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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549
_______________

FORM 10-K

Commission file number 33-68412
____________________

AVONDALE INCORPORATED

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

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

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

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

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

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

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

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INDEX TO FORM 10-K

AVONDALE INCORPORATED

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PART I

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

ITEM 1. BUSINESS

General

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

         The Company’s predecessor was founded in 1895 by the family of G. Stephen Felker, the Company’s Chairman, President and Chief Executive Officer. Prior to 1986, the Company’s predecessor primarily manufactured and marketed greige fabrics. In July 1986, the Company’s predecessor, together with Mr. Felker and certain other investors, acquired Avondale Mills, Inc., now a wholly owned subsidiary of the Company (“Avondale Mills”). The acquisition of Avondale Mills expanded the Company’s product line to include yarns and finished fabrics. In April 1996 the Company acquired the assets of the textile business of Graniteville Company (“Graniteville”). The acquisition of Graniteville, founded in 1845, enhanced the Company’s manufacturing and marketing of cotton and cotton-blend finished fabrics.

Description of the Business

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

Products

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

         The Company is a leading manufacturer of indigo-dyed denim fabrics used in the production of branded and private label fashion apparel, as well as casual jeans, sportswear and outerwear. The Company develops and manufactures new and innovative colors, textures, weaves and finishes for its customers, which has helped make the Company’s denim fabrics a leader in the branded and private label, fashion-oriented segment of the apparel market.

         The Company is one of the largest domestic manufacturers and marketers of fabrics used in the production of utilitywear (principally uniforms and other occupational apparel) for the U.S. rental and retail markets. The Company’s utilitywear fabric customers require durable fabrics characterized by long wear and easy care. The Company works closely with customers to develop fabrics with these and other enhanced performance characteristics.

         The Company is a leading manufacturer and marketer of woven cotton piece-dyed fabrics used in the production of sportswear, casual wear and outerwear. Fabrics are produced for customers in a wide variety of styles, colors, textures and weights according to individual customer specifications. The Company’s product design staff

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

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

         Yarns. The Company is one of the largest domestic producers and marketers of cotton and cotton-blend yarns, which are used internally in the production of woven fabrics or marketed to outside customers in the knitting and weaving industries. The Company’s yarns are used in the manufacture of a broad range of items, including apparel (primarily T-shirts, underwear, hosiery, knitted outerwear, denim, and woven and fleece sportswear) and home furnishings. The Company’s yarn sales accounted for approximately 28%, 31% and 29%, respectively, of the Company’s net sales in fiscal 2000, 2001 and 2002.

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

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

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

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

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

Sales and Marketing

         During fiscal 2002, the Company sold apparel fabrics, greige and specialty fabrics, and yarns to approximately 700, 400 and 400 customers, respectively, or approximately 1,200 customers in total after eliminating duplications. The Company is one of the leading suppliers of denim to V.F. Corporation (the maker of Lee®, Rider®, Wrangler®, Rustler®, Brittania®, Red Kap®, Timbercreek®, Chic®, and HealthTex® brands), with total sales of apparel fabrics and yarns to V.F. Corporation accounting for 20% of the Company’s net sales in fiscal 2002. The Company believes that it has a strong working relationship with V.F. Corporation. Other than V.F. Corporation, none of the Company’s customers accounted for 10% or more of the Company’s net sales in fiscal 2002. The Company’s sales billed to customers domiciled outside the U.S. accounted for 8%, 6% and 7%, respectively, of the Company’s net sales in fiscal 2000, 2001 and 2002.

         The Company targets customers who demand a high level of customer service. The Company’s two yarn sales offices are located geographically to be close to customers’ manufacturing facilities, and its seven fabric sales offices are generally located near the headquarters of key customers. Sales associates visit their customers on a regular basis and are primarily responsible for interpreting customers’ needs, processing customer orders and interacting with the Company’s production scheduling personnel. The Company’s sales associates are paid a base

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salary plus sales incentives to the extent certain performance targets are met. The Company’s independent sales representatives are paid on a commission basis.

Manufacturing

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

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

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

         Yarn to be used in the manufacture of apparel fabrics may be dyed using “range” dyeing techniques. The Company weaves dyed or undyed yarn using modern, high-speed looms to manufacture fabrics that have a variety of widths and weaves. The woven fabrics may be piece-dyed and finished according to customer specifications. The Company’s dyeing and finishing facilities use a wide range of technologies, including sophisticated electronic monitoring and control systems. These systems allow the Company to continuously monitor and control each phase of the dyeing and finishing process, which helps to improve productivity, efficiency, consistency and quality.

         Manufacturing Facilities. The Company currently operates 22 manufacturing facilities in the U.S. Of the Company’s manufacturing facilities, twelve produce yarn, six manufacture fabrics, four are dyeing facilities and four are engaged in fabric finishing.

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

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

	•		1997 — Completed replacement of earlier generation projectile looms with new, high speed air jet looms and installation of two new integrated finishing ranges in an existing integrated denim facility;
	•		1997 — Purchased additional computer controlled cleaning and blending equipment for one plant, replaced earlier generation open-end spinning equipment with technologically advanced spinning equipment at a second plant, and replaced opening and carding equipment at a third plant;

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	•		1997 and 1998 — Constructed a new denim weaving facility, completed in April 1998, housing technologically advanced slashing equipment and high speed air jet looms, upgraded fabric finishing equipment, and executed a lease for a new distribution center;
	•		1998 and 1999 — Completed expansion of an existing weaving facility in June 1999, which included the installation of technologically advanced slashing equipment and high speed air jet looms for the production of additional greige fabrics to be piece-dyed for sportswear and utilitywear end uses;
	•		1998 and 1999 — Completed construction of a new piece-dyeing range in February 1999, and installed technologically advanced fabric inspection equipment for piece-dyed fabrics;
	•		2000 — Completed replacement of earlier generation air jet looms with new, high speed air jet looms in November 1999 for production of greige fabrics to be piece-dyed for sportswear and utilitywear end uses;
	•		2000 — Completed modernization of an existing ring spinning facility in August 2000, including the replacement of earlier generation roving, ring spinning and winding equipment with technologically advanced linked ring spinning;
	•		2001 — Completed expansion of an existing piece-dyed finishing facility in January 2001, for the production of additional finished piece-dyed fabrics for sportwear and utilitywear end uses;
	•		2001 — Completed expansion and modernization of an existing greige weaving facility in May 2001, including the construction of a new building addition and the installation of modern air jet looms for the production of additional greige fabrics;
	•		2001 — Completed expansion and modernization of an existing integrated denim weaving facility in May 2001, including the installation of modern air jet looms for the production of additional denim fabrics;
	•		2001 — Completed expansion of linked ring spinning facility which was modernized in August 2000;
	•		2002 — Completed replacement of earlier generation winding equipment at an existing ring spinning facility in September 2001 with technologically advanced, fully automated winders;
	•		2002 — Completed modernization of existing spinning operation within integrated fabric weaving facility in October 2001, including installation of technologically advanced linked ring spinning equipment; and
	•		2002 — Completed construction of a new ring spinning facility using existing manufacturing floor space, in October 2001, including installation of technologically advanced linked ring spinning equipment.

Raw Materials

         The Company is one of the largest U.S. consumers of raw cotton, the principal raw material used in the Company’s manufacturing processes. Consequently, the Company’s results of operations may be impacted significantly due to fluctuations in the price of cotton. Since cotton is an agricultural product, its supply and quality, which affect prevailing prices, are subject to forces of nature. Significant increases in cotton prices due to any

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material shortage or interruption in the supply or variations in the quality of cotton by reason of weather, disease or other factors could have a material adverse effect on the Company’s results of operations.

         Because the importation of cotton into the U.S. has generally been prohibited, historically imbalances between the domestic and world price of cotton have occurred. In recent years, Congress has passed a series of legislative initiatives to ensure that U.S. cotton is priced competitively with world markets. The Food, Agriculture, Conservation and Trade Act of 1990 (the “1990 Trade Act”) and the regulations promulgated thereunder established a three-step competitiveness program designed to make domestic cotton prices approximate world cotton prices. This program includes a mechanism that triggers tariff free quotas for the importation of cotton if U.S. prices exceed world prices for an extended period of time.

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

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

         The Company closely monitors the cotton market and manages its cotton-buying practices. The Company’s Chief Executive Officer is a director of the National Cotton Council, a trade organization that spearheads initiatives to implement U.S. cotton industry policy, which helps the Company stay abreast of developments in the cotton market. The Company generally purchases cotton in sufficient quantities to achieve planned manufacturing schedules. Such purchases may be short of, or in excess of, the quantities needed to satisfy customers’ orders depending upon such factors as the Company’s outlook for the cotton market.

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

         The principal man-made fiber purchased by the Company is polyester. The Company currently purchases substantially all of the man-made fibers used in its products from two suppliers, but such fibers are readily available from other suppliers. The Company maintains a limited supply of such fibers in inventory. The Company generally has no difficulty in obtaining sufficient quantities of man-made fibers.

         The Company purchases dyes and chemicals used in its dyeing and finishing processes, and these dyes and chemicals normally have been available in adequate supplies through a number of suppliers. In connection with the acquisition of Graniteville, the Company entered into an agreement (the “Supply Agreement”), extending through March 2006, with C.H. Patrick & Co., Inc. which was subsequently acquired by B.F. Goodrich (“Goodrich”). In 2000, Goodrich sold the chemical portion of their business to Noveon, Inc. (“Noveon”), formerly B.F. Goodrich PMD Group and the textile dye portion of their business to C.H. Patrick & Co, Inc. (“Patrick”), formerly CHP Acquisition Group, Inc. On February 28, 2001, the Company executed an assignment of the Supply Agreement whereby the Company will purchase textile dyes from Patrick and chemicals from Noveon. This Supply Agreement

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generally stipulates that Patrick and Noveon (the “Suppliers”) will have the opportunity to provide certain dyes and chemicals utilized by the Company if the Suppliers meet certain conditions, including competitive pricing and the ability to provide the applicable dyes and chemicals in accordance with the Company’s specifications and delivery requirements. The Supply Agreement is terminable by the Company prior to the end of the original 10-year term in the event of a pattern of repeated, material failures by the Suppliers to satisfy their obligations with respect to product specifications, delivery schedules or other material terms. Under the Supply Agreement, a default by one supplier will not constitute a default by the other supplier.

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

Competition

         The textile industry is highly competitive, and no single company is dominant. Management believes that the Company is one of the largest domestic manufacturers of indigo-dyed denim, piece-dyed fabrics for utilitywear and sportswear, and cotton and cotton-blend yarns. The Company’s competitors include large, vertically integrated textile companies and numerous smaller companies. There has been a general trend toward consolidation within certain markets of the textile industry and, within the Company’s markets, some increases in manufacturing capacity. However, the resulting excess manufacturing capacity, an increase in the U.S. importation of textiles and apparel from countries having significantly devalued currencies, a downturn in the U. S. economy and the reaction of U. S. consumers to reports of terrorism throughout the world and possible military action in response to those terrorist acts have created intensely competitive market conditions leading to severe financial difficulties of several domestic yarn and apparel fabric manufacturers, and the accompanying closure of domestic manufacturing capacity.

         The primary competitive factors in the textile industry are price, product styling and differentiation, quality, manufacturing flexibility, delivery time and customer service. The importance of these factors is determined by the needs of particular customers and the characteristics of particular products. The failure of the Company to compete effectively with respect to any of these key factors or to keep pace with rapidly changing markets could have a material adverse effect on the Company’s results of operations and financial condition.

         Increases in domestic capacity and imports of foreign-made textile and apparel products are a significant source of competition for many domestic textile manufacturers, including the Company.. The U.S. government attempts to regulate the growth of certain textile and apparel imports by establishing quotas and tariffs on imports from countries that historically account for significant shares of U.S. imports. Although imported apparel represents a significant portion of the U.S. apparel market, in recent years, a significant portion of import growth has been attributable to imports of apparel products manufactured outside the U.S. of (or using) domestic textile components. In addition, imports of certain textile products into the U.S. have increased in recent years primarily as a result of significant devaluation of the currencies of other textile producing countries, particularly within Asia, against the U.S. dollar.

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

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under the WTO may result in increased imports of certain textile products and apparel into North America. These factors could make the Company’s products less competitive against low cost imports from third world countries.

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

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

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

Backlog

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

Governmental Regulation

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

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

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

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

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

         The Company is currently defending an environmentally related lawsuit, described under Item 3, Legal Proceedings of this Annual Report on Form 10-K.

Associates

         At August 30, 2002, the Company had approximately 5,700 associates. None of the Company’s associates is covered by a collective bargaining agreement, and management believes that the Company’s relations with its associates are good.

ITEM 2. PROPERTIES

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

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

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

ITEM 3. LEGAL PROCEEDINGS

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

         The Company is also a party to other litigation incidental to its business from time to time. The Company is not currently a party to any litigation that management believes, if determined adversely to the Company, would have a material adverse effect on the Company.

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

         Not applicable.

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PART II

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

         There is no established public trading market for the Company’s Class A Common Stock or Class B Common Stock (collectively, “Common Stock”). As of August 30, 2002 there were 130 and one holders of record of Class A Common Stock and Class B Common Stock, respectively. The Company paid dividends aggregating $5.1 million, $5.0 million and $3.8 million in respect of its outstanding Common Stock during fiscal 2000, 2001 and 2002, respectively.

         The Company has issued and outstanding $125 million aggregate principal amount of 10 1/4% Senior Subordinated Notes due 2006 (the “Senior Subordinated Notes”) under an Indenture dated as of April 23, 1996 among the Company, Avondale Mills and The Bank of New York, as trustee (the “Indenture”). The Indenture contains certain covenants that limit the Company’s ability to pay dividends. As amended effective August 30, 2002 the Company maintains a $100 million revolving credit facility under an agreement among Avondale Mills and a syndicate of banks (the “Revolving Credit Facility”). The Revolving Credit Facility contains certain covenants that limit the Company’s ability to pay dividends.

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ITEM 6. SELECTED FINANCIAL DATA

         The following table sets forth selected consolidated statement of income data and selected consolidated balance sheet data of the Company for each of the five fiscal years in the period ended August 30, 2002. Such data were derived from the audited consolidated financial statements of the Company. The audited consolidated financial statements and Notes thereto of the Company for each of the three fiscal years in the period ended August 30, 2002 are included elsewhere in this Annual Report. The selected consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto of the Company included elsewhere in this Annual Report.

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		accounting principles), but because it is a widely accepted financial indicator of a company’s ability to incur and service debt. EBITDA as calculated by the Company is not necessarily comparable with similarly-titled measures presented by other companies.
(3)		The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. For this purpose, “earnings” include income before income taxes plus fixed charges. Fixed charges include interest, whether expensed or capitalized, amortization of deferred financing costs, discount and expenses on sale of receivables and the portion of capital lease payments that is representative of interest or financing charges.

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

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

Critical Accounting Policies

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

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

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

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

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

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

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

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

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

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

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

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Results of Operations

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

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

Fiscal 2002 Compared to Fiscal 2001

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

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

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Results of Operations (continued)

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

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

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

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

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

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

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

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

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

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Results of Operations (continued)

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

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

Fiscal 2001 Compared to Fiscal 2000

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

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

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

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

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

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Results of Operations (continued)

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

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

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

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

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

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

Liquidity and Capital Resources

General

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

Revolving Credit Facility

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

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Liquidity and Capital Resources (continued)

points or at the “set” rate, which shall be an interest rate agreed to by the Company and Wachovia at the time such loan is made. The Company is required to pay certain structuring, administration and funding fees relating to the Revolving Credit Facility. The Revolving Credit Facility is secured by substantially all of the Company’s assets and contains customary covenants, including requirements to maintain certain financial ratios.

Swap Agreements

         The Company has used interest rate swap agreements to effectively fix the interest rate with respect to the borrowings outstanding under the Revolving Credit Facility, which otherwise bear interest at floating rates. Such agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments during the term of such agreements without an exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the borrowings outstanding under the Revolving Credit Facility. The related amount payable to or receivable from counterparties is included in other liabilities or assets. At August 30, 2002, the Company had swap agreements with notional amounts aggregating $35 million, providing an effective weighted average interest rate of 5.3%.

Equipment Note

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

Receivables Securitization Facility

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

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

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

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Liquidity and Capital Resources (continued)

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

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

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

Senior Subordinated Notes

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

Capital Expenditures and Cash Flows Analysis

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

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

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

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

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Liquidity and Capital Resources (continued)

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

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

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

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

Refund of prior year income taxes

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

Adjustment of deferred income taxes

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

Off-Balance Sheet Financing Arrangements

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Liquidity and Capital Resources (continued)

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

Seasonality

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

New Accounting Standards

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

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

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

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

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

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

Forward Looking Statements

         Statements herein regarding the Company’s anticipated capital expenditures and anticipated performance in future periods constitute forward looking statements within the meaning of the Securities Exchange Act of 1933 and Securities Act of 1934. Such statements are subject to certain risks and uncertainties that could cause actual amounts to differ materially from those projected. With respect to anticipated capital expenditures, management has made certain assumptions regarding, among other things, maintenance of existing facilities and equipment, availability and desirability of new, technologically advanced equipment, installation and start up times, cost estimates and continued availability of financial resources. The estimated amount of capital expenditures is subject to certain risks, including, among other things, the risk that unexpected capital expenditures will be required and unexpected costs and expenses will be incurred. Statements herein regarding the Company’s performance in future periods are subject to risks relating to, among other things, the cyclical and competitive nature of the textile industry in general, pressures on selling prices due to competitive and economic conditions, deterioration of relationships with, or loss of, significant customers, availability, sourcing and pricing of cotton and other raw materials, technological advancements, employee relations, continued availability of financial resources and possible changes in governmental policies affecting raw material costs. In addition, governmental trade policies, including establishment of textile quotas and tariffs, may be changed in response to terrorist attacks and related military action and the Company’s performance in future periods is subject to other risks associated with possible future terrorist activity or the governmental or the military response thereto. Management believes these forward looking statements are reasonable; however, undue reliance should not be placed on such forward looking statements, which are based on current expectations.

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Other Data

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Upward or downward changes in market interest rates and their impact on the reported interest expense of the Company’s variable rate borrowings may affect the Company’s earnings. However, the Company’s use of interest rate swap agreements will limit the negative impact of higher interest rates. Assuming the revolving credit facility and interest rate swap agreements at August 30, 2002 remain in effect throughout fiscal 2003, a 10% change in the effective average interest rate would not have a material effect on the Company’s pretax earnings for fiscal 2002. In addition, a 10% change in interest rates would not have a material effect on the fair value of the Company’s interest rate swap agreements and senior subordinated notes.

         Increases or decreases in the market price of cotton may affect the valuation of the Company’s inventories and fixed purchase commitments and, accordingly, the Company’s earnings. The potential decline in fair value of these inventories and fixed purchase commitments resulting from a 10% decline in market prices is estimated to be approximately $8 to $11 million.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AVONDALE INCORPORATED

CONSOLIDATED FINANCIAL STATEMENTS

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

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REPORT OF MANAGEMENT

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

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

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

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Avondale Incorporated:

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

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

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

         Our audit was made for the purpose of forming an opinion on the 2002 basic consolidated financial statements taken as a whole. The schedule listed in the Index at Item 14(a) is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, the 2002 information fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.

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

CRISP HUGHES EVANS LLP

Atlanta, Georgia
October 11, 2002

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

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Avondale Incorporated:

         We have audited the accompanying consolidated balance sheets of Avondale Incorporated as of August 31, 2001, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the two years in the period ended August 31, 2001. These financial statements and the schedule referred to below are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

         In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avondale Incorporated as of August 31, 2001, and the consolidated results of their operations and their cash flows for each of the two years in the period ended August 31, 2001 in conformity with accounting principles generally accepted in the United States.

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

ARTHUR ANDERSEN LLP

Atlanta, Georgia
October 9, 2001

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AVONDALE INCORPORATED

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

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

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AVONDALE INCORPORATED

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

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

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AVONDALE INCORPORATED

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