  |                      |  |                  |  |            |  |            |  |             |  |                  |  |  |  |                   |  |  |  |  |  |  |  | 
|                   
|                   
|                   
|                   
|Keith M. Hull       |  |                      |  |                  |  |            |  |            |  |             |  |                  |  |  |  |                   |  |  |  |  |  |  |  | 
|                   
|                   
|                   
|                   
|Craig S. Crockard   |  |                      |  |                  |  |            |  |            |  |             |  |                  |  |  |  |                   |  |  |  |  |  |  |  | 

52



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##### Table of Contents



Aggregated Options Table.The table below sets forth certain information
with respect to options held at the end of fiscal 2002 by each Named Executive
Officer.

Fiscal Year End Option Values Table

|                    |  |                   |             |                  |  |   |            | 
|------------------- |  | ----------------- | ----------- | ---------------- |  | - | ---------- | 
|                    |  | Number of         |             |                  |  |  
|                    |  | Shares Underlying |             | Value of        
|                    |  | Unexercised       |             | Unexercised     
|                    |  | Options at        |             | Options at      
|                    |  | Fiscal Year End   |             | Fiscal Year End 
|                    |  | Exercisable/      |             | Exercisable/    
|                    |  | Unexercisable     |             | Unexercisable(1)
|                    |  |                   |             |                 
|G. Stephen Felker   |  |                   | 265,000/-   |                  |  | $ | 780,000/$- | 
|                   
|                   
|                   
|                   
|Jack R. Altherr, Jr |  |                   | 125,000/-   |                  |  |   | 325,000/-  | 
|                   
|                   
|                   
|                   
|T. Wayne Spraggins  |  |                   | 45,000/-    |                  |  |   | 65,000/-   | 
|                   
|                   
|                   
|                   
|Keith M. Hull       |  |                   | 71,001/-    |                  |  |   | 149,503/-  | 
|                   
|                   
|                   
|                   
|Craig S. Crockard   |  |                   | 4,000/6,000 |                  |  |   | -/-        | 



---

|(1) |  | 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 30, 2002.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Long-term Incentive Plans.The table below sets forth certain information
with respect to phantom units held at the end of fiscal 2002 by each Named
Executive Officer. No phantom units were awarded during fiscal 2002.

Long-term Incentive Plans  Units Held at August 30, 2002

|                    |  |               |     |                |  |                       |    |                  |  |   |           | 
|------------------- |  | ------------- | --- | -------------- |  | --------------------- | -- | ---------------- |  | - | --------- | 
|                    |  | Aggregate     |     |                |  |                       |    | Estimated Future
|                    |  | Phantom Units |     | Period Until   |  | Payouts for All      
|Name                |  | Held(1)       |     | Payout (Years) |  | Phantom Units Held(2)
|                    |  |               |     |                |  |                      
|G. Stephen Felker   |  |               | 150 |                |  |                       | 14 |                  |  | $ | 1,049,330 | 
|                   
|                   
|                   
|                   
|Jack R. Altherr, Jr |  |               | 90  |                |  |                       | 12 |                  |  |   | 629,598   | 
|                   
|                   
|                   
|                   
|T. Wayne Spraggins  |  |               | 50  |                |  |                       |   |                  |  |   | 349,777   | 
|                   
|                   
|                   
|                   
|Keith M. Hull       |  |               | 90  |                |  |                       | 15 |                  |  |   | 629,598   | 
|                   
|                   
|                   
|                   
|Craig S. Crockard   |  |               |    |                |  |                       |   |                  |  |   |          | 



---

|(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% 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
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

53



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##### Table of Contents





|    |  | 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, 2002, of vested and non-vested phantom units
held at the end of fiscal 2002 based on the results of the Company for the
10 fiscal quarters ended August 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

54



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##### Table of Contents



Report on Executive Compensation

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 2002 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 2002, there were no increases in the annual base
salaries of the Named Executive Officers. Due to the timing of increases last
granted in fiscal 2001, the base salary paid to each Named Executive Officer
other than the Chief Executive Officer in fiscal 2002 increased 0.5% to 0.6%
over the amounts paid to each such Named Executive Officer in fiscal 2001. 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 2002, certain executive officers were eligible to
earn a cash bonus in an amount from 25% 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 2002, the named executive
officers other than the chief executive officer earned bonuses ranging from 19%
to 28% of their respective base salaries. Mr. Felkers bonus was equal to 50%
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 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

55



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##### Table of Contents



creation of opportunities to own stock is considered the most significant
component in an executive officers compensation package. During fiscal 2002,
no stock options were granted.

| |  |                    
| |  | -------------------
| |  | 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 1933, as amended, or under the Securities Exchange
Act of 1934 as amended (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.

Compensation Committee Interlocks and Insider Participation

The members of the Compensation Committee are Messrs. Boden, Callaway,
Calhoun and Stevens. None of the members of the Compensation Committee have
ever been an officer or employee of the Company. In addition, none of the
Companys executive officers serves as a member of a Compensation Committee of
a Board of Directors of any entity that has one or more executive officers who
serves on the Companys Compensation Committee. As discussed below under the
caption Certain Relationships and Related Party Transactions, Mr. Callaway, is
president of Calgati Chemical Company, Ltd. During fiscal 2002, the Company
purchased specialty chemicals from Calgati Chemical Company, Ltd. in the
aggregate amount of approximately $1,080,000.

56



---



##### Table of Contents






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 1, 2002, 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.

|                                                                   |  |                      |           |                      |  |            |      |          |  |              |         |  |  |  |     |   |  |  |      |  
|------------------------------------------------------------------ |  | -------------------- | --------- | -------------------- |  | ---------- | ---- | -------- |  | ------------ | ------- |  |  |  | --- | - |  |  | ---- | -
|                                                                   |  | Beneficial Ownership |           | Beneficial Ownership |  |            |      |         
|                                                                   |  | of Class A           |           | of Class B           |  |           
|                                                                   |  | Common Stock         |           | Common Stock         |  | Percentage
|                                                                   |  |                      |           |                      |  | Of         |      |         
|                                                                   |  | Number               |           | Percent              |  | Number     |      | Percent  |  | Combined    
|Name of Beneficial Owner(1)                                        |  | of Shares            |           | Of Class             |  | of Shares  |      | of Class |  | Voting Power
|                                                                   |  |                      |           |                      |  |            |      |          |  |             
|G. Stephen Felker(2)                                               |  |                      | 4,338,989 |                      |  |            | 33.9 | %        |  |              | 978,939 |  |  |  | 100 | % |  |  | 73.1 | %
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Jack R. Altherr, Jr.(3)                                            |  |                      | 232,199   |                      |  |            | 2.0  | %        |  |              |        |  |  |  |    |   |  |  | *    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|T. Wayne Spraggins(4)                                              |  |                      | 115,000   |                      |  |            | *    |          |  |              |        |  |  |  |    |   |  |  | *    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Keith M. Hull (5)                                                  |  |                      | 121,001   |                      |  |            | *    |          |  |              |        |  |  |  |    |   |  |  | *    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Craig S. Crockard (6)                                              |  |                      | 12,077    |                      |  |            | *    |          |  |              |        |  |  |  |    |   |  |  | *    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Dale J. Boden(7)                                                   |  |                      | 115,500   |                      |  |            | *    |          |  |              |        |  |  |  |    |   |  |  | *    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Kenneth H. Callaway(8)                                             |  |                      | 20,000    |                      |  |            | *    |          |  |              |        |  |  |  |    |   |  |  | *    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Robert B. Calhoun(9)(10)(11)                                       |  |                      | 2,310,823 |                      |  |            | 20.0 | %        |  |              |        |  |  |  |    |   |  |  | 7.4  | %
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Harry C. Howard(12)                                                |  |                      | 55,000    |                      |  |            | *    |          |  |              |        |  |  |  |    |   |  |  | *    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|C. Linden Longino, Jr.(13)                                         |  |                      | 35,250    |                      |  |            | *    |          |  |              |        |  |  |  |    |   |  |  | *    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|James A. Rubright (14)                                             |  |                      | 8,500     |                      |  |            | *    |          |  |              |        |  |  |  |    |   |  |  | *    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|John P. Stevens(15)                                                |  |                      | 113,000   |                      |  |            | *    |          |  |              |        |  |  |  |    |   |  |  | *    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|The Clipper Group(10)(16)                                          |  |                      | 2,277,523 |                      |  |            | 19.7 | %        |  |              |        |  |  |  |    |   |  |  | 7.3  | %
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Grayward Company(17)                                               |  |                      | 3,497,740 |                      |  |            | 30.3 | %        |  |              |        |  |  |  |    |   |  |  | 11.2 | %
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Felker Investments, Ltd.(18)                                       |  |                      | 2,093,750 |                      |  |            | 18.1 | %        |  |              |        |  |  |  |    |   |  |  | 6.7  | %
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Avondale Mills, Inc. Associate Profit
Sharing and Savings Plan(19) |  |                      | 600,000   |                      |  |            | 5.2  | %        |  |              |        |  |  |  |    |   |  |  | 1.9  | %
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|All directors and executive officers
As a group (16 persons)       |  |                      | 7,508,339 |                      |  |            | 57.2 | %        |  |              | 978,939 |  |  |  | 100 | % |  |  | 82.3 | %



---

|*   |  | 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, (iii) 265,000
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, and (iv) 100
shares owned by Mr. Felkers son, for which Mr. Felker shares neither
voting nor investment power.
|   
|   
|   
|   
|(3) |  | Includes 125,000 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 45,000 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

57



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##### Table of Contents





|(5)  |  | Includes 71,001 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 4,000 shares of Class A Common Stock issuable upon exercise of
stock options beneficially owned by Mr. Crockard, which shares are deemed
beneficially owned by Mr. Crockard under Rules 13d-3 under the Exchange
Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    
|    
|    
|    
|(7)  |  | Reflects (i) 10,000 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,
(ii) 6,333 shares beneficially owned by Textile Capital Partners with
respect to which Mr. Boden has shared voting and investment power, (iii)
8,500 shares beneficially owned by Textile Capital Partners II with
respect to which Mr. Boden has shared voting and investment power, (iv)
90,000 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, and (v) 667 shares owned by Mr.
Bodens wife, for which Mr. Boden shares neither voting nor investment
power. Mr. Boden is the majority shareholder of Textile Capital Partners
and Textile Capital Partners II, 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 10,000 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, LP, 650
Madison Avenue, 9th Floor, New York, New York 10022.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|    
|    
|    
|(10) |  | Includes (i) 10,000 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, and (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 10,000 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) 10,000 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 4,000 shares of Class A Common Stock issuable upon exercise of
stock options beneficially owned by Mr. Rubright, which shares are deemed
beneficially owned by Mr. Rubright under Rules 13d-3 under the Exchange
Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    
|    
|    
|    
|(15) |  | Includes (i) 13,000 shares beneficially owned by Mr. Stevens spouse, for
which Mr. Stevens shares neither voting nor investment power, and (ii)
10,000 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

58



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|(16) |  | 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 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.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(17) |  | 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.                                     
|    
|    
|    
|    
|(18) |  | The address of Felker Investments, Ltd. is c/o G. Stephen Felker, 506
South Broad Street, Monroe, Georgia 30655.                                                                                                                                                                                                                                                                                                     
|    
|    
|    
|    
|(19) |  | These shares are held by the trustee, Scudder Trust Company, P.O. Box
957, Salem, New Hampshire 03079, for the benefit of participants in the
Avondale Mills, Inc. Associate Profit Sharing and Savings Plan (the
Plan). The Company is the administrator of the trust and its Chairman
and Chief Executive Officer votes the shares held by the trust on behalf
of the Company.                                   

Equity Compensation Plan Information

The following table gives information about the Companys Class A Common
Stock that may be issued upon exercise of options under the 1993 Avondale
Incorporated Stock Option Plan and the 1997 Avondale Incorporated Stock Option
Plan for Non-employee Directors (the only stock compensation plans of the
Company). Under the 1993 plan, which was approved by the shareholders of the
Company, options may be granted to full time employees of the Company,
including executive officers.

|                                                               |  |                  |         |                   |  |                      |       |                 |  |                      |         | 
|-------------------------------------------------------------- |  | ---------------- | ------- | ----------------- |  | -------------------- | ----- | --------------- |  | -------------------- | ------- | 
|                                                               |  |                  |         |                   |  |                      |       |                 |  | (c) Number of       
|                                                               |  |                  |         |                   |  |                      |       |                 |  | Securities Remaining
|                                                               |  |                  |         |                   |  |                      |       |                 |  | Available for       
|                                                               |  | (a) Number of    |         |                   |  |                      |       | Future Issuance
|                                                               |  | Securities to be |         | (b) Weighted      |  | Under Equity        
|                                                               |  | Issued Upon      |         | Average           |  | Compensation        
|                                                               |  | Exercise of      |         | Exercise Price of |  | Plans (Excluding    
|                                                               |  | Outstanding      |         | Outstanding       |  | Securities Reflected
|Plan Category                                                  |  | Options          |         | Options           |  | in Column (a))      
|                                                               |  |                  |         |                   |  |                     
|Equity Compensation plans approved
by the security holders     |  |                  | 823,000 |                   |  | $                    | 14.95 |                 |  |                      | 132,451 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Equity Compensation plans not
approved by the security holders |  |                  | 64,000  |                   |  | $                    | 18.28 |                 |  |                      | 36,000  | 

For discussion of the 1993 Avondale Incorporated Stock Option Plan, see
Footnote 11. Common Stock in the Notes to Consolidated Financial Statements
included in Item 8, Financial Statement and Supplementary Data of this Annual
Report on Form 10-K.

The Company adopted the Avondale Incorporated Stock Option Plan for
Non-employee Directors, effective September 1, 1997, reserving 100,000 shares
of the Companys Class A Common Stock. Under the plan, each director is
automatically granted each year, 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 the stock on
the date of the grant. Options are exercisable for a period of ten years,
subject to certain limitations. The plan did not require approval of the
shareholders of the Company. In fiscal 2000, options to purchase 12,000 shares
were granted and 14,000 options were granted in fiscal 2001 and 2002.

59



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##### Table of Contents






ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Kenneth H. Callaway, a director, is president of Calgati Chemical Company,
Ltd. During fiscal 2002, the Company purchased specialty chemicals from
Calgati Chemical Company, Ltd. in the aggregate amount of approximately
$1,080,000.




ITEM 14. CONTROLS AND PROCEDURES

An evaluation has been performed under the supervision and with the
participation of the Companys management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures and internal
controls. Based on that evaluation, the Companys management, including the
Chief Executive Officer and Chief Financial Officer, conclude that the
Companys disclosure controls and procedures and internal controls were
effective as of August 30, 2002. There have been no significant changes in the
Companys internal controls or in other factors that could significantly affect
internal controls subsequent to August 30, 2002.

60



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##### Table of Contents






PART IV




ITEM 15. 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 Public Accountants,
included in the Registrants Annual Report to Shareholders for the year ended
August 30, 2002 are included in Part II, Item 8.

|                                                                                                                          |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Report of Independent Public Accountants                                                                                  |  | 
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Consolidated Balance Sheets as of August 31, 2001 and August 30, 2002                                                     |  | 
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Consolidated Statements of Income  Fiscal Years Ended August 25, 2000,
August 31, 2001 and August 30, 2002               |  | 
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Consolidated Statements of Shareholders Equity  Fiscal Years Ended
August 25, 2000, August 31, 2001 and August 30, 2002 |  | 
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Consolidated Statements of Cash Flows  Fiscal Years Ended August 25,
2000, August 31, 2001 and August 30, 2002           |  | 
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Notes to Consolidated Financial Statements                                                                                |  | 



|2. |  | Financial Statement Schedules of the Company.  
|-- |  | -----------------------------------------------
|  
|   |  | Schedule II  Valuation and Qualifying Accounts
|  
|3. |  | Exhibits.                                      

|        |  |   |  |                                                                                                                                                                                                                                                                                                                                               
|------- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                               
|Number  |  |   |  |                                                                                                                                                                                                                                                                                                                                               
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                               
|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)                                                                                                                                        
|       
|       
|       
|       
|3.3     |  |  |  | Amended and restated bylaws of Avondale Incorporated, adopted as of January 17, 2000
(incorporated by reference to Exhibit 3.3 to Avondale Incorporateds Quarterly Report
on Form 10-Q for the period ended February 25, 2000, File No. 333-5455-01)                                                                                         
|       
|       
|       
|       
|4.1     |  |  |  | Indenture for the Senior Subordinated 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)                                                                           
|       
|       
|       
|       
|4.9     |  |  |  | Second Amended and Restated Credit Agreement, dated as of September 28, 2000, among
Avondale Mills, Inc., various listed banks and Wachovia Bank, N.A., as agent.
(incorporated by reference to Exhibit 4.9 to Avondale Incorporateds 2000 Annual Report
on Form 10-K, File No. 33-68412)                                                    
|       
|       
|       
|       
|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. (Incorporated by reference to Exhibit 10.3 to
Avondale Incorporateds 1998 Annual Report on Form 10-K, File No. 33-68412)
|       
|       
|       
|       
|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. (Incorporated by reference to Exhibit 10.4 to
Avondale Incorporateds 1998 Annual Report on Form 10-K, File No. 33-68412)

61



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##### Table of Contents



|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Number  |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       
|       
|       
|       
|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. (Incorporated by reference to Exhibit
10.5 to Avondale Incorporateds 1998 Annual Report on Form 10-K, File No. 33-68412)                                                                                                                                                                                                             
|       
|       
|       
|       
|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)                                                                                                                                                                                  
|       
|       
|       
|       
|10.10   |  |  |  | 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 2002 Management Incentive Plan for G. Stephen Felker.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.13   |  |  |  | Avondale Mills, Inc. Fiscal 2002 Management Incentive Plan for Jack R. Altherr, Jr.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.14   |  |  |  | Avondale Mills, Inc. Fiscal 2002 Management Incentive Plan for T. Wayne Spraggins.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       
|       
|       
|       
|10.15   |  |  |  | Avondale Mills, Inc. Fiscal 2002 Management Incentive Plan for Keith Hull.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       
|       
|       
|       
|10.16   |  |  |  | Avondale Mills, Inc. Fiscal 2002 Management Incentive Plan for Craig Crockard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       
|       
|       
|       
|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 B.F. Goodrich
(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)                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.23   |  |  |  | Omnibus Amendment No. 1 to Amended and Reinstated Series 1996-1 Supplement to Pooling
and Servicing Agreement, and Amended and Reinstated Certificate Purchase Agreements,
dated April 25, 2000, among Avondale Receivables Company, Avondale Mills, Inc. and
various banks (incorporated by reference to Exhibit 10.23 to Avondale Incorporateds
2001 Annual Report on Form 10-K, File No. 33-68412)                                                                                                                                                       
|       
|       
|       
|       
|10.24   |  |  |  | First Amendment to Second Amended and Reinstated Credit Agreement, dated as of August
30, 2001, among Avondale Mills, Inc., various banks and Wachovia Bank, N.A., as agent
(incorporated by reference to Exhibit 10.24 to Avondale Incorporateds 2001 Annual
Report on Form 10-K, File No. 33-68412)                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.25   |  |  |  | Amendment No. 6 to Letter of Credit Agreement, dated August 30, 2001, between and among
Avondale Incorporated, Avondale Mills, Inc. and Suntrust Bank related to Development
Authority of Walton County Industrial Development Revenue Bonds (incorporated by
reference to Exhibit 10.25 to Avondale Incorporateds 2001 Annual Report on Form 10-K,
File No. 33-68412)                                                                                                                                                                                      
|       
|       
|       
|       
|10.26   |  |  |  | Consent and First Amendment between Avondale Mills, Inc. and B.F. Goodrich, Partial
Assignment and Assumption of Supply Agreement between Avondale Mills, Inc., B.F.
Goodrich and Noveon, Inc. (formerly B.F. Goodrich PMD Group) and Amendment and Partial
Assignment of Supply Agreement, between Avondale Mills, Inc., B.F. Goodrich and C.H.
Patrick & Co. (formerly CHP Acquisition Group, Inc.), all dated February 28, 2001
(incorporated by reference to Exhibit 10.26 to Avondale Incorporateds 2001 Annual
Report on Form 10-K, File No. 33-68412)
|       
|       
|       
|       
|10.27   |  |  |  | Second Amendment to Second Amended and Restated Credit Agreement, dated as of February
6, 2002, among Avondale Mills, Inc., various listed banks and Wachovia Bank, N.A., as
agent (incorporated by reference to Exhibit 10.27 to Avondale Incorporateds quarterly
report on Form 10-Q for the period ended March 1, 2002, File No. 33-68412)                                                                                                                                                                                                               
|       
|       
|       
|       
|10.28   |  |  |  | Third Amendment to Second Amended and Restated Credit Agreement, dated as of March 1,
2002, among Avondale Mills, Inc., various listed banks and Wachovia Bank, N.A. as agent
(incorporated by reference to Exhibit 10.28 to Avondale Incorporateds quarterly report
on Form 10-Q for the period ended March 1, 2002, File No. 33-68412)                                                                                                                                                                                                                    

62



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##### Table of Contents



|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                        
|------- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                        
|Number  |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                        
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                        
|       
|       
|       
|       
|10.29   |  |  |  | Fourth Amendment to Second Amended and Restated Credit Agreement and First Amendment to
Security Agreement dated, as of May 24, 2002, among Avondale Mills, Inc. and various
listed banks and Wachovia Bank, N.A. , as agent (incorporated by reference to Exhibit
10.29 to Avondale Incorporateds quarterly report on Form 10-Q for the period ended May
31, 2002, File No. 33-68412)
|       
|       
|       
|       
|10.30   |  |  |  | Master Security Agreement and related documents, dated July 30, 2002, among Avondale
Mills, Inc. and The CIT Group/Equipment Financing, Inc.                                                                                                                                                                                                                                           
|       
|       
|       
|       
|10.31   |  |  |  | Intercreditor Agreement, dated July 30, 2002 among Avondale Mills, Inc. The CIT
Group/Equipment Financing, Inc. and various listed banks and Wachovia Bank, N.A., as
agent.                                                                                                                                                                                                            
|       
|       
|       
|       
|10.32   |  |  |  | Sale and Contribution Agreement, dated as of August 30, 2002, among Avondale Mills,
Inc., Avondale Incorporated and Avondale Funding, LLC.                                                                                                                                                                                                                                             
|       
|       
|       
|       
|10.33   |  |  |  | Receivables Purchase and Servicing Agreement, dated as of August 30, 2002, by and among
Avondale Funding, LLC, Redwood Receivables Corporation, Avondale Mills, Inc., and
General Electric Capital Corporation.                                                                                                                                                                        
|       
|       
|       
|       
|10.34   |  |  |  | Annex X to Sale and Contribution Agreement and Receivables Purchase and Servicing
Agreement, each dated as of August 30, 2002.                                                                                                                                                                                                                                                         
|       
|       
|       
|       
|10.35   |  |  |  | Receivables Purchase Termination and Reassignment Agreement, dated August 30, 2002,
among Manufacturers and Traders Trust Company, Avondale Receivables Master Trust,
Avondale Receivables Company, Avondale Mills, Inc., Falcon Asset Securitization
Corporation, and Bank One, N.A.                                                                                                  
|       
|       
|       
|       
|10.36   |  |  |  | Blocked Account Agreement, dated August 30, 2002, among Wachovia Bank, N.A., Avondale
Mills, Inc., Avondale Funding, LLC and General Electric Capital Corporation.                                                                                                                                                                                                                     
|       
|       
|       
|       
|10.37   |  |  |  | Intercreditor Agreement, dated August 30, 2002, among General Electric Capital
Corporation, Wachovia Bank, N.A., Avondale Funding, LLC and Avondale Mills, Inc.                                                                                                                                                                                                                        
|       
|       
|       
|       
|10.38   |  |  |  | Fifth Amendment to Second Amended and Restated Credit Agreement, dated August 30, 2002
among Avondale Mills, Inc. , various listed banks and Wachovia Bank, N.A., as agent.                                                                                                                                                                                                            
|       
|       
|       
|       
|10.39   |  |  |  | Borrow Pledge Agreement, dated August 30, 2002 between Avondale Mills, Inc. various
listed banks and Wachovia Bank, N.A., as agent.                                                                                                                                                                                                                                                    
|       
|       
|       
|       
|12.1    |  |  |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                     
|       
|       
|       
|       
|99.1    |  |  |  | Charter of the Audit Committee of the Board of Directors, adopted effective July 13,
2000 (Incorporated by reference to Exhibit 5.1 to Avondale Incorporateds 2000 Annual
Report on Form 10-K, File No. 33-68412)                                                                                                                                                                     



|(b) |  | Reports on Form 8-K                                              
|--- |  | -----------------------------------------------------------------
|   
|    |  | Not applicable.                                                  
|   
|(c) |  | See Item 14(a)(3) and separate Index to Exhibits attached hereto.

63



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##### Table of Contents



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, 2002 |                                       | 

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:

|                                            |  |                                       |  |                  
|------------------------------------------- |  | ------------------------------------- |  | -----------------
|Name                                        |  | Title                                 |  | Date             
|                                            |  |                                       |  |                  
|                                            |  |                                       |  |                  
|/s/ G. STEPHEN FELKER                       |  | Chairman of the Board,                |  | November 11, 2002
|                                            |  |                                       |  |                  
|G. Stephen Felker                           |  | President and Chief Executive
Officer |  |                  
|                                           
|                                           
|                                           
|                                           
|                                            |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|Principal Financial and
Accounting Officer: |  |                                      
|                                           
|                                           
|                                           
|                                           
|                                            |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|/s/ JACK R. ALTHERR, JR                     |  | Vice Chairman, Chief                  |  | November 11, 2002
|                                            |  |                                       |  |                  
|Jack R. Altherr, Jr.                        |  | Financial Officer and
Director        |  |                  
|                                           
|                                           
|                                           
|                                           
|                                            |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|Directors:                                  |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|                                            |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|/s/ DALE J. BODEN                           |  | Director                              |  | November 11, 2002
|                                            |  |                                       |  |                  
|Dale J. Boden                               |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|                                            |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|/s/ ROBERT B. CALHOUN                       |  | Director                              |  | November 11, 2002
|                                            |  |                                       |  |                  
|Robert B. Calhoun                           |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|                                            |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|/s/ KENNETH H. CALLAWAY                     |  | Director                              |  | November 11, 2002
|                                            |  |                                       |  |                  
|Kenneth H. Callaway                         |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|                                            |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|/s/ HARRY C. HOWARD                         |  | Director                              |  | November 11, 2002
|                                            |  |                                       |  |                  
|Harry C. Howard                             |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|                                            |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|/s/ C. LINDEN LONGINO, JR                   |  | Director                              |  | November 11, 2002
|                                            |  |                                       |  |                  
|C. Linden Longino, Jr.                      |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|                                            |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|/s/ JAMES A. RUBRIGHT                       |  | Director                              |  | November 11, 2002
|                                            |  |                                       |  |                  
|James A. Rubright                           |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|                                            |  |                                       |  |                  
|                                           
|                                           
|                                           
|                                           
|/s/ JOHN P. STEVENS                         |  | Director                              |  | November 11, 2002
|                                            |  |                                       |  |                  
|John P. Stevens                             |  |                                       |  |                  

64



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##### Table of Contents



Sarbanes-Oxley Certification

I, G. Stephen Felker, certify that:



|1. |  | I have reviewed this Annual Report on Form 10-K of Avondale
Incorporated;                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Annual Report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this Annual Report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this Annual Report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Annual
Report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of the registrants board of directors (or persons
performing the equivalent functions):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in
this Annual Report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                                
|----------------------- |  | -----------------------------------------------
|Date: November 11, 2002 |  | /s/ G. STEPHEN FELKER                          
|                        |  |                                                
|                        |  | G. Stephen Felker                              
|                       
|                       
|                       
|                       
|                        |  | Chairman, President and Chief Executive Officer

65



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##### Table of Contents



Sarbanes-Oxley Certification

I, Jack R. Altherr, Jr., certify that:



|1. |  | I have reviewed this Annual Report on Form 10-K of Avondale
Incorporated;                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Annual Report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this Annual Report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this Annual Report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Annual
Report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of the registrants board of directors (or persons
performing the equivalent functions):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in
this Annual Report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                          
|----------------------- |  | -----------------------------------------
|Date: November 11, 2002 |  | /s/ JACK R. ALTHERR, JR.                 
|                        |  |                                          
|                        |  | Jack R. Altherr, Jr                      
|                       
|                       
|                       
|                       
|                        |  | Vice Chairman and Chief Financial Officer

66



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##### Table of Contents



SCHEDULE II

AVONDALE INCORPORATED

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

|                           |  |                                 |  |             |       |            |  |          |       |            |  |        |        |        |  |         |       |     |  | 
|-------------------------- |  | ------------------------------- |  | ----------- | ----- | ---------- |  | -------- | ----- | ---------- |  | ------ | ------ | ------ |  | ------- | ----- | --- |  | 
|                           |  |                                 |  |             |       |            |  |          |       |            |  |        |        |        |  |         |       | (B)
|                           |  |                                 |  |             |       |            |  |          |       | Charged    |  |        |        |        |  | Balance
|                           |  |                                 |  |             |       | Balance at |  | to costs |       |            |  |        |        | at end
|                           |  |                                 |  |             |       | Beginning  |  | and      |       | (A) (C)    |  | of    
|                           |  |                                 |  | Description |       | of Period  |  | earnings |       | Deductions |  | Period
|                           |  |                                 |  |             |       |            |  |          |       |            |  |       
|Year Ended August 25, 2000 |  | Allowance for doubtful
accounts |  |             | 7,650 |            |  |          | 900   |            |  |        | (747   | )      |  |         | 7,803 |    
|                          
|                          
|                          
|                          
|Year Ended August 31, 2001 |  | Allowance for doubtful
accounts |  |             | 7,803 |            |  |          | 699   |            |  |        | (1,306 | )      |  |         | 7,196 |    
|                          
|                          
|                          
|                          
|Year Ended August 30, 2002 |  | Allowance for doubtful
accounts |  |             | 7,196 |            |  |          | 1,442 |            |  |        | (6,439 | )      |  |         | 2,199 |    



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|(A) |  | Deductions represent customer account balances written off during the
period.                                                                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(B) |  | At August 25, 2000 and August 31, 2001, the balance at end of period
includes $4,814 and $4,580, respectively, related to accounts receivable
sold. These amounts are included in other accrued expenses in the
Consolidated Balance Sheets.
|   
|   
|   
|   
|(C) |  | For the fiscal year ended August 30, 2002, deductions include $5,000
related to the write down of accounts receivable to net realizable value
in conjunction with the sale of those receivables to Avondale Funding,
LLC.