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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
   FORM 10-K (Mark One) [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended August 27, 2004OR[  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ____________to____________
 Commission file number 33-68412   AVONDALE INCORPORATED  Georgia
    
    58-0477150(State of Incorporation)
    
    (IRS Employer Identification No.)506 South Broad Street
    
    30655Monroe, Georgia
(Address of principal executive offices)
    
    (Zip code)
 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 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES  NO þ The aggregate market value of the Class A Common Stock held by
non-affiliates of the registrant as of November 3, 2004 (based upon the book
value per share of Class A Common Stock as of August 29, 2004) was $13,200,000. As of November 3, 2004, the registrant had 11,394,160 and 978,939 shares
of Class A Common Stock and Class B Common Stock outstanding, respectively. Documents incorporated by reference: None.




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INDEX TO FORM 10-K AVONDALE INCORPORATED PageReferencePART IItem 1.
    Business
    
    
    2Item 2.
    Properties
    
    
    10Item 3.
    Legal Proceedings
    
    
    11Item 4.
    Submission of Matters to a Vote of Security Holders
    
    
    12PART IIItem 5.
    Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    13Item 6.
    Selected Financial Data
    
    
    14Item 7.
    Managements Discussion and Analysis of Financial Condition and
Results of Operation
    
    
    16Item 7A.
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 8.
    Financial Statements and Supplementary Data
    
    
    33Item 9.
    Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    65Item 9A.
    Controls and Procedures
    
    
    65Item 9B.
    Other Information
    
    
    65Part IIIItem 10.
    Directors and Executive Officers of the Registrant
    
    
    66Item 11.
    Executive Compensation
    
    
    69Item 12.
    Security Ownership of Certain Beneficial Owners and Management

    
    74Item 13.
    Certain Relationships and Related Transactions
    
    
    77Item 14.
    Principal Accountant Fees and Services
    
    
    77PART IVItem 15.
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    78EX-4.17 FELKER PUT AGREEMENT, DATED JULY 8, 2004EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-21.1 LIST OF SUBSIDIARIESEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO




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PART I 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 a leading domestic manufacturer and marketer of cotton and
cotton-blend fabrics and yarns used in the production of casual apparel and, to
a lesser extent, home furnishings and industrial products. The Company designs,
manufactures and markets a broad line of indigo-dyed denim for both branded and
private label apparel producers of denim jeans, slacks, shorts, skirts and
jackets as well as non-apparel producers of denim luggage, bags and other
products. The Company also designs and manufactures an extensive line of
piece-dyed sportswear and workwear fabrics. The Companys sportswear fabrics
are marketed to both branded and private label producers of casual, or khaki,
slacks, shorts and skirts. The Companys workwear fabrics are marketed to
producers of uniforms, career apparel and other workwear (shirts, slacks and
jackets) that are distributed through either the rental or retail channels. The
Company manufactures cotton and cotton-blend yarns, which are sold to knitters
and weavers of apparel fabrics. The Company also manufactures greige and
specialty fabrics, which are sold to the apparel, home furnishings and
industrial markets. The Companys predecessor was founded in 1895 by the family of G. Stephen
Felker, the current chairman, president and chief executive officer. Avondale
Incorporated was incorporated as a Georgia Corporation in 1965. The Company
currently operates seventeen manufacturing facilities with locations in
Alabama, Georgia, North Carolina and South Carolina. The facilities and
equipment are modern and efficient, reflecting the significant investment made
in recent years to enhance productivity, operating efficiencies and
manufacturing flexibility, and to reduce unit costs. Description of the Business The Company operates principally in three segments: apparel fabrics, yarns
and other sales. Financial information relating to these segments and
geographical sales information is presented in Note 4 to the consolidated
financial statements. Products Apparel fabrics.The Companys apparel fabrics consist of cotton and
cotton-blend denim, sportswear and workwear fabrics and are generally
manufactured to fill specific customer orders. The Company is one of the largest domestic manufacturers and marketers of
indigo-dyed denim used in the production of branded and private label denim
jeans, slacks, shorts, skirts, jackets and other denim garments. The Company
designs, often in conjunction with customers, and manufactures a broad range of
high quality, value-added denim with new and innovative colors, textures,
weaves and finishes. The Company is one of the largest domestic manufacturers and marketers of
cotton sportswear fabrics used in the production of khaki slacks, shorts,
skirts and other sportswear garments. The Company produces fabrics in a wide
variety of styles, colors, finishes, textures and weights according to
individual customer specifications, including, for example, fabrics with water
and stain repellant finishes. The Company is one of the largest domestic manufacturers and marketers of
cotton and cotton-blend workwear fabrics used in the production of uniforms,
career apparel and other workwear (shirts, slacks, jackets and other garments).
Customers of the Companys workwear fabrics require durable fabrics
characterized by long wear 2




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and easy care. The Company works closely with its customers to develop fabrics
with these and other enhanced performance characteristics. Apparel fabrics sales accounted for 78%, 80% and 75%, respectively, of the
Companys net sales in fiscal 2002, 2003 and 2004. Yarns. The Company is a leading domestic manufacturer and marketer of
cotton and cotton-blend yarns, which are used internally in the production of
woven apparel fabrics or marketed to knitters or weavers of apparel fabrics.
The Companys customers use these yarns in the manufacture of a broad range of
items, including apparel (T-shirts, underwear, socks and hosiery, knitted
shirts, shorts and slacks, denim jeans, woven khaki slacks, and fleece
sweatshirts, pants and jackets), and home furnishings. The Companys yarn sales
accounted for approximately 29%, 28% and 32%, respectively, of the Companys
net sales in fiscal 2002, 2003 and 2004. 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 the Company markets to manufacturers of apparel, home furnishings
and industrial products. The Company works with customers to create new fabric
styles and constructions and can alter the Companys overall product mix to
meet changing customer requirements. In addition, the Company can maintain
production levels and efficiencies by manufacturing greige fabrics for use in
the apparel fabrics operation. The Company produces a variety of specialty fabrics that are marketed to
recreational, industrial and military product manufacturers. The Companys
specialty fabrics 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 11%, 11% and 10%, respectively, of
the Companys net sales in fiscal 2002, 2003 and 2004. 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 (18%), (19%) and
(17%), respectively, of the Companys net sales in fiscal 2002, 2003 and 2004. Sales and Marketing During fiscal 2004, the Company sold apparel fabrics, greige and specialty
fabrics, and yarns to approximately 500, 200 and 250 customers, respectively,
or approximately 800 customers in total after eliminating duplications. The
Company is one of the leading suppliers of denim to Flynn Enterprises, Inc., a
private label apparel manufacturer, and V.F. Corporation (the maker of Lee®,
Rider®, Wrangler®, Rustler®, Brittania®, Red Kap®, Timbercreek®, Chic®, and
HealthTex® brands), with total sales to each of these two customers accounting
for approximately 10% of the Companys net sales in fiscal 2004. The Company
believes that it has a strong working relationship with Flynn Enterprises, Inc.
and V.F. Corporation. None of the Companys other customers individually
accounted for 10% or more of the Companys net sales in fiscal 2004. The
Companys sales billed to customers domiciled outside the U.S. accounted for
7%, 8% and 16%, respectively, of the Companys net sales in fiscal 2002, 2003
and 2004. The Company targets customers who demand a high level of customer service.
The Companys nine sales offices are generally located near the headquarters or
manufacturing facilities of key customers. Sales associates visit their
customers on a regular basis and are primarily responsible for interpreting
customers needs, processing customer orders and interacting with the Companys
production scheduling personnel. The Companys sales
associates are paid a base salary plus sales incentives to the extent certain
performance targets are met. The Companys independent sales representatives
are paid on a commission basis. 3




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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 seventeen
manufacturing facilities in the U.S. Of the Companys manufacturing
facilities, ten produce yarn, four manufacture fabrics, three are dyeing
facilities and four are engaged in fabric finishing. In response to the highly competitive market conditions and continued
imbalance of global supply and demand for textile and apparel products, in May
2004, the Company closed an open-end yarn manufacturing facility located in
North Carolina and the weaving operation of an integrated greige fabric
manufacturing facility located in Georgia. These actions to rationalize excess
manufacturing capacity and relocate certain equipment have improved capacity
utilization of the Companys remaining facilities and lowered costs per unit
produced. No reduction in net sales is anticipated as a result of this
capacity rationalization. Flexibility of the Companys manufacturing
facilities to shift production from one product line to another and the
Companys ability to source additional yarns and greige fabrics from outside
vendors to increase production of its finished products in reaction to added
demand are expected to be maintained. Certain equipment has been relocated
from these two operations to other facilities located in Alabama, Georgia and
South Carolina to retain certain specialized manufacturing capabilities. Other
excess equipment has been sold. 4




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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 in recent fiscal years have included, among
others, the following principal initiatives:  
    
    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
workwear 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 workwear 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;  
    
    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;  
    
    2003  Completed installation of an automated dye mixing and
dispensing system in May 2003 at a fabric finishing facility in
South Carolina; and  
    
    2003  Completed installation of new roving equipment in May
2003 at an existing ring spinning facility in Alabama. 5




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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 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 reimbursement 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 reimbursement 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. On September 8, 2004, a dispute settlement panel of the World Trade
Organization (WTO) ruled that the payments made by the U.S. Department of
Agriculture, representing the differential between domestic cotton prices and
world cotton prices, as adjusted, are prohibited export subsidies in violation
of WTO global trade rules. The U.S. appealed this ruling to the Appellate Body
of the WTO on October 15, 2004. If the ruling by the dispute settlement panel
is upheld, suspension of the U.S. agricultural support programs may be required
to avoid economic retaliation against the U.S. by WTO member countries. Such
action could result in an increase in the Companys raw material costs, making
the Companys products less competitive. The Company closely monitors the cotton market and manages its
cotton-buying practices. The Companys Chief Executive Officer is an officer of
the National Cotton Council, a trade organization that spearheads initiatives
to implement U.S. cotton industry policy, which helps the Company stay abreast
of 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. 6




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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 by the Company of the assets and certain of the liabilities of
Graniteville Company (Graniteville) during fiscal 1996, 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 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. Seasonality The Companys sales are broadly distributed over markets with staggered
seasonality and, therefore, generally do not exhibit significant seasonal
trends. Backlog The Companys order backlog was approximately $171 million at August 27,
2004, as compared to approximately $200 million at August 29, 2003, primarily
reflecting lower unit volume in the Companys apparel fabrics operation. Orders
on hand are not necessarily indicative of total future sales. Substantially all
of the orders outstanding at August 27, 2004 are expected to be filled by the
end of fiscal 2005. 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 workwear 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 and an increase in the U.S. importation of textiles and
apparel from countries employing trade distorting tactics to benefit their
industries 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 7




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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. Trade Regulation Increases in global capacities 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 has
attempted 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 trade
distortions including the devaluation of currencies of other textile producing
countries, particularly within Asia, against the U.S. dollar, export tax
credits and loose lending practices. 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, the WTO, a multilateral trade organization, 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. The elimination of all quotas effective
December 31, 2004 and the reduction of tariffs under the WTO may result in
increased imports of certain textile products and apparel into North America.
These factors could make the Companys products less competitive against low
cost imports from third world countries. The North American Free Trade Agreement (NAFTA) among the United States,
Canada and Mexico, which became effective on January 1, 1994, has created the
worlds largest free-trade zone. The agreement contains safeguards sought by
the U.S. textile industry, including a rule of origin requirement that products
be processed in one of the three countries in order to benefit from NAFTA. In
addition, NAFTA requires, with limited exception, 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 also be woven from North American spun yarn. A limited
exemption to the rules of origin requirement for certain apparel assembled in
Mexico from yarns and fabrics made outside of North America is scheduled to
expire in December 2004. Certain importers have requested that the exemption be
extended, while certain U.S. textile producers have argued for the exemption to
expire, as continuation of the exemption would effectively provide Chinese and
other Asian producers duty-free access to the U.S. market, at a time when they
will also gain quota-free access to the U.S. market following the December 31,
2004 elimination of all quotas. 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 September 30, 2007. This legislation
effectively grants these four countries the 8




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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. The growing U.S. trade deficit with China and decline in U.S.
manufacturing jobs has resulted in numerous recent proposals to restrict
imports from China. Critics of the U.S. governments China trade policy have
focused on the Chinese governments policy of pegging its currency, the yuan,
to the dollar, rather than letting it float freely and having its value
determined by market forces. These critics have estimated that the yuan is
undervalued by as much as 40 percent relative to the dollar, which enhances the
competitiveness of Chinese exports in the United States. Pending legislation,
such as U.S. Senate Bill S.1586, introduced on September 5, 2003, would impose
tariffs on imports from China to offset Chinas undervalued currency. Industry
groups such as the National Council of Textile Organizations, the National
Cotton Council, the American Manufacturing Trade Action Coalition, the
Coalition for a Sound Dollar and the National Association of Manufacturers are
lobbying the U.S. government to initiate dispute settlement proceedings in the
WTO which, if successful, would require China to allow the value of its
currency to be determined by market forces. An increase in the value of the
Chinese yuan vis-à-vis the U.S. dollar would make the Companys products more
competitive with imports from China. However, the Company cannot predict at
this time whether legislation will be adopted or the WTO lobbying efforts will
be successful. In addition, the National Council of Textile Organizations and other
textile and apparel manufacturing trade associations have filed several
petitions seeking safeguard relief, requesting that the U.S. government take
the following actions in response to recent increases in imports from China and
Vietnam to enhance the competitiveness of U.S. textile and apparel
manufacturers: (1) invoke the special China textile safeguard that was enacted
into law when China joined the WTO; (2) maintain U.S. tariff levels in the Doha
Round and require U.S. trading partners to reduce their tariffs to U.S. levels
and remove non-tariff barriers; and (3) require a NAFTA-type yarn forward rule
of origin, with no tariff preference levels, in future trade agreements such as
the Central American Free Trade Agreement (CAFTA) and the Free Trade Area of
the Americas (FTAA). There can be no assurance that any of these proposals
will be implemented. 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 and various state
counterparts. The Company has obtained, and is in compliance in all material
respects with, all significant permits required to be issued by federal, state
or local laws 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,
asbestos-containing materials are present in some of the structural components
of some Company facilities, and management believes these materials are
properly contained and managed. Many of the Companys manufacturing facilities have been in operation for
several decades, with some operations originating in the 1800s. Historical
management of hazardous substances and waste disposal practices may have
resulted in on-site and off-site unknown remediation liability for which the
Company may be responsible. In addition, certain operations, including
wastewater treatment facilities and air emission sources may
have to be upgraded to meet more stringent environmental requirements in the
future. The Company has established reserves for certain significant
environmental projects which it anticipates will be completed within the next
two to three years to address certain known potential environmental issues
(including the two Graniteville issues discussed in 9




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further detail below). The
Company cannot with certainty assess at this time the impact of future emission
or discharge or other regulatory 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 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, and subsequently the
Company has provided all reports required under the monitoring proposal. 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 27, 2004, the Company had approximately 4,300 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 seventeen manufacturing facilities in the
U.S., of which six are located in Alabama, three are located in Georgia and
eight are located in South Carolina. The Company owns all seventeen of these
facilities. Of the Companys manufacturing facilities, ten produce yarn, four
manufacture fabrics, three are dyeing facilities and four are engaged in fabric
finishing. Additionally, the Company operates six warehouses, including one
leased facility. The Companys plants generally operate 24 hours a day, five to 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 10




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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 Court subsequently dismissed
Alabama Power as a defendant in the case, based on their motion for summary
judgement. 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. All parties are awaiting the courts
decision on certain evidentiary motions filed in anticipation of the trial,
which if granted, could reduce the scope of the plaintiffs claims in the case.
The trial has been scheduled to begin in February 2005. The Company intends to
vigorously defend this case and believes that it has a number of defenses
available to it. While the outcome of this case cannot be predicted with
certainty, the Company does not believe that it will have a material adverse
effect on the Companys financial condition or results of operations. The Company received a grand jury subpoena issued by the U.S. District
Court for the Eastern District of North Carolina on January 20, 2004. The
subpoena concerns the production of documents and records in connection with an
investigation being conducted by the Antitrust Division of the U. S. Department
of Justice relating generally to the manufacture, sale, purchase and
distribution of open-end spun yarns. The Company does not believe that the
outcome of this matter will have a material adverse effect on the Companys
financial condition or results of operation. The Company is fully cooperating
with the U.S. Department of Justice in its investigation. In separate actions initiated by third parties based upon the public
disclosure of the investigation by the U.S. Department of Justice, the Company
and various other defendants have been named in three class action complaints
filed in the U. S. District Court for the Middle and Western Districts of North
Carolina on May 12, May 28 and May 25, 2004, respectively, and one class action
complaint filed in the Circuit Court for Shelby County, Tennessee on April 21,
2004. On August 26, 2004, two of the District Court cases were consolidated in
the Middle District of North Carolina. The Western District of North Carolina
case was voluntarily dismissed and re-filed in the Middle District of North
Carolina. The Company anticipates the third case will be consolidated with the
other two. All complaints seek, under antitrust laws, various damages and
injunctive relief related to the pricing and sale of open-end yarns. These
complaints are in preliminary procedural stages and do not have scheduled trial
dates. The Company has moved to dismiss one of the District Court cases on the
basis of a binding
arbitration provision in the parties sales agreement. The Company intends
to vigorously defend these cases and believes it has a number of defenses
available to it. While the outcome of these cases cannot be predicted with
certainty, the Company does not believe that the resolution of these cases will
have a material adverse effect on the Companys financial condition or results
of operations. 11




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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 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. 12




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES 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 27, 2004 there were 128 and one holders of record of Class A Common
Stock and Class B Common Stock, respectively. The Company paid dividends
aggregating $3.8 million, $5.0 million and $2.5 million in respect of its
outstanding Common Stock during fiscal 2002, 2003 and 2004, respectively. The Company has issued and outstanding $90.7 million aggregate principal
amount of 101/4% Senior Subordinated Notes due 2013 (the 2013 Notes) under
an Indenture dated as of June 30, 2003 among the Company, Avondale Mills and
Wachovia Bank, National Association, as trustee (the Indenture). The
Indenture contains certain covenants that limit the Companys ability to pay
dividends. The Company has issued and outstanding $41.2 million aggregate principal
amount of Senior Floating Rate Notes due 2012 (the 2012 Notes). The 2012
Notes contain certain covenants that limit the Companys ability to pay
dividends. The Company maintains a secured five-year installment equipment note,
executed July 30, 2002, with a balance outstanding of $13.5 million at August
27, 2004. The equipment note contains certain covenants that limit the
Companys ability to pay dividends. At August 27, 2004 there was no balance outstanding, other than
obligations relating to three letters of credit issued in the aggregate amount
of $1.6 million, under a $40 million revolving credit facility executed
November 7, 2003 among Avondale Mills, its subsidiary Avondale Mills
Graniteville Fabrics, Inc. and General Electric Capital Corporation. The
revolving credit facility contains certain covenants that limit the Companys
ability to pay dividends. 13




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated statement of
operations data and selected consolidated balance sheet data of the Company for
each of the five fiscal years in the period ended August 27, 2004. Such data
were derived from the audited consolidated financial statements of the Company.
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 Year2000
    
    2001
    
    2002
    
    2003
    
    2004(In millions, except per share data and ratios)Statement of Operations Data:Net sales
    
    $
    836.5
    
    
    $
    772.8
    
    
    $
    659.7
    
    
    $
    590.9
    
    
    $
    564.8Gross profit
    
    
    116.3
    
    
    
    60.9
    
    
    
    54.0
    
    
    
    41.2
    
    
    
    16.7Restructuring charges, net
    
    
    
    
    
    
    
    
    
    
    7.0
    
    
    
    2.5
    
    
    
    1.7Operating income (loss)
    
    
    77.9
    
    
    
    27.9
    
    
    
    18.7
    
    
    
    12.6
    
    
    
    (10.8
    )Interest expense, net
    
    
    20.2
    
    
    
    20.4
    
    
    
    18.4
    
    
    
    19.0
    
    
    
    17.8Discount and expenses on sale of receivables
    
    
    5.6
    
    
    
    4.9
    
    
    
    1.1
    
    
    
    2.6
    
    
    
    2.4Loss (gain) on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.2
    
    
    
    (17.0
    )Other expense (income), net
    
    
    0.5
    
    
    
    0.8
    
    
    
    (0.5
    )
    
    
    (0.1
    )
    
    
    (2.9
    )Income (loss) before income taxes
    
    
    51.6
    
    
    
    1.8
    
    
    
    (0.3
    )
    
    
    (12.2
    )
    
    
    (11.1
    )Provision for (benefit of) income taxes
    
    
    18.6
    
    
    
    0.5
    
    
    
    (0.2
    )
    
    
    (4.5
    )
    
    
    (4.9
    )Net income (loss)
    
    
    33.0
    
    
    
    1.3
    
    
    
    (0.1
    )
    
    
    (7.7
    )
    
    
    (6.2
    )Per Share Data:Net income (loss)  basic
    
    $
    2.61
    
    
    $
    0.10
    
    
    $
    (0.01
    )
    
    $
    (0.62
    )
    
    $
    (0.50
    )Net income (loss)  diluted
    
    
    2.57
    
    
    
    0.10
    
    
    
    (0.01
    )
    
    
    (0.62
    )
    
    
    (0.50
    )Dividends declared
    
    
    0.40
    
    
    
    0.40
    
    
    
    0.30
    
    
    
    0.40
    
    
    
    0.20Weighted average number of shares outstanding  basic
    
    
    12.7
    
    
    
    12.5
    
    
    
    12.5
    
    
    
    12.5
    
    
    
    12.4Weighted average number of shares outstanding  diluted
    
    
    12.8
    
    
    
    12.7
    
    
    
    12.5
    
    
    
    12.5
    
    
    
    12.4Balance Sheet Data (at period end):Total assets
    
    $
    438.7
    
    
    $
    453.0
    
    
    $
    397.4
    
    
    $
    359.5
    
    
    $
    328.5Long-term debt, including current portion
    
    
    187.7
    
    
    
    230.1
    
    
    
    170.0
    
    
    
    167.8
    
    
    
    145.4Shareholders equity
    
    
    134.5
    
    
    
    130.0
    
    
    
    130.3
    
    
    
    116.0
    
    
    
    107.3Other Data:Capital expenditures
    
    $
    30.5
    
    
    $
    91.1
    
    
    $
    13.1
    
    
    $
    16.7
    
    
    $
    6.3Depreciation and amortization
    
    
    42.8
    
    
    
    46.4
    
    
    
    45.5
    
    
    
    42.2
    
    
    
    37.3Adjusted EBITDA(1)
    
    
    115.5
    
    
    
    75.5
    
    
    
    67.9
    
    
    
    60.3
    
    
    
    37.7Ratio of Adjusted EBITDA to interest expense, net and
discount
and expenses on sale of receivables
    
    
    4.5x
    
    
    
    3.0x
    
    
    
    3.5x
    
    
    
    2.8x
    
    
    
    1.9Ratio of earnings to fixed charges(2)
    
    
    2.9x
    
    
    
    1.1x
    
    
    
    
    
    
    
    
    
    
    
    
   (1)
    
    Adjusted EBITDA is a supplemental non-GAAP financial measure. EBITDA is
commonly defined as net income (loss) plus (a) interest expense, (b)
provision for (benefit of) income taxes and (c) depreciation and
amortization. The Companys definition of Adjusted EBITDA differs due to
the further addition to net income (loss) of (a) discount and expenses on
sale of receivables, (b) gain on extinguishment of debt, (c) restructuring
non-cash charges and (d) adjustment of carrying value of inventories to
LIFO basis, net of market adjustments. Adjusted EBITDA is presented
because management believes that it is a widely accepted indicator of a
companys ability to service its indebtedness and is used by investors and
analysts to evaluate companies within the textile and apparel industry.
In addition, Adjusted EBITDA is used to determine compliance with certain
covenants under the Companys receivables securitization, revolving credit
facility, equipment note, the 2013 Notes and the 2012 Notes. 14




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##### Table of Contents



Adjusted EBITDA as calculated by the Company is not necessarily comparable
to similarly titled measures used by other companies. Adjusted EBITDA (a)
does not represent net income (loss) or cash flow from operations as defined
by generally accepted accounting principles; (b) is not necessarily
indicative of cash available to fund cash requirements; and (c) should not
be considered an alternative to operating income, net income (loss) or net
cash provided by operating activities as determined in accordance with
generally accepted accounting principles.The following table reconciles Adjusted EBITDA on a consolidated basis to
the line on the Companys consolidated statement of operations entitled net
income (loss) for the periods presented in the table above: Fiscal Year2000
    
    2001
    
    2002
    
    2003
    
    2004Net income (loss)
    
    $
    33.0
    
    
    $
    1.3
    
    
    $
    (0.1
    )
    
    $
    (7.7
    )
    
    $
    (6.2
    )Interest expense, net
    
    
    20.2
    
    
    
    20.4
    
    
    
    18.5
    
    
    
    19.0
    
    
    
    17.8Provision for (benefit of) income taxes
    
    
    18.6
    
    
    
    0.5
    
    
    
    (0.2
    )
    
    
    (4.5
    )
    
    
    (4.9
    )Depreciation and amortization
    
    
    42.8
    
    
    
    46.4
    
    
    
    45.5
    
    
    
    42.2
    
    
    
    37.3EBITDA
    
    
    114.6
    
    
    
    68.6
    
    
    
    63.7
    
    
    
    49.0
    
    
    
    44.0Discount and expenses on sales of
receivables
    
    
    5.6
    
    
    
    4.9
    
    
    
    1.1
    
    
    
    2.6
    
    
    
    2.4Loss (gain) on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.2
    
    
    
    (17.0
    )Restructuring charges, net and other
equipment disposals (non-cash portion)
    
    
    
    
    
    
    
    
    
    
    5.3
    
    
    
    4.2
    
    
    
    3.1Adjustment of carrying value of
inventories to LIFO basis, net of
market adjustment
    
    
    (4.7
    )
    
    
    2.0
    
    
    
    (2.2
    )
    
    
    1.3
    
    
    
    5.2Adjusted EBITDA
    
    $
    115.5
    
    
    $
    75.5
    
    
    $
    67.9
    
    
    $
    60.3
    
    
    $
    37.7
  (2)
    
    The ratio of earnings to fixed charges is computed by dividing income
before income taxes plus fixed charges, by fixed charges. Fixed charges
include interest, whether expensed or capitalized, amortization of
deferred financing costs, loss on extinguishment of debt, discount and
expenses on sale of receivables and the portion of capital lease payments
that is representative of interest or financing charges. For fiscal 2002,
2003 and 2004, earnings were insufficient to cover fixed charges by $0.4
million, $12.2 million and $7.9 million, respectively. 15




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION 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. Overview The Company is a leading domestic manufacturer and marketer of cotton and
cotton-blend fabrics and yarns used in the production of casual apparel and, to
a lesser extent, home furnishings and industrial products. The Company designs,
manufactures and markets a broad line of indigo-dyed denim for both branded and
private label apparel producers of denim jeans, slacks, shorts, skirts and
jackets as well as non-apparel producers of denim luggage, bags and other
products. The Company also designs and manufactures an extensive line of
piece-dyed sportswear and workwear fabrics. The Companys sportswear fabrics
are marketed to both branded and private label producers of casual, or khaki,
slacks, shorts and skirts. The Companys workwear fabrics are marketed to
producers of uniforms, career apparel and other workwear (shirts, slacks and
jackets) that are distributed through either the rental or retail channels.
The Company manufactures cotton and cotton-blend yarns, which are sold to
knitters and weavers of apparel fabrics. The Company also manufactures greige
and specialty fabrics, which are sold to the apparel, home furnishings and
industrial markets. In fiscal 2004, the Company sold fabrics and yarns to
approximately 800 customers, including many of the worlds leading apparel
companies. General business conditions in the textile industry have been very
challenging. The Company believes the strength of the U.S. dollar in comparison
to the Chinese yuan and currencies of other Asian countries continues to
promote the importation of goods from those countries by United States
retailers, exacerbating the already highly competitive market conditions
resulting from the imbalance of global supply and demand for textile and
apparel products. In fiscal 2004, the Company had net sales and a net loss of
$564.8 million and ($6.2) million, respectively. The Company believes many of the factors affecting its operating
performance during fiscal 2004, including global over-supply of textile and
apparel products and the relative strength of the U.S. dollar compared to the
Chinese yuan and currencies of other Asian countries, will continue into fiscal
2005. In addition, the elimination of all import quotas under the WTO effective
December 31, 2004 adds to the uncertainties facing the domestic textile
industry. However, increases in sales volumes and reductions in raw material
costs are expected to yield improvement in margins and operating cash flow
during fiscal 2005. The Company remains focused on cost reduction initiatives,
new product development and working capital management. 16




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##### Table of Contents



Results of Operations The Company operates principally in three segments: apparel fabrics, yarns
and other sales. The table below sets forth for the periods indicated statement of
operations data expressed as a percentage of net sales: Fiscal Year2002
    
    2003
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Apparel fabric sales
    
    
    78.4
    
    
    
    79.6
    
    
    
    74.4Yarn sales
    
    
    28.7
    
    
    
    28.4
    
    
    
    31.6Other sales
    
    
    10.7
    
    
    
    11.2
    
    
    
    10.6Intersegment sales
    
    
    (17.8
    )
    
    
    (19.2
    )
    
    
    (16.6
    )Cost of goods sold:Raw materials
    
    
    34.8
    
    
    
    30.7
    
    
    
    40.4Conversion costs
    
    
    50.2
    
    
    
    55.3
    
    
    
    50.1Total
    
    
    85.0
    
    
    
    86.0
    
    
    
    90.5Depreciation
    
    
    6.8
    
    
    
    7.1
    
    
    
    6.5Selling and administrative expenses
    
    
    4.3
    
    
    
    4.4
    
    
    
    4.6Restructuring charges, net
    
    
    1.1
    
    
    
    0.4
    
    
    
    0.3Operating income
    
    
    2.8
    
    
    
    2.1
    
    
    
    (1.9
    )Interest expense, net
    
    
    2.8
    
    
    
    3.2
    
    
    
    3.2Discount and expenses on sales of receivables
    
    
    0.2
    
    
    
    0.4
    
    
    
    0.4Loss (gain) on extinguishment of debt
    
    
    
    
    
    
    0.6
    
    
    
    (3.0
    )Provision for income taxes
    
    
    (0.0
    )
    
    
    (0.8
    )
    
    
    (0.9
    )Net income
    
    
    (0.0
    )
    
    
    (1.3
    )
    
    
    (1.1
    )
 Fiscal 2004 Compared to Fiscal 2003 Net Sales.Net sales decreased 4.4% to $564.8 million for fiscal 2004 from
$590.9 million for fiscal 2003, as the Company experienced intensely
competitive conditions in its markets. The decline in net sales in fiscal 2004
primarily reflected lower unit volume for all segments, as imported apparel
continued to capture market share of domestic retail sales and weak employment
and economic conditions within the United States impacted consumer demand.
Selling prices remained very competitive reflecting the significant
uncertainties presented by the economic and political environment, the
imbalance of global supply and demand for textile and apparel products and the
financial distress experienced by many of the Companys domestic competitors.
In addition, the manipulation of the Chinese yuan and currencies of other Asian
countries relative to the U.S. dollar and other trade distorting practices
employed by those countries create competitive advantages which continue to
promote the importation of goods from those countries by U.S. retailers,
exacerbating the already highly competitive market conditions Operating Income. Company operations produced an operating loss of ($10.9)
million for fiscal 2004 compared to an operating income of $12.6 million for
fiscal 2003. The operating loss reflected a significant increase in raw
material costs, partially offset by improved unit cost absorption generated
through the Companys capacity rationalization programs. In addition, largely
due to the increase in raw material costs, the Company incurred a non-cash
charge of $5.2 million to adjust the carrying value of inventories to LIFO
basis, net of market adjustment, for fiscal 2004 compared to a charge of $1.3
million for fiscal 2003. Consumption of internally produced yarns and greige
fabrics in the production of finished apparel fabrics in lieu of outside
purchases continued to provide higher overall capacity utilization. Cost of
goods sold increased 0.7% to $511.3 million for fiscal 2004 from $507.8 million
for fiscal 2003, reflecting the significant increase in raw material costs.
Cost of goods sold as a percentage of net sales increased to 90.5% for fiscal
2004 from 86.0% for fiscal 2003. 17




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##### Table of Contents



Results of Operations (continued) Selling and administrative expenses decreased 0.8% to $25.9 million for
fiscal 2004 from $26.1 million for fiscal 2003. Selling and administrative
expenses increased to 4.6% of net sales for fiscal 2004 from 4.4% for fiscal
2003, primarily due to the decline in net sales. Segment Performance. Apparel fabric sales decreased 10.6% to $420.3
million for fiscal 2004 from $470.2 million for fiscal 2003. The decline in
sales reflected a 10.5% decrease in yards sold as demand for denim and other
bottom-weight fabrics weakened, while average selling price remained relatively
flat over the respective periods. Operating income for apparel fabrics
decreased 83.5% to $4.7 million for fiscal 2004 from $28.5 million for fiscal
2003, primarily due to higher raw material costs and the reduced unit volume. Yarn sales, including intra-company sales to the apparel fabric operation,
increased 6.6% to $178.6 million for fiscal 2003 from $167.5 million for fiscal
2003. Pounds invoiced declined 12.6%, primarily reflecting the closure of a
yarn manufacturing facility in North Carolina and reduced yarn requirements of
the apparel fabrics operation. Average invoice price increased 22.0% as
improved market demand for certain yarn products and higher raw material costs
helped increase both outside invoice prices and intra-company transfer prices.
Yarn operating income was $1.1 million for fiscal 2004 compared to an operating
income of $46,000 for fiscal 2003, as the increase in average invoice price
offset the higher raw material costs. Other sales, which include sales of greige and specialty fabrics and
revenue from the Companys trucking operation, decreased 9.5% to $59.8 million
for fiscal 2004 from $66.1 million for fiscal 2003. The decrease in other sales
was primarily attributable to decreased intra-company sales of greige fabrics
to the apparel fabric operations. Operating income for other sales increased
11.4% to $4.9 million for fiscal 2004 from $4.4 million for fiscal 2003,
reflecting improved market demand for certain higher margin specialty fabrics
products. Intersegment sales decreased 16.8% percent to $93.9 million for fiscal
2004 from $112.9 million for fiscal 2003, primarily reflecting the decrease in
consumption of internally produced yarns and greige fabrics by the apparel
fabrics operation. Unallocated amounts included in operating income reflect general and
administrative expenses, certain associate benefits and performance based
incentives, and adjustments of the carrying value of inventories to LIFO basis,
net of market adjustments. Interest Expense, Net.Interest expense, net decreased 6.3% to $17.8
million for fiscal 2004 from $19.0 million for fiscal 2003, due to lower
average outstanding borrowings and lower market interest rates applicable to
those borrowings. Discount and Expenses on Sale of Receivables.Discount and expenses on
sale of receivables decreased 7.7% to $2.4 million for fiscal 2004 compared to
$2.6 million for fiscal 2003, primarily reflecting a net decrease in accounts
receivable sold under the securitization facility. Gain on Extinguishment of Debt. In the third and fourth quarters of
fiscal 2004, the Company recorded a $17.0 million net gain on early
extinguishment of debt related to a partial exchange of its 2013 Notes, net of
the write-off of $1.1 million of unamortized financing costs related to the
original issuance of the 2013 Notes. The Company executed a series of private
transactions, exchanging $59.3 million of the 2013 Notes for $41.2 million of
the 2012 Notes as further described under Senior Notes in Liquidity and
Capital Resources. Provision for Income Taxes.An income tax benefit of ($4.9) million was
recorded for fiscal 2004 compared to an income tax benefit of ($4.5) million
for fiscal 2003. The Companys effective tax rate for fiscal 2004 was 44.1% of
the pre-tax loss, compared to 36.7% of the pre-tax loss for fiscal 2003. The
fiscal 2004 effective tax rate reflected permanent differences generated from
charitable contribution deductions of the appreciated value of certain donated
property. 18




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Results of Operations (continued) Restructuring Charges, net.In response to the highly competitive market
conditions and continued imbalance of global supply and demand for textile and
apparel products, in May 2004, the Company closed an open-end yarn
manufacturing facility located in North Carolina and the weaving operation of
an integrated greige fabric manufacturing facility located in Georgia. These
actions to rationalize excess manufacturing capacity, following the relocation
of certain equipment, have improved capacity utilization of the Companys
remaining facilities and lowered costs per unit produced. No reduction in net
sales is anticipated as a result of this capacity rationalization. Flexibility
of the Companys manufacturing facilities to shift production from one product
line to another and the Companys ability to source additional yarns and greige
fabrics from outside vendors to increase production of its finished products in
reaction to added demand have been maintained. Certain equipment has been
relocated from these two operations to other facilities located in Alabama,
Georgia and South Carolina to retain certain specialized manufacturing
capabilities. Other excess equipment has been sold, generating a gain of
approximately $1.8 million. In connection with these actions, the Company
recorded restructuring charges and other non-operating costs of approximately
$1.7 million, net of the gain on equipment sold, during the third and fourth
quarters of fiscal 2004. At August 27, 2004, a North Carolina yarn plant closed in January 2002, an
Alabama yarn plant closed in May 2003 and the North Carolina yarn plant closed
in May 2004 remain unsold and are included at estimated net realizable values
in assets held for sale in the Consolidated Balance Sheets included in Item 8
of this Annual Report on Form 10-K. Fiscal 2003 Compared to Fiscal 2002 Net Sales.Net sales decreased 10.4% to $590.9 million for fiscal 2003
from $659.7 million for fiscal 2002, as the Company experienced intensely
competitive conditions in its markets. The decline in net sales in fiscal 2003
primarily reflected lower unit volume in all segments, as domestic retail sales
of apparel continued to reflect weak consumer demand. Selling prices remained
very competitive reflecting the significant uncertainties presented by the
economic and political environment, the imbalance of global supply and demand
for textile and apparel products and the financial duress experienced by many
of the Companys domestic competitors. In addition, the manipulation of the
Chinese yuan and currencies of other Asian countries relative to the U.S.
dollar and other trade distorting practices employed by those countries create
competitive advantages which continue to promote the importation of goods from
those countries by U.S. retailers, exacerbating the already highly competitive
market conditions Operating Income. Operating income decreased 32.6% to $12.6 million for
fiscal 2003 from $18.7 million for fiscal 2002. The decrease in operating
income primarily reflected the decline in unit volume and corresponding
reductions in unit cost absorption and operating efficiencies, as well as the
$2.5 million restructuring charge recorded in the third quarter of fiscal 2003.
The effects of the reduced volume were partially offset during the first three
fiscal quarters of 2003 by lower raw material costs. However, raw material
costs trended upward late in fiscal 2003, contributing to substantially lower
operating income in the fourth quarter. Consumption of internally produced
yarns and greige fabrics in the production of finished apparel fabrics in lieu
of outside purchases continued to provide higher overall capacity utilization.
Cost of goods sold decreased 9.5% to $507.8 million for fiscal 2003 from $560.8
million for fiscal 2002, primarily reflecting the reduction in unit sales. Cost
of goods sold as a percentage of net sales increased to 86.0% for fiscal 2003
from 85.0% for fiscal 2002, primarily reflecting the diminished unit cost
absorption. Selling and administrative expenses decreased 7.8% to $26.1 million for
fiscal 2003 from $28.3 million for fiscal 2002 reflecting a reduction in
certain associate benefits and performance based incentives. Selling and
administrative expenses increased to 4.4% of net sales for fiscal 2003 from
4.3% for fiscal 2002, primarily due to the decline in net sales. Segment Performance. Apparel fabrics sales decreased 9.0% to $470.2
million for fiscal 2003 from $516.9 million for fiscal 2002. The decline in
sales reflected a 8.3% decrease in yards sold as demand for denim
and other bottom-weight fabrics weakened, while average selling price decreased
slightly. Operating income for apparel fabrics decreased 28.8% to $28.5 million
for fiscal 2003 from $40.0 million for fiscal 2002, primarily due to the
reduced unit volume. 19




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Results of Operations (continued) Yarn sales, including intra-company sales to the apparel fabrics
operation, decreased 11.4% to $167.5 million for fiscal 2003 from $189.1
million for fiscal 2002. This reflects a 10.0% decrease in pounds sold and a
1.6% decrease in average selling price. Market pricing for sales yarns remained
very competitive, reflecting continued excess production capacity within the
domestic industry and importation of yarns and knitted apparel, predominately
from Asia. Yarn operating income was $46,000 for fiscal 2003 compared to an
operating loss of ($4.3) million for fiscal 2002, primarily due to lower raw
material costs in the first three fiscal quarters of fiscal 2003 and a
reduction in sales of commodity open-end yarns following the closure of yarn
manufacturing facilities during fiscal 2002 and 2003. Other sales, which include sales of greige and specialty fabrics and
revenue from the Companys trucking operation, decreased 6.5% to $66.1 million
for fiscal 2003 from $70.7 million for fiscal 2002. The decrease in sales
reflected a 3.4% decrease in units sold, a 3.4% decrease in average selling
price, 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 7.3% to $4.4
million for fiscal 2003 from $4.1 million for fiscal 2002, reflecting lower raw
material costs in the first three fiscal quarters of fiscal 2003. Intersegment sales decreased 3.4% percent to $112.9 million for fiscal
2003 from $116.9 million for fiscal 2002, primarily reflecting a decrease in
consumption of internally produced yarns by the apparel fabrics operation. Interest Expense, Net.Interest expense, net increased 3.3% to $19.0
million for fiscal 2003 from $18.4 million for fiscal 2002. Although average
outstanding borrowings were lower during the majority of fiscal 2003, the
increase reflected higher average interest rates applicable to the revolving
credit agreement, as amended, and additional interest incurred in July 2003
while the 10.25% Senior Subordinated Notes due 2006 (the 2006 Notes) and the
2013 Notes were both outstanding. For discussion, see Note 10 Long-term Debt
in the Notes to Consolidated Financial Statements included in Item 8 of this
Annual Report on Form 10-K. 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 Note 9 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 $2.6 million for fiscal 2003 compared to $1.1 million
for fiscal 2002. This increase was attributable to higher interest rates and
enhanced eligibility under the securitization facility, as amended. Loss on Extinguishment of Debt. During the fourth quarter of fiscal 2003,
the Company recorded a loss on early extinguishment of debt of $3.2 million
related to the redemption of its 2006 Notes. The loss consisted of a $2.1
million prepayment premium and the write-off of $1.1 million of unamortized
financing costs related to the original issuance of the notes. Funding of the
redemption was provided through the issuance at par of the 2013 Notes. Provision for Income Taxes.An income tax benefit of ($4.5) million was
recorded for fiscal 2003 compared to an income tax benefit of ($0.2) million
for fiscal 2002, reflecting the increased loss before income taxes. The
Companys effective tax rate for fiscal 2003 was 36.7% of the pre-tax loss,
compared to 63.6% of the pre-tax income for fiscal 2002. The fiscal 2002
effective tax rate reflected minor permanent differences affecting the fiscal
2002 provision for income taxes and the nominal level of the fiscal 2002
operating loss. 20




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##### Table of Contents



Results of Operations (continued) Restructuring Charges, net.In response to the deterioration of domestic
and regional demand for heather and stock-dyed open-end yarns, in May 2003, the
Company completed the closing of an open-end yarn manufacturing facility
located in Alabama. Continued operation of this facility could not be justified
given the diminished volume and pricing for these products. Production of
stock-dyed yarns for internal consumption by the apparel fabrics operation was
shifted to another manufacturing facility within the Company. In connection
with this action, the Company recorded restructuring charges and other
non-operating costs of approximately $2.5 million during the third quarter of
fiscal 2003. 21




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##### Table of Contents



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 27, 2004, the Company had no borrowings outstanding under
the revolving credit facility and $28.0 million of borrowing availability as
determined using prescribed advance rates against qualified inventory
collateral, less outstanding letters of credit and required minimum
availability. In addition, at August 27, 2004, $13.5 million of the equipment
note, $41.2 million aggregate principal amount of the 2012 Notes and $90.7
million aggregate principal amount of the 2013 Notes (the 2012 Notes and 2013
Notes are fully and unconditionally guaranteed by the Company) were
outstanding. Revolving Credit Facility The Company maintains a senior secured revolving credit facility, which
was executed with General Electric Capital Corporation (GECC) on November 7,
2003, replacing a revolving credit facility previously provided by a group of
lenders. The revolving credit facility provides aggregate borrowing
availability up to $40 million, including letter of credit availability up to
$10 million, based on levels of qualified inventory collateral and certain
required minimum availability. The term of the revolving credit facility extends through the earlier of
August 29, 2007, or the date at which the Receivables Securitization Facility
terminates, unless replaced by another securitization facility with GECC or an
affiliate of GECC. Borrowing availability under the new revolving credit
facility is based on specified percentages of Avondale Mills raw material,
work in process, greige fabric and finished good inventories, less applicable
reserves. The revolving credit facility is secured by the Companys
inventories, equipment (other than that securing the equipment note), accounts
receivable (not sold under the Receivables Securitization Facility), certain of
the Companys deposit and investment accounts, and the capital stock and
limited liability company interests of all subsidiaries of the Company. The
Company and Avondale Mills Graniteville Fabrics, Inc. have guaranteed the
obligations of Avondale Mills under the revolving credit facility. With respect to advances drawn under the revolving credit facility, the
Company can designate interest rates equal to the Eurodollar rate (adjusted for
reserves) plus a specified number of basis points or the reported prime rate
plus a specified number of basis points. A commitment fee is payable monthly on
the average unused portion of the revolving credit facility. The Company is
required to pay certain audit and administrative fees relating to the revolving
credit facility, and is subject to specified prepayment premiums if the
facility commitment is reduced or terminated prior to the second anniversary of
the closing date. Covenants of the revolving credit facility require the Company to maintain
certain minimum cash flow amounts and fixed charge coverage ratios in the event
that combined excess availability under the revolving credit facility and the
Receivables Securitization Facility falls below $20 million for a period of
four consecutive weeks. At August 27, 2004, combined excess availability under
these two facilities was approximately $53 million. These covenants limit the
Companys ability to pay dividends. 22




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##### Table of Contents



Liquidity and Capital Resources (continued) 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. There have been no such swap
agreements outstanding since November 2003. Equipment Note The equipment note, a secured five-year installment loan, was executed
with The CIT Group/Equipment Financing, Inc. (CIT) 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 $29.6 million at August 27, 2004.
The equipment note contains customary covenants, including requirements to
maintain certain financial covenants, and includes provisions relating to cross
acceleration to other debt obligations of the Company. Receivables Securitization Facility Established on August 30, 2002 and as subsequently amended, the Company
and its wholly-owned, special purpose subsidiary, Avondale Funding, LLC
(Funding), maintain an arrangement (Receivables Securitization Facility)
with GECC, an independent issuer of receivables-backed commercial paper, to
provide financing of up to $75 million through the sale of undivided interests
in 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 dates. The Receivables Securitization Facility replaced a previous
receivables securitization facility with a bank. The Company has been engaged
by Funding and GECC 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 GECC 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 GECC in the event that sufficient
additional Receivables are not available to maintain GECCs investment, or pay
fees and expenses. At August 27, 2004, the outstanding amount of GECCs
investment in the Receivables was $42.0 million. 23




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##### Table of Contents



Liquidity and Capital Resources (continued) 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 GECC from Funding is tied to
GECC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.
In conjunction with the execution of the senior secured revolving credit
facility with GECC on November 7, 2003, the Company executed an amendment to
the Receivables Securitization Facility adopting the same financial covenants
as provided in the revolving credit facility. Senior Notes In the third and fourth quarters of fiscal 2004, Avondale Incorporated and
its wholly-owned subsidiary, Avondale Mills, Inc., executed a series of
privately negotiated transactions, exchanging $59.3 million of the 2013 Notes
for $41.2 million of the 2012 Notes. The 2012 Notes are unsecured, but are
ranked pari pasu in right of payment with other senior indebtedness of the
Company. Interest on the 2012 Notes is due quarterly in arrears commencing
October 1, 2004, and is calculated based on the applicable three month LIBOR
rate (subject to a minimum of 1.75% and a maximum of 4.5%) plus 7.0%. After July 1, 2005, the 2012 Notes are redeemable at the Companys option,
in whole or in part, at a redemption price of 104.0%, which declines in
intervals to 100.0% in 2009 and thereafter. The 2012 Notes contain certain
provisions substantially identical to the 2013 Notes, including, 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. From time to time, the
Company may enter into additional exchange offers and/or purchase its 2013
Notes in privately negotiated or open market transactions or by tender offer. In connection with the exchanges, the Company received waivers of certain
restrictions provided under its revolving credit facility with GECC and amended
certain covenants provided under its equipment loan with CIT. The Company also
entered into a trustee agreement with Wachovia Bank, N.A. (Wachovia) whereby
Wachovia agreed to act as trustee for the 2012 Notes. The securities offered in the exchanges have not been registered under the
Securities Act of 1933 and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements. Senior Subordinated Notes The Company has $90.7 million of the 2013 Notes outstanding, after the
partial exchange of notes during fiscal 2004 discussed below. The Company
originally issued $150.0 million of the 2013 Notes at par in a private
placement to qualified institutional buyers on June 30, 2003. On October 21,
2003, the Company completed an offer to exchange the unregistered notes for new
notes with substantially identical terms that are registered under the
securities act. The 2013 Notes, which mature on July 1, 2013, are unsecured and
subordinated to all existing and future senior indebtedness of the Company.
Interest on the 2013 Notes is due semiannually, on January 1 and July 1,
commencing January 1, 2004. Proceeds from the sale of the 2013 Notes were used
to redeem the 2006 Notes, to repay indebtedness outstanding under the revolving
credit facility and for general corporate purposes. 24




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##### Table of Contents



Liquidity and Capital Resources (continued) The Company in agreement with Wachovia Securities, LLC, the original
purchaser of the 2013 Notes, filed a registration statement with the Securities
and Exchange Commission on September 16, 2003, with respect to an offer to
exchange the unregistered notes for freely tradable notes that have
substantially identical terms. All unregistered notes were tendered for
exchange prior to expiration of the exchange offer on October 21, 2003. On or after July 1, 2008, the 2013 Notes are redeemable at the Companys
option, in whole or in part, at a redemption price of 105.125%, which declines
in intervals to 100% in 2011 and thereafter. The indenture under which the 2013 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. In general, the amount of
dividends and capital stock purchases may not exceed an amount equal to $20
million plus 50% of net income, or less 100% of all net losses, all calculated
on an accumulative basis subsequent to the date of the indenture. With the loss
reported for fiscal 2004, the covenants of the indenture prohibit further
payment of dividends or purchases of capital stock until such time as
sufficient earnings are reported to eliminate the restriction. Covenant Compliance At August 27, 2004, the Company was in compliance with the covenants of
the revolving credit facility, equipment note, 2012 Notes, indenture of the
2013 Notes and the Receivables Securitization Facility. Capital Expenditures and Cash Flows Analysis The Companys capital expenditures aggregated $6.3 million for fiscal
2004. These expenditures were used primarily to complete routine maintenance
projects. Management estimates that capital expenditures for fiscal 2005 will
be approximately $10.0 million, and that such amounts will be used primarily
for general maintenance of facilities and equipment. Net cash used by operating activities was $2.0 million in fiscal 2004.
Principal working capital changes included a $10.9 million increase in accounts
receivable and $11.0 million decrease in accounts receivable sold under the
securitization facilities, a $4.6 million reduction in inventories, and a $5.8
million increase in accounts payable and accrued expenses. The Companys
investing activities were primarily the capital improvements described above
and proceeds from the disposal of manufacturing equipment of approximately $6.9
million. Net cash used by financing activities aggregated $6.9 million,
including a net decrease in long term debt of $4.3 million and payment of $2.5
million in dividends on outstanding common stock. Net cash provided by operating activities was $35.3 million in fiscal
2003. Principal working capital changes included a $35.4 million decrease in
accounts receivable and $21.3 million decrease in accounts receivable sold
under the securitization facilities, a $4.1 million reduction in inventories,
and a $15.2 million decrease in accounts payable and accrued expenses. The
Companys investing activities were primarily the capital improvements of $16.7
million and proceeds from the disposal of manufacturing equipment of
approximately $3.9 million. Net cash used by financing activities aggregated
$11.6 million, including the issuance of senior subordinated notes due 2013 of
$150.0 million, redemption of senior subordinated notes due 2006 of $127.1
million, including prepayment premium, a net decrease in the revolving credit
facility and other long term debt of $27.2 million, payment of $5.0 million in
dividends on outstanding common stock and the purchase and retirement of
treasury stock of $2.3 million. 25




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##### Table of Contents



Liquidity and Capital Resources (continued) Net cash provided by operating activities was $71.7 million in fiscal
2002. Principal working capital changes included a $9.1 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 $2.6 million increase in accounts payable and accrued expenses. The
Companys investing activities were primarily capital improvements of $13.0
million. Net cash used 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. The table below summarizes the Companys outstanding contractual
obligations as of August 27, 2004, and the effect such obligations are expected
to have on liquidity and cash flow in future periods (amounts in thousands). Payments Due by PeriodContractual Obligations
    
    Total
    
    Less than1 year
    
    1  3years
    
    3  5years
    
    After5 yearsLong-term debt
    
    $
    145,364
    
    
    $
    4,325
    
    
    $
    9,186
    
    
    $
    
    
    
    $
    131,853Operating leases
    
    
    5,656
    
    
    
    2,248
    
    
    
    3,142
    
    
    
    266
    
    
    
    Equipment purchase
orders
    
    
    1,325
    
    
    
    1,325
    
    
    
    
    
    
    
    
    
    
    
    Raw material purchase
orders
    
    
    52,733
    
    
    
    52,733
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    205,078
    
    
    $
    60,631
    
    
    $
    12,328
    
    
    $
    266
    
    
    $
    131,853
 For discussion related to contractual obligations, see Note 10 Long-Term
Debt and Note 13 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 senior secured 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. Off-Balance Sheet Financing Arrangements The receivables securitization facility is the Companys only off-balance
sheet financing arrangement. The Company generates funds through the sale of
trade 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 GECC, and
has not experienced any gains or losses on the sale of the investment in
Receivables. The Company believes minimal counter party risk exists due to the
financial strength of GECC. 26




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##### Table of Contents



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 of America (GAAP). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company evaluates these estimates and assumptions on an ongoing basis,
including but not limited to those affecting inventories, allowances for
doubtful accounts, assets held for sale, long-lived assets, income taxes
payable and deferred income taxes, deferred compensation, associate and post
retirement benefits, and contingencies. Estimates and assumptions are based on
historical and other factors believed to be reasonable under the circumstances.
The results of these estimates and assumptions may form the basis of the
carrying value of certain assets and liabilities. Actual results, under
conditions and circumstances different from those assumed, may differ from
these estimates and assumptions. The Company believes the following accounting policies are critical to the
presentation and understanding of its financial condition and the results of
its operations and involve the more significant judgments and estimates
utilized in the preparation of its consolidated financial statements: Accounts Receivable and Credit Risks:The Company extends credit lines to
its customers in the normal course of business and performs ongoing evaluations
of the financial condition of its customers. In general, collateral is not
required to support such credit lines and the related receivables. The Company
establishes allowances for doubtful accounts based upon factors surrounding the
financial condition and credit risk of specific customers, historical payment
trends and other information. The Company generates funds through the sale of accounts receivable, at a
discount and without recourse, to a special purpose subsidiary established to
facilitate the acquisition and subsequent resale of certain accounts receivable
to GECC. The discount rate on the accounts receivable purchased from the
Company is established periodically by the subsidiary based on the fair market
value of the receivables. The Company includes in accounts receivable in its
consolidated balance sheets the portion of accounts receivable sold to the
subsidiary which have not been resold to GECC. Inventories:Inventories are stated at the lower of cost or market value.
Except for certain supply inventories valued on an average cost basis, the
costs of the Companys inventories are determined on a last-in, first-out
(LIFO) basis. Under LIFO, current material and conversion costs are charged
to cost of goods sold while inventories remain valued using costs incurred in
the initial and subsequent fiscal years following election of the LIFO method.
In periods of declining prices, LIFO values may exceed current replacement
market values and require downward adjustment. Estimates, including the
estimated costs to complete work in process inventories and the estimated
realizable values of all inventories, are used in determining the lower of LIFO
cost or market. During periods when current costs or inventory quantities
fluctuate significantly, use of the LIFO method may yield cost of goods sold
that differs significantly from that which would result under other inventory
methods. Long-Lived Assets:The Company periodically reviews the values assigned to
long-lived assets, such as property, plant and equipment, assets held for sale
and goodwill. The associated depreciation and amortization periods are
reviewed on an annual basis. Estimated recoverability of long-lived asset
values is based on anticipated undiscounted and discounted cash flows from
operations, as appropriate, or in the case of assets held for sale, the lower
of historical carrying amount or estimated net realizable value. Management
periodically reviews the values assigned to these assets and if additional
information becomes available which indicates a decline in value, makes
adjustments in that period. 27




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##### Table of Contents



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 are 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 certain legal proceedings 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 27, 2004. 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. 28




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New Accounting Standards In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities, which
requires the accounts of a variable interest entity to be included in the
consolidated financial statements of a company if that company is subject to a
majority of the risk of loss from the variable interest entitys activities, is
entitled to receive a majority of the entitys residual returns, or both.
Interpretation No. 46 also requires certain disclosures regarding a variable
interest entity in which a company has a significant variable interest but is
not required to include its accounts in the companys consolidated financial
statements. The consolidation requirements of Interpretation No. 46 apply
immediately to variable interest entities created after January 31, 2003 and in
the first fiscal year or interim period beginning after June 15, 2003 for
entities existing on or before January 31, 2003. Certain of the disclosure
requirements apply to financial statements issued after January 31, 2003,
regardless of the date on which the variable interest entity was created. The
Company has evaluated the provisions of this interpretation and concluded that
the interpretation has no effect on the consolidated financial statements of
the Company since Funding is a qualified special purpose entity. In April 2003, the Financial Accounting Standards Board issued Statement
No. 149, Amendments of Statement No. 133 on Derivative Instruments and Hedging
Activities, which requires certain contracts to be treated as either
derivatives or hybrid instruments, on a consistent basis. Statement No. 149 is
effective for contracts and hedging transactions executed or modified after
June 30, 2003. The adoption of the provisions of Statement No. 149 in the
fourth quarter of fiscal 2003 had no impact on the Companys consolidated
financial statements. In May 2003, the Financial Accounting Standards Board issued Statement No.
150, Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity, which requires certain financial instruments that were
previously presented on the consolidated balance sheets as equity or temporary
equity to be presented as liabilities. Such instruments include mandatorily
redeemable preferred and common stock, and certain options and warrants.
Statement No. 150 is generally effective for the first fiscal interim period
beginning after December 15, 2003. The adoption of the provisions of Statement
No. 150 had no impact on the Companys consolidated financial statements. In December 2003, the Financial Accounting Standards Board amended and
reissued Statement No. 132, Employers Disclosures about Pensions and Other
Postretirement Benefits, which requires companies to provide additional
disclosures about retirement plan assets, benefit obligations, cash flows,
benefit costs and other relevant information. In addition to extended annual
disclosures, companies are required to report the various elements of pensions
and other postretirement benefit costs on a quarterly basis. The Company has
adopted amended Statement No. 132 effective with the third fiscal quarter ended
May 28, 2004, and the required disclosures are included in Note 11 of the
Companys consolidated financial statements under Item 8, Financial Statements
and Supplementary Data, of this Annual Report on Form 10-K. As Statement No.
132 only provides for additional disclosures and does not impact the accounting
for the Companys post retirement benefit plans, the adoption of this Statement
had no impact on the reported amounts in the Companys consolidated financial
statements. In May 2004, the Financial Accounting Standards Board issued Staff
Position No. 106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003. Staff
Position No. 106-2 requires an employer to initially account for any subsidy
received under the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 as an actuarial experience gain to the accumulated postretirement
benefit obligation, which would be amortized over future service periods.
Future subsidies would reduce service cost each year. The provisions of Staff
Position No. 106-2 are generally effective for fiscal interim periods beginning
after July 15, 2004. The Company is currently evaluating the impact of Staff
Position No. 106-2 on its consolidated financial statements. 29




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Forward Looking Statements This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the federal securities laws. Statements that are not historical
facts, including statements about our beliefs and expectations, are
forward-looking statements. Forward-looking statements include statements
generally preceded by, followed by or that include the words believe,
expect, anticipate, plan, estimate or similar expressions. These
statements include, among others, statements regarding business outlook,
anticipated financial and operating results, strategies, contingencies, working
capital requirements, expected sources of liquidity, estimated amounts and
timing of capital expenditures, estimated environmental compliance costs and
other expenditures, and expected outcomes of litigation. Forward-looking statements reflect managements current expectations and
are not guarantees of performance. Such statements are based on managements
beliefs and assumptions, which in turn are based on currently available
information. Important assumptions relating to these forward-looking
statements include, among others, assumptions regarding product demand, selling
prices, raw material costs, timing and cost of capital expenditures, cost of
environmental compliance, outcomes of pending litigation, competitive
conditions and general economic conditions. These assumptions could prove
inaccurate. Forward-looking statements also involve risks and uncertainties,
which could cause actual results to differ materially from those contained in
any forward-looking statement. Many of these factors are beyond our ability to
control or predict. Such factors include, but are not limited to, all the
risks described under the heading Risk Factors in the Companys Current
Report on Form 8-K dated June 20, 2003 and the following:  
    
    cyclical and competitive nature of the textile industry;  
    
    pressures on selling prices due to competitive and economic conditions;  
    
    deterioration of relationships with, or loss of, significant customers;  
    
    strength of the U.S. dollar versus the currencies of other textile producing countries;  
    
    changes in trade policies, including textile and apparel tariffs,
and the elimination of import quotas under the WTO effective December
31, 2004;  
    
    ability to identify and respond to fashion trends;  
    
    availability and pricing of cotton and other raw materials;  
    
    changes in government policies affecting raw material costs,
including the impact of WTO rulings against the U.S. agricultural
support programs;  
    
    availability and desirability of technological advancements;  
    
    retention of key management personnel;  
    
    continued availability of financial resources;  
    
    changes in environmental, health and safety regulations; and  
    
    political or military responses to terrorist activities. You should not place undue reliance on any forward-looking statements,
which are based on current expectations. Further, forward-looking statements
speak only as of the date they are made, and we undertake no obligation to
update publicly any of them in light of new information or future events. 30




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Other Data Adjusted EBITDA is a supplemental non-GAAP financial measure. Adjusted
EBITDA is presented because management believes that it is a widely accepted
indicator of a companys ability to service its indebtedness and is used by
investors and analysts to evaluate companies within the textile and apparel
industry. In addition, Adjusted EBITDA is used to determine compliance with
certain covenants under the Companys receivables securitization, revolving
credit facility, equipment note, the 2013 Notes and the 2012 Notes, and is
calculated by the Company as follows (amounts in thousands): Fiscal Year2002
    
    2003
    
    2004Net income (loss)
    
    $
    (130
    )
    
    $
    (7,738
    )
    
    $
    (6,237
    )Interest expense, net
    
    
    18,449
    
    
    
    19,034
    
    
    
    17,788Benefit of income taxes
    
    
    (227
    )
    
    
    (4,495
    )
    
    
    (4,915
    )Depreciation and amortization
    
    
    45,538
    
    
    
    42,204
    
    
    
    37,268EBITDA
    
    
    63,630
    
    
    
    49,005
    
    
    
    43,904Discount and expenses on
sale of receivables
    
    
    1,117
    
    
    
    2,596
    
    
    
    2,419Loss (gain) on extinguishment of debt
    
    
    
    
    
    
    3,236
    
    
    
    (17,000
    )Restructuring charges, net and other
equipment disposals (non-cash portion)
    
    
    5,330
    
    
    
    4,140
    
    
    
    3,140Adjustment of carrying value of inventories
to LIFO basis, net of market adjustment
    
    
    (2,150
    )
    
    
    1,335
    
    
    
    5,210Adjusted EBITDA
    
    $
    67,927
    
    
    $
    60,312
    
    
    $
    37,673
 Adjusted EBITDA as calculated by the Company is not necessarily comparable
to similarly titled measures used by other companies. Adjusted EBITDA (a) does
not represent net income (loss) or cash flow from operations as defined by
generally accepted accounting principles; (b) is not necessarily indicative of
cash available to fund cash requirements; and (c) should not be considered an
alternative to operating income, net income (loss) or net cash provided by
operating activities as determined in accordance with generally accepted
accounting principles. 31




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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. Assuming the revolving credit facility and 2012
Notes outstanding at August 27, 2004 remain in effect throughout fiscal 2005, a
10% change in the effective average interest rate would not have a material
effect on the Companys pretax earnings for fiscal 2005. In addition, a 10%
change in interest rates would not have a material effect on the fair value of
the Companys 2012 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 $7.1 to $8.6 million. 32




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. AVONDALE INCORPORATED CONSOLIDATED FINANCIAL STATEMENTS Years Ended August 30, 2002, August 29, 2003
and August 27, 2004 PageReport of Independent Registered Public Accounting Firm
    
    
    34Consolidated Balance Sheets
    
    
    35Consolidated Statements of Operations
    
    
    36Consolidated Statements of Shareholders Equity
    
    
    37Consolidated Statements of Cash Flows
    
    
    38Notes to Consolidated Financial Statements
    
    
    39
 33




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To Avondale Incorporated: We have audited the accompanying consolidated balance sheets of Avondale
Incorporated and subsidiaries as of August 27, 2004 and August 29, 2003, and
the related consolidated statements of operations, shareholders equity and
cash flows for each of the years in the three-year period ended August 27,
2004. 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
audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Avondale
Incorporated and subsidiaries as of August 27, 2004 and August 29, 2003, and
the results of their operations and their cash flows for each of the years in
the three-year period ended August 27, 2004 in conformity with accounting
principles generally accepted in the United States of America. Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
Index at Item 15(a) has been subjected to the auditing procedures applied in
the audits of the basic consolidated financial statements and, in our opinion,
the financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein. DIXON HUGHES PLLC Atlanta, Georgia
October 8, 2004 34




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##### Table of Contents



AVONDALE INCORPORATED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) August 29,
    
    August 27,2003
    
    2004ASSETSCurrent assetsCash and cash equivalents
    
    $
    13,769
    
    
    $
    5,481Accounts receivable, less allowance for doubtful accounts of
$1,867 in 2003 and $1,015 in 2004
    
    
    29,157
    
    
    
    50,975Inventories
    
    
    82,887
    
    
    
    78,282Prepaid expenses
    
    
    1,980
    
    
    
    1,275Income taxes refundable
    
    
    2,825
    
    
    
    506Total current assets
    
    
    130,618
    
    
    
    136,519Assets held for sale
    
    
    2,640
    
    
    
    1,037Property, plant and equipmentLand
    
    
    6,484
    
    
    
    6,289Buildings
    
    
    79,647
    
    
    
    75,771Machinery and equipment
    
    
    497,213
    
    
    
    465,647583,344
    
    
    
    547,707Less accumulated depreciation
    
    
    (367,759
    )
    
    
    (365,755
    )215,585
    
    
    
    181,952Goodwill
    
    
    2,951
    
    
    
    2,951Other assets
    
    
    7,712
    
    
    
    6,023$
    359,506
    
    
    $
    328,482LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    18,724
    
    
    $
    24,167Accrued compensation, benefits and related expenses
    
    
    9,280
    
    
    
    10,440Accrued interest
    
    
    2,726
    
    
    
    2,403Other accrued expenses
    
    
    9,785
    
    
    
    9,340Long-term debt due in one year
    
    
    4,325
    
    
    
    4,325Total current liabilities
    
    
    44,840
    
    
    
    50,675Long-term debt
    
    
    163,512
    
    
    
    141,039Deferred income taxes and other long-term liabilities
    
    
    35,203
    
    
    
    29,439Commitments and contingenciesShareholders equityPreferred stock$.01 par value; 10,000 shares authorized
    
    
    
    
    
    
    Common stockClass A, $.01 par value; 100,000 shares authorized; issued and
outstanding  11,402 shares in 2003 and 11,394 shares in 2004
    
    
    114
    
    
    
    114Class B, $.01 par value; 5,000 shares authorized; issued and
outstanding  979 shares in 2003 and 2004
    
    
    10
    
    
    
    10Capital in excess of par value
    
    
    39,194
    
    
    
    39,170Accumulated other comprehensive loss
    
    
    (151
    )
    
    
    Retained earnings
    
    
    76,784
    
    
    
    68,035Total shareholders equity
    
    
    115,951
    
    
    
    107,329$
    359,506
    
    
    $
    328,482
 The accompanying notes are an integral part of these consolidated financial statements. 35




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##### Table of Contents



AVONDALE INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)


Fiscal Year EndedAugust 30,
    
    August 29,
    
    August 27,2002
    
    2003
    
    2004Net sales
    
    $
    659,735
    
    
    $
    590,862
    
    
    $
    564,777Operating
costs and expensesCost of goods sold
    
    
    560,794
    
    
    
    507,846
    
    
    
    511,305Depreciation
    
    
    44,956
    
    
    
    41,842
    
    
    
    36,732Selling and administrative expenses
    
    
    28,289
    
    
    
    26,143
    
    
    
    25,909Restructuring charges, net
    
    
    7,000
    
    
    
    2,450
    
    
    
    1,680Operating income (loss)
    
    
    18,696
    
    
    
    12,581
    
    
    
    (10,849
    )Interest expense, net
    
    
    18,449
    
    
    
    19,034
    
    
    
    17,788Discounts and expenses on sales of receivables
    
    
    1,117
    
    
    
    2,596
    
    
    
    2,419Loss (gain) on extinguishment of debt
    
    
    
    
    
    
    3,236
    
    
    
    (17,000
    )Other income, net
    
    
    (513
    )
    
    
    (52
    )
    
    
    (2,904
    )Loss before income taxes
    
    
    (357
    )
    
    
    (12,233
    )
    
    
    (11,152
    )Benefit of income taxes
    
    
    (227
    )
    
    
    (4,495
    )
    
    
    (4,915
    )Net loss
    
    $
    (130
    )
    
    $
    (7,738
    )
    
    $
    (6,237
    )Per share dataNet loss  basic
    
    $
    (.01
    )
    
    $
    (.62
    )
    
    $
    (.50
    )Net loss  diluted
    
    $
    (.01
    )
    
    $
    (.62
    )
    
    $
    (.50
    )Dividends declared
    
    $
    .30
    
    
    $
    .40
    
    
    $
    .20


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

36



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##### Table of Contents



AVONDALE INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands, except per share data) Common StockIssued
    
    Capital inExcess of
    
    AccumulatedOtherComprehensive
    
    Retained
    
    TotalShareholdersShares
    
    Amount
    
    Par Value
    
    Loss
    
    Earnings
    
    EquityBalance at August 31, 2001
    
    
    12,531
    
    
    $
    125
    
    
    $
    39,669
    
    
    $
    (561
    )
    
    $
    90,768
    
    
    $
    130,001Refund of prior year income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,471
    
    
    
    4,471Net 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
    
    
    
    130,255Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,738
    )
    
    
    (7,738
    )Change in fair value of interest rate
swaps, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    738
    
    
    
    
    
    
    
    738Cash dividends ($0.40 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,990
    )
    
    
    (4,990
    )Purchase and retirement of treasury stock
    
    
    (150
    )
    
    
    (1
    )
    
    
    (475
    )
    
    
    
    
    
    
    (1,838
    )
    
    
    (2,314
    )Balance at August 29, 2003
    
    
    12,381
    
    
    
    124
    
    
    
    39,194
    
    
    
    (151
    )
    
    
    76,784
    
    
    
    115,951Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,237
    )
    
    
    (6,237
    )Change in fair value of interest rate
swaps, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    151
    
    
    
    
    
    
    
    151Cash dividends ($0.20 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,476
    )
    
    
    (2,476
    )Purchase and retirement of treasury stock
    
    
    (8
    )
    
    
    
    
    
    
    (24
    )
    
    
    
    
    
    
    (36
    )
    
    
    (60
    )Balance at August 27, 2004
    
    
    12,373
    
    
    $
    124
    
    
    $
    39,170
    
    
    $
    
    
    
    $
    68,035
    
    
    $
    107,329
 The accompanying notes are an integral part of these consolidated financial statements. 37




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##### Table of Contents



AVONDALE INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Fiscal Year EndedAugust 30,
    
    August 29,
    
    August 27,2002
    
    2003
    
    2004Operating activitiesNet loss
    
    $
    (130
    )
    
    $
    (7,738
    )
    
    $
    (6,237
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activitiesDepreciation and amortization
    
    
    45,538
    
    
    
    42,204
    
    
    
    37,268Provision for (benefit of) deferred income taxes
    
    
    3,534
    
    
    
    (4,913
    )
    
    
    (5,036
    )Loss (gain) on disposal of equipment and
restructuring charges, net
    
    
    5,379
    
    
    
    2,175
    
    
    
    (2,127
    )Loss (gain) on extinguishment of debt
    
    
    
    
    
    
    3,236
    
    
    
    (17,000
    )Sales of accounts receivable, net
    
    
    12,390
    
    
    
    (21,313
    )
    
    
    (10,971
    )Changes in operating assets and liabilitiesAccounts receivable
    
    
    (9,122
    )
    
    
    35,461
    
    
    
    (10,847
    )Inventories
    
    
    12,725
    
    
    
    4,059
    
    
    
    4,605Other assets and liabilities, net
    
    
    (1,198
    )
    
    
    (2,664
    )
    
    
    2,516Accounts payable and accrued expenses
    
    
    2,559
    
    
    
    (15,229
    )
    
    
    5,835Net cash provided by (used in) operating activities
    
    
    71,675
    
    
    
    35,278
    
    
    
    (1,994
    )Investing activitiesPurchase of property, plant and equipment
    
    
    (13,086
    )
    
    
    (16,703
    )
    
    
    (6,298
    )Proceeds from sale of property, plant and equipment
and assets held for sale
    
    
    739
    
    
    
    3,938
    
    
    
    6,865Net cash provided by (used in) investing activities
    
    
    (12,347
    )
    
    
    (12,765
    )
    
    
    567Financing activitiesPayments on long-term debt
    
    
    (2,500
    )
    
    
    (129,299
    )
    
    
    (4,325
    )Payments on revolving line of credit, net
    
    
    (77,650
    )
    
    
    (25,000
    )
    
    
    Issuance of long-term debt
    
    
    20,000
    
    
    
    150,000
    
    
    
    Refund of prior year income taxes
    
    
    4,471
    
    
    
    
    
    
    
    Purchase and retirement of treasury stock
    
    
    
    
    
    
    (2,314
    )
    
    
    (60
    )Dividends paid
    
    
    (3,759
    )
    
    
    (4,990
    )
    
    
    (2,476
    )Net cash used in financing activities
    
    
    (59,438
    )
    
    
    (11,603
    )
    
    
    (6,861
    )Increase (decrease) in cash and cash equivalents
    
    
    (110
    )
    
    
    10,910
    
    
    
    (8,288
    )Cash and cash equivalents at beginning of year
    
    
    2,969
    
    
    
    2,859
    
    
    
    13,769Cash and cash equivalents at end of year
    
    $
    2,859
    
    
    $
    13,769
    
    
    $
    5,481
 The accompanying notes are an integral part of these consolidated financial statements. 38




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AVONDALE INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 27, 2004 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. Avondale Funding, LLC (Funding), a special purpose subsidiary of
Avondale Mills, was established to provide financing through the sale of
accounts receivable generated by the Company. The Company accounts for its
investment in Funding using the equity method of accounting. Avondale Incorporated is a holding company and has no operations,
liabilities or assets other than those related to its investment in Avondale
Mills. 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 remain valued using costs incurred in the initial
and subsequent fiscal years following election of the LIFO method. In periods
of declining prices, LIFO values may exceed current replacement market values
and require downward adjustment. Estimates, including the estimated costs to
complete work in process inventories and the estimated realizable values of all
inventories, are used in determining the lower of LIFO cost 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, assets held for sale
and goodwill. The associated depreciation and amortization periods are
reviewed on an annual basis. Estimated recoverability of long lived assets is
based on the anticipated undiscounted and discounted cash flows from
operations, as appropriate, or in the case of assets held for sale, the lower
of historical carrying cost or estimated net realizable value. 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. Prior to October 1, 2003, the Company matched 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 39




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##### Table of Contents



compensation plans is charged to operations
currently and totaled $0.4 million for fiscal 2003 and $22,000 for fiscal 2004.
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 through the termination of the plan on December
31, 2003, 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 and capitalized software costs. Loan fees
are amortized on a straight line basis over the outstanding term of the related
debt. Other long-term liabilities consist of accrued postretirement and
workers compensation benefits and deferred compensation for certain key
management personnel. Fair Value of Financial Instruments:The carrying values of cash, accounts
receivable, certain other assets, accounts payable and accrued expenses
approximate reasonable estimates of their fair values at August 29, 2003 and
August 27, 2004. See Notes 6 and 10 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, 2003 and 2004, employee
and director options are not considered due to their antidilutive effect. Share
information is summarized as follows (in thousands): 2002
    
    2003
    
    2004Weighted
average shares outstanding -Basic
    
    
    12,531
    
    
    
    12,458
    
    
    
    12,378Effect of
employee and director stockoptions
    
    
    
    
    
    
    
    
    
    
    Weighted
average shares outstanding -Diluted
    
    
    12,531
    
    
    
    12,458
    
    
    
    12,378
 Stock Based Compensation:The Company adopted the provisions of Statement
of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, during fiscal 2003, electing to
continue its use of the intrinsic value method. Accordingly, no stock-based
compensation has been recorded, as the exercise price of each option granted
under the existing plan equals the market value of the underlying common stock
on the date of grant. See Note 12 for disclosure related to the expiration of
the employee Stock Option Plan, and the effect on results of operations had the
Company computed compensation in accordance with the fair value method as
provided in Statement No. 123, Accounting for Stock-Based Compensation. 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 6% of total revenues in fiscal
2002, 2003 and 2004, respectively) on a bill and hold basis, invoicing goods
that have been produced, packaged and made ready for shipment. These goods are
effectively segregated from inventory which is available for sale, the risks of
ownership of the goods have passed to the 40




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##### Table of Contents



customer, and the remittance terms
and collection experience on the related invoicing are consistent with all
other sales by the Company. The credit status of each customer is approved and monitored by the
Company. Sales to Flynn Enterprises, Inc. represented 7% of net sales for
fiscal 2002, 8% of net sales for fiscal 2003 and 10% of net sales for fiscal
2004. Sales to V.F. Corporation and its affiliates represented 20% of net sales
for fiscal 2002, 16% of net sales for fiscal 2003 and 10% of net sales for
fiscal 2004. None of the Companys other customers individually accounted for
10% or more of the Companys net sales in fiscal 2002, 2003 or 2004. Recent Accounting Pronouncements:In January 2003, the Financial
Accounting Standards Board issued Interpretation No. 46, Consolidation of
Variable Interest Entities, which requires the accounts of a variable interest
entity to be included in the consolidated financial statements of a company if
that company is subject to a majority of the risk of loss from the variable
interest entitys activities, is entitled to receive a majority of the entitys
residual returns, or both. Interpretation No. 46 also requires certain
disclosures regarding a variable interest entity in which a company has a
significant variable interest but is not required to include its accounts in
the companys consolidated financial statements. The consolidation requirements
of Interpretation No. 46 apply immediately to variable interest entities
created after January 31, 2003 and in the first fiscal year or interim period
beginning after June 15, 2003 for entities existing on or before January 31,
2003. Certain of the disclosure requirements apply to financial statements
issued after January 31, 2003, regardless of the date on which the variable
interest entity was created. The Company has evaluated the provisions of this
interpretation and concluded that the interpretation has no effect on the
consolidated financial statements of the Company since Funding, as discussed in
Note 7, is a qualified special purpose entity. In April 2003, the Financial Accounting Standards Board issued Statement
No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging
Activities, which requires certain contracts to be treated as either
derivatives or hybrid instruments, on a consistent basis. Statement No. 149 is
effective for contracts and hedging transactions executed or modified after
June 30, 2003. The adoption of the provisions of Statement No. 149 in the
fourth quarter of fiscal 2003 had no impact on the Companys consolidated
financial statements. In May 2003, the Financial Accounting Standards Board issued Statement No.
150, Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity, which requires certain financial instruments that were
previously presented on the consolidated balance sheets as equity or temporary
equity to be presented as liabilities. Such instruments include mandatorily
redeemable preferred and common stock, and certain options and warrants.
Statement No. 150 is generally effective for the first fiscal interim period
beginning after December 15, 2003. The adoption of the provisions of Statement
No. 150 had no impact on the reported amounts in the Companys consolidated
financial statements. In December 2003, the Financial Accounting Standards Board amended and
reissued Statement No. 132, Employers Disclosures about Pensions and Other
Postretirement Benefits, which requires companies to provide additional
disclosures about retirement plan assets, benefit obligations, cash flows,
benefit costs and other relevant information. In addition to extended annual
disclosures, companies are required to report the various elements of pensions
and other postretirement benefit costs on a quarterly basis. The Company has
adopted amended Statement No. 132 effective with the third fiscal quarter ended
May 28, 2004, and the required disclosures are included in Note 11. As
Statement No. 132 only provides for additional disclosures and does not impact
the accounting for the Companys post retirement benefit plans, the adoption of
this Statement had no impact on reported amounts in the Companys consolidated
financial statements. In May 2004, the Financial Accounting Standards Board issued Staff
Position No. 106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003. Staff
Position No. 106-2 requires an employer to initially account for any subsidy
received under the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 as an actuarial
experience gain to the accumulated postretirement benefit obligation, which is
amortized over future service periods. Future subsidies reduce service cost
each year. The provisions of Staff Position No. 106-2 are generally effective
for fiscal interim periods beginning 41




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##### Table of Contents



after July 15, 2004. The Company is
currently evaluating the impact of Staff Position No. 106-2 on its consolidated
financial statements. 2. Restructuring Charges, net: In response to 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 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. In response to the deterioration of domestic and regional demand for
heather and stock-dyed open-end yarns, in May 2003, the Company completed the
closing of an open-end yarn manufacturing facility located in Alabama.
Continued operation of this facility could not be justified given the
diminished volume and pricing for these products. Production of stock-dyed
yarns for internal consumption by the apparel fabrics operation was shifted to
another manufacturing facility within the Company. In connection with this
action, the Company recorded restructuring charges and other non-operating
costs of approximately $2.5 million during fiscal 2003. In response to the highly competitive market conditions and continued
imbalance of global supply and demand for textile and apparel products, in May
2004, the Company closed an open-end yarn manufacturing facility located in
North Carolina and the weaving operation of an integrated greige fabric
manufacturing facility located in Georgia. These actions to rationalize excess
manufacturing capacity, following the relocation of certain equipment, have
improved capacity utilization of the Companys remaining facilities and lowered
costs per unit produced. No reduction in net sales is anticipated as a result
of this capacity rationalization. Flexibility of the Companys manufacturing
facilities to shift production from one product line to another and the
Companys ability to source additional yarns and greige fabrics from outside
vendors to increase production of its finished products in reaction to added
demand have been maintained. Certain equipment has been relocated from these
two operations to other facilities located in Alabama, Georgia and South
Carolina to retain certain specialized manufacturing capabilities. Other excess
equipment has been sold, generating a gain of approximately $1.8 million. In
connection with these actions, the Company recorded restructuring charges and
other non-operating costs of approximately $1.7 million, net of the gain on
equipment sold, during the third and fourth quarters of fiscal 2004. At August 27, 2004, a North Carolina yarn plant closed in January 2002,
the Alabama yarn plant closed in May 2003 and the North Carolina yarn plant
closed in May 2004 remain unsold and are included at estimated net realizable
values in assets held for sale in the consolidated balance sheets. 3. Loss (Gain) on Extinguishment of Debt: During the fourth quarter of
fiscal 2003, the Company recorded a loss on early extinguishment of debt of
$3.2 million related to the redemption of $125 million of 10.25% Senior
Subordinated Notes Due 2006 (2006 Notes). The loss consisted of a $2.1
million prepayment premium and the write-off of $1.1 million of unamortized
financing costs related to the original issuance of the notes. Funding of the
redemption was provided through the issuance at par of $150 million of 101/4%
Senior Subordinated Notes due 2013 (2013 Notes) as described in Note 10. In the third and fourth quarters of fiscal 2004, the Company recorded a
$17.0 million net gain on early extinguishment of debt related to a partial
exchange of its 2013 Notes, net of the write-off of $1.1 million of unamortized
financing costs related to the original issuance of the 2013 Notes. The Company
executed a series of private transactions, exchanging $59.3 million of the 2013
Notes for $41.2 million of new senior Floating Rate Notes due 2012 (the 2012
Notes) as further described in Note 10. 42




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##### Table of Contents



4. 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 workwear. 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). 2002
    
    2003
    
    2004Revenues:Apparel fabrics
    
    $
    516,900
    
    
    $
    470,159
    
    
    $
    420,302Yarns
    
    
    189,057
    
    
    
    167,541
    
    
    
    178,588Other
    
    
    70,715
    
    
    
    66,056
    
    
    
    59,826776,672
    
    
    
    703,756
    
    
    
    658,716Less intersegment sales
    
    
    116,937
    
    
    
    112,894
    
    
    
    93,939Total
    
    $
    659,735
    
    
    $
    590,862
    
    
    $
    564,777Income (loss):Apparel fabrics
    
    $
    39,976
    
    
    $
    28,514
    
    
    $
    4,651Yarns
    
    
    (4,313
    )
    
    
    46
    
    
    
    1,136Other
    
    
    4,060
    
    
    
    4,432
    
    
    
    4,893Unallocated
    
    
    (21,027
    )
    
    
    (20,411
    )
    
    
    (21,529
    )Total operating income (loss)
    
    
    18,696
    
    
    
    12,581
    
    
    
    (10,849
    )Interest expense
    
    
    18,449
    
    
    
    19,034
    
    
    
    17,788Discounts and expenses on sales of
receivables
    
    
    1,117
    
    
    
    2,596
    
    
    
    2,419Loss (gain) on extinguishment of debt
    
    
    
    
    
    
    3,236
    
    
    
    (17,000
    )Other income, net
    
    
    (513
    )
    
    
    (52
    )
    
    
    (2,904
    )Loss before income taxes
    
    $
    (357
    )
    
    $
    (12,233
    )
    
    $
    (11,152
    )Identifiable assets:Apparel fabrics
    
    $
    253,348
    
    
    $
    226,777
    
    
    $
    221,664Yarns
    
    
    75,018
    
    
    
    67,177
    
    
    
    61,144Other
    
    
    17,728
    
    
    
    13,088
    
    
    
    11,776Unallocated
    
    
    51,319
    
    
    
    52,464
    
    
    
    33,898Total
    
    $
    397,413
    
    
    $
    359,506
    
    
    $
    328,482Depreciation and amortization:Apparel fabrics
    
    $
    28,188
    
    
    $
    26,689
    
    
    $
    23,842Yarns
    
    
    11,019
    
    
    
    10,133
    
    
    
    9,326Other
    
    
    3,597
    
    
    
    2,282
    
    
    
    1,316Unallocated
    
    
    2,734
    
    
    
    3,100
    
    
    
    2,784Total
    
    $
    45,538
    
    
    $
    42,204
    
    
    $
    37,268
 43




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##### Table of Contents



2002
    
    2003
    
    2004Capital expenditures:Apparel fabrics
    
    $
    6,391
    
    
    $
    9,930
    
    
    $
    3,679Yarns
    
    
    4,820
    
    
    
    5,440
    
    
    
    1,401Other
    
    
    344
    
    
    
    371
    
    
    
    484Unallocated
    
    
    1,531
    
    
    
    962
    
    
    
    734Total
    
    $
    13,086
    
    
    $
    16,703
    
    
    $
    6,298Geographic sales information:United States
    
    $
    612,706
    
    
    $
    542,192
    
    
    $
    475,351All other
    
    
    47,029
    
    
    
    48,670
    
    
    
    89,426Total
    
    $
    659,735
    
    
    $
    590,862
    
    
    $
    564,777
 5. Comprehensive Loss:Comprehensive loss includes unrealized gains and
losses in the fair value of certain derivative instruments which qualify for
hedge accounting. A reconciliation of net loss to comprehensive loss is as
follows (in thousands): 2002
    
    2003
    
    2004Net loss
    
    $
    (130
    )
    
    $
    (7,738
    )
    
    $
    (6,237
    )Change in fair value of interest rate swaps,
net of income taxes
    
    
    (328
    )
    
    
    738
    
    
    
    151Comprehensive loss
    
    $
    (458
    )
    
    $
    (7,000
    )
    
    $
    (6,086
    )
 6. 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 operating results or other comprehensive
income depending on whether specific hedge accounting criteria are met. For the
fiscal years ended August 30, 2002, August 29, 2003 and August 27, 2004,
increases (declines) in fair value of approximately ($328,000), $738,000 and
$151,000, respectively, net of income taxes, were recorded as unrealized gains
(losses) in other comprehensive loss. 7. Receivables Securitization Facilities:Established on August 30, 2002
and as subsequently amended, the Company and its wholly owned, special purpose
subsidiary, Funding, maintain an arrangement (Receivables Securitization
Facility) with General Electric Capital Corporation (GECC), an independent
issuer of receivables-backed commercial paper, to provide financing of up to
$75 million through the sale of undivided interests in certain trade
receivables (Receivables) originated by the 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 GECC 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 GECC
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 GECC in the event that
sufficient additional Receivables are not available to maintain its investment,
or pay fees and expenses. Funding retains no interest in the investment in the
Receivables sold to GECC, and has experienced no gains or losses on such sales.
Funding is
a separate corporate 44




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##### Table of Contents



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. 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 GECC from Funding is tied to
GECC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.
In conjunction with the execution of the senior secured revolving credit
facility with GECC on November 7, 2003, the Company executed an amendment to
the Receivables Securitization Facility adopting the same financial covenants
as provided in the revolving credit facility. 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 GECC. At August 29, 2003 and August 27, 2004, the outstanding amount of
investments by GECC or the issuer of commercial paper under the agreements was
$52.9 million and $42.0 million, respectively. Accounts receivable in the
consolidated balance sheets have been reduced by approximately $53.2 million
and $42.3 million at August 29, 2003 and August 27, 2004, respectively,
representing the face amount of the outstanding receivables sold at those
dates. During fiscal 2003 and 2004, the Company received approximately $550
million and $485 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 $1.1 million, $2.6
million and $2.4 million for fiscal years 2002, 2003, and 2004, respectively,
have been included in discounts and expenses on sales of receivables in the
consolidated statements of income. 8. Inventories:Components of inventories are as follows (in thousands): August 29,
    
    August 27,2003
    
    2004Finished goods
    
    $
    26,579
    
    
    $
    29,187Work in process
    
    
    33,176
    
    
    
    33,047Raw materials
    
    
    9,072
    
    
    
    8,173Dyes and chemicals
    
    
    4,593
    
    
    
    4,09673,420
    
    
    
    74,503Adjustment of carrying value to LIFO basis,
net of market adjustment
    
    
    3,565
    
    
    
    (1,645
    )76,985
    
    
    
    72,858Supplies at average cost
    
    
    5,902
    
    
    
    5,424$
    82,887
    
    
    $
    78,282
 45




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##### Table of Contents



9. Income Taxes:Provision for (benefit of) income taxes is composed of
the following (in thousands): 2002
    
    2003
    
    2004Current:Federal
    
    $
    (3,602
    )
    
    $
    364
    
    
    $
    50State
    
    
    (159
    )
    
    
    54
    
    
    
    71(3,761
    )
    
    
    418
    
    
    
    121Deferred:Federal
    
    
    3,079
    
    
    
    (4,280
    )
    
    
    (4,367
    )State
    
    
    455
    
    
    
    (633
    )
    
    
    (669
    )3,534
    
    
    
    (4,913
    )
    
    
    (5,036
    )$
    (227
    )
    
    $
    (4,495
    )
    
    $
    (4,915
    )
 The following table shows the reconciliation of federal income taxes
(benefits) at the statutory rate on loss before income taxes to reported income
tax benefit, (in thousands): 2002
    
    2003
    
    2004Federal income tax benefit at statutory rate
    
    $
    (125
    )
    
    $
    (4,282
    )
    
    $
    (3,902
    )State income taxes (benefits), net of
federal tax effect
    
    
    192
    
    
    
    (376
    )
    
    
    (622
    )Appreciated value of charitable contributions
    
    
    
    
    
    
    
    
    
    
    (562
    )Other
    
    
    (294
    )
    
    
    163
    
    
    
    171$
    (227
    )
    
    $
    (4,495
    )
    
    $
    (4,915
    )
 At August 27, 2004, the Company had available net operating loss
carryforwards for federal income tax purposes of approximately $5.0 million,
expiring in 2018, and certain state net operating loss carryforwards, expiring
at various dates beginning in 2016, which have been recorded in deferred tax
assets. The Company believes that it is more likely than not that all of the
net operating loss carryforwards will be utilized prior to expiration. The Company made no income tax payments during fiscal 2002 and 2003, and
made payments of $172,000 during fiscal 2004. The Company received a refund of
approximately $5.0 million during fiscal 2002 relating to payment of estimated
fiscal 2001 income taxes, a refund of approximately $3.6 million during fiscal
2003 resulting from carryback of the fiscal 2002 income tax operating loss and
a refund of approximately $2.3 million during fiscal 2004 resulting from
carryback of the fiscal 2001 and 2002 income tax operating losses. 46




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##### Table of Contents



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 29,
    
    August 27,2003
    
    2004Deferred tax liabilities:Depreciation
    
    $
    25,788
    
    
    $
    20,688Inventory valuation
    
    
    7,523
    
    
    
    9,048Other
    
    
    1,993
    
    
    
    1,24935,304
    
    
    
    30,985Deferred tax assets:Employee benefit programs
    
    
    6,093
    
    
    
    6,133Receivable reserves
    
    
    2,330
    
    
    
    2,203Net operating loss and contribution carryforwards
    
    
    3,041
    
    
    
    2,612Other
    
    
    1,152
    
    
    
    2,38612,616
    
    
    
    13,334Net deferred tax liabilities
    
    $
    22,688
    
    
    $
    17,651
 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
operations. 10. Long-term Debt:Long-term debt consists of the following (in
thousands): August 29,
    
    August 27,2003
    
    2004Revolving credit facility, interest tied to banks base rate
or alternative rates, 4.75% - 5.25% in 2004,
due March 2006
    
    $
    
    
    
    $
    Equipment note, 4.61% - 5.18% in 2004, due in monthly
installments of approximately $360 beginning March 2004,
with final payment of approximately $876 due August 2007
    
    
    17,837
    
    
    
    13,512Floating rate senior notes, interest tied to LIBOR plus 7.0%,
8.75% in 2004, due July 1, 2012
    
    
    
    
    
    
    41,177Senior subordinated notes, 101/4%, due July 1, 2013
    
    
    150,000
    
    
    
    90,675167,837
    
    
    
    145,364Less current portion
    
    
    (4,325
    )
    
    
    (4,325
    )$
    163,512
    
    
    $
    141,039
 The Company maintains a senior secured revolving credit facility, which
was executed with GECC on November 7, 2003, replacing a revolving credit
facility previously provided by a group of lenders. The revolving credit
facility provides aggregate borrowing availability up to $40 million, including
letter of credit availability up to $10 million, based on levels of qualified
inventory collateral and certain required minimum availability. 47




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##### Table of Contents



The term of the revolving credit facility extends through the earlier of
August 29, 2007, or the date at which the Receivables Securitization Facility
terminates, unless replaced by another securitization facility with GECC or an
affiliate of GECC. Borrowing availability under the new revolving credit
facility is based on specified percentages of Avondale Mills raw material,
work in process, greige fabric and finished good inventories, less applicable
reserves. The revolving credit facility is secured by the Companys
inventories, equipment other than that securing the equipment note, accounts
receivable (not sold under the Receivables Securitization Facility), certain of
the Companys deposit and investment accounts, and the capital stock and
limited liability company interests of all subsidiaries of the Company. The
Company and Avondale Mills Graniteville Fabrics, Inc. have guaranteed the
obligations of Avondale Mills under the revolving credit facility. With respect to advances drawn under the revolving credit facility, the
Company can designate interest rates equal to the Eurodollar rate (adjusted for
reserves) plus a specified number of basis points or the reported prime rate
plus a specified number of basis points. A commitment fee is payable monthly on
the average unused portion of the revolving credit facility. The Company is
required to pay certain audit and administrative fees relating to the revolving
credit facility, and is subject to specified prepayment premiums if the
facility commitment is reduced or terminated prior to the second anniversary of
the closing date. Covenants of the revolving credit facility require the Company to maintain
certain minimum cash flow amounts and fixed charge coverage ratios in the event
that combined excess availability under the revolving credit facility and the
Receivables Securitization Facility falls below $20 million for a period of
four consecutive weeks. At August 27, 2004, combined excess availability under
these two facilities was approximately $53 million. These covenants limit the
Companys ability to pay dividends. 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. There have been no such swap
agreements outstanding since November 2003. 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 at two plant locations, which had a carrying value of
approximately $29.6 million at August 27, 2004. The equipment note contains
customary covenants, including requirements to maintain certain financial
covenants, and includes provisions relating to cross acceleration to other debt
obligations of the Company. The Company has $90.7 million of the 2013 Notes outstanding, after the
partial exchange of notes during fiscal 2004 discussed below. The Company
originally issued $150.0 million of the 2013 Notes at par in a private
placement to qualified institutional buyers on June 30, 2003. On October 21,
2003, the Company completed an offer to exchange the unregistered notes for new
notes with substantially identical terms that are registered under the
Securities Act. The 2013 Notes, which mature on July 1, 2013, are unsecured and
subordinated to all existing and future senior indebtedness of the Company.
Interest on the 2013 Notes is due semiannually, on January 1 and July 1,
commencing January 1, 2004. Proceeds from the sale of the 2013 Notes were used
to redeem the 2006 Notes, to repay indebtedness outstanding under the revolving
credit facility and for general corporate purposes. 48




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On or after July 1, 2008, the 2013 Notes are redeemable at the Companys
option, in whole or in part, at a redemption price of 105.125%, which declines
in intervals to 100% in 2011 and thereafter. The indenture under which the 2013 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. In general, the amount of
dividends and capital stock purchases may not exceed an amount equal to $20
million plus 50% of net income, or less 100% of all net losses, all calculated
on an accumulative basis subsequent to the date of the indenture. With the loss
reported for fiscal 2004, the covenants of the indenture prohibit further
payment of dividends or purchases of capital stock until such time as
sufficient earnings are reported to eliminate the restriction. In the third and fourth quarters of fiscal 2004, Avondale Incorporated and
its wholly-owned subsidiary, Avondale Mills, Inc., executed a series of
privately negotiated transactions, exchanging $59.3 million of the 2013 Notes
for $41.2 million of the 2012 Notes. The 2012 Notes are unsecured, but are
ranked pari pasu in right of payment with other senior indebtedness of the
Company. Interest on the 2012 Notes is due quarterly in arrears commencing
October 1, 2004, and is calculated based on the applicable three month LIBOR
rate (subject to a minimum of 1.75% and a maximum of 4.5%) plus 7.0%. After July 1, 2005, the 2012 Notes are redeemable at the Companys option,
in whole or in part, at a redemption price of 104.0%, which declines in
intervals to 100.0% in 2009 and thereafter. The 2012 Notes contain certain
provisions substantially identical to the 2013 Notes, including, 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. From time to time, the
Company may enter into additional exchange offers and/or purchase its 2013
Notes in privately negotiated or open market transactions or by tender offer. In connection with the exchanges, the Company received waivers of certain
restrictions provided under its revolving credit facility with GECC and amended
certain covenants provided under its equipment loan with CIT. The Company also
entered into a trustee agreement with Wachovia Bank, N.A. (Wachovia) whereby
Wachovia agreed to act as trustee for the 2012 Notes. The securities offered in the exchanges have not been registered under the
Securities Act of 1933 and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements. At August 27, 2004, the Company was in compliance with the covenants of
the revolving credit facility, equipment note, 2012 Notes, indenture of the
2013 Notes and the Receivables Securitization Facility. At August 27, 2004, the carrying value of the Companys equipment note
approximates fair value. At August 27, 2004, the market values of the 2012
Notes and the 2013 Notes were approximately $37 million and $54 million,
respectively. The Company does not anticipate settlement of the 2012 Notes and
the 2013 Notes at fair value and currently expects the 2012 and the 2013 Notes
to remain outstanding through maturity. 49




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##### Table of Contents



Aggregate maturities of long-term debt are as follows (in thousands): 2005
    
    $
    4,3252006
    
    
    4,3252007
    
    
    4,8612012 and thereafter
    
    
    131,853$
    145,364
 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 $18.8 million, $18.5 million and
$18.6 million in fiscal 2002, 2003 and 2004, respectively. 11. 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 and 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 (the
Graniteville Retirees). 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 (the Early
Retirees). Benefits are paid from the general assets of the company. Changes in the accumulated postretirement benefit obligation were as
follows (in thousands): 2003
    
    2004Beginning balance
    
    $
    7,851
    
    
    $
    7,750Service cost
    
    
    111
    
    
    
    103Interest cost
    
    
    532
    
    
    
    458Amortization of prior service cost
    
    
    332
    
    
    
    332Benefits paid
    
    
    (979
    )
    
    
    (1,537
    )Actuarial gain
    
    
    (97
    )
    
    
    (61
    )Ending balance
    
    $
    7,750
    
    
    $
    7,045
 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 29,
    
    August 27,2003
    
    2004Accumulated post retirement
benefit obligation
    
    $
    (7,980
    )
    
    $
    (3,651
    )Unrecognized prior service cost
    
    
    1,328
    
    
    
    (3,729
    )Unrecognized net (gain) loss
    
    
    (1,098
    )
    
    
    335Accrued postretirement benefit liability
    
    $
    (7,750
    )
    
    $
    (7,045
    )
 50




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##### Table of Contents



The Company recorded postretirement benefit costs based on actuarial
calculations using a weighted average discount rate of 7% for fiscal 2002,
6.25% for fiscal 2003 and 6.25% for fiscal 2004. Net postretirement benefit
costs include the following components (in thousands): 2002
    
    2003
    
    2004Service cost
    
    $
    102
    
    
    $
    111
    
    
    $
    103Interest cost
    
    
    590
    
    
    
    532
    
    
    
    458Net amortization
    
    
    332
    
    
    
    332
    
    
    
    332Recognized actuarial gain
    
    
    (202
    )
    
    
    (97
    )
    
    
    (61
    )Net postretirement benefit cost
    
    $
    822
    
    
    $
    878
    
    
    $
    832
 The assumed average annual rate of increase in the per capita cost of
covered health care benefits for each fiscal year is as follows: Medicare
    
    Non MedicareEligible
    
    EligibleParticipants
    
    Participants2003
    
    
    10.5
    %
    
    
    12.5
    %2004
    
    
    9.5
    %
    
    
    11.5
    %2005
    
    
    8.5
    %
    
    
    10.5
    %2006
    
    
    7.5
    %
    
    
    9.5
    %2007
    
    
    6.5
    %
    
    
    8.5
    %2008
    
    
    5.5
    %
    
    
    7.5
    %2009
    
    
    5.0
    %
    
    
    6.5
    %2010
    
    
    5.0
    %
    
    
    5.5
    %2011 and thereafter
    
    
    5.0
    %
    
    
    5.0
    %
 An increase of 1% in the assumed health care cost trend rate would have
the following effects (in thousands): One
    
    OnePercentage
    
    PercentagePoint
    
    PointIncrease
    
    DecreaseEffect on total service and interest cost
    
    $
    40
    
    
    $
    (35
    )Effect on post retirement benefit obligation
    
    $
    99
    
    
    $
    (88
    )
 51




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##### Table of Contents



The following post retirement benefit payments are expected (in
thousands): 2005
    
    $
    4702006
    
    
    4562007
    
    
    4442008
    
    
    4222009
    
    
    4022010 - 2014
    
    
    1,655$
    3,849
 On April 28, 2004 the Company announced the elimination of medical
benefits for the Graniteville Retirees and the Early Retirees effective August
1, 2004. These retired participants may continue to submit claims until
December 31, 2004 for covered expenses incurred prior to August 1, 2004. The
reduction in the accumulated post retirement benefit obligation generated by
this plan amendment will be amortized over the remaining years of service to
full eligibility for the active plan participants, approximately 7 years, and
will reduce post retirement benefit expense by approximately $675,000 in each
of those years. 12. 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 2003, the Company repurchased 150,000 shares of its Class A
Common Stock for an aggregate purchase price of approximately $2.3 million,
pursuant to offers to sell by the Avondale Mills, Inc. Associate Profit Sharing
and Savings Plan. During fiscal 2004, the Company repurchased 8,000 shares of
its Class A Common Stock for a purchase price of approximately $60,000, from a
former officer of the Company. All shares repurchased have been canceled and
reinstated as authorized but unissued shares of Class A Common Stock. Under an agreement executed effective July 8, 2004 with an officer of the
Company, the Company may be required to purchase a portion of the shares of
Common Stock held by that officer (representing approximately 7.9% of the
Companys outstanding Common Stock) upon the death of the officer. The purchase
price, as defined, will approximate market value. The Company has purchased
term life insurance on the officer to provide the necessary funding should that
commitment occur. 52




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##### Table of Contents



The Company maintained an employee Stock Option Plan that allowed for the
grant of non-qualified and incentive stock options to purchase up to 1,081,250
shares of Class A Common Stock. Under the Stock Option Plan, options were
granted to full-time employees, including executive officers of the Company.
The Stock Option Plan expired in July 2003 and, accordingly, no additional
options may be granted. Activity under the plan is summarized as follows
(option shares in thousands): Grant Price Per Share$12.50
    
    $18.00
    
    $19.00Stock options outstanding at August 31, 2001
    
    
    475
    
    
    
    256
    
    
    
    110Options exercised
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    (8
    )
    
    
    (10
    )Stock options outstanding at August 30, 2002
    
    
    475
    
    
    
    248
    
    
    
    100Options exercised
    
    
    (10
    )
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    
    
    
    
    Stock options outstanding at August 29, 2003
    
    
    465
    
    
    
    248
    
    
    
    100Options exercised
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    
    
    
    
    (10
    )Stock options outstanding at August 27, 2004
    
    
    465
    
    
    
    248
    
    
    
    90Average contractual life remaining in years
    
    
    0.3
    
    
    
    1.8
    
    
    
    5.3Stock options exercisable at August 27, 2004
    
    
    465
    
    
    
    248
    
    
    
    90
 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 prior to expiration of the plan were
reinstated as available for grant. All options granted vest ratably over five
years and may be exercised for a period of ten years. 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 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 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 2002, 2003 and 2004, 14,000 non-qualified options
were granted in each year. Exercise prices of the grants were $16.50, $15.75
and $12.70 per share in fiscal 2002, 2003 and 2004, respectively. At August
27, 2004, 8,000 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 2002, 2003 and 2004: 2002
    
    2003
    
    2004Risk free interest rate
    
    
    4.3
    %
    
    
    4.1
    %
    
    
    4.1
    %Expected dividend yield
    
    
    2.4
    %
    
    
    2.5
    %
    
    
    3.2
    %Expected lives
    
    8 years
    
    8 years
    
    8 years
 53




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##### Table of Contents



The total values of the options granted during fiscal 2002, 2003 and 2004
were computed as approximately $53,000, $30,000 and $24,000, 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 loss and net loss per share would be revised to the following pro
forma amounts (in thousands, except per share data): 2002
    
    2003
    
    2004Net loss:As reported
    
    $
    (130
    )
    
    $
    (7,738
    )
    
    $
    (6,237
    )Pro forma
    
    
    (165
    )
    
    
    (7,773
    )
    
    
    (6,272
    )Net loss per share:BasicAs reported
    
    $
    (.01
    )
    
    $
    (.62
    )
    
    $
    (.50
    )Pro forma
    
    
    (.01
    )
    
    
    (.62
    )
    
    
    (.51
    )DilutedAs reported
    
    $
    (.01
    )
    
    $
    (.62
    )
    
    $
    (.50
    )Pro forma
    
    
    (.01
    )
    
    
    (.62
    )
    
    
    (.51
    )
 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. 13. 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, the Company 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 Court subsequently dismissed
Alabama Power as a defendant in the case, based on their motion for summary
judgement. 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 judgment as a
matter of law in the Companys favor on all counts except the narrow legal
theory involving public nuisance tort. All parties are awaiting the courts
decision on certain evidentiary motions filed in anticipation of the trial,
which if granted, could reduce the scope of the plaintiffs claims in the case.
The trial has been scheduled to begin in February 2005. The Company intends to
vigorously defend this case and believes that it has a number of defenses
available to it.
While the outcome of this case cannot be predicted with certainty, the
Company does not believe that it will have a material adverse effect on the
Companys financial condition or results of operations. 54




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##### Table of Contents



The Company received a grand jury subpoena issued by the U. S. District
Court for the Eastern District of North Carolina on January 20, 2004. The
subpoena concerns the production of documents and records in connection with an
investigation being conducted by the Antitrust Division of the U.S. Department
of Justice relating generally to the manufacture, sale, purchase and
distribution of open-end spun yarns. The Company does not believe that the
outcome of this matter will have a material adverse effect on the Companys
financial condition or results of operation. The Company is fully cooperating
with the U.S. Department of Justice in its investigation. In separate actions initiated by third parties based upon the public
disclosure of the investigation by the U.S. Department of Justice, the Company
and various other defendants have been named in three class action complaints
filed in the U. S. District Court for the Middle and Western Districts of North
Carolina on May 12, May 28 and May 25, 2004, respectively, and one class action
complaint filed in the Circuit Court for Shelby County, Tennessee on April 21,
2004. On August 26, 2004, two of the District Court cases were consolidated in
the Middle District of North Carolina. The Western District of North Carolina
case was voluntarily dismissed and re-filed in the Middle District of North
Carolina. The Company anticipates the third case will be consolidated with the
other two. All complaints seek, under antitrust laws, various damages and
injunctive relief related to the pricing and sale of open-end yarns. These
complaints are in preliminary procedural stages and do not have scheduled trial
dates. The Company has moved to dismiss one of the District Court cases on the
basis of a binding arbitration provision in the parties sales agreement. The
Company intends to vigorously defend these cases and believes it has a number
of defenses available to it. While the outcome of these cases cannot be
predicted with certainty, the Company does not believe that the resolution of
these cases 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
it 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): 2005
    
    $
    2,2482006
    
    
    1,6702007
    
    
    1,4722008
    
    
    266$
    5,656
 Rent expense for operating leases totaled $2.6 million, $2.5 million and
$2.1 million for fiscal 2002, 2003 and 2004, respectively. Commitments for future additions to plant and equipment were approximately
$1.3 million at August 27, 2004. Commitments for the purchase of raw materials
were approximately $52.7 million at August 27, 2004. 55




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##### Table of Contents



14. Related Party Transactions:The Company purchases specialty chemicals,
at market value and under normal trade payable terms, from a supplier whose
president is a director of the Company. During fiscal 2002, 2003 and 2004,
aggregate purchases from this supplier were approximately $862,000, $1,080,000
and $747,000, respectively. 15. Consolidating Guarantor and Non-Guarantor Information:The following
consolidating financial information presents balance sheets, statements of
income and statements of cash flow of the Company and its subsidiaries.
Avondale Incorporated, the parent company and sole shareholder of Avondale
Mills, has fully and unconditionally guaranteed the 2012 Notes and the 2013
Notes. Avondale Mills Graniteville Fabrics, Inc., a wholly owned subsidiary of
Avondale Mills and non-guarantor of the 2012 Notes and the 2013 Notes, operates
a denim manufacturing facility and warehouse operation located in South
Carolina. 56




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##### Table of Contents



AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
August 27, 2004
(amounts in thousands) Non-GuarantorAvondale MillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedASSETSCurrent AssetsCash and cash equivalents
    
    $
    5,481
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,481Accounts receivable
    
    
    50,973
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    50,975Inventories
    
    
    78,282
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,282Prepaid expenses
    
    
    1,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,275Income taxes refundable
    
    
    506
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    506Total current assets
    
    
    136,517
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    136,519Assets held for sale
    
    
    1,037
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,037Property, plant and equipmentLand
    
    
    6,093
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    6,289Buildings
    
    
    64,021
    
    
    
    
    
    
    
    11,750
    
    
    
    
    
    
    
    75,771Machinery and equipment
    
    
    427,807
    
    
    
    
    
    
    
    37,840
    
    
    
    
    
    
    
    465,647497,921
    
    
    
    
    
    
    
    49,786
    
    
    
    
    
    
    
    547,707Less accumulated depreciation
    
    
    (336,477
    )
    
    
    
    
    
    
    (29,278
    )
    
    
    
    
    
    
    (365,755
    )161,444
    
    
    
    
    
    
    
    20,508
    
    
    
    
    
    
    
    181,952Goodwill
    
    
    2,951
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,951Investment in subsidiaries
    
    
    7,840
    
    
    
    96,943
    
    
    
    
    
    
    
    (104,783
    )
    
    
    Other assets
    
    
    6,023
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,023$
    315,812
    
    
    $
    96,943
    
    
    $
    20,510
    
    
    $
    (104,783
    )
    
    $
    328,482LIABILITIES
AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    23,051
    
    
    $
    
    
    
    $
    1,116
    
    
    $
    
    
    
    $
    24,167Accrued compensation, benefits
    
    
    10,333
    
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    10,440Accrued interest
    
    
    2,403
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,403Other accrued expenses
    
    
    9,339
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    9,340Long-term debt due in one year
    
    
    4,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,325Total current liabilities
    
    
    49,451
    
    
    
    
    
    
    
    1,224
    
    
    
    
    
    
    
    50,675Long-term debt
    
    
    141,039
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141,039Deferred income taxes
and other long term liabilities
    
    
    29,439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,439Due to (from) subsidiaries
    
    
    (1,060
    )
    
    
    (10,386
    )
    
    
    11,446
    
    
    
    
    
    
    
    Shareholders equity
    
    
    96,943
    
    
    
    107,329
    
    
    
    7,840
    
    
    
    (104,783
    )
    
    
    107,329$
    315,812
    
    
    $
    96,943
    
    
    $
    20,510
    
    
    $
    (104,783
    )
    
    $
    328,482
 57




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##### Table of Contents



AVONDALE INCORPORATED
CONSOLIDATING BALANCE SHEETS
August 29, 2003
(amounts in thousands) Non-GuarantorAvondale MillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedASSETSCurrent AssetsCash and cash equivalents
    
    $
    13,769
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13,769Accounts receivable
    
    
    29,155
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    29,157Inventories
    
    
    82,887
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,887Prepaid expenses
    
    
    1,980
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,980Income taxes refundable
    
    
    2,825
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,825Total current assets
    
    
    130,616
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    130,618Assets held for sale
    
    
    2,640
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,640Property, plant and equipmentLand
    
    
    6,288
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    6,484Buildings
    
    
    67,897
    
    
    
    
    
    
    
    11,750
    
    
    
    
    
    
    
    79,647Machinery and equipment
    
    
    459,401
    
    
    
    
    
    
    
    37,812
    
    
    
    
    
    
    
    497,213533,586
    
    
    
    
    
    
    
    49,758
    
    
    
    
    
    
    
    583,344Less accumulated depreciation
    
    
    (342,217
    )
    
    
    
    
    
    
    (25,542
    )
    
    
    
    
    
    
    (367,759
    )191,369
    
    
    
    
    
    
    
    24,216
    
    
    
    
    
    
    
    215,585Goodwill
    
    
    2,951
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,951Investment in subsidiaries
    
    
    8,202
    
    
    
    105,726
    
    
    
    
    
    
    
    (113,928
    )
    
    
    Other assets
    
    
    7,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,712$
    343,490
    
    
    $
    105,726
    
    
    $
    24,218
    
    
    $
    (113,928
    )
    
    $
    359,506LIABILITIES
AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    17,675
    
    
    $
    
    
    
    $
    1,049
    
    
    $
    
    
    
    $
    18,724Accrued compensation, benefits
    
    
    9,203
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    9,280Accrued interest
    
    
    2,726
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,726Other accrued expenses
    
    
    9,784
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    9,785Long- term debt due in one year
    
    
    4,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,325Total current liabilities
    
    
    43,713
    
    
    
    
    
    
    
    1,127
    
    
    
    
    
    
    
    44,840Long-term debt
    
    
    163,512
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,512Deferred income taxes
and other long term liabilities
    
    
    35,203
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,203Due to (from) subsidiaries
    
    
    (4,664
    )
    
    
    (10,225
    )
    
    
    14,889
    
    
    
    
    
    
    
    Shareholders equity
    
    
    105,726
    
    
    
    115,951
    
    
    
    8,202
    
    
    
    (113,928
    )
    
    
    115,951$
    343,490
    
    
    $
    105,726
    
    
    $
    24,218
    
    
    $
    (113,928
    )
    
    $
    359,506
 58




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##### Table of Contents



AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Fiscal Year ended August 27, 2004
(amounts in thousands) Non-GuarantorAvondale MillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    564,777
    
    
    $
    110
    
    
    $
    103,311
    
    
    $
    (103,421
    )
    
    $
    564,777Operating costs and expensesCost of goods sold
    
    
    514,486
    
    
    
    
    
    
    
    100,148
    
    
    
    (103,311
    )
    
    
    511,305Depreciation
    
    
    32,996
    
    
    
    
    
    
    
    3,736
    
    
    
    
    
    
    
    36,732Selling and administrative expenses
    
    
    26,019
    
    
    
    
    
    
    
    
    
    
    
    (110
    )
    
    
    25,909Restructuring charges, net
    
    
    1,680
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,680Operating income (loss)
    
    
    (10,386
    )
    
    
    110
    
    
    
    (573
    )
    
    
    
    
    
    
    (10,849
    )Interest expense, net
    
    
    17,788
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,788Discount and expenses on sales
of receivables
    
    
    2,419
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,419Gain on extinguishment of debt
    
    
    (17,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,000
    )Other income, net
    
    
    (2,904
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,904
    )Income (loss) before income taxes
    
    
    (10,689
    )
    
    
    110
    
    
    
    (573
    )
    
    
    
    
    
    
    (11,152
    )Provision for (benefit of) income taxes
    
    
    (4,744
    )
    
    
    40
    
    
    
    (211
    )
    
    
    
    
    
    
    (4,915
    )Equity in income (loss) of subsidiary
    
    
    (362
    )
    
    
    (6,307
    )
    
    
    
    
    
    
    6,669
    
    
    
    Net loss
    
    $
    (6,307
    )
    
    $
    (6,237
    )
    
    $
    (362
    )
    
    $
    6,669
    
    
    $
    (6,237
    )
 59




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##### Table of Contents



AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Fiscal Year ended August 29, 2003
(amounts in thousands) Non-GuarantorAvondale MillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    590,862
    
    
    $
    111
    
    
    $
    89,247
    
    
    $
    (89,358
    )
    
    $
    590,862Operating costs and expensesCost of goods sold
    
    
    512,319
    
    
    
    
    
    
    
    84,774
    
    
    
    (89,247
    )
    
    
    507,846Depreciation
    
    
    37,855
    
    
    
    
    
    
    
    3,987
    
    
    
    
    
    
    
    41,842Selling and administrative expenses
    
    
    26,254
    
    
    
    
    
    
    
    
    
    
    
    (111
    )
    
    
    26,143Restructuring charges, net
    
    
    2,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,450Operating income
    
    
    11,984
    
    
    
    111
    
    
    
    486
    
    
    
    
    
    
    
    12,581Interest expense, net
    
    
    19,034
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,034Discount and expenses on sales
of receivables
    
    
    2,596
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,596Loss on extinguishment of debt
    
    
    3,236
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,236Other income, net
    
    
    (52
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52
    )Income (loss) before income taxes
    
    
    (12,830
    )
    
    
    111
    
    
    
    486
    
    
    
    
    
    
    
    (12,233
    )Provision for (benefit of) income taxes
    
    
    (4,725
    )
    
    
    45
    
    
    
    185
    
    
    
    
    
    
    
    (4,495
    )Equity in income (loss) of subsidiary
    
    
    301
    
    
    
    (7,804
    )
    
    
    
    
    
    
    7,503
    
    
    
    Net income (loss)
    
    $
    (7,804
    )
    
    $
    (7,738
    )
    
    $
    301
    
    
    $
    7,503
    
    
    $
    (7,738
    )
 60




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##### Table of Contents



AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Fiscal Year ended August 30, 2002
(amounts in thousands) Non-GuarantorAvondale MillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedNet sales, including intercompany
transfers and charges
    
    $
    659,735
    
    
    $
    101
    
    
    $
    97,121
    
    
    $
    (97,222
    )
    
    $
    659,735Operating costs and expensesCost of goods sold
    
    
    565,211
    
    
    
    
    
    
    
    92,704
    
    
    
    (97,121
    )
    
    
    560,794Depreciation
    
    
    40,839
    
    
    
    
    
    
    
    4,117
    
    
    
    
    
    
    
    44,956Selling and administrative expenses
    
    
    28,390
    
    
    
    
    
    
    
    
    
    
    
    (101
    )
    
    
    28,289Restructuring charges, net
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,000Operating income
    
    
    18,295
    
    
    
    101
    
    
    
    300
    
    
    
    
    
    
    
    18,696Interest expense, net
    
    
    18,449
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,449Discount and expenses on sales
of receivables
    
    
    1,117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,117Other income, net
    
    
    (513
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (513
    )Income (loss) before income taxes
    
    
    (758
    )
    
    
    101
    
    
    
    300
    
    
    
    
    
    
    
    (357
    )Provision for (benefit of) income taxes
    
    
    (362
    )
    
    
    35
    
    
    
    100
    
    
    
    
    
    
    
    (227
    )Equity in income (loss) of subsidiary
    
    
    200
    
    
    
    (196
    )
    
    
    
    
    
    
    (4
    )
    
    
    Net income (loss)
    
    $
    (196
    )
    
    $
    (130
    )
    
    $
    200
    
    
    $
    (4
    )
    
    $
    (130
    )
 61




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##### Table of Contents



AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Fiscal Year ended August 27, 2004
(amounts in thousands) Non-GuarantorAvondale MillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedOperating activitiesNet loss
    
    $
    (6,307
    )
    
    $
    (6,237
    )
    
    $
    (362
    )
    
    $
    6,429
    
    
    $
    (6,237
    )Adjustments to reconcile net loss
to net cash provided by operating
activities:Depreciation and amortization
    
    
    33,532
    
    
    
    
    
    
    
    3,736
    
    
    
    
    
    
    
    37,268Benefit of deferred income taxes
    
    
    (5,036
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,036
    )Gain on disposal of equipment and
restructuring charges, net
    
    
    (2,127
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,127
    )Gain on extinguishment of debt
    
    
    (17,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,000
    )Sale of accounts receivable, net
    
    
    (10,971
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,971
    )Changes in operating assets and
liabilities
    
    
    5,464
    
    
    
    (10
    )
    
    
    (3,345
    )
    
    
    
    
    
    
    2,109Dividends from subsidiary
    
    
    
    
    
    
    2,476
    
    
    
    
    
    
    
    (2,476
    )
    
    
    Equity in loss of subsidiary
    
    
    362
    
    
    
    6,307
    
    
    
    
    
    
    
    (6,429
    )
    
    
    Net cash provided by (used in)
operating activities
    
    
    (2,083
    )
    
    
    2,536
    
    
    
    29
    
    
    
    (2,476
    )
    
    
    (1,994
    )Investing activitiesPurchase of property, plant and equipment
    
    
    (6,269
    )
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    (6,298
    )Proceeds from sale of property, plant
and equipment and assets held for sale
    
    
    6,865
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,865Net cash provided by (used in)
investing activities
    
    
    596
    
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    567Financing activitiesPayments on long term debt
    
    
    (4,325
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,325
    )Purchase and retirement of treasury
stock
    
    
    
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    (60
    )Dividends paid
    
    
    (2,476
    )
    
    
    (2,476
    )
    
    
    
    
    
    
    2,476
    
    
    
    (2,476
    )Net cash used in financing activities
    
    
    (6,801
    )
    
    
    (2,536
    )
    
    
    
    
    
    
    2,476
    
    
    
    (6,861
    )Decrease in cash and cash equivalents
    
    
    (8,288
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,288
    )Cash and cash equivalents at beginning of
year
    
    
    13,769
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,769Cash and cash equivalents at end of year
    
    $
    5,481
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,481
 62




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AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Fiscal Year ended August 29, 2003
(amounts in thousands) Non-GuarantorAvondale MillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedOperating activitiesNet income (loss)
    
    $
    (7,804
    )
    
    $
    (7,738
    )
    
    $
    301
    
    
    $
    7,503
    
    
    $
    (7,738
    )Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:Depreciation and amortization
    
    
    38,217
    
    
    
    
    
    
    
    3,987
    
    
    
    
    
    
    
    42,204Benefit of deferred income taxes
    
    
    (4,913
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,913
    )Loss on disposal of equipment and
restructuring charges, net
    
    
    2,175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,175Loss on extinguishment of debt
    
    
    3,236
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,236Sale of accounts receivable, net
    
    
    (21,313
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,313
    )Changes in operating assets and liabilities
    
    
    23,202
    
    
    
    2,248
    
    
    
    (3,823
    )
    
    
    
    
    
    
    21,627Dividends from subsidiary
    
    
    
    
    
    
    4,990
    
    
    
    
    
    
    
    (4,990
    )
    
    
    Equity in loss (income) of subsidiary
    
    
    (301
    )
    
    
    7,804
    
    
    
    
    
    
    
    (7,503
    )
    
    
    Net cash provided by operating
activities
    
    
    32,499
    
    
    
    7,304
    
    
    
    465
    
    
    
    (4,990
    )
    
    
    35,278Investing activitiesPurchase of property, plant and equipment
    
    
    (16,238
    )
    
    
    
    
    
    
    (465
    )
    
    
    
    
    
    
    (16,703
    )Proceeds from sale of property, plant
and equipment
    
    
    3,938
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,938Net cash used in investing activities
    
    
    (12,300
    )
    
    
    
    
    
    
    (465
    )
    
    
    
    
    
    
    (12,765
    )Financing activitiesNet payments on revolving line of
credit and long term debt
    
    
    (154,299
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (154,299
    )Issuance of long term debt
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000Purchase and retirement of treasury stock
    
    
    
    
    
    
    (2,314
    )
    
    
    
    
    
    
    
    
    
    
    (2,314
    )Dividends paid
    
    
    (4,990
    )
    
    
    (4,990
    )
    
    
    
    
    
    
    4,990
    
    
    
    (4,990
    )Net cash used in financing activities
    
    
    (9,289
    )
    
    
    (7,304
    )
    
    
    
    
    
    
    4,990
    
    
    
    (11,603
    )Increase in cash and cash equivalents
    
    
    10,910
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,910Cash at beginning of year
    
    
    2,859
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,859Cash and cash equivalents at end of year
    
    $
    13,769
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13,769
 63




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AVONDALE INCORPORATED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Fiscal Year ended August 30, 2002
(amounts in thousands) Non-GuarantorAvondale MillsGuarantor
    
    GranitevilleAvondale
    
    Avondale
    
    Fabrics,Mills, Inc.
    
    Incorporated
    
    Inc.
    
    Eliminations
    
    ConsolidatedOperating activitiesNet income (loss)
    
    $
    (196
    )
    
    $
    (130
    )
    
    $
    200
    
    
    $
    (4
    )
    
    $
    (130
    )Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:Depreciation and amortization
    
    
    41,421
    
    
    
    
    
    
    
    4,117
    
    
    
    
    
    
    
    45,538Provision for deferred income taxes
    
    
    3,534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,534Loss on disposal of equipment and
restructuring charges, net
    
    
    5,379
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,379Sale of accounts receivable, net
    
    
    12,390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,390Changes in operating assets and liabilities
    
    
    9,253
    
    
    
    (66
    )
    
    
    (4,223
    )
    
    
    
    
    
    
    4,964Dividends from subsidiary
    
    
    
    
    
    
    3,759
    
    
    
    
    
    
    
    (3,759
    )
    
    
    Equity in loss (income) of subsidiary
    
    
    (200
    )
    
    
    196
    
    
    
    
    
    
    
    4
    
    
    
    Net cash provided by operating
activities
    
    
    71,581
    
    
    
    3,759
    
    
    
    94
    
    
    
    (3,759
    )
    
    
    71,675Investing activitiesPurchase of property, plant and equipment
    
    
    (12,992
    )
    
    
    
    
    
    
    (94
    )
    
    
    
    
    
    
    (13,086
    )Proceeds from sale of property, plant
and equipment
    
    
    739
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    739Net cash used in investing activities
    
    
    (12,253
    )
    
    
    
    
    
    
    (94
    )
    
    
    
    
    
    
    (12,347
    )Financing activitiesNet payments on revolving line of
credit and long term debt
    
    
    (60,150
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,150
    )Refund of prior year income taxes
    
    
    4,471
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,471Dividends paid
    
    
    (3,759
    )
    
    
    (3,759
    )
    
    
    
    
    
    
    3,759
    
    
    
    (3,759
    )Net cash used in financing activities
    
    
    (59,438
    )
    
    
    (3,759
    )
    
    
    
    
    
    
    3,759
    
    
    
    (59,438
    )Decrease in cash
    
    
    (110
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (110
    )Cash at beginning of year
    
    
    2,969
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,969Cash at end of year
    
    $
    2,859
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,859
 64




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. None. 
 ITEM 9A. CONTROLS AND PROCEDURES. As required by Securities and Exchange Commission rules, the Company has
evaluated the effectiveness of the design and operation of the Companys
disclosure controls and procedures as of the end of the period covered by this
report. This evaluation was carried out under the supervision and with the
participation of the Companys management, including the Companys principal
executive officer and principal financial officer. Based on this evaluation,
the principal executive officer and principal financial officer have concluded
that the design and operation of the Companys disclosure controls and
procedures are effective. There were no changes to the Companys internal
controls during the period covered by this annual report that materially
affected, or are reasonably likely to materially affect, the Companys internal
controls over financial reporting. Disclosure controls and procedures are the Companys controls and other
procedures designed to ensure that information required to be disclosed by the
Company in the reports filed or submitted under the Exchange Act are recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commissions rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that the Company files under the Exchange Act are accumulated and communicated
to the Companys management, including the Companys principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. 
 ITEM 9B. OTHER INFORMATION. None. 65




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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 HeldG. Stephen Felker.
    
    
    52
    
    
    Chairman of the Board, President and Chief Executive
Officer of the Company
     and Avondale MillsJack R. Altherr, Jr.
    
    
    55
    
    
    Vice Chairman, Chief Financial Officer, and
Director of the Company and
     Avondale MillsKeith M. Hull
    
    
    51
    
    
    Vice President of Avondale Mills and President,
Marketing and SalesT. Wayne Spraggins
    
    
    67
    
    
    Vice President of Avondale Mills and President,
Manufacturing OperationsM. Delen Boyd
    
    
    48
    
    
    Vice President, Controller and Secretary of the Company
and Avondale MillsSharon L. Rodgers
    
    
    48
    
    
    Vice President, Human Resources of Avondale Mills and
Assistant Secretary of
     the Company and Avondale MillsDale J. Boden(1)
    
    
    47
    
    
    Director of the Company and Avondale MillsKenneth H. Callaway(1)
    
    
    49
    
    
    Director of the Company and Avondale MillsRobert B. Calhoun(1)(2)(3)
    
    
    62
    
    
    Director of the Company and Avondale MillsHarry C. Howard(2)
    
    
    75
    
    
    Director of the Company and Avondale MillsC. Linden Longino, Jr.(2)
    
    
    68
    
    
    Director of the Company and Avondale MillsJames A. Rubright (2)
    
    
    57
    
    
    Director of the Company and Avondale MillsJohn P. Stevens(1)
    
    
    75
    
    
    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, National Association, from 1989 to 2000 and is currently a director of
American Fibers and Yarns, Inc., Rock-Tenn Company and USPA Properties, Inc.. 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. 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 is
currently a director of Cherokee, Inc. 66




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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. 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. 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.Before joining
Rock-Tenn Company, Mr. Rubright served as Executive Vice President of Sonat,
Inc., an energy company. Mr. Rubright is also a director of Rock-Tenn Company,
AGL Resources, Inc. and Oxford Industries, 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, National Association, 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, National Association, 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. 67




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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 27, 2004, the Board of
Directors of the Company held seven meetings. The Compensation Committee of the Board of Directors during fiscal 2004
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 27, 2004, the
Compensation Committee held two meetings. See Report on Executive
Compensation. The Audit Committee of the Board of Directors during fiscal 2004 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
27, 2004, 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. The Board of Directors has determined, pursuant to Item 7(d)(3)(iv)(B) of
Schedule 14A, that all of the members of the Audit Committee are independent in
accordance with Rule 4350(d)(2) and Rule 4200 of the NASDAQ Stock Market
listing standards. Additionally, the Board has determined that all members of
the Audit Committee qualify as audit committee financial experts pursuant to
Securities and Exchange Commission regulations. The Company has a code of business conduct applicable to all officers of
the Company. In addition, the Company has adopted a code of ethics for its
senior executive and financial officers. During fiscal 2004, the Company paid each non-employee director a
quarterly fee of $6,250 plus reimbursement of out-of-pocket expenses. In
addition, the Audit Committee Chairman is paid $1,000 for each formal meeting. 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 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 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 2002, 2003
and 2004, 14,000 non-qualified options were granted in each respective year. At
August 27, 2004, 8,000 non-qualified options remained available for grant. 68




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ITEM 11. EXECUTIVE COMPENSATION. Executive Compensation Summary Compensation Table.The table below sets forth certain
information concerning the compensation earned during fiscal 2002, 2003 and
2004 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 OtherName and Principal Position
    
    Year
    
    Salary($)
    
    Bonus($)(2)
    
    Compensation($)(3)G. Stephen Felker
    
    
    2004
    
    
    
    800,016
    
    
    
    500,000
    
    
    
    12,715Chairman of the Board, President and Chief
    
    
    2003
    
    
    
    800,016
    
    
    
    
    
    
    
    4,399Executive Officer
    
    
    2002
    
    
    
    800,016
    
    
    
    400,000
    
    
    
    1,578Jack R. Altherr, Jr.
    
    
    2004
    
    
    
    355,008
    
    
    
    420,000
    
    
    
    5,244Vice Chairman and Chief Financial Officer
    
    
    2003
    
    
    
    355,008
    
    
    
    
    
    
    
    6,9882002
    
    
    
    355,008
    
    
    
    100,000
    
    
    
    5,760Keith M. Hull
    
    
    2004
    
    
    
    298,032
    
    
    
    90,000
    
    
    
    3,364Vice President and President, Marketing and Sales
    
    
    2003
    
    
    
    298,032
    
    
    
    
    
    
    
    4,9902002
    
    
    
    298,032
    
    
    
    75,000
    
    
    
    4,115T. Wayne Spraggins
    
    
    2004
    
    
    
    296,016
    
    
    
    75,000
    
    
    
    11,893Vice President and President, Manufacturing
    
    
    2003
    
    
    
    296,016
    
    
    
    
    
    
    
    13,779Operations
    
    
    2002
    
    
    
    296,016
    
    
    
    75,000
    
    
    
    11,050Sharon L. Rodgers
    
    
    2004
    
    
    
    137,088
    
    
    
    30,000
    
    
    
    1,193Vice President, Human Resources
    
    
    2003
    
    
    
    137,088
    
    
    
    
    
    
    
    2,2312002
    
    
    
    127,512
    
    
    
    26,000
    
    
    
    1,842
    (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 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 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 $1,397, $1,398
and $956 on behalf of Messrs. Hull and Spraggins and Ms. Rodgers,
respectively and (ii) life insurance premiums of $4,260, $2,718, $9,662
and $885 paid by the Company on behalf of Messrs. Altherr, Hull and
Spraggins and Ms. Rodgers, respectively, and taxable income of $78 to Mr.
Felker in conjunction with a split dollar insurance agreement. Amounts
shown reflect, for fiscal 2003, (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 $1,490, $1,480 and
$1,223 on behalf of Messrs. Hull and Spraggins and Ms. Rodgers,
respectively and (ii) life insurance premiums of $5,488,
$3,500, $12,299 69




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##### Table of Contents



and $1,008 paid by the Company on behalf of Messrs.
Altherr, Hull and Spraggins and Ms. Rodgers, respectively, and taxable
income of $2,899 to Mr. Felker in conjunction with a split dollar
insurance agreement. Amounts shown reflect, for fiscal 2004, (i) matching
401(k) contributions made by the Company to the Companys Associate
Profit Sharing and Savings Plan of $10, $20 and $91 on behalf of Messrs.
Hull and Spraggins and Ms. Rodgers, respectively and (ii) life insurance
premiums of $12,715, $5,244, $3,354, $11,873 and $1,102 paid by the
Company on behalf of Messrs. Felker, Altherr, Hull and Spraggins and Ms.
Rodgers, respectively Option Grants Table.The Companys employee Stock Option Plan expired in
July 2003. No options were granted to the named executive officers in fiscal
2004. Aggregated Options Table.The table below sets forth certain information
with respect to options held at the end of fiscal 2004 by each Named Executive
Officer. Fiscal Year End Option Values Table Number ofShares Underlying
    
    Value ofUnexercised
    
    UnexercisedOptions at
    
    Options atFiscal Year End
    
    Fiscal Year EndExercisable/
    
    Exercisable/Unexercisable
    
    Unexercisable(1)G. Stephen Felker
    
    
    265,000/
    
    
    
    $/$Jack R. Altherr, Jr
    
    
    125,000/
    
    
    
    /Keith M. Hull
    
    
    71,001/
    
    
    
    /T. Wayne Spraggins
    
    
    45,000/
    
    
    
    /Sharon L. Rodgers
    
    
    20,000/
    
    
    
    /
    (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 27, 2004. 70




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##### Table of Contents



Long-term Incentive Plans.The table below sets forth certain information
with respect to phantom units held at the end of fiscal 2004 by each Named
Executive Officer. No phantom units were awarded during fiscal 2004. Long-term Incentive Plans  Units Held at August 27, 2004 Aggregate
    
    
    
    
    
    Estimated FuturePhantom Units
    
    Period Until
    
    Payouts for AllName
    
    Held(1)
    
    Payout (Years)
    
    Phantom Units Held(2)G. Stephen Felker
    
    
    150
    
    
    
    13
    
    
    $
    649,329Jack R. Altherr, Jr.
    
    
    90
    
    
    
    11
    
    
    
    389,598Keith M. Hull
    
    
    90
    
    
    
    14
    
    
    
    389,598T. Wayne Spraggins
    
    
    50
    
    
    
    
    
    
    
    216,443Sharon L. Rodgers
    
    
    
    
    
    
    
    
    
    
    
   (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 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, 2004, of vested and non-vested phantom units
held at the end of fiscal 2004 based on the results of the Company for the
10 fiscal quarters ended August 27, 2004. 71




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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 2004 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 2004, none of the Named Executive Officers
received a salary increase. 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 2004, 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. Under terms of the First Amendment of the
Post-Merger Stock Transfer Agreement dated April 12, 2004, and attached as
exhibit 10.50 to this annual report of Form 10-K, a series of cash bonus
payments will be paid to Mr. Altherr, Vice Chairman and Chief Financial
Officer. Such series of bonus payments included an initial payment of $300,000,
paid upon the execution of the agreement. Three remaining payments of $200,000
are payable on the first business day of fiscal 2005, 2006 and 2007, under the
stipulation that Mr. Altherr must remain an employee of the Company through
those dates. 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 2004, the named executive officers
received discretionary cash bonuses ranging from $30,000 to $500,000 per named
executive officer. 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 72




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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 2004,
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 2004, the Company
purchased specialty chemicals from Calgati Chemical Company, Ltd. in the
aggregate amount of approximately $747,000. 73




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##### 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 3, 2004, 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. 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. Beneficial Ownership
    
    Beneficial Ownershipof Class A
    
    of Class BCommon Stock
    
    Common Stock
    
    PercentageOfNumber
    
    Percent
    
    Number
    
    Percent
    
    CombinedName of Beneficial Owner(1)
    
    of Shares
    
    Of Class
    
    of Shares
    
    of Class
    
    Voting PowerG. Stephen Felker(2)
    
    
    4,338,989
    
    
    
    37.2
    %
    
    
    978,939
    
    
    
    100
    %
    
    
    73.4
    %Jack R. Altherr, Jr.(3)
    
    
    232,199
    
    
    
    2.0
    %
    
    
    
    
    
    
    
    
    
    
    *Keith M. Hull (4)
    
    
    121,001
    
    
    
    1.1
    %
    
    
    
    
    
    
    
    
    
    
    *T. Wayne Spraggins(5)
    
    
    115,000
    
    
    
    1.0
    %
    
    
    
    
    
    
    
    
    
    
    *Sharon L. Rodgers (6)
    
    
    21,000
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    *Dale J. Boden(7)
    
    
    119,500
    
    
    
    1.0
    %
    
    
    
    
    
    
    
    
    
    
    *Kenneth H. Callaway(8)
    
    
    24,000
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    *Robert B. Calhoun(9)(10)(11)
    
    
    132,772
    
    
    
    1.2
    %
    
    
    
    
    
    
    
    
    
    
    *Harry C. Howard(12)
    
    
    59,000
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    *C. Linden Longino, Jr.(13)
    
    
    39,250
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    *James A. Rubright (14)
    
    
    12,500
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    *John P. Stevens(15)
    
    
    117,000
    
    
    
    1.0
    %
    
    
    
    
    
    
    
    
    
    
    *Credit Suisse Group (16)(17)(18)
    
    
    1,352,949
    
    
    
    11.9
    %
    
    
    
    
    
    
    
    
    
    
    4.4
    %Grayward Company(19)
    
    
    1,748,870
    
    
    
    15.3
    %
    
    
    
    
    
    
    
    
    
    
    5.6
    %Equitable Trust Company(20)
    
    
    1,748,870
    
    
    
    15.3
    %
    
    
    
    
    
    
    
    
    
    
    5.6
    %Felker Investments, Ltd.(21)
    
    
    2,093,750
    
    
    
    18.4
    %
    
    
    
    
    
    
    
    
    
    
    6.8
    %Avondale Mills, Inc. Associate Profit
Sharing and Savings Plan(22)
    
    
    450,000
    
    
    
    3.9
    %
    
    
    
    
    
    
    
    
    
    
    1.5
    %All directors and executive officers
As a group (16 persons)
    
    
    5,342,211
    
    
    
    44.4
    %
    
    
    978,939
    
    
    
    100
    %
    
    
    75.8
    %
  * 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 74




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##### Table of Contents



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 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.(5)
    
    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.(6)
    
    Includes 20,000 shares of Class A Common Stock issuable upon exercise of
stock options beneficially owned by Ms. Rodgers, which shares are deemed
beneficially owned by Ms. Rodgers under Rules 13d-3 under the Exchange
Act.(7)
    
    Reflects (i) 14,000 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 14,000 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 Monitor Clipper Partners, 650 Madison
Avenue, 9th Floor, New York, New York 10022.(10)
    
    Includes (i) 14,000 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) 95,472 shares of Class A Common Stock beneficially
owned by Clipper Capital Associates LP (CCA).(11)
    
    Mr. Calhoun is the sole stockholder and a director of CCA. As a result,
Mr. Calhoun and CCA are deemed to beneficially own all shares of Class A
Common Stock beneficially owned by CCA.(12)
    
    Includes 14,000 shares of Class A Common Stock issuable upon exercise of
stock options beneficially owned by Mr. Howard, which shares are deemed
beneficially owned by Mr. Howard under Rule 13d-3 under the Exchange Act.(13)
    
    Includes (i) 14,000 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 8,000 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)
14,000 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.(16)
    
    The address of Credit Suisse Group (CSG) is 11 Madison Avenue, New
York, NY 10010.(17)
    
    Includes (i) 670,496 shares of Class A Common Stock held of record by
Merban Holding LP (Merban), (ii) 579,619 shares of Class A Common Stock
held of record by Merchant Holding, Inc. (Merchant), and (iii) 102,834
shares of Class A Common Stock held of record by CS First Boston Merchant
Investments 1995/96 LP (CSFB). 75




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##### Table of Contents



(18)
    
    Merchant, a wholly-owned affiliate of CSG, is the general partner of
Merban. CSG is the general partner of CSBF. Merchant, Merban and CSFB are
all ultimately controlled by CSG, a Swiss company whose stock is publicly
traded on the New York Stock Exchange. As a result, CSG is deemed to
beneficially own all of the shares of Class A Common Stock beneficially
owned by Merchant, Merban and CSFB.(19)
    
    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.(20)
    
    Equitable Trust Companys address is 4400 Harding Road, Nashville,
Tennessee 37205. Equitable Trust Company serves as trustee for three
related trusts and, as trustee, Equitable Trust Company is deemed to
beneficially own under Rule 13d-3 under the Exchange Act all of the shares
beneficially owned by the trusts.(21)
    
    The address of Felker Investments, Ltd. is c/o G. Stephen Felker, 506
South Broad Street, Monroe, Georgia 30655.(22)
    
    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 Plan 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 were granted to full time employees of the Company, including
executive officers. (c) Number ofSecurities RemainingAvailable for(a) Number of
    
    
    
    
    
    Future IssuanceSecurities to be
    
    (b) Weighted
    
    Under EquityIssued Upon
    
    Average
    
    CompensationExercise of
    
    Exercise Price of
    
    Plans (ExcludingOutstanding
    
    Outstanding
    
    Securities ReflectedPlan Category
    
    Options
    
    Options
    
    in Column (a))Equity Compensation plans approved
by the security holders
    
    
    803,000
    
    
    $
    14.93
    
    
    
    Equity Compensation plans not
approved by the security holders
    
    
    92,000
    
    
    $
    17.43
    
    
    
    8,000
 For discussion of the 1993 Avondale Incorporated Stock Option Plan, see
Note 12 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. 76




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##### Table of Contents



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 each of fiscal 2002, 2003 and 2004, options to
purchase 14,000 shares were granted. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Kenneth H. Callaway, a director, is president of Calgati Chemical Company,
Ltd. During fiscal 2004, the Company purchased specialty chemicals from
Calgati Chemical Company, Ltd. in the aggregate amount of approximately
$747,000. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. For fiscal 2003 and 2004, the Company retained Dixon Hughes PLLC (DH) to
audit the consolidated financial statements and perform services normally
provided by the accountant in connection with the review of registrant reports
filed with the Securities and Exchange Commission, and provided compliance, tax
advice and tax planning services in connection with the Companys state and
federal income tax returns. In addition, DH performed audit related services
consisting of the audit of the Avondale Mills Associate Profit Sharing and
Savings Plan for the plan years ended December 31, 2004 and 2004, and the audit
of the financial statements of Funding for fiscal 2003 and 2004. Also in fiscal
2003, DH performed other services in conjunction with the Companys issuance of
the 2013 Notes. The following summary discloses all fees paid or payable to DH
for fiscal 2003 and 2004 (in thousands). 2003
    
    2004Audit fees
    
    $
    169
    
    
    $
    135Audit related fees
    
    
    6
    
    
    
    6Tax fees
    
    
    11
    
    
    
    11All other fees
    
    
    
    
    
    
    Total fees
    
    $
    186
    
    
    $
    152
 The Audit Committee pre-approves all auditing and permitted non-audit
services and fees to be performed for the Company by its independent auditor.
No audit work was performed by persons other than the principal accountants
full-time, permanent employees. 77




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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
for the year ended August 27, 2004 are included in Part II, Item 8.  Report of Independent Public AccountantsConsolidated Balance Sheets as of August 29, 2003 and August 27, 2004Consolidated Statements of Operations  Fiscal Years Ended August 30, 2002, August 29, 2003
and August 27, 2004Consolidated Statements of Shareholders Equity  Fiscal Years Ended August 30, 2002, August 29, 2003 and August 27, 2004Consolidated Statements of Cash Flows  Fiscal Years Ended August 30,
2002, August 29, 2003 and August 27, 2004Notes to Consolidated Financial Statements2.
    
    Financial Statement Schedules of the Company.Schedule II  Valuation and Qualifying Accounts3.
    
    Exhibits. ExhibitNumber3.1
    
    
    
    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).4.3
    
    
    
    Indenture for the 101/4 Senior Subordinated Notes due 2013 among Avondale Incorporated, Avondale
Mills, Inc. and Wachovia Bank, National Association, as Trustee (incorporated by reference to
Exhibit 4.3 to Avondale Incorporateds Registration Statement on Form S-4, File No. 333-108353).4.5
    
    
    
    Registration Rights Agreement, dated as of June 30, 2003, among Avondale Mills, Inc., Avondale
Incorporated and Wachovia Securities, LLC. Trustee (incorporated by reference to Exhibit 4.3 to
Avondale Incorporateds Registration Statement on Form S-4, File No. 333-108353).4.10
    
    
    
    Exchange Agreement, dated as of May 27, 2004, by and among Avondale Mills, Inc., Avondale
Incorporated and Cohanzick Management, L.L.C., as agent for Cohanzick Credit Opportunities Master
Fund, Ltd., Gabriel Capital, L.P. and Ariel Fund Limited (incorporated by reference to Exhibit 4.10
to Avondale Incorporateds Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).4.11
    
    
    
    Exchange Agreement, dated as of July 1, 2004, by and among Avondale Mills, Inc., Avondale
Incorporated and Allstate Life Insurance Company, Allstate Insurance Company, Allstate Plans
Master Trust and Allstate Investments, LLC (incorporated by reference to Exhibit 4.11 to Avondale
Incorporateds Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).4.12
    
    
    
    Exchange Agreement, dated as of July 30, 2004, by and among Avondale Mills, Inc., Avondale
Incorporated and Cohanzick Management, L.L.C., as agent for Cohanzick Credit Opportunities Master
Fund, Ltd., and Gabriel Capital, L.P. (incorporated by reference to Exhibit 4.12 to Avondale
Incorporateds Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).4.13
    
    
    
    Exchange Agreement, dated as of August 26, 2004, by and among Avondale Mills, Inc., Avondale
Incorporated and 3V Capital Master Fund Ltd. (incorporated by reference to Exhibit 4.13 to Avondale
Incorporateds Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).4.14
    
    
    
    Exchange Agreement, dated as of August 26, 2004, by and among Avondale Mills, Inc., Avondale
Incorporated and Deutsche Asset Management Inc. and Deutsche Investment Management Americas, Inc.
(incorporated by reference to Exhibit 4.14 to Avondale Incorporateds Current Report on Form 8-K,
dated August 26, 2004, File No. 33-68412).4.15
    
    
    
    Exchange Agreement, dated as of August 26, 2004, by and among Avondale Mills, Inc., Avondale
Incorporated and T. Rowe Price Associates, Inc. (incorporated by reference to Exhibit 4.15 to
Avondale Incorporateds Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).
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ExhibitNumber4.16
    
    
    
    Trustee Agreement, dated as of August 26, 2004, between Avondale Mills, Inc., Avondale Incorporated
and Wachovia bank, N.A., as Trustee. (incorporated by reference to Exhibit 4.16 to Avondale
Incorporateds Current Report on Form 8-K, dated August 26, 2004, File No. 33-68412).4.17
    
    
    
    Felker Put Agreement, dated July 8, 2004, by and between Avondale Incorporated and G. Stephen Felker10.6
    
    
    
    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).10.17
    
    
    
    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).10.26
    
    
    
    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).10.30
    
    
    
    Master Security Agreement and related documents, dated July 30, 2002, among Avondale Mills, Inc.
and The CIT Group/Equipment Financing, Inc. (incorporated by reference to Exhibit 10.30 to Avondale
Incorporateds 2002 Annual Report on Form 10-K, File No. 33-68412).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, National Association, as agent
(incorporated by reference to Exhibit 10.31 to Avondale Incorporateds 2002 Annual Report on Form
10-K, File No. 33-68412).10.32
    
    
    
    Sale and Contribution Agreement, dated as of August 30, 2002, among Avondale Mills, Inc., Avondale
Incorporated and Avondale Funding, LLC (incorporated by reference to Exhibit 10.32 to Avondale
Incorporateds 2002 Annual Report on Form 10-K, File No. 33-68412).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 (incorporated by reference to Exhibit 10.33 to Avondale Incorporateds 2002 Annual
Report on Form 10-K, File No. 33-68412).10.34
    
    
    
    Annex X to Sale and Contribution Agreement and Receivables Purchase and Servicing Agreement, each
dated as of August 30, 2002 (incorporated by reference to Exhibit 10.34 to Avondale Incorporateds
2002 Annual Report on Form 10-K, File No. 33-68412).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.
(incorporated by reference to Exhibit 10.35 to Avondale Incorporateds 2002 Annual Report on Form
10-K, File No. 33-68412).10.36
    
    
    
    Blocked Account Agreement, dated August 30, 2002, among Wachovia Bank, National Association,
Avondale Mills, Inc., Avondale Funding, LLC and General Electric Capital Corporation (incorporated
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ExhibitNumberby reference to Exhibit 10.36 to Avondale Incorporateds 2002 Annual Report on Form 10-K, File No.
33-68412).10.37
    
    
    
    Intercreditor Agreement, dated August 30, 2002, among General Electric Capital Corporation,
Wachovia Bank, National Association, Avondale Funding, LLC and Avondale Mills, Inc. (incorporated
by reference to Exhibit 10.37 to Avondale Incorporateds 2002 Annual Report on Form 10-K, File No.
33-68412).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, National Association, as agent
(incorporated by reference to Exhibit 10.38 to Avondale Incorporateds 2002 Annual Report on Form
10-K, File No. 33-68412).10.39
    
    
    
    Borrow Pledge Agreement, dated August 30, 2002 between Avondale Mills, Inc. various listed banks
and Wachovia Bank, National Association, as agent (incorporated by reference to Exhibit 10.39 to
Avondale Incorporateds 2002 Annual Report on Form 10-K, File No. 33-68412).10.40
    
    
    
    Third Amended and Restated Credit Agreement dated, as of March 28, 2003, among Avondale Mills,
Inc., various listed banks and Wachovia Bank, National Association, as agent (incorporated by
reference to Exhibit 10.40 to Avondale Incorporateds quarterly report on Form 10-Q for the period
ended May 31, 2003, File No. 33-68412).10.41
    
    
    
    Amendment No. 1 to Receivables Purchase and Servicing Agreement, and Sale and Contribution
Agreement, dated as of March 28, 2003, by and among Avondale Funding, LLC, Redwood Receivables
Corporation, Avondale Mills, Inc., and General Electric Capital Corporation (incorporated by
reference to Exhibit 10.41 to Avondale Incorporateds quarterly report on Form 10-Q for the period
ended May 31, 2003, File No. 33-68412).10.42
    
    
    
    Amendment No. 2 to Receivables Purchase and Servicing Agreement, dated as of August 30, 2002, by
and among Avondale Mills, Inc. and General Electric Capital Corporation dated July 3, 2003
(incorporated by reference to Exhibit 10.42 to Avondale Incorporateds Registration Statement on
Form S-4, File No. 333-108353).10.43
    
    
    
    Letter Agreement related to the Blocked Account Agreement, dated August 30, 2002, by and among
Avondale Mills, Inc., Avondale Funding, LLC, General Electric Capital Corporation and Wachovia
Bank, National Association, dated July 3, 2003 (incorporated by reference to Exhibit 10.43 to
Avondale Incorporateds Registration Statement on Form S-4, File No. 333-108353).10.44
    
    
    
    Credit Agreement, dated as of November 7, 2003, among Avondale Mills, Inc., Avondale Mills
Graniteville Fabrics, Inc. and General Electric Capital Corporation, GECC Capital Markets Group,
Inc., and from time to time various Lenders, and various related agreements (incorporated by
reference to Exhibit 10.44 to Avondale Incorporateds 2003 Annual Report on Form 10-K, File No.
33-68412).10.45
    
    
    
    Amendment No. 3 to Receivables Purchase and Servicing Agreement, dated as of August 30, 2002, by
and among Avondale Mills, Inc., Avondale Funding, LLC and General Electric Capital Corporation,
dated November 7, 2003 (incorporated by reference to Exhibit 10.45 to Avondale Incorporateds 2003
Annual Report on Form 10-K, File No. 33-68412).10.46
    
    
    
    Intercreditor Agreement, dated as of November 7, 2003, by and among General Electric Capital
Corporation, Avondale Funding, LLC and Avondale Mills, Inc. (incorporated by reference to Exhibit
10.46 to Avondale Incorporateds 2003 Annual Report on Form 10-K, File No. 33-68412).10.47
    
    
    
    Wavier and Amendment No. 1 to Credit Agreement, dated as of November 7, 2003, among Avondale Mills,
Inc., Avondale Mills Graniteville Fabrics, Inc. and General Electric Capital Corporation, GECC
Capital Markets Group, Inc., and from time to time various Lenders, dated January 22, 2004
(incorporated by reference to Exhibit 10.47 to Avondale Incorporateds quarterly report on Form
10-Q for the period ended February 27, 2004, File No. 33-68412).10.48
    
    
    
    Amendment No. 4 to Receivables Purchase and Servicing Agreement, dated as of August 30, 2002, by
and among Avondale Mills, Inc., Avondale Funding, LLC and General Electric Capital Corporation,
dated January 22, 2004 (incorporated by reference to Exhibit 10.48 to Avondale Incorporateds
quarterly report on Form 10-Q for the period ended February 27, 2004, File No. 33-68412).10.49
    
    
    
    Amendment No. 1 to Master Security Agreement, dated July 30, 2002, between Avondale Mills, Inc. and
The CIT Group/Equipment Financing, Inc., dated February 24, 2004 (incorporated by reference to
Exhibit 10.48 to Avondale Incorporateds quarterly report on Form 10-Q for the period ended
February 27, 2004, File No. 33-68412).10.50
    
    
    
    First Amendment to the Post-Merger Stock Transfer and Repurchase Agreement, dated as of August
1993, by and among Avondale Incorporated, Jack R. Altherr, Jr. and G. Stephen Felker, dated April
12, 2004. Corporation (incorporated by reference to Exhibit 10.50 to Avondale Incorporateds
quarterly report on Form 10-Q for the period ended May 28, 2004, File No. 33-68412).10.51
    
    
    
    Consent and Amendment No. 2 to Credit Agreement, dated as of November 7, 2003, among Avondale
Mills, Inc., Avondale Mills Graniteville Fabrics, Inc. and General Electric Capital Corporation,
GECC Capital Markets Group, Inc., and from time to time various Lenders, dated May 26, 2004
(incorporated by reference to Exhibit 10.51 to Avondale Incorporateds Current Report on Form 8-K,
dated August 26, 2004, File No. 33-68412).
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##### Table of Contents



ExhibitNumber10.52
    
    
    
    Consent and Amendment No. 3 to Credit Agreement, dated as of November 7, 2003, among Avondale
Mills, Inc., Avondale Mills Graniteville Fabrics, Inc. and General Electric Capital Corporation,
GECC Capital Markets Group, Inc., and from time to time various Lenders, dated July 1, 2004
(incorporated by reference to Exhibit 10.52 to Avondale Incorporateds Current Report on Form 8-K,
dated August 26, 2004, File No. 33-68412).10.53
    
    
    
    Consent to Credit Agreement, dated as of November 7, 2003, among Avondale Mills, Inc., Avondale
Mills Graniteville Fabrics, Inc. and General Electric Capital Corporation, GECC Capital Markets
Group, Inc., and from time to time various Lenders, dated July 28, 2004 (incorporated by reference
to Exhibit 10.53 to Avondale Incorporateds Current Report on Form 8-K, dated August 26, 2004, File
No. 33-68412).10.54
    
    
    
    Amendment No. 2 to Master Security Agreement, dated July 30, 2002, between Avondale Mills, Inc. and
The CIT Group/Equipment Financing, Inc., dated July 20, 2004 (incorporated by reference to Exhibit
10.54 to Avondale Incorporateds Current Report on Form 8-K, dated August 26, 2004, File No.
33-68412).12.1
    
    
    
    Computation of Ratio of Earnings to Fixed Charges.14.1
    
    
    
    Code of Ethics For Senior Executive and Financial Officers (incorporated by reference to Exhibit
10.46 to Avondale Incorporateds 2003 Annual Report on Form 10-K, File No. 33-68412).21.1
    
    
    
    List of Subsidiaries.31.1
    
    
    
    Certificate of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    Certificate of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    Certificate of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    Certificate of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.99.1
    
    
    
    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-KNone.(c)
    
    See Item 15(a)(3).
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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 INCORPORATEDBy:
    /s/ G. STEPHEN FELKERName:
    G. Stephen FelkerDate:  November 12, 2004
    
    Title:
    Chairman of the Board,
President and
Chief Executive Officer 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: Name
    
    Title
    
    DatePrincipal Executive Officer and Director:/s/  G. STEPHEN FELKER
G. Stephen Felker
    
    Chairman of the Board,
President and Chief Executive
Officer
    
    November 12, 2004Principal Financial and Accounting Officer:/s/  JACK R. ALTHERR, JR.
Jack R. Altherr, Jr.
    
    Vice Chairman, Chief
Financial Officer and
Director
    
    November 12, 2004Directors:/s/  DALE J. BODEN
Dale J. Boden
    
    Director
    
    November 12, 2004/s/  ROBERT B. CALHOUN
Robert B. Calhoun
    
    Director
    
    November 12, 2004/s/  KENNETH H. CALLAWAY
Kenneth H. Callaway
    
    Director
    
    November 12, 2004/s/  HARRY C. HOWARD
Harry C. Howard
    
    Director
    
    November 12, 2004/s/  C. LINDEN LONGINO, JR.
C. Linden Longino, Jr.
    
    Director
    
    November 12, 2004/s/  JAMES A. RUBRIGHT
James A. Rubright
    
    Director
    
    November 12, 2004/s/  JOHN P. STEVENS
John P. Stevens
    
    Director
    
    November 8, 2004
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Schedule II AVONDALE INCORPORATED CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance
    
    Charged to
    
    
    
    
    
    Balanceat Beginning
    
    Costs and
    
    (A) (B)
    
    at EndDescription
    
    of Period
    
    Earnings
    
    Deductions
    
    of PeriodYear Ended August 30, 2002
    
    Allowance for doubtful accounts
    
    
    7,196
    
    
    
    1,442
    
    
    
    (6,439
    )
    
    
    2,199Year Ended August 29, 2003
    
    Allowance for doubtful accounts
    
    
    2,199
    
    
    
    (318
    )
    
    
    (14
    )
    
    
    1,867Year Ended August 27, 2004
    
    Allowance for doubtful accounts
    
    
    1,867
    
    
    
    31
    
    
    
    (883
    )
    
    
    1,015
   (A)
    
    Deductions represent customer account balances written off during the
period.(B)
    
    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. 83